The very silly film director Roland Emmerich is currently making a film called "Anonymous," based on the even sillier theory that Shakespeare couldn't have written his own plays, and that they must have been done by a sophisticated London nobleman or some such person, such as Edward de Vere, the Earl of Oxford.
Actually, the theory I prefer is that Shakespeare's plays were written, not by Shakespeare, but by another man who had the same name and also was born in Stratford in 1564. But I digress.
To find any credence in an Edward de Vere-style theory, you must be, not only prone to accepting implausible conspiracies, but entirely clueless about art, artists, and creativity. If Shakespeare's plays had no known author and the question were what sort of person must have written them, the historically known William Shakespeare would exactly fit the prototype that I'd expect. Ambitious outlander, self-educated with a few rough edges, prone to innovate because he hadn't been in the center early enough to imbibe orthodoxy instead of making it up for himself, and so forth. A well-educated, well-connected London nobleman is absolutely the last sort of person one could imagine ever having written Shakespeare's plays.
Same reason, by the way, that the Beatles were more creative, original, and inspired than the Rolling Stones.
Friday, April 30, 2010
Thursday, April 29, 2010
Good news for people who like bad news
Alan Auerbach and William Gale have just published their latest update of the long-term U.S. federal budget situation. They use 3 scenarios:
(a) the CBO baseline, which is based on the law on the books, which includes politically unrealistic sunsets for various huge tax cuts enacted in 2001 and 2003,
b) the Obama Administration budget proposals, including those whose enactment seems highly unlikely, and
(c)an adjustment to the CBO baseline that is based on "assum[ing] that future Congresses will act more or less like previous Congresses, for example in granting continuances to expiring tax provisions."
It seems pretty obvious to me that (c) is the most realistic projection of actual current budget policy. Under it, Auerbach and Gale project a ten-year deficit (through 2020) of $11.3 trillion - even with an assumed, in my view unrealistically rapid (from CBO projections) return of the economy to full employment. By 2023, moreover, the debt-to-GDP ratio would pass its 1946 high of 108.6 percent and "would then continue to rise rapidly, contrary to its sharp decline in the years immediately after 1946." The long-term fiscal gap, under this scenario, is 9.07 percent of the present value of all U.S. GDP, or $131.2 trillion in present value.
To illustrate what this means, suppose (purely as a thought experiment) that the fiscal gap was eliminated entirely through tax increases that took effect immediately. Taxes would have to go up by well over $1 trillion a year, rising at the same rate as the economy, and of course ignoring the cataclysmic macroeconomic effect that such an immediate tax increase would in fact have.
A couple of further points from the update. First, as yet unenacted health care changes "can be an important part of reducing the fiscal gap, but the problem is far too large to be solved by plausible reductions in health care spending alone."
Second, the inevitable forced retrenchment "can happen gradually or suddenly." Even "under the gradual scenario, sustained large deficits will reduce future national income and living standards. In the sudden scenario, long-term budget shortfalls could trigger a political or market reaction that leads to a sudden change in interest rates, exchange rates, capital outflows, etc. Avoiding these outcomes will require significant and sustained changes to spending and revenue policies in the very near future."
The mode of expression here is sedate, the underlying thought considerably less so. The phrase "market reaction that leads to a sudden change in interest rates, exchange rates, capital outflows, etc." refers to something a bit like the 2008-9 financial crisis, only vastly worse. (And note that the government can bail out banks when they fail, but it can't bail itself out when it fails.)
As for the scenario required to avoid these outcomes, I put it probabilistically on a par with arrival of the Easter Bunny.
(a) the CBO baseline, which is based on the law on the books, which includes politically unrealistic sunsets for various huge tax cuts enacted in 2001 and 2003,
b) the Obama Administration budget proposals, including those whose enactment seems highly unlikely, and
(c)an adjustment to the CBO baseline that is based on "assum[ing] that future Congresses will act more or less like previous Congresses, for example in granting continuances to expiring tax provisions."
It seems pretty obvious to me that (c) is the most realistic projection of actual current budget policy. Under it, Auerbach and Gale project a ten-year deficit (through 2020) of $11.3 trillion - even with an assumed, in my view unrealistically rapid (from CBO projections) return of the economy to full employment. By 2023, moreover, the debt-to-GDP ratio would pass its 1946 high of 108.6 percent and "would then continue to rise rapidly, contrary to its sharp decline in the years immediately after 1946." The long-term fiscal gap, under this scenario, is 9.07 percent of the present value of all U.S. GDP, or $131.2 trillion in present value.
To illustrate what this means, suppose (purely as a thought experiment) that the fiscal gap was eliminated entirely through tax increases that took effect immediately. Taxes would have to go up by well over $1 trillion a year, rising at the same rate as the economy, and of course ignoring the cataclysmic macroeconomic effect that such an immediate tax increase would in fact have.
A couple of further points from the update. First, as yet unenacted health care changes "can be an important part of reducing the fiscal gap, but the problem is far too large to be solved by plausible reductions in health care spending alone."
Second, the inevitable forced retrenchment "can happen gradually or suddenly." Even "under the gradual scenario, sustained large deficits will reduce future national income and living standards. In the sudden scenario, long-term budget shortfalls could trigger a political or market reaction that leads to a sudden change in interest rates, exchange rates, capital outflows, etc. Avoiding these outcomes will require significant and sustained changes to spending and revenue policies in the very near future."
The mode of expression here is sedate, the underlying thought considerably less so. The phrase "market reaction that leads to a sudden change in interest rates, exchange rates, capital outflows, etc." refers to something a bit like the 2008-9 financial crisis, only vastly worse. (And note that the government can bail out banks when they fail, but it can't bail itself out when it fails.)
As for the scenario required to avoid these outcomes, I put it probabilistically on a par with arrival of the Easter Bunny.
Wednesday, April 28, 2010
We could be heroes, just for one day
Now that the Mets are in first place, I think it's time to declare victory and cancel the rest of the season.
Monday, April 26, 2010
The first time you know something is seriously wrong
In Getting It, the first time you know something is seriously wrong with the people and the environment is in the second sentence: "They were due to visit him at 4 o'clock, and already it was 3:59:30."
Foreign tax credits redux
Tonight I'm presenting my foreign tax credits paper to an NYC practitioners' group. Meanwhile, I'm proceeding on three tracks with regard to its publication (with permission from the various editors). A short version will appear in the National Tax Journal (the papers & proceedings volume for the May 13-14 annual National Tax Association conference in Washington, D.C.), as well as in an Institute for Austrian and International Tax Law conference volume, from the conference in Vienna I attended this past March.
The long version - not needlessly long, I hope, but aiming to discuss the relevant issues more comprehensively and in depth - will be appearing in the Journal of Legal Analysis, a new faculty-edited law review from the Harvard University Press. For this one, my anonymous expert reviewer, who was reasonably favorable but declined to roll over for me, had some good comments that, combined with the fact that I understand what I'm talking about in the paper a lot better than when I started writing it and had not yet presented it, will enable me to be much clearer than I now gather I was in the posted version.
Here's hoping, therefore, that interested individuals, even if they have read the SSRN version (often the only version of people's work that anyone bothers with these days), will give the JLA version a shot when it comes out next year.
The long version - not needlessly long, I hope, but aiming to discuss the relevant issues more comprehensively and in depth - will be appearing in the Journal of Legal Analysis, a new faculty-edited law review from the Harvard University Press. For this one, my anonymous expert reviewer, who was reasonably favorable but declined to roll over for me, had some good comments that, combined with the fact that I understand what I'm talking about in the paper a lot better than when I started writing it and had not yet presented it, will enable me to be much clearer than I now gather I was in the posted version.
Here's hoping, therefore, that interested individuals, even if they have read the SSRN version (often the only version of people's work that anyone bothers with these days), will give the JLA version a shot when it comes out next year.
Sunday, April 25, 2010
Then again, maybe not
Surely this NYT sports headline ("To Mets, Reaching .500 Does Not Feel Half Bad") is a reference to Getting It, for reasons you'll discern if you read it all the way through (as I think you will if you start it).
Saturday, April 24, 2010
More summer plans?
We're thinking that Seymour should go to meowing school. As he gallops around excitedly in the morning when he knows we're about to head downstairs and feed him, he emits these half-strangled, high-pitched squeaks that suggest he never learned properly.
Seymour's latest nickname is Austin Powers, because he's a swinger (as in tail swinger; it's long and he's often sweeping it from side to side).
Friday, April 23, 2010
Summer plans
There is no shortage of projects I need to get to work on, now that I'm through with teaching (and most other academic responsibilities) for the 2009-2010 academic year.
First up is a short article, "Taxation of the Financial Sector," that I'm coauthoring with Joel Slemrod and Doug Shackelford for presentation at the May 2010 National Tax Association meeting in Washington and publication not long thereafter in the National Tax Journal.
Next up, I need to complete revisions of my SSRN-posted article, "The Case Against Foreign Tax Credits," a.k.a. (in a scaled-down version) "Rethinking Foreign Tax Creditability." The longer version will appear in the Journal of Legal Analysis, a new faculty-edited journal from the Harvard University Press, while the shorter version will also appear in the N.T.J. after presentation at the May N.T.A. meeting, as well as in an Austrian conference volume from a talk I gave in Vienna last month.
After that, an international tax article that's in an early stage, currently called "A Voluntary Worldwide Tax? Corporate Residence and the Transition Problem In U.S. International Taxation." The clunky title will have to change.
Probably next up after that is my book in progress, "Fixing the U.S. International Tax Rules," which is more than half complete (first drafts of 5 chapters out of 7 plus conclusion) but needs to be reshaped in addition to being otherwise completed. Possibly another international tax article before that one, however, such as on the relationship between international tax issues and tariff/trade issues (which several prominent people have written on, but without seeing the analogies between the issues in the same way that I do).
I also have to write a 25-minute talk on the "law and economics" (I'd rather say "welfare economics") analysis of transition policy, for a debate at a European tax law professors conference in Leuven, Belgium next month. Plus a talk to Canadian tax law professors in a couple of months, and I'm also giving talks in Oxford and Munich, plus there's a chance I'll be doing something in Costa Rica - I haven't heard back about this yet.
Sounds like Getting It will need to remain the unique entry in my novelistic canon for a considerable time to come, even if I am lucky enough as to conceive a sequel ("Losing It"?).
First up is a short article, "Taxation of the Financial Sector," that I'm coauthoring with Joel Slemrod and Doug Shackelford for presentation at the May 2010 National Tax Association meeting in Washington and publication not long thereafter in the National Tax Journal.
Next up, I need to complete revisions of my SSRN-posted article, "The Case Against Foreign Tax Credits," a.k.a. (in a scaled-down version) "Rethinking Foreign Tax Creditability." The longer version will appear in the Journal of Legal Analysis, a new faculty-edited journal from the Harvard University Press, while the shorter version will also appear in the N.T.J. after presentation at the May N.T.A. meeting, as well as in an Austrian conference volume from a talk I gave in Vienna last month.
After that, an international tax article that's in an early stage, currently called "A Voluntary Worldwide Tax? Corporate Residence and the Transition Problem In U.S. International Taxation." The clunky title will have to change.
Probably next up after that is my book in progress, "Fixing the U.S. International Tax Rules," which is more than half complete (first drafts of 5 chapters out of 7 plus conclusion) but needs to be reshaped in addition to being otherwise completed. Possibly another international tax article before that one, however, such as on the relationship between international tax issues and tariff/trade issues (which several prominent people have written on, but without seeing the analogies between the issues in the same way that I do).
I also have to write a 25-minute talk on the "law and economics" (I'd rather say "welfare economics") analysis of transition policy, for a debate at a European tax law professors conference in Leuven, Belgium next month. Plus a talk to Canadian tax law professors in a couple of months, and I'm also giving talks in Oxford and Munich, plus there's a chance I'll be doing something in Costa Rica - I haven't heard back about this yet.
Sounds like Getting It will need to remain the unique entry in my novelistic canon for a considerable time to come, even if I am lucky enough as to conceive a sequel ("Losing It"?).
Summer here kids
The title of this post is taken from that of a 1998 song by Grandaddy. Perhaps not the aptest reference I could have chosen - certainly I hope not - as the oft-repeated theme of that song is "I'm not having a good time." Whereas I personally love the summer, both the weather and the freedom. But the song has been running through my head this morning because the title applies.
Summer's here for me, even if the weather is still a bit back and forth, as yesterday I co-taught my last classes of the semester (and indeed the academic year, as I'm on sabbatical in the fall). That's as good a definition of summer as you can get in the academic world.
It was a pretty long day, as I first spoke at an international tax panel and then did 4 hours of classes (per the usual Tax Policy Colloquium "super Thursday"). But it was reasonably lively throughout.
From 9 to 9:45 am, I led a tax policy panel discussion at an NYU-KPMG event held here at the law school. Perhaps loosely in the spirit of Passover and the "four questions," I offered 4 statements that I described as mistaken but widely accepted. To wit:
"(1) U.S. international tax policy is or should be based on maximizing worldwide welfare.
"(2) The basic policy choice we face is between (a) an exemption system for U.S. taxpayers’ foreign source income, and (b) a worldwide system with foreign tax credits.
"(3) It makes no real difference that corporations, rather than individuals, are the main U.S. taxpayers subject to our rules for foreign source active business income.
"(4) The debate should focus purely on existing U.S. companies – or alternatively, should forget about them altogether."
Given 20 minutes to explain why all 4 of these statements are wrong, I finished in 15, followed by discussion with panelists David Rosenbloom, Mihir Desai, and Charles Kingson, none of whom disagreed enormously with any of my points although their own views are not exactly identical.
Then it was off to an AM colloquium class at 10 am to discuss with the students a new (though it's been around for a while) paper by Ed McCaffery and Jim Hines, "The Last Best Hope for Progressivity in Tax." I share the authors' belief that it would be desirable to shift from the existing income tax to a reasonably well-designed progressive consumption tax. The model they (or at least McCaffery) may prefer is an individual "consumed income tax," looking a bit like a standard income tax on individuals but with all saving being deducted and all dissaving included. In my view, about equally as good would be the use of an X-tax (like the flat tax but with more rate bracket graduation).
One big theme McCaffery has had in his past writing, reflected to a degree in the paper, is that he regards a post-paid consumption tax as greatly superior to a prepaid wage tax - even though, as he recognizes, if you build in a certain number of assumptions and design features, the two would be long-term economically equivalent.
The paper calls the flat tax, and thus equivalently the David Bradford X-tax, a prepaid wage tax. However, I explained at the 4 pm session, and Hines agreed - McCaffery, alas, could not come to New York for the day - that this is incorrect. The flat tax and X-tax superficially look like wage taxes because, in fact, the workers' wages are taxed under the applicable rate structure (e.g., 0%, then 15%, then 25%, then 35%).
Given the explicit tax on wages, how could these not be wage taxes? Ah, but you need to look a bit further. Let's illustrate using the flat tax, since its having only two brackets (0% and the single rate applying above that) makes the exposition simpler. To create a flat tax, you effectively start with a VAT, in which all inter-business sales are taxable to the seller but deductible or creditable by the buyer, leading to a net tax on those transactions of zero. Only sales to retail customers are taxable on the seller side without being refundable on the buyer side. Hence, a VAT is simply a retail sales tax (RST) plus paperwork for the preceding inter-business sales - which generate a positive tax plus an offsetting negative tax, rather than simply no tax like the RST, in order to generate a paper trail for auditors.
All you need do to convert the VAT into a flat tax is make wage payments deductible by the business and includable by the worker. This, too, would make no difference whatsoever if workers were taxed from the first dollar on at the business rate. The only reason it matters under the flat tax is that workers have a zero rate bracket.
Thus, suppose the flat tax is at 25%, except for a zero bracket on the first $20,000 of wages. It is economically equivalent to the sum of (1) a 25% VAT (which McCaffery and all others would agree is a "post-paid consumption tax," not a "prepaid wage tax"), plus (2) a cash payment of up to $5,000 per worker, under which the amount you get equals 25% of your wages up to $20,000.
In short, the flat tax is simply a post-paid consumption tax plus a wage SUBSIDY (you can call it a "VAT rebate" if you like) for the first $20,000 earned. Case closed, unless one wants to classify based on optics rather than economic reality (which I suppose one could try to defend on behavioral economics grounds).
Hines and McCaffery are both enormously entertaining speakers. (I thought of the phrase describing Jeff Goldblum's Ian Malcolm character in the first Jurassic Park movie: "a deplorable excess of personality"). It would have been great to see both of them, but it was nice to at least see one of them.
The paper appears to have more McCaffery than Hines content, but Jim was game in defending most of the views expressed therein (although, again, he agreed with my analysis of the above). I myself tend to agree more with Ed's bottom lines than with the details of his analysis, such as a seeming tendency to like "work" and "saving" as ends in themselves while criticizing excess "consumption," whereas I might say one works and saves in order to be able to consume.
To Jim, the key takeaway from the paper is that the reason one can be more progressive in a consumption tax than an income tax is that everyone recognizes the optimal tax rate on saving can't (for efficiency reasons) be as high as it might be on work / consumption. So decoupling the two rates means that a high marginal rate becomes more sensible and more politically feasible. But all one needs to achieve this decoupling is a "dual income tax," such as those that have existed in various Scandinavian countries, in which the tax rate on the normal return to saving is determined separately from that on other income. Jim agreed with this as well, and noted that he also thinks the tax rate on that normal return should be zero (as it is under a consumption tax). But he agreed that decoupling the two rates takes care of his critique and that it's a separate question whether the tax on the normal return to saving should be zero, rather than simply lower than the higher plausible rates on everything else.
I suppose this post is getting more than long enough. So I'll close by noting with pleasure that I will be co-teaching the Tax Policy Colloquium with Mihir Desai again next year, and that we were both delighted to have great students.
Summer's here for me, even if the weather is still a bit back and forth, as yesterday I co-taught my last classes of the semester (and indeed the academic year, as I'm on sabbatical in the fall). That's as good a definition of summer as you can get in the academic world.
It was a pretty long day, as I first spoke at an international tax panel and then did 4 hours of classes (per the usual Tax Policy Colloquium "super Thursday"). But it was reasonably lively throughout.
From 9 to 9:45 am, I led a tax policy panel discussion at an NYU-KPMG event held here at the law school. Perhaps loosely in the spirit of Passover and the "four questions," I offered 4 statements that I described as mistaken but widely accepted. To wit:
"(1) U.S. international tax policy is or should be based on maximizing worldwide welfare.
"(2) The basic policy choice we face is between (a) an exemption system for U.S. taxpayers’ foreign source income, and (b) a worldwide system with foreign tax credits.
"(3) It makes no real difference that corporations, rather than individuals, are the main U.S. taxpayers subject to our rules for foreign source active business income.
"(4) The debate should focus purely on existing U.S. companies – or alternatively, should forget about them altogether."
Given 20 minutes to explain why all 4 of these statements are wrong, I finished in 15, followed by discussion with panelists David Rosenbloom, Mihir Desai, and Charles Kingson, none of whom disagreed enormously with any of my points although their own views are not exactly identical.
Then it was off to an AM colloquium class at 10 am to discuss with the students a new (though it's been around for a while) paper by Ed McCaffery and Jim Hines, "The Last Best Hope for Progressivity in Tax." I share the authors' belief that it would be desirable to shift from the existing income tax to a reasonably well-designed progressive consumption tax. The model they (or at least McCaffery) may prefer is an individual "consumed income tax," looking a bit like a standard income tax on individuals but with all saving being deducted and all dissaving included. In my view, about equally as good would be the use of an X-tax (like the flat tax but with more rate bracket graduation).
One big theme McCaffery has had in his past writing, reflected to a degree in the paper, is that he regards a post-paid consumption tax as greatly superior to a prepaid wage tax - even though, as he recognizes, if you build in a certain number of assumptions and design features, the two would be long-term economically equivalent.
The paper calls the flat tax, and thus equivalently the David Bradford X-tax, a prepaid wage tax. However, I explained at the 4 pm session, and Hines agreed - McCaffery, alas, could not come to New York for the day - that this is incorrect. The flat tax and X-tax superficially look like wage taxes because, in fact, the workers' wages are taxed under the applicable rate structure (e.g., 0%, then 15%, then 25%, then 35%).
Given the explicit tax on wages, how could these not be wage taxes? Ah, but you need to look a bit further. Let's illustrate using the flat tax, since its having only two brackets (0% and the single rate applying above that) makes the exposition simpler. To create a flat tax, you effectively start with a VAT, in which all inter-business sales are taxable to the seller but deductible or creditable by the buyer, leading to a net tax on those transactions of zero. Only sales to retail customers are taxable on the seller side without being refundable on the buyer side. Hence, a VAT is simply a retail sales tax (RST) plus paperwork for the preceding inter-business sales - which generate a positive tax plus an offsetting negative tax, rather than simply no tax like the RST, in order to generate a paper trail for auditors.
All you need do to convert the VAT into a flat tax is make wage payments deductible by the business and includable by the worker. This, too, would make no difference whatsoever if workers were taxed from the first dollar on at the business rate. The only reason it matters under the flat tax is that workers have a zero rate bracket.
Thus, suppose the flat tax is at 25%, except for a zero bracket on the first $20,000 of wages. It is economically equivalent to the sum of (1) a 25% VAT (which McCaffery and all others would agree is a "post-paid consumption tax," not a "prepaid wage tax"), plus (2) a cash payment of up to $5,000 per worker, under which the amount you get equals 25% of your wages up to $20,000.
In short, the flat tax is simply a post-paid consumption tax plus a wage SUBSIDY (you can call it a "VAT rebate" if you like) for the first $20,000 earned. Case closed, unless one wants to classify based on optics rather than economic reality (which I suppose one could try to defend on behavioral economics grounds).
Hines and McCaffery are both enormously entertaining speakers. (I thought of the phrase describing Jeff Goldblum's Ian Malcolm character in the first Jurassic Park movie: "a deplorable excess of personality"). It would have been great to see both of them, but it was nice to at least see one of them.
The paper appears to have more McCaffery than Hines content, but Jim was game in defending most of the views expressed therein (although, again, he agreed with my analysis of the above). I myself tend to agree more with Ed's bottom lines than with the details of his analysis, such as a seeming tendency to like "work" and "saving" as ends in themselves while criticizing excess "consumption," whereas I might say one works and saves in order to be able to consume.
To Jim, the key takeaway from the paper is that the reason one can be more progressive in a consumption tax than an income tax is that everyone recognizes the optimal tax rate on saving can't (for efficiency reasons) be as high as it might be on work / consumption. So decoupling the two rates means that a high marginal rate becomes more sensible and more politically feasible. But all one needs to achieve this decoupling is a "dual income tax," such as those that have existed in various Scandinavian countries, in which the tax rate on the normal return to saving is determined separately from that on other income. Jim agreed with this as well, and noted that he also thinks the tax rate on that normal return should be zero (as it is under a consumption tax). But he agreed that decoupling the two rates takes care of his critique and that it's a separate question whether the tax on the normal return to saving should be zero, rather than simply lower than the higher plausible rates on everything else.
I suppose this post is getting more than long enough. So I'll close by noting with pleasure that I will be co-teaching the Tax Policy Colloquium with Mihir Desai again next year, and that we were both delighted to have great students.
Thursday, April 22, 2010
Another customer review for Getting It
Sorry for the intermittent monomania (if that isn't an oxymoron), but I keep having this feeling that even people who have heard of Getting It, and are reasonably sympathetic to me or amused by my having published it, under-rate (logically, perhaps, given their info and reasonable assumptions, but incorrectly) how enjoyable they'd find it. If I didn't think I had a really good little number on my hands, I certainly wouldn't have published it - why would I need to, and why would I bother unless I believe (and have been told enough times) that it's really good?
Anyway, here's another customer review, again admittedly from someone I've known for a very long time. But this person could very easily have said nothing at all:
"Dear Dan, I just finished reading your novel, which I enjoyed hugely. It is so funny and the tone is pitch-perfect: how come we care about this no-goodnik? but we do; we want him to win. Next, [X]'s turn [to read it], then, [Y]'s. Congratulations! Best to all, [Z]"
Anyway, here's another customer review, again admittedly from someone I've known for a very long time. But this person could very easily have said nothing at all:
"Dear Dan, I just finished reading your novel, which I enjoyed hugely. It is so funny and the tone is pitch-perfect: how come we care about this no-goodnik? but we do; we want him to win. Next, [X]'s turn [to read it], then, [Y]'s. Congratulations! Best to all, [Z]"
Tuesday, April 20, 2010
Smart versus dumb on Wall Street
I have no particular expertise regarding securities fraud, but my preliminary sense of the Goldman Sachs indictment is that it makes a powerful case, as explained by Brad DeLong. The tricky question for me is whether the cherry-picked portfolio here was bad for reasons other than its simply losing ex post because the real estate market headed south, rather than north. This might shed light on the degree to which rational investors ought to have been leery of the investment had they known more about its provenance, leaving aside the fact that they were insanely (but through their own foolishness) betting on continued expansion of the real estate bubble.
Obviously, if there were no further reason for concern, Goldman Sachs could simply have disclosed the provenance, and I agree with Brad that this would have tended to make investors run for the hills. Or they could have actually designed the instrument in the more benign and neutral manner that the disclosure materials suggested.
In principle, there is always a danger that the SEC, if it won this case, would in the future be emboldened to look for something, anything, that hadn't been disclosed whenever investors make a deliberate bet and lose it big-time ex post. But we seem to be very far from such a world. And the all-too-justified sense among investors, given events of the last few years, that Wall Street is a non-transparent sucker's game in which the rubes are perpetually being fleeced by the more knowledgeable is potentially exceptionally deadly to the healthy functioning of our economy.
Even if Goldman Sachs wins this case, they have sent a message to investors around the world regarding exactly how trustworthy they are. Evidently, they have a bridge in Brooklyn that they would like to sell me, and I can't see why any small-time player by their lights (including people with a few spare millions to invest) would want to have any dealings with them for years to come.
But whatever else you think about Goldman Sachs, these guys are smart, not stupid like so many of the other players who brought Wall Street to its knees in the last few years. (Or maybe the point is that the managers owned the firm, and thus weren't inclined, like so many others on Wall Street, to be wildly reckless with the shareholders' money.) They saw where the real estate bubble was heading, and in principle that can help markets to adjust. Better, perhaps, to fleece your customers, who at least have the option of staying away, than to fleece the U.S. taxpayers with "heads we win, tails you lose" bets in which an extra-normal return bespeaks, not "alpha" or the ability to out-perform the market, but rather simply the decision (reflecting both incentives and stupidity) to ignore tail risk.
But sometimes Goldman Sachs' special talent for getting the most out of its customers does harm that resonates more broadly. Their actions in Greece bring to mind a person who observes that his neighbor is feeling despondent, sells him a loaded gun, and then thoughtfully takes out a life insurance policy on the poor guy.
Obviously, if there were no further reason for concern, Goldman Sachs could simply have disclosed the provenance, and I agree with Brad that this would have tended to make investors run for the hills. Or they could have actually designed the instrument in the more benign and neutral manner that the disclosure materials suggested.
In principle, there is always a danger that the SEC, if it won this case, would in the future be emboldened to look for something, anything, that hadn't been disclosed whenever investors make a deliberate bet and lose it big-time ex post. But we seem to be very far from such a world. And the all-too-justified sense among investors, given events of the last few years, that Wall Street is a non-transparent sucker's game in which the rubes are perpetually being fleeced by the more knowledgeable is potentially exceptionally deadly to the healthy functioning of our economy.
Even if Goldman Sachs wins this case, they have sent a message to investors around the world regarding exactly how trustworthy they are. Evidently, they have a bridge in Brooklyn that they would like to sell me, and I can't see why any small-time player by their lights (including people with a few spare millions to invest) would want to have any dealings with them for years to come.
But whatever else you think about Goldman Sachs, these guys are smart, not stupid like so many of the other players who brought Wall Street to its knees in the last few years. (Or maybe the point is that the managers owned the firm, and thus weren't inclined, like so many others on Wall Street, to be wildly reckless with the shareholders' money.) They saw where the real estate bubble was heading, and in principle that can help markets to adjust. Better, perhaps, to fleece your customers, who at least have the option of staying away, than to fleece the U.S. taxpayers with "heads we win, tails you lose" bets in which an extra-normal return bespeaks, not "alpha" or the ability to out-perform the market, but rather simply the decision (reflecting both incentives and stupidity) to ignore tail risk.
But sometimes Goldman Sachs' special talent for getting the most out of its customers does harm that resonates more broadly. Their actions in Greece bring to mind a person who observes that his neighbor is feeling despondent, sells him a loaded gun, and then thoughtfully takes out a life insurance policy on the poor guy.
An Inconvenient Tax
Attended the screening last night, then briefly spoke on a panel with Lee Sheppard and filmmaker Vincent Vittorio. In the movie itself, I got to talk about the "dead cat" phenomenon that led to enactment of the Tax Reform Act of 1986 (i.e,. even lawmakers who hated tax reform didn't want the "dead cat" on their doorstep), and a bit about tax reform and income vs. consumption taxation.
Of course, what's a movie appearance without complaining about the great material that the filmmakers left on the cutting room floor. In my case, this might have involved discussing the long-term U.S. fiscal situation, on which I no doubt (reflecting my views) said something alarming. They covered the issue, but no Shaviro clips in that part of the movie. So no "Best Supporting Actor" nominations for me ...
The movie was remarkably entertaining given the potentially dense subject, with lots of amusing interspersed bits from 1950s low-budget sci fi and homemaker training films, etc. Suitable for lay audiences, including high school students who are learning about civics and our political institutions. The filmmakers did a great job laying out some basics of the history of the federal income tax, the political reasons why it's so terrible, etc.
Inevitably, on the topic of tax reform (e.g., what significant changes we might make), while the film laid out some basic options, it couldn't explore them in depth - that would have been impossible without losing the audience. One also could argue that the complexity problems it discussed are becoming more tolerable for individual filers in the era of Turbo Tax. Too bad they didn't have Joe Bankman talking about Ready Return. But nonetheless two thumbs up (from both the left and the right).
I noted in the discussion afterward that, even though experts disagree about the ranking of alternative tax reform options, they actually would have little trouble agreeing to something everyone would agree was way better than the current system, if given the authority to decide on something. Expert dissensus is in a much narrower range. And one of the striking things about watching the movie is that one sees Noam Chomsky on the one hand and Dick Armey and Mike Huckabee on the other, and generally feels that most of what they are saying across this broad range is both reasonable and largely consistent.
Alas, the relative consensus of the experts does not count for much here. That plus a $2 Metrocard will get you on the NYC subway, but that's about it.
Of course, what's a movie appearance without complaining about the great material that the filmmakers left on the cutting room floor. In my case, this might have involved discussing the long-term U.S. fiscal situation, on which I no doubt (reflecting my views) said something alarming. They covered the issue, but no Shaviro clips in that part of the movie. So no "Best Supporting Actor" nominations for me ...
The movie was remarkably entertaining given the potentially dense subject, with lots of amusing interspersed bits from 1950s low-budget sci fi and homemaker training films, etc. Suitable for lay audiences, including high school students who are learning about civics and our political institutions. The filmmakers did a great job laying out some basics of the history of the federal income tax, the political reasons why it's so terrible, etc.
Inevitably, on the topic of tax reform (e.g., what significant changes we might make), while the film laid out some basic options, it couldn't explore them in depth - that would have been impossible without losing the audience. One also could argue that the complexity problems it discussed are becoming more tolerable for individual filers in the era of Turbo Tax. Too bad they didn't have Joe Bankman talking about Ready Return. But nonetheless two thumbs up (from both the left and the right).
I noted in the discussion afterward that, even though experts disagree about the ranking of alternative tax reform options, they actually would have little trouble agreeing to something everyone would agree was way better than the current system, if given the authority to decide on something. Expert dissensus is in a much narrower range. And one of the striking things about watching the movie is that one sees Noam Chomsky on the one hand and Dick Armey and Mike Huckabee on the other, and generally feels that most of what they are saying across this broad range is both reasonable and largely consistent.
Alas, the relative consensus of the experts does not count for much here. That plus a $2 Metrocard will get you on the NYC subway, but that's about it.
Sunday, April 18, 2010
From literature, on to cinema
Having given a book talk about Getting It at NYU last week, it is now time - though my Amazon sales rate is beginning to dip alarmingly - to switch my efforts to film.
I was interviewed for, and apparently do indeed appear in, An Inconvenient Tax, the recently released documentary about tax reform and Americans' perpetual (yet perpetually ineffectual) dissatisfaction with the federal income tax system. (I hope they didn't leave my best scenes on the cutting room floor.) The film is going to be shown at NYU Law School tomorrow (Monday night, 4/19/10, in the main law school building starting at 7 pm), although I believe it is mainly for the NYU community (general public might need to get in touch with someone such as me to have names left at the front guard desk). The showing will be followed by a panel featuring the film maker, Lee Sheppard (who also appears in it), and myself.
I suppose music has to be next. I am getting in touch with Paul and Ringo to see if they can help me record my latest, although without George's slide guitar leads perhaps it isn't worth bothering. (I'd also try Pavement, but they're busy touring. Maybe the Wrens are available? I know Tom Verlaine is in town.)
I was interviewed for, and apparently do indeed appear in, An Inconvenient Tax, the recently released documentary about tax reform and Americans' perpetual (yet perpetually ineffectual) dissatisfaction with the federal income tax system. (I hope they didn't leave my best scenes on the cutting room floor.) The film is going to be shown at NYU Law School tomorrow (Monday night, 4/19/10, in the main law school building starting at 7 pm), although I believe it is mainly for the NYU community (general public might need to get in touch with someone such as me to have names left at the front guard desk). The showing will be followed by a panel featuring the film maker, Lee Sheppard (who also appears in it), and myself.
I suppose music has to be next. I am getting in touch with Paul and Ringo to see if they can help me record my latest, although without George's slide guitar leads perhaps it isn't worth bothering. (I'd also try Pavement, but they're busy touring. Maybe the Wrens are available? I know Tom Verlaine is in town.)
Friday, April 16, 2010
Tax policy colloquium on Michael Schler's "Rebooting Section 356"
On the surface, it's difficult to imagine two papers that we would cover at the NYU Tax Policy Colloquium as different as Joel Slemrod's "Buenas Notches" paper from last week and Michael Schler's "Rebooting Section 356" yesterday.
As discussed here, Slemrod's article is a brief exploration of general conceptual and design issues raised by the concept of discontinuity in system design. Schler's is a considerably longer discussion of a set of relatively technical issues in the reorganization provisions of the existing U.S. corporate income tax.
Nonetheless, I wasn't actually kidding (just exaggerating for effect) when I kept saying: This is the same paper as last week. Because essentially it's about how to handle discontinuity and line-drawing problems.
When I first saw Schler's title, "Rebooting Section 356," but hadn't seen the actual paper yet, I was surprised by the choice of topic, because I had been inclined (from inattention) to think that the subject must be relatively cut-and-dried. Section 356 generally provides that "boot," or non-qualifying consideration such as cash, received by the shareholders in otherwise tax-free corporate reorganizations, is taxable to the extent of gain realized (but otherwise not recognized for tax purposes) on the transaction. E.g., suppose you have stock in company A with tax basis of $70 and value of $100. If company A merges into company B, and you swap your A stock for B stock, presumably also with value of $100, it's a tax free exchange. But suppose you instead get B stock worth $90 plus $10 cash. The cash is taxable to the extent not in excess of the underlying gain (which is $30, from the excess of the $100 value received over the $70 basis of the A stock).
So what could be the big issue? It turns out there are several, but the main one concerns rules addressing a trick that taxpayers might otherwise be inclined to pull. Suppose you are planning to pay yourself a big cash dividend, but realize that stapling the distribution to an otherwise pointless corporate reorganization (such as with a shell entity) would permit you to get more favorable tax treatment on the cash received - as it would now be section 356 boot - than you would have gotten by simply doing the dividend. Then jumping through silly hoops, by arranging an otherwise pointless reorg instead of merely distributing the cash, may become appealing from a tax planning standpoint.
This scenario is sufficiently realistic that section 356 was amended from its original form many decades ago in order to provide that boot (such as cash) distributions that are overly dividend-like in their attributes will generally be treated as a dividend. If section 356 worked exactly in parallel to the rules otherwise used to detect disguised dividends (e.g., on a purported redemption by a company of its own stock), then taxpayers would have no reason to attach otherwise pointless reorgs to their cash distributions as a way of improving the tax treatment. But the rules are not exactly parallel, for the most part seemingly due to historical happenstance. Thus, in some situations the idea of stapling a pointless reorg to a cash distribution may continue to be appealing, and in cases where that happens this may wastefully (from a social standpoint) increase transaction costs associated with tax planning.
The notches analogy is that we have discontinuous rules in the tax law for various categories - e.g., "dividend," "stock redemption," etc. - and how we draw the lines may affect efficiency. Perhaps a comparison to David Weisbach's paper on line-drawing would have been even closer, but we hadn't covered that in the colloquium.
Perhaps the most prominent and important disparity in the paper, and certainly the one we focused on the most, is the "gain limitation" rule that applies to dividend treatment of boot under section 356, but not to the treatment of dividends generally. Consider the earlier example of a reorg using stock that has basis of $70 and value of $100. Only, suppose now that you get $60 new stock and $40 cash. Suppose further that the cash distribution is effectively a disguised dividend given the broader circumstances. But for the gain limitation rule, you'd have a $40 dividend even though the overall gain is only $30. But of course a straight cash sale of the stock - assuming that this would NOT have been a disguised dividend (e.g., the recipient is departing from the scene rather than retaining voting control) would have led to a tax on only $30 of gain.
Schler, in keeping with several prior commentators from the tax bar who have examined the issue, wants to tax the above shareholder on a $40 dividend even though the total gain is only $30. The reason: This is exactly how the dividend rules work. Thus, while he would be willing to consider revisiting the dividend rules generally, to limit the taxable amount to underlying stock appreciation, he thinks consistency with the dividend rule is the most important thing here, so that taxpayers determined to extract cash in excess of appreciation, but who don't actually want to sell, won't simply devise more complicated and wasteful transactions (by stapling a reorg to the dividend payment).
Whatever one thinks of the argument in this particular context, this is actually a move that the existing tax system frequently makes, and indeed must make barring more fundamental reform. Thus, consider the rules affording stock redemptions more favorable treatment than dividends. (More favorable in that they get basis recovery, although pre-2003 they also usually were taxable at a much lower rate.) If the tax code didn't have rules taxing entirely pro rata stock redemptions as disguised dividends, it would generally would never make tax sense for anyone with taxable shareholders to pay a simple, straightforward dividend. Transaction costs permitting, it would be a no-brainer to simply take the more circuitous route of a pro rata redemption. (Given, e.g., that it should make no difference to me whether I have 10 of the company's 100 outstanding shares, or 9 out of 90.) Economic substance / business purpose rules, along with almost anything that limits the effective electivity of favorable tax treatment (e.g., claiming a taxable realization only when this is to one's advantage, such as to realize a tax loss), also can be thought of in similar terms.
It's worth noting, however, the craziness of the underlying dividend rule (leaving aside administrative rationales for it). Taxing shareholders on dividends when they don't have appreciated stock would be perverse even if one generally favored double taxation of equity-financed corporate income. Thus, suppose Jones creates a new company, issues zero-basis stock to herself, earns $100 (after payment of corporate tax) through the company by exploiting a good idea, and then sells the stock to Smith for $100. Double tax results from taxing Jones on the capital gain. But now suppose Smith is silly enough to give himself a $100 corporate distribution. This is a dividend, since made out of the company's earnings and profits, so Smith pays a dividend tax despite having no stock appreciation (its pre-distribution value, just like its basis to him, is $100). Only when he subsequently sells the stock for 0, realizing a $100 loss given its basis, does the triple tax revert to being merely double (ignoring problems such as whether he can deduct the capital loss).
In short, while we tend to think of the dividend tax as a rule for treating shareholder-level gain as realized when cash comes out, in fact it can exceed the shareholder's unrealized gain (if any) because there is no "gain limitation" rule outside section 356.
OK, perhaps I've allowed myself to get more interested in this topic than non-hardcore-tax readers of this blog would find suitable. But I do think that there is a conceptually interesting broader issue pertaining to how one should think about disparities of this kind in rule-drawing, i.e., under what circumstances is broadening a "bad" rule (and an even worse one if one dislikes double taxation) better than permitting it to be avoided through wasteful maneuvers?
The main criticism I offered (Mihir Desai was the lead commentator, but had generally similar views) was that, while it's hard to tell what is optimal in this sort of setting, it's natural for someone in Schler's position as a practitioner to focus (and potentially over-focus, in comparative terms) on the waste that he can observe from over-complicated deals that exploit such disparities. In other words, while the disparity imposes real tax planning costs, other real costs or benefits may be less visible. Plus there is a natural aesthetics of wanting to achieve clean alignment between different rules, which one could imagine a benevolent legislator being unmoved by.
It was a good feeling to see that a paper quite different from our usual fare, and that some prospective attendees might have predicted would not work out well in our somewhat navel-gazing colloquium setting, actually led to a really good session. (Though biased, I feel I can say that because my expectations are high enough that I'm quite willing and able to be disappointed when it doesn't work out as well.)
Overall, I feel we've had a good semester, and I should add with really good students (perhaps collectively our best ever). Just one week to go, and in my book it will be summer.
As discussed here, Slemrod's article is a brief exploration of general conceptual and design issues raised by the concept of discontinuity in system design. Schler's is a considerably longer discussion of a set of relatively technical issues in the reorganization provisions of the existing U.S. corporate income tax.
Nonetheless, I wasn't actually kidding (just exaggerating for effect) when I kept saying: This is the same paper as last week. Because essentially it's about how to handle discontinuity and line-drawing problems.
When I first saw Schler's title, "Rebooting Section 356," but hadn't seen the actual paper yet, I was surprised by the choice of topic, because I had been inclined (from inattention) to think that the subject must be relatively cut-and-dried. Section 356 generally provides that "boot," or non-qualifying consideration such as cash, received by the shareholders in otherwise tax-free corporate reorganizations, is taxable to the extent of gain realized (but otherwise not recognized for tax purposes) on the transaction. E.g., suppose you have stock in company A with tax basis of $70 and value of $100. If company A merges into company B, and you swap your A stock for B stock, presumably also with value of $100, it's a tax free exchange. But suppose you instead get B stock worth $90 plus $10 cash. The cash is taxable to the extent not in excess of the underlying gain (which is $30, from the excess of the $100 value received over the $70 basis of the A stock).
So what could be the big issue? It turns out there are several, but the main one concerns rules addressing a trick that taxpayers might otherwise be inclined to pull. Suppose you are planning to pay yourself a big cash dividend, but realize that stapling the distribution to an otherwise pointless corporate reorganization (such as with a shell entity) would permit you to get more favorable tax treatment on the cash received - as it would now be section 356 boot - than you would have gotten by simply doing the dividend. Then jumping through silly hoops, by arranging an otherwise pointless reorg instead of merely distributing the cash, may become appealing from a tax planning standpoint.
This scenario is sufficiently realistic that section 356 was amended from its original form many decades ago in order to provide that boot (such as cash) distributions that are overly dividend-like in their attributes will generally be treated as a dividend. If section 356 worked exactly in parallel to the rules otherwise used to detect disguised dividends (e.g., on a purported redemption by a company of its own stock), then taxpayers would have no reason to attach otherwise pointless reorgs to their cash distributions as a way of improving the tax treatment. But the rules are not exactly parallel, for the most part seemingly due to historical happenstance. Thus, in some situations the idea of stapling a pointless reorg to a cash distribution may continue to be appealing, and in cases where that happens this may wastefully (from a social standpoint) increase transaction costs associated with tax planning.
The notches analogy is that we have discontinuous rules in the tax law for various categories - e.g., "dividend," "stock redemption," etc. - and how we draw the lines may affect efficiency. Perhaps a comparison to David Weisbach's paper on line-drawing would have been even closer, but we hadn't covered that in the colloquium.
Perhaps the most prominent and important disparity in the paper, and certainly the one we focused on the most, is the "gain limitation" rule that applies to dividend treatment of boot under section 356, but not to the treatment of dividends generally. Consider the earlier example of a reorg using stock that has basis of $70 and value of $100. Only, suppose now that you get $60 new stock and $40 cash. Suppose further that the cash distribution is effectively a disguised dividend given the broader circumstances. But for the gain limitation rule, you'd have a $40 dividend even though the overall gain is only $30. But of course a straight cash sale of the stock - assuming that this would NOT have been a disguised dividend (e.g., the recipient is departing from the scene rather than retaining voting control) would have led to a tax on only $30 of gain.
Schler, in keeping with several prior commentators from the tax bar who have examined the issue, wants to tax the above shareholder on a $40 dividend even though the total gain is only $30. The reason: This is exactly how the dividend rules work. Thus, while he would be willing to consider revisiting the dividend rules generally, to limit the taxable amount to underlying stock appreciation, he thinks consistency with the dividend rule is the most important thing here, so that taxpayers determined to extract cash in excess of appreciation, but who don't actually want to sell, won't simply devise more complicated and wasteful transactions (by stapling a reorg to the dividend payment).
Whatever one thinks of the argument in this particular context, this is actually a move that the existing tax system frequently makes, and indeed must make barring more fundamental reform. Thus, consider the rules affording stock redemptions more favorable treatment than dividends. (More favorable in that they get basis recovery, although pre-2003 they also usually were taxable at a much lower rate.) If the tax code didn't have rules taxing entirely pro rata stock redemptions as disguised dividends, it would generally would never make tax sense for anyone with taxable shareholders to pay a simple, straightforward dividend. Transaction costs permitting, it would be a no-brainer to simply take the more circuitous route of a pro rata redemption. (Given, e.g., that it should make no difference to me whether I have 10 of the company's 100 outstanding shares, or 9 out of 90.) Economic substance / business purpose rules, along with almost anything that limits the effective electivity of favorable tax treatment (e.g., claiming a taxable realization only when this is to one's advantage, such as to realize a tax loss), also can be thought of in similar terms.
It's worth noting, however, the craziness of the underlying dividend rule (leaving aside administrative rationales for it). Taxing shareholders on dividends when they don't have appreciated stock would be perverse even if one generally favored double taxation of equity-financed corporate income. Thus, suppose Jones creates a new company, issues zero-basis stock to herself, earns $100 (after payment of corporate tax) through the company by exploiting a good idea, and then sells the stock to Smith for $100. Double tax results from taxing Jones on the capital gain. But now suppose Smith is silly enough to give himself a $100 corporate distribution. This is a dividend, since made out of the company's earnings and profits, so Smith pays a dividend tax despite having no stock appreciation (its pre-distribution value, just like its basis to him, is $100). Only when he subsequently sells the stock for 0, realizing a $100 loss given its basis, does the triple tax revert to being merely double (ignoring problems such as whether he can deduct the capital loss).
In short, while we tend to think of the dividend tax as a rule for treating shareholder-level gain as realized when cash comes out, in fact it can exceed the shareholder's unrealized gain (if any) because there is no "gain limitation" rule outside section 356.
OK, perhaps I've allowed myself to get more interested in this topic than non-hardcore-tax readers of this blog would find suitable. But I do think that there is a conceptually interesting broader issue pertaining to how one should think about disparities of this kind in rule-drawing, i.e., under what circumstances is broadening a "bad" rule (and an even worse one if one dislikes double taxation) better than permitting it to be avoided through wasteful maneuvers?
The main criticism I offered (Mihir Desai was the lead commentator, but had generally similar views) was that, while it's hard to tell what is optimal in this sort of setting, it's natural for someone in Schler's position as a practitioner to focus (and potentially over-focus, in comparative terms) on the waste that he can observe from over-complicated deals that exploit such disparities. In other words, while the disparity imposes real tax planning costs, other real costs or benefits may be less visible. Plus there is a natural aesthetics of wanting to achieve clean alignment between different rules, which one could imagine a benevolent legislator being unmoved by.
It was a good feeling to see that a paper quite different from our usual fare, and that some prospective attendees might have predicted would not work out well in our somewhat navel-gazing colloquium setting, actually led to a really good session. (Though biased, I feel I can say that because my expectations are high enough that I'm quite willing and able to be disappointed when it doesn't work out as well.)
Overall, I feel we've had a good semester, and I should add with really good students (perhaps collectively our best ever). Just one week to go, and in my book it will be summer.
More things that annoy me at the health club
How about, while stretching on the exercise mat, being crammed in too close to a narcissistic "Master Trainer" and his easily gulled client. The MT can scarcely pretend to watch what the client is doing, though the sunglasses he wears indoors are so dark he probably couldn't see anyway. He also is busy punching away on his iPhone, and when the mirror catches his eye he's lost - he can't resist staring at himself for a while. Near the end of the session, he graciously deigns to chat with the client for a few minutes (with no further pretense of still working out), thus presumably helping to ensure a repeat session.
If they're operating across the room I think it's funny, but when the act pushes into my exercise space I want to call the Better Business Bureau.
If they're operating across the room I think it's funny, but when the act pushes into my exercise space I want to call the Better Business Bureau.
Thursday, April 15, 2010
My book talk about "Getting It"
I gave a talk the other night about how and why I wrote Getting It and what it's about, with other related quasi-personal ruminations. Text is available here.
Wednesday, April 14, 2010
And earlier on the same evening ...
As I was walking to the subway to get to the dinner mentioned in the prior post, I passed by an individual on a street corner who was a bit disoriented and attempting to inspire donations. I heard him say to someone:
"Hey, are you Dicky, don't be so tricky, Tricky Dicky ... I am not a kook!"
Best riff on old Nixon memories that I've heard in some time.
"Hey, are you Dicky, don't be so tricky, Tricky Dicky ... I am not a kook!"
Best riff on old Nixon memories that I've heard in some time.
I probably shouldn't have said that
I was having dinner tonight with some childhood friends, going back to when I was a mere wisp of a thing (7 years old for the one I've known longest).
One of these old friends, who I remember as a fellow New York Mets fan from way back in the day, said he'd given up and is now a Yankee fan.
I agreed that I would shed my Mets fandom if there was a simple surgical procedure that could take care of it. But how can you root for the Yankees, I said, with their wildly unfair financial advantage over everyone else?
He said, when I come home at the end of a long, grueling, and stressful work day (he's a lawyer, but not out of love for the law), I want to watch good baseball being played. Would you listen to bad music when you have the choice of listening to good music?
I have an even better idea, I said. Why don't you simply DVR whichever baseball game is on first, wait for it to end, find out who won, then turn it on and root for the winning team? That way you'll do even better than by rooting for the Yankees. You'll see winning baseball being played every single time. What could be more satisfying?
He appeared not to like the suggestion.
One of these old friends, who I remember as a fellow New York Mets fan from way back in the day, said he'd given up and is now a Yankee fan.
I agreed that I would shed my Mets fandom if there was a simple surgical procedure that could take care of it. But how can you root for the Yankees, I said, with their wildly unfair financial advantage over everyone else?
He said, when I come home at the end of a long, grueling, and stressful work day (he's a lawyer, but not out of love for the law), I want to watch good baseball being played. Would you listen to bad music when you have the choice of listening to good music?
I have an even better idea, I said. Why don't you simply DVR whichever baseball game is on first, wait for it to end, find out who won, then turn it on and root for the winning team? That way you'll do even better than by rooting for the Yankees. You'll see winning baseball being played every single time. What could be more satisfying?
He appeared not to like the suggestion.
Sunday, April 11, 2010
Why the title "Getting It"?
I'll admit I like the title of Getting It, which came to me some time after I had started it but probably early on. Not everyone likes it - an eminent academic and long-time federal judge who I sent it to once (based on our knowing each other) urged me to change it as insufficiently descriptive.
At least he didn't urge me to add a colon followed by a more descriptive subtitle, like you might do with a law review article.
Not many titles are quadruple entendres, but this one is. Achieving one's goal, sexual innuendo, "this time you're really gonna get it," and grasping or understanding what's actually important. The play between the meanings also captures what one might say the novel is really "about."
I was thinking of P.G. Wodehouse when I wrote it. Wodehouse famously said that one way to write a novel was by "going right deep down into life and not caring a damn." The other way "is mine, making a sort of musical comedy without music and ignoring real life altogether." I definitely wanted to do it Wodehouse's way - I wasn't inclined to try to write the Flaubert or Joyce version of young lawyers in D.C. in the 1980s. Try that and you'll more likely than not end up with something boring, pretentious, and above all middlebrow.
But Wodehouse was perhaps being unfair to himself. His best novels actually are about something: rejecting (in spirit, not behavior) the serious, grown-up, adult world as crazy, excessive, onerous, and boring, in order to embrace a perpetual state of early adolescence.
This is not wholly unrelated to my impetus in starting Getting It, which has something to do with the shock I initially felt upon leaving the student world for good and having to play, from then on, for keeps and real stakes in the all-too-real and adult world of offices and permanent employment.
And from this, at the risk of sounding much more serious than the novel ever is, comes the central point behind the title, which is that you can get it in one sense and yet utterly fail to get it in another sense, which is really the one that matters.
The theme is definitely there, but thank goodness it's never made explicit, as not a single character in the novel ever comes close to really getting it as they otherwise variously either get it or get it.
That aside, the goal is purely entertainment.
At least he didn't urge me to add a colon followed by a more descriptive subtitle, like you might do with a law review article.
Not many titles are quadruple entendres, but this one is. Achieving one's goal, sexual innuendo, "this time you're really gonna get it," and grasping or understanding what's actually important. The play between the meanings also captures what one might say the novel is really "about."
I was thinking of P.G. Wodehouse when I wrote it. Wodehouse famously said that one way to write a novel was by "going right deep down into life and not caring a damn." The other way "is mine, making a sort of musical comedy without music and ignoring real life altogether." I definitely wanted to do it Wodehouse's way - I wasn't inclined to try to write the Flaubert or Joyce version of young lawyers in D.C. in the 1980s. Try that and you'll more likely than not end up with something boring, pretentious, and above all middlebrow.
But Wodehouse was perhaps being unfair to himself. His best novels actually are about something: rejecting (in spirit, not behavior) the serious, grown-up, adult world as crazy, excessive, onerous, and boring, in order to embrace a perpetual state of early adolescence.
This is not wholly unrelated to my impetus in starting Getting It, which has something to do with the shock I initially felt upon leaving the student world for good and having to play, from then on, for keeps and real stakes in the all-too-real and adult world of offices and permanent employment.
And from this, at the risk of sounding much more serious than the novel ever is, comes the central point behind the title, which is that you can get it in one sense and yet utterly fail to get it in another sense, which is really the one that matters.
The theme is definitely there, but thank goodness it's never made explicit, as not a single character in the novel ever comes close to really getting it as they otherwise variously either get it or get it.
That aside, the goal is purely entertainment.
Friday, April 09, 2010
Intimidating?
Students in my Tax Policy Colloquium sometimes join our dinner group after the sessions. Three who are considering coming were thinking of coordinating to come as a group. When I asked why (not that there's anything either wrong or surprising about that), I was told that, to the solo attendee in a significantly younger age group, the likes of me can seem intimidating.
"Who? Little old me?" I believe I answered. The underlying thought being that, if you've seen as much of me as I have - meaning a full lifetime supply of lows as well as highs - it feels intuitively, however myopically, as if people oughtn't to feel at all intimidated.
Then again, this is certainly an advance on how I felt while in law school - I probably would have needed a large cash payment to consider voluntarily attending dinner with most of my professors at the time.
"Who? Little old me?" I believe I answered. The underlying thought being that, if you've seen as much of me as I have - meaning a full lifetime supply of lows as well as highs - it feels intuitively, however myopically, as if people oughtn't to feel at all intimidated.
Then again, this is certainly an advance on how I felt while in law school - I probably would have needed a large cash payment to consider voluntarily attending dinner with most of my professors at the time.
Thursday, April 08, 2010
Tax Policy Colloquium on Joel Slemrod's Buenas Notches
This delightfully playful and whimsical paper formed the basis for a fun and interesting discussion at the colloquium today. A notch (the paper's topic) in the narrow sense arises when a tax or other fiscal system features gives rise to a discontinuous jump in taxes or transfers at a given point as the quantity of something (such as income) rises. Thus, suppose we enacted a 10% income tax that only applied to individuals earning $100,000 or more. If it applied to ALL of such individuals' income, rather than having a $100,000 exemption amount, then earning one more cent so your income went from $99,999.99 to $100,000 would cost you $10,000 of tax. Pretty steep marginal tax rate on that penny.
While that example may sound silly, there actually are features like that in various fiscal systems. E.g., as Slemrod explores more fully in a related paper, "Car Notches," the gas guzzler tax on car manufacturers has that structure a bit. So do value-added taxes (VATs) in some countries with small-business exemptions that disappear without a surviving exemption amount once the business crosses a given size threshold. And Medicaid has that character in the U.S. - earn too much, and you lose this entire, rather valuable benefit all at once (or actually not quite - I believe the notch effect is mitigated slightly by time lag rules for losing Medicaid eligibility).
I'd define a notch in this sense, in the clearest base case, as existing whenever the marginal tax rate at a given point is greater than 100% or less than 0% (on the latter, suppose Medicaid eligibility were only for non-poor individuals who earned enough - not that this would make much sense, but just to illustrate the point).
One distinctive move the paper makes, which gave us plenty of grist for discussion and criticism but was conceptually a move worth making, was to compare these relatively clearcut "quantity notches" to "characteristic notches" that arise from line-drawing. E.g., an instrument is somewhere on the continuum between being classified as debt or as equity. One iota more towards the debt side of the spectrum, and its character for tax purposes discontinuously changes - it now qualifies (100% rather than 0%) as debt.
Or geographically, I'm in NYC and face the NYC sales tax. But I'm walking towards the Connecticut border. I step across the NYC line into Yonkers, and with that one step (supposing for convenience that the tax legally depended on where I made the purchase, rather than on where I consume the good), and my sales tax rate drops by several points. When I finally make it to Connecticut, with that last step my tax rate drops still more. So there are geographical notches in sales tax liability in this example, although it's hard to express them as marginal tax rates (since what would be the denominator).
In the discontinuity discussion, I added some non-tax examples, such as the negligence standard for tort liability, in which taking just barely too little care leaves you liable in full for the harm caused, whereas an iota more care may leave you completely non-liable. As discussed in a well-known article by Craswell and Calfee, at least with uncertainty about appropriate care levels (in the mind of a subsequent fact-finder) this creates peculiar incentives to take too much care when you are close to the line of escaping liability.
The paper takes advantage of the conceptually clearest example, a Pigovian tax in which the correct marginal rate depends on marginal harm caused by increasing scale of the activity. It's difficult to believe a perfect Pigovian tax (say, on pollution) would have notches, since that would require a very bizarre marginal harm structure. But in the Pigovian world one can perhaps rationalize notches as a response either to (1) the costliness or impossibility of continuous measurement or (2) the unavailability of continuous outcomes - e.g. only one of the rival candidates can win an election, to borrow another of my discontinuity examples.
The harder question was how well the Pigovian analysis applies to the non-Pigovian setting. E.g., would it be desirable (for New York? Or for a benevolent higher-level decision-maker interested in social welfare?) to wear away the notch a bit by having the tax rate decline as one approaches the Connecticut border. This reduces the incentive to cross over into Connecticut just for tax reasons, but newly introduces distortions within the now tax-varying jurisdiction.
Also unclear how well the analysis from Pigovian taxes crosses over to, say, debt vs. equity line-drawing, or economic substance rules for tax-motivated transactions (where having "just enough" substance discontinuously switches the taxpayer from losing to winning), or the use of an income tax that inefficiently (even if on the whole optimally, given distributional goals and limits on available instruments) discourages work and saving. But it wasn't the paper's job to try to solve these issues.
The one issue I had on my list that we didn't get to is how continuity should affect our thinking about distributional issues. I had noted that treating the Pareto standard as distinctively important creates a discontinuity in one's social welfare function - eliminating the last scintilla of harm to the last uncompensated loser from a policy change shifts the normative verdict from thumbs down to potentially thumbs up - no matter how great the positive consequences on the other side of the ledger - if one accords Pareto changes special status. Louis Kaplow argues that accepting Pareto plus the principle of continuity means you have to be a welfarist (and perhaps, after arguing with him for a further 20 minutes, a utilitarian).
I'm sympathetic to this line of argument, but others say: Even if I accept Pareto, you can't force me to accept continuity. If I see nothing wrong with letting trivial differences in the outcome radically change the normative outcome, there's nothing you can do to argue me out of it - unless you force me to grant further assumptions that I decline to make. Essentially, the problem is that continuity, asserted for its own sake rather than as an aspect of a given framework (e.g., utilitarianism, or the Pigovian tax approach to efficiency), is a postulate not a theorem. So, however unreasonable rejecting it might appear to some of us to be, you can't force it on the rest any more than you could logically compel them to accept transitivity.
I'm reminded of the hilarious passage in Lewis Carroll's discussion of Achilles and the Tortoise. Achilles gets the Tortoise to accept (i) A, and (ii) if A, then B. But the Tortoise nonetheless declines to accept B. Achilles says: You HAVE to accept it as a consequence of the other assumptions! The Tortoise replies: If that's so, why don't you tell me to accept (iii) If I accept A and also the statement if A then B, then I must also accept B.
Now Achilles thinks he's got him - the Tortoise HAS to accept B now. But the Tortoise replies: I don't see it. But if you like, I'd be happy to accept proposition (iv), which holds that, if I accept the first three propositions, then I must also accept B.
Achilles is slow to realize that this won't help either - because if the Tortoise now is compelled to accept B, that point is worth stating as proposition (v). And on that approximate note, Lewis Carroll leaves them to continue their squabble.
Not quite on point, of course, as the Tortoise rejects basic principles about how to reason logically (which he effectively posits are themselves postulates), rather than rejecting propositions (i) or (ii) themselves. But to one who accepts the postulates, rejecting them is comparably baffling.
I'm with Achilles and Kaplow. But then again, I suppose I started out that way - they didn't actually persuade me, so much as express a viewpoint that I share. Accepting Pareto plus continuity leads to welfarism, but you can't logically force someone to accept either of those principles, if they don't independently resonate.
While that example may sound silly, there actually are features like that in various fiscal systems. E.g., as Slemrod explores more fully in a related paper, "Car Notches," the gas guzzler tax on car manufacturers has that structure a bit. So do value-added taxes (VATs) in some countries with small-business exemptions that disappear without a surviving exemption amount once the business crosses a given size threshold. And Medicaid has that character in the U.S. - earn too much, and you lose this entire, rather valuable benefit all at once (or actually not quite - I believe the notch effect is mitigated slightly by time lag rules for losing Medicaid eligibility).
I'd define a notch in this sense, in the clearest base case, as existing whenever the marginal tax rate at a given point is greater than 100% or less than 0% (on the latter, suppose Medicaid eligibility were only for non-poor individuals who earned enough - not that this would make much sense, but just to illustrate the point).
One distinctive move the paper makes, which gave us plenty of grist for discussion and criticism but was conceptually a move worth making, was to compare these relatively clearcut "quantity notches" to "characteristic notches" that arise from line-drawing. E.g., an instrument is somewhere on the continuum between being classified as debt or as equity. One iota more towards the debt side of the spectrum, and its character for tax purposes discontinuously changes - it now qualifies (100% rather than 0%) as debt.
Or geographically, I'm in NYC and face the NYC sales tax. But I'm walking towards the Connecticut border. I step across the NYC line into Yonkers, and with that one step (supposing for convenience that the tax legally depended on where I made the purchase, rather than on where I consume the good), and my sales tax rate drops by several points. When I finally make it to Connecticut, with that last step my tax rate drops still more. So there are geographical notches in sales tax liability in this example, although it's hard to express them as marginal tax rates (since what would be the denominator).
In the discontinuity discussion, I added some non-tax examples, such as the negligence standard for tort liability, in which taking just barely too little care leaves you liable in full for the harm caused, whereas an iota more care may leave you completely non-liable. As discussed in a well-known article by Craswell and Calfee, at least with uncertainty about appropriate care levels (in the mind of a subsequent fact-finder) this creates peculiar incentives to take too much care when you are close to the line of escaping liability.
The paper takes advantage of the conceptually clearest example, a Pigovian tax in which the correct marginal rate depends on marginal harm caused by increasing scale of the activity. It's difficult to believe a perfect Pigovian tax (say, on pollution) would have notches, since that would require a very bizarre marginal harm structure. But in the Pigovian world one can perhaps rationalize notches as a response either to (1) the costliness or impossibility of continuous measurement or (2) the unavailability of continuous outcomes - e.g. only one of the rival candidates can win an election, to borrow another of my discontinuity examples.
The harder question was how well the Pigovian analysis applies to the non-Pigovian setting. E.g., would it be desirable (for New York? Or for a benevolent higher-level decision-maker interested in social welfare?) to wear away the notch a bit by having the tax rate decline as one approaches the Connecticut border. This reduces the incentive to cross over into Connecticut just for tax reasons, but newly introduces distortions within the now tax-varying jurisdiction.
Also unclear how well the analysis from Pigovian taxes crosses over to, say, debt vs. equity line-drawing, or economic substance rules for tax-motivated transactions (where having "just enough" substance discontinuously switches the taxpayer from losing to winning), or the use of an income tax that inefficiently (even if on the whole optimally, given distributional goals and limits on available instruments) discourages work and saving. But it wasn't the paper's job to try to solve these issues.
The one issue I had on my list that we didn't get to is how continuity should affect our thinking about distributional issues. I had noted that treating the Pareto standard as distinctively important creates a discontinuity in one's social welfare function - eliminating the last scintilla of harm to the last uncompensated loser from a policy change shifts the normative verdict from thumbs down to potentially thumbs up - no matter how great the positive consequences on the other side of the ledger - if one accords Pareto changes special status. Louis Kaplow argues that accepting Pareto plus the principle of continuity means you have to be a welfarist (and perhaps, after arguing with him for a further 20 minutes, a utilitarian).
I'm sympathetic to this line of argument, but others say: Even if I accept Pareto, you can't force me to accept continuity. If I see nothing wrong with letting trivial differences in the outcome radically change the normative outcome, there's nothing you can do to argue me out of it - unless you force me to grant further assumptions that I decline to make. Essentially, the problem is that continuity, asserted for its own sake rather than as an aspect of a given framework (e.g., utilitarianism, or the Pigovian tax approach to efficiency), is a postulate not a theorem. So, however unreasonable rejecting it might appear to some of us to be, you can't force it on the rest any more than you could logically compel them to accept transitivity.
I'm reminded of the hilarious passage in Lewis Carroll's discussion of Achilles and the Tortoise. Achilles gets the Tortoise to accept (i) A, and (ii) if A, then B. But the Tortoise nonetheless declines to accept B. Achilles says: You HAVE to accept it as a consequence of the other assumptions! The Tortoise replies: If that's so, why don't you tell me to accept (iii) If I accept A and also the statement if A then B, then I must also accept B.
Now Achilles thinks he's got him - the Tortoise HAS to accept B now. But the Tortoise replies: I don't see it. But if you like, I'd be happy to accept proposition (iv), which holds that, if I accept the first three propositions, then I must also accept B.
Achilles is slow to realize that this won't help either - because if the Tortoise now is compelled to accept B, that point is worth stating as proposition (v). And on that approximate note, Lewis Carroll leaves them to continue their squabble.
Not quite on point, of course, as the Tortoise rejects basic principles about how to reason logically (which he effectively posits are themselves postulates), rather than rejecting propositions (i) or (ii) themselves. But to one who accepts the postulates, rejecting them is comparably baffling.
I'm with Achilles and Kaplow. But then again, I suppose I started out that way - they didn't actually persuade me, so much as express a viewpoint that I share. Accepting Pareto plus continuity leads to welfarism, but you can't logically force someone to accept either of those principles, if they don't independently resonate.
Not to be obsessive but ...
Getting It is currently up to #42,372 among books on Amazon. But in the course of a week it goes up and down like a jet-powered clown on a trampoline.
Monday, April 05, 2010
More cheap self-promotion
You know what they say (at least in the old Avis commercials) - If you're # 2, it must mean that you try harder.
Reader comment on Getting It
I couldn't resist disseminating (with permission) comments I got over the weekend from a Getting It reader. He's a childhood friend, but one with whom I've only been sporadically in touch over the last few decades. Anyway, here goes:
"If someone had told me last week that you were going to cause me to have a great weekend, I would immediately have dispatched them to the nearest psychiatric center. Well, after I got the news about your book, I ordered it on Amazon, and I just finished reading it. It was hysterical! Doberman was just a great total sociopath! Obviously, your alter ego!
"And the overwrought, over the top metaphors were just so far gone that they were hysterical ... [My wife] got tired of hearing, 'Wait, listen to this one!'
"The story was also fantastic. I just loved the way Doberman plotted, planned, acted, reacted. He was the master!
"Seeing all of them squirm and be tortured was fun. It had a truly realistic feel to it, almost being hyper real, everyone a little bit of a caricature of real people. As I approached the inevitable train wreck, I could not put the book down!
"I know you fantasize about being Doberman. With your intelligence, the sky would be the limit. Unfortunately, you possess ethics, morality, a conscience, and compassion. Too bad!"
Ahem, no comment here on whether I fantasize about being Doberman. Or on how it actually comes out for him.
"If someone had told me last week that you were going to cause me to have a great weekend, I would immediately have dispatched them to the nearest psychiatric center. Well, after I got the news about your book, I ordered it on Amazon, and I just finished reading it. It was hysterical! Doberman was just a great total sociopath! Obviously, your alter ego!
"And the overwrought, over the top metaphors were just so far gone that they were hysterical ... [My wife] got tired of hearing, 'Wait, listen to this one!'
"The story was also fantastic. I just loved the way Doberman plotted, planned, acted, reacted. He was the master!
"Seeing all of them squirm and be tortured was fun. It had a truly realistic feel to it, almost being hyper real, everyone a little bit of a caricature of real people. As I approached the inevitable train wreck, I could not put the book down!
"I know you fantasize about being Doberman. With your intelligence, the sky would be the limit. Unfortunately, you possess ethics, morality, a conscience, and compassion. Too bad!"
Ahem, no comment here on whether I fantasize about being Doberman. Or on how it actually comes out for him.
Tax policy colloquium on Markle & Shackelford, Cross-Country Comparisons of Corporate Income Taxes
At last Thursday's colloquium, Doug Shackelford presented a paper that uses extensive worldwide financial accounting data to look at how multinational entities (MNEs) are taxed around the world, compared to each other based on where they "reside" and invest, and compared to non-multinational public corporations.
The paper presented grist for the mills of both pro-worldwide and pro-territorial U.S. advocates. Aiding the latter, the relative tax burden on US MNEs has been rising relative to that on other countries' MNEs, and Japan, which currently has the highest such burdens, is switching to a territorial system. But aiding the former, the burdens on US companies are not greatly out of line with those for other OECD countries, and what's more US MNEs are shown as facing about the same worldwide tax burdens as purely domestic US companies. (This may reflect a draw in the battle between aggressive tax planning on the one hand and aggressive U.S. rules, e.g., limiting deductions, on the other.)
One clear caveat to keep in mind is that the data relates to companies that are acquired to make public income reports, as distinct from all businesses. So closely held and private firms are not in the data set. This might affect the significance of finding that purely domestic businesses and MNEs from the same country often face similar worldwide effective tax burdens. For example, it's long been assumed that MNEs are predominantly public corporations - although this is becoming less true over time - but the same certainly doesn't hold in the U.S. domestically. Private companies often are more aggressive and savvy in their tax planning, reflecting that managerial ownership significantly reduces agency costs.
Not surprisingly, discussants at the session agreed with the universal consensus (in my experience) among knowledgeable people that managers at publicly traded U.S. companies are far more interested in boosting reported earnings for accounting purposes than in actually saving tax. Hence a suggestion was made that U.S. companies' behavior might be far less affected, in some respects, by the actual U.S. rules for foreign source income than by the accounting rule permitting them to treat foreign earnings as "permanently reinvested" abroad, and thus as not potentially subject to ultimate U.S. tax on repatriation.
Absent that accounting benefit, the firms would have to book the hypothetical future U.S. repatriation taxes without any time value discount for the economic value of deferral. This might cause U.S. managers to start acting as if the U.S. had a purely worldwide system even though, in effect, it is actually partly territorial. By contrast, with the "permanently reinvested" accounting rule they may be inclined to act today as if we had a purely territorial system even though, in fact, it is partly worldwide.
Strange to think that mere accounting changes might matter behaviorally, to some taxpayers, more than changes in the income tax rules that actually apply.
The paper presented grist for the mills of both pro-worldwide and pro-territorial U.S. advocates. Aiding the latter, the relative tax burden on US MNEs has been rising relative to that on other countries' MNEs, and Japan, which currently has the highest such burdens, is switching to a territorial system. But aiding the former, the burdens on US companies are not greatly out of line with those for other OECD countries, and what's more US MNEs are shown as facing about the same worldwide tax burdens as purely domestic US companies. (This may reflect a draw in the battle between aggressive tax planning on the one hand and aggressive U.S. rules, e.g., limiting deductions, on the other.)
One clear caveat to keep in mind is that the data relates to companies that are acquired to make public income reports, as distinct from all businesses. So closely held and private firms are not in the data set. This might affect the significance of finding that purely domestic businesses and MNEs from the same country often face similar worldwide effective tax burdens. For example, it's long been assumed that MNEs are predominantly public corporations - although this is becoming less true over time - but the same certainly doesn't hold in the U.S. domestically. Private companies often are more aggressive and savvy in their tax planning, reflecting that managerial ownership significantly reduces agency costs.
Not surprisingly, discussants at the session agreed with the universal consensus (in my experience) among knowledgeable people that managers at publicly traded U.S. companies are far more interested in boosting reported earnings for accounting purposes than in actually saving tax. Hence a suggestion was made that U.S. companies' behavior might be far less affected, in some respects, by the actual U.S. rules for foreign source income than by the accounting rule permitting them to treat foreign earnings as "permanently reinvested" abroad, and thus as not potentially subject to ultimate U.S. tax on repatriation.
Absent that accounting benefit, the firms would have to book the hypothetical future U.S. repatriation taxes without any time value discount for the economic value of deferral. This might cause U.S. managers to start acting as if the U.S. had a purely worldwide system even though, in effect, it is actually partly territorial. By contrast, with the "permanently reinvested" accounting rule they may be inclined to act today as if we had a purely territorial system even though, in fact, it is partly worldwide.
Strange to think that mere accounting changes might matter behaviorally, to some taxpayers, more than changes in the income tax rules that actually apply.
Friday, April 02, 2010
Exciting contest
Maybe you'd have to be me to find this exciting. But the horse race is on at amazon.com between my two most recent, rather substantially different, publications:
1) Decoding the Corporate Tax, currently ranked # 426,062 in Books, and
2) Getting It, currently ranked # 445,077, but more likely (as a very recent publication) still to be headed up.
If I can write 'em both, I don't see why you can't read 'em both.
UPDATE: Getting It has broken into the top 200,000. Can't let this become obsessive, however.
FURTHER UPDATE: #54,000, but up and down a lot. Okay, I'll stop.
1) Decoding the Corporate Tax, currently ranked # 426,062 in Books, and
2) Getting It, currently ranked # 445,077, but more likely (as a very recent publication) still to be headed up.
If I can write 'em both, I don't see why you can't read 'em both.
UPDATE: Getting It has broken into the top 200,000. Can't let this become obsessive, however.
FURTHER UPDATE: #54,000, but up and down a lot. Okay, I'll stop.
One reason tax expenditure analysis still matters (at least conceptually)
I hadn't yet discussed here the NYU Tax Policy Colloquium held on March 25, at which Robert Peroni presented his paper (co-authored with Clifton Fleming) "Can Tax Expenditure Analysis Be Divorced From a Normative Tax Base?: A Critique of the “New Paradigm” and Its Denouement." But something seemingly unrelated from the recent blogosphere brings it firmly to mind.
Peroni's paper criticizes Ed Kleinbard's efforts at the Joint Committee on Taxation to reformulate tax expenditure analysis so that it wouldn't run into all the anomalous side-controversies that have undermined its acceptance over the years, such as its conflating the controversy over hidden "spending" through the Tax Code with the income versus consumption tax debate. I agree with Peroni that the now-abandoned JCT effort did not entirely work, but I was also dissatisfied with the notion - seemingly a main theme of the Peroni-Fleming paper, although in person Bob seemed far more flexible - that Stanley Surrey got everything exactly right, and we should just all bloody well shut up and do it his way.
I naturally couldn't resist bringing up my take on the tax expenditure issue, which I view as having gotten things conceptually right, and which I at times self-centeredly feel ought to have reshaped how everyone thinks and talks about tax expenditures far more than it evidently has (it's generally ignored, I self-pityingly tend to feel, except for being cited in a footnote, typically around page 20 or so).
Anyway, the overwhelming consensus from the floor at the NYU tax expenditure session, voiced as well by regulars who for this very reason didn't come, was: Enough with the tax expenditures already! The whole thing isn't even worth thinking about any more! The whole thing is so 1960s to 1980s, and anyone who's really paying attention has long since moved on.
Okay, fine. But the other day I noticed a recent blog entry by economist Greg Mankiw, including the following table:
TAXES PER PERSON
France $15,556
Germany $13,893
U.K. $13,714
U.S. $13,097
Canada $12,789
Italy $12,478
Spain $11,014
Japan $8,992
Mankiw thinks this is meaningful as a gauge of whether the U.S. is truly a "low-tax" country. Critics respond that he should compare taxes to GDP rather than measuring them per capita. But what if the "taxes" number is entirely meaningless to begin with?
In illustrating this, I always like to use the "weapons supplier tax credit" (WSTC) example, which I got from David Bradford, in which the U.S. cuts both taxes and spending by $50 billion by zeroing out a bunch of weapons appropriations and replacing them with tradable tax credits, given to the very same manufacturers for the very same weapons. End result: by Mankiw's lights, the government is now spending $50 billion less. Yet nothing has changed anywhere. Weapons procurement is unchanged and distribution in the society is unchanged. All that's happened is a bit of creative relabeling, treated as substantive due to our reliance on the pure form represented by "taxes" and "spending."
A fanciful example? Ed Kleinbard argues that Congress now does things almost exactly like the WSTC. And note that, per Peroni's paper, the 2010 estimate of U.S. federal income tax expenditures is almost $1.2 trillion, or about $4,000 per person. Now, that isn't an actual revenue estimate. For example, it's static, in the sense of entirely ignoring behavioral responses to repeal, along with interactions between different provisions. And it treats consumption tax features of the income tax that don't involve inter-asset distortion - e.g., retirement saving tax benefits, as distinct from, say, expensing for Asset A but not Asset B - as if they were "spending," which I would reinterpret here as meaning allocative rather than distributional, an ill-fitting label for the retirement saving rules.
Nonetheless, if we raise U.S. taxes per person by the raw tax expenditure number, we're up to about $17,000. Now the U.S. is clearly first, except that we also need to run the same exercise for everyone else.
Now let's think about payroll taxes. To the extent I pay in to the Social Security system but expect to get money back, is that really a tax? Is the "tax" just the excess in present value of taxes paid over expected retirement benefits? This would require a much longer conversation. Seemingly different from tax expenditure analysis as such, but for me it's part of the very same fiscal language point. "Taxes" and "spending" are not substantively meaningful in this context. They shouldn't be used in such empty and formalistic ways. Not just Mankiw, but everyone else who routinely talks in these terms, ought to know better.
Peroni's paper criticizes Ed Kleinbard's efforts at the Joint Committee on Taxation to reformulate tax expenditure analysis so that it wouldn't run into all the anomalous side-controversies that have undermined its acceptance over the years, such as its conflating the controversy over hidden "spending" through the Tax Code with the income versus consumption tax debate. I agree with Peroni that the now-abandoned JCT effort did not entirely work, but I was also dissatisfied with the notion - seemingly a main theme of the Peroni-Fleming paper, although in person Bob seemed far more flexible - that Stanley Surrey got everything exactly right, and we should just all bloody well shut up and do it his way.
I naturally couldn't resist bringing up my take on the tax expenditure issue, which I view as having gotten things conceptually right, and which I at times self-centeredly feel ought to have reshaped how everyone thinks and talks about tax expenditures far more than it evidently has (it's generally ignored, I self-pityingly tend to feel, except for being cited in a footnote, typically around page 20 or so).
Anyway, the overwhelming consensus from the floor at the NYU tax expenditure session, voiced as well by regulars who for this very reason didn't come, was: Enough with the tax expenditures already! The whole thing isn't even worth thinking about any more! The whole thing is so 1960s to 1980s, and anyone who's really paying attention has long since moved on.
Okay, fine. But the other day I noticed a recent blog entry by economist Greg Mankiw, including the following table:
TAXES PER PERSON
France $15,556
Germany $13,893
U.K. $13,714
U.S. $13,097
Canada $12,789
Italy $12,478
Spain $11,014
Japan $8,992
Mankiw thinks this is meaningful as a gauge of whether the U.S. is truly a "low-tax" country. Critics respond that he should compare taxes to GDP rather than measuring them per capita. But what if the "taxes" number is entirely meaningless to begin with?
In illustrating this, I always like to use the "weapons supplier tax credit" (WSTC) example, which I got from David Bradford, in which the U.S. cuts both taxes and spending by $50 billion by zeroing out a bunch of weapons appropriations and replacing them with tradable tax credits, given to the very same manufacturers for the very same weapons. End result: by Mankiw's lights, the government is now spending $50 billion less. Yet nothing has changed anywhere. Weapons procurement is unchanged and distribution in the society is unchanged. All that's happened is a bit of creative relabeling, treated as substantive due to our reliance on the pure form represented by "taxes" and "spending."
A fanciful example? Ed Kleinbard argues that Congress now does things almost exactly like the WSTC. And note that, per Peroni's paper, the 2010 estimate of U.S. federal income tax expenditures is almost $1.2 trillion, or about $4,000 per person. Now, that isn't an actual revenue estimate. For example, it's static, in the sense of entirely ignoring behavioral responses to repeal, along with interactions between different provisions. And it treats consumption tax features of the income tax that don't involve inter-asset distortion - e.g., retirement saving tax benefits, as distinct from, say, expensing for Asset A but not Asset B - as if they were "spending," which I would reinterpret here as meaning allocative rather than distributional, an ill-fitting label for the retirement saving rules.
Nonetheless, if we raise U.S. taxes per person by the raw tax expenditure number, we're up to about $17,000. Now the U.S. is clearly first, except that we also need to run the same exercise for everyone else.
Now let's think about payroll taxes. To the extent I pay in to the Social Security system but expect to get money back, is that really a tax? Is the "tax" just the excess in present value of taxes paid over expected retirement benefits? This would require a much longer conversation. Seemingly different from tax expenditure analysis as such, but for me it's part of the very same fiscal language point. "Taxes" and "spending" are not substantively meaningful in this context. They shouldn't be used in such empty and formalistic ways. Not just Mankiw, but everyone else who routinely talks in these terms, ought to know better.