My general objection to tax loopholes is that they have the effect of reducing the tax burden on one class of citizens at the expense of others. Usually this means that the vocal or well organized minority opts out and the silent, poorly organized remainder carries the burden. The situation applies to subsidies as well as deductions and credits.
Naturally, the eventual result is increased complexity in the tax code and therefore increased compliance costs. However, a subtler effect is also at work - the opt out class is now silenced with respect to objections to that particular element of tax policy. By silencing objections from a minority, government is allowed to grow beyond the pain threshold of the population at large.
If one observes the high cost of government contracts relative to commonly available off the shelf prices (e.g. $160 hammers and $600 toilet seats), it should be obvious that government is not a value oriented consumer. Milton Friedman on government spending: “There are four ways in which you can spend money.
- You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money.
- Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost.
- Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch!
- Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income.”
Conversion of capital into goods and services is optimized when income earners and consumers are one and the same. If taxpayers are to get the most bang for their aggregate buck, they should spend it themselves - a clear argument for a minimalist government.
Anyone that has an interest in limiting the growth of government might logically object to policies that allow tax rates to grow beyond the painful revolt threshold of taxpayers. Despite the obvious regressive impact, loopholes that effectively exclude classes of citizens from certain aspects of taxation should be limited because their adoption enables larger government and its associated inefficiencies.
If the number of citizens engaged in the tax policy debate is maximized, government will be forced to operate on a budget defined by the threshold of pain dictated by the poorest voters. Admittedly, this must sound absolutely awful from a socioeconomic perspective, but if one considers government as a living organism, striving to grow and dominate the economic landscape, it’s logical to conclude that such a constraint threshold might motivate it to improve the quality of life of the threshold class, thereby enabling its own growth. That should be the desired effect of government.
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