Murray N. Rothbard, “Deductibility and Subsidy” (1985) — Summary

This file is a brief single-author political-economic essay. Its scope is narrow—a Reagan-era tax-policy dispute over deducting state and local taxes from federal income tax—but Rothbard uses that dispute to make a broader libertarian argument about taxation, ownership, and the language of “subsidy.”

One of the most controversial aspects (because it involves scores of billions of dollars) of the Reagan administration’s tax “reform” plan is its proposal to eliminate the deductibility of state and local taxes from the federal income tax.

Rothbard begins by reconstructing the controversy: reformers claim that deductibility lets residents of high-tax states shift burdens onto residents of low-tax states; opponents answer that eliminating deductibility amounts to taxing the same income twice. Rothbard’s central thesis, however, is that the pro-reform “subsidy” argument depends on a hidden premise: that all income first belongs to the state, so any taxpayer retention of income can be described as a public expense.

His first conceptual move is definitional. He insists that subsidy has a specific meaning: an enforced transfer from one group to another, not a reduction in expropriation.

Subsidy has always meant that one set of people has been taxed and the funds transferred to another group: that Peter has been taxed to pay Paul.

From this definition, deductibility cannot be a subsidy in the ordinary sense. No funds are transferred to high-tax-state taxpayers; they are simply allowed to surrender less to the federal government because they have already surrendered money to state and local governments. Rothbard’s robber analogy sharpens the point: leaving someone with more of his own money is not equivalent to paying him.

How can allowing you to keep more of your own money be called a "subsidy?"

The essay’s deeper argument is therefore semantic and moral rather than merely technical. Rothbard argues that calling deductions “subsidies” only works if one assumes a fixed, rightful federal tax take, so that any reduction for one taxpayer must be treated as a cost imposed on another. He rejects that premise as statist ownership disguised as neutral fiscal analysis.

Only then does the idea that a tax cut is equivalent to a subsidy make any sense at all.

The structure of the piece is compact: it states the policy issue, challenges the reformers’ vocabulary, exposes the ownership assumption behind that vocabulary, and ends with a political warning. Rothbard’s most important move is to shift the frame from “fair shares” within a given tax burden to the legitimacy of the burden itself.

There is no warrant for the notion that payment of some grand allotted total is so vital that it must override any devotion to the rights of person and property, to the idea that people are entitled to keep the property they have earned.

The essay’s relevance lies in its critique of “tax expenditure” reasoning and revenue-neutral reform politics. Rothbard sees such reasoning as strategically divisive: instead of uniting taxpayers against coercive extraction, it encourages them to police one another’s alleged privileges.

The recent emphasis on tax allocation, on concentrating on "fair shares" or alleged "subsidies," has been a clever and largely successful device to divert people's attention from the real problem: that taxes are burdensome and oppressive for everyone.

Rothbard’s conclusion is not a detailed tax plan but a principle for taxpayer solidarity. Any “reform” that closes loopholes by raising someone’s coerced payments is, for him, a defeat of the proper objective: lowering taxes wherever possible and refusing to treat retained income as a government gift.

Such a grand taxpayers’ coalition can only be maintained if there is a tacit agreement that, regardless of whose taxes are cut and by how much, no person or group will have to suffer an increase of taxes, and this means all coerced payments to government, whether they be called taxes, fees, revenues, contributions, or “closing of loopholes.”