Squeaky McGee ...

... is one of my new nicknames for our cat Buddy, the one who ran away. One of my kids calls him Tubby Lardo.

We're both right, and relatedly. Buddy's piteous squeaking for food, along with his sly tactic of begging from one adult after the other has fed him and left the room, paid off enough to earn him the second nickname.

But now he's been busted, or rather we have. The vet says he must lose 1/3 of his 15 pound body weight, like it or not, or else risk diabetes, arthritis, etc. At least he doesn't get mocked by the other cats in the feline equivalent of the schoolyard. (Although I don't know exactly what that big black cat was saying to him the time he ran away.)

Sorry, Buddy. It's high-fiber crunchies for you from now on. But keep on playing frisk-about with the other guys; it's kitty aerobics.

Shooting dead fish in a barrel

While the short-term political prospects of the Tax Reform Panel's recommendations are generally assumed to be nil, a clue to what would happen if they became more prominent is offered by an op-ed in today's LA Times, co-authored by NYC Congressman Charles Rangel. the ranking Democrat on the Ways and Means Committee. The op-ed portrays the proposals to disallow state and local tax deductions and to cap home mortgage interest deductions as reflecting the goals of "right wing ideologues'" in the Bush Administration to "shift the tax burden from the wealthy to the middle class and put pressure on states such as California and New York to shrink critical public services." He calls on everyone in adversely affected states such as New York and California, including those two states' Republican governors, to condemn this "double-barreled blast aimed squarely at the middle class."

Rangel ignores the Tax Reform Panel's surprising independence from right wing ideologues in the Bush Administration. One also might quarrel with his assertion that lowering the mortgage loan deduction cap from $1 million to $411,000 is a device to "shift the tax burden from the wealthy to the middle class." But he certainly shows us the politics that we could expect if these proposals ever got far, including the pressures that Republicans as well as Democrats in high-tax states would face.

Poor Saddam

I heard on the radio this morning that Saddam complained angrily when he arrived in court today because, with the elevators broken in the courthouse, he had to walk up several flights of stairs while handcuffed and carrying a cup of hot coffee. That's certainly pretty rich, coming from someone who treated prisoners as he did.

He surely must be the single best-treated prisoner the U.S. has abroad. Imagine what our other prisoners around the world would make of his complaint. They are probably a lot more likely to have their heads plunged in boiling fluids than to get anywhere near hot coffee in a cup.

Various CDs

New releases to which I have been listening lately include those by the Silver Jews (Tanglewood Numbers), Broken Social Scene (Broken Social Scene), and John Cale (Black Acetate), all recommended, perhaps in that order.

Another strange item I have been playing recently is the Dukes of Stratosphear (Chips from the Chocolate Fireball). This would be a little-known late-60s psychedelic classic except that it was actually done in the mid-1980s by XTC as a lark.

CDs I wish I could find, but that are out of print and available only at very high prices, include items by the Wrens (Silver), the dBs (Sound of Music), and Tom Verlaine (Dreamtime).

Insanity

The House and Senate are busy right now fighting over exactly how to cut taxes by $60 to $70 billion over the next 5 years. It's hard to overstate how wildly irresponsible this is given the fiscal gap. Here's hoping that they will deadlock themselves and do nothing. This isn't impossible, given differing preferences as to where the money should go, along with the Senate Finance Committee's apparent move to raise taxes on oil companies (anathema to several influential Senators whose votes would likely be needed).

Some of the tax cuts being considered make sense as structural features of the Code. For example, the 15 percent rate for corporate dividends reduces double taxation of equity-financed corporate profits, and the alternative minimum tax is getting out of hand. But to address these things without paying for them is just one more instance of the drunken spree that we have been on in Washington for the last 5 years, which will at some point start to spook the bond markets (prompting a fiscal meltdown) if the premise that Congress will at some point act responsibly continues to be rebutted.

Tax and budget staff turnover on Capital Hill

I gather that Doug Holtz-Eakin is leaving his job as the Director of the Congressional Budget Office. This, in combination with George Yin's departure as the Joint Committee on Taxation Chief of Staff, leaves two vacancies in important tax or budget-related staff positions. The big question is not just who will replace them, but what type of person.

Despite all my qualms (to put it mildly) about the Congressional leadership, they really could not have named better, more reputable, or more honest and independent people to those two slots than Holtz-Eakin and Yin. From the standpoint of a Congressional leader, there are genuine selfish payoffs to appointing such a person. For example, they can give you better expert advice and research than a hack, they bring more prestige to what they do, they nurture staff professionalism, they are more likely to be honest brokers between competing interests, etcetera.

But there are also selfish benefits to naming a hack who will do whatever you say and say whatever you want. Not to mention the lure of cronyism and rewarding faithful foot soldiers.

I will refrain from making a pessimistic prediction this time around, as I was pleasantly surprised last time by the appointment of Yin. But whichever way it goes on either appointment, it should be pretty clear immediately which path the leadership has taken.

Drunk?

Judge for yourself.

Digging a deeper hole

One good thing to do, if nearly 60 percent of the country has concluded that you are a liar, is to stop lying.

This evidently has not occurred to President Bush, who, in addition to equating dissent with treason (despite an upfront disclaimer), is still making the false claims that (a) everyone in Congress had access to the same intelligence as he did (rather than just the parts the Administration chose to share), and (b) the Administration has been cleared by independent inquiries of slanting the prewar Iraq intelligence info.

The Washington Post puts this a bit gingerly in a straight news story, entitled "Asterisks Dot White House's Iraq Argument," and stating in its second paragraph that "neither assertion is wholly accurate."

The Post article is also kind enough to state: "The administration's overarching point is true: Intelligence agencies overwhelmingly believed that Saddam Hussein had weapons of mass destruction..."

But that is not the point in dispute, which is whether, in addition to the honest mistake that everyone on all sides made, the Administration also made dishonest mistakes by deliberately hyping what it knew were false particulars.

If I genuinely believe it is cold outside and everyone shares this belief, I am still lying if I falsely claim that a thermometer says it is 14 degrees.

A windfall profits tax for oil companies?

With oil companies' profits way up, reflecting what has happened to gasoline at the pump, Democrats are naturally pushing the windfall profits tax issue. At times like this, the tax becomes a great talking point for them, just as Republicans use power blackouts as an excuse to push totally unrelated giveaways to oil and coal companies.

Is there any decent intellectual defense for a windfall profits tax on oil companies? The standard economics-inflected answer would be no, for the same reason that one might want to let price gougers charge what they like for water in a drought disaster area. The argument is that the high returns encourage them to anticipate and fill demand, bidding the price back down and causing the market to respond to demand shocks much faster than it would otherwise. Thus, in the oil company case, the standard argument would be that windfall profits attract apparently needed extra capacity into the industry.

Nonetheless, a couple of reasonable arguments could be made, in present circumstances, for a windfall profits tax on oil companies. The first is worth considering though probably in the end wrong; the second has more clout. The first argument is that oil companies have a huge risk position in energy prices, which may not be economically desirable for them. Presumably they are in the energy supply business, and would want to hedge price risk rather than placing huge side bets on energy price uncertainties that are resolved once they have made a bunch of investment decisions. A windfall profits tax amounts to a government supplied hedge, in that they pay higher tax rates if they win the bets they have perhaps inadvertently made on energy prices than if they lose. The problem with this argument, however, is that it presupposes that they can't or won't properly hedge on their own. (This is mainly a company-level issue about default risk and the like, since shareholders can presumably diversify their stockholdings even if particular companies aren't diversified.) One would really need a missing financial market for hedging oil price risks to make this argument fly, and with derivatives and the like this is a hard argument to make. Flawed managerial incentives probably don't do the trick either, since the standard view is that managers are too risk-averse, relative to the interests of diversified shareholders, due to their firm-specific economic interests.

A variant of this argument would be that, for companies we might be likely to bail out if things get really bad (e.g., automobile companies and the airlines), having a windfall profits tax on the upside would make things more neutral overall. But it may not be the case that we would be bailing out the oil companies on the downside, which would be needed for the implication that a windfall profits tax on the upside makes things more symmetric with respect to extreme outcomes.

This brings us to the better argument, which is a political second-best. Even before the Bush-Cheney administration, oil companies had a tendency to win huge concessions, tax and otherwise, from the federal government, due to their immense political clout and insider connections. So we probably have a background situation in which oil companies are inefficiently favored by government policy. A windfall profits tax is one of the politically more feasible correctives, although it probably is not the response one would choose in the absence of political constraints.

So let's hear it, albeit tentatively, for a windfall profits tax on oil companies, on the view that it might (however imperfectly) reduce the overall bias of government policy in favor of this line of business as opposed to others.

Tax Reform Panel

My article on the Panel's report and recommendations should be in Tax Notes today. Summary of discussion, from the opening section, is as follows:

First, the Panel’s revenue parameters, which derive from its instructions and were not chosen by the members, are unacceptable, and thus discourage taking the plans seriously as complete packages. Although ostensibly revenue-neutral, the plans actually would lose almost $20 trillion over the infinite horizon compared to present law. More than two-thirds of the shortfall results from assuming a change in present law – that is, the law currently on the books – via extension of the 2001 and 2003 tax cuts to remain in force permanently. The rest results from testing for revenue neutrality only over the next ten years, rather than over the long term. Overall, the combined revenue loss, measured against actual present law, is almost twice the size of the infinite horizon Social Security fiscal gap that President Bush recently decried as posing a severe and immediate fiscal crisis.

Second, there is a lot of merit in the Panel’s proposals with regard to individual-level taxation. Here in particular it supplies a useful hit list, and also develops an important approach that has previously received too little attention: converting deductions into credits when accurate income measurement is not at issue.

Third, the Simplified Income Tax has a number of creative and novel features relating to the taxation of businesses. However, their workability remains in some cases unclear. Perhaps the biggest flaw is that businesses could continue avoiding tax at any level, as they often do under present law, by stripping out their taxable income via deductible interest that is paid to tax-indifferent parties. The Plan’s corporate integration rule relies on the incoherent present-law distinction between debt and equity, and it would permit businesses to pair accelerated cost recovery with debt that yields deductible interest payments.

Finally, the Growth and Investment Tax Plan, while having many virtues, is worsened by its being a quasi-consumption tax rather than a straight consumption tax. Its add-on tax at the individual level, which gives it this hybrid character, fits poorly into the rest of the structure, with unfortunate implications for tax planning at the business level, and reduces the individual-level simplification that would otherwise be possible. Without this feature, the Growth and Investment Tax Plan would clearly be much simpler for individuals than the Simplified Income Tax. From the standpoint of progressivity, raising the top rate in the Plan would make a lot more sense than imposing the add-on tax.

David Brooks again

I've really run out of things to say. I just wish he would. Come to think of it, he has.

UPDATE: I simply didn't have the patience to deal once again with Brooks' intellectual dishonesty or astonishing stupidity (take your pick), so I will let Jonathan Chait at the L.A. Times take care of it:

Conservative columnist David Brooks wrote sneeringly Thursday of Senate Democratic leader Harry Reid's attempt to investigate "the Republican plot to manipulate intelligence to trick the American people into believing Saddam Hussein had weapons of mass destruction." Brooks pointed out that the Clinton administration also believed that Hussein had weapons of mass destruction. Therefore, Reid must believe that Democrats were part of the conspiracy to fool the public. Therefore, Reid is crazy. Other conservatives have made the same point as Brooks.

Are they really so dense? It isn't that complicated. The Bush administration, like almost everybody else, made some honest mistakes. Unlike everybody else, it also made some dishonest mistakes. The Clintonites warned against Hussein's weapons, but they didn't bully intelligence analysts into suppressing contrary information, and they didn't pass on information they knew was false. That's what the investigation is about. Everybody got it?

Fair comment?

Kevin Drum says:

"Back in March, we asked 'Is Grover Over?' We were, of course, talking about Grover Norquist, the anti-tax jihadist-in-chief whose sole goal in life is to bully politicians into endless tax cuts."

Kevin, that simply isn't fair. Grover also aims to make lots of money by procuring government favors for his lobbying clients.

Sorry, but ...

... I won't be commenting here on the Tax Reform Panel's plans, at least right away, as I am hoping to publish something on it in the fairly short term. When the details first came out, I did comment in several earlier posts that should not be hard to find.

UPDATE: My article discussing the tax reform plans will be in Tax Notes on Monday, November 7.