mises.org/library/no-video-games-are-not-subsidized
There’s a popular misconception that giving tax breaks to industries is the same as subsidizing them. Sadly, like many economic myths, this one just won’t die.
The video game industry offers a recent example. Critics have been arguing for years that US game developers are given unfair advantages and “subsidies” through a range of state and federal tax breaks that lower the cost of game design and artificially prop up production.
The most commonly-cited source for this criticism is a New York Times article chastising developers for claiming a number of these unique tax benefits. And while economic error is no stranger to the NYT, even some proponents of free markets have fallen into the trap. Given this confusion, it’s worth looking more closely at the underlying ideas.
Tax Breaks Are Not Subsidies
Decades ago, economists like Mises and Rothbard were already arguing that tax breaks are not economically or ethically equivalent to receiving subsidies. Simply put, being permitted to keep your income is not the same as taking it from competitors. Exemptions and loopholes do not forcibly redistribute wealth; taxes and subsidies do, thereby benefiting some producers at the expense of others.
Yes, entrepreneurs who take advantage of tax breaks will incur fewer costs than entrepreneurs who don’t. But this doesn’t show that exemptions or loopholes provide unfair advantages; in fact, just the opposite — it shows that taxes penalize entrepreneurs unlucky enough to be left holding the bill.
Tax breaks are beneficial to those who claim them, but they are not subsidies. Rather, exemptions and loopholes are life jackets in a sea of wealth redistribution. Mises said it perfectly: “capitalism breathes through those loopholes.” Sadly, his simple insight continues to elude most commentators.
For instance, the NYT claims that developer Electronic Arts receives “financial help from moms and other United States taxpayers to reduce its federal tax bill.” But EA receives nothing from other taxpayers by having its own tax bill reduced. Tax breaks aren’t impositions unless we think of “moms and other taxpayers” as being entitled to the income generated by the industry.
The Government Is Not the Source of Wealth