Tax Breaks Are Breaking the Free Market

Source Composite Sean Culligan/OZY; Image Shutterstock

Why you should care

Indiscriminate cuts for the wealthy don’t help the free market. They harm it.

The Future of Taxes: How's the government coming for your cash? The Future of Taxes: How's the government coming for your cash?

Bob Dole was doling out special tax cuts for the energy industry, and Howard Gleckman couldn’t figure out why. After all, the future presidential candidate was part of a Republican Party touting a “pick no winners” free market as part of the Reagan Revolution of the eighties. Plus, Dole wasn’t from a gas-titan state like Texas. “He’s from Kansas!” as Gleckman, then a reporter at Business Week, put it.

More on that in a minute. Let’s talk about tax cuts. The Republican Congress and President Donald Trump passed the Tax Cuts and Jobs Act in 2017, fulfilling a long-offered promise of putting more money back in the pockets of the American people. And it did: About 82 percent of middle-class earners were expected to see a tax cut, with an average of $1,200, according to the Tax Policy Center.

Still, the payout was felt most by corporations and the highest earners. The corporate tax rate dropped from 35 percent to 21 percent. “It makes investing in the U.S. less expensive and more rewarding by ending a distortion,” Grover Norquist, the founder of Americans for Tax Reform, writes by email.

Critics note that relatively few companies — a few hundred — have brought their internationally shielded dollars back to the States, and those that did so took advantage of a “repatriation holiday” that gave them a greatly reduced rate. Meanwhile, those savings that were supposed to go to hiring U.S. workers just as often went to a record $1 trillion in stock buybacks. The bill did not, in fact, pay for itself, as the White House promised. The expected cost is roughly around $1.5 trillion added to the deficit conservatives have spent much of the last decade decrying. And there are other concerns, even among conservative economists like Alan Viard of the American Enterprise Institute: “Although you hear Republicans claim the effects of taxes are very big, it’s not always clear if they really are even linking them to incentives,” he said in August of last year.

The devil is in the details, and the particulars of the tax bill are what surprise the most. A new 20 percent deduction on pass-through business income means that many workers can avoid paying taxes on a fifth of their income simply by transforming from a wage earner to a sole proprietor. While eliminating some of the tax breaks for companies stashing cash internationally, they created other, equally potent, loopholes that are causing businesses to shapeshift to adapt — not for business reasons, but because they benefit more from tax avoidance than free market principles.

“You want to have a tax code that raises revenue in a way that interferes with the market as little as possible,” Gleckman says. “At best, we have a missed opportunity to get rid of some of these targeted tax preferences that do interfere with economic decison-making. At worst, they made it worse by adding new ones.”

Admittedly, the large cut to the corporate tax rate should preserve free market competition in a way few other changes could. It’s an “odd argument that a dramatically lower tax burden would be a greater distortion of the market,” Norquist says in responding to Gleckman’s points.

Still, the pass-through deduction — and other loopholes introduced by the TCJA — do alter the market, turning us “into a nation of tax-shelter hunters,” as Gleckman, now an economist and senior fellow at the Tax Policy Center, wrote last year. It’s a very unconservative notion that special tax breaks have led to companies creating models meant to take advantage of government policies rather than to serve the needs of customers.

Which brings us back to Dole. Gleckman eventually figured out that while Kansas wasn’t a big oil and gas producer, it did have more “strip wells” — that is, do-it-yourself gas wells typically on ordinary people’s land — than most states. Dole, from his lofty perch as chair of the Senate Finance Committee, was bending the nation’s competitive markets for a few random citizens in heartland states looking to make a quick buck. “This wasn’t a matter of Exxon and Mobil; this was a farmer in Iowa’s [or Kansas’] backyard,” Gleckman says.

The game hasn’t changed. Talking big about the free market may seem like a principled stance. But next time a politician does, ask them for the receipts showing that they aren’t just creating more carve-outs to special interests. Odds are, they lost them with this last tax law.

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