There's been much discussion recently of the idea of a "war tax" to pay for the costs of ongoing fighting in Afghanistan. Specifically, David Obey and others in the House of Representatives have introduced the Share the Sacrifice Act of 2010, under which income tax rate increases would be used, starting in 2011, to pay for the costs of the Afghanistan surge.
How should one evaluate this? I feel reasonably well qualified to chip in given my interest in both tax policy and budget deficits (as per this and this).
First point of interest concerns budget deficits. I believe we have a very grave long-term problem that, more likely than not, will lead to a catastrophic federal government default or quasi-default. The fact that we are headed this way is unambiguous in the projections, and has much less to do with the current recession (or the stimulus package) than the long-term path of projected outlays, for entitlements (especially healthcare) and otherwise relative to revenues. Key problems include the unsustainable growth of healthcare and the fact that American voters are simply unwilling to come anywhere close to paying for the government services they want.
The reason I expect a cataclysm is pure political economy, however. The Democratic and Republican parties of the 1980s probably would have been able to solve this, but things have changed (particularly on the Republican side). As always, California will get there first, in terms of totally unnecessary failure caused by political paralysis driven by lunatics playing chicken games, but I believe the U.S. will eventually follow. But again, this all depends on the course of national politics - how the parties behave, what legislative rules apply in Congress, and so forth.
From that perspective, any tax increase helps by narrowing the gap a bit, and the fact that it's targeted to Afghanistan war expenses is mere detail.
But the counter-argument, to my view decisive for now, is that this is the wrong time for implementing a move towards budgetary balance. Just as FDR taught us the hard way in 1937 that returning to budgetary balance needed to wait until the economy had fully recovered, so we would learn the same lesson now. Indeed, I agree with Krugman's column today about the need for a jobs bill.
But keep in mind the key word in the above paragraph - now (including 2011) is the wrong time for IMPLEMENTING, not for enacting, tax increases. I believe that tax increases moving us back towards fiscal balance are an inevitable part of what's needed, and that the sooner they are enacted the better. Only, the implementation needs to be a bit more delayed - not to the extent of making it clearly hypothetical and politically unrealistic, but sufficiently to permit recovery, and indeed to encourage moving economic activity up in time so that it will precede the effective date of pre-announced tax increases.
Some of the more interesting issues here, however, go to the specific targeting of the revenues in the proposed legislation. Earmarking of revenues is fundamentally a fiction unless revenues and outlays are indeed kept in lockstep. For example, Social Security earmarking arguably is fictional, to the extent that, if the Social Security Trust Fund were deemed to have run out, Congress would simply add general revenues to keep it going. It's all one big stomach, as the saying goes. But targeting or earmarking can make an important political economy difference.
If politics in Congress were less poisonously dysfunctional, and the war lobby in Washington less dedicated to endless military adventures abroad, the virtue of this proposal (at least, with more delayed implementation) would be its providing a fig leaf for moving tax policy in the needed direction, by suggesting that it's for the patriotic cause of supporting the troops. But that's not really what's going on here, as the proponents would be the first to say.
Rather, they are trying to create more of a sense that wars have costs, so that cost-benefit analysis will apply to decisions to engage in and prolong them.
The response from people such as Senator Even Bayh (who denounced it) is entirely nonsensical. They say: there's no room for cost-benefit analysis when it comes to national security. But this of course is false, especially with a relatively discretionary war like that in Afghanistan is right now. (To call it discretionary is not to oppose continuing it, though in fact I do - even if one supports it, no one in his right mind could compare it to, say, fighting Japan and Germany after Pearl Harbor.)
A better way to make their point is to say that, in cases where going to war is really important - I'd count here not only World War II but also the initial decision to go to Afghanistan and kick out / try to destroy Al Qaeda after 9/11 - it is guaranteed to win out in cost-benefit analysis.
There's an old Jack Benny joke, where he's asked by a robber; "Your money or your life?" Dead silence. "Well?" the robber asks after a long pause. -- "I'm thinking! I'm thinking!" [Note of personal privilege to readers - I'm too young to have heard this - I merely heard ABOUT it.] But the rest of us don't think that way.
So yes, war for vital national self-defense, like anything else, should be subject to cost-benefit analysis, only in that case it easily wins.
In theory, whenever expected future outlays increase, financing should immediately be implemented to pay for it over the infinite horizon, leaving aside the counter-cyclical problem that makes implementing (as opposed to announcing) an offsetting tax increase unwise today. But that, too, isn't really the main issue posed by the proposed legislation. It goes rather to political economy.
The proper question, in evaluating the proposal from this perspective, is the following: Is the political system prone to error in the form of going to war too readily, or not readily enough? In other words, will bringing forceful direct attention to the cost (which always should be considered in principle) do more to reduce errors of commission, in the form of fighting wars when it isn't worth it, or to induce errors of omission, in the form of undervaluing the benefits and thus mistakenly not going to war?
In the 1930s, perhaps one could have reasonably argued, as the German and Japanese threats kept rising and the majority in the U.S. didn't want to do much about it, that dedicated financing (say, for war preparations) would have led to worse decisions. But when you look at the post-World War II era in the U.S., I believe it's overwhelmingly clear that there's immense political bias in favor of war.
The causes are complex and beyond my subject matter expertise. They include (1) the rise of the military-industrial complex of which Eisenhower so presciently warned, (2) the fact that we haven't been soured on war and military adventure to the same extent as the Europeans (whose horrific experiences from 1914 through 1945 finally had an impact), and (3) the fact that it is so emotionally shocking for the U.S. to face genuine threats today after centuries when the oceans largely protected us. Hence the urge to lash out angrily even if that isn't the wisest course. Racial and cultural chauvinism also may play a role. And also, as Lord Acton would understand, the insidious, morally corrupting influence of being a global hyperpower.
A pervasive political bias in favor of going to war, and then prolonging unwise wars because no one wants to be responsible for admitting to misfires, suggests that dedicated financing would tend to improve decisions. This presumably is why people like Evan Bayh so vociferously oppose it. They don't want a fuller and more honest debate, because they realize they would not be guaranteed to win it.
UPDATE: Eric Posner opposes the war tax, and not just for the business cycle reasons I note. But it seems to me that he totally misses the political economy point, and has a half-baked argument to the effect that, if continuing the war in Afghanistan is a good idea, future generations should benefit, so why transfer wealth from us to them via a tax to pay for it. This is a bit blind to (a) the predominant trend of budget policy, which, for good or bad, is to transfer lifetime consumption from them to us, and (b) the need for a much less ad hoc approach. Even if one believed in generational "balance" (if that could be defined), shouldn't we look at the whole picture rather than just item by item?
FURTHER UPDATE: I would actually be prepared to endorse the war tax with the Megan McArdle proviso (one year delay in enactment, tax to remain in place for one year after the war's end).
Monday, November 30, 2009
Sunday, November 22, 2009
Worst opening I've ever seen in a NY Review of Books article
From Diane Johnson, in an 11/5/09 review of the latest Margaret Atwood novel:
"Sarah Palin, the former governor of Alaska, announced on her Facebook page that she didn't want the lives of her elderly parents or her Down syndrome infant to be judged before Barack Obama's 'death panel.' It may be that Palin has been reading the works of Margaret Atwood, the distinguished Canadian writer ..."
Actually, I myself am rather inclined to think not.
"Sarah Palin, the former governor of Alaska, announced on her Facebook page that she didn't want the lives of her elderly parents or her Down syndrome infant to be judged before Barack Obama's 'death panel.' It may be that Palin has been reading the works of Margaret Atwood, the distinguished Canadian writer ..."
Actually, I myself am rather inclined to think not.
Wednesday, November 18, 2009
Sad news
Earlier this week, former House of Representatives Legislative Counsel Ward Hussey died. Ward was the chief person responsible for actual drafting of the Internal Revenue Code from at least the early 1950s through the Tax Reform Act of 1986.
That sounds like a left-handed compliment at best (then again, I'm left-handed and it's a strong part of my identity). But in fact it is a straightforward compliment. Ward was not responsible for the often stupid policies that he was charged with executing. Nor was it his job to make the Code easy for casual readers to scan (an impossible task in any event, given the microscopically variegated rules that Congress continually demanded). Rather, his main job was to get it right so that it worked technically, including when it was being read by sophisticated tax lawyers who wanted to get it wrong, to their clients' advantage, if they were left the room to do so without acting in entire bad faith. Often this involved ensuring that huge Rube Goldberg machines did in fact have all their moving parts working in sync - where the parts might include prior Rube Goldberg machines, implemented in past years' legislation, that needed to continue operating alongside the new ones.
He also had to turn vague ideas into statutory language, where the proponents hadn't properly thought through what they were doing. A classic example from just before my time, which I believe was his work (unless John Buckley, working with him, did it), involved deciding that the building rehabilitation tax credit should be drafted to require, in its definition of rehab as distinct from new construction, that three of the preexisting outer walls remain in place. As a matter of basic policy, perhaps a tax credit based on keeping three of the outer walls intact doesn't make enormous sense. But that wasn't his call. He was presented with a vague statutory concept and had to make it feasible to implement, and he did.
Think of all the different social policies that are pursued through the Internal Revenue Code, or the fantastic complexity of a cops-and-robbers realization-based income tax with taxpayer move followed by government counter-move, then taxpayer counter-counter-move (like Spy vs. Spy in accounting lingo), and one can start to understand how challenging it was for one person to be in charge of House-side drafting of absolutely everything in the tax law. Against that background, and of course with the help of his own staff (e.g., John Buckley) plus the Joint Committee on Taxation and the House and Treasury staffs, he did a fantastic job.
On a more personal note, I well remember working with him on the Tax Reform Act of 1986. I was a Legislation Attorney at the Joint Committee, which I had joined just before work started on the 1986 Act, and was still perhaps a bit green behind the ears (the cliche I've chosen over "young cub.") I was warned before going to my first House drafting session: "You'd better know what you're talking about, and also try to be concise, or Ward will be all over you." It's not so much that he tested the young 'uns, as that they had to prove that they deserved his professional esteem. He knew all too well how sloppy and self-infatuated young staffers can potentially be. After the initial trial period, I felt that I had succeeded and indeed that he liked me, which was a relief.
You'd all be in there sitting around an enormous table. The JCT people, deferring as needed to the House majority staffers, would explain what something was supposed to do. He'd ask questions and listen for a while, then grab a piece of chalk and start working on a big green chalkboard, taking ideas but very much in the lead.
Somehow he reminded me of a benign Burgess Meredith (whose best-known roles to me at the time were as the Penguin in the Batman TV show and the fight manager in Rocky). I wish I could have seen him again, and I'm sorry that he is gone.
That sounds like a left-handed compliment at best (then again, I'm left-handed and it's a strong part of my identity). But in fact it is a straightforward compliment. Ward was not responsible for the often stupid policies that he was charged with executing. Nor was it his job to make the Code easy for casual readers to scan (an impossible task in any event, given the microscopically variegated rules that Congress continually demanded). Rather, his main job was to get it right so that it worked technically, including when it was being read by sophisticated tax lawyers who wanted to get it wrong, to their clients' advantage, if they were left the room to do so without acting in entire bad faith. Often this involved ensuring that huge Rube Goldberg machines did in fact have all their moving parts working in sync - where the parts might include prior Rube Goldberg machines, implemented in past years' legislation, that needed to continue operating alongside the new ones.
He also had to turn vague ideas into statutory language, where the proponents hadn't properly thought through what they were doing. A classic example from just before my time, which I believe was his work (unless John Buckley, working with him, did it), involved deciding that the building rehabilitation tax credit should be drafted to require, in its definition of rehab as distinct from new construction, that three of the preexisting outer walls remain in place. As a matter of basic policy, perhaps a tax credit based on keeping three of the outer walls intact doesn't make enormous sense. But that wasn't his call. He was presented with a vague statutory concept and had to make it feasible to implement, and he did.
Think of all the different social policies that are pursued through the Internal Revenue Code, or the fantastic complexity of a cops-and-robbers realization-based income tax with taxpayer move followed by government counter-move, then taxpayer counter-counter-move (like Spy vs. Spy in accounting lingo), and one can start to understand how challenging it was for one person to be in charge of House-side drafting of absolutely everything in the tax law. Against that background, and of course with the help of his own staff (e.g., John Buckley) plus the Joint Committee on Taxation and the House and Treasury staffs, he did a fantastic job.
On a more personal note, I well remember working with him on the Tax Reform Act of 1986. I was a Legislation Attorney at the Joint Committee, which I had joined just before work started on the 1986 Act, and was still perhaps a bit green behind the ears (the cliche I've chosen over "young cub.") I was warned before going to my first House drafting session: "You'd better know what you're talking about, and also try to be concise, or Ward will be all over you." It's not so much that he tested the young 'uns, as that they had to prove that they deserved his professional esteem. He knew all too well how sloppy and self-infatuated young staffers can potentially be. After the initial trial period, I felt that I had succeeded and indeed that he liked me, which was a relief.
You'd all be in there sitting around an enormous table. The JCT people, deferring as needed to the House majority staffers, would explain what something was supposed to do. He'd ask questions and listen for a while, then grab a piece of chalk and start working on a big green chalkboard, taking ideas but very much in the lead.
Somehow he reminded me of a benign Burgess Meredith (whose best-known roles to me at the time were as the Penguin in the Batman TV show and the fight manager in Rocky). I wish I could have seen him again, and I'm sorry that he is gone.
Monday, November 09, 2009
Quick, get them a law prof or economist before they embarrass themselves further
On the New York City subway today, I saw the following ad:
"Freelancers pay twice the Social Security tax that traditional workers do. And yet, we don't feel any more secure. Weird."
Followed by a plea to go the website of the Freelancers Union, which is "working to make freelance fair."
Somebody give these guys an F, as in "fuddled." The so-called double tax creates neutrality rather than bias as between freelancers and employees, given the employer share of the payroll tax. Indeed, it's even adjusted to take account of excluding the employer share from the payroll tax base.
If it makes the Freelancers Union feel any better, they can tell themselves that, when they pay that double Social Security tax, they are actually wearing their self-employed employer hats for half of it.
Gilbert and Sullivan's Lord Poobah would understand. "Let's go over there where the Lord Chief Justice [or one of his other multiple titles] can't hear us."
"Freelancers pay twice the Social Security tax that traditional workers do. And yet, we don't feel any more secure. Weird."
Followed by a plea to go the website of the Freelancers Union, which is "working to make freelance fair."
Somebody give these guys an F, as in "fuddled." The so-called double tax creates neutrality rather than bias as between freelancers and employees, given the employer share of the payroll tax. Indeed, it's even adjusted to take account of excluding the employer share from the payroll tax base.
If it makes the Freelancers Union feel any better, they can tell themselves that, when they pay that double Social Security tax, they are actually wearing their self-employed employer hats for half of it.
Gilbert and Sullivan's Lord Poobah would understand. "Let's go over there where the Lord Chief Justice [or one of his other multiple titles] can't hear us."
Thursday, November 05, 2009
Foreign tax credits
I'm nearing completion of a short, somewhat preliminary, but I think also provocative and surprising yet correct, article entitled "The Case Against Foreign Tax Credits." Not ready to post it, but the time may come fairly soon.
Waiting for 2012
No, that isn't a presidential election reference. I'd predict that Obama is reelected (running against an actual or simulated loon) after tough midterms in 2010, but that's not what I have in mind here. By now the 2009 elections are so earlier-this-week anyway, whereas last night's baseball travesty remains fresh for another few hours.
The 2012 reference, rather, is to when I am hoping baseball's owners will lock out the players after expiration of the current labor contract.
OK, I am not actually hoping for a lockout, but there is no other realistic scenario for restoring the basic competitive balance that fairness and equity demand - no, strike that, let's say instead that consumer principles of enjoyable viewership require, among people with basic good taste.
The $210 million Yankees will presumably be adding Lackey and Holliday this offseason (unless they prefer Jason Bay). Perhaps a few others as well. How long before they add Cliff Lee? And I wouldn't be surprised if they get Utley in a couple of years. This is what they generally do with people who have hurt them in the postseason. They will also continually get their pick of the big money international free agents, such as from Cuba and Japan.
Maybe they'll even find a way to add LeBron. (Insert smiley face here.)
The other 29 teams get to squabble over whomever the Yankees decide they don't want. This isn't really a formula, at least to my taste or any that I find easy to understand, for interesting competition.
A lockout of, say, one full season plus half of the next would be well worth it, from my standpoint, if it meant that baseball competition subsequently would be more like that in football and basketball. (I'm hoping LeBron will come to the Knicks, but think it's great that (a) this is far from certain, and (b) the Knicks can only get him within the salary cap that applies to all.) If this hurts my team, the Mets - just imagine what baseball's dumbest organization could do with only a median budget - so be it.
The 2012 reference, rather, is to when I am hoping baseball's owners will lock out the players after expiration of the current labor contract.
OK, I am not actually hoping for a lockout, but there is no other realistic scenario for restoring the basic competitive balance that fairness and equity demand - no, strike that, let's say instead that consumer principles of enjoyable viewership require, among people with basic good taste.
The $210 million Yankees will presumably be adding Lackey and Holliday this offseason (unless they prefer Jason Bay). Perhaps a few others as well. How long before they add Cliff Lee? And I wouldn't be surprised if they get Utley in a couple of years. This is what they generally do with people who have hurt them in the postseason. They will also continually get their pick of the big money international free agents, such as from Cuba and Japan.
Maybe they'll even find a way to add LeBron. (Insert smiley face here.)
The other 29 teams get to squabble over whomever the Yankees decide they don't want. This isn't really a formula, at least to my taste or any that I find easy to understand, for interesting competition.
A lockout of, say, one full season plus half of the next would be well worth it, from my standpoint, if it meant that baseball competition subsequently would be more like that in football and basketball. (I'm hoping LeBron will come to the Knicks, but think it's great that (a) this is far from certain, and (b) the Knicks can only get him within the salary cap that applies to all.) If this hurts my team, the Mets - just imagine what baseball's dumbest organization could do with only a median budget - so be it.
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