The Perfect Example of Politics over Policy

I don't think you could find any better example of paying off one's political constituents at the cost of out groups than this:

Congressional Democrats and the White House have agreed to pay for a bill to freeze student loan interest rates for a year by raising taxes on so-called S Corporations, according to a top Senate Democrat and senior House and Senate aides, but Republicans said the tax increase may ensure the bill’s defeat in the Senate.

Apparently, the taxpayer-subsidized rate of 3.4% on student loans is set to go up to a less-subsidized 6.8% in a couple of months.    So to keep this subsidy rolling, Congress is proposing to tax S-Corporations, mainly used by entrepreneurs and small businesses  (disclosure:  including mine) to avoid double taxation of business income.

I don't think its possible to come up with a real policy reason that money should be taken away from entrepreneurs and given to 18-year-olds so they can overpay for college, especially since most of the subsidy for student loans is captured by universities that have simply raised tuition to soak up each successive college subsidy program.  Note that Congress is instituting a permanent tax hike on entrepreneurs in order to give just a 1-year break (ie through the next election) to students.

But this is the perfect political bill.  It takes money from a group likely to be lost to the Administration in the next election anyway (e.g. entrepreneurs and small business people) and transfers it to a group that is very likely to vote for Obama if it votes at all, but needs to be energized to get to the polls.  The Obama Administration was obviously watching the Occupy movement carefully, and noted that much of the angst seemed to be aimed at student loans.

Expect similar payoffs to other constituencies over the next few months.  Oops, here is one already.

  • BFD

    The 26th Amendment to the United States Constitution - Ratified July 1, 1971

    The right of citizens of the United States, who are eighteen years of age or older, to vote shall not be denied or abridged by the United States or by any State on account of age.

  • BFD

    The 26th Amendment to the United States Constitution - Ratified July 1, 1971

    The right of citizens of the United States, who are eighteen years of age or older, to vote shall not be denied or abridged by the United States or by any State on account of age.

  • Sol

    "The bill will require S Corporations with three or fewer shareholders who declare income of at least $250,000 a year to pay employment taxes, according to Harkin and Democratic staffers involved in the talks."

    Okay, pop quiz. My S Corporation has zero shareholders who declare an income of at least $250,000 a year. Would this bill affect me or not, based on the above wording? (Zero is definitely fewer than three, right?)

    And why is the number three involved anyway? Why should four shareholders making $250,000 a year not be taxed, but three should be?

  • Mark2

    I know this is a thread about taxing. But yes, maybe the government should be forgiving some of the interest and the debt. Why? Because the f'ed the whole system over to begin with.

    See the government gives these loans with no qualifications whatsoever. They give you the money without caring if you can actually reasonable get a job able to pay back the loan. Even more pernicious, if you get a low paying job they will even forgive some of the debt. This leads students not only to get bad college degrees, but also allows "tech colleges" to basically defraud students - You have seen ads on TV, "Tired of your current job, why not go to the Wayman school of Sump science, where you can learn in two short years how to repair sumps in all situations" Well yeah, in reality not that many sump jobs, just a hard sell and the promise that the student can pay with Federal student loan money.

    Now if it were a bank giving the loan the bank would want to make sure you pay the money back, and so would do a bit of due diligence on Wayman school for you, and determine that the students didn't amount to much. The fraud school would end up shutting down - cus their students couldn't get loans to pay. In regular college, it would be similar - Banks would have a harder time loaning for lower value degrees. Not that you couldn't still get that degree in Sock Puppetry - you would just have to do more summer jobs and maybe work through school.

    this is an issue in addition to the issue of government giving loans, and colleges just raising the rate to the students tolerance to take on debt.

    So yeah, government didn't do due diligence or request any kind of plan or stats regarding the value of the degrees they are paying for - they should be stuck with the debt, and henceforth stop loaning for worthless degrees.

  • Billford

    I consolidated my grad school loans back in either 2005 or 2006, when there was a super low rate. I ended up being able to consolidate and lock-in a rate of something like 2.8% on about $40,000 in loans while still in school. THANKS TAX PAYERS! There was some ambiguity in the law or regulations then, because normally you can't consolidate until you are out of school. I still have to pay 4.5% on about another $20,000 worth of loans incurred after that though. Before you complain too much consider that the young people whose college you are subsidizing now will probably be paying through the nose for your social security benefits, at least if you are over 55 right now.

  • Mark2

    @Billford, yes you used to be able to consolidate during the grace period and lock in the low grace period rate. I am glad I didn't do that because I was able to get a loan consolidation in 2003 for 3.75%, now after 4 years of good payment they give me 2.75%.

    Interestingly with our loans (from that period) the Fed guaranteed interest at a certain level to banks (prime + X) so if we consolidate at 3.75 and prime + X ends up being 6.75% the government pays the 3% difference too the bank.

  • perlhaqr

    I don’t think its possible to come up with a real policy reason that money should be taken away from entrepreneurs and given to 18-year-olds so they can overpay for college

    It's worse than that. The main beneficiaries of this largesse are people who have already graduated from college. So it's not even "to encourage 18 year olds", it's just to buy off 26 year olds.

  • Mark2

    These games have been played for years though, in 2000 when I graduated they allowed the SL interest to be deducted top line up to $2500, for the first 3 years of the loan (I believe). The deduction went away for one year, and there was outcry. Now every year I have been able to deduct my student loan debt from my taxes. So my 2.75% rate is effectively 2.06%

    Every year, a bit more money, a bit less cost, until we all have free college like in Europe.

    Speaking of Free college, Remember the GI bill where you could get up to 30K for college - well it typically covered only half the cost.

    Now the GI bill will pay the full cost of any college in which you can enroll, and they pay you your salary you were getting in the service for the entire period you are getting the degree.

    Now these guys did serve our country in a war so I have some understanding, but it does seem like that first step to the free education, financed by the rest of us.

  • DoctorT

    If the proposed law passess, many S corporations will restructure (as limited liability partnerships, limited liability companies, or professional corporations) to avoid the new tax. Each S corporation that restructures will reduce its profits by thousands of dollars that will go to lawyers*, tax accountants, and state and local governments (new incorporation fees).

    The few affected S corporations that choose not to restructure will pay the new tax, but that revenue will fall far short of what the federal government needs for its subsidization of student loans. The federal government will borrow (mostly from China) the tens of billions of dollars it lacks. Successful grads (eg: those who get good jobs) who received federal loans will have whopping payroll taxes because servicing the massive federal debt soon will cost over a trillion dollars per year. (I expect the national debt to exceed twenty-two trillion by the end of Obama's second term.)

    *Many lawyers use S corporations. Since Congress is packed with lawyers (40%), they may get enough pressure from their colleagues to kill the bill.

  • Doug

    "The Obama Administration was obviously watching the Occupy movement carefully, and noted that much of the angst seemed to be aimed at student loans." It's simpler than that. The original bill lowering the student loan rate to 3.4% from 6.8% was passed in 2007 under a democrat-controlled legislature (and of course, signed by a gullible W, anxious to seem compassionate), and deliberately timed to end at this time, at the height of the presidential races. Its original intent was to make a democrat legislature look good in 2007, and either make a republican house look bad in 2012 for letting it expire, or a democrat legislature look good in 2012 by extending the 3.4% rate. It is working as planned. The House has passed a bill to keep the rate at 3.4% but taking the money from one of the Obamacare slush funds. Now we have the "women's rights" nutcases out in full force claiming the republicans again want to kill women. Of course the Senate will kill it, and Obama can run around saying that the republicans are responsible for the rising rates. What college-attending child could follow this drama? Obama gets his kids votes, gullible leftist women take the "women's health" hook, and you've got your 2012 coveted wedge issue.

    Got that?

    Translation: heap some more debt on the national debt. It's just the kids' problem. Who cares?

  • Xmas

    This is even stupider than you're putting it. The "tax" they want to collect is Medicare Insurance payroll taxes. (The original article says "employment taxes", which would be SS and Medicare taxes, but SS taxes cap around 120K). So...if they do collect that money, it really should not be going anywhere near paying for student loan interest rate reductions.

  • me

    Then again - if this is what keeps the taxes on everyone else lower... has anyone any info on the following graph? I was surprised by the assertions, but I don't have the data: http://www.ritholtz.com/blog/2012/04/hey-big-spender-2/

  • Mark2

    @me amazing, Obama is holding the line. The 1.5 trillion deficits as far as the eye can see are acceptable.

    I think the reality is there was some "temporary" Keynesian spending done at the end of the Bush term, which should have stopped, but instead it has kept going. For Obama to be doing his job, the spending should have actually decreased significantly.

    I think the whole idea was to make Bush look bad (and he was bad, he let domestic spending climb over his first 6 years at almost twice the rate of Clinton) and Obama saintly with a statistical anomaly.

  • IGotBupkis, Legally Defined Cyberbully in All 57 States

    >>> Then again – if this is what keeps the taxes on everyone else lower… has anyone any info on the following graph?

    Its source says it all, offhand. It's from Krugman, which means it's got about a 99% chance of being a prevaricating container of almost pure bovine excreta, with all the impurities being equine excreta.

    I not only would take its claims with a grain of salt, I'd call "Shenanigans!" right off the bat until the source data, and whatever freaky mathematical manipulations were applied to "massage" it, are open.

    Krugman is the only man who rivals Hansen for unreliably statistically fauxed garbage. It's not that either one actually lies, it's worse than that --- they abuse the facts until they no longer have any meaning. In this they are quintessential postmodernist libtards, willing to do anything to promote the cause, Truth Be Damned.

    Trust not in Krugman for anything vaguely resembling facts. He has no use for them.

  • Ted Rado

    I LOVE our delightful government! Everything is an entitlement. You want a house you can't afford? No problem. Your dad didn't have the forsight to plan for your college education? No problem. You can't afford your own contraceptives? No problem. The USG will either loan you the money (diretly or indirectly) or pay for it outright.

    Can't pay for your student loan? No problem. Can't make your house payment? No problem. The USG will twist arms to get your loan modified or forgiven.

    I am beginning to feel like an idiot. I have always lived within my means and paid my bills. What foolishness. I should have availed myself of every USG handout and said "screw my fellow citizens who are paying for it all".

  • me

    LOL. Good point. Krugman is nothing but delusional... that explains it.

  • Bob Smith

    One of the ways the Dems got buyin on Obamacare was to exempt S-Corporations from its 3.8% surtax on non-wage income. This is a stab in the back for small business owners, while preserving the exemption for larger S-Corporations with many shareholders, like law firms.

    I'll wait to see the language, as others have noted that the English description is ambiguous. Is a firm with > 3 shareholders, $250k, subject to the tax? If so, that's crazy. 10 shareholders > $250k. Ok! 8 $250k drops under 4 because one died, the taxes for the rest go up.

  • Bob Smith

    Hmm, the message parser mangled my message. It should say:

    Is a firm with more than 3 shareholders, 3 or fewer of which make greater than $250k, subject to the tax? If so, that's crazy. Ten shareholders making greater than $250k? Ok! Eight making less and two making more? Not ok, a surtax for you! There are also weird effects if a shareholder gives their interest to others by gift or bequest. If that reduces the number of shareholders making greater than $250k to fewer than 4, taxes go up!

  • Slocum

    "The bill will require S Corporations with three or fewer shareholders who declare income of at least $250,000 a year to pay employment taxes, according to Harkin and Democratic staffers involved in the talks."

    Pretty obviously this was written specifically to nail small businesses, particularly family businesses (who are presumed to lean Republican) but exempt much higher-income law firms (who are presumed to lean Democratic and are often big donors). The law firms tend to have multiple partner/shareholders (and so don't meet the seemingly arbitrary, otherwise inexplicable "3 or fewer shareholders" rule). Fortunately, this has roughly zero chance of becoming law.