Yesterday we had our third session of the year, with Ed Kleinbard (Chief of Staff at the Joint Committee on Taxation) concerning the recent JCT pamphlet(s) on tax expenditure analysis.
This is a topic I've written and thought about a lot, such as in Rethinking Tax Expenditures and Fiscal Language, 57 Tax Law Review 187 (2004) (draft version available here), reworked (and shortened) as chapter 8 of my recent book Taxes, Spending, and the U.S. Government's March Toward Bankruptcy. In brief, my main points include the following:
(1) The distinction between taxes and spending is purely formal rather than economically meaningful. Hence, a tax rule can't "really" be spending, as tax expenditure analysis posits.
(2) Since, however, people mistakenly treat it as meaningful, tax expenditure analysis can improve information by addressing labeling games, the canonical illustration of which (for me) is David Bradford's joke about making the government $50 billion smaller by replacing $50 billion of military spending with the $50 billion "weapons supplier tax credit" ("WSTC") thereby causing both taxes and spending, as conventionally measured, to drop by that amount even though absolutely nothing has changed in substance. As we discussed in the session, if you look at recent legislation, the WSTC idea looks prescient rather than like a joke.
(3) In the context of a general, distributionally motivated "tax" system such as the income tax, the way to come up with a coherent framework for improving information despite the underlying fiscal language problem is to identify allocative provisions that have been stuck into this mainly (in its rationale) distributional system. E.g., no one would think that the WSTC is an aspect of adjusting relative burdens based on ability; rather, it serves to affect economic activity, i.e., by permitting the government to acquire the specified weapons.
Following our interdisciplinary philosophy at the colloquium, Alan Auerbach was the lead commentator on this law-based paper (obviously well within his expertise, of course), whereas next week I will be the lead commentator on a very interesting econometrics paper, Amy Finkelstein's EZ-Tax: Tax Salience and Tax Rates. Ed Kleinbard was, as always, a lively, delightful, and illuminating discussant, although given his current eminence at JCT I need to treat his remarks as off the record. It did seem clear, however, that there is a relationship between how the JCT proposed to revise tax expenditure analysis (links below) and my analysis, although for institutional reasons the two must and do look significantly different. This puts me in the position of being an ungrateful whelp, so to speak, if I cavil and carp at exactly how they did it, although this of course was also my duty as a commentator.
Recent JCT publications on the subject, all worth a look, include the following:
A Reconsideration of Tax Expenditure Analysis (the piece we discussed at the colloquium)
Tax Expenditures for Healthcare (using the new structure to illuminate the issues in a much contested area)
Estimates of Federal Tax Expenditures for Fiscal Years 2008-2012 (using the new approach in lieu of the hoary old one).
Friday, January 30, 2009
Thursday, January 29, 2009
So far, so good?
The stimulus bill as it passed the House does, it's true, contain the rule extending carrybacks for NOLs to 5 years. As I discussed here, this is probably a bad idea on balance, although the Tax Policy Center was generous enough to give it a B.
But at least the thoroughly silly proposal to reward private equity firms for buying back their debt at a discount instead of boosting employment did not make it into the House bill.
Nor did the even sillier proposal to enact another dividend repatriation tax holiday, only 5 years after the last one. (These are supposedly one-time-only special deals, although only the exceptionally naive would ever view them as such.)
If ever there was a proven policy failure, it is the 2004 dividend repatriation tax holiday. A leading paper analyzing it concludes: "Repatriations did not lead to an increase in investment, employment, or R & D - even for the firms that lobbied for the tax holiday stating these intentions. Instead, a $1 increase in repatriations was associated with an increase of approximately $1 in payouts to shareholders."
But that arguably is all the more reason to expect its repetition. After all, if insiders don't capture the benefits from it, instead of having these benefits diffused via generally stimulative extra economic activity, why on earth would they lobby for its repetition? So the fact that Holiday 2 did not make it into the House bill arguably is a surprise.
But not to despair, if you are irredeemably cynical and thus perversely welcome news of Congress living down to your lowest expectations. There is always the chance, I suppose, that these provisions will be added later on, such as on the floor of the Senate.
But at least the thoroughly silly proposal to reward private equity firms for buying back their debt at a discount instead of boosting employment did not make it into the House bill.
Nor did the even sillier proposal to enact another dividend repatriation tax holiday, only 5 years after the last one. (These are supposedly one-time-only special deals, although only the exceptionally naive would ever view them as such.)
If ever there was a proven policy failure, it is the 2004 dividend repatriation tax holiday. A leading paper analyzing it concludes: "Repatriations did not lead to an increase in investment, employment, or R & D - even for the firms that lobbied for the tax holiday stating these intentions. Instead, a $1 increase in repatriations was associated with an increase of approximately $1 in payouts to shareholders."
But that arguably is all the more reason to expect its repetition. After all, if insiders don't capture the benefits from it, instead of having these benefits diffused via generally stimulative extra economic activity, why on earth would they lobby for its repetition? So the fact that Holiday 2 did not make it into the House bill arguably is a surprise.
But not to despair, if you are irredeemably cynical and thus perversely welcome news of Congress living down to your lowest expectations. There is always the chance, I suppose, that these provisions will be added later on, such as on the floor of the Senate.
Monday, January 26, 2009
My tax & accounting article comes out
The Georgetown Law Journal has now officially published my article, The Optimal Relationship Between Taxable Income and Financial Accounting Income. Here is the link, and the abstract is as follows:
The persistence of the book-tax gap, or excess of companies’ reported financial accounting income over their taxable income, suggests that accounting manipulation and tax sheltering remain significant problems, even in the aftermath of the “Enron era.” Some have therefore suggested making the United States a “one-book” country, in which the same income measure would be used for both purposes. This Article offers the first systematic exploration of the optimal relationship between the two income measures, based on the distinct purposes they serve and the significance of two distinct sets of incentive problems: those pertaining to corporate managers and those pertaining to the political decisionmakers who make the rules.
Absent these incentive problems, the two ideal measures would differ, reflecting that allocating tax burdens is not the same exercise as informing investors. The incentive problems cut in favor of uniformity, however, by supporting the creation of a “Madisonian” offset between managers’ and politicians’ twin quests for high accounting income and low taxable income. But this offset has more promise as a device to constrain managers than politicians, given the difficulty of binding Congress and the existing partial insulation of accounting rules from direct political influence. In light of the political incentive issues, pure one-book and two-book approaches may both be inferior to partial conformity, such as that which would result from generally requiring a 50% adjustment by large, publicly traded companies of taxable income towards financial accounting income.
The persistence of the book-tax gap, or excess of companies’ reported financial accounting income over their taxable income, suggests that accounting manipulation and tax sheltering remain significant problems, even in the aftermath of the “Enron era.” Some have therefore suggested making the United States a “one-book” country, in which the same income measure would be used for both purposes. This Article offers the first systematic exploration of the optimal relationship between the two income measures, based on the distinct purposes they serve and the significance of two distinct sets of incentive problems: those pertaining to corporate managers and those pertaining to the political decisionmakers who make the rules.
Absent these incentive problems, the two ideal measures would differ, reflecting that allocating tax burdens is not the same exercise as informing investors. The incentive problems cut in favor of uniformity, however, by supporting the creation of a “Madisonian” offset between managers’ and politicians’ twin quests for high accounting income and low taxable income. But this offset has more promise as a device to constrain managers than politicians, given the difficulty of binding Congress and the existing partial insulation of accounting rules from direct political influence. In light of the political incentive issues, pure one-book and two-book approaches may both be inferior to partial conformity, such as that which would result from generally requiring a 50% adjustment by large, publicly traded companies of taxable income towards financial accounting income.
Friday, January 23, 2009
Another tax stimulus proposal
Everett Ehrlich has written a paper on behalf of the U.S. Chamber of Commerce urging another business tax stimulus measure: permitting companies, for the next two years, to avoid paying tax when they repurchase their debts at a discount. Thus, to use his lead example, suppose a company that owes the banks a dollar gets to buy back the debt for only 75 cents. Under present law, the company would have twenty-five cents of cancellation of indebtedness income ("CODI"). The Chamber of Commerce proposal apparently would use a tax credit (though I don't know the exact mechanics - presumably based on the 35 percent corporate rate?) to negate this tax liability.
Ehrlich's paper reads like an intelligent and fair-minded effort, rather than as any sort of a hack advocacy piece. But I am skeptical on the merits. A starting point to keep in mind is that, under present law, insolvent companies avoid paying current tax on CODI. Instead, they have their tax attributes reduced - e.g., net operating losses or excess credits or basis of assets that would reduce their tax liability in future years. So apparently we are not talking about these companies, which avoid current tax anyway - unless the legislation would permit them to avoid having their tax attributes reduced, a benefit that would not give them any current cash but rather permit them to avoid taxes in future years if they continue operations and return to profitability. This doesn't sound like good stimulus, if the legislation would have this effect.
For companies that are not insolvent (or can't show it for federal income tax purposes), I find the whole thing a bit more perplexing. The scenario is that, even though are solvent, they get to repurchase their debts at a discount because of the general uncertainties in the business climate. Admittedly, it would be perverse if, absent the legislation, all that would happen is that companies headed down the drain would need to postpone their debt workouts until they were demonstrably insolvent. But how important is this scenario overall? Are desperate banks trying to settle right and left at a discount even with solvent lenders? Is the problem that the transactions effectively produce net taxable income because, while the CODI would otherwise be taxable, the bank's offsetting bad debt loss is useless in the face of an already big net operating loss?
From the stimulus standpoint, one wonders as well. A firm that uses cash on hand to pay down its debt on favorable terms doesn't use that cash for something else, such as hiring new workers. On the other hand, the bank has more cash on hand once it has sold back the debt. But is the bank more likely to lend it out again to someone who would use it productively than the debtor would have been to make such use itself absent the debt cancellation? I seem to recall all those stage 1 TARP funds simply disappearing, rather than being lent out again.
Even if one does excuse current CODI, I would hope that tax attributes are reduced, as with insolvent debtors under present law. Somehow I doubt that the proposal currently has this feature.
Certainly far from my first choice regarding how to achieve stimulus through business tax breaks - unless, as per my discussion of the NOL proposal in the previous post, it's a question of doing either this or something that's affirmatively worse.
UPDATE: More nefarious than I realized, apparently.
FURTHER UPDATE: Apparently this is all about relief for private equity firms, which are buying up their debt at a discount because they can't think of anything better to do with their cash. Just the guys who need relief & stimulus right now. They don't want taxable income, for which I can hardly blame them (I would welcome legislation exempting my salary, and would even promise to spend some of the tax savings), and they also don't want reduction of tax attributes. A proposal by Senator Baucus that would merely defer the private equity firms' tax liability is estimated to cost $26 billion over 3 years, but Senator Ensign wants to permanently forgive it. And why not. They've had a lot of stress lately.
Ehrlich's paper reads like an intelligent and fair-minded effort, rather than as any sort of a hack advocacy piece. But I am skeptical on the merits. A starting point to keep in mind is that, under present law, insolvent companies avoid paying current tax on CODI. Instead, they have their tax attributes reduced - e.g., net operating losses or excess credits or basis of assets that would reduce their tax liability in future years. So apparently we are not talking about these companies, which avoid current tax anyway - unless the legislation would permit them to avoid having their tax attributes reduced, a benefit that would not give them any current cash but rather permit them to avoid taxes in future years if they continue operations and return to profitability. This doesn't sound like good stimulus, if the legislation would have this effect.
For companies that are not insolvent (or can't show it for federal income tax purposes), I find the whole thing a bit more perplexing. The scenario is that, even though are solvent, they get to repurchase their debts at a discount because of the general uncertainties in the business climate. Admittedly, it would be perverse if, absent the legislation, all that would happen is that companies headed down the drain would need to postpone their debt workouts until they were demonstrably insolvent. But how important is this scenario overall? Are desperate banks trying to settle right and left at a discount even with solvent lenders? Is the problem that the transactions effectively produce net taxable income because, while the CODI would otherwise be taxable, the bank's offsetting bad debt loss is useless in the face of an already big net operating loss?
From the stimulus standpoint, one wonders as well. A firm that uses cash on hand to pay down its debt on favorable terms doesn't use that cash for something else, such as hiring new workers. On the other hand, the bank has more cash on hand once it has sold back the debt. But is the bank more likely to lend it out again to someone who would use it productively than the debtor would have been to make such use itself absent the debt cancellation? I seem to recall all those stage 1 TARP funds simply disappearing, rather than being lent out again.
Even if one does excuse current CODI, I would hope that tax attributes are reduced, as with insolvent debtors under present law. Somehow I doubt that the proposal currently has this feature.
Certainly far from my first choice regarding how to achieve stimulus through business tax breaks - unless, as per my discussion of the NOL proposal in the previous post, it's a question of doing either this or something that's affirmatively worse.
UPDATE: More nefarious than I realized, apparently.
FURTHER UPDATE: Apparently this is all about relief for private equity firms, which are buying up their debt at a discount because they can't think of anything better to do with their cash. Just the guys who need relief & stimulus right now. They don't want taxable income, for which I can hardly blame them (I would welcome legislation exempting my salary, and would even promise to spend some of the tax savings), and they also don't want reduction of tax attributes. A proposal by Senator Baucus that would merely defer the private equity firms' tax liability is estimated to cost $26 billion over 3 years, but Senator Ensign wants to permanently forgive it. And why not. They've had a lot of stress lately.
Tax policy colloquium on Auerbach's "Understanding U.S. Corporate Tax Losses"
Yesterday, with the help of Bill Gentry (Williams College/Columbia Law School) as guest commentator, we discussed co-convener Alan Auerbach's paper (with Rosanne Altshuler & two Treasury economists), "Understanding U.S. Corporate Tax Losses." The paper analyzes a puzzle: why corporations had so many more tax losses during the relatively mild recession of 2001-02 than during the previous and otherwise comparable recession ten years earlier. At the end of the paper, the puzzle is left standing, but corpses of potential explanations that failed are strewn around the landscape. E.g., the greater losses were not caused by changes in the composition of firms, whether by age or size or industrial segment, nor were they caused by particular changes in the tax rules that may have had anomalous one-time effects on reported taxable income, e.g., the dividend tax holiday or temporary bonus depreciation. An obvious potential explanation, that divergence in C corporations' economic outcomes had increased, also bites the dust. Instead, it turns out that the key change was that companies' mean rate of return dropped, leaving more of those on the lower end of the spectrum with a return below zero (i.e., a loss).
The paper leaves us with the question of whether this reduced mean rate of return pertained just to taxable income, or instead to economic income. One way to try to get at this would be to look at financial statement income for the same period. But this would require examining a smaller universe of companies, since the data set for this paper went well beyond the publicly traded sector. Plus, the book-tax gap (ratio of book income to taxable income reported by the same companies) swung wildly all over the place in the early 2000s especially.
If the reduced mean rate of return, leading to lots of losses, pertained only to taxable income, then there is no need as a policy matter to do anything about it, except that one would want to take note of the fact that companies are apparently doing lots of tax sheltering (presumably leading to overkill when economic income is unexpectedly low). If the pattern pertains to economic income, however, the upshot would be that C corporation income appears now to vary more with the stages of the business cycle than it used to. An alternative interpretation, that the economic return to the corporate sector has dropped generally, is contradicted by the steep return to profitability in 2004. (Needless to say, results for 2008 and 2009 are likely to be gruesome.)
Steeper corporate income fluctuations, in turn, would raise the possibility that the asymmetry resulting from loss non-refundability is becoming socially costlier than previously, with the implication that perhaps it needs to be rethought (e.g., longer carrybacks, interest on NOL accounts, or the return of safe harbor leasing so companies can effectively sell their unused deductions). But that in turn may not be a big problem if the business cycle means that lots of companies promptly get the losses back from subsequent profitability, in a period when low interest rates mean that the deferral of recovery doesn't cost much in present value terms.
The sentiment in the room (mine but also others') was quite unsympathetic to the current proposal to extend the carryback period for NOLs from 2 years to 5. As per an earlier post here, for existing losses this is a one-time giveaway without favorable anticipation effects. And while rationalized as stimulus, it's a bizarre form thereof in which only companies that have been losing lots of money get federal handouts in order to increase liquidity. Mightn't it be better, if we're giving handouts to (presumably cash-constrained) businesses to promote new investment, to use a selection technique other than targeting companies that have lost money recently (or at least reported tax losses)? It's like having a prize competition, to stimulate productive activity, in which only proven losers are allowed to apply.
Another point that came out forcefully in the discussion was that NOLs are in some respects a bad way to reduce the asymmetry that otherwise results from nonrefundability. The problem is their being dribbled out over time (with a 20-year carryforward). This turns loss companies into zombies that people want to keep alive, stuffing them full of profit-making activities (if the metaphor isn't too disgusting) so that the income from those new activities won't be taxed. This can lead to significant efficiency costs if the zombies otherwise ought to be put out of their misery. Better, perhaps, to say that NOLs expire in 3 years going forward if they aren't used first, but that permissible use includes selling them to someone else who can use them in the 3-year window. That would limit the zombie problem to three years going forward. Of course, applying it to preexisting losses raises the same sort of transition problem (after-the-fact betterment of incentives) as extending the carryback period to 5 years. Plus, as a move towards effective full refundability, it raises the concern about excessive ability to make use of tax shelter losses. But the basic design seems better than what we have now, assuming it could be adjusted to be comparably generous rather than more so.
The best defense I heard of the 5-year NOL proposal was that other stimulus proposals to give business tax breaks are likely to be even worse (as well as costlier over the long run). The NOL proposal's current budgetary cost would in one respect exceed its long-term cost, given that some of the losses it permits to be used today would otherwise have been used in some future year. Better a moderately bad proposal, the argument went, than something likely to be long-term costlier and no more stimulative.
One of the best things about the session was the vigorous participation from around the room, including from numerous students in the class. I personally felt sluggish at the start (perhaps from having gone to a Knicks game the night before), but the audience promptly livened things up. Students played a big role in the discussion, even though we hadn't reviewed the paper in the morning session (as we were completing a review of basic public econ ideas). This was great to see, and if it continues we will have a great semester.
The paper leaves us with the question of whether this reduced mean rate of return pertained just to taxable income, or instead to economic income. One way to try to get at this would be to look at financial statement income for the same period. But this would require examining a smaller universe of companies, since the data set for this paper went well beyond the publicly traded sector. Plus, the book-tax gap (ratio of book income to taxable income reported by the same companies) swung wildly all over the place in the early 2000s especially.
If the reduced mean rate of return, leading to lots of losses, pertained only to taxable income, then there is no need as a policy matter to do anything about it, except that one would want to take note of the fact that companies are apparently doing lots of tax sheltering (presumably leading to overkill when economic income is unexpectedly low). If the pattern pertains to economic income, however, the upshot would be that C corporation income appears now to vary more with the stages of the business cycle than it used to. An alternative interpretation, that the economic return to the corporate sector has dropped generally, is contradicted by the steep return to profitability in 2004. (Needless to say, results for 2008 and 2009 are likely to be gruesome.)
Steeper corporate income fluctuations, in turn, would raise the possibility that the asymmetry resulting from loss non-refundability is becoming socially costlier than previously, with the implication that perhaps it needs to be rethought (e.g., longer carrybacks, interest on NOL accounts, or the return of safe harbor leasing so companies can effectively sell their unused deductions). But that in turn may not be a big problem if the business cycle means that lots of companies promptly get the losses back from subsequent profitability, in a period when low interest rates mean that the deferral of recovery doesn't cost much in present value terms.
The sentiment in the room (mine but also others') was quite unsympathetic to the current proposal to extend the carryback period for NOLs from 2 years to 5. As per an earlier post here, for existing losses this is a one-time giveaway without favorable anticipation effects. And while rationalized as stimulus, it's a bizarre form thereof in which only companies that have been losing lots of money get federal handouts in order to increase liquidity. Mightn't it be better, if we're giving handouts to (presumably cash-constrained) businesses to promote new investment, to use a selection technique other than targeting companies that have lost money recently (or at least reported tax losses)? It's like having a prize competition, to stimulate productive activity, in which only proven losers are allowed to apply.
Another point that came out forcefully in the discussion was that NOLs are in some respects a bad way to reduce the asymmetry that otherwise results from nonrefundability. The problem is their being dribbled out over time (with a 20-year carryforward). This turns loss companies into zombies that people want to keep alive, stuffing them full of profit-making activities (if the metaphor isn't too disgusting) so that the income from those new activities won't be taxed. This can lead to significant efficiency costs if the zombies otherwise ought to be put out of their misery. Better, perhaps, to say that NOLs expire in 3 years going forward if they aren't used first, but that permissible use includes selling them to someone else who can use them in the 3-year window. That would limit the zombie problem to three years going forward. Of course, applying it to preexisting losses raises the same sort of transition problem (after-the-fact betterment of incentives) as extending the carryback period to 5 years. Plus, as a move towards effective full refundability, it raises the concern about excessive ability to make use of tax shelter losses. But the basic design seems better than what we have now, assuming it could be adjusted to be comparably generous rather than more so.
The best defense I heard of the 5-year NOL proposal was that other stimulus proposals to give business tax breaks are likely to be even worse (as well as costlier over the long run). The NOL proposal's current budgetary cost would in one respect exceed its long-term cost, given that some of the losses it permits to be used today would otherwise have been used in some future year. Better a moderately bad proposal, the argument went, than something likely to be long-term costlier and no more stimulative.
One of the best things about the session was the vigorous participation from around the room, including from numerous students in the class. I personally felt sluggish at the start (perhaps from having gone to a Knicks game the night before), but the audience promptly livened things up. Students played a big role in the discussion, even though we hadn't reviewed the paper in the morning session (as we were completing a review of basic public econ ideas). This was great to see, and if it continues we will have a great semester.
Tuesday, January 20, 2009
Happiest word in the English language
"Ex," when placed with a dash in front of the words "President George W. Bush."
I smiled when I saw this word today.
I smiled when I saw this word today.
Saturday, January 17, 2009
Matt Taibbi nails Thomas Friedman to the floor once again
To me, Friedman is so drearily unreadable that, despite subscribing to the Times plus frequently reading it on-line, I need bloggers to tell me what he actually says. Thank goodness for Matt Taibbi (print journalist but available on-line), whose review of Friedman's latest admittedly falls just a smidgen short of his all-time classic review of The World is Flat, which I linked when it came out and am happy to link once again.
Friday, January 16, 2009
First NYU Tax Policy Colloquium session
Yesterday was day 1 of the spring (can I call it that when it's 10 degrees outside?) 2009 NYU Tax Policy Colloquium. In the public afternoon session (we also meet with students in the AM), we covered my forthcoming paper, The Long-Term Fiscal Gap: Is the Main Problem Generational Inequity?
I hope it's not terrible of me to say: I really do like this paper. I've written about these issues a number of times, but am not just repeating myself - I think my understanding of them, and also my capacity to explain them crisply, has benefited from the multiple rounds. And I see the issues somewhat differently than I used to. Apart from being more pessimistic about the politics and more agnostic about the generational equity issues than I was earlier on, I think I have a fuller handle now on what the normative issues really are, how various measures might relate to them, etcetera. (Analytics are ultimately more interesting to me than the bottom line.)
Discussion at the afternoon session (from Alan Auerbach and Mihir Desai plus various members of the audience) focused on international issues that I perhaps ought to have covered more, as well as on questions of what an abrupt course change would look like, when it might happen, why it hasn't happened yet, and how much worse the current financial crisis has made it. Alan estimates that the financial crisis has worsened the existing fiscal projections by as much as 25 percent, which is more of an impact than one might have expected. Mihir considers it possible that the abrupt course change could end up having characteristics of an efficient one-time capital levy.
One important point we all agreed on, but which lots of the liberal bloggers (including Paul Krugman) appear to have a lot of trouble with, is that there is no contradiction between believing that a lot of stimulus is currently needed and that we have grave long-term fiscal problems that ought to be addressed ASAP (other than being subject to business cycle concerns). By analogy, even had the U.S. fiscal situation been really awful in December 1941, it would nonetheless have been right to conclude that we should fight an enormously costly two-front world war and seek to finance it only over the long term. The value of the war spending would have exceeded the cost even in much graver fiscal circumstances. And the same holds today for well-conceived stimulus measures that have a sufficient chance of generating the hoped-for benefits. But to say that we can and should spend, say, $800 billion or $1.4 trillion if the payoff is high enough, and thus run staggering budget deficits over the next couple of years, in no way negates the long-term problem and the need to start heading away from the cliff (rather than towards it) as soon and as smoothly as we can.
While the afternoon session had lots of familiar people and the feeling of a reunion, there's always the element of getting to know the new class. They appear to be both good students and motivated, but the chemistry of a new class can take a couple of weeks. I'm hopeful that the usual good vibe (for want of a better word) will gel (to mix the metaphors as badly as possible) in reasonably short order.
I hope it's not terrible of me to say: I really do like this paper. I've written about these issues a number of times, but am not just repeating myself - I think my understanding of them, and also my capacity to explain them crisply, has benefited from the multiple rounds. And I see the issues somewhat differently than I used to. Apart from being more pessimistic about the politics and more agnostic about the generational equity issues than I was earlier on, I think I have a fuller handle now on what the normative issues really are, how various measures might relate to them, etcetera. (Analytics are ultimately more interesting to me than the bottom line.)
Discussion at the afternoon session (from Alan Auerbach and Mihir Desai plus various members of the audience) focused on international issues that I perhaps ought to have covered more, as well as on questions of what an abrupt course change would look like, when it might happen, why it hasn't happened yet, and how much worse the current financial crisis has made it. Alan estimates that the financial crisis has worsened the existing fiscal projections by as much as 25 percent, which is more of an impact than one might have expected. Mihir considers it possible that the abrupt course change could end up having characteristics of an efficient one-time capital levy.
One important point we all agreed on, but which lots of the liberal bloggers (including Paul Krugman) appear to have a lot of trouble with, is that there is no contradiction between believing that a lot of stimulus is currently needed and that we have grave long-term fiscal problems that ought to be addressed ASAP (other than being subject to business cycle concerns). By analogy, even had the U.S. fiscal situation been really awful in December 1941, it would nonetheless have been right to conclude that we should fight an enormously costly two-front world war and seek to finance it only over the long term. The value of the war spending would have exceeded the cost even in much graver fiscal circumstances. And the same holds today for well-conceived stimulus measures that have a sufficient chance of generating the hoped-for benefits. But to say that we can and should spend, say, $800 billion or $1.4 trillion if the payoff is high enough, and thus run staggering budget deficits over the next couple of years, in no way negates the long-term problem and the need to start heading away from the cliff (rather than towards it) as soon and as smoothly as we can.
While the afternoon session had lots of familiar people and the feeling of a reunion, there's always the element of getting to know the new class. They appear to be both good students and motivated, but the chemistry of a new class can take a couple of weeks. I'm hopeful that the usual good vibe (for want of a better word) will gel (to mix the metaphors as badly as possible) in reasonably short order.
Tuesday, January 13, 2009
Get well soon
Ursula, the lovely little creature shown here in two views, stopped eating and drinking late last week, evidently feeling very sick, and she got severely dehydrated. We had to bring her to the veterinary hospital, where she has been getting IV fluids for the last few days. Still too early to tell if she has acute kidney disease or merely a treatable infection. We already have to give our elder statesman, Shadow, regular fluid shots under the skin (which he mainly tolerates, being extremely placid and good-tempered), but a second recipient may soon be in the offing. Before you know it we'll be operating our own veterinary clinic.
Ursula is very young for kidney disease (age 7). We adopted her from an animal shelter, thinking she was a standard brown tabby plus something-or-other mutt, but uncanny likenesses from a cat book have since persuaded us that she is probably what's called a wild Abyssinian (a breed that was created by crossing Abys with Singapore street cats). The only breed cat we've ever owned, a Somali (Aby offshoot with a mutant gene for bushy tails) died before age 2 of kidney disease. I don't know if this should put us off Abys, breeds generally, or neither.
Ursula is a moderately shy but exceptionally affectionate cat whose good opinion has to be earned (unlike Shadow, who likes everyone from the moment he meets them). Having her sick is a tough way to start the new year.
UPDATE: Ursula is back home, but the long-term prognosis remains unclear.
Monday, January 12, 2009
Out with the old, in with the new
My Tax I students from last semester will probably be glad to hear that I have submitted my grades. I am even gladder to reflect on the closely associated fact that I have finished grading their exams.
Grading exams is by far the worst part of a law prof's work - nothing else is even close. The tedium of reading 80-plus answers to the same question, one after the other, and having to keep one's critical faculties engaged enough to scribble down a reasonably fair number at the end, verges on indescribable.
This week, my classes for the spring semester begin. I'm co-teaching Tax Deals with Mihir Desai, and the Tax Policy Colloquium with Alan Auerbach. The former should be a really interesting experience, involving the Scholes-Wolfson framework and lots of actual deals brought in by leading NYC tax practitioners, although it's all coming together a bit at the last minute. The latter I am very hopeful will be good as always (from my biased perspective at least), and our paper schedule for it is as follows:
1. January 15 – Daniel Shaviro, NYU Law School. “The Long-Term Fiscal Gap: Is the Main Problem Generational Inequity?”
2. January 22 – Alan Auerbach, Berkeley Economics Department and NYU Law School. “Understanding U.S. Corporate Tax Losses.”
3. January 29 – Edward Kleinbard, Joint Committee on Taxation. “A Reconsideration of Tax Expenditure Analysis.”
4. February 5 – Amy Finkelstein, MIT Economics Department, “EZ-Tax: Tax Salience and Tax Rates.”
5. February 12 – Dorothy Brown, Emory Law School, “Shades of the American Dream.”
6. February 19 – Yoram Margalioth, Tel Aviv University Law School and NYU Law School, “Taking a Closer Look at Capital Export Neutrality.”
7. February 26 – Leslie McCall, Northwestern University Sociology Department, “American Policy Preferences in the Era of Rising Inequality.”
8. March 5 – Michael Doran, University of Virginia Law School, “Managers, Shareholders, and the Double Corporate Tax.”
9. March 12 – David Duff, University of Toronto Law School, “Tax Fairness and the Tax Mix.”
10. March 26 – Emmanuel Saez, Berkeley Economics Department. “Details Matter: The Impact of Presentation and Information on the Take-Up of Financial Incentives for Retirement Saving.”
11. April 2 – Lily Batchelder, NYU Law School.
12. April 9 – Mihir Desai, Harvard Business School and NYU Law School.
13. April 16 – Mitchell Kane, NYU Law School.
14. April 23 – Thomas Brennan, Northwestern Law School, “Certainty and Uncertainty in the Taxation of Risky Returns.”
All colloquium sessions will meet from 4-6 pm on Thursdays in Furman Hall 120 at NYU Law School. People outside NYU are welcome, although to get past the security guards they should let me know in advance by e-mail. Interested individuals can also contact me to get on our e-mail distribution list for weekly papers.
Grading exams is by far the worst part of a law prof's work - nothing else is even close. The tedium of reading 80-plus answers to the same question, one after the other, and having to keep one's critical faculties engaged enough to scribble down a reasonably fair number at the end, verges on indescribable.
This week, my classes for the spring semester begin. I'm co-teaching Tax Deals with Mihir Desai, and the Tax Policy Colloquium with Alan Auerbach. The former should be a really interesting experience, involving the Scholes-Wolfson framework and lots of actual deals brought in by leading NYC tax practitioners, although it's all coming together a bit at the last minute. The latter I am very hopeful will be good as always (from my biased perspective at least), and our paper schedule for it is as follows:
1. January 15 – Daniel Shaviro, NYU Law School. “The Long-Term Fiscal Gap: Is the Main Problem Generational Inequity?”
2. January 22 – Alan Auerbach, Berkeley Economics Department and NYU Law School. “Understanding U.S. Corporate Tax Losses.”
3. January 29 – Edward Kleinbard, Joint Committee on Taxation. “A Reconsideration of Tax Expenditure Analysis.”
4. February 5 – Amy Finkelstein, MIT Economics Department, “EZ-Tax: Tax Salience and Tax Rates.”
5. February 12 – Dorothy Brown, Emory Law School, “Shades of the American Dream.”
6. February 19 – Yoram Margalioth, Tel Aviv University Law School and NYU Law School, “Taking a Closer Look at Capital Export Neutrality.”
7. February 26 – Leslie McCall, Northwestern University Sociology Department, “American Policy Preferences in the Era of Rising Inequality.”
8. March 5 – Michael Doran, University of Virginia Law School, “Managers, Shareholders, and the Double Corporate Tax.”
9. March 12 – David Duff, University of Toronto Law School, “Tax Fairness and the Tax Mix.”
10. March 26 – Emmanuel Saez, Berkeley Economics Department. “Details Matter: The Impact of Presentation and Information on the Take-Up of Financial Incentives for Retirement Saving.”
11. April 2 – Lily Batchelder, NYU Law School.
12. April 9 – Mihir Desai, Harvard Business School and NYU Law School.
13. April 16 – Mitchell Kane, NYU Law School.
14. April 23 – Thomas Brennan, Northwestern Law School, “Certainty and Uncertainty in the Taxation of Risky Returns.”
All colloquium sessions will meet from 4-6 pm on Thursdays in Furman Hall 120 at NYU Law School. People outside NYU are welcome, although to get past the security guards they should let me know in advance by e-mail. Interested individuals can also contact me to get on our e-mail distribution list for weekly papers.
Bush economic policy post-mortems
From today's Washington Post, here are Bush's very best economic reviews, coming as they do from people on the conservative / Republican side.
From former McCain economic adviser: Doug Holtz-Eakin:
"The expansion was a continuation of the way the U.S. has grown for too long, which was a consumer-led expansion that was heavily concentrated in housing ... There was very little of the kind of saving and export-led growth that would be more sustainable ... For a group that claims it wants to be judged by history, there is no evidence on the economic policy front that that was the view," Holtz-Eakin said. "It was all Band-Aids."
From Mark Zandi, also an informal McCain adviser:
"It's sad to say, but we really went nowhere for almost ten years, after you extract the boost provided by the housing and mortgage boom. It's almost a lost economic decade."
From AEI's Kevin Hassett, who also advised the McCain campaign:
"On tax reform, I think they themselves were not very interested in it .... [T]he economy was caught up in a storm while he was president, but it wasn't his fault .... In the end, to the extent there ends up being a defense of the Bush presidency [on economic issues], that's about the best you can get."
Again, these are the relatively good reviews. The bad ones probably wouldn't be allowed in a family newspaper.
UPDATE: I should have noted that Ed Lazear, who is still working for Bush, was quoted in the Washington Post article as saying that the Administration's economic record was great except for the last quarter.
Uh, Ed - that reminds me of the guy who said about the plane that crashed after its engine failed 8,000 feet up in the air - "They were doing just great until the last second, when they hit the ground and blew up."
I once tangled with Lazear at a National Tax Association meeting, where he argued, I thought unpersuasively, that the Bush Administration's tax policy was both (a) highly progressive and (b) highly fiscally responsible. We'll let the historians sort that one out, but I don't think it will take them very long.
From former McCain economic adviser: Doug Holtz-Eakin:
"The expansion was a continuation of the way the U.S. has grown for too long, which was a consumer-led expansion that was heavily concentrated in housing ... There was very little of the kind of saving and export-led growth that would be more sustainable ... For a group that claims it wants to be judged by history, there is no evidence on the economic policy front that that was the view," Holtz-Eakin said. "It was all Band-Aids."
From Mark Zandi, also an informal McCain adviser:
"It's sad to say, but we really went nowhere for almost ten years, after you extract the boost provided by the housing and mortgage boom. It's almost a lost economic decade."
From AEI's Kevin Hassett, who also advised the McCain campaign:
"On tax reform, I think they themselves were not very interested in it .... [T]he economy was caught up in a storm while he was president, but it wasn't his fault .... In the end, to the extent there ends up being a defense of the Bush presidency [on economic issues], that's about the best you can get."
Again, these are the relatively good reviews. The bad ones probably wouldn't be allowed in a family newspaper.
UPDATE: I should have noted that Ed Lazear, who is still working for Bush, was quoted in the Washington Post article as saying that the Administration's economic record was great except for the last quarter.
Uh, Ed - that reminds me of the guy who said about the plane that crashed after its engine failed 8,000 feet up in the air - "They were doing just great until the last second, when they hit the ground and blew up."
I once tangled with Lazear at a National Tax Association meeting, where he argued, I thought unpersuasively, that the Bush Administration's tax policy was both (a) highly progressive and (b) highly fiscally responsible. We'll let the historians sort that one out, but I don't think it will take them very long.
Friday, January 09, 2009
Health club morons
Here's the sort of thing that ruffles my otherwise sunny disposition.
My health club is always crowded in early January - the marginal attendees either are working off their holiday weight or else haven't abandoned their New Year's resolutions yet. There is a particular type of elliptical machine I favor, and 4 of the 5 were in use when I got there this morning. I was about to start using the fifth, when a woman who was standing about 8 feet away from it, talking earnestly on her cellphone (BTW, the sign in the room says "No cellphones"), came up to me and said: "I'm still on that machine."
Clearly this was not literally so. But I walked away rather than start a dispute. She lingered close to the machine for a moment, then retreated to her post 8 feet away and resumed her animated conversation. Seething a bit, I went upstairs to do something else, and when I came back down five minutes later she was gone.
My health club is always crowded in early January - the marginal attendees either are working off their holiday weight or else haven't abandoned their New Year's resolutions yet. There is a particular type of elliptical machine I favor, and 4 of the 5 were in use when I got there this morning. I was about to start using the fifth, when a woman who was standing about 8 feet away from it, talking earnestly on her cellphone (BTW, the sign in the room says "No cellphones"), came up to me and said: "I'm still on that machine."
Clearly this was not literally so. But I walked away rather than start a dispute. She lingered close to the machine for a moment, then retreated to her post 8 feet away and resumed her animated conversation. Seething a bit, I went upstairs to do something else, and when I came back down five minutes later she was gone.
Wednesday, January 07, 2009
Obama's proposal to extend the carryback for NOLs
I have mixed feelings about this part of Obama's proposed stimulus package. On the one hand, if not for pervasive income mismeasurement by the tax system it would be madness not to treat losses as fully refundable. Otherwise, one discourages risk-bearing (since the government in effect says "heads we win, tails you lose") and offers inefficient incentives for corporate conglomerates (so one activity's losses can be deducted against another's gains). But with pervasive income mismeasurement and tax sheltering opportunities, it's more problematic. Imagine what Enron would have done had losses been refundable.
So extending NOL carrybacks is a move towards refundability, with mixed merits, but it happens after the fact for losses that have already occurred. This takes care of the tax planning problem for losses to date, but also eliminates the significance of making planning decisions more neutral ex ante (at least for those past decisions).
Perhaps another factor to consider here is that, as discussed in Alan Auerbach's recent paper (with Rosanne Altshuler) that we will be discussing at the NYU Tax Policy Colloquium on Thursday, Jan. 22, losses at the corporate level have become more common, predating the recession and apparently reflecting an economic shift towards greater divergence in business outcomes. That presumably strengthens the case for refundability by showing that it's more of a problem.
From the standpoint of Keynesian stimulus, the issues are somewhat different. Unclear to me that handing $$ to companies that happen to have experienced big losses recently is necessarily the best way to encourage further economic activity. If they have been losing money lately, are they the ones who would invest and hire more if someone handed them money? Is being cash constrained their big problem? Are they the ones to whom handing dollars would be most stimulative? (As opposed to consumers, or else the businesses - if any exist these grim days - that actually would run out and hire & invest if only they had the cash in hand.)
I'm reminded of TARP's fiasco in handing money to banks that did not respond by lending it out again because they didn't want to lend, didn't consider it a good move in the current economic environment, as opposed to being cash-constrained or simply paralyzed by the state of their balance sheets.
So this idea is not necessarily bad policy, but it might not be especially good stimulus.
So extending NOL carrybacks is a move towards refundability, with mixed merits, but it happens after the fact for losses that have already occurred. This takes care of the tax planning problem for losses to date, but also eliminates the significance of making planning decisions more neutral ex ante (at least for those past decisions).
Perhaps another factor to consider here is that, as discussed in Alan Auerbach's recent paper (with Rosanne Altshuler) that we will be discussing at the NYU Tax Policy Colloquium on Thursday, Jan. 22, losses at the corporate level have become more common, predating the recession and apparently reflecting an economic shift towards greater divergence in business outcomes. That presumably strengthens the case for refundability by showing that it's more of a problem.
From the standpoint of Keynesian stimulus, the issues are somewhat different. Unclear to me that handing $$ to companies that happen to have experienced big losses recently is necessarily the best way to encourage further economic activity. If they have been losing money lately, are they the ones who would invest and hire more if someone handed them money? Is being cash constrained their big problem? Are they the ones to whom handing dollars would be most stimulative? (As opposed to consumers, or else the businesses - if any exist these grim days - that actually would run out and hire & invest if only they had the cash in hand.)
I'm reminded of TARP's fiasco in handing money to banks that did not respond by lending it out again because they didn't want to lend, didn't consider it a good move in the current economic environment, as opposed to being cash-constrained or simply paralyzed by the state of their balance sheets.
So this idea is not necessarily bad policy, but it might not be especially good stimulus.
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