Where Have You Gone, Jemme Madison?

Another effect of public instability is the unreasonable advantage it gives to the sagacious, the enterprising, and the monied few, over the industrious and uninformed mass of the people. Every new regulation concerning commerce or revenue, or in any manner affecting the value of the different species of property, presents a new harvest to those who watch the change, and can trace its consequences; a harvest, reared not by themselves, but by the toils and cares of the great body of their fellow citizens.

–          James Madison, Federalist 62, 324

Recent posts on this blog have addressed the perennial  “James Madison, nationalist or states’ righter” question. It’s probably common ground, though, that Madison’s views were driven by his constant pursuit of a republican, deliberative form of government, as opposed to the nominally democratic politics of a “mutable government.” The difference is brought to mind by an illuminating piece by my AEI colleagues Kevin A. Hassett and Alan D. Viard on the reclassification of business expenditures as foreign income taxes, see  Sec. 901(i)(1), reg. section 1.901.2; legislative proposals to address percentage depletion allowances granted to most extractive industries, see Sec. 613(b)(1)-(7), but not—or  in lower and varying amounts—to oil companies, Sec. 613A(a)-(d); and “Section 199” domestic production activities deductions with respect to major oil companies, see Sec. 199(d)(9). Hassett & Viard, “Big Oil, Targeted Taxes, and the Rule of Law,” Tax Notes (Apr. 9, 2012), 217.

Missed that, didn’t you? Too bad, because the piece is a splendid illustration of the walking, talking, wholesale corruption of the rule of law that is our “government.” Let us count the ways:

Instability. The provisions at issue are pieces—there are many others—in the campaign to hammer “Big Oil.” To call that crusade an “annual ritual” is a gross understatement. As Hassett & Viard describe in mind-numbing detail, not a day in a decade has gone by without yet another clever proposal or enactment, usually contained in a legislative masterpiece that has the word “Jobs” or “Emergency” in it. The only stability to be had is enjoyed by the K Street characters who work on this stuff: they have de facto lifetime tenure.

Corruption. “Big Oil” is a term of convenience for the five companies whose CEOs must do a semi-annual perp walk, formally known as a “hearing,” on the Hill. The companies are defined, with bone-chilling legal precision, in Sec. 167(h)(5)(B), which circumscribes an effectively closed set of “major integrated oil producers.” The code might as well name the companies, which at least would be honest. Instead, it fakes adherence to the rule of law and its generality.

Scams. An exemption from a general rule (favorable or unfavorable) is tolerably easy to discern and, moreover, comes with a cloud: all else equal, neutrality is preferable, for well-rehearsed reasons of efficiency, fairness, and transparency. But that’s not how the system works. Rather, the code creates one ludicrous loophole (the percentage depletion allowance, which allows companies to deduct some income as a cost) and then closes it for a few disfavored companies—as if the mortgage interest deduction got any better if we revoked it for five rich guys on Old Cedar Road in McLean, VA. “Fairness versus favors” ceases to be an issue. The system is a scam one way or the other; the only question is which way it should run.

Opacity and Public Debate. It’s safe to say that no one can or wants to follow this stuff. (My colleagues down the hall know better than to harangue me with one more point on the efficiency properties of the reclassification of foreign income: I’d walk out on them). This does more than simply alienate citizens from politics; it corrupts and polarizes. When the “Big Oil” debate hits the newspapers, the transmission systems fail: the newspapers and blogs have no earthly idea of the bargains that went into the arrangements, let alone the economics. (Hassett & Viard provide telling evidence.) And in the absence of any actual information or any realistic means of acquiring it at tolerable expense, everyone migrates to the natural, political proxy: if Obama (or Ryan, or whoever) is for it, it’s probably evil. The more convoluted and opaque our policies, the more existentialist our public debate becomes.

Hassett & Viard aren’t telling a singular horror story; they provide a window into the ordinary working of our so-called political process, which operates over thousands of issues day in and day out. It’s demagogy and interest group muscle, 24/7. And as the authors make admirably clear, much more is at stake here than the fate of oil companies (which will do fine one way or the other): you can’t run a prosperous, confident country this way. The story isn’t about stupid policies, which (within limits) we can survive; it’s about our institutions. Suppose you could by some miracle clear the tax code of its accumulated dross and make it neutral, and suppose you could reconfigure the regulatory system in like fashion: could the accomplishment last? No way. Our institutions cannot precommit to anything, and everyone knows it in advance. The only predictable consequence of restoring a rule-of-law regime is a doubling of the D.C. lobbying corps.

Our policies and our high politics—presidential elections included—have become irrelevant, or at least epiphenomenal. We are living Madison’s nightmare, and no one knows how to end it.