The fallacy of the ‘revenue neutral’ tax

Glenn Jacobs Co-Founder, The Tennessee Liberty Alliance
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The latest ruse by supporters of the Marketplace Fairness Act — more accurately described as an Internet sales tax mandate — is that raising taxes will actually result in making them lower. By allowing state governments to collect sales taxes on Internet purchases, they say, state governments will be able to lower or eliminate other taxes.

For fiscal conservatives, a “revenue neutral” tax is nothing to applaud. In fact, revenue neutrality does nothing to impede the growth of government. Instead of starving the beast, or at least putting it on a serious diet, a revenue-neutral taxation policy virtually guarantees Leviathan a near all-you-can-eat buffet at taxpayer expense.

Taxation is only half of the equation for stopping the growth of government. Spending is the other half, and, as Milton Friedman pointed out, it is arguably the more important part.

From an economic standpoint, government spending causes all sorts of distortions in the market. Programs like TARP, the bailout of GM, and subsidies to companies like Solyndra are some clear examples of government using its power to pick economic winners and losers.

Government spending has even remolded society itself. Instead of relying on civil society for charity, the poor turn to the government. Government social welfare programs are notoriously ineffective and ripe with abuse. The result is that vast swaths of society are dependent on government handouts, a phenomenon which has tragically become intergenerational with increasing numbers of Americans trapped in a cycle of dependency.

However, before we begin addressing these issues, we should look at government waste. For instance, The Beacon Center’s latest “Pork Report” estimates that Tennessee’s state and local governments wasted $468 million in 2012. The federal government wastes hundreds of billions of dollars each year. Shouldn’t fiscal conservatives deal with this massive amount of waste and pork before advocating a new tax?

Even if a tax is revenue neutral, no tax is neutral in its economic impact.

Every tax creates its own unique distortions in the market. Income taxes discourage hard work and ambition. Capital gains taxes punish savers and investors. Property taxes impede capital and property accumulation. Sales taxes inhibit commercial activity.

Of course, even within the various tax categories there are winners and losers. An Internet sales tax would tend to harm small businesses more than it would larger businesses. Larger businesses can much more easily absorb the compliance costs of this tax than small businesses can, many of whom will be forced to close their doors if the tax takes effect.

Fiscal conservatives should always push to lower the overall tax burden. Instead of supporting new tax schemes, we should pressure politicians to lower those taxes which already exist. We often hear that such-and-such tax is unfair and should be replaced with a more equitable tax. Unfortunately, what usually seems to happen is either the old tax is never repealed, or the new tax ends up raising the aggregate amount of taxes citizens pay. At the end of the day, an Internet sales tax will take billions out of the private sector and divert it to government coffers. There’s absolutely nothing conservative about that.

Politicians love to tax and spend. It’s their nature, just like it was the nature of the scorpion to sting the frog. Don’t be fooled by politicians’ promises to lower taxes by raising taxes or by the claim that a tax will be revenue neutral.

The goal is, as Friedman put it, to cut “taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.”

Glenn Jacobs is an entertainer and liberty activist. He is the co-founder of the Tennessee Liberty Alliance, a free-market educational organization.