The GOP majorities in both houses of Congress and the Trump administration talk expansively about cutting unnecessary federal spending, abolishing unneeded regulation and reforming the tax code to give greater incentives to economic efficiency. But the New Testament warning that “by their fruits ye shall know them” applies in spades here.
Will Republicans use their position to make legislative changes that actually improve the efficiency and fairness of our economy? Or will the outcomes just be gravy for key companies and households to the detriment of the rest of us? If they are serious about reform, here are suggestions in the three areas of tax reform, deregulation and spending cuts that genuinely would benefit U.S. society as a whole.
TAXES
On taxes, do away with the “step-up basis” provision of the income tax. This tax exempts from income taxation gains in value of assets held until death. Buy a farm for $100,000, for example, sell it when you retire for $500,000 and you will owe income tax on a capital gain of $400,000. Hold it to your death and your heirs get a $500,000 asset that has a “cost basis” of the market value on the day you died. If they sell it, the $400,000 gain is never taxed. (For more details, see my column of April 23).
This provision is unfair, and only benefits a small proportion of households. It is unfair. Put money from your salary into CDs or bonds to pass to your kids and you will have paid income tax on every dollar they get. But if you are in a position to save in the form of a farm or rental property or stock in a startup corporation, then nearly all the wealth the next generation gets will never have been taxed. This distorts decisions on how to use capital. Of those who use it, a benefit of thousands or tens of thousands of dollars accrue to most, while hundreds of millions or even billions go to super-rich families with names like Gates, Buffett, Walton and Soros.
Killing this unfair and inefficient provision is particularly important if we abolish the federal estate tax. This tax does have a high overall cost to the economy relative to revenue raised, but it has the advantage of catching some of the money that escapes income taxation because of step-up basis. Eliminating the estate tax while keeping step-up basis and the richest 5 percent of households gets an enormous windfall.
REGULATION
If you want to get rid of harmful regulation, kill the ethanol mandate. It does little to improve the environment and has no such benefits that could not be achieved more efficiently and fairly with other policies, like emissions taxes. It distorts commodity prices, skews land values and motivates misallocation of inputs like fertilizer. Many of the benefits end up in the pockets of non-farming landowners like me. Young beginning farmers have to pay more for land because of it. And this federal law transfers money from consumers as a whole to the handful of large companies composing the oligopoly that produces most of the ethanol.
In this same rubric of deregulation, get rid of the opaque network of import restrictions, barriers to entry and price discrimination that keep U.S. sugar prices above what they would be in a free market. These don’t involve direct subsidy payments so it is off most people’s radar. The income transfer occurs with 330 million people paying a few cents per pound more for sugar so that fewer than 6,000 sugar producers can have higher income and net worth. Ironically, the higher price also helps tilt the floor in favor of high-fructose corn sweetener to the benefit of corn producers.
Yes, most of the sugar producers are hard-working farmers like those in Minnesota and North Dakota. But these farmers are not Ma and Pa Kettle. Nearly all fall into the top 5 percent or so of household incomes and the top 1 percent of net worth.
And in cane sugar production and the non co-op side of sugar refining and distribution, things are worse. One Miami-based Lebanese-Spanish-Cuban-American family dominates the sector. And, following the example of ADM’s Dwayne Andreas, who long gave personal gifts to Democrat Hubert Humphrey and Republican Bob Dole alike, this Fanjul family plays both sides of the political street. Alfy, still a Spanish citizen, headed Bill Clinton’s campaign in Florida in 1992 and is a major donor to Democrats. His brother Pepe funnels family money to the GOP. Representatives and senators who snap to attention when a phone call comes from the Fanjuls are not limited to the Florida delegation. There is no reason why all the rest of us should pay more to enrich this clan every time we buy a bag of sugar or of any food containing sugar, such as a scone with our latte. Or even a candy bar.
SPENDING
For a wasteful spending program that takes money from one group to give it to another, consider the system of farm subsidies nominally structured as “insurance.” This replaced the old “direct payment” subsidies that had been in place for decades.
One purported advantage was that it would reduce incentives for the efficiency-robbing distortions created by direct payments. But it is becoming clear that the primary advantage for farmers and politicians is that it is opaque, hiding, rather than eliminating, perverse incentives and camouflaging the level of income transferred by government fiat. And it induced its own distortions, reducing in the diversity of crops produced and tilting the playing field even more toward large operations.
It also is a gravy train for the oligopoly of private underwriters who actually administer this federal income redistribution program, since federal re-insurance protects them against major losses and fees are ample. And it created many opportunities for farmers to game the system and even engage in outright fraud. Examples are common of producers who suffered from “prevented planting” three years out of five or had crop “disasters” significant enough to merit payments eight years out of 10. Some observers see proportionately more abuse and fraud in federal crop insurance than in food stamps or Temporary Aid to Needy Families and I, personally, think they are right.
Once again, the benefits are skewed. A relatively numerous group of mid-sized farmers get modest payments. But, despite laws supposedly limiting payments to any individual farmer, there are loopholes so that large payments go to a small cohort of very large producers. Indemnities are based on self-tabulated “Actual Production Histories.” Planting dates, yields and other data related to losses also comes from producers. Ostensibly, there are provisions to check the accuracy of producer reports, but with modern large operations covering multiple tract owners within the same family, often located in more than one county and involving homogeneous commodities like corn and soybeans, preventing abuse and outfight fraud is difficult.
Moreover, the private underwriters who administer the program with a broad backstop from the U.S. Treasury compete with each other. Profits are in the small cohort of large produces with thousands of acres effectively in one operation, even if not on paper. No single underwriter wants to press such big customers too closely on the accuracy of reported yields or loss circumstances or that account will go somewhere else. Problems in the whole system are a mess that everyone is trying to avoid.
Economists use the term “scale-neutral” to describe incentives created by some institution or government policy that influence the size of companies. A policy is “scale neutral” if it favors all different size operations to the same degree. But federal farm policies have never been neutral and have always created incentives for operations to get bigger. This is no different under the contemporary “insurance” scheme than it was under prior subsidy systems. And having taxpayers pick up production risks discouraged crop diversification and encouraged growing crops on marginal land where they would not be feasible under market forces.
Do I really think Congress and the president will adopt these suggestions? Yes, about the time I see pigs swooping and soaring outside my window. Would a Democratic Congress and president be any more likely to do so? No. The power of vested interests and of sheer political inertia is too great. But if all remain as is, please spare us the pious do-nothing rhetoric about any thirst for reform of taxes, regulation and spending.