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Intended consequences are the worst

I saw this news story by Jesse Drucker and Eric Lipton, headlined, “Meant to Lift Poor Areas, Tax Break is Boon to Rich.”

The news article is informative, and the story it tells is horrifying. Beyond all that, I’m bothered by the headline, as it seems that the scamtastic aspect of this tax benefit was intended all along. Maybe instead of “Meant to Lift Poor Areas, Tax Break is Boon to Rich,” the headline should’ve been, “Meant to Help Rich, Well-Connected People, Tax Break Succeeds.”

My larger concern is with the narrative of unintended consequences. Here’s the story: What a paradox! Law intended to help poor, actually helps rich. But it seems like the real story is much simpler. This is an example of something I like to say, that unintended consequences often were actually intended.

P.S. The online headline is, “How a Trump Tax Break to Help Poor Communities Became a Windfall for the Rich.” Better would be, “How a Tax Break to Help Rich People Succeeded in its Purpose.”

21 Comments

  1. jim says:

    ‘Maybe instead of “Meant to Lift Poor Areas, Tax Break is Boon to Rich,” the headline should’ve been, “Meant to Help Rich, Well-Connected People, Tax Break Succeeds.”’

    It is possible that the people creating these tax breaks aren’t intentionally trying to enrich themselves.

    Progressives do incredibly stupid things all the time that hurt the people they’re trying to help. For example, Seattle just imposed a “winter eviction” restriction on property owners. It’ll be great for all the people currently on the verge of eviction. But once those people have been evicted, property owners will just raise the rent to prevent borderline tenants from being in the unit in the first place. Consequence: people who need a place to live won’t be able to afford it and will be homeless in the winter.

    So I guess we have to ask ourselves: should this somehow be considered an “honest” an unintentional consequence because no one immediately gets richer, even though the outcome is stupidly obvious? Or is council playing on popular fears to keep itself in power, even though playing on those fears is destructive to the larger society?

    • gec says:

      Well, the broader consequence of fewer poor people living nearby (because they cannot afford housing) might well have been intended?

      Of course, the bigger issue is that there can be conflict between what people “wish” for in an global, ethical sense (e.g., “people should have access to shelter regardless of their economic means”) and what people “want” for themselves (e.g., “I’d rather not have destitute people living next to me”). So the question is, was the effect “intended” if it may not have been the original stated goal but is one that was desired anyway? Maybe a way to put it is that it’s kind of a “retroactive intention”, one that might have been orthogonal or even opposed to the original goal but which no one is willing to reverse after the fact.

      This is a bit like what Lakeland was saying in another thread, that a lot of the issues in economic decision making boil down to people not honestly expressing the values that guide their decisions (or maybe not being honest with themselves about it).

      • jim says:

        gec says: “(e.g., “I’d rather not have destitute people living next to me”).”

        No doubt that’s part of the equation, but perhaps not as unintentional as it might first appear.

        One effect of such regulations is to push out the small property owner: 1) for a property owner with a single rental property one non-eviction puts the entire asset base at risk. 2) a large property owner can manage growing regulations much more efficiently; 3) large property owner has lower cost for implementing changes to rental agreements and for legal services in general.

        Also people with certain ideologies might find it beneficial to increase homelessness, which then provides a justification for expanding social services.

    • Jake says:

      > But once those people have been evicted, property owners will just raise the rent to prevent borderline tenants from being in the unit in the first place

      For this analysis to work, you’d need to assume that property owners would choose to not raise rents after a wintertime eviction, and only do so during the other months of the year.

      • jim says:

        You’re correct, they can raise the rent any time, but people who are behind on rent won’t have to worry about it in the winter, since they can’t be evicted until spring.

        Aside from several recent letters to editors from property owners, the growing homeless population is at least consistent with the growing number of restrictions on property owners.

  2. poorlando says:

    The rich pay most of the taxes collected by the federal government, so any tax break will probably help the rich.

    • I think the point is this goes beyond just the tax break they get, it also leads to things like building luxury hotels on the edge of jerrymandered zones or high rise luxury apartments or private college housing or whatever… the linked NYT article says:

      “Instead, billions of untaxed investment profits are beginning to pour into high-end apartment buildings and hotels, storage facilities that employ only a handful of workers, and student housing in bustling college towns, among other projects.”

      So, it’s not just that the rich got a tax break… but they also got to spend it on themselves even though the cover was that they would spend it on developing poor neighborhoods

      • Anoneuoid says:

        It says in the article the stated goal was to encourage gentrification of poor neighborhoods.

        Why anyone would expect that to play out any different than any time in the past is a mystery to me.

        • Anoneuoid says:

          And I wonder what they would consider “helping the poor”, building versions of Cabrini Green all around the country where people are getting evicted even though rent is $1/mo and crack babies are getting thrown out of a window once a week? That will make the neighborhood more affordable…

        • Like Andrew says, this is yet another rent seeking scam under cover of some social good or whatever. It’s totally intended consequences: Politicians tout success of system designed to give money to the ultra wealthy! More News at 11.

          • Anoneuoid says:

            I happen to know the area in New Orleans they mention, it is already pretty nice right there but there are places I wouldn’t walk at night (tent cities) a few blocks away. So who knows how these areas got carved out but I would look there for the corruption.

  3. Terry says:

    I agree with everything everyone has said. My only concern is that the criticisms may be too gentle.

    This has been going on for decades … at least. The path is well trodden and developers and politicians know exactly how this plays out. As a developer, Trump knows how these things work.

    These programs are crafted to co-opt local mayors and governors. Local pols help decide where the “poor” areas are and so they get in on the grift too. Since local urban governments are usually Democrat controlled, this is a bipartisan grift.

    Since these are tax-breaks, they don’t show up as spending in the budget (I think).

    Even on their own terms, these programs don’t really make sense. The benefits, even when the projects are in genuinely poor areas, flow primarily to developers and landowners, who are usually not poor. Yes, a few poor people may own homes in the area and benefit from increased property values, but generally, poor people rent rather than own. These projects increase their rent, and they may have to locate to another genuinely poor area to find low rents. The poorest people tend to live in the poorest areas where rent is lowest … who else is going to live in the poorest areas?

    There is a vague notion that making a neighborhood nicer benefits poor people in the area. How exactly? Some vague force that flows down the streets? Improved job prospects? But most cities have buses that poor people can ride to get to work in thriving areas.

    Yes, the neighborhoods may improve. But “neighborhood” is not the unit of analysis. People are what matter. Neighborhoods generally “improve” due to demographic changes. How does that translate into helping people?

  4. Terry says:

    Gentrification is generally good for any local businesses and property owners, go talk to anyone running a corner shop and they will probably love it.

    Agree.

    A small number of lower-middle class people benefit. A traditional path to the middle class is to buy a small apartment building, fix it up and rent it out. I have no problem if these people benefit. Of course, development in Neighborhood A probably means less development in Neighborhood B, so it still isn’t clear how large the benefits are.

  5. Jonathan (another one) says:

    As many economists have pointed out, the most appropriate tax rate on capital gains is probably zero. See https://en.wikipedia.org/wiki/Optimal_capital_income_taxation for a summary of the arguments. So there are actually good public policy reasons to free up Sean Parker’s pile of FB stock he’s sitting on. That said, for all the reasons mentioned here, encouraging a particular form of investment in particular geographies is a cockeyed way to do this. But since it’s hard to describe the Chamley-Judd theorem and easy to say you want to help the downtrodden (whether you do or not) and particularly easy to get the buy-in of hungry mayors, the inefficiencies described in the article are the price you pay.

    • The best design of a tax scheme, in my opinion, is a simple flat tax on income + a flat tax on consumption (sales or value added or whatever) + a universal basic income. This does by far the least distortion of asset allocation, and helps the poor and middle class the most, while ensuring stability for the poor and no perverse “poverty traps” where making more money reduces your ability to consume due to loss of benefits.

      As pointed out in the article you link, taxing capital gains is basically taxing future consumption more than you’d tax present consumption, which is perverse… But taxing present consumption makes sense, and future consumption will be taxed at that later time… the investor can then make a decision to accept a tax of x percent now, or a tax of x percent later on an amount that’s different based on the return on investment… so they’re making market based trade offs of now vs later consumption, which makes sense.

      The one thing it doesn’t do? Let governments sell special favors to rich people in exchange for appropriate campaign contributions. And this is the big business of government today…

  6. Jonathan says:

    There is a disconnect between encouraging investment and benefitting people who are relatively remote from investment effects. To make this math, there’s an effect of investment and a reach. An investment credit like these does appear to stimulate investment. That investment has an effect which has a reach which is separable from the overall effects because it is relatively far away. I like to use two notes on a piano: play a very low B and then a very high C. You don’t notice much discord. If you play the very high B, you probably have to think ‘oh, this really is the same in some ways as that very low B’. The C will sound very different if you play them one after another but the dissonance is largely lost because the actual distance is so far. You can call this a measure of trickle down.

    One issue is that effects at a distance may be substantial, while being remote. This is how scale works: seen from above, seen up close and personal. Another issue is that negative effects at a distance directly compete with what we can presume are positive effects closer to the investment. Another issue is that it may be easier to see immediate negative effects – or immediate positive effects. This has long been an argument made by liberal economics: short term pain that benefits over the long run, your losing your job, your city losing its industry, is part of a longer term positive effect.

    I also note that incentives seem to work best when a market is ready to turn or has already turned. They were available in Detroit for many years but no one could get the money to invest in the city, whether from investors or lenders. Development was typically cobbled together with grants and subsidized loans because there was no money. This suggests a functional limit to this kind of incentive: it works when people want to move into that area, shop in that area, etc. and not if they don’t. One of the most amazing things about investment in general is that low prices discourage investment (assuming you’re not dealing commodity goods, etc.) because low prices carry a very strong signal about the future. In Detroit, the competition was basically ‘this is free’. That low a price says ‘no future, don’t invest’. And the sad truth is no one knows how to make a better future until sufficient glimmers appear that enough people can see it. Detroit is now reviving in places. That revival doesn’t respect the poor any more than revivals elsewhere have.

    And I note that I have experience with tax incentivized development, even one that got an exception written into a law (not done by me). That exception was because a city wanted to encourage redevelopment to draw business. That is a fundamental piece as well: the places set where you can use these credits. They direct them to the areas they want to improve. They know the general lesson: you can’t force investment, just help it along to where it might fit.

    • Martha (Smith) says:

      Jonathan said, “[incentives] were available in Detroit for many years but no one could get the money to invest in the city, whether from investors or lenders.”

      Can you say what period of time you are talking about? (I’m curious because I was born and grew up in Detroit.)

      • Jonathan says:

        Pretty much from the late 1960’s until the bankruptcy. Before the bankruptcy, Detroit could not provide basic services like electricity and garbage pickup.

        The last few years have seen a substantial increase in prices. The most desirable areas, like Indian Village, have skyrocketed. I remember when you could get a mansion there for under $100K. In some areas, you could buy extremely nice houses for next to nothing. I knew a guy who had a 26 room house that he paid $20k for. I knew someone who bought a lovely house for $14k.

        I worked in law in the early 1980’s and there was no development in the city. Banks would not lend. To do anything, you needed a whole bunch of grants. The state had some. The city really didn’t because they couldn’t afford any. There were federal designations but each required so many hoops – like getting other financing – that it seemed more a way to not fund things in what everyone believed was a place sinking into the depths.

        It’s not unusual: I worked with a number of affordable developments in Boston, which was already a hot market, and each project required several funding sources, many of them state-sponsored, all of them highly subsidized. Boston just approved an affordable housing tower … paid for by money a developer put up to build a big development downtown.

        I grew up in the 1960’s. I remember Detroit before it went down.

  7. D Kane says:

    > Law intended to help poor, actually helps rich.

    Should be:

    Law intended pretending to help poor, actually helps rich.

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