Crony capitalism is one of the biggest problems the American economy faces today. In order to gain an artificial advantage over competitors, cronyistic businesses push for economically damaging regulations, restrictions on trade, and market-distorting subsidies and tax breaks. Confronting such a wide-ranging epidemic requires that Americans have a strong grasp of how crony capitalism manifests itself in our economy. Unfortunately, Robert Reich, a professor of public policy and former Labor Secretary under President Clinton, appears to be dedicated to peddling an inaccurate definition of crony capitalism.
Reich claims that because the House GOP tax bill would cut the corporate income tax rate, it is a form of cronyism. Never mind that the corporate tax cut would apply to all corporations, and that small businesses, or pass-through businesses, would also be receiving a significant tax cut. To Reich, it is cronyism because corporations would benefit.
Policy is only a form of crony capitalism if it benefits one corporation or industry at the expense of the economy as a whole. Cutting rates across-the-board to make our tax treatment of corporations more internationally competitive, on the other hand, is a positive policy goal. A corporate tax cut would reduce the incentives under current law that drive jobs overseas as corporations seek to avoid punitively high tax rates and stagnant wages.
Reich points to the fact that business groups met with GOP leaders (common practice for drafting a bill that affects those business groups) and that corporations donate to Republicans (as though corporate donations are unique to Republicans) as proof that corporations paid for their tax cut. But many business groups that were initially supportive of tax reform turned right around to oppose the reform effort when they found out their favorite tax breaks were under threat.
The National Association of Home Builders and the National Association of Realtors each turned around and attacked the tax reform effort once they realized that the mortgage interest deduction (MID) would be capped. The MID is itself a cronyistic policy, benefiting the housing industry and wealthier homeowners at the cost of making housing more expensive for the majority of Americans who do not itemize their tax returns.
In fact, many businesses and organizations have come out against a tax bill that will further reduce the number of Americans who itemize their taxes. As the House GOP bill would double the standard deduction and reduce the benefits of itemizing, the Joint Committee for Taxation estimates that the number of Americans who itemize rather than claiming the standard deduction will drop from 29 percent to 6 percent. Such policy is hardly consistent with Reich’s claims of a “cronyistic” bill.
Tax reform that simplifies the tax code is almost by its very nature not cronyistic. Our current tax code is a mess of special tax breaks and carve-outs that place the interests of specific groups and industries over those of the economy as a whole. Approximately 94 percent of Americans and 85 percent of small businesses pay a tax preparer or service to do their taxes for them. A recent study by the National Taxpayers Union Foundation placed the total cost of tax code compliance in 2016 at $262.6 billion.
Crony capitalism continues to be a serious problem for the economy, costing jobs and hurting less well-connected competitors. But using the term as a cudgel against policies that benefit all businesses and the economy as a whole is self-defeating.
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