Shadow forgets the rules again; Buddy gets into the holiday spirit

Shades of O.J.?

Nice to see that Clemens is doing his own investigation of the steroid reports.

The movie versus the book

I recently saw Citizen Kane again, for the first time in quite a few years, to show it to my kids (one of them anyway).  When I then came across a William Randolph Hearst biography on a Christmas shopping foray to a Barnes & Noble, my interest was piqued.  The book is "The Chief," by David Nasaw, and I strongly recommend it if this sort of thing appeals to you.

I must say, the actual story is considerably more interesting and complex than the one in the screenplay, leaving aside those amazing deep focus shots and the jump cuts.  E.g., at 40 he married, not the President's niece, but a 21-year old chorus girl he had been seeing for five years.  And, as is somewhat better known, the "Susan Alexander" figure actually was the accomplished and independently successful Hollywood comic actress Marion Davies.

I've gotten to 1904, when Hearst, having conquered the newspaper markets in SF & NYC, was seeking the Democratic nomination for President.  Though running as a radical (decades before supporting Joe McCarthy), he differed from Charles Foster Kane in focusing on "trusts" (corporations accused of wielding monopoly power) and union issues, rather than on the likes of Boss Jim Gettys.

An amusing quote I want to share, from an anti-Hearst editorial alarmed by his candidacy:

"It is not a question of policies, but of character.  An agitator we can endure; an honest radical we can respect; a fanatic we can tolerate; but a low voluptuary trying to sting his jaded senses to a fresh thrill by turning from private to public corruption is a new horror in American politics."

Other than in the writing style, why do I almost feel this is about another NY-based Presidential candidate, 104 years later?

On Romney's claim that he saw his father march with Martin Luther King

The Romster has been taking quite a bit of abuse on this one, especially given the added revelation that in 1978 he told the Boston Globe: "My father and I marched with Martin Luther King Jr. through the streets of Detroit."

He has been defending himself by saying that "saw" means "was aware of," not literally "saw," a defense that I gather he will not try to extend to the 1978 claim.

All the same, I am reminded of that bit - is it from Monty Python? I can't quite remember - that goes something like this:

"Is it for the likes of you that I lost my leg in the War?"

"But James, you have both your legs."

"I was speaking metaphorically, you fool!"

Double standards

It's kind of interesting how the very same Senate Republicans who were threatening to invoke the "nuclear option" and destroy filibustering if the Democrats used it even a tiny bit, have now set the all-time 200-year record for filibusters in a single two-year Congressional term, in just eleven months.

This brings to mind the game they were going to play in California, trying to make it apportion electoral votes by Congressional district while Republican-majority states such as Texas would remain winner-take-all.

Or the fact that, in 2000, they were all set to launch a huge PR campaign if Bush lost the electoral vote but won the popular vote, demanding that the people's will be honored by giving him the 270. Then of course when it went the other way (leaving aside that Bush actually lost both), not a peep was heard of this.

The press plays along with this as well.

Quotations of the year

These are arguably the ten most memorable quotations of the year (U.S. only). I didn't find them myself - seven are from Fred R. Shapiro, editor of the Yale Book of Quotations, as reported on-line in today's New York Times, and three are from an article by James Parker, posted on 12/18 at http://thephoenix.com. But well worth passing on:

--1. ''Don't tase me, bro.'' Andrew Meyer, a senior at the University of Florida.

--2. ''I personally believe that U.S. Americans are unable to do so because some people out there in our nation don't have maps and I believe that our education like such as in South Africa and Iraq and everywhere like such as and I believe that they should our education over here in the U.S. should help the U.S. or should help South Africa and should help Iraq and the Asian countries so we will be able to build up our future for us.'' Lauren Upton, South Carolina contestant in the Miss Teen America contest, when asked why one-fifth of Americans cannot find the U.S on a map.

--3. “You must have meant something more intelligent.” Christopher Hitchens, responding to an audience member in Madison, Wisconsin during his book tour for God Is Not Great.

--4. “My view is, we ought to double Guantanamo.” Mitt Romney.

--5. ''I don't recall.'' Alberto Gonzalez (repeatedly).

--6. ''There's only three things he (Rudolph Giuliani) mentions in a sentence: a noun and a verb and 9/11.'' Joseph Biden.

--7. ''I'm not going to get into a name-calling match with somebody who has a 9 percent approval rating.'' Harry Reid, referring to Dick Cheney.

--8. ''(I have) a wide stance when going to the bathroom.'' Larry Craig.

--9. “I’m here with the members of the NRA – would you like to say hello?” Rudolph Guiliani, purporting to answer his wife’s call on his cellphone during a speech.

--10. ''I think as far as the adverse impact on the nation around the world, this administration has been the worst in history.'' Jimmy Carter.

Evidence from the crime scene

I'd like to see Shadow and Buddy offer an innocent explanation of this little number. They know perfectly well that counter-top visits, and our food, are off-limits. Not that they care particularly, as one can see, but it is something they know.

A bit too convenient

OK, a baseball aside admittedly reflecting my anti-Yankee bias.

First Andy Pettitte is named in the Mitchell report for using human growth hormone. Then he promptly apologizes for using it just twice. So sorry about those two days, he says, "if what I did was an error in judgment." (Interesting use of "if.") Then Mitchell says yup, that's what we heard, he did it twice. Today Mariano Rivera praises him for being so forthright.

Admittedly, Pettitte still has a leaner build than you see on some of the big time abusers. But this seems awfully pat and convenient. He trained with Roger Clemens for years. And he did seem to add a couple of miles to his fastball after having elbow problems in his early 30s. He's reportedly been named by Jason Grimsley.

If he's admitting to two days right off the bat, I'm bidding - oh, maybe 150 times over four or five years. Just a guess.

You know what they say - the opening bid is never the final offer. But that goes for us both.

Worth every penny?

The U.S. Treasury has just issued the 2007 Financial Report of the U.S. Government, available here.

Money quote, from page 32 of the document:

"[The report's measure of the long-term U.S. fiscal gap] totaled approximately $53 trillion as of September 30, 2007 ... an increase of more than $32 trillion from about $20 trillion as of September 30, 2000. This translates into a burden of about $175,000 per American or approximately $455,000 per American household."

Of the entire U.S. historical total, more than 60 percent arose under Bush. A bit of it comes from simple accrual of interest on the preexisting fiscal gap, plus changed assumptions may have had some impact. But the bulk of it comes from massive tax cuts, spending increases, and the Medicare prescription drug abomination.

These figures arguably are grossly under-stated relative to Bush's actual policy, because they ignore the revenue cost of making his tax cuts permanent (as he urges, admittedly it seems ineffectually) and fixing the alternative minimum tax. I couldn't quickly find a contemporaneous estimate for those changes, but the ten-year (2008-2017) estimate for extending the tax cuts and fixing the AMT is $3.5 trillion according to a report by the Center for Budget and Policy Priorities, available here. This report also states that extending the Bush tax cuts would double the expected size of the national debt relative to the economy in 2050.

Just to make the Bush share of the overall fiscal gap more tangible, even without these changes in the current baseline that he is urging, developments on his watch, which overwhelmingly are the fruit of his policy moves, have run up the tab by about $106,000 per American or $275,000 per household.

That is quite a tab for a not very enjoyable bash.

Don't play for money, folks - he's a ringer

On a lighter note, here is a new photo of my cat, Buddy, which has just been posted, but fairly far down the page, at stuffonmycat.com

Mitt Romney and my novel, Getting It

My unpublished comic novel, Getting It, features a convoluted set of battles between the "hero," a character who is a complete phony and hypocrite, and his rival, who is even worse by reason of being a true believer in the values of their workplace, and no phony or hypocrite at all.

One "lesson" of the story in my mind, not that it tries to teach lessons any more than my models Wodehouse and Waugh did, is that there are worse things out there than mere hypocrisy - even total, arrant hypocrisy mixed with grandiose dishonesty and over-wrought self-involvement. I am trying to remind myself of this in order to feel a bit less angry at the scoundrel Mitt Romney.

Beyond trying to read atheists and agnostics out of membership in U.S. society, he is also trying to prompt an angry counter-attack by them so he can pose as the champion of the Bible-thumping sectarians. Of course, he doesn't give a damn about any of this. I suppose he'd be even more dangerous if he actually believed any of this stuff. But then again, how far is he willing to go in this direction for political convenience? Doberman, the scoundrel hero of my novel, is just trying to make partner - he will always be scrabbling and desperate, for all his bravado. Romney aims for the ability to do a lot more harm, and evidently is entirely willing to do it. Maybe my novel's "lesson" shouldn't be over-generalized.

Michael Graetz's tax reform plan

Today I was at a session at Columbia Law School where Michael Graetz presented his tax reform plan, from a forthcoming book. Among his main ideas is to enact a VAT and use some of the revenues to give the income tax a $100,000 exemption amount, thereby eliminating income tax filing for people earning less than that. Such individuals would exit not only the income tax, but generally the filing of annual federal tax returns that base liability on household circumstances. This has implications for differential rates and adjustments for dependents, to the extent that other mechanisms aren't able to pick up the slack.

I've commented adversely on the proposal before at this site, but am prepared to change my tune a bit now. I certainly would welcome the adoption of Graetz's tax reform plan, as well as of any of the main academically posited alternatives, compared to keeping the status quo. I remain a bit concerned that it doesn't do as much as it could for equity as between different households below $100,000. He rightly points out that, politically, discretion to adjust for household circumstances in this range is not always used for the best. And he has tried to address the problem in some ways.

Other proposals, such as the Bradford X-tax, have advantages over the Graetz plan, e.g., in rationalizing business taxation. He rightly points out that they are not likely to be politically feasible. Not clear that his plan is either, but if he manages to get somewhere with it, then more power to him. I'd certainly be a supporter relative to the politically likely alternatives.

The fact that his plan, like the others, seems to me unlikely to be politically feasible, highlights a key dilemma, which is: What do you propose if nothing good seems possible? Actually, I think our political choice problems are even worse than this. Not only is nothing good possible; nothing possible is possible. That is, an unsustainable policy (by definition) can't be sustained, but nothing sustainable can be enacted any time soon.

At least he is trying to find a way to square the circle, and it's not his fault that this is likely to be a hopeless task. I personally think the best political maneuver to grease the skids for adding a VAT to the current mix (which at some point is likely to be unavoidable, even if not one's first choice) is to purport to earmark all of the revenues towards addressing funding shortfalls in social insurance programs. Hopefully as part of lowering the programs' growth rates to be more sustainable. But this is obviously a long way off anyway.

Pending that, I'd be glad if I were wrong and the plan proved to have some political traction. Clearly my preferred alternatives don't.

More bug-swatting (Mitt Romney edition)

Shorter Mitt Romney, from his speech today: Being a Mormon is okay, but being an atheist isn't.

Ugly intolerance fits poorly, to my mind, in a speech requesting tolerance.

Since this raises my ire, let's have some fun with Romney's tax plan, which I had previously not commented on because it seemed just too easy.

According to Romney's website, he has five main tax proposals:

1) "Make the Bush tax cuts permanent." Wow, what an original idea, Mitt! This would cost trillions of dollars and massively augment the long-term U.S. fiscal gap. No serious financing for it, of course.

2)"Lower tax rates for all Americans." I'm glad to see he isn't pandering or anything. Same comment. But these are fake tax cuts, not real ones, as indeed are any tax cuts that are unsustainable. I call it tax-shifting to the future, not tax reduction.

3. "Abolish the death tax." That Orwellian name again - it's an estate tax, not a death tax, since just dying doesn't trigger it. I have come off the fence in recent years to favor some degree of estate or inheritance taxation, largely based on economic research about people's relatively low responsiveness to taxation at the bequest margin. But again, what makes it recklessly irresponsible is the overall U.S. fiscal situation and lack of any meaningful offset.

4. "Savings incentive plan." He proposes to make interest, dividends, and capital gains tax-free for middle class families (which I believe he defines as people with up to $200,000 of income). Another unsustainable tax cut, of course. I do happen to favor progressive consumption taxation as a replacement for the income tax, so arguably this goes in a good direction from that vantage point, the lack of financing aside. But - if people can borrow deductibly (such as through their homes) while investing tax-free, all you are doing is handing them free money for zero net saving. This probably reduces national saving due to the income effect (write them a check for doing no net saving and they have more $$ to spend on consumption).

5. "Our corporate tax rate must be competitive with the rest of the world." Okay, some serious economists agree about this. But again, there is a difference between genuinely cutting tax rates, which requires a fully financed or otherwise sustainable change, and simply shifting them to the future.

I've got it - maybe Mitt is planning an Atheists Tax. After all, he said in his speech that there is no freedom without religion. With a high enough Atheists Tax, this could literally be true, and the fiscal gap addressed to boot.

Iran news

I consider the NIE news the best that I have heard for a very long time. Good news not only about what's happening in Iran, but about the chances of stopping the lunatic Bush Administration rush to war. I had been periodically very worried about this. Now I guess Bush and Cheney are down to the Doonesbury option (from last week's strips), or variants such as freshening up a version of the 1939 Polish "attack" on German border posts.

Quote of the day

This is from Rob Jovanovic, Perfect Sound Forever: The Story of Pavement.

"While not ones to get up to the usual hotel-trashing antics of other bands, Pavement nevertheless received robust coverage of their backstage activities ...

"'We can definitely brag about our Scrabble,' said Malkmus. 'I think we can pretty much take down any other rock band at that.'"

Rare moments in parenting

"Dad, what's the music you're playing?"

"Oh, it's a group called the Feelies."

"Really? It sounds pretty good."

Definitely atypical, despite a few past success stories such as Squeeze and Heatmiser.

Fred Thompson's bad idea

It's hardly worth mentioning Fred Thompson's recent tax proposals, although lauded in the Wall Street Journal the other day, given that the dang doggone ol' boy (as this Washington-Hollywood smoothie likes to style himself) is going nowhere fast. He makes my 16-year-old cat Shadow, who sleeps almost all the time, seem like a whirling dynamo by contrast. But I'll briefly discuss ol' Fred's tax plans anyway, as they raise broader points of interest.

What with proposing to end the AMT, extend the Bush tax cuts, and on and on, Fred appears to envision reducing Federal revenues by as much as 5 to 10 trillion dollars for 2008-2017 alone. (This is a wild guess, but the Bush tax cuts alone come in at $2.3 trillion according to the Congressional Budget Office.) This verges on the criminally insane given the overall U.S. fiscal picture and the political unlikelihood of commensurate outlay reductions.

The bad idea I want to emphasize here, however, is his proposal to add a simple flat tax system with fewer deductions to the Code, but not to replace the current system - he would instead make it elective: you get to use whichever system you prefer.

Tax Policy Rule # 12 (I don't have a list, it's just that this one isn't important enough to be Rule # 1): Taxpayer elections are almost always a bad idea. They add complexity while losing revenue, since taxpayers have an incentive to look at all the options and then pick the one under which they pay the least. Plus, the pattern of tax liability you get is bound to be incorrect, given its being a mix-and-match between different systems. No matter which system you prefer, the result is "wrong" for people who pick the other system.

The Wall Street Journal, in its Nov. 28 editorial lauding the plan, was characteristically ignorant and naive. They put it as follows: "Anyone who prefers the current tax code can stick with it. The rest of us can have a better choice."

Does the Journal really think that taxpayer elections will be based on personal affinity as opposed to which system enables one to pay less tax? That is not a very plausible or sophisticated view of taxpayer behavior.

Yes, as the Journal notes, providing the election may ease the politics of adopting a flat tax, which may seem good if that is the tax system you prefer. But it eases enactment by not really enacting the flat tax, given that the other system remains out there, influencing behavior and running up tax planning costs. Making something easier to adopt by not really adopting it is not a very brilliant strategy.

Okay, just for completeness, are taxpayer elections always bad? No. To over-simplify, suppose there were 2 kinds of elections: those that induced the taxpayer to choose whichever option reduced tax liability, and those that induced the taxpayer to choose whichever option lowered her tax planning and compliance costs. The latter type of election would be good, the former bad. In practice, of course, the two effects will generally be mixed together, so it's a question of how much you get of each. But the election Thompson proposes certainly seems likely to be the bad kind, as taxpayers would have strong reason to track, e.g., their home mortgage interest deductions and such (not all that administratively costly a thing to do) in deciding which option they want to use.

Inadvertent hilarity

In an op-ed in today's LA Times, Zev Chafets says that Bush is the "big winner" from today's Middle East shindig in Annapolis, notwithstanding that nothing is likely to happen there. Could be so, I suppose, as a statement about the U.S. opinion poll effects (though even this seems to me unlikely).

But then the LSD kicks in, and the spittle starts spraying from Chafets' mouth.

He asserts that, just because various countries and institutions came to the thing, "[i]t turns out that Bush, far from wrecking America's prestige and influence, has compounded it."

Then the true comedy payoff:

"In the past, there were foreign leaders who might have attempted to spoil the party. President Jacques Chirac of France, Chancellor Gerhard Schroeder of Germany, Canadian Prime Minister Jean Chretien and U.N. Secretary-General Kofi Annan were all publicly rude to Bush at one time or another, and perhaps they would have dissed him again this time. But guess what? None of them is invited. They are all gone from office -- a fact not lost on their successors, who are almost embarrassingly anxious to be friendly with the Bush administration."

Never mind Australia, or for that matter the fate of Tony Blair. The really important thing to keep in mind is that Bush can go over the heads of foreign leaders and appeal to the voters out there ANY TIME HE LIKES. Those foreign voters are nuts about him, and protective like a mother hen. Likewise, Bush's pull with the UN General Assembly rank and file is just INCREDIBLE. So none of these people would DARE stand up to him unless they had a political death wish.

Is Chafets living on the planet Zircon or something? Is he deranged enough to believe what he writes, or too crass to care?

My ideal

Someone once said the following about David Ricardo, the great classical economist, who developed all kinds of remarkable insights without any formal economic tools. (An example is what we now call Ricardian equivalence with respect to budget policy, an idea he both expressed and saw the problems with, in a couple of throwaway paragraphs, nearly two centuries before anyone else wrote about it.)

Anyway, this individual compared Ricardo to the guy you see at the end of a tough mountain climb, when you've gotten there with tons of special gear and burkah helpers, who you find out has ascended before you with nothing but a T-shirt, shorts, and sneakers.

That's my ideal in academic work, though I certainly make no pretense of comparability.

David Halberstam's The Coldest Winter

This widely noted book about the Korean War has been a very interesting read. The start is painful and hard to get through - a flash forward to the stage of the war where American soldiers, near the Chinese border, were being overwhelmed by Chinese forces for whom the sleeping MacArthur had totally failed to prepare despite more than ample warnings.

A lot that happened in the Korean War era is painfully recognizable today. Policy being driven by ignorance about the other side. People who knew something being ignored, as the "China hands" had been driven from influence for the sin of correctly predicting the outcome of the Chinese Civil War. People who knew better lying about what had happened in China to score political points against the Truman Administration. The overwhelming inclination in U.S. politics to be over-hawkish at all costs, without regard to rational pursuit of national self-interest. The arrogant disregard of local realities out there. Absurd worship of military figures, permitting them to exercise malign influence. Deliberate exploitation of patriotism themes by right-wingers determined to pursue nefarious ends, or in some cases well-meant but unrealistic ones. Knowledgeable civil servants being defamed and ignored. Insistence on reading every single situation in world politics as Munich revisited, with "appeasement" of a mythically monolithic adversary to be avoided at all costs, and with "appeasement" defined to include any exercise of sanity and common sense.

Interesting side-point: MacArthur's daring Inchon landing succeeded for a reason that no one fully understood at the time. It was guaranteed to fail if the North Koreans were at all prepared for it, highly likely to succeed (as it did) if it caught them completely by surprise. What we didn't know, before the archives opened abroad, was how close it came to failing. The Chinese knew from their intelligence sources in Japan that the U.S. was planning a landing somewhere. Being a lot savvier and more experienced than Kim Il Sung, they correctly guessed Inchon because they had studied MacArthur and knew his style. So they told Kim, a couple of weeks before the landing, to prepare for it. He wouldn't have had to do much - just put minimal resources there without greatly diverting from anywhere else. But luckily enough he arrogantly ignored them. So MacArthur's gamble worked because of Kim, but certainly was not bound to work given that the Chinese had figured it out. Being a racist, MacArthur had counted on "Asians" lacking the wit to foresee what he was up to.

Back to the main themes and how familiar they feel from the perspective of 2007. We really are reliving 1946 to 1954 in a lot of ways, albeit without responsible adults running the Executive Branch or the Republican Party. Let's hope we are lucky enough to emerge again. But I am not very confident that we will.

If Bush isn't stupid ...

... then why is he so laughably easy for sophisticated foreign leaders, such as Putin and Musharraf, to dupe?

Great new album

Glenn Mercer (previously of the Feelies), Wheels in Motion. So far as I can tell, the biggest difference between this album and his work with the Feelies is that this one is actually in print.

You could call it George Harrison on guitar with a Velvet Underground drone.

Cat pandering

Posts on international tax appeal only to a select audience. But I fail to see how anyone could resist my three cats.

This one is Shadow, aka The Big Fella.








This one is Ursula, aka The Lovely One.








And this one is Buddy, aka The Wascally Wabbit.

U.S. international taxation

Today at NYU Law School we held the session on international taxation mentioned in my blog entry from yesterday, with Jim Hines presenting his new paper, “Reconsidering the Taxation of Foreign Income,” followed by comments from Alan Auerbach, Mitchell Kane, and Stephen Shay, followed by general discussion. The following is a partial report and some very preliminary thoughts. (I am likely to publish about this topic at some point down the road.) But let me just mention up front that the event seemed (to my biased eyes at least) to be a big success - 70 attendees, lively discussion that could have kept right on going if people didn't have to leave, and most importantly it may have advanced people's thinking about the issues, as it certainly did mine.

Jim argues that U.S. (and other countries’) tax policy with respect to outbound investment should be guided by capital ownership neutrality (CON) rather than capital export neutrality (CEN), with the claimed implication in practice that the U.S. should exempt active business income earned abroad by U.S. corporations. Under CEN, the prescription would instead be to move towards full U.S. taxation of all worldwide income of resident corporations (and individuals), albeit subject to allowing foreign tax credits.

CON focuses on not distorting ownership patterns, as would happen if a German firm rather than a U.S. firm owned a given investment in China, despite the U.S. firm’s expecting a higher pre-tax return from the investment, because the German company earns more after-tax by reason of Germany’s imposing less tax than the U.S. does on top of whatever China levies. CON advances worldwide efficiency by increasing pre-tax profitability, taxes being ignored for this purpose as they are a cost to the taxpayer but a transfer from the social perspective (since the taxing government gets the money and does something with it). CON is understood to matter a lot in a world where the theory of the firm, as pioneered by Ronald Coase, suggests that ownership arrangements are economically very important. (You have a firm instead of arm’s length market arrangements between partners in the productive process where this increases efficiency.)

CEN focuses on not distorting where investments are made. If Ireland has a lower tax rate than the U.S., investment will tend to shift from the U.S. towards Ireland, leading to the selection of some Irish investments that are more appealing after-tax than their U.S. alternatives despite having lower expected pre-tax returns. Same point about pre-tax profitability being the proper guide since taxes are a transfer not a social cost.

So why should we think the CON margin is more worth pursuing than the CEN margin? Not because it is inherently more important, which Jim doesn’t claim (noting only that CON is indeed important), but on the ground that the U.S. can benefit from unilaterally pursuing CON but not CEN. This is a part of the analysis that needs to be developed more.

Proponents of CEN usually define unilateral pursuit of national self-interest by invoking national neutrality (NN), under which the home country would fully tax outbound investment by its companies without foreign tax credits – permitting only deductibility for foreign taxes paid. The foreign tax credits then emerge either out of benevolence or (more plausibly) reciprocity between nations. As I argued in my recent Tax Law Review piece on international taxation, moving towards CEN by increasing the U.S. tax burden on multinationals is often defensible in terms of national self-interest because it also moves towards NN.

Jim rejects this nationalistic ground for moving towards CEN and NN via what I am inclined to call the “musical chairs” or “row of shops” hypothesis. NN is motivated by the concern that, if we tax outbound investment by U.S. companies less than their domestic investment, we lose revenue because their investments relocate from the US to abroad. But suppose the amount that will be invested in the U.S. is fixed so far as the U.S. tax regime for U.S. firms is concerned. If the U.S. tax rules induce a U.S. firm to invest abroad, someone else will make the investment here. Or the U.S. firm will raise more capital in worldwide capital markets and make both investments, not just one or the other. He invokes recent empirical research in support of this view, suggesting that home and foreign investment by U.S. multinationals seem to be complements rather than substitutes.

I call this the musical chairs theory because it’s as if the music is playing, and the companies are marching around all the chairs (i.e., investment choices), and everyone ends up getting a seat somewhere. If we induce the U.S. firm not to take the seat here, someone else will take it instead. This is of course the benign (or should I say progressive schools) version of musical chairs, where you have just enough for everyone rather than being one short.

The row of stores metaphor for this story is inspired by Bleecker Street, which I sometimes pass on my way from home to school, in which every storefront is bound to be rented by someone – it’s just a question of who ends up where. Bad theory so far as Bleecker Street is concerned, by the way – there are lots of boarded-up storefronts still seeking tenants, some of which have been there for years. (A puzzle: why are the rents apparently so high if so many stay vacant for so long?)

Again, Jim doesn’t deny that low taxes attract investment. The claim here is that, if the U.S. tries to move towards CEN, rather than everyone doing it, all it does is create clientele effects, whereby other nations’ firms replace U.S. firms as the makers of particular foreign investments. So no motivation for the U.S. to address CEN alone, and indeed we get a piece of the worldwide CON welfare loss if U.S. firms (still these days predominantly owned by U.S. individuals) make a bit less money due to the inefficient reallocations. Unclear how much we gain from following CON, however, even granting that in this model we have nothing to gain from unilaterally following CEN.

Jim rejects distributional or fairness-based reasons for taxing the worldwide income of U.S. firms by analogy to tax-exempt bonds. Say the interest rate on taxable bonds is 10%, the marginal tax rate (MTR) is 30%, and tax-free municipal bonds pay 7%. Then there is no distribution problem by reason of the preference (assuming the pre-tax interest rate is fixed), because muni bond holders pay a 30% implicit tax that is the same as everyone else’s explicit tax. All earn 7% after-tax. By analogy, investment in low-tax Ireland pays an implicit tax in the form of a lower pre-tax return (by reason of the CEN-violating shift of investment into Ireland), so there’s no reason for distributional concern about its being (to exaggerate relative to actual Ireland) tax-exempt.

The big problem with the muni bond argument is that it only works with a single MTR for all investors. So, if in actuality we taxed corporate income on outbound investment at the individual level, so we could apply Bill Gates’ MTR to his investments and a lower rate to yours and mine, exemption for foreign source income would involve sacrificing this potential to apply the desired MTR to each investor. But since we generally tax outbound corporate equity investment purely at the flat corporate rate, we aren’t getting that rate differentiation anyway under the current system or even one revised to accord more with CEN.

There is lots more one could say (and that I perhaps will say) about the paper and the topic – including details of excellent comments by Auerbach, Kane, and Shay – but given the length of this post I will omit them at least for now. But one last point concerns passive income, earned through portfolio investment. Jim agrees that the U.S. should tax all worldwide income of U.S. residents. This is potentially a big concession, making one wonder about the broader principle. It has a rationale, relating to the point that passive income doesn’t have a meaningful location in the same sense as active business investment (e.g., there is no limit to the funds that could be described to the tax authorities as deposited in Caymans banks). So the musical chairs hypothesis does not apply. But still, it might have big implications for the overall analysis – especially considering the murkiness of the active-passive distinction (which Jim conceptualizes as, “does ownership or control matter here?” – a matter of degree, of course) – and considering as well the murkiness of the source concept.

Source is not an economically well-defined idea. Consider, for example, the synergies obtained by operating as a multinational rather than through arm’s length dealings between firms in different nations. Where exactly does the synergy income arise? And this is not just an implementation question – it undermines the underlying idea on which source-based taxation ostensibly rests.

International tax session at NYU Law School

On Wednesday, November 14 (tomorrow as I write this), from 12 to 2 pm, we will be having a really interesting session at NYU Law School on international tax issues. Jim Hines of the University of Michigan Business School and Law School will be presenting a new and as yet unpublished (perhaps even unposted?) paper entitled "Reconsidering the Taxation of Foreign Income." Commentators will be Alan Auerbach, Mitchell Kane, and Stephen Shay. If I do say so myself despite having arranged the event, this is a really strong group of people with diverse backgrounds and viewpoints.

I am expecting a very lively and enjoyable session. Jim argues for significantly changing the policies and policy benchmarks that have prevailed for several decades in U.S. international tax policy. The panelists' level of agreement may well top out at 50 percent while in some cases being significantly lower. But all agree about seeking light not heat.

Interested individuals who will be in the area and who were not previously aware of the event (or at least have not previously responded) should let me know, and I can offer fuller information about it.

Budget hypocrites threaten to strike again

Courtesy of Paul Caron's TaxProf blog, I note that the White House is threatening to veto the one-year AMT patch being considered by Congress. Specifically:

"The Administration does not believe the appropriate way to protect 21 million additional taxpayers from 2007 AMT liability is to impose a tax increase on other taxpayers. Accordingly, if H.R. 3996 were presented to the President in its current form, the President’s senior advisors would recommend he veto the bill."

How exactly does the White House rationalize counting AMT revenues towards its multi-year deficit forecasts, under this view? They're counting net revenues that they insist must be lost, not replaced.

UPDATE: Stan Collender, in his "Budget Battles" analysis of the AMT squall, puts it a bit more crisply:

"On one hand, the White House says that paying for a one-year "patch" on the AMT is unnecessary, so an offsetting tax increase isn't needed. As he has done with everything else Congress is considering that he doesn't like, the president is threatening to veto any AMT fix that is revenue neutral.

"On the other hand, congressional Republicans have been insisting that the Democrats maintain their pledge to live up to pay-as-you-go budget rules by offsetting the AMT fix so that it has no impact on the budget.

"The Republican positions clearly are not defensible.... [given] the glaring, inherent conflict between saying that the AMT fix doesn't have to be paid for and demanding that PAYGO, which applies to taxes, be maintained."

Collender notes as well how utterly (and I would add characteristically) incompetent the Congressional Democrats have been in letting the Republicans paint them into this corner, and in failing to explain why the AMT fix isn't a tax cut but the offsets are somehow tax increases.

Could those guys win a poker hand if they had four aces and the other side had face-up junk? I am starting to think not.

Newly published or forthcoming

My article "Why Worldwide Welfare as a Normative Standard in Tax Policy?", 60 Tax L. Rev. 155-178 (2007), has now been published. Hard-copy reprints are available to anyone who still wants so old-fashioned a thing.

Another forthcoming article of mine, "Beyond the Pro-Consumption Tax Consensus," should be appearing very shortly in issue 4 of Volume 60 of the Stanford Law Review.

Finally, within the next few weeks my article "Disclosure and Civil Penalty Rules in the U.S. Legal Response to Corporate Tax Shelters" should be appearing in Wolfgang Schon (ed.), Tax and Corporate Governance, to be published by Springer Science. This volume contains the papers from a conference that was held in Munich in December 2006, and other authors whose papers should be in the volume include, e.g., Reuven Avi-Yonah, Steve Bank, and Mihir Desai.

Radiohead redux

They're not a natural band for me to espouse. I'm a bit suspicious of the popularity, although the Beatles model says that in the ideal world the best band is also the most popular. But then there's the U2-ish, prog-rock sound and the keening mournfulness of Yorke's lead vocals, neither to my typical taste.

Still, in varying degrees I like most of their albums, previously OK Computer best of all, and to date I would call In Rainbows the best album of 2007.

UPDATE: I've also come to like the new Fiery Furnaces album, after initial skepticism. Eval of Jens Lekman, highly touted by pitchforkmedia.com and others, remains open.

Buffoon in chief

A stopped clock is right twice a day, but not Cheney - he is wrong 100% of the time, defying the law of averages. Latest bit is that he has apparently demanded 100% loyalty by the Bush Administration to Musharraf, in lieu of any thought of steering an independent course.

State of the play academically on wealth transfer taxation

Yesterday I went to a session at Columbia Law School where my colleague, Lily Batchelder, was presenting her paper, "How Should an Ideal Consumption Tax or Income Tax Treat Wealth Transfers?" Lily is doing excellent and important work in this area, ranging from her actual policy proposal as part of the Hamilton Project to the more theoretical inquiries she is pursuing now. But even apart from any one individual's distinctive view of the area, I think it's important to say something about the current state of the play, which Lily helps make her clear both through her own contributions and through the prior empirical literature she cites.

Ten years ago, I would have said the jury is out in the academic and tax policy literature, so far as the merits of wealth transfer taxation are concerned. E.g., there is no particular reason one should favor wealth transfer taxation just because it's progressive, given that in principle equal progressivity could be obtained with or without it, through adjustments to other tax instruments.

From a 2007 perspective, however, I think the case for wealth transfer taxation has pretty much been made. A key point that Lily's work makes clear is that inheritance taxation - where the tax depends on the circumstances of the recipient - is theoretically superior on informational grounds both to estate taxation - where it depends on the size of the bequest - and to no tax at all on wealth transfers. The inheritance tax option uses more distributionally relevant information than do the other mechanisms. E.g., my wellbeing clearly depends on the wealth transfers I receive, plus other stuff I have or can earn, so the tax system is depriving itself of distributionally relevant information if it ignores the wealth transfers or fails to interact them with what else I have.

Now for a refinement, potentially reversing the seeming import of what I just said. The clear superiority, on informational grounds, of inheritance taxation over the alternatives does not tell us that the inheritance tax rate should be positive. This depends on a whole raft of relevant inputs, including (as Lily's work makes clear) the case for subsidizing gratuitous transfers due to the "altruistic externality" that Louis Kaplow may have been the first to emphasize. So to say we should have an inheritance tax isn't to say we should burden inheritance relative to not having a wealth transfer tax - just that in theory it ought to be taken into account somehow, which straight exemption fails to do.

But here is what I would argue is the clincher in terms of a positive inheritance tax rate (again, recognizing that there are complicated multiple inputs). Recent empirical research concerning bequest motives and practices, including, e.g., work by Wojciech Kopszuk of Columbia University, suggests that "accidental bequests" (those reflecting imperfect lifecycle saving and annuitization rather than bequest motives) are a sufficiently large piece of the whole to suggest that the distortionary effects of taxing wealth transfers, e.g., the discouragement of work and saving by future decedents (which we all are), are likely to be substantially lower than they would be if bequest motives were doing more of the work. So there are likely to be substantial efficiency advantages to this device for taxing work and saving, relative to the use of standard annual income or consumption taxation.

All this is not just high theory, of course. The estate tax is actually scheduled to disappear in 2010 and then re-appear in its pre-2001 form in 2011. This is a crazy and implausible sequence of rule changes, leaving aside the fascinating "throw momma from the train" research opportunities that it would offer empirically minded economists. So something is bound to be done. It thus is well worth knowing how strong the academic case for some type of wealth transfer taxation, especially an inheritance tax, now appears to be.

I myself would combine inheritance taxation in some form with a progressive consumption tax in lieu of the current income tax, but this is a topic for another day (actually for a past not a future day as I have written about income and consumption taxation quite a lot in recent years).

What did Rudy actually do on 9/11?

Since I was there at the time, I remember. The answer is: one thing, and one thing only. He was a heckuva good TV talk show host over the period of several days right afterwards.

I don't want to minimize this too much. It actually mattered to a degree. A key virtue is that he was actually calm. With all the grief and shock in the air, he helped New Yorkers to feel better.

But that was it. So far as actual emergency management is concerned, the less said the better. Think of the lost command post that he put on top of the WTC, possibly as a love nest. Or the dead firemen who would have survived if they could have communicated by radio with the police. Or the lack of health precautions for people at the site, who are still getting sick due to his negligence. Or the fact that he spent more hours at Yankee games between 9/11 and the end of that year than at the site (not that he was really needed there).

Good talk show host for a few days. Period. Via a completely different persona than his mad dog spewings on the campaign trail these days. And again, this was genuinely valuable and I still appreciate it. But it is a slim reed for a Presidential campaign.

Invidious comparison

I felt slightly bad about rooting for the higher-budget, bigger-bully Red Sox, an involuntary reflex reflecting all the years of counting on them (faute de mieux) to stop the Yankees. I also wanted the thing to end already, so I wouldn't have to keep on staying up late.

If you think the World Series outcome was inevitable, even after 8 innings of Game 4, think back to game 4 of the 2004 ALCS. It's difficult to draw any distinction between the Yankees' degree of dominance (and seeming inevitability) through that point in 2004, and that for the Red Sox this time around. E.g., the Yankees in 2004 had outscored the Red Sox by 36-19 through the 8th inning of game 4, versus 29-10 for the Sox this time around.

Only, Rivera blew it and Papelbon didn't.

New tax bill introduced by Congressman Rangel

House Ways & Means Chair Rangel has introduced a major tax bill, the "Tax Reduction and Reform Act of 2007." Zero chance of enactment - probably zero chance of passage, but even if passed it would be vetoed by Bush - but it matters for two reasons. First, revenue-raisers in it might be used to pay for extending AMT relief. Second, all of its provisions automatically land on the shelf full of items that might be considered in the future, e.g., in 2009 under a Democratic President. (Which is not to say that Hillary or any of the others would actually take much from this bill - it would simply add to the background list of options.)

Clear discussion of the bill would be helpful but is unlikely to emerge in the political process. I gather no Democrats wanted to co-sponsor. Republicans will presumably yammer centrally furnished talking points about how it's a huge tax increase (a lie - it's a mix of tax increases and cuts), reflecting once again that they behave more like a Bolshevik-style cabal than like the type of political party one really would expect to find in a country with several centuries' worth of democratic traditions. But I am hopeful that thoughtful conservative commentators will take it seriously - there actually are parts of it that they ought to like, although they might quite reasonably dislike it on balance.

Anyway, here is a quick summary of several main features with my thoughts about them.

1) Lower-income tax reductions - The bill would cut taxes for lower-income Americans via about $86 billion (over 10 years) worth of increases to the standard deduction, earned income tax credit, and refundable child credit. This is a straight distribution issue. I'm sympathetic, but readers can evaluate it for themselves (the counter-argument is that it gives infra-marginal rate cuts that need financing via distortionary taxes).

2) AMT shuffle - interesting methodology here to try to pay for AMT repeal. Complete AMT repeal, costing $795B over 10 years, is financed by a "limitation of benefits of individual AMT repeal" provision (raising $831B). This is simply a rate increase of 4% initially, then 4.6%, on groups at income levels with a lot of AMT exposure. Amusing that the top rate gets back to exactly its pre-2001 level of 39.6%. Substantively, the idea is to raise top rates in lieu of having the AMT. Semantically, the idea is to call this a mere limitation of the benefits of AMT repeal. As a political or semantic matter, I don't think it will work. Substantive merits are mixed - getting rid of the AMT may be good but in part this amounts to higher marginal rates instead of indirectly denying state and local tax deductions. Further marginal rate increase here, although as a "bubble rate" not at the very top, from restoring the phaseout of personal exemptions. I would argue that personal exemptions are appropriate at all income levels, so the best rationale for this is an optimal income tax thing about not putting the highest rates at the very top.

3) Business, including international - Top corporate rate is cut from 35% to 30.5%. (Republicans will of course ignore this.) 90% of the revenue loss from this is offset by the revenue gain from (a) repealing the idiotic special lower tax rate for domestic production activities, (b) denying deductions related to foreign source income that is not currently taxable, until such income is actually repatriated & thus becomes taxable here, and (c) barring the use of LIFO accounting for inventories. This is a good package that almost any good-faith independent observer ought to like, with the possible exception of (b). I tend to think (b) probably is good policy - preventing what is effectively better-than-exempt treatment for foreign source income - but I feel a need to hear more about this issue from people who know more about the intimate institutional details.

One interesting effect, if you put it all together, is that marginal tax rates for individuals become much higher than for corporations if all this is enacted - 39.6%, plus more in the personal exemption phase-out range, versus 30.5%. I gather that the 15% dividend rate would be allowed to expire. Never mind, in an era when double taxation of corporate income is ever easier to avoid through sophisticated planning, this seems likely to make the corporate tax a net benefit rather than a net burden. All those economists doing incidence studies of the burden of the corporate tax (a subject I've been studying and writing about for my latest academic project) are going to have to turn around and write new papers about the incidence of the benefit from the corporate tax.

4) Other - about a gazillion one-year extenders. Not the fault of the Rangel bill, but I find it pretty unedifying to have all this stuff on regular extenders needing annual lobbying infusions to get them renewed for another year. This is a case where Congress and the lobbyists may be colluding to screw the lobbyists' clients. But again I don't lay this on Rangel or the bill - the extenders simply bring this preexisting situation to mind.

Among other features, the bill would take on carried interests, put "economic substance" in the Internal Revenue Code (which at least would stop Scalia & Thomas from saying, in any event prospectively, that there is no such doctrine), and address various little planning tricks that the staffers on Capital Hill have evidently learned about.

On the whole, I would definitely take this package over present law. Not going to happen, of course. Even apart from the lack of votes, and the Republican noise machine lying about it, it's inherently pretty hard to enact a break-even package with hundreds of billions of dollars worth of tax cuts and tax increases both, because the losers tend to screech more than the winners. Certainly a good try, in most respects, to throw out the AMT in a fiscally responsible manner and to improve the corporate tax rules through the classic combination of rate cuts and base-broadening.

Interesting National Bureau of Economic Research study of the Iraq "surge"

According to Michael Greenstone of the MIT Economics Department, in his new NBER working paper, "Is the 'Surge' Working? Some New Facts" (NBER Working Paper 13458, 10/07), while various on-the-ground Iraqi indicators are mixed, perhaps the most salient fact is that Iraq's bonds have declined by 40% since the surge started. He concludes:

"This decline signals a 40% increase in the market's expectation that Iraq will default. This finding suggests that, to date, the Surge is failing to pave the way toward a stable Iraq and may in fact be undermining it."

Bond prices reflect, of course, people betting real money for real payoffs down the road, either good or bad. This market, unlike that for Washington punditry, is one in which it actually pays off to be right, rather than wrong.

Current reading

I've just finished Ken Kalfus' A Disorder Peculiar to the Country, a black comedy about a divorce from hell, set in NYC on 9/11 and the ensuing months. For the first two-thirds I liked it, though sometimes I had to make myself pick it up, what with the themes being what they are. Often very dark and painfully funny. But it turned too episodic and scattershot, didn't build quite as I would have expected, and at the end took a sharp turn into a sarcastic historical fantasy ending that is the sort of thing I ought to like, but that I didn't feel built on or went with what had come before. So the potential effect, for me, was lost.

Next, Alexander Waugh's Fathers and Sons.

Just asking

If Bush sought legislation permitting him to throw the entire Democratic Congressional leadership in jail, would they support it? I rather think they would.

Strange alliance

Although obviously I am no fan of the Christian right, I must say I am encouraged by recent talk (to the extent one believes it) that they will take major steps to block Giuliani's candidacy. I don't know anyone in New York who doesn't regard the prospect of his becoming President with a mixture of astonishment and trepidation. This includes people (such as me) who believe he was in many respects a successful mayor.

As a Presidential candidate, Giuliani stands for two things: war and dictatorship. In a mayor, such inclinations don't matter so much. As President, they would go well beyond making him the living embodiment of the Peter Principle. Anyone who can block him, on any grounds, is doing a good thing whether or not for the right reasons.

What's so funny?

If you want your Halloween chills a couple of weeks early, check out the video of Bush smiling and giggling as he raises the idea of World War III with Iran.

If you know you've decided to attack, I suppose it's funny, at least to a certain type of mentality.

There's no magic bullet reason for doing this - a similar rat's nest of reasons, I would think, to those for attacking Iraq. Finding it fun and exciting is certainly one of the reasons.

For another, consider how the media will play it, and how the Democrats will react, if the Iranians take any violent counter-measures, be they in the U.S., in Iraq, or elsewhere. The Administration can only win from ratcheting up the tensions, having "America under attack," etcetera.

War with Iran?

From today's NY Times coverage of Bush's press conference:

“If Iran had a nuclear weapon, it’d be a dangerous threat to world peace,” Mr. Bush said. “So I told people that if you’re interested in avoiding World War III, it seems like you ought to be interested in preventing them from having the knowledge necessary to make a nuclear weapon.”

If I am interpreting this correctly, Bush is suggesting that Iran should be attacked unless there are other means of "preventing them from having the knowledge necessary to make a nuclear weapon.”

This mere "knowledge" standard appears to be much lower than the standard supposedly applied to Iraq, where the Administration claimed that Saddam actually had WMD including an active nuclear program. It does not, for example, appear to require any sort of access to bomb-making materials.

I personally put the odds of an attack at greater than 50 percent. The only arguments I have heard against the likelihood of its happening are that (a) it would be insane, and (b) people (whether the public, the military, or Secretary Gates) wouldn't stand for it. I can't see that (a) matters to this crew, or that the public will stop it, or that the military can stop it given the principle of civilian control plus generals' craven careerism. I fear that means we're down to Secretary Gates.

Presidential line item veto

The Republican Presidential candidates are having a little spat about the line item veto, which Rudy as Mayor successfully sued to have struck down on constitutional separation of powers grounds. Attacked for this at the last debate, he took the extremely bizarre position - for a Republican Presidential candidate - that it actually matters whether something is constitutional or not.

By the way, I read about all this in newspapers and blogs. If there is one rule I live by, it is never to watch either Republican or Democratic Presidential candidate debates. Doctor's advice, or at least it would be if I asked him after properly laying out the facts.

Anyway, today McCain renewed the attack, although I think it started from Romney, saying that no true fiscal conservative could oppose the line item veto. And this is not necessarily a purely hypothetical debate, since conceivably clever structuring could create something rather like the line item veto that would withstand constitutional scrutiny. (Even leaving aside whether the "unitary executive" types on today's Court would vote differently.)

But one small problem here. As I point out in my recent book, Taxes, Spending, and the U.S. Government's March Toward Bankruptcy, it is theoretically ambiguous whether a line item veto will increase or decrease government spending, budget deficits, or the fiscal gap - whichever one chooses as the operative measure. It all depends on how the president uses it.

There are decent political economy arguments for the view that presidents will typically have a lower preference than members of Congress for lots of small handouts to this interest group or that. (Although Bush never minded earmarks or other pork until the first Wednesday of November 2006.) But presidents also tend to like really big-ticket projects - monuments to their "great leadership," perhaps - much more than do the members of Congress. This is pretty much a constant across presidents.

Give a president the line item veto, and while there is reason to think that anyone except for Bush from 2001-2006 will occasionally use it to lop off egregious handouts here and there, there is also reason to think that they will see it as a bargaining chip, the threat of which can help them win extra votes for the really big items they are struggling to press through.

So I think it is plausible that the line item veto would exacerbate rather than ease problems of fiscal discipline.

There may be some empirical evidence from the state level supporting the more conventional view. But there is a big difference between presidents and governors regarding the incentive to swing for the fences with really big "historic" programs.

Extremely lucky travel day

Today I flew roundtrip NYC - Boston to present my new paper on tax and accounting at Boston College Law School, where I saw various old friends in the biz (Diane Ring, Jim Repetti, David Walker, Marjorie Kornhauser). Given the storm sweeping up the East Coast, I was astonishingly lucky in how it played out for me - I could easily have spent hours in the airport but actually saved time due to the travel delays. On a normal travel day I would have returned on the 3:30 shuttle, but because the 2:30 was delayed I managed to board it and leave Boston at 3. Back in NYC the Marine Air Terminal (where the Delta shuttle lands) was an absolute horror show, jammed with people and with one of the longest airport cab lines I've ever seen. But I caught a ride back with a limo driver who had lost his scheduled pick-up due to the wall-to-wall canceled flights from DC and Chicago, and who also proved a wizard at the sort of shortcuts through backed-up traffic that I resent when I am one of the other drivers. Plus I heard his very interesting life story, or at least the dramatic highlights.

Either I'm living right or the gods are making up for the pulled hamstring I suffered while playing tennis last week. Or else perhaps neither. (And do I owe the gods for those gnats in Cleveland game 2?)

One thing I like about my paper, in the course of presenting it, is that the proposal I offer (a 50% adjustment of companies' taxable income towards their financial accounting income, with a few miscellaneous bells and whistles) has some interesting pluses and minuses that - rightly, I think, from an expositional standpoint - I don't fully explore in my paper, as they would make it too long and ponderous. Maybe others will choose to write about the proposal if it gets off the ground sufficiently. I am also increasingly persuaded that it makes basic sense, at least enough to get off the ground as a serious contender even if in the end one might choose not to adopt it. (Although I myself would adopt it.)

How much did I pay for the new Radiohead album?

$ 5 U.S.

UPDATE: Pretty good album, by the way. Would certainly have been worth full price.

Today's Krugman column

He argues today that the Republicans have always been as they are now under Bush. I disagree. His analysis is a bit like saying that someone who has gone stark raving mad with a 105 fever was always just like this because back in the day he had an infected toenail. Yes, Barry Goldwater did some bad things, and the Reagan Administration did Iran-Contra. But they also worked in a bipartisan and responsible way with the Democrats on tax and budget policy in 1982, 1983, 1984, 1985-86, and 1988. They effectively admitted that the "riverboat gamble" had failed within 6 months of trying it. And, despite the Beirut fiasco, which of course is far from the worst blunder our country has ever perpetrated, they certainly did nothing like Iraq, Blackwater, the sinister plans for Iran, etc., etc.

No one is a saint in politics, not the Republicans at any time and certainly not the Democrats at any time. But our institutions can't survive for much longer with the Republicans that we have now, and it's worth remembering that they were never like this, more than just a little bit perhaps, before 1994.

It's only chamber pop, but I like it

The New Pornographers' Challengers, mildly criticized in early reviews for being too sedate, is actually quite enjoyable. It sounds a bit at times like Belle & Sebastian playing early-70s Bowie.

Encouraging news

I just saw a link somewhere to a new NBER study finding that people have U-shaped happiness across their lifetimes, sinking to a low point at age 49 for men and 45 for women before steadily rising again.

I suppose this is good news for me - apparently I have bottomed out and am headed back up again. Separate analysis, perhaps, for my wife ...

The word from Washington

I've just returned from a brief trip to Washington, where I attended a conference on taxes, technology, and privacy, and offered comments on a paper by Kyle Logue and Joel Slemrod on endowment taxation, the use by the tax system of genetic "tags" that correlate with expected income, etc.

While there, I happened to chat with several people who have worked for a long time in different agencies of the executive branch of the government (not just tax-related), and who report on what a historically unprecedented horror it is for career professionals in the government to have to deal with the current Bush Administration (earlier Republican Administrations were generally fine). Essentially, it's like being in the Soviet Union with a party commissar harassing everyone, except that while he can (and does) make your life miserable and prevent all honest governance he at least can't have you arrested.

Once the national nightmare has ended, someone should really go around collecting accounts from people in different departments. While unlikely to be a best-seller, it would be genuinely eye-opening reading with a lot of startling stories about dishonesty and dirty work.

Horrifying collapse of the Mets

By reminding myself of the (to me, hilarious and delightful) 2004 playoff collapse of the Yankees, I can at least avoid paranoid thoughts about the structure of the universe. Then again, who knows what horrors lurk in the 2007 baseball post-season.

If one could take a pill and eliminate one's rooting interest for a given team, I would certainly do so with respect to the Mets. But not mainly because of the horrifying choke they have perpetrated. From the standpoint of the principles that lead me to despise the Yankees, the Mets, not to mention the Red Sox, are merely lesser versions of the same thing. Okay, significantly lesser versions given the Yanks' nearly 2-1 spending advantage over the Mets, even though the Mets are the # 3 spenders in baseball.

No such pill exists, however. (And I would decline on ethical or aesthetic grounds to take the companion pill making me a Yankees fan.) The sad thing for me is that this Met fandom just goes so deep, immune to rational questioning and far beyond any positive rooting interest that I have in any other team in any sport. It all goes back to 1964, when at age 7 I became the only Mets fan on my block (in the Bronx, no less). Apparently, rooting interests that were laid down in sediments that deep simply go far beyond any laid down more recently in their emotional depth and ineradicability.

New Proposed Legislation - Senator Levin's Ending Corporate Favors for Stock Options Act

Thanks to a tip from Victor Fleischer, i just came across the following link to Senator Carl Levin's newly proposed Ending Corporate Favors for Stock Options Act. For better or worse, this bill is an interesting move in the ongoing set of disputes about tax and corporate governance, taxable income vs. accounting income, etc.

At the risk of excessively repeating myself, here is the link again for my recently posted article draft on this general topic.

The first thing the Levin bill does is limit corporate tax deductions for employee stock options (not just for highly paid executives) to the amount being deducted for financial accounting purposes.

On this, I would start by saying that I generally favor mandating greater tax-book conformity, in response to managerial incentive problems involving tax sheltering and earnings management I advocate only partial conformity in my article because I don't want Congress to start mucking around more with the financial accounting definition of income - it's bad enough that they already do things to the tax definition. This is generally consistent with that view, so long as it doesn't lead a subsequent Congress to muck around directly with the financial accounting definition in order to get an indirect tax result. One objection to this proposal, however, is that we already have a form of discipline on the tax end because the employer deduction generally must be coincident with an employee inclusion. I would think it's uncommon for the net of the two to favor the taxpayers, because presumably the company is more likely than the employee to have a low rate (given net operating losses and such). So, if I'm right that there isn't a systemic problem with the tax deduction being claimed, the only rationale here would be to discourage structuring options to have a bigger tax than financial accounting deduction. Arguably defensible under the skeptical view of the social merits of such tax-accounting "arbitrages" that I express in my piece, unless we don't think people are deliberately structuring into the inconsistency.

Second, the Levin bill lets corporations take the tax deduction in the same year it's reported on the company books, apparently even if the employee hasn't included it yet. This I don't like. Companies that don't need to worry as much about reported earnings, e.g., because they're relatively closely held and thus have a well-informed audience for their financial accounting income, now have a license to play tax games. I actually address this sort of problem in my paper, by the way, by limiting reductions of taxable income towards lower financial accounting income to the amount of previous adjustments in the opposite direction. No such control here. I wonder if the provision should have a negative revenue estimate, given this point.

Third (leaving out some miscellaneous stuff), the bill extends current law's $1 million annual limit on deductions for a publicly traded corporation's payments to top executives, so that it extends to stock options as well as straight compensation. But the existing exception to the $1 million limit for "performance-based compensation" remains. He's just moving stock options out of the performance-based box.

Even if you like the $1 million limit, and few people do, this is just silly. All one needs to do to avoid it is have a virtual stock option instead of a literal one. E.g., you have performance-based compensation that pays you off based on the stock price, but it isn't called a stock option despite having identical economics. Outside the rule, presumably?

My new article on SSRN

My new article, The Optimal Relationship between Taxable Income and Financial Accounting Income: Analysis and a Proposal, is now available on SSRN. Here is the link.

International tax policy

This evening I attended the annual Tillinghast Lecture on international taxation at NYU Law School. The speaker was John Samuels of General Electric, who has been called the leading in-house corporate tax counsel in the US today.

I have met Samuels several times over the years when presenting papers at the International Tax Policy Forum in DC, which he directs. My post about my most recent appearance there, where my interlocutors, including Samuels, succeeded in stirring some doubts concerning how I have been thinking about international tax policy, is here.

But this time John was on the firing line, not me. And I was very interested in hearing about the alternative (and as it happens, more pro-US multinationals) view of international tax policy that he holds and had effectively argued for at my ITPF session.

John started by criticizing the standard US (at least in pro-government circles) view of international tax policy as aiming to promote worldwide economic welfare (as distinct from national economic welfare) by advancing capital export neutrality (CEN), which urges, among other applications, that US companies face as high a tax rate on outbound investment as on home investment, so that they will go for the investment with the highest pre-tax yield. He condemned the foolishness of pursuing WW welfare when everyone else is pursuing national welfare.

There was a missing piece at this stage of the talk, but one that he was, I think, prepared to supply. Under the long-standard economic analysis, dating back to Peggy Musgrave's early-1960s work, the right thing to do from a selfish standpoint with outbound investment of your own nationals is to be less generous than the current US international tax regime - not more so. Musgrave describes "national neutrality," under which nations make no effort to ameliorate double taxation, merely allowing deduction of dollars paid to foreign governments on outbound investment. Result under the standard analysis: outbound investment is greatly deterred to everyone's WW detriment. For example, if France and the US both have 40% tax rates, a US firm earning $100 in France ends up with only $36 ($40 French tax leaves $60, then 40% US tax on this residue). Only, within the standard analysis, the US has no reason to change its behavior here unless there is reciprocal forbearance - i.e., France as well as the US retreats on revenue claims via foreign tax credits or exemption of foreign source income. Big difference from free trade, where everyone benefits from being a good guy even if it is unilateral. Here, it has to be reciprocal. Hence, my paper from the above-noted ITPF session where I talked about it in terms of prisoner's dilemmas.

Often when the US tries to clobber its multinationals on outbound investment, this is rationalized as cooperating when everyone else is defecting, from the standpoint of tax harmonization versus tax competition. John's talk was highly critical of US policy on this point, leaving unrebutted the critique that what we're doing might alternatively be rationalized as moving closer to national neutrality by increasing US taxation of outbound investment by shaving foreign tax credits.

The central bone of contention, and of John's answer to this national neutrality point, and of the responses to my article at ITPF the other month, goes to whether US outbound investment is a substitute or a complement for home investment. Substitute is what you'd expect if a given US company has a fixed pool of capital. E.g., we have $10M to invest, and we'll put it either here or there. Tne national neutrality view depends on substitution, rather than complementarity, thus rationalized in terms of where you spend your finite budget. But research by Mihir Desai, Jim Hines, and others fails to find substitution and instead finds complementarity. In other words, making more foreign investments if anything increases a US firm's home investments, rather than crowding them out.

How can this be, when the idea of budget constraints is among the most fundamental in economics? The idea is that the various firms from around the world are competing for capital. Assume for now it's loan capital not equity they are competing for. They're battling each other to borrow money in order to invest it at a high return.

Let's make it concrete. GE or MacDonald's is considering investing in China. Given home country bias in where people buy stock, we assume that these US companies are mainly US-owned, so the profits are going ultimately to US individuals who own the shares. GE or MacDonald's is competing with a German firm (a) to make a given investment in China that is expected to be profitable, and (b) to borrow $$ on worldwide capital markets to fund the iinvestment.

John argues that the US firm can't compete with the German firm if it has to pay more tax due to the US international tax system. Problem # 1: paying a higher tax rate doesn't necessarily make you non-competitive. Example: a 40% taxpayer and a 30% taxpayer can compete without competitive advantage to the former (other than, e.g., in generating funds internally). Both will price their goods for the highest pre-tax profit, the 30% guy simply gets to keep more of it. If the bank offers 10% interest, the 30% guy isn't going to out-compete the 40% guy to put money there; he'll simply do better after-tax (but the home country government does better in the 40% case, making it in this sense potentially a wash).

Problem # 2: Why does GE or MacDonald's have this profitable investment opportunity? Multinationals are set up, modern corporate theory has it, to exploit rents that are available to them through the most efficient ownership structure to exploit these rents. In plain English, MacDonald's has that stupid name that people value, so they can sell manure-filled cow slop for big bucks. GE has internal knowhow and valuable patents or something like that. Rents in this lingo are special opportunities to realize extra-normal returns. Economic theory says that you can tax rents (once established) without changing behavior. E.g., if Michael Jordan's best opportunity is to earn $30 million playing basketball, and second best is to earn $100,000 playing baseball, tax his basketball earnings at 90% and it's still the best thing he's got going.

So why can't one tax the rents, also why are there rents if the Germans are out there competing with GE. Don't they get competed away? Why doesn't it all boil down to Americans getting the normal return on their saving, meaning that we ain't gonna get no richer unless we save more.

Next problem: if GE or MacDonald's isn't tax-deterred from making this investment, how is it going to fund it, as a complement rather than a substitute for home investment, absent a magical money machine? The answer, presumably, is that it raises the money - not from Americans, who aren't saving any more, but from foreign investors on WW capital markets. But now the rent ceases to be captured by Americans unless we posit that GE or MacDonald's, despite being able to attract the rent in China notwithstanding German competition, and despite being so readily tax-deterred on the US side if we don't treat them as favorably as Germany treats the German firm, can decline to share it with the foreign investors. They ostensibly lack the market power to do any more than get the normal rate of return on debt, leaving the extra profit still to be captured by the American shareholders.

Something about this story still doesn't compute for me. I am starting to think that what Samuels is showing is WW inefficiency, not national inefficiency. The world loses if the capital goes through the German firm rather than through GE, despite GE's being the more efficient operator, because the suppliers of WW capital would rather go through that firm in order to get the corporate residence company tax savings. That sounds like a decent WW efficiency argument. But why is it a US problem if Americans, not being the suppliers of the extra capital, aren't going to be the ones who reap the extra profit?

Perhaps at best he's saying that the US tax regime will generate WW inefficiencies while doing little for us given the escape hatch of investing through a foreign firm. So we don't really gain that much, he may be saying, and WW efficiency suffers. But the case he thought he was making was that US living standards will be hurt if GE doesn't get to make that foreign investment that is being competed against by the Germans and that is funded at the margin by foreign capital from somewhere or other. And I am finding it hard to make this story stand up.

NYU presentation of my new paper

Today at NYU I gave a lunchtime presentation, at one of our in-house faculty seminars, of my newly completed paper draft, "The Optimal Relationship Between Taxable Income and Financial Accounting Income: Analysis and a Proposal." I didn't mention the session here in advance because it isn't open to the public.

By the way, the paper has that sub-title after the colon, even though it makes the whole thing clunkier, in order to provide fuller guidance about what it actually tries to do.

Good session. The main points I got that may prompt revisions before I post the paper on SSRN (with a link here) relate to special topics such as executive compensation and treatment of foreign subsidiaries. But I do hope to post and link it shortly.

One always ends up in a huge triage operation deciding what to do next and what to put off. I just resolved one triage in favor of editing the final page proofs of my forthcoming Tax Law Review paper, "Why Worldwide Welfare as a Normative Standard in U.S. Tax Policy?" before revising my accounting paper or working on my new paper, which may end up being a think tank book, and which has the working title: "The U.S. Corporate Tax: What Is It, and Where Is It Headed?" More on that in due course.

I've decided to resolve my next triage in favor of consolidating a bit of progress on the corporate tax project and then getting my accounting paper working draft out.

Leaving aside that I am currently neglecting both in favor of writing this post.

Evil scam

I just received a new variant of the various credit card scams (often claiming to be from Paypal or various banks) that arrive through e-mail from scoundrels bent on larceny.

This one is ostensibly from "service@irs.gov" and reads as follows:

"Subject: Notification of Tax Refund on your VISA or MasterCard Now

"After the last annual calculations of your fiscal activity we have determined that you are eligible to receive a tax refund of $209.30.

"A refund can be delayed for a variety of reasons.

"Fox [sic] example submitting invalid records or applying after the deadline.

"Sorry for any inconvenience this may cause and thank you for your patience.

"To access the form for your tax refund please click the link below."

I didn't click on the link but no doubt it would help me to tell the senders everything they want to know about my credit card.

I suppose one could argue, from a Darwin Awards standpoint, that these guys are good for the genome. Meaning that, if you fall for it ... But I am not so hardhearted, nor would such an argument even be correct evolutionary science.

Indirect defense of Obama

An earlier post is largely critical of Senator Obama's new tax plan.

But it's only fair to hold other candidates to a common standard.

So here is Mayor Giuliani, on eliminating the alternative minimum tax (AMT), courtesy of a recent Associated Press article:

The article notes that "eliminating the AMT would be extremely expensive, costing $100 billion in 2010 alone.

"Giuliani told the 700-member audience of the Northern Virginia Technology Council that he wants to cap the tax, and perhaps eventually eliminate it altogether.

"'Over time we can figure out how to eliminate it. ... If we were going to eliminate it, though, we'd have to balance it with additional tax cuts,' Giuliani said, leaving confused expressions on his audience. "That might be by making the Bush tax cuts permanent.'"

Got that? In Giuliani's world, you have to finance the revenue cost of repealing the AMT by enacting other tax cuts as well.

The article suggests that Giuliani may have misspoken. But this is uncertain. Giuliani is on record as stating categorically that tax cuts raise revenue, and that only extreme liberals believe otherwise. So perhaps he thinks that he actually is financing the AMT tax cut by raising revenue by adopting the other tax cuts. Only - doesn't the AMT tax cut necessarily raise revenue also?

I'm confused, but it's gotta be me, not him.

UPDATE: Giuliani is such a grotesque clown that I've got to add a couple of more things about him. First, he apparently said today that criticizing General Petraeus should be illegal. Second, he stated that the reason he now is begging the NRA for support, rather than sticking to his old stance on gun control, is that 9/11 changed everything.

Lyndon Johnson to the rescue

The other day, playing tennis at Roosevelt Island, I was trying to close out a tough set on my serve. Trailing 3-5, I had gone up 6-5 and now needed to hold. But I was getting tentative.

Every now and then I'd peek between points at the doubles match on the next court involving some much older men. When I see these guys (there are lots of them at the club, playing doubles in different groups), I always ask myself whether I am looking at my own future. They obviously know doubles pretty well, and hit all kinds of strange spins and and lobs along with sharp angles. But if this is my future, I hope I don't start foot-faulting all the time on my serve, as it appears that they invariably do.

Anyway, I saw the guy serving on my side of the net, and suddenly said to myself: "Wait a second, what's Lyndon Johnson doing playing tennis at the next court?" (The guy was a dead ringer.)

I immediately relaxed and won three straight points to take my service game at 15.

Comedy special of the day

Dick Cheney has an op-ed in today's WSJ, ostensibly rebutting Greenspan's criticism of the Bush budget record.

The entire column is a laff riot. But for me the comedy highlight was the following:

"Alan has long argued, correctly, that fiscal discipline is a long-term obligation requiring honesty and a willingness to make tough choices. Here again, we agree. And on this measure, President Bush's record is superb."

Cheney then mentions Medicare, to which Bush added an unfunded $20 trillion new entitlement, and Social Security, on which the Bush plan would have had zero net effect on the program's long-term shortfall (although it would have required a future political willingness to follow through on deferred cuts just to break even).

Quote NOT found in this op-ed: "Reagan proved that deficits don't matter. We're entitled to these tax cuts - we won the midterms."

Obama tax plan

I admittedly have a hard time getting interested in politically hypothetical tax reform plans, such as those announced by candidates who appear to be long shots, and who even if elected might have to change course. Then again, it turns out that everyone (certainly including me) should have paid a lot more attention to what Bush was saying about taxes in 1999, since, astonishingly enough, crazy though it was, he actually meant it.

Thus, I suppose I should comment on Barack Obama's tax plan, announced yesterday in a D.C. think tank speech, although i don't think he'll get very far and even if he did he might learn that Democratic Congresses don't follow executive direction (at least from their own party - they're certainly puppy dogs for Bush on national security issues).

Obama's tax advisor is Austan Goolsbee of the University of Chicago, which I would say generally bodes well for his proposals. But he is (obviously) operating in a political environment, and particular one in which he is behind. Not always the best prescription for good policy. Anyway, here goes. According to his website, he proposes the following:

Obama’s middle class tax relief plan would provide $80-85 billion in tax cuts to America’s workers, seniors and homeowners by:

* Cutting taxes for 150 million Americans and their families, allowing them to get a tax cut of up to $1000.
* Easing the burden on the middle class by providing a universal homeowner’s tax credit to those who do not itemize their deductions, immediately benefiting 10 million homeowners, the majority of whom make under $50,000 per year.
* Eliminating the income tax for any American senior making less than $50,000 per year, eliminating income taxes for about 7 million American seniors.
* Simplifying tax filings so millions of Americans can do their taxes in less than 5 minutes.

Obama would pay for his tax reform plan by closing corporate loopholes, cracking down on international tax havens, closing the carried interest loophole, and increasing the dividends and capital gains rate for the top bracket."

A few comments from me:

1) Given the fiscal gap, I'm not a big fan of $80 billion of tax breaks for anyone - those getting them will probably end up giving them back in a few years, through tax increases plus benefit cuts, even if fully financed

2) Apparently a $1,000 tax credit for middle class folks, phased out as income rises. Not great in efficiency terms - no marginal effect on incentives, except for the bad effect of increased marginal tax rates in the phase-out range. Again, I really don't think we're giving people anything on a lifetime basis if they are effectively going to have to pay it back in a few years.

3) I am not a big fan of the home mortgage interest deduction. Admittedly there's no point I can see to limiting it to those who itemize their deductions. A flat percentage credit that cost the same total amount as the current deduction (which rises in value with marginal tax rates) sounds like an improvement - see the recent Batchelder, Goldberg, and Orszag article in the Stanford Law Review on refundable credits. But giving non-itemizers more would require giving itemizers less if it isn't losing revenue, and I doubt this is what Obama has in mind.

4) No income tax for seniors earning $50,000. Just what we needed, a big giveaway to current seniors. Admittedly, we may want to benefit the low-earners among seniors if they don't have enough retirement saving plus benefits. But this is a big tax cut for all seniors unless we raise marginal tax rates on seniors above $50,000 in order to get back to the same place. One possible efficiency benefit, depending on the tradeoff if higher-income seniors face increased marginal rates - seniors have unusually responsive labor supply, so in an optimal tax sense they arguably should face lower marginal rates. But basically I don't like this proposal, and the word pandering occurs to me (as with the $1,000 credit).

5) Simplifying tax filing - I believe this is the Joe Bankman / California "Ready Return" idea. A great idea, and if anything that's understating it. I am hoping Joe publishes his account of the disgracefully sleazy actions of Intuit in California, killing Ready Return there because they thought it would diminish their rents. It's one thing for corporations to seek tax breaks for themselves - that's expected - it's worse for them to try to screw their customers, which is what Intuit was essentially doing.

6) Closing corporate loopholes and cracking down on tax havens - great in principle, but let's see the details. Revenue claims from this could easily be overstated. If worth doing, it should be done to raise revenue on balance given the fiscal gap.

7) Closing the carried interest loophole - I think I've heard of this issue somewhere. While I agree with doing this, one wonders about the revenue claims.

8) Raise capital gains and dividend rates - The former sounds fine on balance so long as it stops sufficiently short of the revenue-maximizing rate (Laffer curves are actually a factor here, unlike on labor income in politically plausible ranges). On dividends, I happen to favor corporate integration, and this is a step away from that, but I'm not convinced corporate integration is worth doing unless the distinction between debt and equity is eliminated. Debt is deductible by the company, includable by the recipien, while equity is neither deductible nor includable in the most commonly proposed integration prototype. This permits sorting of investors so that the tax-exempts hold all the debt and taxables all the equity (with some effort to minimize the second level of tax), possibly leading corporate income to be taxed on average less than once. Anyway, undoing the wrong kind of integration might be defensible even though I'm otherwise not thrilled with the direction.

On balance, not great although I suppose one shouldn't be surprised given the political context.

NYU carried interests event

Today I was merely in the audience (a question I asked aside) as 100 or so (!) NYU law students attended a panel on carried interests. Panel consisted of Vic Fleischer, Jon Talisman again for the defense, Cardozo law prof Mitch Engler, and economist Joel Slemrod, currently visiting at Columbia.

Vic gave the basic rundown of the issues. Talisman laid out his case a bit more fully this time than when I saw him at the panel in Washington a couple of weeks ago. Although he noted he was the only non-academic on the panel, it was actually classic first year law school type stuff, aka familiar legal reasoning by analogy. We all know A gets capital gain treatment, B is a little bit like A, C is not unlike B, D is not that far removed from C, and therefore they all should get capital gain treatment. Well done though not to me persuasive.

Talisman made a point in response to my question that I didn't feel I could answer there without unduly hogging the floor, what with other people waiting to ask questions. But it was the classic reasoning by analogy without (I would argue) adequate grounding. He noted that the proposed legislation gives ordinary income rather than capital gain treatment based on disproportion in the interests. E.g., I put in no cash but get 20% of the return as compensation for my services, and the proposed legislation makes this disproportion the ground for denying CG treatment.

Talisman gave the example: A and B both put cash in a partnership that develops shopping centers. Case 1, they participate equally, doing lots of work, and get a 50% return each, which unambiguously gets CG treatment under current law. Why should this change because A does a bit more work than B and thus gets 60-40. For that matter, why is A here different than if he did his own thing completely, blending a lot of labor income in developing the shopping centers with his own cash, and getting CG treatment for the whole thing. So what's the deal with disproportion being fatal to the CG result?

The answer relates to evidentiary problems in determining tax consequences. If, in the case of the solo developer of a shopping center, or the guy who spends lots of time on his stock trading and therefore gets an extra profit, we could impute the labor income, we probably should and would. But we can't - the evidence is assumed to be missing to do the imputed transaction here. Disproportion simply provides evidence that someone must be getting labor income, since why otherwise would they get a bigger share than is merited by the cash down alone. To say we shouldn't impute labor income when we have evidence of it, because we don't in various cases impute it due to the lack of clear evidence, would be rather silly. Why not then give me CG treatment on my labor income in teaching classes? It's merely a technicality that I didn't get to commingle it with some ordinary return on an asset.

Joel Slemrod made a nice analogy to "notches" in the rate structure, which would take too long to explain fully here, but the gist was that, when tax treatment is unavoidably discontinuous (i.e., one iota more CG-like, and the whole thing switches to getting CG rather than ordinary treatment), you want to find break points where people can't cluster just barely on the better side of the line. Having enough of your own money to invest versus needing other people's money is a convenient break point, in this sense, assuming one can police non-arm's length (or at least not generally available) and typically nonrecourse loans. So the analogy Talisman suggested fails here because it doesn't sufficiently suggest actual substitutability between structures.

Mitch Engler gave an analysis from his paper with Noel Cunningham, to the effect that the whole thing should be analyzed as an implicit loan. $10M fund, I as the general partner put in no cash but get a 20% profits interest, this is like making me an interest-free $2M loan. If the interest rate is 10%, the "real" transaction ostensibly had matching $200K payments of compensation from the LPs to me and an interest payment from me to them. Current year result: I have $200K net taxable income from the inclusion, due to rules limiting interest deductions.

Mitch (and Vic) called this the most accurate way to tax the deal, which I didn't necessarily see. One equally could see it as paying the GP $2M cash that he invests in the partnership - why think of this as "really" involving a loan of the value of the profits interest?

On alternative grounds, however, I saw this as an interesting solution. Say $2M is our best estimate of the value of what is given to the GP, because he has 20% of the profit interests in a $10M fund. (Admittedly, valuation may be more complicated. He may have to meet a hurdle rate, on the other hand suppose we expect an extraordinary return here, relative to the cash invested, due to the labor component.) Allowing the GP to defer the inclusion at a market interest rate, and making the LPs (who may be tax-exempt anyway) defer the $2M deduction at a market interest rate, is pretty much neutral compared to requiring current inclusion and deduction. So I am prepared to see the Engler-Cunningham solution as involving time value-neutral loans of tax liability between taxpayers and the government, even if imputing a loan between the parties does not especially resonate for me.