Only the Rich Can Play: How a Billionaire Sold Washington a Bonanza for the Wealthy as a Way to Help the Poor

by David Wessel

In a Winners Take All meets This Town narrative, a New York Times bestselling author tells the story of the creation of a massive tax break, in which political and economic elites attend to the care and feeding of the super-rich, and inequality compounds.

David Wessel's incredible tale of how Washington works-and why the rich keep getting richer-starts when a Silicon Valley entrepreneur develops an idea that will save rich people money on their taxes and spins it as a way to ostensibly help poor people. He organizes and pays for an effective lobbying effort that pushes his idea into law with little scrutiny or fine-tuning by congressional or Treasury tax experts-and few safeguards against abuse. With an unbeatable pair of high-profile sponsors, bumper-sticker simplicity and deft political marketing, the Opportunity Zone became an unnoticed part of the 2017 Trump tax bill.

The gold rush followed immediately thereafter.

David Wessel follows the money to see who profited from this plan that was supposed to spur development of blighted areas and help people out of poverty: the Mandalay Bay Hotel in Las Vegas, the Portland (Oregon) Ritz-Carlton, the Mall of America, and self-storage facilities-lucrative areas where the one percent can park money profitably and avoid capital gains taxes. And the best part: unlike other provisions for eliminating capital gains taxes (inheritance, for example) you don't have to die to take advantage of this one.

Wessel provides vivid portraits of the proselytizers, political influencers, motivational speakers, consultants, real estate dealmakers, and individual money-seekers looking to take advantage of this twenty-first century bonanza. He looks at places for which Opportunity Zones were supposedly designed (Baltimore, for example) and how little money they've drawn. And he finds a couple of places (Erie, PA) where zones are actually doing what they were supposed to, a lesson on how a better designed program might have helped more left-behind places. Readers will feel outraged as Wessel gives us the gritty reality, the dark underbelly of a system tilted in favor of the few, with the many left out in the cold.

Genres: Politics, Nonfiction, Economics, Audiobook, Business, Finance, History

Audiobook

Published October 5, 2021

Reviews

[Jason Furman · Rating 5 out of 5]

The world is lucky that David Wessel devoted so much time, attention and open mindedness to one particular provision in the tax code, Opportunity Zones, documenting their origin and impact. He has a reporters eye for detail, an ability to tell the story in an exciting way, but also blends in rigorous policy analytics and a certain degree of sympathy and open mindedness--while being willing to make the calls when they are obvious.

Opportunity Zones were a provision in the 2017 that allowed people to take capital gains and instead of paying taxes on them invest them in funds that invested in designated lower-income (sort of) areas with the gains deferred and (they hoped) permanently eliminated it. The idea was the brainchild of Silicon Valley billionaire Sean Parker who established a "think tank" (the Economic Innovation Group), drummed up bipartisan support, and got the idea enacted in record time in the 2017 tax cut. The bad press quickly mounted as many gentrifying and even rich areas were designated Opportunity Zones, connected people started profiting, and funds appeared to be going into expensive hotels, storage facilities and college dorms.

As someone that has worked on economic policy, both reporting and from within Brookings, Wessel brings a lot of insight into how ideas are fleshed out and defended. In some ways he is appropriately cynical, but in other ways he shows the ways in which the idea was, at least in part, well intentioned by its developers, promoter and legislators (and Parker himself does not appear to have profited at all from it). He does make the think tank policy industry sound a little more cynical than it deserves, I would also love to read a book on how the idea of a child allowance went from pipe dream to reality rapidly in part through think tanks and research in a manner that has some similarities but many differences from Opportunity Zones.

The first part of the book filled in a few holes in my knowledge (including some great stories, like Tim Scott in the Oval Office after Charlottesville using the opportunity to push President Trump on Opportunity Zones). But it got more interesting the second part where Wessel goes through the quirks of the process by which Treasury rapidly wrote rules on Opportunity Zones and the States implemented them with mixed results along with the many weirdnesses, quirks, accidents and malevolence that went into the process. Then he goes off to Portland, Baltimore and other places to examine project, finding that most of them would have happened anyway, did not appear to serve any particularly worthwhile goal, but in a few cases may have been consistent with the intention.

These anecdotes would be a wonderful complement to rigorous causal research, unfortunately there is none and given the paucity of data there may never be. But he cites evidence that Opportunity Zones have not raised housing prices, most did not get anything like the initial hype or even get anything at all, and most of the money went to gentrifying ones. All in all, the combination of anecdotes and evidence leaves one wondering whether a small fraction of the cost went to good or none of the cost went to good.

At the end of the day my own deep policy conviction is to be extremely skeptical of place-based policies and extremely skeptical of indirect policies that gives financial incentives to businesses or high-income people to do good things for others. The problem with place-based policies is they often do not benefit those in most need but property owners and in practice can be implemented in a highly politicized manner because nothing is more powerful for politicians than places. And then there is a parade of policies that are about indirectly giving incentives through corporations or high-income households to achieve goals (like the repatriation holiday), almost all of which beg the question of why not use the federal resources directly for whatever the purpose was.

A big advantage of giving money to people rather than places or high-income households is that it is hard to go badly wrong. If the government had spent the money on housing vouchers, for example, we might debate the finer points of whether they were optimally designed (e.g., whether and how to encourage mobility to high opportunity areas) but there would not be any doubt that the resources went to their intended purposes. Instead we are left with a triple bank shot of a policy that may have delivered a little to people who needed it while letting the most affluent take a huge cut.

Overall, a great case study in how Washington works, how tax policy works, and some of the challenges around promoting economic development through the tax code--highly recommended.

[Joey Nedland · Rating 3 out of 5]

David Wessel’s ‘Only The Rich Can Play’ is about Opportunity Zones, a privately-backed tax concept introduced in the 2017 TCJA. It’s informative, as one might expect from a Brookings Fellow, though my gripe is that I don’t quite get why it’s a full book. Wessel’s thesis is fairly simple: OZs are a questionable concept in their origin, and their use shows that they’re ineffective at accomplishing their authors’ stated goals. One might think he would focus on the opportunity cost of capital gains avoidance that OZs rely on (they’re tracts which allow individuals to reinvest capital gains in infrastructure to defer/avoid tax payment on realizing their gains). However, he spends most of the book pulling anecdotes and focusing on specs of the actual OZ investments that don’t feel germane (this building has a second story deck with bay views, this student housing project offers granite countertops). That, and a few unnecessary biographical asides make me think this could have been more effective as a white paper, but was purposefully stretched for content. It’s not too wonky, and informative, but after a few chapters you get the gist.

[Dylan Groves]

In the same way that I would appreciate a book series that's basically a bunch of "what's up with this country lately?" books I hope someone starts a book series that's a bunch of "how'd that policy really come about and how'd it turn out?"

[Susan Tunis · Rating 3 out of 5]

Both interesting and informative, but 350 pages on tax law is... a lot.

[Scott · Rating 4 out of 5]

An example of how DC works in the new gilded age, with “Opportunity Zones” legislation intended to help the poor, but, without much scrutiny, mostly favored the wealthy with tax havens. Left-behind communities were supposed to benefit, but saw gentrification instead and displacement. Only with proper oversight, can this slick legislation build proper results.

[MICHAEL · Rating 4 out of 5]

This is meant as a supplement to Jason Furman's excellent Goodreads review of this book.

In the book, Wessel describes how Opportunity Zones came into law and tracks what, as best can be ascertained, they have, and have not, accomplished in delivering on the goal of boosting investment, economic development and job creation in “poverty-plagued, left-behind communities.” Of the thousands of pages in the Internal Revenue Code, Opportunity Zones, passed in 2017, are of particular interest for two reasons. First, they had bipartisan support in Congress. That is unusual in general and particularly for current-day anti-poverty initiatives. Second, there have been headline-grabbing instances of wealthy investors garnering lucrative Opportunity Zone capital gains tax breaks for investments in areas far more prosperous than those ostensibly targeted.

There is a certain aura to measures that are supported by lawmakers of both political parties — an impression that if both parties support something it must reflect all that is good, and none that is bad, about each party and the ideologies that motivate them. In the realm of social policy the thinking is that if it’s bi-partisan we’ll get Republican’s enchantment with the efficiency of free markets, combined with Democrat’s fixation on doing social good, and end up with a highly efficient, market-based, policy that does social good. That can happen, but it is at least as likely that we get Republican’s fixation with lowering taxes on the wealthy combined with Democrat’s tendency to throw money at problems and get the worst of both worlds. Setting aside critical judgement because a policy is bi-partisan is a bad practice.

This book makes clear that most of the Opportunity Zone investments we know of would have happened anyway and many are in communities that few would consider “poverty-plagued.” This isn’t surprising. The way eligibility of a community for the tax preferred investment is determined is laughable. Governors get to choose among census tracts that meet very broad criteria as low-income. Eligible communities can include college towns, prosperous commercial census tracts with very few people, rapidly gentrifying areas and other areas that meet loose criteria for being in need but actually are not. Because states are competing nationally for investment, governors had a strong incentive to pick census tracts that were most attractive to investors — whether they were particularly needy or not. By definition, those tracts were already the most attractive to investors among the possible selections. Of the Opportunity Zones the governors selected, investors, in turn, are most likely to invest in the ones that are likely to be most profitable — which are very likely to be ones they would have invested in anyway. That isn’t to say that no socially conscious investor has been moved by this tax benefit to put their money where it’s needed most. But this is no way to target capital where it can do the most good in fighting poverty.

Although the poor design of the law is a problem, in some ways it masks a universal problem with investment incentives. That universal problem is that most of the money, the fiscal cost to government, almost always goes to supporting activity that would have happened anyway. Most of the money spent on tax incentives is, in this sense, “wasted.” Most people would have bought their houses without the home mortgage interest deduction or save for retirement without 401(k) accounts. Companies would still invest without accelerated depreciation and expensing, and engage in research and experimentation without a tax credit subsidizing it. There are already extremely strong market incentives to do these things — the tax break is just the cherry on top. That doesn’t mean all tax incentives are bad, that there aren’t market failures they address, but it does mean they deserve close scrutiny and a look for more efficient alternatives.

Also, to be clear, there are always “design problems” with tax incentives. It’s one reason public-spirited lawyers tend to favor these things less than economists. Economists think “look, this will bring down the cost of capital for investments in low-income communities so we’ll get more investment in low-income communities.” Lawyers think “how will this be exploited to reduce tax liabilities, regardless of the intent of the incentive.” The lawyers know that, with anything like this, it will be a constant game of whack-a-mole trying to close the paths that lawyers and accountants find for gaining the tax benefit for activities that were not intended. They also know that it’s almost always a losing fight because once the tax benefit is in place there becomes an entrenched interest in preserving it and coming up with arguments why limiting it will do more harm than good. “Better targeting rules will make it too complicated!” “What’s wrong with investing in business districts next to college campuses!” “Look how many jobs our luxury hotel on the upper west side of Manhattan created!” Elected officials get little credit for closing tax loopholes but they can take a lot of grief from lobbyists, donors and self-interested constituents for doing so.

In one way Opportunity Zones were better than many other tax incentives in that they weren’t strictly on autopilot: benefits weren’t available simply by complying with broad, legislatively defined, criteria. With Opportunity Zones, governors could limit them if they wanted and be held accountable if their actions resulted in misallocation of resources. Unfortunately, the governors didn’t feel an obligation to honor the intent of the legislation.

One question is, why did Opportunity Zones pass despite flaws that many policy experts recognized. Well, from a Republican standpoint the worst that was going to happen was that some wealthy people get tax cuts, which they support anyway, without the poverty alleviation intended. From the standpoint of Democrats, the worst that could happen would be that the share of money flowing into low-income communities would be less than hoped — with too much going into relatively higher income areas — and some rich people would get undeserved tax breaks. That’s bad — but it still means that some more money would go into poorer communities than without the law, even if the bang for the buck is bad. It’s not like, at the time, Congress was choosing from a vast menu of ways to help poor communities. This was the only show in town
.
I’m going to end with a critique of the book that isn’t really a critique of the book. The question is: “David, why pick on Opportunity Zones?” Sure, it’s an inefficient waste of money. Or, to use your words: “OZ money going to heavily celebrated, heart-warming projects appears to be a small percentage of total OZ investments.” But at least there are some scraps for communities and people who need it. There are plenty of provisions in the tax code that aren’t as well targeted as they should be and the excess all goes to people or companies that don’t need it. Why not write a book about one of them! The reason I say this is not really a criticism is that if I had been wanting to write a book about a tax provision I’d probably have chosen Opportunity Zones too, for the reasons I said at the beginning. It’s an interesting study of bi-partisanship gone awry. It is also distinctively distasteful to see a government program intended to help the poor end up mostly lining the pockets of wealthy investors and serving communities that don’t need the help.

[Aden · Rating 5 out of 5]

Only the Rich Can Play is a book about many things: lobbying, left-behind cities, tax law, investing, and intergenerational mobility. It felt more like a political thriller or a long-form investigative journalism piece than an economics book.

David Wessel details a little known aspect of Trump’s tax cut called Opportunity Zones (OZs) that allowed investors to delay or even altogether avoid paying capital gains if they invested in a (supposedly) low-income census tract classified as an OZ. The book follows the years-long lobbying effort that preceded the bill and closely analyzes its results.

I learned a lot and greatly recommend the book. A couple points.

1. At first the book reads like it's supposed to be an indictment of money in politics. But, as Wessel says, Sean Parker — the Silicon Valley billionaire who was responsible for the passage of OZs — never took advantage of the loophole he created.

Instead, OZs represent hubris and arrogance more so than corruption. Parker thought his idea could save left-behind cities, but instead it was hijacked by the ultra-wealthy to avoid taxes. Yes, policy is sometimes bought by the rich, but not always to benefit themselves. Here, a Silicon Valley billionaire had too much time on his hands.

2. OZs also raises a fundamental question about government regulation. Parker and his allies wanted minimal strings on where the money invested in OZs could go, arguing that government bureaucracy was the reason that past efforts had failed. But the result was that investors disregarded social impact and instead took their money where it had the highest return: high-rises in fancy areas and luxury student housing.

Fundamentally, there is a tradeoff between social investing and high returns — at least in investors’ eyes — that the writers of the bill wanted to ignore. Instead, the government should have taken care to make the most high-impact investments attractive somehow.

3. Where exactly, then, was the failure in this policy? Some will place the blame on attempting to “place based policies,” of which economists are rightly skeptical.

The book doesn’t seem to agree with this interpretation, though, largely placing the blame on lack of reporting requirements and oversight by the Treasury.

The fundamental failure, perhaps, lay in the conflation of social and private returns, mentioned above. Money flows to its highest returns, but Parker allies had assumed these projects would benefit the receiving communities writ large when instead they went to much more narrowly tailored deals, helping only the very richest in an OZ.

[Frank Stein · Rating 4 out of 5]

Half of this book is a masterclass on both think tanks and politics that should be read by anyone interested in either topic. The story of how Facebook founder Sean Parker founded a new think tank, the Economic Innovation Group, with Steve Glickman and John Lettieri, DC Democratic and Republican workers, rolled out a proposal for "Opportunity Zones," or capital gains tax-breaks for investments in certain lower income census-tracts, and got it hitched as a "stowaway," as Glickman said, on President Trump's 2017 tax bill is well-told and insightful. EIG got top tier thinkers and politicians involved, did appropriate outreach to the press (cemented by their "Distressed Communities Index") and got bipartisan buy-in by people in both chambers of Congress (especially Senators Cory Booker and Tim Scott in the Senate). They then leveraged that support, and Tim Scott's personal conversation with President Trump after the Charlottesville tragedy, into a bill provision that managed to survive in the Senate with nary a public peep and into the conference committee act (the House, where Speaker Paul Ryan and Ways and Means Chair Kevin Brady remained suspicious, had kept it out.) It's all well-told and well down.

About half of the book, however, is taken up with tales of individual real-estate investors in individual OZ tracts and funds. As the author admits, the Treasury is not required to issue reports on the zones and there is basically no systematic data on them. He probably proves his point that much of the big investment went into high-end hotels in already wealthy areas, but much of this part reads as tendentious. It's simply not particularly interesting how some investor scrounged up funding for a development in Portland or in Charleston or in Baltimore, and doesn't say too much about the overall program.

But for a good tale of how some people can get things done in Washington, this is tough to beat.

[Jonathan · Rating 4 out of 5]

8/10

I wonder what would happen if Wessel hadn't chosen to devote over a year to this project? I suppose I just wouldn't know about Opportunity Zone's (OZ's). Perhaps that wouldn't matter, though, as it's not as if can do anything about the abuses of it.

Essentially, an OZ is "an economic development tool that allows people to invest in distressed areas in the United States. Their purpose is to spur economic growth and job creation in low-income communities while providing tax benefits to investors." Sounds great, until you learn that nearly anything can become an OZ, including downtown Seattle and Vegas, and 95% of the investments into OZ's go to fewer than 10% of them. As always, Washington has found a method of benefiting the rich while making it appear to be a benefit for the marginalized. I know that sounds naive, but I'm just tired of this. All this ends up doing is allowing the wealthy to avoid capital gains tax.

The issue of course is clear, we should help poor people, not poor places. Placed based determinism: you are less likely to move upward if you don’t move outward.

[Bill Brewer]

This is a fascinating story of opportunity zones and Portland OR is one of the subjects. Written by David Weasel of the WSJ lent credence. A friend had quizzed me on my knowledge of movers and shakers in Portland. after reading this book. Senator Tim Scott and even Donald Trump. are characters in the story. Check back later.

[regina · Rating 4 out of 5]

throwback to my thesis days — i am so bad at reading nonfiction but this was so easy to get through and read like a story and gagged me!!! and was also just beyond helpful for my thesis 🫡

spoiler: sean parker is actually so important in this book/for the policy???

[Alex Clark · Rating 4 out of 5]

Interesting, balanced analysis of Opportunity Zones.

[J.P. · Rating 5 out of 5]

#ettd

[MARC L'ESPERANCE · Rating 4 out of 5]

Good read, concerning a Trump tax loophole, Opportunity Zones. The enticement of avoiding the capital gains tax by investing in poor regions of the states.