The view from my window at NYU Berlin

Nice to see this corvid right outside my window at NYU Berlin, where at the moment I am working on a new international tax article (as a brief change of pace from my literature book).  I am a fan, or more like a distant admirer, of corvids as a group.

Corvids, due to their strikingly high intelligence, have been called "flying monkeys" by knowledgeable bird experts.  I gather that they need the brains (which are definitely not "bird brains" in the colloquial sense) both for social reasons and to navigate a complex environment. E.g., given that they are willing and able to eat just about anything, they both need to make good choices, and may try to access things that require some work and cleverness.

But, alas, it doesn't seem practical (and might not be prudent) to try to make a new friend here.

I am confident that my cats, if they were on the scene, also wouldn't deem it prudent to seek a closer association, even if they could get through the closed window. This bird is too big for them.

Precise targeting to increase high-end inequality?

I haven't yet read this recently posted article, but I plan to, as it seems to be important (and is by good researchers). But here is the key finding from its abstract:

"Using administrative data linking 10 million firms to their owners, this paper shows that private business owners who actively manage their firms are key for top-income inequality. Private business income accounts for most of the rise of top incomes since 2000 and the majority of top-earners receive private business income - most of which accrues to active owner-managers of mid-market firms in relatively skill-intensive and unconcentrated industries."

This would appear to suggest that the proposed lower tax rates for business owners of pass-throughs are almost precisely targeted to increase high-end inequality as much as possible, in exchange for as little efficiency payoff as possible. These probably tend to be people with low labor supply elasticity and/or who are in effect reaping rents.

What could Trump / Mnuchin mean when they claim taxes won't decline for the wealthy?

Not just Trump but also Mnuchin have been claiming that taxes won't decline for the high-income in the supposedly soon-emerging tax "reform" plan. The fact that Mnuchin is saying it, too, makes one think that maybe it isn't just impulsive lying or oblivious salesmanship, but reflects a view about what they will be able to claim about the ultimate package. Yet this is a deal that they are working on with Paul Ryan, not with Ron Wyden or Chuck Schumer.

So what might they be thinking, if we make the assumption (not 100% certain to be correct) that they actually are thinking strategically about the next stage? The following four things occur to me:

1) The fact that a corporate rate cut is likely to be at centerstage in the package may help them. Their argument that this doesn't help rich people can be both formalistic (corporations are separate taxpayers) and substantive (claims about the incidence of the corporate tax). Two points they will have to ignore, however, are (1) the transition incidence of cutting the corporate rate, which benefits existing shareholders if it wasn't fully anticipated, e.g., due to political uncertainty, and (2) the tax planning opportunities that a low corporate rate may give to high-income owner-employees.

2) They will be trying desperately to ignore the effects on high-income taxpayers of lowering the tax rate on amounts that business owners earn through pass-through entities. This is where the really big distributional action will be, if they go ahead with their reported plans to require people whom the tax system classifies as employees to pay significantly higher tax rates than those whom the tax system classifies as business owners. They'll call this a "small business" tax cut, but the point will be made in response that this a misportrayal of where the bulk of the benefit actually goes.

3) They anticipate announcing a package that takes away state and local tax deductions, and perhaps that also does something to home mortgage interest deductions. But these provisions seem highly unlikely to get through the Senate even if they are in the package and pass the House. Indeed, it's possible that they're being over-optimistic about the prospects even for unified "Big Six" endorsement of this.

4) Might they be planning not to propose repealing what is left of estate and gift taxes? Leaving that out of the package would certainly make it easier to claim that taxes aren't declining for the wealthy. But if I had to guess, they'll just try to brazen through the awkward tension between proposing estate and gift tax repeal and dressing up the package as no tax cut for the rich.

Plus ça change, plus c'est la même chose

After last night's game, the New York Mets' team ERA climbed to 5.02.

In 1962, the Mets' team ERA was 5.04.

Very different eras, but just sayin'.

Tax "reform" update

According to this account in Politico, the so-called Big Six disagree fundamentally about what their tax "reform" legislation should look like.

Speaker Ryan wants to enact expensing, but "Senate Republicans believe it won't fly in their chamber."

Ryan also wants to eliminate (net?) corporate interest deductions, but "the break is important to many companies, and other negotiators [Senate? Administration?] want only to reduce it."

Ryan wants to repeal state and local tax deductions for individuals, "but some are concerned over what that means for upper-middle class people."

Meanwhile, Senator Hatch favors a corporate integration proposal that presumably is dividend deductibility, but "the idea has not gotten much traction with House Republicans."

These are some pretty fundamental disagreements. Indeed, other than cutting rates and exempting things, which as a standalone cannot plausibly be called "reform" and would of course raise budget issues, there's nothing of comparable importance left. (Home mortgage interest deductions are presumably even a bigger political lift than state and local tax deductions.)

Tough question?

Two weeks from today, I'll be speaking at a KPMG-run conference in Amsterdam entitled "EMA Tax Summit 2017: A Year of Disruption and Rapid Change."  It would be rather a long trip to undertake from the U.S., but as it happens I'll be by then in Berlin, amid a three-week stay at NYU Berlin, where I'll be doing some work on my literature book. (The work isn't site-specific, except insofar as I suppose that getting away can help one's focus.) So I thought it was reasonable to engage in the side-trip.

Since the conference deals with what tax planners should expect in both the US and the EU, I wouldn't be surprised if they asked me whether it's realistic to expect Congress to enact comprehensive tax reform - say, by the end of this year or so.

Hmmm, that's a tough one. I will have to think about it.

Why is Exile on Main Street so much better than Let It Bleed and Sticky Fingers?

More ruminations here from my resurrecting stuff via Spotify that I hadn't listened to for a while, to help get me through my elliptical machine sessions at the health club:

The canonical view of the Rolling Stones' career, for those in my approximate taste sector, goes something like this. In the 1960s, they were the best and most important white rock or pop musicians, with the exception of the Beatles and Dylan, plus in retrospect perhaps the Velvet Underground. But they were mainly just a great singles band (plus other outstanding tracks - e.g., Sitting on a Fence, What to Do, She Smiled Sweetly, and Ride On Baby, to name four that come right to mind), whose albums generally fell short of showing them consistently at their best. Then came the mistake of Satanic Majesties, after which they pulled themselves together by starting their mature period with Beggars Banquet, followed by the 3 classics - Let It Bleed, Sticky Fingers, and Exile on Main Street - after which they got bored and mostly dull for a few albums (albeit, still with a few great tracks). Then they woke up one last time for Some Girls, the fading echoes of which somewhat enlivened the next two albums (Emotional Rescue and Tattoo You). But after that, while perhaps there's a good track here or there, their recordings are generally best forgotten.

Canonical or not, this basically matches my view of their career, except that I would make one big revision that I know is not canonical. Of the "3 classics," I find Let It Bleed and Sticky Fingers overrated and at times boring, although of course they have a number of essential tracks. But Exile on Main Street truly is their pinnacle.

I would put Some Girls second and Between the Buttons, released in January 1967 as their version of Revolver, third. Each of my favorite 3 Stones albums has a distinctive internal creative dynamic. Exile on Main Street is basically a Richards album with Jagger just along for the ride. Some Girls is basically a Jagger album with Richards just along for the ride. And Between the Buttons gets a lot of its punch from Brian Jones' playing a different odd instrument to flavor the sound on almost every track. (It thus makes their much later work sound incredibly monochromatic and boring.)

Anyway, so what makes Exile on Main Street so much better (in my view at least) than Let It Bleed and Sticky Fingers? Again, the latter two have a number of incredible tracks. But there's a whole lot of not that interesting macho posturing going on, along with rock-blues stuff that sounds a bit generic although I realize of course that this is partly from its being imitated so much afterwards (but then again, they were imitating earlier black artists when they did it). Take Honky Tonk Women and Brown Sugar, even leaving to one side their racial and sexual political incorrectness, which were deliberate, pursuant to their outlaw image in a more retrograde era than ours today. Although these tracks are extremely catchy, dynamic, and fun, they can't be at or near the artistic and expressive pinnacle of popular music from the rock era, unless that pinnacle was considerably lower than some of us would like to believe.

But Exile on Main Street is not just rich, full, and beautiful in its sound (despite its famously murky mix) - it makes fantastic use of all the great extra musicians and singers they had on hand - but soulful, wistful, elegiac, and hurt.  (Just one great example among many is Torn and Frayed.) Macho preening isn't its thing; instead it's about staring into an abyss of one's own creation. A suitable mood, perhaps, for the United States these days.

Not wonky enough?

Matt Yglesias, in a generally excellent column about the sorts of federal income tax changes that the Administration and Republican Congressional leadership may seek in the next couple of months, rightly notes that tax reform, in common usage, means “reducing tax rates without massively reducing federal tax revenue because the losses from the rate cuts are offset by closing loopholes and eliminating or curbing deductions.”  He also rightly notes that the Republicans are unlikely actually to attempt this, since base-broadening sufficient to offset the revenue loss is no fun politically. He then asks why, on policy grounds, one might favor bona fide tax reform:

“What’s good about tax reform?

“The official wonky case for tax reform stems from a divergence in the way that a normal person thinks about taxes from the way that an economist [does] ....

“To a normal person, taxes are a necessary evil. The evil thing about them is that after you pay taxes you have less money than you had before. Most people like money, so they like the idea of getting a tax cut, and they don’t like the idea of getting a tax hike, primarily because they are focused on the impact of tax changes on their after-tax income. If Congress changed the law to cut my taxes by $500, I’d be pretty happy about that. And I wouldn’t care whether they did that by tweaking the individual exemption, tweaking the dependent exemption for my 2-year-old, making his preschool tuition tax-deductible, or cutting my marginal income tax rate. At the end of the day, the point would be to get the $500.

“But from a supply-side viewpoint, these are very different policies. Making the individual exemption a little bit bigger puts $500 in my pocket but it doesn’t give me any new incentives to work harder and earn more money. If anything, by making me a little more economically comfortable it reduces my incentive to work harder and earn more money. By contrast, cutting my marginal income tax rate doesn’t just put $500 in my pocket. It makes it more worth my while to try to go out and hustle up some paid speaking appearances or otherwise find ways to earn a bit more.

“Tax reform is good, on this view, because it’s a way to greatly improve incentives without costing the government much in the way of revenue. The 1986 tax reform bill, for example, eliminated enough loopholes to pay for a cut in the top marginal income tax rate from 50 percent all the way down to 33 percent — drastically increasing the incentive of rich people to go out and try to become even richer.”

In the above text, Yglesias offers a generally useful explanation. However, he may overstate (or, at least, slightly misstate) the main character of the economist’s case for tax reform.  To show this, let’s make two tweaks to his illustration.  First, let’s suppose that I’d get $500 via Congress’s newly making preschool tuition tax-deductible, rather than by its either (a) raising personal or dependent exemptions or (b) lowering marginal tax rates.  Second, let’s suppose that I would decide to work and earn more if I were sending my child to a costly preschool than if I were keeping the child at home.

Now, with the tax treatment of preschool tuition tax being an input to my labor supply choice, it lines up more the marginal tax rate change, and less with changing the individual and/or dependent exemption. So, if we already had preschool tuition tax-deductibility as a feature of current tax law, and we were thinking of repealing it to fund a lower marginal tax rate, the “tax reform” might end up, at a first approximation, not increasing my incentive to earn. E.g., suppose that, when I was thinking of working more so I could send my child to preschool, the combination of (a) an increased after-tax return from my work and (b) an increased after-tax cost to the preschool, left me in the same place as I was before.

To make this a more plausible revision of the hypothetical, suppose that both decisions are scalable. E.g., I can work just a little bit more or a lot more; I can send my child to a cheaper preschool or a more expensive one. The bottom line may still be a lot less change than might otherwise have been expected to my labor supply incentives. I work to earn money to spend on things I want, and the base-broadening makes it costlier than it was before to buy the things I happen to most want.

Why point this out? In the 1986 tax reform, at least some studies found afterwards that work incentives hadn’t really changed much, by reason of the base-broadening. E.g., suppose I previously hadn’t minded the 50% top rate because tax shelters would prevent me from actually having to pay it. Now the rate was lower but the tax shelters were gone, so I would actually have to pay the headline rate. This may have been a good policy change for other reasons that I’ll get to in a moment. But it could mean that my incentive to earn more $$ wouldn’t actually have increased.

Now let’s turn to contemporary thought experiments in which, say, state and local tax deductions, home mortgage interest deductions, and/or 401(k) deductions are repealed to fund lower rates.  (In the 401(k) example, even if the current deduction is replaced by a future exclusion that’s slated to apply when I withdraw the money, suppose that I’m either myopic or else don’t trust future Congresses to retain the exclusion.) If I’m paying about as much tax on balance as I was before, it’s plausible, depending on the details and on my level of understanding, that my view of my after-tax incentive to work will also remain about where it was before, given the changes to the tax treatment of some of my earnings’ possible uses.

With that in mind, let’s re-ask Yglesias’s question: “What’s good about tax reform?” The answer, if any, is that, even if we haven’t substantially changed my incentive to work and earn, we have done so with respect to how I spend my earnings.

In terms of the 1986 example, it’s presumably good that I’m no longer investing in tax shelters (assuming that their tax benefits were socially undesirable), since I will now seek opportunities that offer greater expected pretax profitability. But it’s my inter-asset choices that are now less tax-distorted than previously, rather than my incentive to work and earn.

Likewise, for the 2017 scenario, suppose we see no relevant social difference between my spending my $$ on (a) preschool tuition or (b) fancy vacations. Then eliminating the distortion to my choice that resulted from the hypothetical tuition deduction is a good thing here, albeit by express stipulation. But if we don’t think the deduction was bad, e.g., because we see positive externalities to people’s sending their kids to preschool instead of spending the $$ on own consumption, then so much the worse for the case for “tax reform” here.

I myself tend to like the inter-asset efficiency consequences of a revenue-neutral tax rate cut plus reduction to the home mortgage interest deduction. But that’s because I don’t like the deduction, or more precisely what I take to be its main effects. The state and local tax deduction example is potentially quite different. So is the 401(k) deduction repeal, although there we would need to specify a lot more about what people expect, how they make savings choices, how we should think about socially optimal savings choices, etcetera.

Returning to Yglesias’s main point about tax reform, we’ve now both (a) made the economist’s argument wonkier still – by relating it to distortions in asset or activity or consumption choice, rather than to labor supply as such, and (b) shown that it needs to be evaluated case-by-case, in terms of the arguments for a particular tax benefit that would be eliminated to pay for tax reform.

Of course, as I agreed with Yglesias at the start, the Republicans appear unlikely to attempt bona fide “tax reform” (with significant base-broadening) anyway. But just in case anyone should ever attempt it in the future, I hope it’s useful to clarify the nature of the main argument for it.

Talk on my literature book and its E.M. Forster chapter

This Tuesday, hard on the heels of my international tax talk at USF Law School the previous day, I gave a talk at U.C. Hastings College of Law on my literature book in general, and its chapter on E.M. Forster's Howards End in particular.

Slides for the talk are available here.

Talk on inversions and corporate residence

This past Monday, I gave a talk at USF Law School entitled "Inversions and the Legal Fiction of Corporate Residence." Details about the event are available here.

My slides for the talk are available here.

Is it "populist" to cut taxes for Wall Street?

To call corporate tax cuts "populist" really achieves a new level in rhetorical depravity.

It's true that lowering the tax rate on inbound investment (including that which might otherwise be outbound without facing the domestic rate) should increase U.S. investment, all else equal, presumably with positive implications for wages and/or jobs.  Although, that said, two important points to keep in mind are:

(1) the labor market is complicated, and it's not a simple question how employment levels end up being set.

(2) the link between productivity and wages also is complicated.  It used to be more or less assumed that, if labor productivity increased, including due to added capital investment, wages were bound to go up, too.  But data from the last twenty years have cast doubt on this, as "capital" rather than "labor" - although the standard use of these terms may be questioned - has seemed to capture nearly all of the productivity growth.  One really has to look closely at how markets operate, how wages are set, who has market power and in what dimensions, and so forth, in order to answer that.

So, even in the best case, calling tax cuts for Wall Street a shot in the arm for American workers is simplistic and questionable, even though it's surely true, all else equal, that we would like U.S. investment to increase and that lower effective tax rates on business investment should tend to accomplish this.

But then we have further aspects to think about.  For example, the transition gain from cutting corporate taxes (or, more precisely, from a change in information regarding the likely future tax rate on corporate investment) goes to existing shareholders.  Note also that the lower tax rate applies to the fruits of old investment, which are no longer subject to choice based on new incentives.  (On the other hand, it is true that Auerbach-Kotlikoff models find a loss to old investment when new investment increases due to a cut in its effective tax rate.)

Also, unfunded tax cuts that the government has to finance through borrowing may lead to crowd-out of new investment.  So even the basic simple model in which investment increases so workers gain will not clearly hold.  And if you fund the rate cuts - however unlikely that might be in terms of the tax changes that the Republicans are seeking - then someone or something has to pay for it.  So middle class taxpayers (and poor people who get reduced services) will have to pay - since it's not going to be the high-income ones, with this crew - and/or there have to be offsetting tax increases on investment (although there is the same issue here of new vs. old investment) that might blunt the incentive effects right from the start.

Final answer: These are complicated issues, so if you want to respect all nuance there is no clear answer to exactly who wins and loses from cutting taxes from Wall Street.  And it also of course depends on the package's full details.  But if I were forced to give an unnuanced short answer, I would say that the initial optics are probably the best short summary: cutting taxes for Wall Street benefits Wall Street.  If that's populist, then it's clear the term has been substantially redefined.