A cure for Boxing Day blues?

Day after Christmas got you down, especially as we Americans don’t get to call it Boxing Day?

Or, not enough new books in your gift bag that you actually want to read?

Or, too much winter lying ahead (this definitely has me down at the moment), or struggling with a surfeit of seasonal family gatherings?

If so, have I got a commercial solicitation for you. Amazon reader comments on Getting It include the following:

"I enjoyed the book very much. In fact, once I started it, I simply could not put it down until I had finished it, and my wife wanted to know what I was laughing about every couple of minutes."

"[H]e precisely captures some of the 'moments' of firm life in a way that left me laughing out loud."

"I believe that if any book actually makes me laugh out loud at any point, it's worth bringing to others' attention .... I think anyone who has had any experience working in the law or dealing with lawyers would enjoy this very quick read, which the author obviously had a lot of fun writing."

The Caped Crusader

Buddy, the crazy one among our cats, decided not to let the fact that he had stuck his head into a shopping bag (with one of the handles around his neck) discourage him from pursuing his interests. On the far left he's chasing a crunchy treat (which he tries to pretend is alive), while in the other two photos he is petitioning for food.

Title of this post courtesy of my wife, who also saw to getting the photos taken.

Slides for my talk on a corporate tax panel next month

Next month in Boca Raton at the ABA Tax Section's Annual Meeting, I'll be talking for 10 minutes on a corporate tax reform panel (along with Rosanne Altshuler, Reuven Avi-Yonah, and Ed Kleinbard).

We only have 10-minute slots so as to leave time for cross-talk and audience participation. I'll be going first, and will pretty much just do set-up - what are the issues here, so others can comment on particular reform proposals.

Here are my slides for the talk - nothing particularly earth-shattering, but perhaps offering a convenient overview of corporate tax reform issues.

The slides for my other panel appearance in Boca, concerning the long-term fiscal gap and tax policy, have a bit more original content and I'm hoping there will be a link for them soon.

Updated NYU Tax Policy Colloquium Schedule

Since last posting the schedule for the Tax Policy Colloquium that Mihir Desai and I will be offering at NYU Law School from January through April 2011, I have learned most of the paper titles. I'm therefore reposting it, with all of the titles that I currently know.

SCHEDULE FOR 2011 NYU TAX POLICY COLLOQUIUM
(All sessions meet on Thursdays from 4-5:50 pm in Vanderbilt 208, NYU Law School)

1. January 20 – Joseph Bankman, Stanford Law School. Reforming the Tax Preference for Medical Expenditures.
2. January 27 – Yair Listokin, Yale Law School. Taxation and Liquidity.
3. February 3 – David Miller, Cadwalader, Wickersham & Taft LLP. Unintended Consequences: How U.S. Tax Law Encourages Investment in Offshore Tax Havens.
4. February 10 – Michael Keen, International Monetary Fund. Bank Taxation and Regulation.
5. February 17 – Kenneth Scheve, Yale University Political Science Dep’t. Envy and Altruism in Hard Times (with Xiaobo Lu).
6. February 24 – Allison Christians, Wisconsin Law School. Hard Law, Soft Law, and No Law: The World of International Tax Dispute Resolution.
7. March 3 – Adam Rosenzweig, Washington University Law School. Thinking Outside the (Tax) Treaty.
8. March 10 – Eric Zolt, UCLA Law School. Charitable Deductions for Foreign Assistance.
9. March 24 – Kirk Stark, UCLA Law School. Bribing the States to Tax Food.
10. March 31 – Len Burman, Maxwell School of Syracuse University.
11. April 7 – Jennifer Blouin, Wharton School, University of Pennsylvania. [Paper TBD on multinationals.]
12. April 14 – Joshua Blank, NYU Law School. Not Seeing Is Believing: A Behavioral Theory of Tax Privacy.
13. April 21 – Leandra Lederman, Indiana University Law School.
14. April 28 – Cheryl Block, Washington University Law School. The Intersection of Federal Income Tax Policy and Bailouts.

Overheard in the NYC subway today

As I was ascending towards the street from two levels down, I overheard the following:

Little child: "Are we underground?"

Parent: "Yes."

Little child: "But there are stairs! Underground doesn't have stairs!"

Not sure I understood this comment either.

Scratch one more "reunion tour" off the list

There aren't that many musical acts that I'd go to see if there weren't seats, though Pavement last summer was one. Ray Davies the other week didn't present this challenge as his (canceled) show was at the Beacon Theater, but if he toured with the Kinks (or even just his brother plus a younger bassist and drummer) I'd consider it.

The list of performers whom I would have stood for three hours to see dropped by one yesterday with the death of Don Van Vliet, a.k.a. Captain Beefheart, though since he'd retired from music more than 20 years ago the chances were remote, even without regard to his health.

Growing up back in the day, if the Beatles were your yin you needed a yang (even though they had their own internal yin and yang). The Rolling Stones, for all their undoubted merit at the time, were judged in my household as simply not original or interesting enough to play this full role (and for much of the late 60s they were pretty much the Beatles' lapdogs anyway - consider Satanic Majesties or the All You Need Is Love broadcast). The Velvet Underground we didn't know about yet. So Captain Beefheart became, I suppose, our yang.

Listening again to my two favorite albums of his (leaving aside "Decals," which I have to try again), Safe as Milk is a startlingly good though still fairly conventional blues album, and I'd say the best blues album recorded in the 1960s by a white rock artist.

Then there's Trout Mask Replica, his most famous (as well as infamous) album, which I gather he may have considered too jokey, reflecting Zappa's influence as the producer. But definitely, for me, belonging on a short best-of list for the decade. Many moments of great beauty alongside the dissonance, weird humor, and the frequently remarkable spoken-word passages.

Earth to Doug Holtz-Eakin

I had thought I was done with the occasional Doug Holtz-Eakin-bashing after the 2008 campaign. I only did it because I expected better from him. So in a way it was a compliment. And indeed much of the time during the campaign he said inconvenient but true things, rather than the crazy hack things that drew my ire, and that a campaign normally assigns to run-of-the-mill politicos, rather than to serious credentialed economists. It was more than disappointing, as well as gratuitously harmful to his reputation and that of the economics profession generally that he engaged in sporadic hackery; it was downright weird. But a campaign can put one under strange pressures, which is one reason why I would never join one.

Today, however, after a cooling off period of several days I find it just too hard not to respond to the news of Doug's joining the organized Republican dissent from the Financial Crisis Inquiry Commission. They appear to argue that there was nothing wrong in the way financial institutions were operating - it was all Fannie, Freddie, and the Community Reinvestment Act of 1977 (that evidently slow-acting time bomb that also somehow exploded across Europe).

They also apparently demanded that the main report not use the terms Wall Street, deregulation, interconnectedness, and shadow banking, and followed this strange counsel in their own document. This is essentially the photo negative version of writing about the Chicago Bulls' championship teams without mentioning Michael Jordan or Scottie Pippen. (Come to think of it, that may be how the Jerry Krause version would look.)

Rather than continue my own rant, why don't I simply link here to the wise words of Barry Ritholtz.

A distressingly crass explanation of why Doug is doing this is probably, on balance, the most complimentary one available.

Album of the year?

While I haven't really bought enough new albums to pick a best of the year authoritatively, based on what I know I suppose I'll join the bandwagon and say Janelle Monae's The ArchAndroid.

Thought experiment

Suppose Romney had won the Republican nomination, and then won the general election by tacking a bit to the center and pledging to go national with his Massachusetts healthcare plan, which he then succeeded in enacting with equal support from Republicans and Democrats (while the rightmost Republicans and leftmost Democrats both voted against it).

Under these circumstances, I seriously doubt that a mandatory insurance rule, substantively identical to that in the healthcare plan that was actually enacted, would face any serious risk of being constitutionally overturned.

UPDATE: See Jack Balkin's take on the actual merits of yesterday's judicial opinion striking down the mandate.

Efficient markets problem

Budget expert Stan Collender's seven main predictions for 2012 fiscal politics are as follows:

"1. Gridlock supreme all year long on anything having to do with spending, revenues, deficit, and debt
"2. No legislated reductions in the deficit
"3. Bowles-Simpson quickly fades into oblivion
"4. No fiscal 2012 budget resolution
"5. Earmarks will thrive
"6. Government contractors will have far more influence than anyone has ever imagined
"7. Wall Street is going to be surprised by #s 1-6."

Stan, I'm sorry to have to tell you this, but while your prediction #7 works in practice (i.e., I agree that it's highly likely to be true), it doesn't make sense in theory.

The most novel point for me, since I had similar expectations anyway, is point # 6, which he explains more fully as follows:

"Government contractors will be the 2011 version of bond market vigilantes. With their payments and profits on the line, companies that do business with federal departments and agencies will be the most vocal opponents of take-no-prisoner tactics like government shutdowns and rapid, large cuts in federal spending. They’ll also have support from their institutional and other investors who won’t want profits, cash flow, dividends and stock prices to suffer. While a shutdown will be threatened and is likely, it will be difficult to keep one going for more than a few days once the contractor community starts protesting."

Coming soon, but probably not to a town near you

I'll be speaking at a couple of conferences next month. Details are as follows:

On Friday, January 14, Loyola Law School in Los Angeles is hosting a conference on tax expenditures, co-sponsored by the Urban-Brookings Tax Policy Center. On Panel 2, meeting from 10 to 11:30 am, Linda Sugin will present her paper, "What's the New Normal in Tax Expenditure Analysis?," while Eric Toder and Donal Marron will present "Tax Expenditures and the Size of Government." Sarah Lawsky will moderate this panel, and I am the commentator.

Then on Friday-Saturday January 21-22, I'll be appearing in Boca Raton, FL, on two panels at the ABA Tax Section's Annual Meeting. First, on Friday from 1:30 to 3 pm, I'll speak on a panel entitled "Tax Policy Responses to the Current Economic Climate and the Long-Term Fiscal Crisis." Tracy Kaye is the chair, Rebecca Kysar is the moderator, and my fellow panelists are Joseph Rosenberg (of the Urban Institute) and Ed Kleinbard.

Second, on Saturday (1/22) from 8:30 to 9:30 am, I'll be on a panel discussing Options for Corporate Tax Reform. Reuven Avi-Yonah is the chair, and my fellow panelists are Rosanne Altshuler and Ed Kleinbard.

Further details, including my PPT slides if any, in due course.

Getting It versus Miller Lite Beer

I learned the other day that NYU Law School's Career Services department, in order to keep students interested (for their own good) in reading a weekly newsletter, sometimes offers drawings for free prizes. They recently offered free copies of Getting It, and within a few hours 15 students had signed up.

Given that interested parties can easily obtain Getting It for a reasonably modest price at any time, I was reminded of those beer commercials in which twenty-something guys will go to insane lengths to get their favorite brew (preferring it to their girlfriends or wives, etc.) even though every block in town has a store selling 6-packs of it for modest prices. These dark Brechtian fables always draw me into idle philosophical rumination concerning why these guys confuse the two distinct concepts of reservation price/subjective value and market price/scarcity cost from having to forego competing budget allocations, or perhaps just why they would inspire what I assume is expected to be bemused self-recognition among the viewers.

Then again, a less charitable (to me) alternative interpretation would be that the responding students value Getting It more than the time cost of sending an e-mail but less than the market price.

On the whole, I think I'll stick with the Brechtian angle on this.

Derivatives pirates

Two good analogies for the folks at big banks discussed in this NYT story. The first is OPEC or any other cartel, and the second is pirates with guns extracting rents at a river crossing.

NYU Tax Policy Colloquium, spring 2011 schedule

I know I've already posted this, but as it's closer to the time I thought I'd re-post our speaker schedule for the NYU Tax Policy Colloquium in spring 2011.

All sessions meet on Thursdays from 4-5:50 pm in Vanderbilt 208, NYU Law School, and I'll be co-leading it with Mihir Desai.

1. January 20 – Joseph Bankman, Stanford Law School
2. January 27 – Yair Listoken, Yale Law School
3. February 3 – David Miller, Cadwalader, Wickersham & Taft LLP
4. February 10 – Michael Keen, International Monetary Fund
5. February 17 – Kenneth Scheve, Yale University Political Science Dep’t
6. February 24 – Allison Christians, Wisconsin Law School
7. March 3 – Adam Rosenzweig, Washington University Law School
8. March 10 – Eric Zolt, UCLA Law School
9. March 24 – Kirk Stark, UCLA Law School.
10. March 31 – Len Burman, Maxwell School of Syracuse University
11. April 7 – Jennifer Blouin, Wharton School, University of Pennsylvania
12. April 14 – Joshua Blank, NYU Law School
13. April 21 – Leandra Lederman, Indiana University Law School
14. April 28 – Cheryl Block, Washington University Law School

Should Obama consider proposing a progressive consumption tax?

Today's New York Times reports on trial balloons from the Obama Administration concerning the possibility that he might propose fundamental tax reform, presumably in his State of the Union address.

Needless to say, as a professional matter I'd be delighted if he did this. And it's potentially great policy, given all the awful things that the Internal Revenue Code does relative to a streamlined alternative with lower rates and a broader base. But I have expressed skepticism about its political prospects to be as popular and transformative as the trial balloonists may hope. Not only does repealing popular tax preferences that offer targeted benefits make it potentially "not that good an issue," as Dick Gephardt put it, but it really has to be a bipartisan deal to have good political prospects, and I just don't see that happening even after the deal announced earlier this week.

A further conundrum in this area is that, if you propose to take away all of the big tax preferences, you get people really mad instead of just somewhat mad. But if you save a couple of the big ones just because they're sacred cows, you invite cries of hypocrisy regarding the ones you do propose to get rid of.

A lot of the really big money in repealing tax preferences, by the way, involves 3 main things. The first is home mortgage interest, which is a horrible rule but politically sacred. And even if one could repeal it, doing it smack in the middle of a housing crisis with widespread mortgage defaults might not be the best time. The second is employer-provided health insurance. Unwise to take this away entirely when the employer-provided element is such a huge part of overall health insurance and we're at least ostensibly in the middle of a transition to implementing healthcare reform. The fight over healthcare reform offered a reminder concerning the political difficulties of trying to make the preference smaller and better-targeted. And the third is pensions and retirement saving, which isn't even a tax preference if (like me) you don't have tax discouragement of saving, a key feature of income taxation, as part of your normative baseline.

But let me offer a suggestion that might dramatically transform the optics while also (in my view and that of many other people) improving the substance. I don't think it would be enacted, at least not right away (and I've been a skeptic about the longer term as well), but it would make people sit up and take notice in a way that the usual style of proposed tax reform would not.

Why not recommend replacing the income tax with a progressive consumption tax? This could either be of two models:

(a) the David Bradford X-tax model, which is essentially a VAT with wages being deducted and included so that you can build in lower rates for lower-income individuals. The flat tax is a version of this, except with only 2 brackets. So individuals (in addition to businesses) file tax returns, but individuals only include wages.

(b) a consumed income tax in which all saving is deducted and all borrowing included in "income."

One advantage of a new and untried system is that at least it doesn't have all the barnacles. Preferences are still being effectively repealed, but the optics are different when you're eliminating one system altogether and announcing the creation of a new one. And I really don't see why the X-tax should be considered a radical experiment set in uncharted waters, when we have VATs all over the world and are also used to having wages deducted and included.

It's hard to see how good faith Republicans could fail to be intrigued by the idea of switching to a consumption tax. But the thing can be distribution-neutral, except perhaps at the very top (where income tax planning is often very effective anyway). And while Obama is already on thin ice with the liberal base, there are a number of people relatively on the left (academics, bloggers, etcetera) who like the progressive consumption tax. We're not exactly powerful politically, but in this setting we might offer a bit of cover.

Enacting a consumption tax can also function as a transition hit on old wealth, adding to progressivity on a one-time basis. And deferred enactment can be stimulative by suggesting that consumer prices will rise when it takes effect (creating an incentive to consume now).

What does Obama hope to accomplish by proposing fundamental tax reform? Enactment is an extreme long shot no matter what, but he wants to press the re-set button, signal where he wants to go, and reframe public debate. A progressive consumption tax strikes me as well worth considering on these grounds if he is doing tax reform at all, in addition to being genuinely better policy.

Continued progress on international tax book

I was going to say that writing a book is like running a marathon. But at least with book-writing you can stop at any time and just resume later where you left off (not sound practice in marathons). On the other hand, the sum total for this multi-year project (as it has turned out, although I generally I write pretty fast) feels a lot longer than 26.2 miles.

I've been laboring in a foreign tax credit portion of my manuscript in progress, Fixing the U.S. International Tax Rules. When I'm stuck, I start writing blog entries or just cruising the Internet out of frustration. Then I feel like I'm wasting my time. But the last couple of days have gone really well (even though I've been throwing up blog posts just to take a break from it.)

The things that make this book in particular so hard for me include the following:

1) I've got a whole lot of balls in the air at the same time. And, to shamelessly mix my metaphors (in addition to splitting an infinitive), I need to explain each of the balls very clearly and fit everything into the book's overall organization. Back and forth can be confusing, but there's no alternative when everything relates to everything else. OK, I feel another metaphor coming on. It's a bit like having 5 cups of coffee that you have to advance 10 blocks, and you can't carry them all at the same time. (No tray, apparently.)

2) Stop-and-go writing, especially on a topic one has been thinking and writing about for a couple of years (and where there was a 70 percent complete prior book draft that I decided to scrap), means that you continually forget what you've said so far in the current version.

3) As usual I'm trying to reach multiple audiences, ranging from students and layfolk to the top of the profession.

4) Unlike in my previous book, Decoding the Corporate Tax, I am to a considerable degree proposing very substantial changes in how we think about the issues. Decoding, by contrast, summarized and explained a preexisting literature. (The difference being that academic understanding of the corporate tax is vastly further along than that in the international tax realm.) But no matter how correct you are, you know there will be plenty of skeptics starting out, and indeed plenty left at the end no matter how good a job you do. This creates a challenging writing task, since you need to be very clear as well as explicit (while also, to a degree, inventing new terminology), but neither grandiose, offensive, nor overly dismissive of what's gone before.

Further pivoting towards (partial) optimism

Contemplating next year's likely showdown over raising the debt ceiling, I once again discern a slightly more optimistic feeling about Obama - though not necessarily about the prospects for limiting collateral damage - than I have typically had lately. It can't be the weather (horribly cold with 3+ months of winter still to go), and I'm not taking any meds, so perhaps it's actually based on a reasoned judgment, whether right or wrong in the end.

Let's start with the pessimistic take. He just proclaimed his view that, when there's a hostage-taking, you generally have to pay the ransom. He could not more clearly have invited the Republicans to threaten a U.S. debt default (based on not raising the debt ceiling) unless he accepts a long list of their budget priorities.

When the time comes, however, I think there's a good chance that it will play out more favorably for him than this suggests - although the prospects that the chicken game gets out of hand might actually be greater than you'd expect if you deemed him certain to fold.

BTW, just in passing, I think one reason Obama got as much out of the Republicans as he did this time around is that he held a hostage, too - the estate tax would naturally revert to 2000 levels if there was no deal, but this was something they cared about a lot more than he did.

Anyway, suppose the Republicans get very aggressive about the debt ceiling. In terms of the optics, I think it really is "their fault" if he refuses their demands and the U.S. therefore faces not only a government shutdown but also an ugly bond market event.

The markets ought to recognize, by the way, that the default is only going to be temporary. BUT - they might very reasonably take the default as a signal that the U.S. is insufficiently default-averse and thus that our credit rating should be permanently affected.

But returning to the optics of blame, Obama will have a better hand to play this time around. "Just pass a clean increase in the default ceiling" is an easier sell than "Just extend these tax cuts but not the other ones." Plus a favorable media narrative is ready at hand, treating this as 1995 Government Shutdown Part Deux.

What's more, the fact that Obama caved (or at least is perceived as having done so) in the tax cut battle actually adds credibility to his arguing to the public the next time around that, if there's a standoff, it can't be his fault. Unfortunately, it also reduces his credibility in terms of telling the Republicans that he's going to stand firm this time, but that's a separate issue.

So, what about the Republicans? This time around, I think they'll actually be more divided. I don't think Boehner and McConnell really want to go to the mat on debt default, unless they're pretty sure they can get an easy win. I don't have a very high opinion of them, but they aren't bomb-throwers at heart. But on the other hand there are people behind them, arguably with more sway over the Republican caucus, who badly want this fight and are totally fine with a default.

One scenario is that Boehner and McConnell try to make a deal that Obama will accept. But if it was good enough from their standpoint not to anger their base, it might have to be too bad for Obama to accept, even though he increasingly seems genuinely to the right of most Democrats.

Another scenario really is 1995 Part Deux - the U.S. defaults and it's bad enough to force the Republicans to retreat after getting a black eye. Only, in this case there really may be hefty collateral damage, since it's not just a government shutdown (though that presumably would be part of it) but also a bond market event that might affect the U.S. government's credit status.

Chicken games are most likely to lead to disaster when one side underestimates the other's resolve. There's certainly a chance of that here, since the Republicans may think Obama more liable to fold than he actually is. But the wild card, in terms of how much collateral damage we get first, may be Boehner and McConnell: to what extent do they underestimate him, and (since I don't think they actually want a conflagration), how much freedom of action do they actually have?

Semantic (?) quibble and a word of praise for a WSJ reporter

One thing the tax cut deal between Obama and the Republican Congressional leadership has done is bring the estate tax back into the news. They propose a permanent resolution (35 percent tax rate on wealth over $5 million) in lieu of jumping back on New Year's Day to pre-2001 law that no one really expects to last longer than legislative deadlock dictates. I had been starting to wonder if this would just keep hanging over everyone.

Just because the estate tax is now back in the news, the anti-"death tax" jeremiads have now resumed (or at least intensified) on the Wall Street Journal's editorial pages. Now, I am far from hard-core on this issue. At a minimum, in a revenue-neutral and distribution-neutral framework, I would probably want the estate tax to be more in the range of the tax cut deal than of 2000 law. Concerns both about the estate tax's effects on work, saving, and altruistic transfers (in lieu of simply consuming the money before one dies), and about its susceptibility to various tax planning devices, persuade me that the rate probably shouldn't be very high - again, especially if one can use other instruments instead to address revenue and distributional goals.

But my point here is perhaps more trivial. Whatever one's bottom line, I find the use of the term "death tax" to be offensively dishonest. First of all, the tax is not levied with respect to death itself - the tax base is indeed the decedent's estate. Second, the old term had been accepted and standard for decades if not centuries. The "death tax" brigade tried changing it because Frank Luntz determined from focus group interviews that this was a good political move. We start losing a common language, and moving into the linguistic world of 1984 where "Freedom Is Slavery," if Frank Luntz can use focus groups to change it. (Nothing personal, Frank - you have a job to do and you do it skillfully; it's just that others shouldn't go along with it.)

It was thus with some relief that I found that WSJ reporters on the news pages, or at any rate Martin Vaughan today, are still using the correct term "estate tax" instead of succumbing to the right wing version of linguistic PC.

I just hope I haven't sold him out here by mentioning this.

The tax cut deal: too soon to tell who really won?

As Yogi Berra once said, "it's very hard to predict things, especially the future." And this poses a key problem in deciding how to assess the tax cut extension deal between Obama and the Republicans.

While the deal still strikes me as better than expected, a key question is what happens down the road. In particular, there are 2 important expiration dates, and what happens around each of them is critical. Possibly an important enabling factor for the deal was that Obama and the Republicans have different predictions about what will happen at each point, leading each to think that the deal was slanted their way.

The first choke point is the end of 2011, when the extension of unemployment insurance and the 2% payroll tax holiday are set to expire. Krugman calls this a really bad feature from Obama's political standpoint, since presidents often get rewarded in the polls for the rate of change in unemployment rather than its absolute level. Hence, stimulus that is withdrawn at the end of 2011 could be bad for him in 2012.

But does he have any political leverage to get them extended at the end of 2011 if the economy is still slumping? Obviously this could only come out of a deal with the Republicans, so there's a question about the carrot he can deploy, and about the stick. The carrot would presumably be extending the Bush tax cuts for at least another year. A second carrot, for the payroll tax but not UI part, is that it's a "tax cut." The stick is that, barring a deal, he attacks them in 2012 for having hurt the economy and indeed rejected extending a "tax cut" for millions of workers. But he hasn't exactly been throwing the equivalent of thunderbolts from Olympus in these rhetorical battles.

Anyway, the deal is much better for Obama (and also for the country) if he turns out to have some leverage at the end of 2011 than if he doesn't - assuming in either case that, as seems almost certain, the economy is still slumping and unemployment remains unacceptably high.

Then there's the 2012 question: what happens as Expiration Take 2 for the Bush tax cuts looms over the presidential campaign? If they've been extended for another year in exchange for UI and payroll tax continuation in 2012, this recedes a bit, but even then it will still be on the table.

During the campaign, presumably Obama has to say the same thing as in 2008, but with a "this time I really mean it" proviso that he would try to defend by citing the state of the economy as his excuse for what happened in 2010. Perhaps he could even tweak his talking point to say he'd increase the start point for the 39.6% rate bracket, along the lines of the Schumer "millionaires" version.

Obama loses big-time if this 2012 replay works out the Republicans' way, but not if it plays out more his way. A number of commentators have asked why we'd expect him and the Democrats to perform more skillfully this time around. But note that the point when they got hammered was in 2009 and 2010 (i.e., the legislative phase), rather than during the 2008 presidential campaign itself. The campaign part is easier (if he can sell voters on "this time is different"), since it's not about trying to get 60 votes, etcetera. But he would have to be very clear that he planned to veto any extensions and let all the tax cuts expire UNLESS the Republicans made the deal he requires, and he'd have to win (or at least not badly lose) the argument that this would make the expiration their fault.

The Republicans may be counting on the view that they are better card players than the Democrats. But again, this appears to be truer in the legislative phase than the presidential campaign phase. So at this point there may still be grounds for cautious non-pessimism.

The deal on extending the tax cuts

The NYT is reporting that Obama and the Congressional Republicans have made the following deal regarding the tax cuts. On the whole, it's better than I expected. Herewith some comments on the reported details:

1) Extend all the expiring individual income tax rate cuts for 2 years - Well, we knew this was going to happen. The only alternative, which was that all be allowed to expire, is something that I and many others would have been OK with, but it wasn't in the cards. What I find mysterious is Obama's willingness to have this guaranteed to come up again in the 2012 presidential campaign. Taking the same stance that he took in 2008 might face extra credibility problems this time around. But I further address this problem below, perhaps a bit more hopefully (for a change) than I ought.

2) Extend unemployment insurance to the end of 2011 - Vital as stimulus (to the tune of $60 billion that's extremely well-directed), and it wasn't going to happen otherwise. Extending long-term UI may create serious incentive problems when labor markets are tight, but that obviously isn't the current situation.

3) Reduce the 6.2% Social Security payroll tax on employees by 2% for one year. Once again, probably about as good stimulus as one could have hoped for (and scored at $120 billion, which is certainly bigger than anything else on the table). The targeting could have been a lot better, given that the tax cut grows with income until one hits the annual cap on taxable wages, and high-income earners then get the full amount. But comparable stimulus was not otherwise going to happen. Note that this will cause Social Security financing to look worse, since the lost revenues will be attributed to the Social Security Trust Fund. Some who are eager to preserve current Social Security may dislike this accounting effect, but I think there's a need to address the program's long-term fiscal problems (along with the rest of the fiscal gap), and perhaps anything that motivates government actors to act on sustainability issues sooner (though after the current recession) has something to be said for it.

4) Estate tax to be restored with a $5 million exemption and a 35% top rate. In a distribution-neutral and revenue-neutral framework, this might be a reasonable place to aim with the estate tax, and indeed conceivably a preferable one in efficiency terms to restoring pre-2001 law. (By those neutralities, I mean that other adjustments are made to keep overall distribution and revenue constant, relative to the case where a pre-2001 estate tax was restored.) To be sure, the estate tax deal is NOT being made in any such framework. But, as a matter of political economy, I don't think a more progressive estate tax than they're agreeing to here is long-term feasible anyway. So I don't regard this as a terrible outcome in a realistic overall sense.

5) The deal also reportedly includes extending the tuition tax credit, expanding the earned income tax credit, and an expensing rule for certain equipment purchases. I don't know the details, but the former two may add a bit of progressivity and the latter can be stimulative so long as it's very short-term.

I'm hoping that DADT and the Russia treaty will also go through as a result of this, although not explicitly in the deal. Among other things, this would leave me a bit less concerned than I have been about the Republicans' degree of good faith behavior regarding governance in general. We will see. (Concerning McCain and DADT, I will follow the advice of mothers everywhere that, if you can't say anything remotely civil about someone, you should probably say nothing at all.)

But back to the fiscal package. One of the main criticisms of the deal pertains to the $180 billion cost of the payroll tax cut plus extending UI, as compared to the $700 billion cost for a 10-year extension of the tax cuts. But if Obama can get through the 2012 election saying that this time he actually will let the top bracket expire (distinguishing 2010 on the basis of the need for stimulus), then a better outcome might be possible that time around (assuming, obviously, that he wins the election). At that point, why not let the whole thing expire as he wouldn't need to run for reelection and even the Democrats in Congress would have 2 full years. In other words, same chicken game as at the end of 2010 (and with the same reasons for pessimism about shearing off the top bracket tax cut), but with a different outcome if the Democrats' true fallback position has shifted to permitting expiration of the whole lot.

A key reason for dismay on the left about the deal is simply that Obama has forfeited a lot of his erstwhile backers' trust (including mine). If one came into it trusting him, I don't think it would be considered that terrible, at least taking it as given that he was against letting all the tax cuts expire. One's degree of trust should indeed be an input to what one thinks of the deal, as one of the key questions is what to expect from him down the road. But at least I don't see the deal as evidence further supporting the negative inferences. So color me a spot more hopeful than I have been lately.

Obviously, one thing we don't have here is the slightest bit of evidence for the needed pivot from short-term stimulus to long-term sustainability. But that was so far beyond anything one could reasonable hope for in December 2010, that its absence isn't freshly dismaying. Expiration of all the tax cuts at the end of 2012, if I may be permitted to dream, would supply an element of that as well.

Unilateral Presidentially declared payroll tax holiday??

Jack Balkin has a very interesting post today (h/t to Tax Prof Blog for bringing it to my attention) in which he offers Obama the following advice:

"1. Let the Bush tax cuts expire.

"2. Declare a payroll tax holiday for Tax Years 2011 and 2012, featuring cuts in the amount of payroll tax the federal government will correct.

"Instruct the Treasury Department to collect less than the current amount of the payroll tax and/or give everyone who pays the payroll tax a tax refund.

"Instruct the Treasury Department to issue new regulations justifying the payroll tax holiday.

"Instruct the IRS not to prosecute employers who deduct only the amount required under the terms of the payroll tax holiday.

"3. Tell the Congress that the payroll tax holiday will continue until Congress passes a tax reform bill to the President's liking.

"4. Tell the Republicans that he is sick and tired of their misusing the political process to benefit rich people and that the best way out of the current economic mess is to put money in the hands of hard working Americans who need tax relief and are most likely to spend it. Note that the payroll tax holiday is as necessary to the country's economic recovery as FDR's bank holiday was during the Great Depression.

"5. Insist that it is the President's duty to take bold action in times of economic emergency and berate the Republicans for playing games with the lives of ordinary citizens.

"6. When members of Congress sue to declare the tax holiday unconstitutional:

(a) argue that they lack standing.
(b) argue that the holiday is justified by the new Treasury Department regulations.
(c) argue that the interpretation of the tax laws in the new regulations is committed to the President under Chevron.
(d) argue that the President, as chief executive officer, has the discretion to refuse to prosecute individuals in the interests of public policy. To interfere with the President's (non)prosecution power violates the Unitary Executive.
(e) Drag out the litigation until 2012, when it will be clear that the payroll tax holiday has helped improve the economy.

"6. Rinse and Repeat."

Obviously, we know (and Jack knows) that Obama isn't going to do this, and that no one in his right mind would even consider it without at least initial ambivalence and unease, because it is so clearly contrary to the way the rule of law is supposed to work in the U.S. What makes it especially interesting is the fact that there plausibly is no legal remedy preventing Obama from doing this, given how standing issues historically have been resolved.

Jack then continues the blog entry as follows:

"The danger of Obama declaring a tax holiday (akin to FDR's bank holiday) is that some future Republican President will declare a tax holiday for corporations. Make no mistake: giving the President the power unilaterally to lower particular people's taxes gives the Chief Executive possibilities for all sorts of mischief.

"The interesting question, however, is why under Republican Reagan and Bush era theories of the Unitary Executive, the President cannot declare a tax holiday.

"And the second interesting question is why the President should not at the very least make a credible threat to adopt this approach in order to break the Republican Party's current stranglehold over tax and fiscal policy....

"What is this blog post about? In one respect it is a proposal for what Barack Obama should do about tax and fiscal policy. In another respect, however, it is a post about how constitutional conventions work and how actors in constitutional systems try to alter existing conventions for their electoral benefit, a practice that Mark Tushnet has called 'constitutional hardball.'

"This post is about how actors in a constitutional system should respond when they feel that other actors have violated unspoken norms in a constitutional system and are playing constitutional hardball. In this case, the Republicans are acting like a European style parliamentary party in a presidential system, and they have manipulated the rules of the Senate to gain an unfair advantage, at least in the view of the Democrats.

"The lesson of this post is that when your opponents engage in constitutional hardball in order to get their way, the correct response is not to wring your hands and urge them to play fair by the old rules. They are trying to change the rules; they are doing so because they believe it gives them an electoral or political advantage.

"Rather, the correct response to constitutional hardball of this sort is to engage in constitutional hardball of your own, in order to make the other side come to the bargaining table and agree to a new set of understandings about how the game of politics is to be played.

"The threat of a payroll tax holiday is designed to say to the Republicans: if you want to play constitutional hardball in order to ensure that you gain seats in 2012, I will play constitutional hardball in order to prevent you from taking advantage of me. If you want me to stop, then meet me at the bargaining table. Otherwise, the rules of politics have changed, and you'd better get used to it, just as you changed the rules, and told me to get used to it. If you don't like these new rules, then back down from the new rules you are trying to impose on me and the rest of the country.

"The President will not get Congressional Republicans to negotiate until he gives them a strong reason to negotiate."

My own sense (and no doubt Jack's) is that, as things stand, constitutional hardball is being played asymmetrically, and that this will continue. If the Republicans win all 3 branches in 2012, I would not be at all surprised to see the Senate end the filibuster, and if they don't it will be solely because the Democrats have made clear that they do not plan to use it anything like the way the Republicans have since 2008. I have also been wondering about the extent to which the ordinary rule of law will continue the next time the Republicans take the White House.

Under Palin literally all bets would be off. Someone like Romney, by contrast, would, I presume, talk to his White House lawyers first, and I would hope they'd have more integrity than some of those in the Bush Administration. But they might very plausibly tell him, under the circumstances of a continued severe economic downturn, to do the Republican (say, corporate tax) version of the unilateral payroll tax holiday. It's both effectively unreviewable (hence legal by definition under a Holmesean "bad man" theory of the law), and plausibly within executive discretion under Republican theories of the unitary executive. I suppose one could even swallow a couple of times and call zeroing out the corporate tax an exercise of "foreign policy" discretion (since it relates to global tax competition and might be a subject of negotiation with other countries). Not that I'd want to be the one making such an argument in public.

BTW, there was more than a bit of this under the G.W. Bush Administration. Let's ignore some of the really bad stuff because of the surrounding controversiality. Something relatively trivial that looked to me like unilateral presidential nullification of existing statutory law, reflecting that there would be no penalty, concerned legal obligations to preserve records (e-mails, etcetera) of everything that was going on. The Bush Administration simply did not comply with this stuff because they didn't have to, in the sense that there would be no consequences. To be sure, under their view of executive powers they probably felt legally entitled to violate these rules, but obviously they made the tactical choice to do it unilaterally rather than, say, finding a mechanism to seek a court judgment in their favor.

Back to Obama and the payroll tax holiday. The proposal is clearly in tension (to put it mildly) with the president's constitutional duty to "take care that the laws be faithfully executed." Hence White House lawyers really could not in good faith endorse it other than under the "bad man" view of no legal recourse or some sort of very broadly conceived notion of presidential emergency powers. (Highly dubious as applied to the payroll tax given that, however horrendous the U.S. economic situation, it's a slow motion disaster rather than one requiring rapid response in the middle of the night.)

Clearly, then, Obama would be acting improperly under constitutional norms if he did this. How does the Constitution purport to stop such things from happening? Mainly through the unenforceable hope that political actors will internalize and heed constitutional norms on their own. With the ultimate fallback threat of impeachment for deliberately failing to see that the laws are faithfully executed. (Subject to Congress's exercising its own discretion as a good faith constitutional actor regarding whether this would count as "high crimes and misdemeanors.")

Obviously, if Obama were playing constitutional hardball, he would say (a) the Republicans don't have the votes to impeach and remove me for this, and (b) just let them try to impeach me for cutting people's taxes and trying to save the economy from a prolonged severe recession.

As an aside, suppose the Republicans said great, we're with you on this one but we also need to extend all the tax cuts and will shut down the government otherwise.

But returning to the issue directly at hand, the Obama Administration's doing this would clearly undermine the rule of law and raise the likelihood (perhaps to near certainty) of Republican presidents' unilaterally imposing their own favored tax cuts the next time around. But we may be headed in that direction anyway. And even if it's best for no one to play constitutional hardball, I'd have to agree with Balkin and Tushnet that one has to think about whether asymmetric hardball might be worse than sharply intensifying the process but making it more symmetric.

I am starting to think I need a computer keystroke short cut for the term "chicken game," which I haven't used yet here but obviously is once again what we're talking about.

Two perspectives on tax reform

Bruce Bartlett notes today that the Simpson-Bowles tax reform proposal, by reducing statutory tax rates in exchange for repealing tax expenditures as defined from a Haig-Simons income tax perspective, might actually end up increasing effective tax rates on saving and investment. Hence, from a principled conservative perspective (if there are any left besides Bruce and a few others), the proposal could be viewed as moving in the wrong direction. I'd add that, in the academy (across the political spectrum) as well as among a few liberal bloggers, the case for replacing the income tax with a progressive consumption tax has considerable support. But I don't see us ever getting there.

David Brooks' column today urges Obama to embrace comprehensive income tax reform (such as Wyden-Gregg) as a game-changer with virtues that include the following:

"The health care reform debate was polarized, but the tax reform debate is not. Almost everybody agrees on the basic outlines. The current system is so rotten everybody could get something they want out of reforming it.

"The tax reform process would reintroduce the parties to each other, and reduce the Manichean caricatures that have built up in their heads. It would also shift attention from the same-old big government-versus-small government debate toward more concrete challenges: shifting resources from unproductive consumption to more productive investment; shifting money from the affluent elderly to the struggling young; eliminating the parts of the tax code that erode personal responsibility and buffing up the parts that encourage responsible risk-taking."

I wish this were true, but unfortunately it's not, on multiple levels. Earlier in the column, for example, Brooks tells us of an interesting encounter at AEI with Paul Ryan, who claimed that, since Obama is taking us on the evil road to Sweden (!), he must be resisted 100% on everything. Ryan believes this because he wants to; it helps reduce cognitive dissonance regarding the ruthless political strategy he has signed up for. So it's not going to be dispelled by a sudden announcement that Obama wants comprehensive tax reform.

Among the truest words ever spoken about comprehensive tax reform were by Dick Gephardt, as quoted in the Birnbaum-Murray account of the 1986 tax reform act. Gephardt, as an ambitious pol on the make, had signed on to Bill Bradley's tax reform plan, causing it to be known ever after as "Bradley-Gephardt." By 1985, however, when I was on the Joint Committee on Taxation staff, there was probably no single Democratic member of the House Ways and Means Committee who was less interested in tax reform than Gephardt. He had decided that opposing free trade offered more political upside. Anyway, as quoted in Birnbaum-Murray, he told the other Democrats about tax reform: "It's not that good an issue." And, as a political matter, he was right.

1986 tax reform only passed because of what the economist Henry Aaron has called the "dead cat" problem. Whichever political leader killed it would have a "dead cat" on his doorstep, which needless to say no one wants. The problem was that the killer of tax reform, in the rhetoric prevailing in that era, would have been viewed both as "failing to lead" and as having sold out to the special interests. (Hence the New Republic called the Senate Finance Chair "Senator Hackwood" when it looked like he was going to let it die.)

But at the same time, no voters actually liked comprehensive tax reform (Gephardt's point). Taking away targeted tax breaks (including but not limited to those that are not actually tax expenditures from a consumption tax framework) in exchange for the more diffuse benefit of lower rates goes completely against the interest group nature of politics (and the interest groups are all of us, not just the well-financed Washington lobbies but certainly including them). In short, while voters may think they hate the existing tax code, any proposal to replace it would draw vastly more fire within a very short time.

If Obama took the course that Brooks recommends, a collective yawn would be the best he could hope to get. The reality would probably be much worse. And this is even leaving aside the zero percent chance that the Republican leadership would give even the slightest consideration to engaging with it.

Marketing Getting It one reader at a time

A few minutes ago I ran into a senior (emeritus) NYU colleague in the faculty library, and he asked me how Getting It (although he didn't know it by name) is doing.

A few hundred copies sold and some on-line or local newspaper reviews, I said.

Ah, he replied, that's better than 33,000 of the 35,000 books published each year (numbers that he knew as of a few years back for family reasons), which get no reviews and sell next to no copies. Compared to the norm, you've had a huge success.

True enough, I agreed, but apart from my admitted bias in favor of its merit, I also think it has a real commercial niche that it's had difficulty penetrating as fully as I'd like. [OK, this is admittedly not a transcript - I was talking more colloquially and am now translating it into more of a written style.]

He asked me to explain, apparently knowing only that I had published a novel but not being familiar with its style or content. I said it's basically a Wodehousean satire (but nastier, a la Waugh) set in a law firm where associates are competing for a partnership slot.

Wodehouse? he replied. You've just said the magic word. So apparently he now plans to buy it.

There's just one problem, from the standpoint of very short term authorial vanity. He is not the on-line purchaser type. So he will order it through a local university-affiliated bookstore, rather than buying it from Amazon (which would have given me a modest two-or-three day ratings spike).

Why does the White House keep making preemptive concessions?

My critique from an earlier post that President Obama "makes a concession, then another one, then another one, because that's his negotiating style ... [although] he isn't going to get anything back," is not exactly unique to me. See, for example, here and here. And the tea leaves appear to strongly suggest that Obama may be on the verge of a massive cave, in exchange for next to nothing (or perhaps even actually nothing) in return, with respect to the expiring tax cuts.

The point is so obvious, and so clearly being consciously exploited by the Republican Congressional leadership (and who can blame them? What professional card player wouldn't enjoy playing poker for money with a putz?), that one wonders what can possibly be going on.

I see only two main explanations, which could be complements rather than rivals. The first is that there's something fundamentally awry (or at least unsuited for present circumstances) in Obama's psychological make-up, so that he is desperate above all for even, and perhaps above all, his sworn enemies to like him. Never mind that they might be largely motivated (at least at the leadership level) by rational self-interest, not just emotion or gut feelings. The second is that he has an extremely naive view of politics, based on a simplistic application of the old Anthony Downs model in which you beat the other guys by going to the center. Hence, by being the more "reasonable" and conciliatory one, you pick up the swing voters and get the majority.

We are all prisoners of the degree of fit between our psychological make-ups, with their strengths and weaknesses, and the environments in which we happen to find ourselves operating. A case in point is the number one political patron saint of the twentieth century, Winston Churchill. Though a brilliant, charming, and eloquent man, Churchill failed repeatedly in politics and government until he ran smack into the one situation that he was absolutely born to get right: understanding and opposing Hitler. Put him anywhere else (as indeed the rest of his career, both before and after, made clear), and you'd simply have a brilliant, charming, and eloquent failure. Lucky Churchill, as well as lucky us.

Obama has not been so fortunate. Indeed, he may even be a reverse Churchill, in that he was put into the one political environment in modern U.S. history where his skills (beyond winning the initial election) would matter the least and his defects the most. Perhaps he could have done great in the political environment of, say, 1964 or even 1976 (obviously, leaving aside the impossibility at those times of electing an individual whom U.S. voters would racially code as black).

Likewise, the Downs theory of working for the middle works sometimes. I see it as a key supporting explanation of why people such as Reagan and Tip O'Neill found it reasonable to cooperate on short-term and long-term deficit reduction in the 1980s. But at other times it doesn't work well - viz, the 2010 elections, in which it was overwhelmed by what I called "differential turnout elasticity" in my recent book on the approaching U.S. fiscal collapse.

Plus, in circumstances like the present, voters are looking for someone who they believe can be effective and strong. And rightly or wrongly (I'd say mainly the latter), voters are giving the Democrats the blame for policy failures that are in significant part due to the Republicans' adoption (again, rationally) of a policy of complete obstructionism. And there's also the "Reagan factor" at work: voters often like someone whom they view as having firm, confident, and consistent principles even if they don't entirely share the principles. So bleating about a federal pay freeze rightly impresses no one.

The sum total is beginning to look pathological, although in fairness to Obama he might have been a great success if plunked into a different political environment. But this is where his reputed intellgence ought to kick in. Can't he see any of this? And doesn't he have enough advisors who can see it and view themselves as having the incentive to tell him?

We will see.

Postponed book talk

I was scheduled to give a lunch talk today at Pace University Law School on Getting It. Unfortunately, due to a couple of mishaps in the travel arrangements, the session didn't happen, and I hope to do it next semester.

Radio appearance on WNYC, All Things Considered

It appears that I'll be discussing the Bowles-Simpson debt commission live on radio for a few minutes this afternoon, on NPR's "All Things Considered," shortly after 4:30 pm EST.

In addition to discussing what I think of the plan (and the phrase "compared to what" is crucial in answering this), I imagine the word "chicken game" may come up in terms of why I don't expect anything significant to come of the commission's work. I may also, if I get a chance in the limited time, assess why the Obama Administration seems eager to push this along, although frankly I've seen better-run campaigns for 6th grade homeroom class president (indeed, I say this from personal experience).

Again, the show time is 4:30 pm today (Tuesday, November 30). It will be on WNYC, 93.9 FM / 820 AM, but I would presume also on other NPR stations around the country that broadcast All Things Considered on weekday afternoons.

UPDATE: A reasonably brisk three minutes. As seems to be my way these days, I closed with a disparaging comment about the Obama Administration's negotiating strategy.

It will be on again in NYC at 7:40 pm tonight.

FURTHER UPDATE: I just heard the playback. Not enormously cheerful; there's a bit of chat about going off a cliff, hard versus soft landings, and the like. At the end, when the interviewer asked me if I think the federal pay freeze idea will help break the logjam, I answered that Obama makes a concession, then another one, then another one, because that's his negotiating style, but that he isn't going to get anything back.

Expiring tax cut for millionaires only?

"Millionaire," for this purpose, is defined in terms of annual taxable income.

I agree that it's politically deft, not that this will necessarily matter. And I do look forward to reading the Todd Henderson remake in which someone writes a column or post insisting that, despite his million-dollar income, he is barely scraping by and certainly isn't rich.

Apparently it loses $400 billion over ten years compared to letting the top bracket rate cut expire at $250,000 (bad), but raises $400 billion compared to extending all of the expiring rate cuts (good).

Given the insanity of extending any of the rate cuts more than very temporarily in the face of the fiscal gap (not to mention the insanity of extending any of them on this ground, in lieu of enacting better-directed stimulus), this is really all just about generating a one-day headline that favors the Dems for a change, albeit almost two years before the next election. We are so far outside the realm where intellectually credible policy options are being considered that it's hard to know how one should even try to discuss such things in normal policy terms, apart perhaps from teasing apart degrees of idiocy in the face of a far-reaching compared-to-what problem.

So I suppose there isn't much to say other than why not try it if it's politically effective, and all the more so if it might even pass (as the prior Democratic position clearly will not). But I assume the Republicans will bite the mosquito-sized political bullet and block it, like all of the other alternatives to 100 percent victory on the tax cuts.

Obama's federal wage freeze idea, by contrast, strikes me as both bad policy and bad politics. See one quick take here and another here. His three favorite activities appear to be begging Republicans to like him, endorsing and validating their policy views, and negotiating with himself (as Bush always refused to do).

I'm thinking of Otter in Animal House when he talks up the toga party: "I've got news for you, pal. They're going to nail us, no matter what we do. So we might as well have a good time." Not exactly Obama's attitude, as he continues to plead for Tea Party votes that will not be coming to him.

Book talk on Getting It?

It looks like I'll be doing a faculty lunch talk on Getting It at Pace University Law School next Wednesday, December 1. More fun for the tax-uninitiated and at the end of a long semester, I suppose, than a reprise of my papers and past talks concerning Taxing Financial Institutions, The Rising Tax-Electivity of U.S. Corporate Residence, or The Case Against Foreign Tax Credits.

$400 billion of easy deficit reduction!!

In today's Wall Street Journal, an op-ed by Stephen Moore and Richard Vedder claims that they have done econometric research credibly establishing that, for every dollar of new federal revenues, federal spending increases by $1.17. Hence, it supposedly is a fallacy to think that tax increases can play any role whatsoever in long-term deficit reduction.

To be frank, I wonder whether this research is credible and whether its results would be replicated by researchers who don't start with their anti-tax ideological prior. After all, Congress doesn't have to have money in the "checking account" in order to spend what it wants. It has (for the moment) unlimited borrowing power anyway. Moore and Vedder also ignore the question of whether one can affect the relationship between new revenues and outlays. Proponents of VAT enactment, for example, often argue for earmarking the revenues in some way to prevent or at least soften the effect on federal outlays.

But suppose we accept their research claim as unalterably true. All one would then need to do is add the claim that it works both ways - i.e., that tax cuts likewise reduce outlays by more than dollar for dollar - and voila, one can argue that tax cuts pay for themselves, in a budgetary sense, without any need to resort to supply side arguments.

It's a good thing, too. Even leaving aside the powerful evidence against the proposition that tax cuts (from where we stand today) would actually raise revenues, the Moore-Vedder proposition should presumably leave a supply-sider queasy, if he actually believes his own empirical claim. Think of it: you cut rates, revenues go up. So far, so good. But then, darn it, spending goes up by 1.17 times the revenue increase.

No doubt it won't be long before some WSJ op-ed writer carries the idea to its logical conclusion. Maybe I should point the way?

Let's see: the President's 2010 budget totes up spending as $3.55 trillion and tax receipts as $2.38 trillion. If Moore and Vedder are right and it works both ways, all we need to do is zero out all federal revenues, and federal spending will decrease by 1.17 times the revenue loss, or $2.78 trillion.

Just think of it: No new taxes, not even any old taxes, federal revenue goes to zero, and we reduce the budget deficit by $400 billion.

I expect to see one or more WSJ op-eds flatly asserting this any day now.

Amusing writer

I'm currently reading Bad News, a novel in the Dortmunder series by Donald Westlake (recently deceased author of a lot of very funny and well-written genre fiction). Here's a typical passage that caught my eye:

"The New York lawyer looked like a hawk who hadn't eaten for a week. His beak of a nose seemed to be pointing at prey, his sharp, icy eyes flicked back and forth like an angry cat's tail and his hands were large and knobby and, when Marjorie shook one of them, cold. His name was Otis Welles and he wore a suit that cost more than Marjorie's car, but somehow, instead of the suit giving some dignity to his bony, gristly body, his body seemed merely to cheapen the suit."

Income tax rates above 50 percent?

One of the headline events at the NTA Annual Conference was a speech by Emmanuel Saez on fundamental tax reform. Emmanuel, a rightly multiply-prize-winning mainly empirical economist, is perhaps best known for his work showing how income distribution has changed over the last few decades, becoming vastly more concentrated at the very top. He has also done other excellent work - for example, in behavioral public finance with work showing how framing can affect consumer responses to substantively identical tax instruments.

But he has not previously been all that involved in thinking or at least writing about the tax base. Thus, it was with clear interest and anticipation that I sat in the big auditorium at the NTA main event session on Thursday afternoon, as Jim Poterba introduced him with the note that Emmanuel, unlike any of those other wimps out there who needed to collaborate with others in order to produce comprehensive tax reform plans (OK, Jim didn't actually quite put it that way), had personally designed his own plan. As a fresh voice in the field, what would he say?

The results were interesting in one sense, but frankly less so in another. Saez drew on his work about income distribution to show what the income tax system would need to do in order to reverse even just, say, the last 20 years of radically rising income concentration at the top. He accordingly endorsed a system that is so far removed from where the discussion is these days that I consider it big news meriting widespread attention. The debate ought to extend at least as far as he wants to go, whether one or not one agrees about going all the way there. But in other respects the talk's content was perhaps a bit less substantial.

In the optimal income tax (OIT) approach, the point to high tax rates on high-earners is to achieve redistributive benefits in excess of efficiency losses, or more precisely the optimize the tradeoff between the two. Typical OIT models have ended up (initially to the surprise of those designing them) to call for relatively flat rather than graduated rates, with the rate at the very, very top (in theory - not necessarily in practice) dropping to zero. Emmanuel instead calls for a very graduated system, with a top rate in excess of 50 percent. This is not because he rejects the theoretical basis for the OIT approach (utilitarianism or other welfarism), but due to his modifying some of the typical assumptions - e.g., by assuming a very low marginal utility of income at the top (given the impossibility of consuming so much wealth any time soon, non-monetary motivations for wanting to earn the highest amount, etcetera).

I find this plausible and think it absolutely should be more prominent in public debate. Perhaps we've moved too far in the direction of thinking low rates are necessarily better. Wherever one comes out in the end on this question, top rates above 50% ought to be within the publicly debated policy space (which currently they are not), and the fact that a prominent and leading tax economist endorses them is genuinely newsworthy.

The exact normative basis for his proposed rate structure was a bit less intellectually satisfying. Even if one is greatly concerned about the plutocratic turn that U.S. society has been taking (a key factor, I think, in our ongoing conversion into a third world banana republic), a specific inequality target, with the view that economic growth should be shared in a particular predetermined manner, is in tension with the OIT principle of optimizing the tradeoff between equity and efficiency. Technological changes that alter pre-tax wealth distribution - not to prejudge how important they've been compared to political economy factors and changing social norms - may indeed change where one wants to end up, by altering the costs and benefits. But one could defend targeting, say, 1989 wealth distribution as a simplifying political economy choice, even if it isn't how one should in principle go about finding the optimal tradeoff point.

So far, so good. More disappointing about the talk was that it's hard to really have much insight or depth in one's views about the myriad tax base issues that arise in this sort of exercise if one hasn't spent a lot of time thinking about them. So I thought the NTA crowd was really the wrong audience for this speech.

Take the income versus consumption tax choice, for example. Saez rejected the cash flow consumption tax because it has never been tried. No X-tax variant, possibly because he had never heard of it. And he appeared to think that, to make an income tax work, you just have to get rid of those darned loopholes. Not much understanding, so far as I could see, of the point that, once you have a realization-based income tax and need to collect corporate income at the entity level, you are really deep in the soup.

Not to be harsh here. I commend him for digging in. It's public-spirited of him, and unmistakably informed by the altruistic goal of performing a public service in lieu of burnishing his academic reputation (which depends more on doing cutting edge research, as indeed he has). He most affirmatively was not trying to position himself to enter public political life, as the contents would have been political suicide if that were his goal. Plus he is making an important contribution, as I noted above, by expanding the parameters of debate and "acceptable" opinion. But I'll admit to thinking during much of the speech: Why am I listening to how he'd resolve Issue X? Sure, I might resolve it the same way, or perhaps in a different way - although he generally got things right rather than wrong where there was such a rubric - but there's a whole lot more to think about here that one needs to have spent some time on to understand in real depth.

The plan's political prospects are not especially bright. For example, in addition to creating a top rate above 50%, he would repeal the home mortgage interest and state and local tax deductions. Leaving aside everything else, there's an unfortunate political paradox at work here that undermines efforts such as this. The richer and more powerful the top 0.1% is, on the one hand the greater the normative case for redistributing wealth way from them, but on the other hand the dimmer the political prospects for actually doing so. Getting wealthier makes them more powerful politically, not less. So they'd probably have to lose substantial ground for the political system to start treating them less favorably.

In that way, the political economy of redistributive politics has a kind of anti-insurance element to it. Winners are rewarded for becoming more powerful, while losers are punished for having become less so. Not an easy problem to try to address.

International tax panel at NTA Annual Meeting

Yesterday I participated in an NTA panel that addressed U.S. international tax policy and where it should be heading. Others on the panel were Jane Gravelle, Ed Kleinbard, and Lee Sheppard, and Jim Hines unofficially served as commentator via extended questions that he asked each of us, as a kind of point of personal privilege (quite reasonable, I thought, under the circumstances) because the panel tended to disagree with him.

All 4 panelists called for improving the source rules so the U.S. can more effectively tax multinationals on the fruits of their economic activity in the U.S. Kleinbard and Sheppard argued that we need to retain and strengthen worldwide taxation, essentially as an indirect way of taxing U.S. multinationals on their U.S. income. Gravelle views the U.S. as having sufficient monopoly power to be able to benefit from imposing a very aggressive tax on worldwide income. I gave the very quick version of my current views, under which switching to exemption is fine if we (a) really improve the source rules, in particular by treating all worldwide multinational groups as a single company, (b) tax the transition gain from U.S. companies' existing $1 trillion pool of overseas earnings, and (c) quite reasonably assume that exempting foreign source income is the only way to get rid of foreign tax credits and deferral.

The slides of my talk are available here.

Kocherlakota lunch talk at National Tax Association meeting

Today (Thursday, November 18) was my first day at the National Tax Association’s 103rd Annual Conference on Taxation, being held in Chicago. (Being posted a day later, however, due to web access issues at the execrably out-of-the-way Hyatt Regency McCormick Place in, but not really of, Chicago.)

Best part of the day was the lunch talk by Narayana Kocherlakota, the President of the Federal Reserve Bank of Minneapolis, concerning the current state of the play in monetary policy. The talk had more intellectual content than one typically finds in luncheon talks, even at the NTA (a neighbor at lunch made the same observation with opposite spin, calling it “very abstract”).

Just to compare it to a couple of past “highlights” at NTA lunches, I well remember a session at which I got into a heated colloquy with the speaker, Ed Lazear (while he was working for the Bush Administration, but before he joined the Tax Reform Panel), because I had been irritated by his passionate encomium to how long-term fiscally responsible his Administration was. And a few years before that, Glenn Hubbard (also while working for the Bush Administration) explained that the Bush tax cuts cost zero, not based on supply-side arguments, but on the view that every single dollar of tax cuts necessarily reduced government outlays by a dollar. But that may not have been at lunch.

Kocherlakota, by contrast, while discussing issues related to his current job, has a position in which he is not comparably required to be a political spokesman. He also clearly has an academic temperament, as one would expect from his work (I’m most familiar with that in “new dynamic public finance,” which I discuss here).

The talk left me feeling better about Kocherlakota’s recognition that it’s desperately important for the Fed, if at all possible, to address sustained unemployment. It left me feeling worse, however about the chances that the Fed’s current policy will actually help.

The basic theme was as follows: What should the Fed do when it wants to stimulate the economy, given the inadequate and slowing recovery, and can’t lower interest rates because they’re already effectively zero? He discussed two main things: the current policy of quantitative easing (QE), a.k.a. asset purchasing; and the potential interchangeability between fiscal policy and monetary policy. By this he meant not just the truism that either one can be stimulative, but rather that one can in principle exactly replicate or simulate the other. This second part of the talk was the one that got him plaudits from me and demerits from some others for being abstract – it was more of a thought experiment than anything with likely short-term policy ramifications.

OK, I’ve been reading a bit here and there about QE, but I must admit, as it’s outside of my real field of knowledge and I have plenty of other things to keep me busy, my understanding of it has been a bit vague. The talk was nicely helpful – unfortunately, in convincing me that it is highly unlikely to be very effective, even leaving aside the question of whether the scale would be too small even if it were in principle a sharp tool.

The ongoing QE ruckus concerns the Fed’s buying $600 billion of U.S. government bonds in simple market transactions. Republicans have been denouncing this – I believe, not in good faith given how 2012 avowedly trumps all other considerations in their thinking. The likes of Krugman say it’s much too small. But a starting point would be to ask how it is supposed to work in stimulating the economy.

One can understand how printing money potentially works. People feel richer in the short run and demand goes up (eliminating slack before inflation becomes a problem). And one can understand directly lowering interest rates, so consumers and businesses are more inclined to borrow for current spending. But why would Fed purchases of Treasury bonds be stimulative?

One path to QE’s being stimulative, which Kocherlakota rightly discounted, is that in practice it involves the Fed’s effectively giving the banks that sell it the bonds $600 billion more capacity to lend. In other words, increase the money supply because they can now make more loans. Only, the banks apparently have at present $1 trillion in unused capacity to lend, even with near-zero interest rates. So raising the unused capacity to $1.6 trillion is not going to accomplish much.

He instead proposed two alternative mechanisms for QE to work, in each case by replicating the policy act of lowering the interest rate despite its being zero. First, he said, the bond purchase is a credible statement that the Fed actually expects and believes and plans for interest rates to be very low for a very long time. So it lowers expected future interest rates that businesses are taking into account today.

This appeared to me to be a “skin in the game” type of argument. Suppose Warren Buffett purchased a vast quantity of U.S. government bonds. This might credibly signal that he believes U.S. interest rates will be low for a long time. If he were somehow the person who gets to decide what interest rates will be, it would be evidence that he expects to keep them low, plus he’d now have an extra reason for doing so (since the bonds he had purchased would lose value if interest rates went up).

But how does this to apply to the Fed, a governmental and hence nonprofit agency? To what extent are the Fed governors’ true incentives (which presumably are largely reputational) either illuminated or affected by its buying bonds? I think all QE really does in this dimension is show that they’re trying to shout. It’s a way of trying to pound the table and say: We really plan to keep interest rates low for a long time. But I’m not sure how much the act adds to the statement – which itself faces a pre-commitment problem, since what the Fed wants to do in the future might not be the same as what it wants people today to think it will do then.

In sum, surely the statement helps, but it’s unclear how much, and also unclear how much QE strengthens it. When a Fed governor admits they’re basically jawboning, it’s time to get nervous about their capacity to do anything effective even if they place a very high priority on addressing unemployment.

Route 2 that Kocherlakota identified by which QE can replicate lowering the interest rate is that, once the Fed has acted, the public (or rather those in the capital markets – including, of course, foreign governments and the like) now holds $600 billion less in U.S. government bonds than it did before. So the “public” is now collectively less exposed to U.S. government bond risk than otherwise, and requires less of a risk premium to hold bonds. This means that interest rates can now be lower (and expected to be lower) than in the absence of QE, continuing into the future. This rationale, unfortunately, strikes me as likely to be a bit trivial as an empirical matter.

In the more analytically, though less practically, interesting part of his talk, Kocherlakota discussed how fiscal policy can in principle replicate monetary policy. He said: Suppose the Fed lowers the interest rate by 100 basis points. Now the amount of consumption you can buy in a year by saving has dropped by 1%. Thus, suppose there is no inflation but the interest rate is zero. So, by saving for a year you are choosing between 1 widget now and 1 widget in a year. If the Fed could make the interest rate negative 1 percent, it could force you to choose between 1.01 widgets now and 1 widget in a year, inducing you to shift consumption forward to the present. But it can’t achieve this due to the zero lower bound. (After all, if you live in a safe neighborhood your mattress offers a 0% rather than negative return.)

Aha, he said. But suppose the legislature enacts a 1% consumption tax, to take effect in a year. And suppose it simultaneously enacts a 1% reduction in the wage tax, also to take effect in a year. Suppose further (though he was not explicit about this) that we assume, quite reasonably, that people in general can inter-temporally shift consumption but not labor supply. He also added in a temporary investment tax credit for purchases this year, but let’s ignore that to keep the example simple.

The exercise is roughly budget-neutral, and also keeps the labor versus leisure tradeoff the same as previously starting next year (since the price increase from the consumption tax is offset by the after-tax wage increase from the wage tax cut). But it means that you are choosing between 1.01 widgets now, before the consumption tax takes effect, and 1 widget next year (since with the 1% consumption tax increase that’s all you’ll get for the price of 1.01 widgets today). So it effectively replicates monetary policy while generally (if not quite perfectly) keeping other fiscal policy variables, such as the budget situation and incentive effects from next year forward, the same.

I thought it was a neat little analytical exercise. The fact that, in the real world of crude and imperfect instruments of fiscal policy, it would never hold quite exactly (as some questioners emphasized) is important as well, but doesn’t defeat the analytical point.

It’s also encouraging that at least one of the Fed governors is evidently so interested in wrestling intellectually with the problem of what the government can do when an interest rate cut is the preferred policy but unavailable. Discouraging as well, however, in that it doesn’t seem he’s come up with anything that we can anticipate actually being done and having a significant effect. Plus, it was almost as if he was saying: It's the legislature's fault, not mine. Even if they wanted to stick to replicating monetary policy, rather than running a more expansionary fiscal policy, they have the power that we at the Fed lack to escape the zero bound on interest rate cuts.

In sum, while this is hardly a new point, if QE is the best they have and all they are likely to do – and even that is attracting hysterical pushback from people who may not want the economy to get better before 2012 – we’d better fasten our seatbelts, or perhaps tighten our waist belts, because there are more bad times ahead.

Pop culture non-news

The Beatles on iTunes isn't exactly big news; it's not as if their catalog has been unavailable or under-exposed.

What would be big news is if they let iTunes put up as much as possible from among the unreleased recordings by the group (including but not limited to the vast array of bootlegs that are out there). This could include content from the original reel-to-reel Abbey Road studios tapes, all available demos and rehearsals from the era, etc.

99 cents per track, no promotional or printing costs for Apple Records, no need to worry about hitting the top of the charts with a particular release, etcetera. And there would quickly be a huge volunteer industry of people listing proposed albums to self-assemble.

Even just with pirate CDs and downloads, the amount that's currently available greatly exceeds their official canon, and indeed is so vast that the hard part is figuring out what bits are of particular interest, as they frequently in the studio already knew what they were doing before the first take of a given track.

Today's single most pathetic news item

Obama has now endorsed the theory that he lost in 2010 for not being bipartisan enough. He is defining political success as getting people (such as McConnell) who state openly that their chief goal is to defeat him, to agree to hand him political victories.

Once he's done in Washington, which if this is how he chooses to operate will be pretty soon, I think I'd like to play poker with him for big money.

Brilliant new policy idea: the CFNIA

Democrats in Congress have a brilliant new policy idea: the CFNIA, or "Compensation For No Inflation Adjustment." Pronounced "siffneeah."

You see, if you're on a fixed budget and prices don't go up, you don't lose any ground. But this apparently is a bad thing (although I hadn't realized it before). It means that, if you have inflation-adjusted benefits that would have offset the price increases, you don't get to enjoy the nominal rise in your budget. This can be very disappointing, so the least Washington can do is ease the pain with some cold hard cash.

Presumably this is why the Democrats are now proposing to pay all Social Security recipients $250 a head to "compensate" them for the fact that there has been no cost of living adjustment (because there has been no inflation and thus no need for the adjustment) for the last 2 years.

$14 billion, just because seniors are a politically powerful group. Yes, I know many seniors have tough circumstances and could use the money. But there are also younger people who could use some help - say, the millions of unemployed who were hit much harder by the down economy than retirees.

One small point in its favor: I suppose it is $14 billion of stimulus. Recipients may conceivably have a relatively high propensity to spend the money. But what a crass and pandering way this is to direct the stimulus, with bad precedential effects for future political decisions that will probably outlive the economic downturn.

If this is enacted, Congress couldn't possibly say more straightforwardly: We like you guys better than everyone else. Or rather, we fear you politically more than everyone else.

The Democrats should really get a prize for this. Beyond the budgetary irresponsibility and sleazy pandering, they show their characteristic political brilliance in proposing this after the election, and at the precise point when the benefit they reap from it will be as close to zero as it could ever be. It's not like anyone will remember this in 2012.

If I post my 2012 vote as collateral, could someone amend the legislation to add me to the list of recipients? I mean, as Al Franken would have said in a prior life, why not me.

Paul Krugman on the Entitlement Commission’s tax reform plans

In his NYT column today, “The Hijacked Commission,” Paul Krugman harshly criticizes the Entitlement Commission’s tax reform proposals. Krugman is a lightning rod, of course, but in my view he’s been right about a lot of things. Here, however, he is in part taking on views widely accepted in the tax policy community, from at least moderate left to right. So herewith I quote the relevant paragraphs from his column, then offer some thoughts in response.

KRUGMAN: “We’ve known for a long time, then, that nothing good would come from the commission. But on Wednesday, when the co-chairmen released a PowerPoint outlining their proposal, it was even worse than the cynics expected.

“Start with the declaration of “Our Guiding Principles and Values.” Among them is, “Cap revenue at or below 21% of G.D.P.” This is a guiding principle? And why is a commission charged with finding every possible route to a balanced budget setting an upper (but not lower) limit on revenue?”

RESPONSE: Agreed as a matter of policy. The right level depends on social value for money or the costs versus benefits of greater government expenditure. The only good explanation for a revenue cap, but it is potentially plausible, would be that there is a political problem of undesirable “program creep” that can be addressed on the revenue side. Unfortunately, addressing program creep through a revenue cap is a “starve the beast” strategy which, as other critics of the plan have noted, does not appear to work. If you want to address the program creep problem, it really needs to be done on the outlay side, given the political ease of using debt financing.

There is, however, one other argument for a revenue cap. It is simply that one needs some such thing for the right to be willing to play ball on deficit reduction. Even if Krugman is 100 percent right on all policy matters, a feasible deal to prevent a U.S. fiscal crisis will need to involve compromise with others who have different views. So here one could see him as making a tactical argument that it’s too soon to concede this when the right isn’t yet really willing to play ball – or alternatively as demanding total victory. (Impossible to distinguish between these two variants until one has an actual, politically feasible take-it-or-leave it deal on the table.)

KRUGMAN: “Matters become clearer once you reach the section on tax reform. The goals of reform, as Mr. Bowles and Mr. Simpson see them, are presented in the form of seven bullet points. ‘Lower Rates’ is the first point; ‘Reduce the Deficit is the seventh.

"So how, exactly, did a deficit-cutting commission become a commission whose first priority is cutting tax rates, with deficit reduction literally at the bottom of the list?”

RESPONSE: Touché, at least to a degree. But this doesn’t mean it’s a right-wing plot. The panel appears to have relied on tax reform types (hardly a word of opprobrium, coming from me) who offered the standard prescription of broadening the base and lowering the rate. Why do this here? Two reasons. First, if revenues are going up relative to current law, it’s all the more important to increase the efficiency of the tax system, since distortions have more impact as it grows. Second, if lots of unpopular stuff is being done anyway to reduce the fiscal gap, why not throw in other unpopular but good-policy type stuff.

KRUGMAN: “Actually, though, what the co-chairmen are proposing is a mixture of tax cuts and tax increases — tax cuts for the wealthy, tax increases for the middle class. They suggest eliminating tax breaks that, whatever you think of them, matter a lot to middle-class Americans — the deductibility of health benefits and mortgage interest — and using much of the revenue gained thereby, not to reduce the deficit, but to allow sharp reductions in both the top marginal tax rate and in the corporate tax rate.

“It will take time to crunch the numbers here, but this proposal clearly represents a major transfer of income upward, from the middle class to a small minority of wealthy Americans. And what does any of this have to do with deficit reduction?”

RESPONSE: Krugman must have really hated the 1986 tax reform, which used ALL of the revenue from base-broadening to pay for lower rates. Here, the commission sets aside $80 billion (in the initial year) for deficit reduction, while using the rest to pay for lower rates.

And yes, the numbers do have to be crunched before we draw conclusions here. Note that the 1986 Act, at least as estimated, was distribution-neutral. And indeed it was probably progressive on balance if, at the time, the corporate tax (which went up despite corporate rate reduction) was mainly borne by shareholders in the transition and savers in the 1980s version of the “long run” (i.e., before global capital mobility, which tends to shift the incidence of the corporate tax to workers, had quite reached current levels).

Krugman does not mention a big chart the commission included, called “Who Benefits from Tax Expenditures,” showing that their effect on after-tax income is greatest for the top 1%. He notes that the deductibility of health benefits and mortgage interest, “whatever you think of them, matter a lot to middle class Americans.” But these benefits are uncapped, apart from the $1.1 million ceiling on home mortgage loan principal that generates deductible interest, and the fact that they “matter” to middle class Americans at lower dollar levels is not really the point. And the middle class does benefit from rate reduction. For example, the Commission’s “Option 1” plan, the one he appears to be addressing here, creates a 3-tier rate structure of 9%, 15%, and 24% (I’m using the variant that keeps the child tax credit and EITC, which, as I have explained elsewhere, are better viewed as rate structure features than as tax expenditures). This does significantly cut rates for everyone, not just at the top, thus creating an offset.

If I had to guess before someone crunches the numbers, the top 1% doesn’t necessarily win under the plan, though the uppermost portion of that percentile may well win big. (This reflects that tax expenditures at very high levels may stop growing significantly with income - e.g., how much bigger is your primary residence likely to be if you earn $50 million, rather than $40 million?) This was probably true in 1986 as well. In analyzing this, the efficiency aspects of lower rates are relevant. Krugman often expresses skepticism about them, usually by correctly debunking exaggerated claims about how higher rates shut down the economy (which we have certainly seen they don’t). But plausible economic models, and not just those done by more conservative economists who assume relatively high taxpayer responsiveness, do show some positive impact of lower rates on productive economic activity.

Important to keep in mind here that this is still an income tax, creating lots of distortions (even if savings behavior as such is relatively inelastic) because the asset valuation piece of income is so hard to measure and thus we are forced to use realization rules. If we’re talking tax reform fantasies here, I would switch to a progressive consumption tax and would certainly expect to end up proposing higher top bracket rates (such as on the order of 35%) than the Commission does under an income tax.

Note also that the Commission proposes lowering the corporate rate – under the option I’m considering, from 35% to 26%. Given current models and empirical work looking at corporate tax incidence in a global economy, this shift probably has a relatively progressive long-term impact, from its attracting more capital to the U.S. through the lower rate (though for this purpose one has to consider the effective rate, increased by base-broadening, not just the marginal rate). But the transition gain from cutting the rates, before investment levels adjust, may go to current shareholders.

By the way, a very non-Krugman problem with the Commission’s Option 1 is that (in the variant I consider) the corporate rate exceeds the top individual rate, and in addition dividends and capital gain are taxed as ordinary income, making the system’s bias against corporate equity (and in favor of debt financing or non-corporate entities) significantly greater than under present law.

An underlying philosophical question here is what should proponents of progressivity really be most concerned with – raising the bottom or lowering the top? I am more of a raise-the-bottom person, although I do see the rising concentration of wealth in the U.S. at the very top as potentially having dangerous social, political, and economic implications. But estate or inheritance taxation may be a better instrument than the annual income tax for addressing this. And I would especially like to focus policy at the top on fortunes that are being made through unproductive activity (e.g., Blackwater-style crony capitalism, horrendously maldesigned executive compensation, and the undue growth of the financial sector), as opposed to winner-takes-all yet to a degree productive development of new consumer products (e.g., Microsoft or Facebook). But this presumably involves political economy and regulatory responses, as opposed to using the tax system.