Why don't Democrat elites need tax cuts?

One of the sharpest divides between the Dems and GOP is tax policy, with Republicans never having seen a tax cut they didn't push for, and Democrats resisting the cut.

The standard story based on the different values and conceptual worldviews of the two parties is that Republicans argue on grounds of fairness that we must allow rich people to keep more of their money, whether annual income or accumulated wealth, while Democrats argue on grounds of providing for the citizenry that we must not cut taxes since that will deprive the government of funding for its public goods and services.

But, remembering that ideology is just a rationalization of crude underlying material interests, we reject that approach and ask instead -- why don't Democrat elites benefit from tax cuts, in the way GOP elites do? They don't ask for tax cuts because they don't get much out of them at a material level, not because they have a system of inviolable values that leads them inexorably toward that policy conclusion.

Democrat elites may get something out of tax cuts -- how could they not, when the rich pay most of the taxes, and all elites are rich? But they don't get as much as the GOP elites would, so tax cuts would shift the "balance of power" toward the economic factions that control the GOP. Societal control is a zero-sum game between warring coalitions of economic sectors.

So, what about the nature of their industries makes the GOP elite factions gain far more than the Democrat elite factions from tax cuts or tax reform?

Recall that the Democrats represent the informational industries that scale up easily, where the cost of materials and labor are not rate-limiting steps on profit growth or market share expansion. Finance, media, digital / internet companies. The Republicans represent the material industries that are physically constrained and are rate-limited in their growth by the cost of materials and labor. Military-industrial complex, agriculture, energy / resource extraction.

Rather than try to solve the problem at the general level first, let's start with a particular example and get some intuition. Consider the estate tax -- this is a tax not on income, but total wealth owned by a person. When this person dies and wants to pass that wealth on to others, it is taxed. Only estates valued at over $5 million are subject to the top tax rate of 40%, affecting only the top 0.2% of estates. So, only the incredibly wealthy are affected by the estate tax.

Still, why aren't stinking-rich Democrats calling to abolish the estate tax like their stinking-rich GOP rivals? Because the form of that wealth differs -- for an elite Republican, it may be a mega-farm in the Great Plains worth $10 million, while for an elite Democrat it may be a bank account with $10 million in it. One is material, the other is virtual. The material is particular and distinct, the virtual is general and fungible.

When it comes time to avoid the tax man, wealth in a form that is physically constrained will be harder to hide, while wealth in a form that is fungible and intangible will be easier to "move" out of the cross-hairs.

Tax laws are enforced by governments, and there is no government above the level of nations -- no international army that conscripts soldiers from the entire global population, no international IRS that levies taxes on the entire global population.

So "moving out of the cross-hairs" of the tax man means getting that wealth outside of the jurisdiction of the United States government -- or of the British, German, etc. governments. The safe spots that the global rich use to hide their wealth from their own government's taxation and other regulations are tax havens like the Cayman Islands, Swiss banks, and so on.

Yet some factions of the rich can move their wealth into bank accounts in the Caymans or Switzerland far more easily than other elite factions.

That great big farm in the middle of Kansas may be worth $10 million, but that doesn't mean they can literally uproot the farm, transplant it onto the physical land within the borders of some tax haven, pass it on entirely to their inheritors, and have it continue to serve as a form of wealth to the inheritors at a similar value.

Digging up a mega-farm, moving it over, transplanting it, etc., would cost more than the value of the farm itself. The climate of the tax haven might not be the same as where the farm came from, the host's subterranean geology might be hostile to the transplanted farm, and so on and so forth.

Even if the physical environments were a perfect match, how are the inheritors supposed to derive income or wealth from a farm that now lies in the Cayman Islands? Is it going to yield the same level of output, sold at the same prices, producing a similar income stream as when it was back in Kansas?

Maybe it was heavily subsidized by the government's farm bill back in the US, and since the Cayman Islands are tax-free, they don't have much revenue to direct toward farm subsidies. And then there's the cost of shipping their corn or soybeans to other countries, since the Caymans and Switzerland are not big enough in population to give a similar demand for corn or soy as there was when the consumers were the American population.

The farm also provided living space for the owning family to build large houses and keep a watch over the crop cultivation -- are the inheritors going to relocate to live in the Caymans in order to stay physically connected with their farm, and to check on its operation?

These difficulties in avoiding the jurisdiction of the tax-payer's national government will generalize from mega-farms in Kansas to all material sources of wealth -- an oil field in Texas cannot be shipped out and parked in the Caymans, and neither can a coal mine in West Virginia, or a defense industry factory in South Carolina (for reasons of national security, these are the least likely factories to be off-shored).

Because the informational sectors of the economy do not rely on material production, they don't own a whole lot of real assets -- some choice real estate for their corporate headquarters, a nice home or two, but not the very life-blood of their company, which are instead based on abstractions like contracts.

That means a far larger share of their total wealth is financial, i.e. stocks and stock derivatives, as well as some cold hard cash. It's not that material sector elites don't also own a lot of stock -- but as a share of their total wealth, it's smaller because of all the real assets in the mix (barrels of oil, head of cattle, soldiers under command, etc.).

And the easily scalable nature of informational sectors means that they are more globalist in supplying customers. Aside from some client states (including a few big ones), the Pentagon does not own or control the militaries of the rest of the world. The oil companies do not own or control the oil in oil-rich nations (those dreams died in the 1970s when all the Middle Eastern countries nationalized their oil fields). Nor do the mega-farms in the Great Plains own or control the farms in other countries.

They compete with the militaries, oil fields, and farms of other nations, but do not always wipe out the competition. Especially since the 1970s, the military and oil sectors have largely failed to take over their international competitors. The big farms have done relatively better, especially with NAFTA opening up the Mexican market to highly subsidized American agriculture that comes with low prices.

The informational sectors, however, have totally swamped their international competitors. They are not only the only game in town in America, but in most of the rest of the world. Google, Hollywood, Wall Street investors.

That means that a far larger share of profits will be earned abroad for informational sectors, and a relatively larger share earned domestically for material sectors. And since income in the form of profits is effectively taxed where it is made, the informational sectors can more easily avoid the IRS, which only has effective jurisdiction over profits made in America. And since the informational sectors are generally the only game in the entire world, they can bully foreign governments into not taxing them very much.

Given how lengthy the tax code is, this overview has only scratched the surface. But the basic intuition is pretty clear -- because the informational sectors are more global in operation, and hold more of their wealth in financial assets, it is easier for them to dodge the tax man in America. And even if they would benefit from a tax cut here, it would benefit their rival factions of the elite stratum even more, and tip the balance of power toward their enemies.

It has nothing to do with liberal or conservative "first principles," and let us never speak of "values" again when analyzing tax policy.

In terms of fairness, the material sectors do have a point that they are unfairly taxed compared to the informational sectors. But the solution is not to let both sides of the elite get away with abandoning their subjects -- it is to rein in the informational side and soak them as well as the material side. Break up these info-age monopolies so that they cannot earn so much profit abroad without having to spread that wealth around back home, and threaten to seize the assets located in America from entities who stash so much of their wealth in tax havens abroad.