Upcoming trip

Torn ACL or not, the show must go on.  (And anyway I have been cleared to walk and travel.)

So on Sunday night I will be flying to Stockholm, Sweden, in order to spend a week there, during which I will guest-lecture at two Stockholm University Law School classes on international taxation, as well as giving a talk based on my Henry Simons paper to Stockholm University faculty.  I also plan on enjoying my first-ever visit to a Scandinavian country.

Advance birthday present!

Tomorrow is my birthday - I won't say what number, though it is a matter of public record.  But today I got a delightful birthday present, a day in advance.  And yes, my saying so is just snark.

Ten days ago I experienced an unpleasant knee injury while playing tennis.  It appeared to have been on the outside of my right knee, where (I determined from about 30 seconds of on-line research) the lateral collateral ligament (LCL) is located. 

I couldn't get in to see my sports doctor (yes, at my age those of us who are still playing sports tend to have sports doctors, whom we have seen multiple times) until this past Monday.  And I couldn't get an MRI for the knee until today.

He said on Monday that he thought the LCL was fine.  But there was a lot of swelling, possible meniscus (cartilage) damage, and possible anterior cruciate ligament (ACL) damage.

I was skeptical on the ACL front, since my understanding is that it's in the back of the knee, and I had thought the trauma was on the side.  I was also really hoping that it wouldn't be the ACL.  Say ACL and I think: Derrick Rose, Iman Shumpert, major setback, surgery, arduous one year rehab.  In a word, ouch.

Well, you can probably guess the punchline.  Today I had my MRI, and within an hour my sports doctor called to say I have a complete ACL tear.   I guess this confirms once again that actual doctors, equipped with actual information, can do a better diagnostic job than lay people who are looking things up on Google.

The good news is that I can still walk, and don't need immediate surgery. My upcoming trips, to Stockholm later this month and Jerusalem next month, appear to be safe.  But it does look like I will be having surgery and rehab starting later this summer, since otherwise my knee stability and lateral movement capacity would be too low for me ever again to play sports such as tennis.

Further good news, relative to the torn-ACL baseline that I had in mind,  is that I gather I should be walking in less than a week after the surgery, and back on the tennis court within 3 months.

The difference in this regard between a casual athlete like me, and a professional like Rose or Shumpert, is as follows.  All of us are projected to be 80% recovered after three months, 90% after six months, and 95% after a year.  But  I can play tennis at 80%, whereas if you are driving to the basket and/or defending against the likes of LeBron James, you had better reach at least 95% before you even think about it.

Tax policy colloquium, week 14: Raj Chetty's "Active vs. Passive Decisions and Crowd-Out in Retirement Savings Accounts: Evidence from Denmark"

Earlier this week we completed the 18th (!) annual edition of the NYU Tax Policy Colloquium.  Thanks to my colleague for the semester, Bill Gale, for being great to work with both in general and with our constituencies, the students and the PM attendees.  I have now co-led the Colloquium with David Bradford, Alan Auerbach, Mihir Desai, Rosanne Altshuler, and Kevin Hassett, in addition to Bill.  I look forward to co-leading it again next year with Alan.

Our final speaker of the semester was Raj Chetty, presenting the above-titled paper, which has already (deservedly) received enormous attention, both within the field and from policymakers, even though it hasn't been officially published yet.  (Of course, it's not as if all that many people, at least in the field, really do read much in the way of published versions of papers, since the working paper versions may appear years earlier.)

Chetty's paper takes advantage of some stunningly complete data from Denmark, providing information about people's income, savings within retirement accounts, and overall wealth-holdings (at least of financial assets), and extending over a long period when Danish policy changes created the equivalent of large-scale natural experiments.  The idea is to test the effects on people's overall financial wealth - not just that which they hold in employers' retirement savings accounts - when the rules for the accounts change in either of two respects.  The first is either (i) requiring mandatory contributions to the accounts or (ii) changing the amount that one invests through them, out of one's paycheck, as a default (i.e., unless one specifically opts to change the contribution amount).  The second is changing the amount of any tax incentives for investing in the accounts.

A couple of preliminary notes: First, mandating contributions can be a lot more like merely defaulting them in than one might initially think.  If you are required to contribute more, thus reducing your currently available cash flow and increasing your retirement savings, then, so long as you are not in a corner, you can respond by reducing your outside saving.  In such cases, the only real difference between a mandate and a default is that reversing out the latter may be easier (as well as more precise, if the mandated saving has different characteristics than the outside saving you can reduce).

Second, when we say that retirement saving through employer accounts is tax-subsidized, we are describing it relative to an income tax framework.  From a consumption tax perspective, exempting returns to saving (or the equivalent thereto) is "normal" treatment, not a tax subsidy.  This can be important for certain purposes when we are thinking about the significance of the Chetty paper's findings - something that I may be writing about this summer, although I will not address it here and now.

A theoretical apparatus that the paper uses to make predictions about the data, which then are strongly confirmed, posits that there are two types of savers: "active" savers and "passive" savers.  The former act like neoclassical utility maximizers.  In other words, they have some sort of preference for the split between current consumption and saving, and if you change where they stand through mandates or defaults they will simply steer back towards where they wanted to be to begin with.  If you give them tax incentives for retirement saving, a key response will be simply to redirect saving that they were already doing to the tax-favored accounts.  They will only respond by saving more insofar as the incentive sufficiently affects the relative payoffs to create a slight change in the overall balance.

Passive savers, by contrast, are inattentive and easily steered.  There actually are several different explanations of what they might be doing and why, and the paper doesn't try to choose between these explanations, although for some purposes it is quite important.  They are posited not to respond to tax incentives because they aren't paying attention.  They also don't deliberately offset any changes in retirement saving from their facing mandates or a change in the default.

It is theoretically indeterminate, in the paper's model, whether mandates and defaults will actually cause them to save more.  Suppose that they start getting smaller paychecks due to larger contributions to their employer retirement accounts.  Possibility (a) is that they go on consuming just as much as before, only they run their bank balances lower, perhaps have to borrow more, etc.  So there is no change in their net saving, not because they are deliberately undoing the induced saving, but because their behavior is so entirely fixed.  Possibility (b) is that they consume less in response to having smaller paychecks.  E.g., suppose they are rule of thumb consumers who don't just go blindly on with the same consumption activities no matter what, but rather they treat their current checking account balances as telling them how much they have to spend for the month.

The Denmark data finds that the population was about 15% active savers and 85% passive savers.  The latter used possibility (b) above - that is, they did reduce consumption when mandatory or default saving reduced the size of their paychecks.  Unsurprisingly, the active savers tended to be people who are wealthier, older, save more in general, etc.

The paper finds that each dollar of increased tax incentives for saving produced only about 1 cent (!) of additional saving.  This reflected the passive savers' inattentiveness and the active savers' mainly shifting saving from outside to tax-favored accounts.

The paper also funds that each dollar of increased mandated or default saving produced about 90 cents of additional saving.  This reflected the predominance of passive savers in the population.

Lots more to say about this in due course.  But for now I'll just say that it's interesting and has important implications for both theory and policy.  (Not just this paper, of course, but also others in the same literature that reach similar findings albeit generally less far-reaching and conclusive ones because the U.S. data, say, simply isn't as rich.)

Department of stupid ideas, part 3,267,889,145

The debt ceiling will be expiring again soon, and reportedly Congressional Republicans are once again considering how best they could try to extract compensation for allowing it to increase. The latest idea, apparently, is to require fundamental tax reform as the price for raising the debt ceiling.  (This may not be a stand-alone price, however, but may be demanded in addition to the enactment of massive spending cuts in the middle of a longstanding but still severe unemployment crisis.)

What does "fundamental tax reform" mean here?  I suppose it could mean anything or close to nothing.  But, as I recently discussed here, for several decades it has meant 1986-style tax reform, in which one lowers the rate and broadens the base, with the aim of achieving overall budget neutrality, and in some versions also maintaining distributional neutrality against prior law.

So here's the idea: the U.S. will have to default unless we enact massive tax changes that have no net budgetary impact.  That makes a lot of sense, in relation to the debt limit problem.

I should note that Republicans and Democrats not only don't agree with each other regarding what fundamental tax reform should look like, but they don't even agree with themselves.  Neither side has, or could easily develop, a budget-neutral fundamental tax reform plan that its own people would generally support.  And few on either side have been willing to specify sufficient base-broadening to make such a plan budget-neutral (let alone distribution-neutral, which is probably impossible today for a significant 1986-style package for individuals).

Perhaps the Congressional Republicans should instead demand something that is more feasible, albeit equally unrelated to achieving long-term fiscal sustainability.  For example, they could demand de-extinction through cloning of the woolly mammoth, a goal that may soon be feasible and that - unlike 1986-style tax reform - I fervently support.

Tax policy colloquium, week 13: Itai Grinberg's "Emerging Countries and the Taxation of Offshore Accounts"

On Tuesday, we had our penultimate session of the year, featuring Itai Grinberg's follow-up to his UCLA Law Review piece, The Battle Over Taxing Offshore Accounts.  In "Battle," Grinberg discusses the global response to "offshoring" (a truly U.S. term that reflects our distinctive geography) of financial holdings by wealthy individuals around the world.  Many of these people are likely committing tax fraud.  Others are hedging against domestic political instability and expropriation or exile risks, hiding their wealth from potential kidnappers, etcetera.

The U.S. share of this problem is relatively small, since a far lower percentage of U.S. wealth is held offshore than that from most other countries.  Note that U.S. individuals generally cannot lawfully avoid U.S. tax by holding their portfolio assets offshore.  The income from foreign bank accounts, stock trading accounts, etceteram is currently taxable, and even if you do your portfolio investment through a company that you incorporate abroad it is likely to face current U.S. tax (or worse-than-equivalent treatment to current taxation) under the passive foreign investment company or PFIC rules.

But there are of course some U.S. individuals who commit tax fraud through the use of secret overseas accounts.  Moreover, the problem can extend past investment income to labor or active business income, as in the scenario where a fraudster tells people to pay for his services (say, as a contractor) via deposits in the secret accounts.  This leaves only the problem of getting spending money out of the accounts, such as via overseas trips or the use of credit cards.  And then the IRS, unless it can trace the cash or find the accounts, can only use "lifestyle audits" to prove that the fraud is occurring.

As further background to all this, in 2010 Congress passed FATCA (the Foreign Account Tax Compliance Act), almost overnight and without advance notice but leading to huge controversy ever since even though it is not scheduled to take effect until 2014.  FATCA seeks to require foreign financial institutions around the world to identify their U.S. account holders and report on them to the IRS.  (For convenience, I'll call them "foreign banks" although they can be other types of financial entities as well.)  Foreign banks that don't cooperate may face huge withholding taxes that are meant to be a punitive rather than an indirect collection mechanism.

Foreign banks and their U.S. allies or representatives have been screaming bloody murder ever since FATCA passed, and they make several good points.  One is that it may be very difficult for them to determine who are their U.S. account-holders, since U.S. individuals may invest in them via foreign entities.  (E.g., I incorporate in Bermuda, and my Bermuda company invests through a Luxembourg bank.)  Another problem is that complying with FATCA may require one to break home country laws aimed at protecting confidentiality, and on the same ground may violate contracts with one's clients and customers.

A sophisticated defense of FATCA would hold that it was simply a device to require foreign banks and other countries to start negotiating with the U.S. with regard to the offshore wealth problem - which again, is in comparative terms a far worse problem for many other countries than for us.  And indeed there has been significant movement along those lines since FATCA was enacted, which likely would not have taken place otherwise.

Grinberg's UCLA article takes stock of all this, and makes a couple of main points.  One is that there has been enormous movement towards global acceptance of the proposition, which would have been thought absurd pre-FATCA, that financial institutions acound the world should serve as "tax intermediaries" that act on behalf of the home country taxing authorities, just as U.S. banks do domestically by issuing Form 1099s to account-holders and the IRS.  But he describes the battle between two competing models: that of information reporting to the home country authorities, and that of anonymously collecting a withholding tax (with respect to dividends, interest, etc.) that is paid over to such authorities in lieu of any reporting.

The second of these two options appears to have been the brainchild of some very clever Swiss banks that figured they could push back against the pressures for full reporting by making selective withholding tax deals with a couple of influential countries (the U.K. and Germany).  Grinberg argues in the UCLA piece that the reporting approach is better than the withholding approach - a view that has considerable merit if withholding is sufficiently feasible.  The basic point is that only information reporting can lead to fully effective home country worldwide taxation of individuals' passive income, which clearly is how one would like to go if the home country has an income tax that it wants to apply effectively.  Reporting also can address, as withholding taxes on interest and dividends cannot, the fraud problem of not reporting one's earnings or business receipts to the home country authorities by reason of having them secretly paid abroad.

One objection to universal information reporting, assuming it to be feasible, concerns bad people getting information about resident individuals' foreign holdings, in settings where it is not simply a matter of anodyne tax enforcement.  Consider Putin wanting as much information as possible about people who might oppose him, or corrupt officials who would sell the foreign wealth information they procure to prospective kidnappers who want to know whom they should victimize and how much they should demand.  But certainly the system has great appeal, if feasible, not just for countries like the U.S. and those in the EU, but also for what Grinberg calls "emerging countries" that have decent governance.  Indeed, those countries might actually benefit the most, so FATCA, if it plays out as Grinberg hopes, might actually be seen as a generous act that leverages U.S. financial market power in favor of a global cause that has bigger winners than us.

Before we start getting all choked up about U.S. generosity, however, it is worth noting that FATCA, at least on its face, is mainly unilateralist.  The idea is that other countries should tell us what we want to know, whereas we don't necessarily want to tell them anything.  The U.S. is indeed a kind of tax and reporting haven that wealthy people in other countries use to escape the scrutiny of home country authorities.  I gather that Miami, for example, is an offshore global financial haven (or heaven) for wealthy people in Central America and South America.  Miamians who are getting rich off this business are not exceptionally eager to face FATCA-type obligations towards foreign governments.  So FATCA can play out in the direction of U.S. hypocrisy, rather than of providing the benign global leadership that Grinberg favors.

"Emerging Countries and the Taxation of Offshore Accounts," Grinberg's follow-up paper for the colloquium, tries to take stock of fast-moving current developments, which in the last month have been unremitting (e.g., at G-20 meetings).  It argues that we are in a "punctuated equilibrium" type moment in which a system that might persist for decades is still fluid and being set up.  Moreover, it discerns grounds for optimism that there are enough players with common interests for the information reporting model to really take hold.  The two detours that the paper argues against are withholding in lieu of information reporting, and narrow special deals between just a few countries (with everyone else left out) in lieu of broader and more widely applicable deals.  The main reasons offered for optimism are (a) lots of countries would benefit - this is not a rich country versus poor country issue, although it is a "countries with substantial resources versus tax haven countries" issue, and (b) financial institutions might prefer a single and consistent system of global reporting than having to comply with 50 different rules from countries that are going it alone.

On the first of these two points, one would have to rely on the ability of the non-haven countries to pressure all (or enough) of the haven countries - there can be no Pareto improvement here that would make everyone eager to cooperate.  Providing accommodation services for foreign wealth is a nice business model for a small country that is sufficiently well-governed.  On the second point, it's clear that uniform global financial reporting would not be the banks' first choice, so getting them to play ball (including in the sense of not opposing it politically) depends on their assessment of the likely alternatives.

If Grinberg is right about the timing, we will know within a couple of years how it all came out.

Alan Viard's "PPL: Exposing the Flaws of the Foreign Tax Credit"

About a month ago, I commented here on PPL, the U.S. Supreme Court's pending foreign tax credit case that raises the question of whether a retroactive UK tax, meant to claw back the benefits that investors derived when government-owned utilities were privatized at what turned out to be too low a price, should trigger foreign tax credits for U.S. companies.

The legal dispute reflects the fact that economically identical taxes may be creditable or not, depending on how they are formally described.  For example, if you had a $5 perpetuity and the pre-tax interest rate is 5%, so it is worth $100, a 40% "income tax" is hard to tell apart from a 2% "property tax," since either one will cost you $2 per year.  Yet only foreign "income, war profits, and excess  profits taxes" qualify for the foreign tax credit.

The IRS has raised a few eyebrows, along with a legal challenge that generated a circuit split and Supreme Court review, by taking an apparently formalistic stance here, and saying that the U.K. tax is not creditable because it was not called or expressly structured as an income tax.  More often, the IRS wants to look at economic substance, while taxpayers rest their cases on self-selected form that supports favorable tax results.

But here, saying that "substance" should control runs into the problem that the underlying law on its face rests on arbitrary and formalistic distinctions.  Should any tax that can be shown to be equivalent to an income tax be creditable, even though it's clear that some such taxes are not meant to be creditable?  If so, then how exactly is one supposed to draw the fantastical line between taxes that win due to income tax equivalence and those that lose despite it (and thus that are also equivalent to the ones that win)?

In today's Tax Notes, Alan Viard has a very nice piece exploring PPL's conundra.  Rather than argue that the case should come out one way or the other, he uses it as a vehicle to expose the fundamental problems with foreign tax creditability and the related illogic and arbitrariness of efforts to draw lines between taxes that are creditable and those that are not.  In addition to agreeing with his analysis, I'll admit to having been personally gladdened by his references to some of my recent work on foreign tax credits (to be further developed in my forthcoming book on international tax policy).  A few samples of the article's discussion include the following:

"Reiterating a point made a half century ago by Peggy Musgrave, Daniel N. Shaviro of the New York University School of Law recently emphasized that from the standpoint of American well-being, U.S. taxpayers’ foreign income tax payments are no different than their other foreign tax payments, nontax foreign business costs, and reductions in foreign income. The credit reduces American well-being by artificially and inefficiently diluting U.S. taxpayers’ incentives to minimize foreign income taxes, because those taxes can be offset by the credit. The credit prompts American companies to operate in high-tax countries, to be less zealous in challenging foreign tax assessments, and to enter transactions that reallocate other parties’ foreign income tax liabilities to them in exchange for other benefits. Statutory and regulatory restrictions on the credit cannot satisfactorily combat those incentives....

"Despite its unusual generosity, the FTC has enjoyed almost unanimous support"  [For example, to bring out the lack of coherent - or any - analysis more bluntly than Viard does, it's not classified as a tax expenditure because it's not classified as a tax expenditure.  That is to say, it has not been defined as a tax expenditure because it has been defined as not a tax expenditure.] ....

"As Shaviro has emphasized, the FTC gives U.S. taxpayers an artificial incentive to pay foreign income taxes rather than incur other taxes or nontax costs. That incentive makes no sense from the standpoint of U.S. national well-being, because there is no meaningful distinction between foreign income taxes and other foreign costs ....

"Empirical evidence recently presented by Kimberly Clausing and Shaviro confirms that a country’s provision of an FTC prompts its investors to direct their overseas investments toward high-tax countries. Clausing and Shaviro found that OECD countries with credits placed a larger share of their foreign direct investment in high-tax countries (statutory corporate tax rate above 30 percent) and a smaller share in low-tax countries (statutory rate below 15 percent) than the OECD countries that exempt overseas income or have a hybrid credit/exemption system. The difference persisted in a statistical analysis that controlled for countries’ GDP levels, geographical distance, and other relevant variables.

"As Shaviro points out, if the FTC were immediate, refundable, and completely unlimited, a U.S. taxpayer would not incur even a $1 cost to avoid a $1 billion foreign income tax liability because the taxpayer would receive a fully offsetting $1 billion reduction in its U.S. taxes. Of course, nobody actually wants the taxpayer to incur the $1 billion liability and stick the U.S. treasury with the tab, so Congress and the IRS have taken steps to prevent that type of extreme result.

"The rules are so extensive and intricate precisely because they are trying to negate the basic incentives built into the credit. Yet, they can address only the most extreme cases.... 

"Some observers object that the removal of the FTC would lead to a dramatic, and potentially undesirable, increase in the U.S. tax burden on U.S. taxpayers’ foreign-source income. As Shaviro emphasizes, however, the appropriate size of that tax burden is a separate question from the degree of relief for foreign income taxes. If taxing foreign income at ordinary rates without a credit is deemed to result in too high of a U.S. tax burden on that income, the solution is to lower the tax rate applicable to the income. Rate reduction provides relief impartially to income that has been heavily taxed abroad and income that has been lightly taxed abroad, avoiding the credit’s bias in favor of the heavily taxed income. As explained above, that bias is the source of the credit’s flaws."

To be sure, there is a distinction between the arguments that (a) unilaterally providing a foreign tax credit is bad policy [I say "unilaterally" because exemption systems effectively make foreign taxes deductible, rather than creditable], and (b) once one has a foreign tax credit and hems it in hither and yon so as to limit the resulting damage, one is likely to find coherent line-drawing impossible.  But Viard nicely shows not only that both of these propositions are true, but also that they are closely logically linked.  One cannot solve the PPL case by determining what taxes "should" be creditable given the underlying policy aims, when there is no non-circular there there.

Tax policy colloquium, week 12: Larry Bartels' "The Class War Gets Personal: Inequality as a Political Issue in the 2012 Election"

This week, Larry Bartels presented the above paper, which relates to tax policy in the sense that it examines public views about tax progressivity, in the context of the 2012 presidential election.

Extra bonus fun: among the paper's data points was the impact of the Obama campaign's immortal "America the Beautiful" campaign ad, which depicted Romney crooning tunelessly while the words on the screen cited him for shipping jobs to Mexico and China, outsourcing other jobs to India, placing millions in a Swiss bank account, and investing in tax havens like Bermuda and the Cayman Islands.  The ad apparently had a very large impact on people right when they saw it - for example, inducing them to feel worse about equal opportunity in America and more negative about extending the Bush tax cuts for upper-income taxpayers.  But the ad's effects unsurprisingly degenerated over time (campaign ads have a short effective half-life).  Just seeing the ad again was a fond trip down memory lane for me.  Whether it mattered or not politically, it's truly an artistic masterpiece, and one could spend an entire seminar session(say, if my colloquium was "law and literature") unpacking its various levels of communication.

The paper's main focus, however, is on the following.  One natural way to view the 2012 presidential election is within a story frame of populist American responses to rising inequality that's accompanied by serious economic distress that arguably is the fault of the elite.  This is how many view the progressive and New Deal eras.  Then in 2012 we get the most anti-plutocratic presidential campaign in modern memory, with grade B Central Casting cartoon villain Mitt Romney starring in the plutocrat bad guy role.  The people rise up and endorse the Obama campaign's call for serious policy responses to rising plutocracy, including progressive tax changes.

This is a nice story, but is it true?  It's way too Frank Capra to be as convincing to the dispassionate observer as one might have liked.

In a way, this is what Bartels' paper examines.  It offers up two poster boys with alternative interpretations of the 2012 presidential election.  The first is Jonathan Chait, who said: "If there is a single plank in the Democratic platform on which Obama can claim to have won, it is taxing the rich."

The second is Kevin Hassett, who said: "I don't think the Obama victory is a policy victory ... In the end what mattered was that it was about Bain and frightening people that Romney is an evil capitalist."

Needless to say, both Chait and Hassett are playing the mandate game, because that's what people in Washington do.  Whenever you win an election, it gives you a mandate.  Whenever you lose an election, it turns out there wasn't any mandate.  Why people go to all this trouble is not entirely clear.  It's a nice talking point, but never really seems to matter much.  The Washington policy process is very substantially insulated from public sentiment.  Despite the high-minded idea that elected officials are agents of The People, broad public sentiment from the last election only matters if politicians conclude that it's stable and repeatable, and thus will drive results in the next election.  But as Harold Wilson once said, even a week is a long time in politics.  Two or four years are exponentially more so, and repeatability thus depends on inferring a long-term trend (a scenario that some Republicans appear to be at least evaluating with respect to immigration and gay marriage, but not tax progressivity).

Anyway, back to the paper.  Using survey data compiled from prospective and then actual voters during and right after the 2012 presidential campaign, Bartels finds that net support for the progressive tax changes that Obama endorsed was fairly slim and if anything narrowed during the course of the campaign.  He views this as rebutting the Chait position claiming a purposive public mandate, although one could also say that support for progressive tax changes "hardened" and "persisted."  But yes, it doesn't seem to have loomed all that large in voters' attitudes.

By contrast, a modified version of Hassett's thesis gains support from the survey data.  Where Hassett goes wrong is in suggesting (perhaps unsurprisingly for a disappointed Romney campaign adviser) that the Obama campaign was merely manipulating people by "frightening" them with a boogeyman story.  To the contrary, the public's view of Romney as a plutocrat who did not care about the interests of people outside his cadre was plain as a bell in late 2011, well before the Obama campaign started attacking him publicly.  They merely pointed to something that the public already believed. 

But "modified Hassett" still wins, in the paper's analysis.  The public responded very substantially to the view that Romney only cared about rich people, not anyone else.  Indeed, this much more deeply held version of the "evil capitalist" meme cost Romney, in the paper's best estimate, 2 to 3 percent in the popular vote.

This in turn suggests that, had there been no widespread public perception of Romney as a sneering, out-of-touch plutocrat, or if voters had not minded his being one (as indeed they might not have, in very different times), Obama's actual popular votye margin of 51.1% to 47.2% would have turned into something ranging from 49.2% to 49.1% for Romney to 50.2% to 48.1% for Romney.

I'm not sure I understand this counterfactual, in which the Republicans have a candidate with all of Romney's other perceived strengths and weaknesses (including, e.g., that he was non-ideological and a great "manager" who "understood creating jobs"), but not this weakness, even though it's arguably related closely to all of the other perceived attributes.

I also wondered why Romney does so well in this hypothetically revised version of the election, given that standard political science models based on the performance of the economy, especially over the last 6 months, tended to predict a small Obama victory.  But there may have been other factors leaning the other way.  For example, the public actually seems to have been worried about deficits and debt, and to have believed (I would say, in considerable tension with the actual campaign evidence) that Romney would have been more fiscally responsible than Obama.  So you could start from the prediction of the standard political science model, with Obama winning by a somewhat smaller margin than he did, than adjust his way for the plutocrat issue, then adjust back the other way for the issue of debt and deficits, leading to a net in which Obama wins by slightly more than expected.

But back to the points of more general interest here.  The paper suggests that revised Hassett beats Chait on the meta level as well as the direct one.  It finds that the evidence fails to support what I am calling the Frank Capra story - a fnding that I suspect might also hold if one could do a similar analysis of 1912 or the 1930s.  It finds instead that the public appears to have responded idiosyncratically at the personal level to Romney's trust deficit by reason of whom they thought he was, rather than what he was planning to do.

I tend to agree with this meta-conclusion, relative to the Frank Capra story in which an aggrieved public rises to demand serious policy responses to rising inequality and elite malfeasance.  But I was less confident that the paper actually provided strong evidence in favor of its meta-conclusion.  After all, one could imagine voter distrust of Romney the plutocrat as proxying for broader progressive views.  From the Capra perspective, why would rational voters, knowing how little in Washington politics they can actually control or even observe, nonetheless choose to focus on a particular issue, rather than on making judgments about the candidates' true characters and commitments?

In short, a U.S. voting public that attached a very high priority to addressing inequality arguably would have focused - just as the actual survey respondents did - on whose interests the candidates were inclined to serve.  The paper's meta-conclusion rests on a further assumption, which the data couldn't reach since the 2012 campaign only happened once, in which all that changes is the quirks of biography, and the public therefore doesn't reach the same conclusion about the Republican candidate even though he is the same as Romney in policy substance.

So in the end I agree with the paper's meta-conclusion because I agree with it, not because the adduced evidence seems conclusive in its favor.