Oops, rounding error

Stan Collender reminds us that Bush in 2000 promised to eliminate the national debt by the end of this decade.  Instead, it is more than $9.3 trillion and rising by $1.59 billion per day.

On a par with his other achievements.

Joint Committee on Taxation addresses tax expenditure analysis

This past Monday, the JCT issued a pamphlet taking on an important conceptual issue, tax expenditure analysis, and making what I think are significant strides in how to rescue the analysis, and its important informational content, from sterile debates about what constitutes a "normal" tax base. The JCT's main move is to distinguish between (a) narrow subsidies, which on their face depart from the usual treatment of a broader category of items, evidently reflecting Congressional intent to affect resource allocation, and (b) what the pamphlet calls "tax-induced structural distortions," such as quirks arising by reason of the realization requirement. The JCT also proposes to measure negative tax subsidies (i.e., allocatively-minded penalties) as well as positive ones.

My writings on tax expenditures (such as in chapter 8 of Taxes, Spending, and the U.S. Government's March Toward Bankruptcy) are similar in spirit although different in some details (e.g., how to classify the earned income credit). So I am delighted to see the JCT taking up the cause of making the analysis more useful and less mired in pointless debates, such as that between income and consumption tax advocates, that are orthogonal to its informational content.

I first got interested in writing about the topic some years ago, when I was a commentator at an AEI event in which Bruce Bartlett criticized tax expenditure analysis because he saw it as a device used by income tax advocates to peddle their side of the ongoing debate. I agreed with him that it had been used this way, going back to Stanley Surrey, but argued that it has more general informati0nal content, and can advance agendas such as his (favoring small government and identifying departures from it) no less than Surrey's. Plus one need not have an agenda in order to favor more crisply identifying cases in which Congress conceals what seem clearly to be allocative policies (e.g., favoring a particular type of investment) by embedding them in a seemingly distributionally motivated instrument (such as a general income or consumption tax).

My favorite example of the core point made by tax expenditure analysis remains one that I got from David Bradford. Let's cut both taxes and spending by $50 billion, David pretended to urge, by zeroing out $50 billion of military spending (to buy advanced weapons) and enacting instead $50 billion worth of "tradable tax credits" that would go to the very same weapons suppliers for the very same weapons. At the end of the day, everything would be exactly the same, but taxes and spending would each be reported as $50 billion lower. Without a tax expenditure concept, it is hard to show as crisply that nothing in this scenario has genuinely changed.

Release of candidates' spouses' tax returns

Cindy McCain is refusing to release her separately-filed tax returns as part of the disclosure process generally demanded in a Presidential campaign. In 2004, Teresa Heinz Kerry similarly refused to release her returns for most of the campaign, although on October 16 of that year she released the front two pages of her 2003 tax return.

Perhaps all this focus on candidates' tax returns is a bit over-blown. I remember the big hoodoo when Hillary Clinton released her returns earlier this year, which turned out to be no big deal except that it provided interesting background on just how much the Clintons have earned (and a bit on the general details of how Bill earned some of it). But if disclosure is the norm, it strikes me as quite illogical to provide an out for spousal income simply by reason of separate filing. If it's germane to understanding the candidate's overall financial circumstances (assuming that's one reason for the norm of releasing the returns), separate filing seems likely, in most actual marital situations, to be quite irrelevant.

A further point of interest is that separate filing is usually a bad idea from a tax planning standpoint. So, if the McCains get away with this (as the Kerrys, admittedly, largely did), then effectively spousal disclosure is required unless the candidate is especially motivated to want to avoid it. Not exactly an ideal filter.

Hillary's next move

She is truly emerging as one of Wellesley's and Yale Law School's great "anti-elitists." I'm expecting her to denounce the theory of evolution any day now. If the U.S. had more Islamic than anti-Islamic voters, no doubt she would call for restoring the veil.

At least her feelings about economists are mutual. Long before the current campaign, very few economists who knew her in the Bill Clinton Administration had anything good to say about her. At best, they would remember what their mothers told them and decline to say anything at all.

Back from Israel

I am back from a very pleasant week in Israel, jet-lagged after a 6 hour plane delay that kept me in the Ben Gurion Airport from 9 pm to 5:30 am, but more or less functioning.

Yoram Margalioth of the University of Tel Aviv Law School was my very gracious host, and I also enjoyed meeting other Israeli tax academics (such as Tsilley Dagan, Yitzhak Hadari, Jacob Nussim, and Avi Tabbach). On my last day there, I gave two talks, one on my tax & accounting paper that is forthcoming in the Georgetown Law Journal, and the other on the content of an as yet unwritten paper that is tentatively called "The Intellectual State of the Play in U.S. International Taxation." There was some good discussion, including from students who read the tax & accounting paper (which I presented at a tax colloquium).

But of course the best part, apart from the hospitality of Yoram and others, was touring Israel. Highlights included Jerusalem, Masada, the Dead Sea, the ruins at Caesarea, and the Golan Heights. And of course all the hummus, pita, Jerusalem bagels, and other such delicacies that are available there. Highly recommended as a tourist site and as someplace for U.S. tax academics to visit.

On the downside, I didn't think Continental Airlines lived up to the billing that they give themselves for service in all those quite amusing TV commercials.

Drinking the kool-aid

The McCain campaign has been arguing that their proposal to allow companies to expense equipment purchases in the first year of use would come at no added budgetary cost. See, for example, here.

I am told that Doug Holtz-Eakin has been making this argument to reporters and at various public forums. Presumably he is arguing (a) that if you don't discount future dollars at the interest rate, the present value of expensing is the same as that for depreciation, and/or (b) once one has fully reached the steady state, if the amount invested each year is constant (a dubious assumption indeed), then the dollars deducted under expensing may be the same as those deducted under a slower depreciation rule.

Now, since I would favor a progressive consumption tax in the best of all possible worlds, I am in principle fine with expensing. (The big issue it poses in such a world is anomalous effects if Congress changes the tax rate between the date when the expensing deduction was claimed and that when the resulting income is taxed.) In our current, ostensibly income tax, world, my main problems with it are (a) inter-asset distortions, if it's given for some things but not others, and (b) inconsistency between consumption tax treatment on the inclusion side via expensing and income tax treatment on the deduction side via interest deductions (if the counter-party isn't including the interest income at the same marginal rate).

This is a sufficiently refined level of argument about the merits of expensing that it should be clear I am not a foaming-at-the-mouth foe of the idea.

But if Holtz-Eakin is claiming publicly, as I gather he is, that adopting it would have a zero revenue cost, then despite being an expert in the area who has written about these topics for years he is saying things that any second-year law student knows, after taking Tax I, to be trivially fallacious.

This is a good example of why I would never want to work on a political campaign. I hope he is duly ashamed of himself, but have no idea if he is.

To my mind, making clearly false claims in public is a much worse sin, from an economic adviser, than Goolsbee-gate from the days of the Ohio primary (which featured an economist saying sensible things in private rather than nonsense in public).

Final NYU Tax Policy Colloquium of 2008

Today Jason Furman presented a paper on healthcare, rightly (I'd say) lambasting the bizarre Cogan-Hubbard-Kessler plan to combat moral hazard in healthcare by increasing it, and proposing his own plan which is hardly bullet-proof (and presumably unenactable) yet has some clear virtues.

Brad DeLong once said in a post that the big issue among healthcare economists is whether the problem is moral hazard (people over-spending because they aren't paying in full hence don't require marginal benefit equal to marginal cost) or adverse selection (failure of insurance markets to permit risk pooling and actuarially fair pricing, on balance, for diverse groups).  Jason, to his credit, sees both as problems not just one.

Cogan-Hubbard-Kessler (henceforth CHK) seem to think the big problem is moral hazard from over-insurance, largely caused by the fact that the income tax permits exclusion of employer-provided health insurance but not deduction of medical expenses, creating an incentive to over-insure.  Hence they propose to make all healthcare expenses deductible, thereby externalizing the moral hazard / over-insurance problem from employer-provided healthcare to everything.

One point that doesn't seem to have occurred to CHK is that the incentive to over-insure goes ONLY to the difference between non-deductibility and coverage at the value of the income tax exclusion.  Say the marginal tax rate (MTR) is 42%, taking account not only of federal income tax marginal rates but state & local income taxes (though they are to a degree deductible) and payroll taxes (although on the Social Security part one may accrue benefits along with tax liabilities).  Under their theory, they should predict that the co-payment required for routine expenses, to the extent these are over-insured in response to the tax incentives, is 58%.  Higher co-pays can't be explained by their theory since they go beyond the tax benefit.  And without higher co-pays than this, they have no theoretical basis for expecting moral hazard to be reduced.

Anyway, CHK want to reduce moral hazard by increasing it, in the sense that it gets peeled out of employer-provided healthcare since you get a federal co-payment based on the MTR even if it is uninsured.  But they are addressing a problem that should not exist by their lights, given the absence of any tax incentive to go beyond the federal tax saving in designing the co-pay.  So their diagnosis must be wrong in order for their prescription to seem superficially appealing.

Perhaps they want to bring the current employer-provided healthcare system more generally crashing down, but that would strike me as a bit reckless and rash.  Albeit, no more so than the fiscal implications of their plan, which (in conventional Republican style these days) would add a vast sum to the fiscal gap.  But who's counting anyway?

Jason's plan is to provide refundable credits that aren't tied to the amount you actually pay - you get it for having qualifying insurance without regard to how much you pay.  So you pay at the margin both for the amount of qualifying health insurance that you select and for outlays outside the plan.  Hence moral hazard is addressed, along with adverse selection if the plan in other respects is successful.

One perplexity posed by the paper is that it suggests that, at the margin, healthcare outlays provide zero marginal healthcare benefits, because consumers (when economizing because their share of the cost has been increased) can't choose properly between reducing the healthcare that actually provides benefits and that which is pure waste or affirmatively harmful.   This is not theoretically implausible, since consumers (myself included) are poorly informed and have to rely on doctors whose incentives and ideology may be a bit off, but the evidence for it is weak, and if it is true a much more radical response than anything Jason suggests might be in order.   It might suggest that we can't rely on consumer preferences at all here, and/or that healthcare should be taxed like pollution even if health insurance is subsidized.

Jason is not on the side of the debate that says universal mandates should definitely be used, but the answer to that one was perhaps beyond our institutional expertise as a group (which is not to say that the experts all agree).

This is it for the year, so far as the NYU Tax Policy Colloquium is concerned.  I'll miss it, albeit cherishing my newfound time and freedom.  A great year, reflecting the efforts of my co-conveners (Kevin Hassett and Mihir Desai) along with the substantial contributions of both regular and sporadic attendees.  We'll be back next January, with Alan Auerbach as my co-convener, and 13 of our speakers are already set.  But more on that later.

On Sunday I head to Israel for a week.  I'll be giving two talks which presumably will be listed on Tax Prof Blog.  One concerns my tax & accounting paper, and the other a paper to be written later this summer called "The Intellectual State of the Play in U.S. International Taxation."  Back in the USA at a horrifically early hour on Monday, May 5.  Then in mid-June I leave to teach for two weeks in Singapore again (followed by two weeks vacation in Vietnam), and before that happens I need to finish my book in progress, "The U.S. Corporate Tax - What is It, and Where Is It Headed?"  Maybe the Coen brothers will want an option on that one, since it has a bit of suspense, but in the interim the Urban Institute Press will be publishing it.  All kidding aside, I do feel good about that book, and hope it can combine informing a lay audience (such as law and business school students) with being enlightening to policymakers and serious academics. 

Free gas for everyone throughout the Labor Day weekend!!

Now that Hillary Clinton has jumped on the McCain bandwagon with regard to suspending the gasoline tax, I think it's time to up the ante.

Why stop at merely eliminating the tax? Zero is so arbitrary as a floor. We could get even more financial relief to Americans during the vacation season, and even more fiscal stimulus, by adopting a gasoline subsidy.

Say, ten cents a gallon for starters. Maybe with a special bonus for cars that are gas-guzzlers, since they'll be paying more at the pump even after getting the subsidy. And maybe with free gas for everyone throughout the Labor Day weekend!!

Better still, let's make the subsidy an income tax credit for gasoline purchases, so that it still qualifies as a "tax cut."

Next up, tax credits for running your air conditioner.

Heads up for Tax Notes readers

My Senate Finance testimony from last Tuesday (April 15) appeared today in print at 119 Tax Notes 313 (April 21, 2008). Non-subscribers can still read my testimony here.