Don’t Blame America’s Wealthy. Blame the Game.

Over the past few months, as Congress has wrangled with changes (once again) to the tax code, the focus has been largely on whether the wealthy will—as U.S. President Joe Biden has frequently intoned—“pay their fair share” to offset some of the administration’s plans for new spending on child care, health care, and various social safety net expansions. Amid this discussion, a spotlight has been trained on how investment income, mostly in the form of capital gains, are taxed versus how income is taxed.

The U.S. tax code taxes capital gains at a lower rate than income, for the most part, with the traditional rationale that while those in the upper income tiers account for the vast majority of investments, investments unlike individual income can benefit society as a whole and not just the one investing. Today, with less than 1,000 billionaires seeing eye-popping gains from investments, the preferential treatment of that form of wealth has come under renewed scrutiny. The question is whether that scrutiny should tip into cynicism.

Only the Rich Can Play: How Washington Works in the New Gilded Age, David Wessel, PublicAffairs, 352 pp., $30, October 2021

Investments can enrich the few, but they can also yield social returns; they can support entrepreneurs, create new companies, and give rise to innovations, such as mRNA vaccines that, until 2020, were speculative and are now life-savers. And as David Wessel, a longtime reporter currently at the Brookings Institution, highlights in his new book, Only the Rich Can Play: How Washington Works in the New Gilded Age, the tax code has long been used—and, at times, abused—to spur private investment for public good. In fact, barely noticed in the last major tax legislation, the 2017 bill passed under then-U.S. President Donald Trump was a provision establishing “Opportunity Zones” as a tax-advantaged investment opportunity meant to encourage investors with hefty capital gains from their investments to put those toward real estate developments in areas starved for capital.

The idea is fairly simple: Create tax incentives for investors to take their realized capital gains and put them in funds or projects that benefit uncapitalized communities. The incentive in this case is investors can defer taxes on their gains for years and, if kept tied up long enough in a new project, potentially forgo paying taxes on those gains altogether.

How that legislation came to pass and whether it fulfilled the promise of its sponsors “to bring private money to downtrodden communities” by spurring real estate investment in areas that would otherwise be capital starved is the question Wessel seeks to answer in his book. Intensively reported, meticulously detailed, and studded with colorful anecdotes and characters, the book ultimately concludes, wisely, that it is both too soon to tell and the signs are less than promising. Passed with noble intentions and pushed by an unlikely cast of characters led by Sean Parker, the one-time billionaire and early investor in Facebook, the Opportunity Zones to date have been a hodgepodge of projects, very few of which appear to fit the mold of low-income housing or developments that will transform neighborhoods and communities. Those that might be transformative, such as the massive Port Covington project in Baltimore, were already underway and would likely have been financed whether or not the Opportunity Zones existed.

Parker was an unlikely herald. He had scant Washington experience, and his Silicon Valley reputation was itself questionable. But he was convinced he could champion an idea that had been percolating for years: that using the tax code to “connect struggling communities with the private investment they need” would do well for society and create meaningful investment opportunities at the same time. Finding strange bedfellow allies, such as Republican Sen. Tim Scott of South Carolina and Democratic Sen. Cory Booker of New Jersey (whose experience as mayor of Newark sensitized him to the burning need for investment capital in struggling metro areas), the statute was passed as part of the omnibus 2017 tax bill that lowered corporate taxes and brought down income tax rates for most Americans.

Like many new ideas, Opportunity Zones were a concept in 2017 but not really a workable plan. Deciding what tracts would qualify as zones was left to state governors, and the IRS was slow to add its own voice to how investment gains would be reported. The result was something of a free for all, with thousands of zones established, many of which only technically met the low-income criteria: mostly industrial areas; all of Hell’s Kitchen in New York City; Rep. Alexandria Ocasio-Cortez’s district of Long Island City, New York; part of Reno, Nevada, dominated by a Tesla Gigafactory nearby; and areas of Oakland, California, that were already rapidly gentrifying.

One of Wessel’s recurring motifs to describe how the allocations unfolded is “don’t blame the players. Blame the game.” In fact, he italicizes that line and invokes it repeatedly as a mantra to underscore the point that, to date, any abuses of the program’s spirit are fully within the law as passed. The fact that money went into a Ritz-Carlton hotel in Portland, Oregon; that it went toward plush developments already planned out; that many of the impact and low-income plans didn’t come to fruition—all of that was legal. All of it flowed from the murky and amorphous nature of the bill. And recent attempts to rectify some of that have come to naught, although there are bills floating around Congress intended to tighten the rules.

To be fair, and Wessel is, this is a very new program, only in place since 2018, but it is far too early to tell whether the easy cases of egregious uses of tax shelters for capital gains will obscure other more worthy projects. Like any new program or idea, 2017 and 2018 saw a flurry of announcements and gatherings, hosted by people cobbling together new pooled funds on the fly, some of whom had been looking for the magic bullet to outside returns for many years and for whom the Opportunity Zones program was just another investment fad. Best estimates suggest perhaps $75 billion had been committed by late 2020, which is hardly nothing, but in a $20 trillion economy, it is actually not that much, especially considering most of those billions of dollars have yet to be deployed on actual real estate projects. While the money has been allocated to eligible funds and projects and hence, granted tax deferrals, most real estate projects take several years before shovels go into the ground. And what money has been put to actual use has tended to be for projects that originated before 2017—before Opportunity Zones existed—but which then became eligible.

None of this means the program has had no effect, only that the evidence so far is at best mixed and at worst, a demonstration of well-intentioned plans being highjacked by opportunists and state governments that used the fuzziness of what constituted an Opportunity Zone to underwrite projects that were more like normal real estate developments than developments specifically designed to help low-income communities starved for capital. In time, the verdict may change as developers and fund managers turn to new zones—if and when the initial program gets modified in Congress.

In the meantime, the lessons remain ambiguous, which Wessel freely acknowledges. There have been boondoggles, and less capital has been raised than initially hoped. But the idea of the government nudging private industries and creating incentives to channel capital where it is needed remains a potent one—and judging from the trillions of dollars directly spent by the government in our pandemic age, one that receives less emphasis than it could. No matter how much the government spends, channeling private capital to needed social good using the tax code is of immense benefit if the United States can get the formulas right. Steering private capital for collective good can provide a pool well in excess of what government alone can spend.

We’ve yet to figure out the best way to do that, which is all the more reason to keep trying. Societies, like companies and people, learn by doing; they learn by failures and near misses. In that spirit, the early missteps of Opportunity Zones can be a path toward doing it better in the future. If so, Wessel’s diligent reporting will have played an integral role.