As tax reform is in the news, there is inevitable debate on the pros and cons of it. There is even debate amongst libertarians.
There are certain portions of the tax reform that most libertarians will cheer. For example, most will agree with reducing corporate tax rates and eliminating the estate tax. But even here, there are people like David Stockman who will criticize the fact that most of the tax cuts go towards the rich.
There are also libertarians who say that tax reform doesn’t do much good if you don’t cut spending. Some will argue otherwise, saying that these are two separate issues that should be argued separately. When it is time to argue for spending reductions, we can do that then. For now, we are talking about tax reforms, so we should argue for tax cuts, they say.
I fall into the former camp. To me, the two things are related, and it is difficult to separate them. If the federal government is going to continue to spend $4 trillion annually, then they are still consuming these resources whether it is through direct taxation, or borrowing, or inflation. The one main reason I favor tax cuts even without cuts in government spending is because it is more likely to bring on higher interest rates and price inflation faster, which will put an end to the reckless spending faster.
Within the tax reform debate, there is also a huge debate about whether to expand or reduce tax deductions. Most libertarians will agree that refundable tax credits should be reduced or eliminated because this is pure welfare. It means that some people will actually receive money who don’t pay any federal income taxes in the first place. (They do pay other taxes.)
The big debate is for non-refundable tax credits and deductions. In the current tax reform, there will be a reduction in the deductions, which will hurt people who itemize. This will disproportionately hurt those in states that have higher taxes and higher costs of living. In other words, it will hurt taxpayers in blue states more than red states.
Some libertarians favor reducing deductions as long as it is coupled with a reduction in rates or an increase in the standard deduction. They argue that the tax code is too convoluted (which it is) and that it plays favoritism for some groups at the expense of others.
Other libertarians argue for the expansion of deductions, or so-called loopholes. They argue: the more, the merrier. When deductions are expanded, it means more people get to keep more of their money (ignoring the spending issue described above).
When we talk about tax reform in general, some people mistakenly believe that the biggest issue is the complicated tax code. But while I wish our tax code were simpler, the bigger issue is the amount we pay.
The average American family is paying over $30,000 annually for the cost of the federal government alone. You have to make this calculation based on government spending, not on government tax collections.
If I spend 10 hours in early Spring doing my taxes, and I pay a total of $30,000 per year, which do you think matters more to me? I would spend an additional 100 hours per year doing my taxes if it meant I could reduce my total tax burden in half. I would gladly trade 100 hours for $15,000. That would be $150 per hour (tax-free).
Again, the main issue isn’t the fact that the tax code is complicated. The main issue is the amount being confiscated by the government.
I am sympathetic to both sides of the tax deduction issue when dealing with libertarians. Those who argue for greater loopholes will quote Mises and Rothbard and say that we should keep expanding loopholes until nobody is paying.
At the same time, we know that wouldn’t happen. It would be easier to reduce the tax rates to near zero. Plus, the libertarians who argue against tax deductions are correct that there is favoritism.
I take an exception to the libertarian argument that we should favor all expansions of deductions. I can easily use an absurd example for illustration. If there were a proposed tax deduction for former presidents of the U.S., I would certainly oppose this. Even if there were a proposed additional deduction for all federal government employees, I would not support this.
Then you get into all of the other questionable deductions and whether most people in these groups are really deserving of them. I understand the libertarian argument that it is their own money, so you should support allowing people to keep more of their own money. But what about people who “earn” their money through the taxpayer in the first place? And what about people who “earn” their money through other government favoritism? Plus, if you reduce the tax burden on some groups, they may care less about the burden placed on those who are paying a heavy load.
If there were a proposed additional tax deduction for all employees of military contractors, should libertarians really support this? If there were an additional tax deduction for all senior citizens, should we support this (even though they get Social Security and Medicare)? You can see where we can start getting into a lot of gray areas where there isn’t necessarily a clear-cut answer for libertarians.
There are a lot of difficult questions here because we already have a system of massive political power and corruption, which puts different groups up against each other.
There is no easy answer, but I believe libertarians need to judge each scenario, but in context with the big picture. I know some libertarians will never support a tax reform that institutes a new tax. But if there were a proposal to eliminate all federal income taxes and payroll taxes and replace it with a 1% national sales tax, it would be hard to oppose this, especially if it means the average American will pay tens of thousands of dollars less each year.
We also must continue to point out what we want. We should not separate issues completely. When tax reform is being discussed, we need to point out the reckless $4 trillion per year spending. When there are crazy tax deductions being discussed, we need to continually advocate lowering rates across the board.
We know the power elite is still holding strong when they can get libertarians arguing over legislation. We can disagree on individual pieces, but we should be united in calling for reduced government spending and reduced tax rates across the board.