Have Some Irony With Your SALT

The Build Back Better Act pushed by the Biden administration and passed by the House last week contains a provision to raise the SALT cap from $10 thousand to $80 thousand.

ironic
That’s how ironic it is

This, for me, is peak irony. Like, Alanis Morissette should henceforth substitute her “It’s like a black fly in your Chardonnay” lyric to instead croon “It’s like SAaaaaaaaLT in Biden’s BBB!” That’s the level of high irony we’re talking about here.

First, some explanation of the SALT cap, which stands for State And Local Taxes deductions cap. Before Trump’s 2017 Tax Cuts and Jobs Act, which is understood correctly as a tremendous tax cut for the wealthy, taxpayers could itemize state and local taxes that they had already paid, and have them deducted from their federal income. 

One of the only tax hikes of the 2017 reform was a cap on SALT deductions at $10,000. Before the cap, for example, if a taxpayer had already paid $30,000 in a combination of property and state income taxes, then their federal income would be considered $30,000 lower, for tax purposes. Limiting the SALT deduction at $10,000 would effectively mean that taxpayer owed taxes on $20,000 more dollars. The difference between $30,000 and the $10,000 cap.

Owning the Libs

This was widely perceived at the time as a fiendishly clever way to both raise revenue while simultaneously owning the libs. The libs, the thinking went, pay high property taxes and high state and local income taxes in places like California, New York, New Jersey, and Connecticut. This cap on tax exemptions seemed highly targeted to blue states. Many people’s taxes – particularly affluent libs who pay alot of state and local income tax and property taxes – went up by a lot, starting in 2018.

Now that Democrats run the House, Senate, and White House, they get to write tax policy in 2021. And while the BBB is described as a social spending bill, it is primarily a tax policy document. 

The BBB seeks anti-poverty, equality, and climate goals largely through tax policy. Spending on climate is largely through tax breaks for clean energy. Spending on reducing child poverty is through an expansion and changed criteria of the earned income tax credit and the child tax credit. A drive for equality comes through expanding taxes on upper 1 percent and 0.1 percent earners. It’s a tax law through and through.

Not surprisingly, one of the key priorities for Democratic representatives from California, New York, New Jersey, and Connecticut was repealing the SALT cap. It’s not a thing they shouted from the rooftops. But certain key constituents made it clear this needed to get done. Now that BBB passed the House, Republican representatives are shouting it from the rooftops, and they will continue to do so.

This all matters – as most tax issues do – more to higher income and higher wealth people. 

If the SALT deduction is lifted from $10 thousand to $80 thousand in the final BBB legislation (all of this is pending a Senate vote) blue-state Congresspeople are happy because every single donor who matters will be affected. They will have delivered for their people.

But we can see a few ironies piling up about the SALT Cap hike.

The bottom line of repealing the SALT cap is that it would be a very big benefit to the wealthy. Substantively, it will cost $85 billion a year in tax revenue. The top 1 percent of taxpayers will get about half this benefit, while the next ten percent will enjoy 35 percent of the benefit. This is all extremely off-brand for the Democratic Party in 2021. It makes an easy attack line for Republicans. Texas Representative Kevin Brady – the ranking Republican on the House Ways and Means Committee and therefore GOP point person for tax policy – immediately began hammering BBB for the SALT cap benefits to the wealthy.

But in Red States Like Texas…

Let’s go further, however, into the ironies. Unmentioned in the critiques of the SALT cap boost are how this will affect Texans for example.

Texas is a very high property-tax rate state, because of the absence of state income tax. In my county, for example, I pay 2.7 percent of market value for my home every year. That means anyone who owns a home worth more than $370 thousand has filled their SALT exemption on property taxes alone. With median home prices now above $300 thousand in my not-particularly-wealthy county, the SALT cap hits a lot of people. A lot of Texas homeowners. While there is not a majority of homeowners who are affected, there will be a large plurality. 

expensive_house
Texans pay high property taxes too!

All of this is to say that every Texas donor of means to Kevin Brady is also massively affected by the SALT cap. They are in that sense hoist upon their own petard. You just won’t hear Brady talking about it.

The SALT cap jockeying lays bare an uncomfortable fact of democracy. Namely, there’s a wide gulf between the “voter class” and the “donor class.” Lower income people, even in blue states, are not much affected by SALT caps. Higher income people and people who own valuable property, even in red states, are very affected by SALT.

For my part – my own valuable house and my hefty 2.7 percent property tax rate means I’m very affected. Even though the SALT cap hike is in that sense “fair to me” personally, I still think House Democrats should not have given me this tax break in the BBB.

Even if you revel in the “owning the libs” aspect of the SALT cap, there are further nuances at play. Namely, federalism. 

Federalism

In the abstract, Republicans profess to believe more strongly in devolving power to states, versus Democrats who often seek to strengthen the central government at the expense of “states’ rights.” State and local taxation, however, is a key way in which citizens of a state exercise choice, engaging in the “50 laboratories of democracy” aspect of our federal system. When citizens of a state (small d) democratically choose higher taxes in order to, for example, improve health care access, that’s a valid choice. In the broadest sense, the SALT deduction serves as a mechanism for shifting spending and taxation power down to the state level. This again puts Democrats and Republicans in this SALT fight on the opposite side of where they usually land.

It’s just another ironic twist in the upside-down roles of SALT caps.

What happens next? A couple of Senators, Bernie Sanders (VT) and Robert Menendez (NJ), do not like the wealthy skew of the House SALT cap increase, and have plans to limit the benefits to those making less than $400,000 per year. I’m hoping Bernie saves the day.

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Reinhart Rogoff and Political Tribalism

I wrote a few days back about how Reinhart and Rogoff’s serious, academic, review of past and prospective debt restructurings seemed to provide policy support for financial repression – such as capital controls, fixed currency regimes, highly regulated banks, and hidden taxes on savings through forced public pension investments.

This post highlights one of my favorite things – intellectual, counter-intuitive, irony.  In particular I enjoy the irony of political affiliations that the Reinhart Rogoff paper inspires.

Political_tribalism

I don’t know Professors Carmen Reinhart and Kenneth Rogoff’s political views, and in the most important sense they don’t matter.  They’re economists, not political leaders.

In the post-2008 Crisis world, one of the ideological fault-lines has been to what extent governments should borrow and spend today, as a counter-cyclical buffer to the extremes of the economic downturn.  Or conversely, whether the heavily-indebted governments of the developed world need to pare down their already-extensive borrowing, to avoid an even more disruptive crisis of fiscal insolvency.

Paul Krugman – from the political left – has carried the banner for more debt-financed government spending.

Regardless of the professors’ politics, the political right has adopted Reinhart and Rogoff’s work studying the history of debt restructurings as academic ammunition in favor of the budget austerity favored by the political right.  This is logical.

To the extent Reinhart and Rogoff highlight fiscal profligacy and its consequences – for example in their book This Time is Different: Eight Centuries of Financial Folly  and in their recent IMF paper – it makes sense that they find supporters in the austerity camp.

I guess that’s why I enjoyed the irony that I recently wrote about, namely that their recent paper appears to justify financial repression.  The right-leaning austerity camp is probably the last group who would approve of an interventionist financial regime such as currency controls, explicit and hidden taxes on savings, and a heavily regulated banking sector.

Meanwhile, from the left, the critics of Reinhart and Rogoff’s history of debtors’ profligacy argue in favor of a much more severe regulatory regime when it comes to banking.  The natural political affiliations seem flipped in this situation.

Of course, the challenge as always is to figure out what we really think about complex topics, rather than just adopt what ‘our side’ thinks on a complex topic.  All of that reminded me of our tendency toward policy tribalism.

More on the irony of political affiliation

The best thing I read last week came from The Washington Post’s Ezra Klein, who highlighted our tendency to choose tribal affiliation over principal when it comes to policy preferences.  It’s worth reading his article in full, but I’ll try to summarize Klein’s article.

First, Jesse Myerson wrote a lefty Op-Ed for Rolling Stone Magazine, advocating five policies

1. Guaranteed jobs

2. Guaranteed incomes

3. Higher taxes on landlords

4.  A sovereign wealth fund to spread common ownership and

5. A public bank

Importantly, he cited Franklin Roosevelt, Martin Luther King, and some presumably left-leaning academics as supporters of his ideas.

Next, Dylan Matthews wrote a right-wing Op-ed for Ezra Klein’s Wonkblog, advocating the exact same policies, but citing conservative support for the ideas, such as The American Enterprise Institute, Milton Friedman, and Charles Murray.

The reaction: conservatives hated the first article and supported the second, while liberals, of course, praised the first and panned the second.

Klein goes on to cite the work of Stanford psychologist Geoffrey Cohen, who has shown that we consistently form our opinions about policies based on who we think supports the ideas – rather than the specific ideas themselves.

Do we really support the policy?  Or do we just support it because our political tribe supports it?  Are we thinking about stuff for ourselves or just figuring out which side our people are on?

To use a sports analogy (that I’m not sure really works): Do we really care about the guys on our team, or are we just rooting for laundry?[1]

I don’t know, but I will try to remember this.

Please see related posts on Reinhart Rogoff: Academia, Markets, and Click-bait

And the Reinhart Rogoff point that Financial Repression = less Financial Crises

Wes_Welker_big_helmet
Am I rooting for the players or laundry?



[1] When he played for my team, Johnny Damon represented the paragon of lovable caveman-hood.  But when he left for the Yankees, all that overdeveloped forehead (from, um, vitamin supplements I guess?) seemed gross.  When he played for my team, Wes Welker was a virtuous, fast-as-a-tiny-quantum-electron, tight-end.  When he crushed my spirit this past weekend with Satan Manning, well then.  Welker is such a loser and a sell-out, in his goofy space helmet.

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