December 20, 2017 / 8:23 PM / 2 years ago

Breakingviews - Cox: Is Wall Street more democratic than America?

NEW YORK (Reuters Breakingviews) - Is Wall Street more democratic than America? As crazy as it may sound, the slapdash process by which the Republican-controlled U.S. Congress just shoehorned a corporate tax cut masquerading as comprehensive tax reform through the legislature raises the question. The bill effectively redistributes income from the most productive states in a fashion that potentially undermines faith in representative democracy.

A street sign stands outside the New York Stock Exchange on August 19, 2011. REUTERS/Lucas Jackson

Taxation without representation was the rallying cry for the colonists rising up against British rule in 1776. Yet a variation on the same just happened with what was billed as the Tax Cuts and Jobs Act. The law - which passed both the Senate and House of Representatives on party lines this week - punishes states that voted for Hillary Clinton in last year’s election to pay for cuts that mostly accrue to companies, their shareholders and the top 1 percent of earners.

But the tragedy isn’t that middle-class taxpayers in places like California and New York may pay more under the new regime, or even saddle the next generation with up to $1.5 trillion in future liabilities, though that is shameful. It’s the way votes in these states were discounted in the legislative process. This could present a profound and existential affront to American democracy. Moreover, it effectively lurches actual governance in the opposite direction of its corporate version.

Consider how Wall Street has been gradually reforming its ways. After the disastrous public offerings of stock with no voting rights by Snap and others, the compilers of the most important benchmark in the world, the S&P 500 Index, said they would no longer admit shares of companies that do not adhere to the one-share, one-vote principle of economic ownership and representation.

While S&P’s decision left untouched companies that are already existing index members like Facebook and Alphabet, it will force debutants like Airbnb, WeWork and Lyft to reconsider whether to give their founders extra voting powers by creating more than one class of stock. Others, like Stitch Fix, have gone public with more than one class but attached expiry dates to the extra voting rights. The point is there is a growing recognition that the system is fairer and more democratic when shareholders are given votes that correspond to their economic ownership.

The framers of the Constitution had a different idea in mind. They came up with institutional safeguards, like giving each state two Senate votes irrespective of its population or creating an electoral college to validate presidential elections, to ensure the laws of the land would not simply be devised by those with the most money. That, anyway, was the theory. In actual fact, the way campaign finance works today, special interests with the greatest wherewithal to lobby politicians get to shape policy.

That explains why big corporations, which far and away have the most resources to influence politicians in Washington, are coming out with the most goodies in the GOP plan. Their tax rate will be permanently cut to 21 percent from 35 percent. Most individuals will derive some smaller benefit, according to the Tax Foundation, but most of these provisions will expire after 2025.

Real pain, though, will occur in those states losing their ability to deduct state and local taxes from their federal returns. That is a direct torpedo to Democrat stalwarts California, New York, New Jersey, Connecticut and Massachusetts, where as much as 40 percent of households rely on the so-called SALT deduction to defray federal tax liabilities. Since these states also boast the highest housing values, they will also be hit by a reduction in the deductibility of mortgage interest.

That’s why the senators in these five states, all Democrats, voted against the GOP tax bill, and why 11 of 12 GOP representatives in the House who opposed the bill also hailed from those five states. Unsurprisingly, states where taxpayers derive the least benefit from the SALT deduction were fine with the bill.

Consider five of them: North and South Dakota, Wyoming, Idaho and Montana. These states have 10 Senate votes, just like New York, California, Connecticut, New Jersey and Massachusetts. Eight of them are Republican and voted for the bill. The two Democrats - one in South Dakota and one in Montana - voted against the proposal. Those five states have 5.1 million people, nearly two million fewer than Massachusetts, one of the original American colonies. That’s 1.6 percent of the U.S. population.

Now tot up the gross product from those five sparsely populated states, a measure of their economic contribution. The combined $263 billion produced from the Dakotas, Wyoming, Montana and Idaho equates to just 1.3 percent of America’s $20 trillion. That means, despite their minuscule contribution to the economy they got a 10 percent stake in deciding how taxes are apportioned across the land.

Meantime, the five coastal states bearing the greatest burden of the corporate tax handout produce around $6 trillion, or 30 percent, of the U.S. economy. The 79 million people who call those states home account for 24 percent of the total population. Roughly put, that means on a per-capita basis they produce more than their fellow countrymen in those five red states. Yet their say on the most important tax bill in a generation was limited to just a third of their contribution.

The founding fathers wanted things to be like this so that agricultural states would get a fair shake in the affairs of the nation. And over the years, parliamentary measures were introduced, such as the 60-vote filibuster, to create a better sense of proportionality. Wall Street’s example, though, suggests the natural order is for rules to move toward a greater sense of fairness, where each vote counts in equal measure rather than in some diluted fashion. Why should it be any different for American democracy?


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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