The STEP Act is About More Than Property and Taxes

I recently caught an episode of Agritalk that included a farmer forum discussing the STEP Act. 

Link: https://omny.fm/shows/agritalk/agritalk-march-31-2021 

Senator Chris Van Wollen uses colorful language to describe the rationale for the STEP act: "This is one of the largest tax breaks in the entire federal tax code, with the Joint Committee on Taxation estimating that it is worth $41.9 billion in 2021 alone. Every dollar of the tax break from tax-free stepped-up basis is a government subsidy for inherited wealth, and the bulk of that subsidy goes to the wealthiest family dynasties." 

So how might this play out? How are these wealthy dynasties taking advantage of this sneaky loophole?

Paul Nieffer gives one among many egregious scenarios that could play out if certain parts of this act pass:

"Bill and Mary have four children and they usually gift $15,000 of grain to each child annually to help fund their college expenses.  Bill and Mary each gave $60,000 of grain in 2021.  This reduces their lifetime transfer exemption to $40,000.  If they give the same amounts in 2022, they will each have $20,000 of ordinary income to report and it may be subject to self-employment taxes."

Interesting this behavior gets characterized as a 'loophole' and simply raising a crop and earning a living counts as a 'tax break', while sending your kids to college is the thing of 'dynasties.' But the real impacts on flesh and blood human beings are abstracted behind the political rhetoric of the legislation's proponents. As the discussion went during the episode, there are lots of incentive effects to consider. Why invest and improve operations when so much is going to be taken back? What will they have to pass on to the next generation? And this is key. It's not just family farms that are going to be largely impacted, these effects will impact small businesses too. But this is just scratching the surface. Family farms do more than just produce food and small businesses do more than just produce goods or provide services. In addition to being part of the social fabric in towns and communities, and in addition to providing a source of employment they serve other important social functions. 

Thomas Jefferson wrote to George Washington in 1787:

“Agriculture … is our wisest pursuit, because it will in the end contribute most to real wealth, good morals and happiness.”

These operations also serve as important institutions that not only transfer real property and assets to the next generation, but also the work ethics and values that go with it. Growing up I raised cattle with my grandfather, but also worked on the larger farms owned by my neighbors. I also worked for a family of WWII veterans who owned a hardware store, farm implement dealership, and a propane gas company. As the author Ayn Rand writes in Atlas Shrugged, 'All work is an act of philosophy.' What I learned from these people (the value of hard work, morals, character, resilience, civic duty, the list goes on....) is more valuable than any lesson learned in college or graduate school. We have gotten so distracted with credentialization we've forgotten that education is about more than a piece of parchment we can hang on the wall.  While I won't inherit a dime in terms of what these land owners and proprietors pass on to their heirs, I'll still pass on the values and philosophical underpinnings I learned from them to another generation. 

While there are many ways that these successful farmers and businessmen give back to their community in visible ways, there are many important contributions they make to society that go unseen. I'm certainly not the only example of someone that has benefited in this way.

As we continue to spend trillions at the federal level, we definitely should be asking how are we going to pay for all of this spending. Note even the loophole above is estimated to be only in the billions (keep in mind it takes 1000 billion to make a trillion). Let's also not forget that there is a huge difference between tax rates and the revenues that are actually realized. Human beings aren't cogs in a wheel or pieces on a chess board that can be played at the will of planners and bureaucrats.  But it is also important to ask what are we paying for and trying to accomplish? What are we giving up to get it? As economist Thomas Sowell writes in 'The Quest for Cosmic Justice"

"many of those pursuing a vision of cosmic justice simply take an adversarial position against the traditions, morals, and institutions that make the survival of this civilization possible."

Along the lines of what Jefferson said, the family farm is one of those important institutions that propagate morals and traditions key to the survival of our civilization from one generation to the next. Will the STEP act put its survival at risk?

Democracy in Chains...? Was that not the vision of the founders?

There has been a lot of buzz and controversy surrounding Nancy MacLean's book  "Democracy in Chains" in relation to how James Buchanan (a founder of the public choice school of economics) and others especially connected to George Mason University have been mischaracterized in the book (see these two pieces from the WaPo here and here).

I want to zero in on one aspect of the book, pointed out by economist Russ Roberts, that also confuses me:

Russ Roberts quotes Nancy MacLean:

NM: "American democratic system of majority rule." 

RR: That phrase confuses me. The American system is a constitutional republic with very little majority rule. "

From:

https://medium.com/@russroberts/nancy-maclean-owes-tyler-cowen-an-apology-e6277ee75eb3

Note, I have not read the book but it makes me interested...is the book assuming that in fact the American system is actually a democratic system of majority rule vs. a constitutional republic that greatly restricts majority rule? Is it arguing that the latter is just a fabrication of Koch funded propaganda? And all of those taking Koch money are antidemocratic shills conspiring to covertly establish a libertarian utopian America? Is Nancy (a historian) ignorant of American History, or is she blatantly distorting it....being intellectually dishonest? Or does she (and by she I really should all along say those that think like her)  have some rather complicated and nuanced view of our history and constitution that you've got to read the book to understand because simply reading our founding documents and standard history textbooks leave something out???

I'm not sure....but the notion of an American system as a constitutional republic certainly predates James Buchanan and the Koch brothers. If we are going to be critical of the historical misinterpretations  and mischaracterizations found in "Democracy in Chains" at least we can give some credit. Noone has yet accused the author of claiming that the Federalist Papers or the Constitution were tantamount to Koch funded studies. But I have not yet read the book.

Our founders were well aware (without Koch money by the way) that a democratic system of majority rule was dangerous and they proposed a constitutional solution to check the kinds of abuses and powers that came with majority rule:

As stated in Federalist #10:

"From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results; and from the influence of these on the sentiments and views of the respective proprietors, ensues a division of the society into different interests and parties."

In Federalist #10 they also warned us about the populist appeals and uprisings that may result from the above, but proposed a solution:

“A rage for paper money, for an abolition of debts, for an equal division of property, or for any other improper or wicked project…we behold a republican remedy for the diseases most incident to republican government.”

The purpose of the constitution was to ensure that the government did very little without the consent of the governed, but consent was not tantamount to majority rule.  For the most part, this was achieved through legislation held in the strict bounds of enumerated powers, with expanded powers of government coming through the amendment process.  This strict adherence to constitutional principles was the foundation for a workable democratic constitutional republic, as stated by economist Thomas Sowell in  Judicial Activism Reconsidered,

“The federal Constitution is "the supreme law of the land," not because it is more moral than state constitutions or state or federal legislative enactments, but because it represents a larger and more enduring majority. Minorities receive their constitutional rights from that enduring majority to which transient majorities bow, not from whatever abstract moral rights are imagined to exist as a brooding omnipresence in the sky.”

Democracy, limited by strict adherence to constitutional principles meant that government would have few powers and resources to spend on corporate interests or other special interests that can distort our democratic processes through campaign finance, lobbying etc.

Thomas Jefferson (who by the way had no connections to the Koch brothers) had the idea:

“in questions of power then, let no more be heard of confidence in man, but bind him down from mischief by the chains of the constitution” - Kentucky Resolutions, 1798

I think the title "Democracy in Chains" is a good title for a book, and perhaps a better description of the American System than "democractic system of majority rule." But I think reading the book will reveal something quite different in the mind of the author and others that think like her.

Science + Economics = Sound Policy

There has been a lot of controversy over the last year regarding IARC and their opinion of Glyohosate. Recently from Reuters, Exclusive: U.S. lawmakers to investigate funding of WHO cancer agency.  By Kate Kelland, Health and Science Correspondent:

"In a Sept. 26 letter to NIH director Francis Collins, Oversight Committee Chairman Jason Chaffetz describes IARC as having "a record of controversy, retractions, and inconsistencies" and asks why the NIH, which has a $33 billion annual budget, continues to fund it.
"IARC's standards and determinations for classifying substances as carcinogenic, and therefore cancer-causing, appear inconsistent with other scientific research, and have generated much controversy and alarm," Chaffetz wrote."

This is interesting. I think that critics are so tired of hearing that science is NOT on their side, they are desperate to (as Thomas Sowell has said) use the 'name and prestige of science to override other people's choices.' i.e they would like governments to ban or restrict glyphosate on the basis of their science.

And this is where economics comes into play. Economics is the study of people's choices and how they are made compatible, or the study of people's choices and the unintended consequences of those choices. So even if the IARC statements were based on rigorous science, the relevant question, at the margin, does not turn necessarily on whether glyphosate is carcinogenic, the question is how carcinogenic (or persistent in the environment or other environmental factors for that matter) is it in comparison to other chemistries or products that farmers would substitute in place of glyphosate and the consequences that follow.  Previous research has shown that the use of biotechnology has led to reductions in greenhouse gas emissions and that biotech trait adoption related to glyphosate (Roundup) has resulted in a substitution away from more toxic chemistries. So if even if we did take the IARC statements about glyphosate as gospel and acted on them, would it make sense from a health and environmental standpoint to discontinue its use and substitute with more toxic chemicals and farming practices that on a systems level be worse for our health and the environment?

In the case of glyphosate, it looks like both the science and economics are in favor of more...not less, or at least some optimal level. Economics can put science, good or bad, into a context relevant to the things we really care about. Unfortunately, many activists have an ax to grind that cuts counter to the principles they claim to be promoting. Economics can dull these sharp charades.

See also:

A Safer Food Future

More on how economic theory can help us determine which 'facts' are 'relevant'

References:

Genetically Engineered Crops: Has Adoption Reduced Pesticide Use? Agricultural Outlook ERS/USDA Aug 2000

GM crops: global socio-economic and environmental impacts 1996- 2007. Brookes & Barfoot PG Economics report

Greenhouse gas mitigation by agricultural intensification Jennifer A. Burneya,Steven J. Davisc, and David B. Lobella.PNAS  June 29, 2010   vol. 107  no. 26  12052-12057

'Baysanto' and the Competitiveness of the Ag Sector

There is a nice post summing this up over at the Farmer Hayek blog:

It seems to me that the relationship between anti-trust legislation and regulation is an under-discussed issue in these cases. Agribusiness firms are heavily regulated by three of the most powerful regulators in the US: the FDA, the USDA, and the EPA. Many regulations function as fixed costs, implying that there are economies of scale in regulatory compliance. Thus, the greater the regulatory burden placed on firms in an industry, the greater the inducement to merge.

Similarly, from a 2003 issue of Regulation:

'In the end, EPA and the USDA regulatory policies place federal bureaucrats in the middle of virtually all field trials of gene-spliced plants, spelling disaster for small businesses and academic institutions whose scientists lack the resources to comply with burdensome, expensive, unnecessary regulation. The cost of field-testing gene-spliced plants is as much as 20-fold higher than for virtually identical plants crafted with older, less precise genetic techniques.' -Regulation, Summer 2003 

See also:
More details related to this from a 2010 post at EconomicSense - Monsanto Antitrust Case

Reference:
Henry Miller and Gregory Conko. 'Bootleggers and Biotechs.' Regulation. Summer 2003

The Supreme Court and the Chains of the Constitution

Milton Freidman said:

"The ballot box produces conformity without unanimity; the marketplace, unanimity without conformity"- Free to Choose

and as Don Boudreaux writes:

"The dispersion of knowledge and experience is one of the most important reasons for relying on free markets. Politicians and bureaucrats, despite their pretenses, know next to nothing about the all-important details of the economic affairs that they regulate. This reality means that government regulation is the displacement of expertise by ignorance."-  http://triblive.com/mobile/9979317-96/affairs-ignorant-economics

 All of the statements above are testaments for why democracy, if left unchecked, can be just as detrimental to a society as so called unrestrained or unregulated markets. Perhaps more so than the critics of capitalism would ever imagine or be willing to admit.

There is a lot of contention about whether we should nominate a new justice now, or wait until after the next election.  Much of this has to do with the fact that the supreme court has not played a very effective role acting as a brake slowing the pace of unrestrained democracy. The effect is that many micro level personal decisions in our lives are becoming subject to the votes, opinions and interpretations made by these justices. The stakes are high for a lot of reasons.

In Judicial Activism Reconsidered, Economist Thomas Sowell describes our Constitution:

“The federal Constitution is "the supreme law of the land," not because it is more moral than state constitutions or state or federal legislative enactments, but because it represents a larger and more enduring majority.107 Minorities receive their constitutional rights from that enduring majority to which transient majorities bow, not from whatever abstract moral rights are imagined to exist as a brooding omnipresence in the sky.”

Once we start making heroic ‘modern’ interpretations of words in the constitution like ‘general welfare’ or ‘regulate commerce,’ the constitution is weakened, and minorities are forced to give power over to whatever transient majority prevails at the time. The short term gain from being able to bypass the amendment process (which requires obtaining the consent of the governed) via the courts or legislative process comes at a long term cost to our liberty and national well being. Every step we take away from the limited role of government defined by the specifically enumerated powers of the Constitution, we concentrate more power and wealth in our central government. This increases the incentives for large corporations and special interests to influence our lawmakers, and provides the means for ever more concentration of power and transfer of power away from the people. This outcome is what game theorists refer to as a prisoner's dilemma, (a nash equilibrium) and the solution or means of escape was proposed by our founders: a binding Constitution that limits the power of all players.

“in questions of power then, let no more be heard of confidence in man, but bind him down from mischief by the chains of the constitution” —Thomas Jefferson

We've broken the chains, and so these nominations have become a much bigger deal than they need be, or our founders envisioned them to be....and we will continue to send lawyers and lobbyists to Washington, offer up our candidates to the highest bidder, and freak out over court appointments all the while proposing band-aid fixes like campaign finance reform or new parliamentary rules and procedures around nomination processes. It's democracy out of control.

For some deeper dives into these issues see: Public Choice Theory for Agvocates