Many individuals confuse the notion of Tax Loopholes and Government Subsidies. Typically, these two are confused in the conversation of “big business” getting special favors from the Government. While it is true that many larger firms rent seek, or lobby, the US Government for subsidies, this does not mean both Tax Loopholes and Government Subsidies are the same.
What is a Subsidy?
A Subsidy is a direct payment received from the US Government. For example, some farmers receive subsidies from the US Government to operate their operation. Of course, this has adverse consequences on the economy. The subsidy is paid from the US Government. Prior to that, the subsidy is underwritten by the Tax payers. However, the farmers receive the direct benefit of the subsidy. Since the funds are re-distributed from the tax payers, to the farmers, this causes economic havoc in the marketplace. Resources are not allocated to their highest uses, as the folks in Washington DC make the choice on how resources are allocated, not the actors in the marketplace using the price system.
What are Tax Loopholes?
Tax Loopholes are simply ways, as per the law, for individuals to keep reduce their tax liability. This simply means they are not due the same amount of tax liability, based upon the individual’s use of the tax code. This differs from a Subsidy in the fact that a subsidy is a direct transfer payment, and the use of a Tax Loophole is not a direct transfer. Moreover, use of a Tax loophole is an opportunity of the individual to keep more of his/her personal property. Recall: The US Government’s role is to protect individual liberty and individual property rights. Also, this allows business owners to invest more of their profits back into their operation. Reducing the economic costs allows more firms to enter the marketplace, subsequently, it provides the consumers more choice.
Subsidies do more harm to the economy, in the long run, as compared to Tax Loopholes. Subsides create much more economic havoc, as it can be detailed out in another article. Tax Loopholes, on the other hand, simply allow citizens to keep more of their private property. This makes more sense because individuals are better suited to make choices for their happiness.