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The Brilliant Business Model of Grover Norquist

by | November 22nd, 2011 | 02:24 pm
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The failure to reach a budget agreement by the US Congressional "super committee" says much about the American political system. Few individuals probably have a bigger stake in this failure than the president of Americans for Tax Reform (ATR), Grover Norquist, whose pledge [pdf] signed by 238 members and 41 senators of the 112th Congress reads: "I will: ONE, oppose any and all efforts to increase the marginal income tax rate for individuals and business; and TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates."

ATR is a nonprofit organization that derives all its income in contributions from the Americans for Tax Reform Foundation (ATRF1) and other anonymously funded organizations.2 Occasionally, the media has taken an interest, as the Boston Globe did in 2006, but the basic reality of American democracy today is that we don’t know who funds an organization that seems able to bend a critical share of the US Congress to its will.

The coercive nature of the "ATR Tax Pledge" is relatively straightforward. The organization approaches every Republican member of Congress (as well as Democrats in relatively conservative districts) and asks for a signature on the pledge. If the new member refuses, ATR will engineer a lavishly funded conservative challenger to that member in the next Republican primary election, running and probably winning on a platform of "incumbent X wants to raise your taxes." The political potency of this threat is reflected by the sheer number Congressional cosignatories.

What makes Grover Norquist the standout lobbying entrepreneur in Washington, however, is not that he is able get Congress to vote with him time and again. Other cash-rich Washington lobbyists like those representing the financial sector probably can match that feat, too. What makes Norquist uniquely brilliant is that he has created a franchise where he sells a lobbying product that is both non-rivalrous (e.g. the consumption of his services by one person does not preclude the consumption of the same services by another person) and countercyclical (e.g. demand for his services should rise during tough economic times). In other words, from an economic point it is not surprising that Norquist is riding high today.

Superficially it appears that Norquist is an ideologically driven lobbying organization that acts on behalf of all Americans opposed to paying more taxes to the US government. This is obviously an issue upon which people will at all times legitimately disagree, so it is fair game in a free society. However, the reality is quite different. The real status quo product that Norquist sells is anonymity to special interest groups that wish to retain their preferential tax status under tens of thousands of pages US tax-code.

In other words, if you are an oil company or a cigarette producer worried that the favorable tax status of your profitable industry might be reconsidered in today’s tough budgetary climate, why go for a merit-based defense of your tax benefits based on why your industry or company deserves them? You could argue, of course, that your industry or firm creates jobs, produces exports, reduces energy consumption or lowers pollution. But given current budget constraints, that justification probably may not carry the same weight.

Instead, it is much safer and easier to approach Norquist, who can sell you protection against a Congressional reevaluation of your tax treatment anonymously, based on the ideological opposition to any tax increase or any reduction in tax benefit. The key difference, though, is that Norquist does not require that you offer any justification for your current beneficial tax treatment or that you ever go public with your case. Because the tough fiscal climate makes it hard to find "offsets" for any tax increases, you get to keep what the tax code gives you today in complete unanimity. And Norquist gets to sell the same deal to as many other special interest groups as is willing to pay, while portraying his protection scheme as a grassroots, libertarian movement. As a business model, it is nearly perfect. The tougher the fiscal situation becomes, the more prized is the anonymity granted to these groups.

But what about the free-rider problem? If Norquist claims to be ideologically opposed to any kinds of changes to the tax code, why would rational special interest groups pay if they get the benefit by letting others contribute? Possibly this problem poses a profit maximization obstacle for Norquist’s business model. But since changes in the exceedingly complex US tax code do take place and companies without champions on Capitol Hill do lose the tax preferences, ATR will still have a "certainty product" to sell to most clients.

Perhaps conservatives might one day "see the light" and return to their longstanding principles of supporting a fiscally sustainable future for America. But for Norquist’s business model, this would be the worst possible outcome. Not only would fiscal sustainability require that taxes be raised, undermining ATR’s and its clients’ claims, a more benign fiscal climate in Washington would also reduce the value of anonymity, relative to the cost of publicly fighting for your tax breaks on their merits. If Uncle Sam had a balanced budget and low debt, Norquist would probably go out of business.

No doubt Europe faces far bigger institutional obstacles in solving its debt crisis than does America. But successful business models like Norquist’s illustrate why the political impediments to balancing budgets in the United States are much bigger than in Europe. Just as in Europe, it regrettably looks certain that only a bond market crisis in America will get the longterm US fiscal crisis solved.

Notes

1. See the latest available ATR Form 990 from 2009 [pdf].

2. See ATR Form 990 from 2007 [pdf] for the latest available form with a number of specified donors.

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