How Much Does a Tax Cut Cost?

People often speak of tax cuts using topsy-turvy lingo like this quotation from the Committee for a Responsible Budget: ‘the country currently spends $1.6 trillion per year on tax breaks.’ Or, as The Hill claims: ‘GOP tax plan would cost $2.4 trillion.’ Statements like these make it sound like a tax cut is something you have to buy – as in, you search for tax cuts, add it to your cart, and purchase it. Then your credit card is charged $2.4 trillion. This is very confusing and very common. With the Trump/Republican tax plan being discussed, this sort of language is everywhere.
Taxes are revenue for the government collected involuntarily from its citizens. Therefore, a cut in taxes simply means less non-consensual money is taken from taxpayers. It is not money changing hands from the government to citizens. Indeed, it is money not changing hands. A tax cut is lowering the rate of taxation, and similarly a tax expenditure is using exemptions, deductions, and credits to target particular situations for tax relief. George Reisman says:
…according to The Times, ‘Tax expenditures cost the federal government more than $1 trillion a year in lost revenue.’
When one recalls that in World War II, there was a 90-percent bracket in the federal income tax, and that the government has it in its power to impose such a tax rate on everyone but presently chooses not to do so, then it becomes clear that by the logic of the concept, the cost of tax expenditures to the federal government is not just $1 trillion, but many, many trillions. It is, in fact, everyone’s entire income and wealth.
Saying there is a cost for lower taxes is a rhetorical tactic meant to obscure what tax cuts really mean: less money for the government. However, it may feel like a cost for some vested interests.

This post was published at Ludwig von Mises Institute on 11/28/2017.


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