There Is No Neutral Tax: Lessons from the the Amazon HQ2 “Subsidy”

There Is No Neutral Tax: Lessons from the the Amazon HQ2 “Subsidy” By  for Lew Rockwell

Capitalism breathes through those loopholes . ~Ludwig von Mises1

I. Introduction

A little noted aspect of the media brouhaha that erupted in the wake of Amazon’s reneging on its deal to locate part of its headquarters in New York City was that almost all participants, pro or con, routinely referred to the tax breaks included in the deal as “government subsidies.” Given the abysmal state of economic knowledge prevailing in the mainstream media this was to be expected and is hardly worth noting. What is remarkable is that a great number of free-market economists and policy experts who wrote about the deal, before or after it collapsed, also treated the tax cuts as, in effect, government subsidies. Accordingly, they declared the deal to be economically inefficient and inequitable, reducing productivity and consumer welfare and transferring wealth from some firms and household to others. It is also noteworthy that most of the authors of these commentaries and policy papers were associated with well-known market-friendly think tanks such as the Cato Institute, the Mercatus Center, the American Enterprise Institute, the Independent Institute, the American Institute of Economic Research, the Manhattan Institute, and the Reason Foundation.2

This effusion of critical commentary on the Amazon deal from free-market proponents reveals an area of serious concern for those interested in disseminating the ideas of Austrian economics: Chicago price theory still exerts an iron grip on free-market thinking in the United States. Even many economists who profess to follow the Austrian tradition in the areas of money, central banking, and business cycles, default to Chicago theory when it comes to analyzing taxation and other areas of applied price theory. In particular, they accept the central premise of the Chicago school that taxes per se are not an intervention into the market economy, in contrast to price controls or government grants of monopoly privileges. The Chicago view implies that there exists a tax that is neutral to the market economy and does not distort relative prices and the allocation of resources and that this “neutral tax” can be identified by economists and implemented by government. In practical terms, the Chicagoan neutral tax boils down to the program outlined by Milton Friedman:

[A] flat-rate tax on income above an exemption, with income defined very broadly and deductions allowed only for strictly defined expenses of earning income. … [T]he abolition of the corporate income tax … with the requirement that corporations be required to attribute their income to stockholders, and that stockholders be required to include such sums on their tax returns. The most important other desirable changes are the elimination of percentage depletion on oil and other natural resources, the elimination of tax exemption of interest on state and local securities, the elimination of special treatment of capital gains, the co-ordination of income, estate, and gift taxes,and the elimination of numerous deductions now allowed.3 [Emphasis added]

Those free-market economists who follow Friedman down this road thus become, in effect if not intent, efficiency experts for the State. They evaluate every alteration in tax policy on the basis of whether the change represents a movement toward or away from the neutral tax ideal. But in doing so, they ignore another approach to price theory, the causal-realist approach of the Austrian school founded on the insights of Carl Menger. The contemporary followers of this approach reject the neutral tax as a myth and view taxation as a government intervention on the same footing with price controls and monopoly privileges.4

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