You’ve heard of Economics in One Lesson? Well, here’s economic policy in one quote:
Trump on why he won’t waive the Jones Act: “A lot of people who are in the shipping industry don’t want” it lifted. https://t.co/OLVpupUfja
— Rebecca Ballhaus (@rebeccaballhaus) September 27, 2017
It’s hard to imagine a more vivid example of the notion of concentrated benefits and dispersed costs than the Jones Act, a 97-year-old Mercantilist garbage-law that requires all ships traveling between U.S. ports to be totally American, which in practice means everything on U.S. islands (including hurricane relief) is way more expensive than it should be. As free-trader Scott Lincicome quickly tabulated, “At best, it’s 1400 workers in Jones Act shipping in/around PR (GAO 2013) vs 3.4 MILLION suffering Puerto Ricans.” The moral calculus is hideous.
It’s easy to blame Trump, because those words did tumble out of his protectionist mouth, and his Department of Homeland Security has already announced its opposition to waiving the Act after Hurricane Maria (though there are reports the White House is wavering). But the lure and/or sway of concentrated benefits does not require politicians to have 19th century notions of trade. Sen. Marco Rubio (R-Fla.), an ardent free-trader in rhetoric, is a grubby protectionist in practice when it comes to the all-powerful sugar lobby in Florida. Politicians are incentivized to please local constituents, and avoid getting on the wrong side of heavily motivated lobbies with deep pockets.
If Rubio can’t stare down Big Sugar, and Trump can’t translate his version of populism into helping an actual population of suffering people instead of a withering industry, how on earth will they locate the courage to overhaul the tax code?
As was the case in the White House’s previous big heave on taxes, this reform proposal mixes 1981-style tax cuts with 1986-style simplification of the tax code. In other words, everyone would pay at lower rates, but most deductions for individuals and corporations would disappear. For instance, the state-and-local-tax deduction. Here’s how I described that in April:
This idea, which makes intuitive sense, would nonetheless be heavily disruptive to those of us who live in high-tax states. And not just in those Democratic-bubble strongholds like New York, California, and Illinois—according to this WalletHubanalysis, vying for worst American state/local tax burden are the deep red states of Nebraska and Iowa (ranked 50th and 43rd out of 51, respectively), plus the Trump swing states of Michigan (44th) and Ohio (45th). That’s five Republican senators right there, at a time when the GOP advantage in the Senate is just 52-48. If this provision passes, I’ll eat my baseball glove. (And then move to Nevada.)
The New York Post points out that A) “Manhattan leads the way nationally in taking the deduction, with residents writing off an average of $24,898 on their federal returns,” B) “More than 3.2 million people in New York — or about 35 percent of the state’s tax filers — claim their state and local taxes as deductions on their federal returns,” and therefore C)
New York congressional Republicans had pleaded with Trump to retain the tax breakover concerns it would hit New Yorkers hard and amount to an unfair double tax.
Republicans from New Jersey and California have also cried foul, and together with New York Republicans like Reps. Dan Donovan and Peter King, they could amass enough opposition to sink the proposal in the House.
So much for that.
Those benefits, comparatively speaking, are dispersed; it’s on the corporate side where concentrated blocs are going to fight like cornered wolverines to keep their special treatment intact. The New York Timesreports that the White House plan “calls on the tax committees to eliminate most of the tax credits that businesses currently use.” Here’s a report from 2015 showing $68 billion in federal subsidies and tax breaks from the prior 15 years; let’s pull a paragraph at random:
A small number of companies have obtained large subsidies at all levels of government. Eleven parent companies among the 50 largest recipients of federal grants and allocated tax credits are also among the top 50 recipients of state and local subsidies. Six of the 50 largest recipients of federal loans, loan guarantees and bailout assistance are also on that state/local list. Five companies appear on both federal lists and the state/local list: Boeing, Ford Motor, General Electric, General Motors and JPMorgan Chase.
Look, I hate to be a Matty Morose on this stuff—I would love-love-love to see the elimination of basically every subsidy and almost every tax break, including the untouchable mortgage interest-rate deduction, in return for a lot of across-the-board reductions and some of the stuff the Trump administration is advocating today (like no longer taxing the overseas profits of U.S. corporations). But this White House has not been very impressive on either policy detail or legislative wrangling, and this Congress has shown precious little in the way of courage, let alone results.
Stay tuned to this space for more analysis of the tax reform rollout!