There is a provision buried deep within the tax bill now being negotiated in Congress that I will bet you have never heard mentioned. I have never seen it discussed on TV, and I watch a lot of news programs plus all three CSPAN channels. But in fact it is the most consequential item of all. It disrupts transactions that currently grease the skids of finance and it amounts to about $2.2T per day. Yes, that is a T for trillions and it occurs every single day! If that doesn’t impress you then you are really jaded.
The issue is repurchase (repo) agreements that provide a short-term funding market for banks and investment companies world-wide. Legislators had no intention of disrupting this, of course. What they were targeting is the way multinationals shift profits to offshore entities to exploit their lower tax rates. However, these repos also flow across borders and the bill would make them unprofitable by imposing a punitive tax on them.
No one knows what the consequences of this will be because it wasn’t discussed or modeled by anyone. Of course the banks are now aggressively lobbying to get this provision killed or modified, and quite possibly they will succeed. I certainly hope so.
But that is a bit beside my point. Our tax system has spread its tentacles into every area of the economy and even to other countries. Any attempt to meddle with it in a significant way will inevitably cause unintended consequences. Some may be good. Some may not. This repo issue is a prime example of My Law of Unintended Consequences, which states that any large-scale change in our economy will inevitably result in some effects that were neither desired nor proposed.
Consider, for example, the proposal to drop the tax deduction for home mortgages. Currently, when buyers purchase a home, part of their affordability calculation is this tax deduction. Remove it and some home purchases become unaffordable, with consequences to the buyers, sellers, and finance companies. But that isn’t the major problem. The real impact is that removing this deduction instantly reduces mortgaged home values throughout the nation by an amount proportional to the amortized deduction over time. This is a massive loss of wealth by the largely middle-class home owners, and it certainly exacerbates wealth inequality.
That was an obvious example and, as it turns out, legislators are currently considering these consequences. But there are more such unintended consequences. What are they, you ask? I haven’t the slightest idea, and neither does anyone else. That’s the whole point, and if that doesn’t scare you, it should.