“Government shouldn’t pick winners and losers.”
Almost every change in government policy produces some winners and losers. Unless we want all existing government policies to continue unchanged forever, the blanket statement needs clarification. (Even if government does nothing new, existing policies ensure that some favored individuals or groups, “winners,” will maintain government-sanctioned benefits at the expense of other groups, “losers.”)
It’s important to distinguish between cases when government places its thumb on the scale, blocking people from making free decisions, and cases when it lifts its thumb from the scale.
Those who advocate limited government ought to recognize at least three distinct scenarios. First, there’s the type of government decision that typically invokes the line about winners and losers: A new program, incentive, or mandate confers benefits on one favored group while forcing those outside the group to pick up the tab.
The second option represents the opposite approach. Government rolls back a program, incentive, or mandate that previously conferred a benefit for a chosen group at the expense of others. This decision also creates winners and losers, though it’s unlikely that free-market advocates will complain about the outcome. Still, they need to recognize and account for the fact that the likely losers will object.
A third type of government decision deserves examination. In this case, a new policy singles out no individuals, groups, or businesses for special treatment. But because of differences in income, family status, geography, or other characteristics, some people benefit more than others.
While winners and losers aren’t spelled out in this type of policy, some people end up “winning” more than others. Advocates for the policy need to be able to defend it against attacks that it benefits only a favored few.
Some examples should help us distinguish these different cases. The first option is the easiest to describe. The John Locke Foundation has spent more than two decades fighting North Carolina’s targeted tax incentives: cash grants, tax breaks, or other giveaways that benefit a selected company or industry at the expense of others.
In this case, government makes a clear choice that individuals and businesses outside the chosen group will subsidize those inside the chosen group. Those in the group are winners. Everyone else is a loser.
To the extent that the incentive involves taxes, rather than grants built into a line item of the state budget, the subsidy violates basic tax principles of neutrality and simplicity. In this case, government clearly should not be choosing winners and losers.
But what about the second option: rolling back an existing program that created winners and losers in the past?
The debate over “craft freedom” offers a good example of this scenario. Years ago, government policy dictated that beer distributors would be winners. Any brewer that reached a point of producing 25,000 barrels of beer in a year would be forced to work with an outside distributor. Government guaranteed business for this selected group.
Brewers wishing to maintain control over their own distribution are the losers, as are consumers who could benefit from additional competition among distributors. Brewers have argued that the state economy as a whole also takes a hit if they are discouraged from building their businesses beyond the 25,000-barrel threshold.
Raising or removing that cap would lead to good news for craft brewers, consumers, and the state’s economy. That’s a large group of winners. But beer distributors would be clear losers. And they would be losers because of a government choice.
Does this mean that government shouldn’t choose winners and losers in this case? No. In this case, government would rectify a poor choice made decades ago. Or, to be charitable to those who made that choice, today’s government leaders would recognize that changing conditions have rendered the original policy counterproductive.
Remember also that the losers face different fates under the different scenarios. In the incentives example, the losers are forced to pay for the winners’ special benefit. In contrast, the distributors pay nothing for the brewers’ increased freedom.
In fact, the distributors still have the opportunity to compete for the brewers’ distribution business. The history of economic competition suggests that well-run distribution companies will develop new innovations to win business from brewers.
This positive result arises from government lifting its thumb off the scale and allowing people to make more free decisions.
For our third example, we turn to potential changes under consideration now for North Carolina’s personal income tax. The original transformation in 2013 of North Carolina’s three-tiered tax system into a system with one flat rate represented a good example of the second type of government choice. Higher-income earners who were losers under progressive taxation had their fortunes reversed by a new policy that treated each dollar of taxed income in the same way — regardless of who earned it.
Since then, successive decreases in the flat rate — which stands now at 5.499 percent and could fall to 5.35 percent under the state Senate’s tax plan — have singled out no particular group. Every dollar of personal income that’s taxed faces the same rate of taxation.
(It’s actually more complicated. Income from savings and investment gets taxed more than once. Hence the desirability of cuts to North Carolina’s capital gains tax.)
The same neutrality applies to substantial increases in the standard deduction or “zero tax bracket” in recent years. Every personal income taxpayer has been able to take that deduction. It stands at $17,500 now for a married couple and could jump to $20,000 under the Senate plan.
While neither the lower rate nor the higher standard deduction singles out any particular group as a winner, that doesn’t mean those two changes have the same impact on every taxpayer. Those with higher incomes see more dollars freed from taxation because of the lower rate, while those with lower incomes see a proportionally greater impact on their overall tax burden from the larger deduction.
By combining the two changes, Senate tax writers blunt to some degree potential criticism that they are choosing winners from one particular income group. It’s possible to argue — as those on the political left will do in the weeks ahead — that the rate reduction by itself leads to a bigger win for those with higher incomes. They do their argument a disservice, though, when they downplay or ignore the major win for low-income earners tied to the increase in the standard deduction.
We’re likely to hear much in the weeks ahead about state government decisions creating winners and losers. We’ll all win if pundits and prognosticators place those decisions in the proper context.
Mitch Kokai is senior political analyst for the John Locke Foundation.