Last Thursday at the Tax Policy Colloquium, David Walker presented his paper, "Suitable for Framing: Business Deductions in a Net Income Tax System." In the paper, David extends ideas that many of us have written about, concerning the fiscal illusion reasons for politicians' frequent preference for "tax expenditures" over equivalent direct spending, to deduction disallowance.
Thus, consider the $1 million cap on non-incentive executive comp that Congress enacted in 1993 - widely regarded today as either pointless pandering or an affirmative blunder that accentuated the move in that era towards excessive and ill-designed "incentive compensation." At the time, President Clinton said it would repeal the "subsidy" for overpaying high-ranking executives at public corporations. But the deduction for paying compensation over $1 million was not a "subsidy" if one views it instead as simply a cost that needs to be taken into account in measuring corporate net income.
For this purpose, it doesn't matter if executives were being grossly overpaid and providing no commensurate value to shareholders. Still an expense from the corporation's standpoint (and thus that of the shareholders as residual claimants). The point in assessing whether an outlay should be deductible, from the net income measurement standpoint, is not whether it was a good deal, but whether it was associated with an offsetting and untaxed value flow. (This is in effect why, say, lunch at a nice restaurant, with no claim of business connection, is nondeductible - you truly are out the money you paid, but in return you got the value of the consumption.)
Anyway, returning to the theme of the paper, Walker argues that, just as tax expenditures can yield fiscal illusion from an optimally "smaller" government that is actually doing the same things as under the direct spending route, denying deductions that are simply inputs to net income measurement leads to "regulatory illusion."
I'm certainly generally sympathetic to the paper's account of this point. Discussion focused more on how best to frame the paper than on criticizing the "regulatory illusion" claim substantively.
For this week, less happy tidings. Jeffrey Brown of U. Illinois had been scheduled to present a paper entitled "Automatic Lifetime Income as a Path to Retirement Security." But he's been forced to cancel at the last minute for reasons beyond his control. For what I believe is the first time in the Colloquium's 15-year history, we have therefore been forced to cancel the PM session for this Thursday (Feb. 18).
I had been looking forward to this discussion. Jeff's paper argues that, given widespread myopia and financial illiteracy, contributing to under-annuitization by retirement savers notwithstanding Social Security, the pension rules should be changed to avoid discouraging employers who run retirement plans from offering, as a default with easy opt-out, 50% annuitization of one's defined contribution account at retirement.
I felt the proposal was a bit modest given the underlying critique. Once one invokes behavioral economics, e.g., to favor particular defaults, one gets into what remains, in the literature, a largely under-theorized world. Proposals in this area seem to me to need what I would call a theory of optimal induced annuitization.
Perhaps I'll write about this at some point (in general, not with regard to this particular paper), but it's likely to be a while.