The Republican effort to cut federal taxes is still underway, and many crucial details are still unsettled. But little doubt remains that the effort has been heavily shaped by wealthy donors.
As Chris Collins, a Republican representative from New York put it: “My donors are basically saying, ‘Get it done or don’t ever call me again.’”
Many affluent people are likely to celebrate if an eventual deal in Washington grants them big tax breaks. Evidence suggests, however, that their jubilation would be short-lived — and followed by deep disappointment.
It is perfectly natural, of course, to believe that extra cash will help them buy the special things they want, such as more spacious homes or better performing cars. But that belief is a garden-variety cognitive error.
The mistake occurs because “special” is an inescapably relative concept. A spacious home is one that is larger than most other homes. A high-performance car is one that outperforms most other cars. Successful bidding for such things depends almost entirely on relative purchasing power. Taxes affect absolute purchasing power, not relative purchasing power. The upshot is that the ability of the already rich to bid successfully for special things is not enhanced by tax cuts.
Why isn’t this simple truth more widely appreciated? In thinking about how taxes affect us, we try to imagine how life would be different if we had less money. And when we recall examples of actual events that left us with less money — think home fires, job losses, business downturns, divorces, serious illnesses and the like — in almost every case, it really was more difficult for us to buy things we wanted.
But such events merely reduce our own incomes while leaving others’ unaffected. They reduce our relative purchasing power. Matters unfold differently when everyone’s spendable income goes down together, as when all pay higher taxes. In that case, our relative purchasing power remains the same as before.
Because virtually every human evaluation depends on context, the category of goods whose accessibility depends overwhelmingly on relative purchasing power is far broader than might appear. Suppose, for example, that you’re driving with your 6-year-old to visit her grandparents and she asks, “Are we almost there yet?” You’ll say “yes” if only 10 miles remain on a 120-mile journey. But you’ll say “no” if that same distance remains on a journey of only 12 miles.
Similarly, someone in Miami knows the answer if someone asks whether it’s cold on a 60-degree day in November. But her answer will be different from that of someone in Montreal who is asked whether it’s cold on a 60-degree day in March.
Little wonder, then, that context shapes our evaluations of virtually every purchase we might consider. The standards that define “special” are therefore highly elastic. When everyone buys larger houses and faster cars, or stages more elaborate wedding celebrations, standards adjust accordingly.
Failure to appreciate that reality has also contributed to the tax resistance that has made it so difficult to restore America’s crumbling public infrastructure. Even proponents of minimal government concede that private cars would be of little use without public roads. And although it’s difficult to reach agreement on the best mix of public and private spending, studies show that the current mix in the United States is strongly biased against public spending.
My research on this issue over many decades has identified the following thought experiment as an instructive way to view this problem.
Imagine that you are a wealthy car enthusiast facing two options: Driving a Porsche 911 Turbo (purchase price: less than $160,000) on well-maintained highways, or driving a Ferrari F12 Berlinetta (purchase price: more than $320,000) on roads riddled with foot-deep potholes. Which would you choose?
It’s an easy question. Suppose that the Ferrari would universally be judged better if both cars were driven on good roads. But since the Porsche already has every design feature that affects performance significantly, the Ferrari’s edge would be tiny at most. No one could reasonably claim that the Ferrari would be more pleasing to drive on pothole-ridden roads than the Porsche on well-maintained ones.
Yet, among the super-wealthy, the actual quality mix of cars and highways in the United States more closely resembles Ferraris on potholes than Porsches on smooth asphalt. That’s puzzling, since the latter combination could be achieved at much lower total expense.
This distortion is in large part a consequence of the cognitive error just described: What happens when any one person spends less on a car is very different from what happens when everyone spends less. In the former case, the buyer feels deprived. But when everyone spends less, the relevant frame of reference shifts, leaving drivers just as satisfied as before. The same logic applies not just to cars and highways, but also to a broad mix of personal and public priorities.
The American tax system is indeed deeply dysfunctional. But the consensus among tax-policy economists from both sides of the political aisle is that the proposals under consideration are not the reforms we need. Rate cuts for top earners would greatly increase budget deficits and do little or nothing to spur growth. Others have objected that they would make a skewed income distribution even more unequal. Fair points all.
But elections have consequences, and Republicans have never hidden their desire to cut taxes. They now have the power to do so.
But it would be a mistake to exercise that power. Tax cuts for the wealthy would not alter the supply of special things to be had. And by increasing government deficits substantially, they would degrade our infrastructure in ways that would harm even the ostensible beneficiaries of those cuts.
In short, cutting taxes for the wealthy is a losing proposition — even for the wealthy.