There is no question that there is a difference between tax breaks and tax subsidies.  For purposes of this article, a subsidy is when a person or group of people (such as a company) gets money or something else of value by having the government extract it from others.  A person or business or industry could also get favoritism in the form of regulations that limit competition.  This would be similar to a subsidy.

A tax break is a reduction in the taxes being paid.  This could be a reduction in the rate, or it could be an increase in deductions so that your reportable income is less.

A libertarian should never support a subsidy.  I’m not saying that a libertarian should never accept a subsidy.  For example, if you are paying $30,000 per year in taxes, and you can get a subsidy for $5,000 for something, then I certainly think you are justified in taking the subsidy.  You didn’t pick the rules of the game, so you should take advantage of the rules when you can, at least up to a point.  There are moral lines that most will not cross, and those lines are different for different people.

The key is that a libertarian should never be promoting a subsidy.  It is one thing to accept a $5,000 subsidy for college.  It is another thing to actually lobby the government for this subsidy.

I believe the libertarian position should be fairly clear on this.  Government subsidies are not compatible with the non-aggression principle.  A libertarian should not advocate for the initiation of the use of force, or threat of force, for political or social change.  A subsidy by the state is enacted by the threat of force (typically taxation).

Tax Breaks – Not so Clear

The issue of tax breaks is much trickier.  There is no clear-cut answer, at least as far as I’m concerned.  There is more nuance to the issue.

One might think that libertarians should support all tax cuts, but this isn’t always clear.

First, there is the issue of spending.  If the total government spending is not going down, then a tax cut isn’t much of a tax cut.  The government is still consuming those resources.  The cost is just being allocated in a different way.

If we are talking about federal spending, then the difference may be made up by more deficit spending and more monetary inflation.

(Note – I am ignoring the Laffer Curve here and assuming that tax rates aren’t so confiscatory that a reduction in rates actually leads to more money collected by the government.)

If there is more monetary inflation, then the people who didn’t benefit from the tax cuts are actually paying more through the depreciation of the currency that they hold.

Even on a state or local level, sometimes there are indirect tax hikes that aren’t easily seen. It might just be a higher property tax with the same rate because the assessed value of the property went up. If there is a tax break for someone, and spending stays the same, that extra money has to come from somewhere.

Second, targeted tax breaks are often a form of cronyism.  If the government gives an extra deduction for farmers only, this is probably due to lobbying from the farm industry.  Is there really that much of a difference if a farmer goes from paying $10,000 in taxes each year to paying just $5,000 because of an added deduction, versus the farmer just getting paid $5,000 from the government while still paying $10,000 in taxes?

A third reason not to support targeted tax breaks is that it does distort the economy.  Let’s say all Chinese restaurants in your city received a major tax break in which they don’t have to pay any property taxes.  Meanwhile, all of the other restaurants in the city are stuck with the same high property tax rate as before.  There is no question that this is a distortion.  Not only do the non-Chinese restaurants have to keep paying their property taxes (and possibly more to make up for the tax breaks to Chinese restaurants), but they also may lose business as a result.

If the expenses for the Chinese restaurants are far lower due to not having any property taxes, then they can charge a little less for food and drive more customers to their place.  If a family is split between eating barbecue or Chinese food for dinner, and the Chinese food will cost ten dollars less for the family, then it may drive them to eat more Chinese food than what otherwise would have occurred.

This Isn’t Obvious

I have a libertarian friend who believes that libertarians should support all tax cuts/ tax breaks no matter what.  He says that any time we can get less money in the hands of government, the better we are.  Unfortunately, this doesn’t work on a federal level at all because they just run bigger deficits.

But I don’t think a libertarian should take such a hard stance on this because I can come up with some ridiculous ideas.  What if there was a tax cut to anyone who professed to be a non-Christian? What if there was a tax cut to anyone who worked for the government?  What if there was a tax cut only to those people named Hillary Clinton?  Should we support all of those tax cuts?

I think it is ok for libertarians to disagree on this issue.  I do tend to support tax cuts, even when they are targeted. But there are times that they are so blatantly a form of cronyism that I just can’t.  It is something I have struggled with before on state ballot initiatives.

I can understand there is debate over Amazon and its setting up a headquarters in New York City, which it ended up backing out of.  I am not exactly jumping in the same camp as Alexandria Ocasio-Cortez on this, but I can see an argument against Amazon setting up there because of special tax breaks.  Why does Amazon get an exceptionally low tax rate to set up shop, while smaller businesses that have been there for a long time (or even if they haven’t) don’t get the same?

They say that Amazon will bring thousands of jobs to the city.  But if you gave the same tax breaks to hundreds of small businesses there, that would create thousands of jobs too.

In New York City, virtually everyone needs a tax cut.

And that’s really where libertarians should focus their energy when it comes to tax cuts. I believe that libertarians should support across the board tax cuts, even if overall spending is not initially being cut.  I would actually rather see a bigger deficit, even though I know the government is still consuming those resources.  At least with more debt, there is eventually a limit, and spending will eventually have to be controlled to some extent.

To go further, libertarians really shouldn’t focus on tax cuts much at all.  The focus needs to be on cutting budgets everywhere. If you can get the state to cut spending, then tax cuts will naturally follow.  And these will be real tax cuts in which you actually get to keep more of the money that you earned.