Tax Policy Colloquiium, week 9: Michelle Layser's article on place-based tax incentives

 Yesterday at the colloquium, Michelle Layser presented How Place-Based Tax Incentives Can Reduce Geographic Inequality.

There is a degree of consensus (if not 100%) among tax policy scholars that place-based tax incentives - e.g.,  the New Markets Tax Credit or the 2017 Opportunity Zone provisions, which favor business investment in particular areas that are thought especially to need it, relative to investment elsewhere - generally are bad ideas. This is based partly on political economy concerns about doing it properly, but also about underlying views that it will merely shift investment from one place to another with no particular social gain, and that tax benefits to address poverty, inner-city or depressed rural area problems, etc., should be people-based (i.e., go to individuals in need) rather than place-based.

Raj Chetty's recent work regarding mobility and other outcomes, differentiated by zip code, might conceivably lead to rethinking about the current consensus, but it's still at an early stage of being compiled, digested, and understood.

Layser's aim in the paper, is not to defend place-based tax incentives, but to ask (1) what real problems with a geographical component they might actually address, (2) how they ought to be designed in light of those problems, and (3) how well existing place-based tax incentives address these problems. (Spoiler alert: not well at all.) It makes a valuable contribution, including via empirical work regarding Chicago and its worse-off neighborhoods, and here are some of my general thoughts regarding the issues it discusses.

Geographical inequality or geographical deprivation? - The paper's title suggests a focus on geographical inequality. And an interest in inequality often is motivated by equity concerns;. I'd argue, however, that (a) the paper is more about geographical deprivation than inequality, and that its concerns sound very much in efficiency as well as equity.

Suppose that Places A and B both have public parks, but that A's is nicer. This might be viewed as involving geographical inequality, and perhaps as creating an equity case for making them more equal. But that sort of thing is not the paper's main concern.

Now suppose instead that Place B has an oozing toxic waste dump that causes illness and early death to its residents. Once again, B is worse than A but here there is a serious absolute problem, not just a relative one. Oozing toxic waste dumps are both (a) really bad, and (b) not necessarily (until we know more) grounds for site abandonment, as opposed to amelioration.

Whenever a given community has some really bad things going on, or an absence of good things, that suggests the possibility of a huge social return to marginal local investment. (And while relocation may be another option, it may be highly costly.) This potential for a huge social payoff to marginal investment may create a case for place-based or spatial policies.

The paper discusses 3 main types of local problems (all receiving at least some support in the literature) that (in my terminology) suggest the possibility of a high marginal return to local investment. The first is spatial mismatch - the case where communities with potential workers lack convenient access to the places where jobs are. Given jobs' importance to personal and social success, this suggests that there may be positive externalities to connecting the jobs and the people, whether by moving the former or providing better access.

The second is systematic disinvestment, which one might relabel as under-investment that has a bad history and malign causation. Even under-investment alone suggests that there may be initially high marginal returns to putting funds back in to the area.

The third is poor community infrastructure, again suggesting that there may be high marginal payoffs to creating local assets with strong positive externalities.

Place-based policies - Looking beyond the fiscal system, governments of course have place-based as well as non-cash policies. Among other things, they provide public goods and address externalities, often requiring physical investment in a particular space. Thus, one might address spatial mismatch by creating local mass transit facilities (e.g., a metro or rail line with local station). They may combat disinvestment or under-investment by clearing trash, developing lots, furnishing decent housing, etcetera. And they may seek to create adequate community infrastructure, e.g., good local schools and meeting places.

Once one has accepted the case for place-based spending, a further question is that of public versus private provision. If the latter, and if the market hasn't been doing the job adequately, we may consider offering both funding and regulation And once we're offering funding, the ways it could be structured include both direct outlays and the use of tax expenditures.

Public versus private provision turns on classic issues of relative competencies, and the marginal benefits vs. costs of using profit-minded (even if subsidized and regulated) actors. And if we're choosing between direct outlays and tax expenditures, the relevant issues may sound in political economy and optics, along with questions of administrative design. Many of us in the tax policy community may tend towards general skepticism about the use of tax expenditures, based on the frequency of their misuse, but it would be silly to assume that this can never be a good idea.

Bottom line, it's entirely plausible that we might want to use place-based tax expenditures, within the article's definitions, to address the local investment deficits that it identifies and characterizes. One of the article's many virtues is its establishing a framework for evaluating when this might be a good idea, and how such provisions might be structured.

Enlisting the business community - One key feature of tax provisions such as opportunity zones is that they enlist the business communities as allies of the political forces seeking to help disadvantaged communities. The virtue of this is that the people in those communities may need all the allies they can get, if they want to have any hope of influencing legislative outcomes. The downside is that it may lead to cooptation or grifting, with business interests procuring self-enriching policies that have only a fig leaf of ostensibly helping bigger causes. 

There are interesting political economy issues here that might be worth writing about. Just to give three examples from casual observation:

--The political history of Food Stamps suggests that support from agricultural interests was crucial to its political success. It seems clear, however, that poor people did indeed benefit from being given non-cash (but in practice close to cash-equivalent) Food Stamps / SNAP benefits. So this is not at all a story of malign cooptation; rather one of fruitful cooperation.

--Possibly towards the other extreme is the 2017 enactment of Opportunity Zones. Even if these programs have done some net good, which is far from clear, the grifting component appears, at least anecdotally, to have been (unsurprisingly) high indeed. 

--Low-income housing tax credits might be somewhere in the middle. I'm only casually acquainted with the literature, but to my knowledge it suggests that, while things could have been better, they could also have been worse.

Demands on administrative quality - The paper discusses in some detail how programs responding to the 3 main issues identified (spatial mismatch, systematic disinvestment, and poor community infrastructure) would best be structured. In brief, a lot of specific oversight based on careful empirical inquiry would be needed to do it really well. I certainly wonder whether the United States, at either the federal or state and local levels, is still capable of operating a competent administrative state. So much has been willfully destroyed so quickly, and with so little regret or hesitancy by the destroyers. Maybe various states that are either to the north of us or on other continents can still do this sort of thing, but in America we will need to re-learn walking first.

Book talk on Literature and Inequality, part 2

Herewith the second of two blogposts regarding yesterday’s session discussing Literature and Inequality, focusing on the book’s main coverage and content. The book has three parts, each discussing three particular works.

PART 1: ENGLAND AND FRANCE IN THE AGE OF REVOLUTION – Here are quick snapshots of Part 1’s three chapters:

 

1) Austen’s Pride and Prejudice: As Branko Milanovic has pointed out, Darcy and Lady Catherine de Bourgh are in the top 0.1% of contemporary England’s income distribution, but the Bennets are also, if barely, in the top 1 percent. We also see a society in which there appears to be complete ordinal, if not cardinal, consensus about vertical rankings. There also is a thriving aristocratic ethos that posits reciprocal obligations and mutual respect, and that allows plenty of pushback to those who are “lower” within the top tiers. So why aren’t things better than this? Why are the tensions so high, and some of the disputes so nasty?

 

2) Stendhal’s Le Rouge et le Noir: Dark and disturbing though this book may be – reading it, after Pride and Prejudice, feels like switching from a milk bath to an acid bath – in one respect it ought to feel considerably more benign than it does. It shows all sorts of people, at different social levels and in different ways, making a lot of money. One might expect widespread upward economic mobility to serve as an emollient, easing social tensions, but here it seems instead to intensify them. Why should a rising tide rock all the boats?

 

3) Balzac’s Le Pere Goriot and La Maison Nucingen: Among the main features of interest here, besides Rastignac’s relentless arrivisme (and Balzac’s keen portrayal of what motivates it), is the transformation of aristocratic rank from implying stability and a set of values, to its being merely a market commodity like having a nice mansion with well-dressed servants. Written later but set ((until La Maison Nucingen) earlier than Le Rouge et le Noir, it shows further disruptive advancement in the rise of finance and in early nineteenth century France’s capitalist transformation.

 

Other main themes in part 1: Why and how did England and France navigate the capitalist transition so differently? Legacy of the French Revolution, importance of the gentry / “gentleman” concept in England, aristocratic versus capitalist hierarchy.

 

PART 2: ENGLAND FROM EARLY IN THE INDUSTRIAL REVOLUTION THROUGH THE ONSET OF WORLD WAR I

 

1) Dickens’ A Christmas Carol – This cheery tale of the lead character’s serial humiliation – made palatable to us by his fervently embracing it – sets terms for the granting of deference and respect to successful businessmen. The distress of today’s “Scrooge truthers” – libertarians who insist that pre-conversion Scrooge is the story’s true hero – testifies to the potency of Dickens’s dignitary challenge to moneymaking that is shorn of accepting a quasi-familial or aristocratic sense of downward obligation.

 

2) Trollope’s The Way We Live Now – This uncharacteristically angry (for Trollope) attack on the social and cultural threat to English social values from the rise of finance explores scapegoating responses, such as blaming Jews or Americans, but concludes that such rot as there is, is self-inflicted, and that the system is resilient despite it all.

 

3) Forster’s Howards End – Here we see an early parallel to the modern American faceoff between the intellectual elite and the business elite. On its surface seeking reconciliation and a merger between the two groups’ virtues, instead it pitilessly attacks, and portrays the rightful subjugation of, the latter, turning even its famous motto, “Only connect!,” into a battle weapon.

 

Main themes in Part 2 – Dignitary issues raised by the unsettling rise of capitalism & finance; importance of the “gentleman” ethos in softening status rivalries; the relationship of this ethos to English social resilience.

 

PART 3: AMERICA DURING THE FIRST GILDED AGE

 

1) Twain’s & Warner’s The Gilded Age – This root and branch satiric attack on the American success ethic shows also the relative porousness and benignity of American class divides at a point when the Gilded Age – which got its name from the book – was still just in the early takeoff phase.

 

2) Wharton’s The House of Mirth – As New York’s new and old social elites merge over money-worship, their social insecurities fuel competitive savagery, and failure may connote virtue, but also self-alienation and self-hatred.

 

3) Dreiser’s The Financier and The Titan – This almost stenographically accurate recounting of the lead events in the life of an actual Gilded Age robber baron – Charles Yerkes, aka Frank Cowperwood – powerfully dramatizes the tension between extreme high-end wealth inequality, on the one hand, and America’s democratic and egalitarian cultural legacy on the other.

 

Main themes in part 3 – What is so wrong with the United States in plutocratic eras (racism aside)? Why is extreme high-end inequality so toxic here? How does this relate to its tension with democracy, egalitarianism, and the lack since earliest days of a titled aristocratic class?

Book talk on Literature and Inequality, part one

Yesterday was the long-postponed, and I hope not annoyingly over-advertised, Zoom session regarding Literature and Inequality: Nine Perspectives from the Napoleonic Era Through the First Gilded Age. (If not for the pandemic, this event would have taken place live in April.)

I offered initial remarks describing the book, given that, after which Branko Milanovic and Kenji Yoshino offered comments. Then I took questions and comments from the audience. The session was recorded, and I believe will be publicly available soon, in which case I will post the link. But for now, I’ll use text from my PPT slides as the skeleton for a two-part overview of what I discussed at the live session. Part 1 here will offer general background, Part 2 will look at the book itself more closely.

 

Autobiographical backstory – This project offered me a chance to use my artistic / aesthetic side, at the same time as my logical reasoning side, to a greater degree than in some of my more conventional academic work. You know the story – tax policy et al by day; books, films, and music after-hours. Using both at once may happen to a degree if one views writing as an aesthetic and not just utilitarian exercise. But other than in my novel Getting It, combining the two has not always been so easy.

 

Inequality: high-end vs. low-end, not just DMU of isolated consumers – I’ve followed the last two decades’ inequality literature with great interest. But especially early on, I had two concerns about it. The first is that “inequality” isn’t just a unidimensional thing, to be measured in the aggregate, such as via the Gini coefficient. In particular, high-end and low-end inequality – extreme wealth and income concentration at the top, and poverty or deprivation at the bottom – are not symmetric. They raise different types of concerns, and generally are best addressed through different fiscal instruments. This is increasingly widely recognized in the literature now (as noted, for example, in my recent blogpost regarding work by Saez and Zucman).

 

My second concern, with some of the public economics literature in particular, is that its emphasis on declining marginal utility as THE reason for being concerned about inequality was far too narrow. Humans are competitive and comparative social creatures, not just isolated consumers of market commodities plus leisure, and reductive analyses based on the standard price theory models of a “rational” consumer miss a lot of the relevant considerations.

 

The “mapmaker’s dilemma,” social science / humanities – My law review article The Mapmaker’s Dilemma in Evaluating High-End Inequality covers a lot of this ground. Initially this was going to be Chapter 2 of Literature and Inequality, but then I realized it didn’t fit there, and published it separately. This piece’s title is based on the story, from both Gulliver’s Travels and the work of Jorge Luis Borges, in which mapmakers realize that the only way to make a map perfectly accurate is to make it life-size. But alas, that seems to hurt its usefulness. Both maps and all other models must simplify, abstract, and shrink the real world in order to be usable, but then there’s a tradeoff between usefulness and accuracy. Neoclassical economics & price theory have achieved great advances through their version of this, but the sacrifice is more costly for some inquiries than others. Evaluating high-end inequality is a case in point, and here one needs to deploy not only other social sciences but also the humanities, because they explore the subjective experiential side of social life.

  

Piketty 2013, Austen & Balzac – Thomas Piketty’s already-classic 2013 work, Capital in the Twenty-First Century, helped give me the idea that one could fruitfully use works of classic literature – more specifically, realist novels from periods including the early nineteenth century –  in this regard. Piketty derives some nice insights from looking briefly at classic novels by Jane Austen and Honoré de Balzac, but doesn’t exhaust the intellectual possibilities. Also, I thought he got Balzac a bit wrong, by describing the likes of Le Père Goriot as accounts of a “rentier society” in which nothing matters but your inherited wealth, whereas Eugène de Rastignac, the novel’s hero or antihero, is the preeminent arriviste – rising through the judicious use of his talents, such as they are – in all of French literature.

 

Project Fun? – The more I thought about this project, the more it seemed clear that, even apart from the intellectual contributions I hoped it might make, it could be quite enjoyable both to write and to read – more so, perhaps, than the likes of What Are Minimum Taxes, and Why Might One Favor or Disfavor Them? Looking back on my thinking, the one flaw seems to have been that it was actually quite hard to write, albeit fun once I had laboriously taught myself the ropes.

  

“Heading out in new directions without a map” – This is what Paul McCartney later called the Beatles’ process of writing and recording the White Album. They were in a new phase, liberated from their past but done with the psychedelic era. So what next? I faced my own version of this in writing Literature and Inequality. There were really no models out there for the book I wanted to write, nor was I entirely clear at the start just what it was. I had to learn the hard way, through multiple tries, what a given chapter should look like, as well as how they should all fit together. The book consequently took me six years to write (albeit, interspersed with lots of other projects), whereas I usually, when I have the time, write pretty fast.

 

Technical challenges – Even apart from figuring out what chapters should look like – generally involving the selection of a central through line – and how they should all fit together to develop general themes – I had to handle a lot of technical challenges in getting it done. One was to put in exposition as needed, in the form of offering needed background regarding a given book’s plot and main characters – without making it tedious. This was more needed, of course, for a book like Twain’s & Warner’s The Gilded Age than for, say, Dickens’s A Christmas Carol or Austen’s Pride and Prejudice. I had no uniform approach to this, but aimed to solve it case-by-case within the chapter’s flow. It brought to mind the issue any novelist or screenwriter faces, regarding how to supply needed exposition as seamlessly as possible.

 

I aimed to make the book interesting and accessible to both experts (in multiple disciplines) and lay people. If you read one or more publications in the vein of the New York Times, the Washington Post, the New York Review of Books, the Atlantic, the New Yorker, and New York / Los Angeles / Boston Magazine, and you’ve read or at least know (such as through movies) say 3 of the 9 books I cover, then you are within the readership I had in mind.

Teaching on Zoom

 I've now been teaching on Zoom for more than half a semester. I've had a surprisingly good experience with it, but alas that may not carry over so easily to lecturing on Zoom in the spring semester.

The NYU Tax Policy Colloquium on Tuesdays has a public session (links available on request), at which it works pretty well. The upside is that we get attendees all over the world, resulting in larger groups than we've ever had before, with a lot of folks who have interesting comments to contribute. It's a shame that we don't get to meet the author in person, discuss the session over lunch, and then have a small group dinner afterwards. But instead we have an advance Zoom session with the author to discuss the plan, with notes from both of us offered in advance to clarify where we're coming from (we aim at fruitful dialogue, not debate). Then we usually have a small group "happy hour" a couple of hours afterwards, in lieu of the dinner. This actually results in more serious discussions than at an 8-person dinner in lower Manhattan, but without the fun. Also, student attendees can feel left out (although we try to address that), whereas at the dinners we'd personally make sure that they were included at least in one of the discussions (table-wide could be difficult in a noisy restaurant).

The colloquium also has a private session before the public one, just with out students (16 in number - in a regular year, we'd usually be in the mid-20s). I knew one of them from past teaching, but have never met the other 15 in person. Each of them is a discussion leader once (along or with a colleague) for these sessions, and we meet with them in advance on Zoom.

So I really do feel I've gotten to know these people to a degree. On the other hand, I've never been in the same room with any of them (aside from the one whom I knew previously). No chatting before or after class, or at the break in the private session. Almost all participate, and it's easy to keep a queue on Zoom. All things considered, I feel it's worked decently well on the human level, but obviously without COVID I'd rather do it the traditional way. (The public session is a closer call given the tradeoff from having access to a larger virtual than live audience.)

I'm teaching an introductory tax course for 1-Ls in the spring. This, too, will be just on Zoom. Because only 1-Ls and can take it (as one choice among say 6 or 7 electives), the enrollment for this tends to be on the low side, albeit drawing people who are highly interested in the subject. The two challenges there will be getting to know the class, and making the lectures work on Zoom (with participation, of course, but in contrast to a seminar there's much more information to convey).

I know from my experiences as a Zoom attendee, when it's not my session, that paying attention and staying focused is not so easy. The remove from the audience is the main reason why I use PowerPoint outlines when I'm making comments at the public colloquium sessions, which I would never do in the live sessions (at most, I might hand out a one-page sketchy outline, and maybe scribble something in advance on the blackboard).

A lot of prep time is apparently needed to have any chance of making it work. At least it will be live rather than "asynchronous" (the word that seems to be used in lieu of "taped"). Hoping for the best, and I'll certainly do my best.

Tax policy colloquium, week 8: Gabriel Zucman's The Rise of Income and Wealth Inequality from America: Evidence from Distributional Accounts, part 2

 Carrying on with respect to the paper by Gabriel Zucman that we discussed at yesterday's colloquium, here are some thoughts on particular issues raised by the aim of measuring material inequality:

1) Future Social Security benefits - Should these be included in distributional tables, at their expected present value? Does it matter, for this purpose, if they're funded or unfunded?

I'd say it depends on the reasons for concern about inequality that motivate a particular measure, or use thereof. For example, if you're trying to measure the relative expected lifetime material resources available to people at different vertical levels, they absolutely should be included. On the other hand, if you're interested in a snapshot of the present, illiquidity and myopia may render them considerably less relevant, at least with respect to people who are not close to retirement. If you're concerned about social gradient ills, top-down consumption cascades, or unequal political influence, their expected value may likewise have little relevance.

The particular measure that the paper works on developing aims at allocating all current-year national income to one individual or another. This is a worthwhile task, but consider what it misses in the following hypothetical.

Suppose that Congress today votes to have me given a $10 billion bond, to be cashed for that face amount in 2030. Suppose my property rights to it are so clear that it's certain to be paid, and hence is worth $10 billion today (minus the loss of present value from my having to wait ten years for it). Suppose even that I'm forbidden to sell it, and can't expressly borrow against it (i.e., by conveying a security interest to a lender). This is not part of national income - although it would appear in my Haig-Simons income, and perhaps even potentially in my taxable income (if not deemed a grateful nation's gift). But it clearly makes me better-off, and is going to change how I live starting today.

The point is that future benefits, funded or not, may matter to welfare and behavior today - or may not, depending on the particulars of liquidity, one's operative time horizon, etc.

2) Consumer durables - The rental value of consumer durables is excluded from the main income measures in the paper we discussed yesterday, to advance comparability with other countries' existing measures. But the value of home ownership may effectively be included via real estate's inclusion among assets that have imputed returns. There's a strong case that this stuff should more generally be included, at least to get an accurate domestic picture (leaving aside the value of cross-border comparability of measures). And it might compress things a bit given that, for people at the very top, the value of consumer durables may be a smaller percentage of economic income than it is for people more towards, say, the upper middle.

3) Capitalization - One of the biggest disagreements between experts who prepare these measures (including, e.g., Zucman, and our earlier years' colloquium guests Gerald Auten and Eric Zwick) pertains to the capitalization rates that one needs to use in navigating back and forth between income and wealth measures. Suppose, for example, that you're using a 2% capitalization rate. Then $2 of current year capital income implies an asset worth $100, while an asset worth $100 implies $2 of current year income. When a study finds less high-end wealth concentration (and recent increase therein) than Saez and Zucman find, this often reflects the influence of assuming that higher discount and capitalization rates apply to higher-income individuals, on the ground that they are able to earn higher returns.

To illustrate, suppose Ms. Middle has $2 of capital income on her tax return, while Ms. Upper has $6. Applying a uniform capitalization rate of 2%, Middle is deemed to have $100 in capital assets, and Upper $300. But suppose instead that Upper earns a 3% return. Then, while we still infer $100 for Middle, we now infer only $200, not $300, for Upper.

Although I understand the logic, I've always been a bit bemused by this sort of adjustment. Personally, all else equal, I'd rather earn 3% than 2%, and would deem myself better-off if I were doing so. 

The result is also impossible in perfect capital markets where there are no risk differences between assets and also no admixture between labor and capital income. Thus, while I perfectly well accept that it may indeed be true in our world, I'm not convinced that thus lowering Upper's measured wealth, and thus showing the society to be more equal in the scenario where she earns a higher rate of return, I would tend to think of this differently.

Should we say that she has an implicit asset that raises her return from 2% to 3%? Or that it's human capital / conceptually labor income? If it reflects her accepting greater risk (e.g., of a black swan collapse of the stock market), does that downside risk matter, for any of the purposes for which we measure inequality, if people are pretty much ignoring it and ex post the risk never is realized?

4) Value of human capital - Many people dislike the term "human capital" for one reason or another. But, semantics notwithstanding expected future earnings can raise current wellbeing and affect current behavior, in some circumstances no less than tangible or financial wealth.

Consider James Dolan, who as the Madison Square Garden Company's (and thus effectively the New York Knicks') CEO earns $54 million per year. He has job security since he is the owner, and he evidently loves his job, despite his being only a Daniel Snyder away from being indisputably the worst major sports franchise owner in North America. Aren't his expected future earnings part of his current financial status?

Admittedly this example ignores the fact that Dolan is effectively paying his own salary via his ownership interest. But if a CEO without a similar ownership stake shared not only his current salary but his future salary expectations, it would understate his current true position to ignore the present value of expected future earnings.

America's rising high-end inequality in recent decades has largely been fueled by changes in labor income. I think we risk under-measuring it when we don't include this sort of thing.

Should everyone's expected future labor income be included? After all, a 60-year old janitor, earning $20,000 per year, also has an expected present value that one can compute. But the grounds for inclusion are clearer when the individual (a) likes the work and hence wouldn't retire if that were feasible, and (b) has greater rather than lesser access to capital markets to realize this value currently, even if not by formally borrowing against it.

All this doesn't mean so much that human capital should ever be included in these measures, as that we should keep in mind that excluding it may throw off the wealth measure's capacity to illuminate actual high-end inequality (and its various potential derivative consequences).

(5) Individual versus household measures - In measuring high-end inequality, it can make a big difference how one treats, say, spouses. Does one amalgamate them in a single household, and measure inequality as between households? Does one look at individuals separately? If so, does one assume a particular split, such as 50-50, between spouses? This can actually have huge effects on how one measures wealth and income concentration at the top.

In the income tax literature, it's common to note that spouses do not in fact generally share their income and wealth equally. For example, in a heterosexual marriage, it may be common for the man, especially if he is the higher (or only) earner, to have more sway. But this does not rebut the relevance of household-level assets and income to the material circumstances of all household members.

We can define a household as a group of individuals (often cohabiting) who, at least to some degree, pool their collective resources and then allocate them among the members based on internal rules or norms other than just "eat what you kill." These rules may be hard for us to observe, but that does not reduce their potential conceptual relevance

There's a well-known issue in the income tax debate, concerning whether it might matter distributionally if households enjoy economies of scale. (Even if the old saying that "two can live as cheaply as one" overstates it. There may also be non-rival consumption within households. For example, if I am extremely rich, and I newly find a partner (whether or not we are legally married), one might reasonably view the partner as now also being extremely rich, without my really now being any less rich. Even apart from mutually beneficial expenses (e.g., I'd rather vacation with a loved one than all alone), our enjoyment of the status and power that the wealth provides may be to a degree non-rival.

It's hard to determine the "right" way to treat this set of issues. But it can have an anomalously large effect on how we end up measuring high-end inequality. Consider, for example, the relative power and status in multiple realms of the very rich versus the rest of us. How much of a difference does it make, to those of us in the bottom 99%, how equally or unequally spouses in the top, say, 1% or .1% or .01% "share" their income or wealth? Probably a lot less than it may seem to matter when one compares the bottom line results in studies that use different conventions with respect to households.

Tax policy colloquium, week 8: Gabriel Zucman's The Rise of Income and Wealth Inequality from America: Evidence from Distributional Accounts, part 1

Yesterday at the colloquium, Gabriel Zucman presented the above paper, coauthored by Emmanuel Saez. This is a forthcoming Journal of Economic Perspectives paper that discusses increasing the menu of available approaches to measuring material inequality by linking up national macroeconomic accounts to information about individuals and households. Its being written for JEP not only increases its accessibility to a legal audience, but also makes it a great vehicle for teeing up questions that interest me about how to conceptualize measuring material inequality. (I would not be the right person to try to add value regarding various of the technical issues that pertain to using different kinds of data sources.

I will use this blog entry (and the next one) to tee up, without purporting to resolve, two types of conceptual issues in the area. The first is how our reasons for being interested in inequality might affect how to measure it. The second, which I will save for a follow-up blog entry, is how one might think about a number of the particular issues that are raised by efforts to measure inequality. 

Why does inequality matter? - A lot of the concern that would motivate measures such as those in this paper pertains to high-end inequality, or wealth or income concentration at the top. Thus, a lot of the content relates to the top 1, .1, .01. .001, or .0001 percent. 

Even just under utilitarianism, which is but one of many normative theories regarding just distribution (and which incorporates no inequality aversion as such), the problems one might have in mind include the following:

Declining marginal utility - If richer people derive less marginal utility from a dollar's worth of resources than poorer people, the marginal welfare payoff to wealth and income held at the top may be extremely low.

Stress, discord, and social gradient ills - A lot of work in both the social sciences and the humanities suggests that extreme concentration at the top can undermine trust and social concord, not to mention democratic institutions, while also increasing psychological stress at all levels. Richard Wilkinson's and Kate Pickett's The Spirit Level is an important example.

Positional externalities and top-down consumption cascades - People who are not willfully psychologically naive generally agree that it's embedded in our human nature to care about relative position, and to be very prone (at least in a society like ours) to evaluating this in part materially. Robert Frank has applied this analysis to argue that top-down "consumption cascades," a kind of keeping-up-with-the-Jones on steroids, is triggered by substantial and rising high-end inequality.

Top-end political and cultural domination - Anyone who has lived in the United States for any fraction of the last few decades knows what I am talking about here. Political scientists such as Lawrence Bartels and Martin Gilens have documented the degree to which the interests and policy viewpoints of the bottom 99% of the U.S. distribution fail to influence policy outcomes.

Macroeconomic issues (growth, stability, and social mobility) - There is also evidence, albeit some of it still disputed, suggesting that high-end wealth and income concentration reduce economic growth, macroeconomic stability, and also social mobility.

Each of these aims might importantly affect how one measures inequality. For example, an item might increase the lifetime welfare of people at all income and wealth levels, thus making the measure look more equal insofar as it is enjoyed on a roughly per capita basis, yet have no effect whatsoever on one or more of these issues.

Relevance of non-standard consumer choice - This potential gap or even gulf between relative lifetime material welfare at different levels and the evils resulting from extreme high-end inequality is especially enhanced by the frequent failure of standard neoclassical / price theory assumptions about consumers to apply in particular real world settings.

Suppose, for example, that the people in a society exercise consistent rational choice, and have access to perfect and complete financial and other markets. Then everyone's behavior and welfare today would reflect the expected level of their expected retirement benefits, from Social Security and otherwise. For example, even if I were 25, my expected lifetime income, reflecting the value of such benefits, would be allocated by me between periods depending on my preferences. The benefits would be no different than an equal-value cash deposit in my bank account. (Given the assumptions here, I would also be able to swap out the risk.)

In that scenario, not including in one's measure those benefits at their expected value would verge on being malpractice. But once we have illiquidity, incomplete markets, possible myopia, etcetera, the case for inclusion becomes much less clear - and depends on which issues pertaining to inequality one is interested in at the moment.

Likewise, the textbook consumer, operating in complete markets, chooses between commodities with the aim of equalizing the marginal utility derived from the last unit of each. So getting more of anything moves one to a higher indifference curve, and there's no difference between cash and particular commodities that, by assumption, could immediately and costlessly be swapped for other commodities.

This model does not apply, for example, to individuals who get medical treatment that is funded by Medicare or Medicaid. Still less does it apply, for example, to, say, one's per capita share of the benefit (if any) derived from one's government's national defense spending. (This is an item that, for good logical reasons, the paper discusses allocating between individuals at different income levels.)

A final general conceptual point here, before I close out this blog entry so as to discuss particular issues in Part 2, is that a lot of different types of considerations go into designing a measure of a given society's material inequality at a given time. There are, for example:

(1) theoretical issues, such as those noted above,

(2) issues of computational tractability,

(3) issues of comparability, since it is desirable to be able to compare different countries, along with the same country in different eras, using a consistent methodology, and 

(4) issues of clear presentation and public / political impact.

Given all these different considerations, it's vital to keep in mind that measures are just a means to greater understanding, and not themselves the end. Thus, for example, even if we rightly decide that a given item must be excluded from the measures, all things considered, we should not back or fool ourselves into ignoring the systematic influence that it might have had if included.

Also, there is no straight line link between how a given measure comes out, and how severe a given problem that is associated with high-end inequality might actually be in a particular social context.

For example, suppose counterfactually that high-end wealth and income concentration were identical as between the U.S. in 1960 as compared to 2020. (In fact, all of the reputable measures agree that it is significantly higher today.) The fact that consumption norms have apparently shifted both at the very top and further down, in favor of greater and more conspicuous display, might nonetheless make a lot of the high-end inequality problems that we face today significantly worse than those from 60 years ago.

On the other hand, other things that interact with inequality may have gotten better. For example, racism, anti-Semitism, and sexism, each of which interacts toxically with material inequality, surely were in many ways worse in the US in 1960 than 2020, however bad they continue to be today.

Snapshot from forty years ago

I happened to get an email from someone who was a fellow summer associate at a law firm 40 years ago, and with whom I hadn't been in touch since. He mentioned a story that he remembers from back then. 

I was in the law firm's library, and must have been asked what I was doing, as I replied: "Oh, I'm just belaboring the obvious for Chatham." [Name has been changed.]

My correspondent apparently liked that quote, and has been repeating it ever since. The background, apparently, was that "Chatham" didn't like a memo that I had written for him, because it had too much reasoning, and too little case citation. 

This apparently resonated with fellow summer associates (or at least one of them) since hazing the juniors was so key a feature of life at that firm. So others had been there too, in one way or another.

Then again, "Chatham" should certainly be commended for helping me to see, at still a young age, that academics was likely to appeal to me more than writing such memos.

Tax policy colloquium, week 7: my paper on minimum taxes

 This week at the NYU Tax Policy Colloquium, we discussed my paper on minimum taxes. There was an excellent discussion, and I got great comments that will help me in revising the final version that will appear in the Virginia Tax Review. But since I don't discuss the sessions here (as they're off the record), and am not eager at the moment to spend time writing a blogpost describing my own paper, I'll pass this week on the usual post-session blog entry. Back in business next week for Gabriel Zucman's paper (co-authored with Emmanuel Saez), The Rise of Income and Wealth Inequality in America: Evidence from Distributional Macroeconomic Accounts.

Trump's $70,000 haircut deduction

Regarding Trump's $70,000 haircut deductions, many commentators have noted that it isn't inherently fraud to claim something is a deductible business expense, rather than a nondeductible personal one, even if the claim proves incorrect, if there were genuine (or at least arguable) business elements to it.

While that is correct as a general principle, it's not clear how much this would help Trump upon a fuller investigation. This New York Times article, following up on the initial big story, points out not only that the law here, including decided cases, is REALLY clear on haircuts' nondeductibility, but also that there is reason to suspect Trump may have deducted something for which he was reimbursed. That would potentially put us in clear fraud territory if the reimbursement was not included in income.

Switch in upcoming NYU Tax Policy Colloquium schedule

 For those who are following the fall 2020 NYU Tax Policy Colloquium schedule (Zoom links available on request), we've had a swap between two forthcoming papers:

On Tuesday, October 13, from 2:00 to 3:50 pm EST, Gabriel Zucman will present "The Rise of Income and Wealth Inequality in America: Evidence from Distributional Macroeconomic Accounts." This had previously been scheduled for October 27.

On Tuesday, October 27, from 2:00 to 3:50 pm EST, Steve Rosenthal will present "Tax Implications of the Shifting Ownership of U.S. Stock." This had previously been scheduled for October 13.