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The Crucial Distinction Between Subsidies and Tax Cuts

How many times have you heard a tax cut described as a “subsidy?”

It’s bad enough that government forcibly confiscates our wealth for the purpose of transferring our money to others in the form of welfare (whether regular or corporate). Adding insult to injury, pundits and politicians often speak as though letting a person keep his own money is the equivalent of handing him someone else’s money. They use the terms “tax cut” and “subsidy” interchangeably.

For example, earlier this year the New York Times ran an editorial under the headline, “Subsidize Students, Not Tax Cuts,” as though handing students other people’s money is no different than letting producers keep their own money.

Unfortunately, even some advocates of free markets use the terms interchangeably. For example, economist David Friedman argues that a subsidy and a tax credit for a given activity “differ only in labeling.” Friedman continues, “They have the same effect on the federal budget. They provide the same amount of subsidy.” James Wilson of Downsize DC agrees.

In a variant of this linguistic contortion, some claim that paying for some government project or welfare program is the equivalent of “paying for” a tax cut. For example, in an article for CNN, Jeanne Sahadi writes that Mitt Romney “has failed to specify which tax breaks he’d eliminate or reduce to help pay for his proposed tax cuts.” Greg Sargent makes the same claim for the Washington Post.

In a July speech, Barack Obama mocked his congressional opponents, describing their proposals as follows: “Their basic idea is that if we spend trillions of dollars more on tax cuts . . . the benefits then will spread to everybody else.” Thus he equates government spending with tax cuts, as though there were no difference between the government handing taxpayers’ money to automakers or food stamp recipients and the government reducing the amount of money it forcibly seizes from producers.

David Harsanyi sensibly replied to such nonsense, “We Don’t ‘Pay’ for Tax Cuts, Mr. President, We Pay for Spending.”

The effect of this abuse of concepts is to obfuscate the difference between the wealth that an individual produces and owns, and the wealth that the government forcibly seizes and redistributes. If the term “subsidy” refers to government distribution of wealth forcibly seized from producers, then it logically cannot refer to a reduction in what the government forcibly seizes from producers.

The cognitive effect of using the same concept to refer to both things is to obliterate the difference between the two in people’s minds. The political effect is that the when the government allows us to keep even a single dollar of our own money, this is regarded as a “subsidy.”

So let us clear the conceptual field. Properly speaking, a “subsidy” means the government giving wealth that it forcibly seized from individuals or businesses to other individuals or businesses. Examples include corporate bailouts, tax-supported loans, and Social Security payments. A “tax cut” means reducing the amount of wealth the government forcibly seizes from individuals or businesses.

Clarifying the distinction between subsidies and tax cuts is an act not only of conceptual integrity, but of justice toward the producers of wealth.

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Image: Ari Armstrong

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