My article "Permanent Income and the Annual Income Tax"

Another article draft of mine is now available on-line, here.

The abstract goes something like this:

Under a prominent and influential economic model known as the permanent income hypothesis, people's decisions depend on their expected lifetime income, not their current income. If completely true, this hypothesis would have radical implications for tax, transfer, and entitlements policy. For example, unless modified by other information, it would suggest replacing the income tax with a consumption tax, establishing lifetime income averaging, viewing Social Security as irrelevant other than as a system for transferring lifetime resources between individuals, and dramatically changing welfare law to base aid purely on people's lifetime income, as distinct from their current circumstances. However, incomplete markets and departures from rational behavior, by shortening people s planning horizons, weaken some of permanent income's implications and refute others.

Eric Solomon update

Thanks to the efforts of Ellen Aprill and Paul Caron, among others, a law profs' petition in favor of Eric Solomon's confirmation is rapidly gaining signatures. There will also be a petition from former Treasury officials and Congressional staffers, along with that from tax lawyers at the New York State Bar Association.

Deciding not to enforce the estate tax

A recent New York Times article noted that the Bush Administration has decided to gut estate tax enforcement by having the IRS fire 45% of its estate tax lawyers. The article quotes estate tax lawyer Sharyn Phillips to the effect that the cuts are a “back-door way for the Bush administration to achieve what it cannot get from Congress, which is repeal of the estate tax.”

Pretty unusual stuff, not to enforce a set of laws on the books that raise so much money relative to the IRS staff involved. And, of course, no surprise if estate tax lawyers don't like it, as it moves in the direction of an open invitation not to file estate tax returns even when legally due.

My first thought on reading the news was: Why doesn't Bush just invoke his war power claims to nullify the estate tax? After all, how can he fight terrorism if the U.S. economy is being hurt as much by the tax as he claims?

Indeed, since Grover Norquist, speaking on NPR in 2003, compared the estate tax to the Holocaust, why not have Bush simply proclaim that it IS terrorism?

Endangered nomination

The post of Assistant Secretary of the Treasury for Tax Policy has been vacant for a very long time, and finally the Bush Administration has nominated someone: Eric Solomon, who has been a high-ranking Treasury tax official since the Clinton Administration. I lauded this nomination in an earlier post. Solomon is nonpartisan and, more importantly, one of the really good people in government (a dying breed in these highly political days).

Senator Baucus, the top Democrat on the Senate Finance Committee, has announced that he intends to block the nomination until the Bush Administration develops a plan to narrow the $290 billion tax gap (i.e., the estimate of annual taxes that are legally due but not paid). Baucus defends this on the ground that the issue is important, although he agrees that Solomon is "a good public servant and certainly a tax expert."

This strikes me as a really bad idea on Baucus's part, notwithstanding that it would be nice to lower the tax gap. (By the way, while some of the barriers to doing so are political - politicians don't want to turn loose the IRS on voters and campaign contributors - this may to some extent be a bipartisan problem although the Republicans surely do much more to fan anti-tax sentiment.)

The Treasury has been falling apart before our eyes as good public servants leave because they realize they are not being allowed to do tax policy - their motivation for accepting salaries that are below what they could get in the public sector. The Assistant Secretary for Tax Policy can do a lot of good, and Solomon in particular surely would, even though the Treasury has lost so much of its influence. Moreover, Solomon really deserves to be confirmed. Making life hard (or harder) for good public servants is not really what we need these days. (By the way, he is an acquaintance whom I have met a few times and had minor dealings with professionally, but not someone I know well enough to count as a friend. There is no unstated agenda here.)

I gather that a group of New York tax lawyers are circulating a petition in support of Solomon's nomination and urging that Baucus retract his opposition. If law professors or other academics get into the act, I would certainly sign. Eric Solomon should be confirmed as promptly and painlessly as possible.

Bush's next veto?

The New York Times has just posted an article entitled "Scientists Plan to Rebuild Neanderthal Genome."

I especially liked the last paragraph:

"If the Neanderthal genome were fully recovered, it might in principle be possible to bring the species back from extinction by inserting the Neanderthal genome into a human egg and having volunteers bear Neanderthal infants. There would, however, be great technical and ethical barriers to any such venture."

Drunk again?

Bush behaved so boorishly and outlandishly at the G-8, even by his standards, that one has to wonder.

Fun movie

Saw an enjoyable documentary last night, "Wordplay," about the sub-culture of crossword puzzle fanatics and their annual tournament. Celebs who participated (in the documentary, not the tournament) included Bill Clinton, Jon Stewart, Mike Mussina, and the Indigo Girls.

Seeing Clinton these days always reminds me of his successor. When he does the NY Times crossword puzzle in pen, the punch lines almost write themselves. For Bush, the Highlights word find? Probably too challenging.

My article "Welfare, Cash Grants, and Marginal Rates"

Not sure if I've posted some other link for this in the past, but this is a forthcoming article of mine, the abstract for which is as follows:

"Marginal rates are frequently analyzed based solely on taxes, without regard to benefit phase-outs that have exactly the same incentive and distributional effects as increasing positive taxes. This myopia reflects the notion, rooted in our current fiscal language, that “taxes” and “spending” are fundamentally different. In fact, however, the difference is purely one of labeling.

"Among the ill consequences of this confusion between substance and labels is the political unfeasibility of demogrant or negative income tax proposals. These proposals often are criticized for seemingly providing universal and unconditional cash grants. In fact, however, cash grants can be just as conditional or selective as benefits that are labeled as “welfare.” Clearer thinking about these matters would expand the realm of politically feasible policy choices, and make excessively high marginal tax rates on people who are escaping poverty easier to avoid."

In work this summer I've finished drafts of papers entitled "Permanent Income and the Annual Income Tax" and "Why Worldwide Welfare as a Normative Standard in U.S. Tax Policy?" To be posted in due course.

My forthcoming Cambridge U. Press book, "Taxes, Spending, and the U.S. Government's March Toward Bankruptcy," appears to be slotted now for the beginning of 2007.

Ron Suskind's "The One Percent Doctrine"

I just finished reading the new Suskind book about the "war on terror." Reported mainly as an anti-Bush screed becomes some of the facts reported in it are embarrassing (to say the least) to our own Dear Leader, it is in fact very balanced in tone. Obviously George Tenet gets favorable treatment, reflecting his cooperation with the author. But in some ways it actually treats Bush and Cheney far more favorably than people like me, who have completely given up on attributing any good faith whatsover to these individuals, would expect from a fairminded account. It portrays them as actually caring a lot about preventing attacks on U.S. soil and as attempting rationally, by their lights, even if misguidedly, to deal with the threat. Bush does, to be sure, turn out to be a thoroughly unpleasant bully who reads less words per day than the average third-grader, and who thinks his time is best spent focusing obsessively on operational details of particular anti-terrorist operations, which he inadvertently prevents the operators from doing properly. And his response to being warned in person about 9/11, in advance, was to say "Okay, you've covered your ass," and go back to his fishing. But still, when one's expectations are low enough it's not hard for these boys to come off better than one expected.

The best insight I got from the book concerns exactly how Cheney and Bush got it wrong. First an application, then the bigger picture. They insisted on torturing the high-value targets (or those Bush had falsely claimed in public were high-value) because they badly wanted results fast. But the CIA tried to tell them that torture doesn't work as well in getting information as building a relationship with the prisoner (good cop/bad cop style) and using it to coax info out of him. This was rejected, in part because even when successful it doesn't work especially fast. But they got so little out of the torture that it seems clear they made the wrong choice, even leaving aside all moral and reputational aspects.

The bigger point concerns Cheney's doctrine, giving the book its title and offering an organizing theme to explain all the insane things they have done, that if there is a 1 % threat of our being attacked we must treat it as an utter certainty. Hence, action is all and analysis worth next to nothing.

There are many reasons why this approach is mistaken, and the book shows this quite well. But let's start by giving Cheney his due. If one is risk-neutral, a 1% chance of 1 million casualties should be treated the same as a 100% chance of 10,000 casualties (i.e., more than 3 times the direct loss of life on 9/11). So yes, low-probability risks of something really bad happening must be taken seriously.

But Cheney's analysis is totally static. In his view, the 1% risk is completely exogenous. It's just there as an isolated event, and we either ignore it or incur large costs to knock it down to 0%.

There is no such thing as eliminating all risks. Facing some set of risks is unavoidable. And they are endogenous - they are affected by what we do. In other words, if you try to knock out those 1% risks one at a time, like people swatting the gopher in that arcade game, you are simply increasing your downside risk if by doing so you create more new risks than you are eliminating. Arguably this is exactly what the US has been doing, if we grant (I would say over-generously) that Saddam represented as much as a 1% risk to us.

More totally static thinking from the big toad with the bad heart: his way of dealing with endogeneity is to say: we'll make everyone so scared of us that no one will dare do anything. But again this looks just at our move without considering the possibility of counter-moves. How would a Cheney type who was running another country (Iran, Russia, etc.) want to react if he saw the US acting the way Cheney wants it to act? Not by meekly knuckling under, one can be quite sure.

We are not the only actors, and we can't control everything by force or by will. That is the core of why Cheney is so completely wrong even on his own terms, and leaving aside all the bad faith and the contempt for every positive value in our law and our history.