Coyote Blog

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.