Chapter 3: Are Subsidies Evaded Taxes?
In the preceding chapter I suggested that tax evasion does its harm by allowing producers who are good at evading taxes but poor at making a product to oust more efficient producers who lack the ability or inclination to evade taxes. The harm would not have arisen had everyone evaded taxes with equal aplomb. The insights of that chapter carry over to any government rule that some producers violate and other producers obey. In this chapter I propose that a business that asks for and receives a subsidy from the state may do the same harm to society as a business that evades taxes. On the surface a subsidy does not look like tax evasion. Bureaucrats and politicians grant subsidies as representatives of the people. Bureaucrats and politicians do not grant businesses leave to evade taxes. Such a distinction is of little importance to understanding the welfare costs of subsidies. If a business can get government money because it is good at talking to bureaucrats rather than being good at stamping out a product, that business may displace a more efficient business that does not have the wit to lobby government. The difference in costs between the two businesses is the same sort of displacement deadweight loss discussed in the previous chapter. To claim that subsidies are evaded taxes in disguise one must believe that subsidies are granted outside the rule of law. The rule of law prevails when elected representatives refrain from using the state’s power outside the limits...
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