A frequently repeated claim is that loopholes in the tax code are ‘inefficient.’ A more efficient tax, economists say, is a flat and all-encompassing tax that is inescapable. Why? Because this means no one will waste resources on tax planning and thus tax avoidance. In other words, more resources will be used in production, which is better for the ‘economy.’
Leaving the moral and ethical argument about tax avoidance aside, the efficiency argument too is completely wrong. It shows how much economists have deviated from understanding what they supposedly try to learn about: the market.
The loophole inefficiency argument is based on the view that seemingly unproductive uses of resources are a waste because they don’t contribute to the overall economy. But this is a backward argument, and in fact the same argument as that against ‘hoarding’ of funds. And it assumes that people (or, more specifically, their owned resources) are for the economy, rather than the economy for people.
This post was published at Ludwig von Mises Institute on August 10, 2017.