During his last press conference, President Barack Obama focused, as he should have, on the fragile state of the economy. Much of his discussion was devoted to the difficult negotiations that lie ahead on the deficit, where the president has pushed hard for a "balanced" approach that requires some mix of spending cuts on the one hand with an inevitable increase in taxes on the other.
But just whose taxes should be increased, and why? On that particular question the president was quick to play the populist card by claiming that the nameless "millionaires and billionaires" ought to bear the brunt of these tax increases, which would otherwise fall on our poorest and most vulnerable citizens. "Corporate jet owners" figured into Obama’s rhetorical calculus on six separate occasions as he called upon an end to tax breaks on corporate jets.
Illustration by Barbara Kelley
One of the president's key statements was as follows:
And if we choose to keep those tax breaks for millionaires and billionaires, if we choose to keep a tax break for corporate jet owners, if we choose to keep tax breaks for oil and gas companies that are making hundreds of billions of dollars, then that means we’ve got to cut some kids off from getting a college scholarship. That means we’ve got to stop funding certain grants for medical research. That means that food safety may be compromised. That means that Medicare has to bear a greater part of the burden. Those are the choices we have to make.
And just to make sure that we did not miss the point, Obama added:
If you are a wealthy CEO or a hedge fund manager in America right now, your taxes are lower than they have ever been. They’re lower than they’ve been since the 1950s. And you can afford it. You’ll still be able to ride on your corporate jet; you’re just going to have to pay a little more.
Such dubious logic explains why this nation finds itself in an economic pickle. To put the problem into high relief let us start with one particular corporate jet that needs no introduction: Air Force One, the corporate jet in the United States. For those who are not up on the details, Air Force One is not a single plane, but it is a code for whatever jet the president flies in at any given time. In fact there are two specially equipped Boeing 747s capable of whisking the president and his entourage away at a moment’s notice anywhere around the globe. The plane need not land en route, for it can be refueled in midair. And it never flies alone, as other air force jets perform a number of ancillary duties to make presidential air travel safer and more secure than would otherwise be the case.
It is easy to don the mantle of a populist reformer. And unwise.
This luxury does not come cheap. Recent estimates of the direct cost of flying Air Force One range from about $60,000 per hour on the low side to $181,000 per hour on the high side. None of these figures include the extensive advance planning and immense support services needed to coordinate activity on the ground, both in the United States and overseas. The presidential salary of $400,000 per year would be wiped out many times over if he had to pay, say, 10 percent of the jet’s direct costs.
Just think of the number of college scholarships and food inspection programs this nation could fund if it had the moral courage to make the president fly first-class commercial on international long hauls, take Amtrak for shorter trips, and use Skype for critical one-on-one negotiations. If the president could make this sacrifice for the nation, why can’t spoiled bank executives and industrial tycoons adopt similar cost saving measures?
My sage proposal shows how easy it is to don the mantle of a populist reformer. And how unwise. The thoughtful reader should not take long to see that it is every bit as foolish to condemn those corporate jet owners for their supposed over-indulgences as it is to condemn the president for his.
As we examine this issue, it is best to start with two questions:
First, is there any principle that explains just how heavily we should tax corporate jet owners. In Obama’s formulation the answer is no. We should therefore just push to the limit and deny any and all business deductions to corporate jet owners as ways to put more resources into other activities. Not even Obama thinks that this is a wise idea. What he lacks is an explanation as to why.
The second question is: what is the alternative to Air Force One? First class travel won’t really cut it for the president. The security risks of traveling in a plane with 300 hundred other passengers are too enormous. Even if his plane is not shot out of the sky, having the president mill around airports while waiting for clearances to take off could easily cost him and his staff critical hours. Changing planes in Albuquerque to get to Santa Fe could be a real drag.
The blunt truth of the matter is that every president since Franklin Roosevelt has traveled with deluxe accommodations in good times and in bad—and the nation has been better off for it. The moral therefore is this: cutting out Air Force One does not save the nation any money for scholarship or food inspection programs. Rather, it costs the nation in terms of the reduced performance, higher substitution costs, and the greater risks to the president.
Corporate jets are modest affairs compared to Air Force One.
So that brings us back to corporate jets, which are modest affairs compared to Air Force One. The last thing we want to do is tax corporate executives and make them pay more for their business comfort. If the current tax accounting rules prevent a disguised transfer of income to these executives, they should be retained. If they are too lax, they should be fixed. The object of a good set of tax rules is to get an accurate measure of income, no matter what the state of the economy.
The big mistake in this area, therefore, is to assume that further restrictions on corporate jets necessarily result in more revenue for scholarships or food programs, as the president has claimed. The calculations are parallel to those made for the president.
Take a chief executive officer who earns ten times as much as the president does per hour. What is gained by stranding him in an airport, having him wait with countless other travelers—whose time is not worth one percent of his time—to catch a plane that might not get him to his final destination?
The tougher tax treatment of jet owners will inevitably lead to less use of these corporate jets. What the nation gets in direct taxes against corporate CEOs it loses in the reduced profits of the businesses that no longer use corporate jets as they once did. For a variety of reasons, this method of transportation is a lot cheaper for corporate officials, who have the option of chartering out the services of corporate jets from sites such as Luxury Jets, which offers "empty leg" specials that help boost the productivity of its own air fleet. Corporations look to their bottom line far more efficiently than the United States government looks to its. Thus, corporations seek out low cost solutions that are not possible for a presidential entourage for whom security is the highest and best good.
We can now see the primitive economics that lie behind the presidential rhetoric. First, it is not possible to gain more money for the public treasury by taxing heavily those practices that are efficient for a firm. Putting a special tax on corporate jets will cut corporate profits, leaving nary a dime to fund the worthy causes that the president promotes. To repeat a constant refrain, taxation policies that are unsound in good times do not become sound in bad times.
The president's rhetoric is laced with primitive economics.
Second, the president always seems to be making the wrong either/or choices. There is no connection whatsoever between the use of corporate jets and the awarding of scholarship money. The correct way to think about such a tradeoff is to ask this question: is allotting tax dollars to one type of venture preferable to allotting it to another?
The president’s failure to compare different expenditures matters, big time. During his press conference, Obama was asked about the ill-conceived decision of the National Labor Relations Board to chase after Boeing for opening a new plant in South Carolina. Naturally, the president played dumb on the question, saying that he did not know the facts and that the matter was properly before "a judge"—i.e. the National Labor Relations Board—to decide. But here is what he should have said if he had the courage to own up to his own decisions:
Right now, Lafe Solomon, my acting General Counsel of the NLRB, has decided to chase after Boeing for the temerity of seeking to open up a new plant in South Carolina in order to escape the risk of union strikes back in Seattle. Economic downturns create hard political choices. I think that it is wise for me as your president to spend your hard-earned tax dollars harassing a company whose increased profits from doing business in South Carolina could actually increase tax revenues. We have to get our priorities right, and mine are simple. Stay true to my union supporters, even if going after Boeing means losing money that could be spent on funding scholarships that let poor kids to go to college or to make sure that the food supply is safe against E. Coli infections.
Unfortunately, you will never hear this level of candor in any presidential press conference.
Obama may think that his cheap political populism is the embodiment of some deep economic insight, but the facts prove otherwise. Only when the president decides to be candid about the budgetary trade-offs that he faces will he be able to reverse the economic malaise for which he bears so much responsibility.