It appears that I'll be discussing the Bowles-Simpson debt commission live on radio for a few minutes this afternoon, on NPR's "All Things Considered," shortly after 4:30 pm EST.
In addition to discussing what I think of the plan (and the phrase "compared to what" is crucial in answering this), I imagine the word "chicken game" may come up in terms of why I don't expect anything significant to come of the commission's work. I may also, if I get a chance in the limited time, assess why the Obama Administration seems eager to push this along, although frankly I've seen better-run campaigns for 6th grade homeroom class president (indeed, I say this from personal experience).
Again, the show time is 4:30 pm today (Tuesday, November 30). It will be on WNYC, 93.9 FM / 820 AM, but I would presume also on other NPR stations around the country that broadcast All Things Considered on weekday afternoons.
UPDATE: A reasonably brisk three minutes. As seems to be my way these days, I closed with a disparaging comment about the Obama Administration's negotiating strategy.
It will be on again in NYC at 7:40 pm tonight.
FURTHER UPDATE: I just heard the playback. Not enormously cheerful; there's a bit of chat about going off a cliff, hard versus soft landings, and the like. At the end, when the interviewer asked me if I think the federal pay freeze idea will help break the logjam, I answered that Obama makes a concession, then another one, then another one, because that's his negotiating style, but that he isn't going to get anything back.
Tuesday, November 30, 2010
Monday, November 29, 2010
Expiring tax cut for millionaires only?
"Millionaire," for this purpose, is defined in terms of annual taxable income.
I agree that it's politically deft, not that this will necessarily matter. And I do look forward to reading the Todd Henderson remake in which someone writes a column or post insisting that, despite his million-dollar income, he is barely scraping by and certainly isn't rich.
Apparently it loses $400 billion over ten years compared to letting the top bracket rate cut expire at $250,000 (bad), but raises $400 billion compared to extending all of the expiring rate cuts (good).
Given the insanity of extending any of the rate cuts more than very temporarily in the face of the fiscal gap (not to mention the insanity of extending any of them on this ground, in lieu of enacting better-directed stimulus), this is really all just about generating a one-day headline that favors the Dems for a change, albeit almost two years before the next election. We are so far outside the realm where intellectually credible policy options are being considered that it's hard to know how one should even try to discuss such things in normal policy terms, apart perhaps from teasing apart degrees of idiocy in the face of a far-reaching compared-to-what problem.
So I suppose there isn't much to say other than why not try it if it's politically effective, and all the more so if it might even pass (as the prior Democratic position clearly will not). But I assume the Republicans will bite the mosquito-sized political bullet and block it, like all of the other alternatives to 100 percent victory on the tax cuts.
Obama's federal wage freeze idea, by contrast, strikes me as both bad policy and bad politics. See one quick take here and another here. His three favorite activities appear to be begging Republicans to like him, endorsing and validating their policy views, and negotiating with himself (as Bush always refused to do).
I'm thinking of Otter in Animal House when he talks up the toga party: "I've got news for you, pal. They're going to nail us, no matter what we do. So we might as well have a good time." Not exactly Obama's attitude, as he continues to plead for Tea Party votes that will not be coming to him.
I agree that it's politically deft, not that this will necessarily matter. And I do look forward to reading the Todd Henderson remake in which someone writes a column or post insisting that, despite his million-dollar income, he is barely scraping by and certainly isn't rich.
Apparently it loses $400 billion over ten years compared to letting the top bracket rate cut expire at $250,000 (bad), but raises $400 billion compared to extending all of the expiring rate cuts (good).
Given the insanity of extending any of the rate cuts more than very temporarily in the face of the fiscal gap (not to mention the insanity of extending any of them on this ground, in lieu of enacting better-directed stimulus), this is really all just about generating a one-day headline that favors the Dems for a change, albeit almost two years before the next election. We are so far outside the realm where intellectually credible policy options are being considered that it's hard to know how one should even try to discuss such things in normal policy terms, apart perhaps from teasing apart degrees of idiocy in the face of a far-reaching compared-to-what problem.
So I suppose there isn't much to say other than why not try it if it's politically effective, and all the more so if it might even pass (as the prior Democratic position clearly will not). But I assume the Republicans will bite the mosquito-sized political bullet and block it, like all of the other alternatives to 100 percent victory on the tax cuts.
Obama's federal wage freeze idea, by contrast, strikes me as both bad policy and bad politics. See one quick take here and another here. His three favorite activities appear to be begging Republicans to like him, endorsing and validating their policy views, and negotiating with himself (as Bush always refused to do).
I'm thinking of Otter in Animal House when he talks up the toga party: "I've got news for you, pal. They're going to nail us, no matter what we do. So we might as well have a good time." Not exactly Obama's attitude, as he continues to plead for Tea Party votes that will not be coming to him.
Wednesday, November 24, 2010
Book talk on Getting It?
It looks like I'll be doing a faculty lunch talk on Getting It at Pace University Law School next Wednesday, December 1. More fun for the tax-uninitiated and at the end of a long semester, I suppose, than a reprise of my papers and past talks concerning Taxing Financial Institutions, The Rising Tax-Electivity of U.S. Corporate Residence, or The Case Against Foreign Tax Credits.
Monday, November 22, 2010
$400 billion of easy deficit reduction!!
In today's Wall Street Journal, an op-ed by Stephen Moore and Richard Vedder claims that they have done econometric research credibly establishing that, for every dollar of new federal revenues, federal spending increases by $1.17. Hence, it supposedly is a fallacy to think that tax increases can play any role whatsoever in long-term deficit reduction.
To be frank, I wonder whether this research is credible and whether its results would be replicated by researchers who don't start with their anti-tax ideological prior. After all, Congress doesn't have to have money in the "checking account" in order to spend what it wants. It has (for the moment) unlimited borrowing power anyway. Moore and Vedder also ignore the question of whether one can affect the relationship between new revenues and outlays. Proponents of VAT enactment, for example, often argue for earmarking the revenues in some way to prevent or at least soften the effect on federal outlays.
But suppose we accept their research claim as unalterably true. All one would then need to do is add the claim that it works both ways - i.e., that tax cuts likewise reduce outlays by more than dollar for dollar - and voila, one can argue that tax cuts pay for themselves, in a budgetary sense, without any need to resort to supply side arguments.
It's a good thing, too. Even leaving aside the powerful evidence against the proposition that tax cuts (from where we stand today) would actually raise revenues, the Moore-Vedder proposition should presumably leave a supply-sider queasy, if he actually believes his own empirical claim. Think of it: you cut rates, revenues go up. So far, so good. But then, darn it, spending goes up by 1.17 times the revenue increase.
No doubt it won't be long before some WSJ op-ed writer carries the idea to its logical conclusion. Maybe I should point the way?
Let's see: the President's 2010 budget totes up spending as $3.55 trillion and tax receipts as $2.38 trillion. If Moore and Vedder are right and it works both ways, all we need to do is zero out all federal revenues, and federal spending will decrease by 1.17 times the revenue loss, or $2.78 trillion.
Just think of it: No new taxes, not even any old taxes, federal revenue goes to zero, and we reduce the budget deficit by $400 billion.
I expect to see one or more WSJ op-eds flatly asserting this any day now.
To be frank, I wonder whether this research is credible and whether its results would be replicated by researchers who don't start with their anti-tax ideological prior. After all, Congress doesn't have to have money in the "checking account" in order to spend what it wants. It has (for the moment) unlimited borrowing power anyway. Moore and Vedder also ignore the question of whether one can affect the relationship between new revenues and outlays. Proponents of VAT enactment, for example, often argue for earmarking the revenues in some way to prevent or at least soften the effect on federal outlays.
But suppose we accept their research claim as unalterably true. All one would then need to do is add the claim that it works both ways - i.e., that tax cuts likewise reduce outlays by more than dollar for dollar - and voila, one can argue that tax cuts pay for themselves, in a budgetary sense, without any need to resort to supply side arguments.
It's a good thing, too. Even leaving aside the powerful evidence against the proposition that tax cuts (from where we stand today) would actually raise revenues, the Moore-Vedder proposition should presumably leave a supply-sider queasy, if he actually believes his own empirical claim. Think of it: you cut rates, revenues go up. So far, so good. But then, darn it, spending goes up by 1.17 times the revenue increase.
No doubt it won't be long before some WSJ op-ed writer carries the idea to its logical conclusion. Maybe I should point the way?
Let's see: the President's 2010 budget totes up spending as $3.55 trillion and tax receipts as $2.38 trillion. If Moore and Vedder are right and it works both ways, all we need to do is zero out all federal revenues, and federal spending will decrease by 1.17 times the revenue loss, or $2.78 trillion.
Just think of it: No new taxes, not even any old taxes, federal revenue goes to zero, and we reduce the budget deficit by $400 billion.
I expect to see one or more WSJ op-eds flatly asserting this any day now.
Sunday, November 21, 2010
Amusing writer
I'm currently reading Bad News, a novel in the Dortmunder series by Donald Westlake (recently deceased author of a lot of very funny and well-written genre fiction). Here's a typical passage that caught my eye:
"The New York lawyer looked like a hawk who hadn't eaten for a week. His beak of a nose seemed to be pointing at prey, his sharp, icy eyes flicked back and forth like an angry cat's tail and his hands were large and knobby and, when Marjorie shook one of them, cold. His name was Otis Welles and he wore a suit that cost more than Marjorie's car, but somehow, instead of the suit giving some dignity to his bony, gristly body, his body seemed merely to cheapen the suit."
"The New York lawyer looked like a hawk who hadn't eaten for a week. His beak of a nose seemed to be pointing at prey, his sharp, icy eyes flicked back and forth like an angry cat's tail and his hands were large and knobby and, when Marjorie shook one of them, cold. His name was Otis Welles and he wore a suit that cost more than Marjorie's car, but somehow, instead of the suit giving some dignity to his bony, gristly body, his body seemed merely to cheapen the suit."
Saturday, November 20, 2010
Income tax rates above 50 percent?
One of the headline events at the NTA Annual Conference was a speech by Emmanuel Saez on fundamental tax reform. Emmanuel, a rightly multiply-prize-winning mainly empirical economist, is perhaps best known for his work showing how income distribution has changed over the last few decades, becoming vastly more concentrated at the very top. He has also done other excellent work - for example, in behavioral public finance with work showing how framing can affect consumer responses to substantively identical tax instruments.
But he has not previously been all that involved in thinking or at least writing about the tax base. Thus, it was with clear interest and anticipation that I sat in the big auditorium at the NTA main event session on Thursday afternoon, as Jim Poterba introduced him with the note that Emmanuel, unlike any of those other wimps out there who needed to collaborate with others in order to produce comprehensive tax reform plans (OK, Jim didn't actually quite put it that way), had personally designed his own plan. As a fresh voice in the field, what would he say?
The results were interesting in one sense, but frankly less so in another. Saez drew on his work about income distribution to show what the income tax system would need to do in order to reverse even just, say, the last 20 years of radically rising income concentration at the top. He accordingly endorsed a system that is so far removed from where the discussion is these days that I consider it big news meriting widespread attention. The debate ought to extend at least as far as he wants to go, whether one or not one agrees about going all the way there. But in other respects the talk's content was perhaps a bit less substantial.
In the optimal income tax (OIT) approach, the point to high tax rates on high-earners is to achieve redistributive benefits in excess of efficiency losses, or more precisely the optimize the tradeoff between the two. Typical OIT models have ended up (initially to the surprise of those designing them) to call for relatively flat rather than graduated rates, with the rate at the very, very top (in theory - not necessarily in practice) dropping to zero. Emmanuel instead calls for a very graduated system, with a top rate in excess of 50 percent. This is not because he rejects the theoretical basis for the OIT approach (utilitarianism or other welfarism), but due to his modifying some of the typical assumptions - e.g., by assuming a very low marginal utility of income at the top (given the impossibility of consuming so much wealth any time soon, non-monetary motivations for wanting to earn the highest amount, etcetera).
I find this plausible and think it absolutely should be more prominent in public debate. Perhaps we've moved too far in the direction of thinking low rates are necessarily better. Wherever one comes out in the end on this question, top rates above 50% ought to be within the publicly debated policy space (which currently they are not), and the fact that a prominent and leading tax economist endorses them is genuinely newsworthy.
The exact normative basis for his proposed rate structure was a bit less intellectually satisfying. Even if one is greatly concerned about the plutocratic turn that U.S. society has been taking (a key factor, I think, in our ongoing conversion into a third world banana republic), a specific inequality target, with the view that economic growth should be shared in a particular predetermined manner, is in tension with the OIT principle of optimizing the tradeoff between equity and efficiency. Technological changes that alter pre-tax wealth distribution - not to prejudge how important they've been compared to political economy factors and changing social norms - may indeed change where one wants to end up, by altering the costs and benefits. But one could defend targeting, say, 1989 wealth distribution as a simplifying political economy choice, even if it isn't how one should in principle go about finding the optimal tradeoff point.
So far, so good. More disappointing about the talk was that it's hard to really have much insight or depth in one's views about the myriad tax base issues that arise in this sort of exercise if one hasn't spent a lot of time thinking about them. So I thought the NTA crowd was really the wrong audience for this speech.
Take the income versus consumption tax choice, for example. Saez rejected the cash flow consumption tax because it has never been tried. No X-tax variant, possibly because he had never heard of it. And he appeared to think that, to make an income tax work, you just have to get rid of those darned loopholes. Not much understanding, so far as I could see, of the point that, once you have a realization-based income tax and need to collect corporate income at the entity level, you are really deep in the soup.
Not to be harsh here. I commend him for digging in. It's public-spirited of him, and unmistakably informed by the altruistic goal of performing a public service in lieu of burnishing his academic reputation (which depends more on doing cutting edge research, as indeed he has). He most affirmatively was not trying to position himself to enter public political life, as the contents would have been political suicide if that were his goal. Plus he is making an important contribution, as I noted above, by expanding the parameters of debate and "acceptable" opinion. But I'll admit to thinking during much of the speech: Why am I listening to how he'd resolve Issue X? Sure, I might resolve it the same way, or perhaps in a different way - although he generally got things right rather than wrong where there was such a rubric - but there's a whole lot more to think about here that one needs to have spent some time on to understand in real depth.
The plan's political prospects are not especially bright. For example, in addition to creating a top rate above 50%, he would repeal the home mortgage interest and state and local tax deductions. Leaving aside everything else, there's an unfortunate political paradox at work here that undermines efforts such as this. The richer and more powerful the top 0.1% is, on the one hand the greater the normative case for redistributing wealth way from them, but on the other hand the dimmer the political prospects for actually doing so. Getting wealthier makes them more powerful politically, not less. So they'd probably have to lose substantial ground for the political system to start treating them less favorably.
In that way, the political economy of redistributive politics has a kind of anti-insurance element to it. Winners are rewarded for becoming more powerful, while losers are punished for having become less so. Not an easy problem to try to address.
But he has not previously been all that involved in thinking or at least writing about the tax base. Thus, it was with clear interest and anticipation that I sat in the big auditorium at the NTA main event session on Thursday afternoon, as Jim Poterba introduced him with the note that Emmanuel, unlike any of those other wimps out there who needed to collaborate with others in order to produce comprehensive tax reform plans (OK, Jim didn't actually quite put it that way), had personally designed his own plan. As a fresh voice in the field, what would he say?
The results were interesting in one sense, but frankly less so in another. Saez drew on his work about income distribution to show what the income tax system would need to do in order to reverse even just, say, the last 20 years of radically rising income concentration at the top. He accordingly endorsed a system that is so far removed from where the discussion is these days that I consider it big news meriting widespread attention. The debate ought to extend at least as far as he wants to go, whether one or not one agrees about going all the way there. But in other respects the talk's content was perhaps a bit less substantial.
In the optimal income tax (OIT) approach, the point to high tax rates on high-earners is to achieve redistributive benefits in excess of efficiency losses, or more precisely the optimize the tradeoff between the two. Typical OIT models have ended up (initially to the surprise of those designing them) to call for relatively flat rather than graduated rates, with the rate at the very, very top (in theory - not necessarily in practice) dropping to zero. Emmanuel instead calls for a very graduated system, with a top rate in excess of 50 percent. This is not because he rejects the theoretical basis for the OIT approach (utilitarianism or other welfarism), but due to his modifying some of the typical assumptions - e.g., by assuming a very low marginal utility of income at the top (given the impossibility of consuming so much wealth any time soon, non-monetary motivations for wanting to earn the highest amount, etcetera).
I find this plausible and think it absolutely should be more prominent in public debate. Perhaps we've moved too far in the direction of thinking low rates are necessarily better. Wherever one comes out in the end on this question, top rates above 50% ought to be within the publicly debated policy space (which currently they are not), and the fact that a prominent and leading tax economist endorses them is genuinely newsworthy.
The exact normative basis for his proposed rate structure was a bit less intellectually satisfying. Even if one is greatly concerned about the plutocratic turn that U.S. society has been taking (a key factor, I think, in our ongoing conversion into a third world banana republic), a specific inequality target, with the view that economic growth should be shared in a particular predetermined manner, is in tension with the OIT principle of optimizing the tradeoff between equity and efficiency. Technological changes that alter pre-tax wealth distribution - not to prejudge how important they've been compared to political economy factors and changing social norms - may indeed change where one wants to end up, by altering the costs and benefits. But one could defend targeting, say, 1989 wealth distribution as a simplifying political economy choice, even if it isn't how one should in principle go about finding the optimal tradeoff point.
So far, so good. More disappointing about the talk was that it's hard to really have much insight or depth in one's views about the myriad tax base issues that arise in this sort of exercise if one hasn't spent a lot of time thinking about them. So I thought the NTA crowd was really the wrong audience for this speech.
Take the income versus consumption tax choice, for example. Saez rejected the cash flow consumption tax because it has never been tried. No X-tax variant, possibly because he had never heard of it. And he appeared to think that, to make an income tax work, you just have to get rid of those darned loopholes. Not much understanding, so far as I could see, of the point that, once you have a realization-based income tax and need to collect corporate income at the entity level, you are really deep in the soup.
Not to be harsh here. I commend him for digging in. It's public-spirited of him, and unmistakably informed by the altruistic goal of performing a public service in lieu of burnishing his academic reputation (which depends more on doing cutting edge research, as indeed he has). He most affirmatively was not trying to position himself to enter public political life, as the contents would have been political suicide if that were his goal. Plus he is making an important contribution, as I noted above, by expanding the parameters of debate and "acceptable" opinion. But I'll admit to thinking during much of the speech: Why am I listening to how he'd resolve Issue X? Sure, I might resolve it the same way, or perhaps in a different way - although he generally got things right rather than wrong where there was such a rubric - but there's a whole lot more to think about here that one needs to have spent some time on to understand in real depth.
The plan's political prospects are not especially bright. For example, in addition to creating a top rate above 50%, he would repeal the home mortgage interest and state and local tax deductions. Leaving aside everything else, there's an unfortunate political paradox at work here that undermines efforts such as this. The richer and more powerful the top 0.1% is, on the one hand the greater the normative case for redistributing wealth way from them, but on the other hand the dimmer the political prospects for actually doing so. Getting wealthier makes them more powerful politically, not less. So they'd probably have to lose substantial ground for the political system to start treating them less favorably.
In that way, the political economy of redistributive politics has a kind of anti-insurance element to it. Winners are rewarded for becoming more powerful, while losers are punished for having become less so. Not an easy problem to try to address.
International tax panel at NTA Annual Meeting
Yesterday I participated in an NTA panel that addressed U.S. international tax policy and where it should be heading. Others on the panel were Jane Gravelle, Ed Kleinbard, and Lee Sheppard, and Jim Hines unofficially served as commentator via extended questions that he asked each of us, as a kind of point of personal privilege (quite reasonable, I thought, under the circumstances) because the panel tended to disagree with him.
All 4 panelists called for improving the source rules so the U.S. can more effectively tax multinationals on the fruits of their economic activity in the U.S. Kleinbard and Sheppard argued that we need to retain and strengthen worldwide taxation, essentially as an indirect way of taxing U.S. multinationals on their U.S. income. Gravelle views the U.S. as having sufficient monopoly power to be able to benefit from imposing a very aggressive tax on worldwide income. I gave the very quick version of my current views, under which switching to exemption is fine if we (a) really improve the source rules, in particular by treating all worldwide multinational groups as a single company, (b) tax the transition gain from U.S. companies' existing $1 trillion pool of overseas earnings, and (c) quite reasonably assume that exempting foreign source income is the only way to get rid of foreign tax credits and deferral.
The slides of my talk are available here.
All 4 panelists called for improving the source rules so the U.S. can more effectively tax multinationals on the fruits of their economic activity in the U.S. Kleinbard and Sheppard argued that we need to retain and strengthen worldwide taxation, essentially as an indirect way of taxing U.S. multinationals on their U.S. income. Gravelle views the U.S. as having sufficient monopoly power to be able to benefit from imposing a very aggressive tax on worldwide income. I gave the very quick version of my current views, under which switching to exemption is fine if we (a) really improve the source rules, in particular by treating all worldwide multinational groups as a single company, (b) tax the transition gain from U.S. companies' existing $1 trillion pool of overseas earnings, and (c) quite reasonably assume that exempting foreign source income is the only way to get rid of foreign tax credits and deferral.
The slides of my talk are available here.
Friday, November 19, 2010
Kocherlakota lunch talk at National Tax Association meeting
Today (Thursday, November 18) was my first day at the National Tax Association’s 103rd Annual Conference on Taxation, being held in Chicago. (Being posted a day later, however, due to web access issues at the execrably out-of-the-way Hyatt Regency McCormick Place in, but not really of, Chicago.)
Best part of the day was the lunch talk by Narayana Kocherlakota, the President of the Federal Reserve Bank of Minneapolis, concerning the current state of the play in monetary policy. The talk had more intellectual content than one typically finds in luncheon talks, even at the NTA (a neighbor at lunch made the same observation with opposite spin, calling it “very abstract”).
Just to compare it to a couple of past “highlights” at NTA lunches, I well remember a session at which I got into a heated colloquy with the speaker, Ed Lazear (while he was working for the Bush Administration, but before he joined the Tax Reform Panel), because I had been irritated by his passionate encomium to how long-term fiscally responsible his Administration was. And a few years before that, Glenn Hubbard (also while working for the Bush Administration) explained that the Bush tax cuts cost zero, not based on supply-side arguments, but on the view that every single dollar of tax cuts necessarily reduced government outlays by a dollar. But that may not have been at lunch.
Kocherlakota, by contrast, while discussing issues related to his current job, has a position in which he is not comparably required to be a political spokesman. He also clearly has an academic temperament, as one would expect from his work (I’m most familiar with that in “new dynamic public finance,” which I discuss here).
The talk left me feeling better about Kocherlakota’s recognition that it’s desperately important for the Fed, if at all possible, to address sustained unemployment. It left me feeling worse, however about the chances that the Fed’s current policy will actually help.
The basic theme was as follows: What should the Fed do when it wants to stimulate the economy, given the inadequate and slowing recovery, and can’t lower interest rates because they’re already effectively zero? He discussed two main things: the current policy of quantitative easing (QE), a.k.a. asset purchasing; and the potential interchangeability between fiscal policy and monetary policy. By this he meant not just the truism that either one can be stimulative, but rather that one can in principle exactly replicate or simulate the other. This second part of the talk was the one that got him plaudits from me and demerits from some others for being abstract – it was more of a thought experiment than anything with likely short-term policy ramifications.
OK, I’ve been reading a bit here and there about QE, but I must admit, as it’s outside of my real field of knowledge and I have plenty of other things to keep me busy, my understanding of it has been a bit vague. The talk was nicely helpful – unfortunately, in convincing me that it is highly unlikely to be very effective, even leaving aside the question of whether the scale would be too small even if it were in principle a sharp tool.
The ongoing QE ruckus concerns the Fed’s buying $600 billion of U.S. government bonds in simple market transactions. Republicans have been denouncing this – I believe, not in good faith given how 2012 avowedly trumps all other considerations in their thinking. The likes of Krugman say it’s much too small. But a starting point would be to ask how it is supposed to work in stimulating the economy.
One can understand how printing money potentially works. People feel richer in the short run and demand goes up (eliminating slack before inflation becomes a problem). And one can understand directly lowering interest rates, so consumers and businesses are more inclined to borrow for current spending. But why would Fed purchases of Treasury bonds be stimulative?
One path to QE’s being stimulative, which Kocherlakota rightly discounted, is that in practice it involves the Fed’s effectively giving the banks that sell it the bonds $600 billion more capacity to lend. In other words, increase the money supply because they can now make more loans. Only, the banks apparently have at present $1 trillion in unused capacity to lend, even with near-zero interest rates. So raising the unused capacity to $1.6 trillion is not going to accomplish much.
He instead proposed two alternative mechanisms for QE to work, in each case by replicating the policy act of lowering the interest rate despite its being zero. First, he said, the bond purchase is a credible statement that the Fed actually expects and believes and plans for interest rates to be very low for a very long time. So it lowers expected future interest rates that businesses are taking into account today.
This appeared to me to be a “skin in the game” type of argument. Suppose Warren Buffett purchased a vast quantity of U.S. government bonds. This might credibly signal that he believes U.S. interest rates will be low for a long time. If he were somehow the person who gets to decide what interest rates will be, it would be evidence that he expects to keep them low, plus he’d now have an extra reason for doing so (since the bonds he had purchased would lose value if interest rates went up).
But how does this to apply to the Fed, a governmental and hence nonprofit agency? To what extent are the Fed governors’ true incentives (which presumably are largely reputational) either illuminated or affected by its buying bonds? I think all QE really does in this dimension is show that they’re trying to shout. It’s a way of trying to pound the table and say: We really plan to keep interest rates low for a long time. But I’m not sure how much the act adds to the statement – which itself faces a pre-commitment problem, since what the Fed wants to do in the future might not be the same as what it wants people today to think it will do then.
In sum, surely the statement helps, but it’s unclear how much, and also unclear how much QE strengthens it. When a Fed governor admits they’re basically jawboning, it’s time to get nervous about their capacity to do anything effective even if they place a very high priority on addressing unemployment.
Route 2 that Kocherlakota identified by which QE can replicate lowering the interest rate is that, once the Fed has acted, the public (or rather those in the capital markets – including, of course, foreign governments and the like) now holds $600 billion less in U.S. government bonds than it did before. So the “public” is now collectively less exposed to U.S. government bond risk than otherwise, and requires less of a risk premium to hold bonds. This means that interest rates can now be lower (and expected to be lower) than in the absence of QE, continuing into the future. This rationale, unfortunately, strikes me as likely to be a bit trivial as an empirical matter.
In the more analytically, though less practically, interesting part of his talk, Kocherlakota discussed how fiscal policy can in principle replicate monetary policy. He said: Suppose the Fed lowers the interest rate by 100 basis points. Now the amount of consumption you can buy in a year by saving has dropped by 1%. Thus, suppose there is no inflation but the interest rate is zero. So, by saving for a year you are choosing between 1 widget now and 1 widget in a year. If the Fed could make the interest rate negative 1 percent, it could force you to choose between 1.01 widgets now and 1 widget in a year, inducing you to shift consumption forward to the present. But it can’t achieve this due to the zero lower bound. (After all, if you live in a safe neighborhood your mattress offers a 0% rather than negative return.)
Aha, he said. But suppose the legislature enacts a 1% consumption tax, to take effect in a year. And suppose it simultaneously enacts a 1% reduction in the wage tax, also to take effect in a year. Suppose further (though he was not explicit about this) that we assume, quite reasonably, that people in general can inter-temporally shift consumption but not labor supply. He also added in a temporary investment tax credit for purchases this year, but let’s ignore that to keep the example simple.
The exercise is roughly budget-neutral, and also keeps the labor versus leisure tradeoff the same as previously starting next year (since the price increase from the consumption tax is offset by the after-tax wage increase from the wage tax cut). But it means that you are choosing between 1.01 widgets now, before the consumption tax takes effect, and 1 widget next year (since with the 1% consumption tax increase that’s all you’ll get for the price of 1.01 widgets today). So it effectively replicates monetary policy while generally (if not quite perfectly) keeping other fiscal policy variables, such as the budget situation and incentive effects from next year forward, the same.
I thought it was a neat little analytical exercise. The fact that, in the real world of crude and imperfect instruments of fiscal policy, it would never hold quite exactly (as some questioners emphasized) is important as well, but doesn’t defeat the analytical point.
It’s also encouraging that at least one of the Fed governors is evidently so interested in wrestling intellectually with the problem of what the government can do when an interest rate cut is the preferred policy but unavailable. Discouraging as well, however, in that it doesn’t seem he’s come up with anything that we can anticipate actually being done and having a significant effect. Plus, it was almost as if he was saying: It's the legislature's fault, not mine. Even if they wanted to stick to replicating monetary policy, rather than running a more expansionary fiscal policy, they have the power that we at the Fed lack to escape the zero bound on interest rate cuts.
In sum, while this is hardly a new point, if QE is the best they have and all they are likely to do – and even that is attracting hysterical pushback from people who may not want the economy to get better before 2012 – we’d better fasten our seatbelts, or perhaps tighten our waist belts, because there are more bad times ahead.
Best part of the day was the lunch talk by Narayana Kocherlakota, the President of the Federal Reserve Bank of Minneapolis, concerning the current state of the play in monetary policy. The talk had more intellectual content than one typically finds in luncheon talks, even at the NTA (a neighbor at lunch made the same observation with opposite spin, calling it “very abstract”).
Just to compare it to a couple of past “highlights” at NTA lunches, I well remember a session at which I got into a heated colloquy with the speaker, Ed Lazear (while he was working for the Bush Administration, but before he joined the Tax Reform Panel), because I had been irritated by his passionate encomium to how long-term fiscally responsible his Administration was. And a few years before that, Glenn Hubbard (also while working for the Bush Administration) explained that the Bush tax cuts cost zero, not based on supply-side arguments, but on the view that every single dollar of tax cuts necessarily reduced government outlays by a dollar. But that may not have been at lunch.
Kocherlakota, by contrast, while discussing issues related to his current job, has a position in which he is not comparably required to be a political spokesman. He also clearly has an academic temperament, as one would expect from his work (I’m most familiar with that in “new dynamic public finance,” which I discuss here).
The talk left me feeling better about Kocherlakota’s recognition that it’s desperately important for the Fed, if at all possible, to address sustained unemployment. It left me feeling worse, however about the chances that the Fed’s current policy will actually help.
The basic theme was as follows: What should the Fed do when it wants to stimulate the economy, given the inadequate and slowing recovery, and can’t lower interest rates because they’re already effectively zero? He discussed two main things: the current policy of quantitative easing (QE), a.k.a. asset purchasing; and the potential interchangeability between fiscal policy and monetary policy. By this he meant not just the truism that either one can be stimulative, but rather that one can in principle exactly replicate or simulate the other. This second part of the talk was the one that got him plaudits from me and demerits from some others for being abstract – it was more of a thought experiment than anything with likely short-term policy ramifications.
OK, I’ve been reading a bit here and there about QE, but I must admit, as it’s outside of my real field of knowledge and I have plenty of other things to keep me busy, my understanding of it has been a bit vague. The talk was nicely helpful – unfortunately, in convincing me that it is highly unlikely to be very effective, even leaving aside the question of whether the scale would be too small even if it were in principle a sharp tool.
The ongoing QE ruckus concerns the Fed’s buying $600 billion of U.S. government bonds in simple market transactions. Republicans have been denouncing this – I believe, not in good faith given how 2012 avowedly trumps all other considerations in their thinking. The likes of Krugman say it’s much too small. But a starting point would be to ask how it is supposed to work in stimulating the economy.
One can understand how printing money potentially works. People feel richer in the short run and demand goes up (eliminating slack before inflation becomes a problem). And one can understand directly lowering interest rates, so consumers and businesses are more inclined to borrow for current spending. But why would Fed purchases of Treasury bonds be stimulative?
One path to QE’s being stimulative, which Kocherlakota rightly discounted, is that in practice it involves the Fed’s effectively giving the banks that sell it the bonds $600 billion more capacity to lend. In other words, increase the money supply because they can now make more loans. Only, the banks apparently have at present $1 trillion in unused capacity to lend, even with near-zero interest rates. So raising the unused capacity to $1.6 trillion is not going to accomplish much.
He instead proposed two alternative mechanisms for QE to work, in each case by replicating the policy act of lowering the interest rate despite its being zero. First, he said, the bond purchase is a credible statement that the Fed actually expects and believes and plans for interest rates to be very low for a very long time. So it lowers expected future interest rates that businesses are taking into account today.
This appeared to me to be a “skin in the game” type of argument. Suppose Warren Buffett purchased a vast quantity of U.S. government bonds. This might credibly signal that he believes U.S. interest rates will be low for a long time. If he were somehow the person who gets to decide what interest rates will be, it would be evidence that he expects to keep them low, plus he’d now have an extra reason for doing so (since the bonds he had purchased would lose value if interest rates went up).
But how does this to apply to the Fed, a governmental and hence nonprofit agency? To what extent are the Fed governors’ true incentives (which presumably are largely reputational) either illuminated or affected by its buying bonds? I think all QE really does in this dimension is show that they’re trying to shout. It’s a way of trying to pound the table and say: We really plan to keep interest rates low for a long time. But I’m not sure how much the act adds to the statement – which itself faces a pre-commitment problem, since what the Fed wants to do in the future might not be the same as what it wants people today to think it will do then.
In sum, surely the statement helps, but it’s unclear how much, and also unclear how much QE strengthens it. When a Fed governor admits they’re basically jawboning, it’s time to get nervous about their capacity to do anything effective even if they place a very high priority on addressing unemployment.
Route 2 that Kocherlakota identified by which QE can replicate lowering the interest rate is that, once the Fed has acted, the public (or rather those in the capital markets – including, of course, foreign governments and the like) now holds $600 billion less in U.S. government bonds than it did before. So the “public” is now collectively less exposed to U.S. government bond risk than otherwise, and requires less of a risk premium to hold bonds. This means that interest rates can now be lower (and expected to be lower) than in the absence of QE, continuing into the future. This rationale, unfortunately, strikes me as likely to be a bit trivial as an empirical matter.
In the more analytically, though less practically, interesting part of his talk, Kocherlakota discussed how fiscal policy can in principle replicate monetary policy. He said: Suppose the Fed lowers the interest rate by 100 basis points. Now the amount of consumption you can buy in a year by saving has dropped by 1%. Thus, suppose there is no inflation but the interest rate is zero. So, by saving for a year you are choosing between 1 widget now and 1 widget in a year. If the Fed could make the interest rate negative 1 percent, it could force you to choose between 1.01 widgets now and 1 widget in a year, inducing you to shift consumption forward to the present. But it can’t achieve this due to the zero lower bound. (After all, if you live in a safe neighborhood your mattress offers a 0% rather than negative return.)
Aha, he said. But suppose the legislature enacts a 1% consumption tax, to take effect in a year. And suppose it simultaneously enacts a 1% reduction in the wage tax, also to take effect in a year. Suppose further (though he was not explicit about this) that we assume, quite reasonably, that people in general can inter-temporally shift consumption but not labor supply. He also added in a temporary investment tax credit for purchases this year, but let’s ignore that to keep the example simple.
The exercise is roughly budget-neutral, and also keeps the labor versus leisure tradeoff the same as previously starting next year (since the price increase from the consumption tax is offset by the after-tax wage increase from the wage tax cut). But it means that you are choosing between 1.01 widgets now, before the consumption tax takes effect, and 1 widget next year (since with the 1% consumption tax increase that’s all you’ll get for the price of 1.01 widgets today). So it effectively replicates monetary policy while generally (if not quite perfectly) keeping other fiscal policy variables, such as the budget situation and incentive effects from next year forward, the same.
I thought it was a neat little analytical exercise. The fact that, in the real world of crude and imperfect instruments of fiscal policy, it would never hold quite exactly (as some questioners emphasized) is important as well, but doesn’t defeat the analytical point.
It’s also encouraging that at least one of the Fed governors is evidently so interested in wrestling intellectually with the problem of what the government can do when an interest rate cut is the preferred policy but unavailable. Discouraging as well, however, in that it doesn’t seem he’s come up with anything that we can anticipate actually being done and having a significant effect. Plus, it was almost as if he was saying: It's the legislature's fault, not mine. Even if they wanted to stick to replicating monetary policy, rather than running a more expansionary fiscal policy, they have the power that we at the Fed lack to escape the zero bound on interest rate cuts.
In sum, while this is hardly a new point, if QE is the best they have and all they are likely to do – and even that is attracting hysterical pushback from people who may not want the economy to get better before 2012 – we’d better fasten our seatbelts, or perhaps tighten our waist belts, because there are more bad times ahead.
Tuesday, November 16, 2010
Pop culture non-news
The Beatles on iTunes isn't exactly big news; it's not as if their catalog has been unavailable or under-exposed.
What would be big news is if they let iTunes put up as much as possible from among the unreleased recordings by the group (including but not limited to the vast array of bootlegs that are out there). This could include content from the original reel-to-reel Abbey Road studios tapes, all available demos and rehearsals from the era, etc.
99 cents per track, no promotional or printing costs for Apple Records, no need to worry about hitting the top of the charts with a particular release, etcetera. And there would quickly be a huge volunteer industry of people listing proposed albums to self-assemble.
Even just with pirate CDs and downloads, the amount that's currently available greatly exceeds their official canon, and indeed is so vast that the hard part is figuring out what bits are of particular interest, as they frequently in the studio already knew what they were doing before the first take of a given track.
What would be big news is if they let iTunes put up as much as possible from among the unreleased recordings by the group (including but not limited to the vast array of bootlegs that are out there). This could include content from the original reel-to-reel Abbey Road studios tapes, all available demos and rehearsals from the era, etc.
99 cents per track, no promotional or printing costs for Apple Records, no need to worry about hitting the top of the charts with a particular release, etcetera. And there would quickly be a huge volunteer industry of people listing proposed albums to self-assemble.
Even just with pirate CDs and downloads, the amount that's currently available greatly exceeds their official canon, and indeed is so vast that the hard part is figuring out what bits are of particular interest, as they frequently in the studio already knew what they were doing before the first take of a given track.
Monday, November 15, 2010
Today's single most pathetic news item
Obama has now endorsed the theory that he lost in 2010 for not being bipartisan enough. He is defining political success as getting people (such as McConnell) who state openly that their chief goal is to defeat him, to agree to hand him political victories.
Once he's done in Washington, which if this is how he chooses to operate will be pretty soon, I think I'd like to play poker with him for big money.
Once he's done in Washington, which if this is how he chooses to operate will be pretty soon, I think I'd like to play poker with him for big money.
Saturday, November 13, 2010
Brilliant new policy idea: the CFNIA
Democrats in Congress have a brilliant new policy idea: the CFNIA, or "Compensation For No Inflation Adjustment." Pronounced "siffneeah."
You see, if you're on a fixed budget and prices don't go up, you don't lose any ground. But this apparently is a bad thing (although I hadn't realized it before). It means that, if you have inflation-adjusted benefits that would have offset the price increases, you don't get to enjoy the nominal rise in your budget. This can be very disappointing, so the least Washington can do is ease the pain with some cold hard cash.
Presumably this is why the Democrats are now proposing to pay all Social Security recipients $250 a head to "compensate" them for the fact that there has been no cost of living adjustment (because there has been no inflation and thus no need for the adjustment) for the last 2 years.
$14 billion, just because seniors are a politically powerful group. Yes, I know many seniors have tough circumstances and could use the money. But there are also younger people who could use some help - say, the millions of unemployed who were hit much harder by the down economy than retirees.
One small point in its favor: I suppose it is $14 billion of stimulus. Recipients may conceivably have a relatively high propensity to spend the money. But what a crass and pandering way this is to direct the stimulus, with bad precedential effects for future political decisions that will probably outlive the economic downturn.
If this is enacted, Congress couldn't possibly say more straightforwardly: We like you guys better than everyone else. Or rather, we fear you politically more than everyone else.
The Democrats should really get a prize for this. Beyond the budgetary irresponsibility and sleazy pandering, they show their characteristic political brilliance in proposing this after the election, and at the precise point when the benefit they reap from it will be as close to zero as it could ever be. It's not like anyone will remember this in 2012.
If I post my 2012 vote as collateral, could someone amend the legislation to add me to the list of recipients? I mean, as Al Franken would have said in a prior life, why not me.
You see, if you're on a fixed budget and prices don't go up, you don't lose any ground. But this apparently is a bad thing (although I hadn't realized it before). It means that, if you have inflation-adjusted benefits that would have offset the price increases, you don't get to enjoy the nominal rise in your budget. This can be very disappointing, so the least Washington can do is ease the pain with some cold hard cash.
Presumably this is why the Democrats are now proposing to pay all Social Security recipients $250 a head to "compensate" them for the fact that there has been no cost of living adjustment (because there has been no inflation and thus no need for the adjustment) for the last 2 years.
$14 billion, just because seniors are a politically powerful group. Yes, I know many seniors have tough circumstances and could use the money. But there are also younger people who could use some help - say, the millions of unemployed who were hit much harder by the down economy than retirees.
One small point in its favor: I suppose it is $14 billion of stimulus. Recipients may conceivably have a relatively high propensity to spend the money. But what a crass and pandering way this is to direct the stimulus, with bad precedential effects for future political decisions that will probably outlive the economic downturn.
If this is enacted, Congress couldn't possibly say more straightforwardly: We like you guys better than everyone else. Or rather, we fear you politically more than everyone else.
The Democrats should really get a prize for this. Beyond the budgetary irresponsibility and sleazy pandering, they show their characteristic political brilliance in proposing this after the election, and at the precise point when the benefit they reap from it will be as close to zero as it could ever be. It's not like anyone will remember this in 2012.
If I post my 2012 vote as collateral, could someone amend the legislation to add me to the list of recipients? I mean, as Al Franken would have said in a prior life, why not me.
Friday, November 12, 2010
Paul Krugman on the Entitlement Commission’s tax reform plans
In his NYT column today, “The Hijacked Commission,” Paul Krugman harshly criticizes the Entitlement Commission’s tax reform proposals. Krugman is a lightning rod, of course, but in my view he’s been right about a lot of things. Here, however, he is in part taking on views widely accepted in the tax policy community, from at least moderate left to right. So herewith I quote the relevant paragraphs from his column, then offer some thoughts in response.
KRUGMAN: “We’ve known for a long time, then, that nothing good would come from the commission. But on Wednesday, when the co-chairmen released a PowerPoint outlining their proposal, it was even worse than the cynics expected.
“Start with the declaration of “Our Guiding Principles and Values.” Among them is, “Cap revenue at or below 21% of G.D.P.” This is a guiding principle? And why is a commission charged with finding every possible route to a balanced budget setting an upper (but not lower) limit on revenue?”
RESPONSE: Agreed as a matter of policy. The right level depends on social value for money or the costs versus benefits of greater government expenditure. The only good explanation for a revenue cap, but it is potentially plausible, would be that there is a political problem of undesirable “program creep” that can be addressed on the revenue side. Unfortunately, addressing program creep through a revenue cap is a “starve the beast” strategy which, as other critics of the plan have noted, does not appear to work. If you want to address the program creep problem, it really needs to be done on the outlay side, given the political ease of using debt financing.
There is, however, one other argument for a revenue cap. It is simply that one needs some such thing for the right to be willing to play ball on deficit reduction. Even if Krugman is 100 percent right on all policy matters, a feasible deal to prevent a U.S. fiscal crisis will need to involve compromise with others who have different views. So here one could see him as making a tactical argument that it’s too soon to concede this when the right isn’t yet really willing to play ball – or alternatively as demanding total victory. (Impossible to distinguish between these two variants until one has an actual, politically feasible take-it-or-leave it deal on the table.)
KRUGMAN: “Matters become clearer once you reach the section on tax reform. The goals of reform, as Mr. Bowles and Mr. Simpson see them, are presented in the form of seven bullet points. ‘Lower Rates’ is the first point; ‘Reduce the Deficit is the seventh.
"So how, exactly, did a deficit-cutting commission become a commission whose first priority is cutting tax rates, with deficit reduction literally at the bottom of the list?”
RESPONSE: Touché, at least to a degree. But this doesn’t mean it’s a right-wing plot. The panel appears to have relied on tax reform types (hardly a word of opprobrium, coming from me) who offered the standard prescription of broadening the base and lowering the rate. Why do this here? Two reasons. First, if revenues are going up relative to current law, it’s all the more important to increase the efficiency of the tax system, since distortions have more impact as it grows. Second, if lots of unpopular stuff is being done anyway to reduce the fiscal gap, why not throw in other unpopular but good-policy type stuff.
KRUGMAN: “Actually, though, what the co-chairmen are proposing is a mixture of tax cuts and tax increases — tax cuts for the wealthy, tax increases for the middle class. They suggest eliminating tax breaks that, whatever you think of them, matter a lot to middle-class Americans — the deductibility of health benefits and mortgage interest — and using much of the revenue gained thereby, not to reduce the deficit, but to allow sharp reductions in both the top marginal tax rate and in the corporate tax rate.
“It will take time to crunch the numbers here, but this proposal clearly represents a major transfer of income upward, from the middle class to a small minority of wealthy Americans. And what does any of this have to do with deficit reduction?”
RESPONSE: Krugman must have really hated the 1986 tax reform, which used ALL of the revenue from base-broadening to pay for lower rates. Here, the commission sets aside $80 billion (in the initial year) for deficit reduction, while using the rest to pay for lower rates.
And yes, the numbers do have to be crunched before we draw conclusions here. Note that the 1986 Act, at least as estimated, was distribution-neutral. And indeed it was probably progressive on balance if, at the time, the corporate tax (which went up despite corporate rate reduction) was mainly borne by shareholders in the transition and savers in the 1980s version of the “long run” (i.e., before global capital mobility, which tends to shift the incidence of the corporate tax to workers, had quite reached current levels).
Krugman does not mention a big chart the commission included, called “Who Benefits from Tax Expenditures,” showing that their effect on after-tax income is greatest for the top 1%. He notes that the deductibility of health benefits and mortgage interest, “whatever you think of them, matter a lot to middle class Americans.” But these benefits are uncapped, apart from the $1.1 million ceiling on home mortgage loan principal that generates deductible interest, and the fact that they “matter” to middle class Americans at lower dollar levels is not really the point. And the middle class does benefit from rate reduction. For example, the Commission’s “Option 1” plan, the one he appears to be addressing here, creates a 3-tier rate structure of 9%, 15%, and 24% (I’m using the variant that keeps the child tax credit and EITC, which, as I have explained elsewhere, are better viewed as rate structure features than as tax expenditures). This does significantly cut rates for everyone, not just at the top, thus creating an offset.
If I had to guess before someone crunches the numbers, the top 1% doesn’t necessarily win under the plan, though the uppermost portion of that percentile may well win big. (This reflects that tax expenditures at very high levels may stop growing significantly with income - e.g., how much bigger is your primary residence likely to be if you earn $50 million, rather than $40 million?) This was probably true in 1986 as well. In analyzing this, the efficiency aspects of lower rates are relevant. Krugman often expresses skepticism about them, usually by correctly debunking exaggerated claims about how higher rates shut down the economy (which we have certainly seen they don’t). But plausible economic models, and not just those done by more conservative economists who assume relatively high taxpayer responsiveness, do show some positive impact of lower rates on productive economic activity.
Important to keep in mind here that this is still an income tax, creating lots of distortions (even if savings behavior as such is relatively inelastic) because the asset valuation piece of income is so hard to measure and thus we are forced to use realization rules. If we’re talking tax reform fantasies here, I would switch to a progressive consumption tax and would certainly expect to end up proposing higher top bracket rates (such as on the order of 35%) than the Commission does under an income tax.
Note also that the Commission proposes lowering the corporate rate – under the option I’m considering, from 35% to 26%. Given current models and empirical work looking at corporate tax incidence in a global economy, this shift probably has a relatively progressive long-term impact, from its attracting more capital to the U.S. through the lower rate (though for this purpose one has to consider the effective rate, increased by base-broadening, not just the marginal rate). But the transition gain from cutting the rates, before investment levels adjust, may go to current shareholders.
By the way, a very non-Krugman problem with the Commission’s Option 1 is that (in the variant I consider) the corporate rate exceeds the top individual rate, and in addition dividends and capital gain are taxed as ordinary income, making the system’s bias against corporate equity (and in favor of debt financing or non-corporate entities) significantly greater than under present law.
An underlying philosophical question here is what should proponents of progressivity really be most concerned with – raising the bottom or lowering the top? I am more of a raise-the-bottom person, although I do see the rising concentration of wealth in the U.S. at the very top as potentially having dangerous social, political, and economic implications. But estate or inheritance taxation may be a better instrument than the annual income tax for addressing this. And I would especially like to focus policy at the top on fortunes that are being made through unproductive activity (e.g., Blackwater-style crony capitalism, horrendously maldesigned executive compensation, and the undue growth of the financial sector), as opposed to winner-takes-all yet to a degree productive development of new consumer products (e.g., Microsoft or Facebook). But this presumably involves political economy and regulatory responses, as opposed to using the tax system.
KRUGMAN: “We’ve known for a long time, then, that nothing good would come from the commission. But on Wednesday, when the co-chairmen released a PowerPoint outlining their proposal, it was even worse than the cynics expected.
“Start with the declaration of “Our Guiding Principles and Values.” Among them is, “Cap revenue at or below 21% of G.D.P.” This is a guiding principle? And why is a commission charged with finding every possible route to a balanced budget setting an upper (but not lower) limit on revenue?”
RESPONSE: Agreed as a matter of policy. The right level depends on social value for money or the costs versus benefits of greater government expenditure. The only good explanation for a revenue cap, but it is potentially plausible, would be that there is a political problem of undesirable “program creep” that can be addressed on the revenue side. Unfortunately, addressing program creep through a revenue cap is a “starve the beast” strategy which, as other critics of the plan have noted, does not appear to work. If you want to address the program creep problem, it really needs to be done on the outlay side, given the political ease of using debt financing.
There is, however, one other argument for a revenue cap. It is simply that one needs some such thing for the right to be willing to play ball on deficit reduction. Even if Krugman is 100 percent right on all policy matters, a feasible deal to prevent a U.S. fiscal crisis will need to involve compromise with others who have different views. So here one could see him as making a tactical argument that it’s too soon to concede this when the right isn’t yet really willing to play ball – or alternatively as demanding total victory. (Impossible to distinguish between these two variants until one has an actual, politically feasible take-it-or-leave it deal on the table.)
KRUGMAN: “Matters become clearer once you reach the section on tax reform. The goals of reform, as Mr. Bowles and Mr. Simpson see them, are presented in the form of seven bullet points. ‘Lower Rates’ is the first point; ‘Reduce the Deficit is the seventh.
"So how, exactly, did a deficit-cutting commission become a commission whose first priority is cutting tax rates, with deficit reduction literally at the bottom of the list?”
RESPONSE: Touché, at least to a degree. But this doesn’t mean it’s a right-wing plot. The panel appears to have relied on tax reform types (hardly a word of opprobrium, coming from me) who offered the standard prescription of broadening the base and lowering the rate. Why do this here? Two reasons. First, if revenues are going up relative to current law, it’s all the more important to increase the efficiency of the tax system, since distortions have more impact as it grows. Second, if lots of unpopular stuff is being done anyway to reduce the fiscal gap, why not throw in other unpopular but good-policy type stuff.
KRUGMAN: “Actually, though, what the co-chairmen are proposing is a mixture of tax cuts and tax increases — tax cuts for the wealthy, tax increases for the middle class. They suggest eliminating tax breaks that, whatever you think of them, matter a lot to middle-class Americans — the deductibility of health benefits and mortgage interest — and using much of the revenue gained thereby, not to reduce the deficit, but to allow sharp reductions in both the top marginal tax rate and in the corporate tax rate.
“It will take time to crunch the numbers here, but this proposal clearly represents a major transfer of income upward, from the middle class to a small minority of wealthy Americans. And what does any of this have to do with deficit reduction?”
RESPONSE: Krugman must have really hated the 1986 tax reform, which used ALL of the revenue from base-broadening to pay for lower rates. Here, the commission sets aside $80 billion (in the initial year) for deficit reduction, while using the rest to pay for lower rates.
And yes, the numbers do have to be crunched before we draw conclusions here. Note that the 1986 Act, at least as estimated, was distribution-neutral. And indeed it was probably progressive on balance if, at the time, the corporate tax (which went up despite corporate rate reduction) was mainly borne by shareholders in the transition and savers in the 1980s version of the “long run” (i.e., before global capital mobility, which tends to shift the incidence of the corporate tax to workers, had quite reached current levels).
Krugman does not mention a big chart the commission included, called “Who Benefits from Tax Expenditures,” showing that their effect on after-tax income is greatest for the top 1%. He notes that the deductibility of health benefits and mortgage interest, “whatever you think of them, matter a lot to middle class Americans.” But these benefits are uncapped, apart from the $1.1 million ceiling on home mortgage loan principal that generates deductible interest, and the fact that they “matter” to middle class Americans at lower dollar levels is not really the point. And the middle class does benefit from rate reduction. For example, the Commission’s “Option 1” plan, the one he appears to be addressing here, creates a 3-tier rate structure of 9%, 15%, and 24% (I’m using the variant that keeps the child tax credit and EITC, which, as I have explained elsewhere, are better viewed as rate structure features than as tax expenditures). This does significantly cut rates for everyone, not just at the top, thus creating an offset.
If I had to guess before someone crunches the numbers, the top 1% doesn’t necessarily win under the plan, though the uppermost portion of that percentile may well win big. (This reflects that tax expenditures at very high levels may stop growing significantly with income - e.g., how much bigger is your primary residence likely to be if you earn $50 million, rather than $40 million?) This was probably true in 1986 as well. In analyzing this, the efficiency aspects of lower rates are relevant. Krugman often expresses skepticism about them, usually by correctly debunking exaggerated claims about how higher rates shut down the economy (which we have certainly seen they don’t). But plausible economic models, and not just those done by more conservative economists who assume relatively high taxpayer responsiveness, do show some positive impact of lower rates on productive economic activity.
Important to keep in mind here that this is still an income tax, creating lots of distortions (even if savings behavior as such is relatively inelastic) because the asset valuation piece of income is so hard to measure and thus we are forced to use realization rules. If we’re talking tax reform fantasies here, I would switch to a progressive consumption tax and would certainly expect to end up proposing higher top bracket rates (such as on the order of 35%) than the Commission does under an income tax.
Note also that the Commission proposes lowering the corporate rate – under the option I’m considering, from 35% to 26%. Given current models and empirical work looking at corporate tax incidence in a global economy, this shift probably has a relatively progressive long-term impact, from its attracting more capital to the U.S. through the lower rate (though for this purpose one has to consider the effective rate, increased by base-broadening, not just the marginal rate). But the transition gain from cutting the rates, before investment levels adjust, may go to current shareholders.
By the way, a very non-Krugman problem with the Commission’s Option 1 is that (in the variant I consider) the corporate rate exceeds the top individual rate, and in addition dividends and capital gain are taxed as ordinary income, making the system’s bias against corporate equity (and in favor of debt financing or non-corporate entities) significantly greater than under present law.
An underlying philosophical question here is what should proponents of progressivity really be most concerned with – raising the bottom or lowering the top? I am more of a raise-the-bottom person, although I do see the rising concentration of wealth in the U.S. at the very top as potentially having dangerous social, political, and economic implications. But estate or inheritance taxation may be a better instrument than the annual income tax for addressing this. And I would especially like to focus policy at the top on fortunes that are being made through unproductive activity (e.g., Blackwater-style crony capitalism, horrendously maldesigned executive compensation, and the undue growth of the financial sector), as opposed to winner-takes-all yet to a degree productive development of new consumer products (e.g., Microsoft or Facebook). But this presumably involves political economy and regulatory responses, as opposed to using the tax system.
Thursday, November 11, 2010
Did the White House cave on extending the Bush tax cuts?
Short answer: this depends on how you define the White House's objectives.
To summarize the underlying story, there has been much back-and-forth in the on-line press today relating to a David Axelrod statement that the White House accepts the reality of the world we live in, a potentially anodyne principle that it more controversially interprets as meaning it can't get the expiring individual tax rate cuts below the top bracket extended permanently, while not also signing on to permanent extension of the top-rate tax cuts (which the White House, I gather and hope, remains unwilling to do).
The upshot appears to be that all of the tax cuts will be extended for just two years, presumably with the Republicans' agreement if the only alternative is to let them all expire.
This is indeed a cave-in on the White House goal of separating the top-rate tax cuts from all the rest. But it appeared clear that the Republicans were willing to go to the mat on this by playing out the chicken game in which the tax cuts expire and each side blames the other. Plus, it was far from clear how many Congressional Democrats would back the White House on this one. And if the impasse and tax rate increase hurt the economy, not only would this be bad for its own sake, but the White House might pay the main political price despite all efforts to blame the Republicans.
But suppose the White House didn't really want to extend any of the tax cuts permanently, but was merely playing defense (going all the way back to the 2008 election) in asserting the contrary. I'd certainly like to believe this was so, given the fiscal insanity at this point of losing trillions in long-term revenue. If so, then getting an excuse not to extend any of them permanently is actually a potential policy improvement over the stated White House position (with political cover being provided by the dispute over the top bracket). And indeed it's arguably better policy than letting the tax cuts expire right away, given the need for fiscal stimulus and the zero prospect of administering it by better-targeted means.
Of course, this raises the question of what will happen (and whose political interests will be served) when the tax cuts' expiration comes up all over again in 2013. The issue will surely feature prominently in the 2012 Presidential election, and Obama will likely have to repeat his 2008 pledge about the rate cuts below the top bracket (no matter how dire our long-term budgetary prospects). Plus, the concession reinforces an all-too-accurate (as well as self-reinforcing and politically costly) perception that the Democrats, as always, remain less willing than the Republicans to play their side of the ongoing chicken games with high determination and vigor.
My bottom line: subjectively speaking they caved, this was probably a realistic choice, but the long-term policy outcome could end up being better than if they had gotten the deal they wanted (2 year extension for the top bracket, permanent for everything else) - depending, however, on how this plays out in 2012 and 2013.
It would be nice just once in a while, however, to see the White House play its cards more aggressively. There will probably be chicken games galore in the first half of 2011, involving Republican threats to shut down the government 1995-style and/or to cause a temporary default by refusing to increase the debt limit, unless they get massive concessions that probably start but don't end with repealing or at least defunding healthcare. And if the White House enters these battles without any credibility regarding its willingness to stand firm, then the chance of a mutually costly miscalculation (or else of abject surrender on its part) becomes all the greater.
To summarize the underlying story, there has been much back-and-forth in the on-line press today relating to a David Axelrod statement that the White House accepts the reality of the world we live in, a potentially anodyne principle that it more controversially interprets as meaning it can't get the expiring individual tax rate cuts below the top bracket extended permanently, while not also signing on to permanent extension of the top-rate tax cuts (which the White House, I gather and hope, remains unwilling to do).
The upshot appears to be that all of the tax cuts will be extended for just two years, presumably with the Republicans' agreement if the only alternative is to let them all expire.
This is indeed a cave-in on the White House goal of separating the top-rate tax cuts from all the rest. But it appeared clear that the Republicans were willing to go to the mat on this by playing out the chicken game in which the tax cuts expire and each side blames the other. Plus, it was far from clear how many Congressional Democrats would back the White House on this one. And if the impasse and tax rate increase hurt the economy, not only would this be bad for its own sake, but the White House might pay the main political price despite all efforts to blame the Republicans.
But suppose the White House didn't really want to extend any of the tax cuts permanently, but was merely playing defense (going all the way back to the 2008 election) in asserting the contrary. I'd certainly like to believe this was so, given the fiscal insanity at this point of losing trillions in long-term revenue. If so, then getting an excuse not to extend any of them permanently is actually a potential policy improvement over the stated White House position (with political cover being provided by the dispute over the top bracket). And indeed it's arguably better policy than letting the tax cuts expire right away, given the need for fiscal stimulus and the zero prospect of administering it by better-targeted means.
Of course, this raises the question of what will happen (and whose political interests will be served) when the tax cuts' expiration comes up all over again in 2013. The issue will surely feature prominently in the 2012 Presidential election, and Obama will likely have to repeat his 2008 pledge about the rate cuts below the top bracket (no matter how dire our long-term budgetary prospects). Plus, the concession reinforces an all-too-accurate (as well as self-reinforcing and politically costly) perception that the Democrats, as always, remain less willing than the Republicans to play their side of the ongoing chicken games with high determination and vigor.
My bottom line: subjectively speaking they caved, this was probably a realistic choice, but the long-term policy outcome could end up being better than if they had gotten the deal they wanted (2 year extension for the top bracket, permanent for everything else) - depending, however, on how this plays out in 2012 and 2013.
It would be nice just once in a while, however, to see the White House play its cards more aggressively. There will probably be chicken games galore in the first half of 2011, involving Republican threats to shut down the government 1995-style and/or to cause a temporary default by refusing to increase the debt limit, unless they get massive concessions that probably start but don't end with repealing or at least defunding healthcare. And if the White House enters these battles without any credibility regarding its willingness to stand firm, then the chance of a mutually costly miscalculation (or else of abject surrender on its part) becomes all the greater.
Wednesday, November 10, 2010
Upcoming international tax policy talk at the NTA
Oops, interrupting my international tax book again, this time to prepare slides for my talk in Chicago next week (Nov. 19) at the National Tax Association's 103rd Annual Conference on Taxation, where I will be on a panel discussion (with Donald Marples, Jane Gravelle, Ed Kleinbard, and Lee Sheppard) entitled "International Corporate Taxation: Are We Headed in the Right Direction"?
I'm enthusiastic about how my slides (which I will as usual post on the NYU Law website and this blog) are shaping up. They will distill the basic conclusions I am reaching in the book-in-progress, which are a bit novel except for their general foreshadowing in a few of my recent international tax articles on SSRN.
Hint # 1: I will trash all of the worldwide welfare norms (such as capital export neutrality or CEN, capital import neutrality or CIN, and capital ownership neutrality or CON) that dominate so much of the expert discussion. Death to alphabet soup & the battle of the acronyms.
Hint # 2: My bottom line will conditionally endorse a shift from our current supposedly worldwide tax to a territorial system, but I would expect U.S. multinationals greatly to prefer present law to what I suggest.
I'm enthusiastic about how my slides (which I will as usual post on the NYU Law website and this blog) are shaping up. They will distill the basic conclusions I am reaching in the book-in-progress, which are a bit novel except for their general foreshadowing in a few of my recent international tax articles on SSRN.
Hint # 1: I will trash all of the worldwide welfare norms (such as capital export neutrality or CEN, capital import neutrality or CIN, and capital ownership neutrality or CON) that dominate so much of the expert discussion. Death to alphabet soup & the battle of the acronyms.
Hint # 2: My bottom line will conditionally endorse a shift from our current supposedly worldwide tax to a territorial system, but I would expect U.S. multinationals greatly to prefer present law to what I suggest.
Entitlement Commission's preliminary report
It's available here. Just ignore the words on the title page that say "Draft Document - Do Not Quote, Cite, or Release" along with the bit on the top of each page that says "Draft - Do Not Cite." Everyone else out there is ignoring these words, after all (and I don't happen to know if what we have here is a trial balloon or a leak).
Also, apparently at most 4 of the 18 commissioners have been willing to say at this point that they accept the report.
Initial reactions that I've come across run the expected gamut. The Committee for a Responsible Federal Budget calls it "remarkable and a significant step towards sound fiscal policy." Elsewhere, the words "Catfood Commission" are being deployed again, on the theory that the Commission aims to reduce seniors to eating catfood, even though its proposed Social Security cuts would be progressive (reducing benefits at upper income ranges but raising them at the bottom).
There's much to quarrel with in the report, including its proposing various arbitrary rules of thumb that one certainly wouldn't have in a rational political process (e.g., revenue must be capped at 21% of GDP, rather than depending on a full assessment of costs and benefits; various meat axe spending freezes or caps that likewise can only, albeit plausibly, be defended on the ground that a more nuanced approach wouldn't work politically).
Also, a big critique of the plan on the left that may well be correct politically could be stated as follows. Even to the extent that politicians on the left and right alike genuinely plan to solve the fiscal problem, they're engaged in a chicken game regarding whose oxen get gored first and the most. If we (reasonably) posit that the people on the right are pretty much unwilling at this point to make any concessions on the tax side, then those on the left might be tactically mistaken to give any ground too soon on entitlements growth and the like. Hence the talk, for example by Brad DeLong, that establishing the Commission was an "unforced error" by the Obama Administration.
All that said, however, there's a lot to be said for this proposal substantively (whether or not it will succeed politically in moving things in a positive direction). For example, it discusses:
(1) cutting military along with other discretionary spending. In my view, much U.S. military spending and activity has not just zero but negative social value from a U.S. national welfare standpoint.
(2) significant income tax base-broadening, with elimination of tax expenditures paying for significantly lower rates (while still permitting some net revenue-raising),
(3) making Social Security not just a slower-growing program but potentially a more progressive one, and
(4) measures to address unsustainable healthcare growth.
One smallish point - addressed, however, to my current research interests - is that the report refers to replacing the current worldwide U.S. international tax system with a territorial or exemption system for foreign source income. Fine, and I'm writing a book that ultimately albeit conditionally endorses this, but it would be a huge mistake to do this without (a) taxing away U.S. companies' transition gain with respect to the as yet unrepatriated foreign earnings that they accumulated under our existing worldwide regime, and (b) improving the source rules for U.S. versus foreign source income, given that the worldwide tax currently functions as a constraint on U.S. (but not foreign) multinationals' ability to shift reported net income out of the U.S.
Also, apparently at most 4 of the 18 commissioners have been willing to say at this point that they accept the report.
Initial reactions that I've come across run the expected gamut. The Committee for a Responsible Federal Budget calls it "remarkable and a significant step towards sound fiscal policy." Elsewhere, the words "Catfood Commission" are being deployed again, on the theory that the Commission aims to reduce seniors to eating catfood, even though its proposed Social Security cuts would be progressive (reducing benefits at upper income ranges but raising them at the bottom).
There's much to quarrel with in the report, including its proposing various arbitrary rules of thumb that one certainly wouldn't have in a rational political process (e.g., revenue must be capped at 21% of GDP, rather than depending on a full assessment of costs and benefits; various meat axe spending freezes or caps that likewise can only, albeit plausibly, be defended on the ground that a more nuanced approach wouldn't work politically).
Also, a big critique of the plan on the left that may well be correct politically could be stated as follows. Even to the extent that politicians on the left and right alike genuinely plan to solve the fiscal problem, they're engaged in a chicken game regarding whose oxen get gored first and the most. If we (reasonably) posit that the people on the right are pretty much unwilling at this point to make any concessions on the tax side, then those on the left might be tactically mistaken to give any ground too soon on entitlements growth and the like. Hence the talk, for example by Brad DeLong, that establishing the Commission was an "unforced error" by the Obama Administration.
All that said, however, there's a lot to be said for this proposal substantively (whether or not it will succeed politically in moving things in a positive direction). For example, it discusses:
(1) cutting military along with other discretionary spending. In my view, much U.S. military spending and activity has not just zero but negative social value from a U.S. national welfare standpoint.
(2) significant income tax base-broadening, with elimination of tax expenditures paying for significantly lower rates (while still permitting some net revenue-raising),
(3) making Social Security not just a slower-growing program but potentially a more progressive one, and
(4) measures to address unsustainable healthcare growth.
One smallish point - addressed, however, to my current research interests - is that the report refers to replacing the current worldwide U.S. international tax system with a territorial or exemption system for foreign source income. Fine, and I'm writing a book that ultimately albeit conditionally endorses this, but it would be a huge mistake to do this without (a) taxing away U.S. companies' transition gain with respect to the as yet unrepatriated foreign earnings that they accumulated under our existing worldwide regime, and (b) improving the source rules for U.S. versus foreign source income, given that the worldwide tax currently functions as a constraint on U.S. (but not foreign) multinationals' ability to shift reported net income out of the U.S.
Tuesday, November 09, 2010
NTA photo
Since I presented my foreign tax credit paper at Rutgers Camden yesterday, why not post a photo I just received by e-mail (via a newsletter attachment) this morning, apparently taken when I was presenting the same paper at a National Tax Association conference in Washington this past May.I've presented this paper a number of times now and am probably done doing so (as it has more or less come out via the December issue of the National Tax Journal). It may not win any download contests (132 so far plus 218 for its longer sibling), but I think that when properly digested it will conceptually reshape the field a bit. Download counts aren't everything.
Monday, November 08, 2010
Martin Sullivan's Part 2 on the approaching U.S. fiscal crisis
This one bears the cheery title, "Fiscal Crisis, Part 2: Catastrophe." Among the points he mentions (from the Len Burman paper I linked here recently, among others) is that, once U.S. debt levels get high enough, rising interest rates for U.S. borrowing (whether triggered by default worries or otherwise) can create a runaway, self-reinforcing cycle that leads to default. Increasing the interest rate makes funding the debt costlier and harder to afford, which requires raising the interest rate, which makes funding the debt costlier and harder to afford, etcetera.
Thursday, November 04, 2010
Wascally wabbit
Buddy, shown here dipping a toe in the waters of the dining room table (so to speak) because there was meat nearby (albeit heavily guarded), always reminds me of Wile E. Coyote in the intensity of his passion for more food. But unlike Wile E. slinking away each time, he never gets discouraged.Alone among our cats, he continually brings to mind cartoon characters, whence the title of this post, reflecting the thought that Elmer Fudd definitely would not have liked him.
Handsome fellow, though, and very sweet-tempered when not moved by the ache of his hunger (since we have him on a diet by vet's orders) to swat at or jump on our other cats.
The reason for the collar & tag is that he's capable of escaping out the door and jumping over a fence, in about 2 seconds flat, if he happens to be baited by the sight of another cat or a squirrel.
An older family member recently asked me: "Doesn't he know you don't want him jumping on the table and the counter tops?"
Of course he knows, I replied. He just happens not to agree.
Wednesday, November 03, 2010
Strange adventures in publishing
I've just completed an odd experience in the Getting It promotion front. There is an American legal practice-related on-line journal, which I won't name any more precisely than I already have, that occurred to me as a possible vehicle for discussing the novel, which does after all arguably provide a window of sorts into what being a young lawyer at a big firm is like.
I sent the editor at this journal a copy of the book, and then (on Monday, August 9) sent her an e-mail. She replied the same day: "Can we talk Wednesday sometime? I'm out til then." We then agreed that she'd call me at 12:30 on Wednesday, August 11.
The day went by, however, without any such call. But not to worry, she replied that night. "OK, sorry I missed you. Wound up in a meeting that went long. I'll try you tomorrow after 3:30/4 pm, if that's ok."
But of course no call transpired the next day either.
I waited a couple of weeks to get back to her, and promptly after I did so heard back from her (on August 30) as follows:
"Maybe we can talk after Labor Day? I’m sorry about this delay but we’ve been swamped and I’ve had my hands full w/ the daily, our redesign project, other Web matters, and endless meetings. It won’t ease up for a while. I’m not sure if it merits a feature, some type of interview perhaps. But I should focus on it a bit more and then we should talk."
Needless to say, I suspected a brush-off, and all the more so after Labor Day passed with no word from her. But how hard is it to say by e-mail that "this doesn't work for us," or even the time-honored classic, "don't call us, we'll call you." Hard to see what one gains by NOT using those more standard brush-off techniques (or even simply not answering). So I figured who knows, and there's nothing to lose, why not keep trying after a suitably long delay.
So last week I tried again, and once more I heard back promptly (last Thursday) as follows:
"Thanks. I really am so sorry, I keep forgetting and I keep having to deal w/ too many other things. I’m travelling again tomorrow /Friday. So, do push me next week, Wednesday is the best day to try and talk b/c Monday and Tuesday are mostly meetings."
Well, today was the indicated Wednesday, so I tried again. Left a message in the morning, was out for a while, then called back with the view that I wouldn't leave a message. But to my surprise, and evidently from her voice to hers, I reached her this time.
Oh, we really can't do anything right now, she said. We just don't have the staff. We're shorthanded these days. There's a lot of pressing stuff that we have to do, and we're behind. Maybe it will change if we hire someone soon, but we just can't devote the resources to it right now.
Needless to say, it seems doubtful that she possessed any new information today that she didn't already have last Thursday. And I gather that this is not a unique experience on my part, but rather her standard operating procedure.
One way of asking the question that occurs to me would be: Why does she use this brushoff technique, rather than alternative ones that don't unduly raise hopes and waste everyone's time? What could she possibly gain by doing it this way, instead of being more forthright up front? It's not like any of this was in person. I could understand wanting to avoid delivering the thumb's down in a face to face meeting, but in an e-mail correspondence??
Another way of asking the question would be: How does a person whose management and communication skills are so deficient become the editor of an on-line journal with a readership larger than five? And can't her bosses do better in a down economy?
I sent the editor at this journal a copy of the book, and then (on Monday, August 9) sent her an e-mail. She replied the same day: "Can we talk Wednesday sometime? I'm out til then." We then agreed that she'd call me at 12:30 on Wednesday, August 11.
The day went by, however, without any such call. But not to worry, she replied that night. "OK, sorry I missed you. Wound up in a meeting that went long. I'll try you tomorrow after 3:30/4 pm, if that's ok."
But of course no call transpired the next day either.
I waited a couple of weeks to get back to her, and promptly after I did so heard back from her (on August 30) as follows:
"Maybe we can talk after Labor Day? I’m sorry about this delay but we’ve been swamped and I’ve had my hands full w/ the daily, our redesign project, other Web matters, and endless meetings. It won’t ease up for a while. I’m not sure if it merits a feature, some type of interview perhaps. But I should focus on it a bit more and then we should talk."
Needless to say, I suspected a brush-off, and all the more so after Labor Day passed with no word from her. But how hard is it to say by e-mail that "this doesn't work for us," or even the time-honored classic, "don't call us, we'll call you." Hard to see what one gains by NOT using those more standard brush-off techniques (or even simply not answering). So I figured who knows, and there's nothing to lose, why not keep trying after a suitably long delay.
So last week I tried again, and once more I heard back promptly (last Thursday) as follows:
"Thanks. I really am so sorry, I keep forgetting and I keep having to deal w/ too many other things. I’m travelling again tomorrow /Friday. So, do push me next week, Wednesday is the best day to try and talk b/c Monday and Tuesday are mostly meetings."
Well, today was the indicated Wednesday, so I tried again. Left a message in the morning, was out for a while, then called back with the view that I wouldn't leave a message. But to my surprise, and evidently from her voice to hers, I reached her this time.
Oh, we really can't do anything right now, she said. We just don't have the staff. We're shorthanded these days. There's a lot of pressing stuff that we have to do, and we're behind. Maybe it will change if we hire someone soon, but we just can't devote the resources to it right now.
Needless to say, it seems doubtful that she possessed any new information today that she didn't already have last Thursday. And I gather that this is not a unique experience on my part, but rather her standard operating procedure.
One way of asking the question that occurs to me would be: Why does she use this brushoff technique, rather than alternative ones that don't unduly raise hopes and waste everyone's time? What could she possibly gain by doing it this way, instead of being more forthright up front? It's not like any of this was in person. I could understand wanting to avoid delivering the thumb's down in a face to face meeting, but in an e-mail correspondence??
Another way of asking the question would be: How does a person whose management and communication skills are so deficient become the editor of an on-line journal with a readership larger than five? And can't her bosses do better in a down economy?
Tuesday, November 02, 2010
Megan McArdle needs a tax primer
Her article in the Atlantic today, "Why We Should Eliminate the Corporate Income Tax," makes some good points. Missing, of course, is any sense of the revenue implications of eliminating the corporate income tax given the long-term fiscal gap.
Two more fundamental problems are the following. First, she is effectively arguing for corporate integration via elimination of the entity-level tax, but relying purely on the taxation of dividends and capital gains to ensure that corporate income is taxed once. This is inadequate. It would create a tax preference for business income earned through a corporation, as compared to other business income, and worsen problems of lock-in of corporate earnings.
Second, she misconceives the nature of the objections regarding how tax planners would exploit exemption of corporations alongside retention of the income tax in other respects. She thinks the basic problem of using corporations as a tax shelter would be no worse than under present law. Thus, she thinks it dispositive that people don't currently shelter income in corporations as much as one might have feared, even though "corporations can deduct all sorts of things that people can't--rent, cars, utilities, non-mortgage interest payments, and so forth." Hence, there must be big practical deterrents limiting the use of corporations as a tax shelter, that she assumes would carry over.
But that stuff is both relatively penny-ante and generally ineffective under present law, unless one is playing the audit lottery, under the business versus personal line. By contrast, the really big problem that her proposal would invite, which is owner-employees under-paying their own wages so that they could avoid any tax, would require substantial new law to avoid its making huge numbers of high-income people effectively tax-exempt (especially if their stock got stepped-up basis at death).
Recommended reading for McArdle: (1) Ed Kleinbard, An American Dual Income Tax: Nordic Precedents (discussing this issue),
(2) my book Decoding the U.S. Corporate Tax.
Two more fundamental problems are the following. First, she is effectively arguing for corporate integration via elimination of the entity-level tax, but relying purely on the taxation of dividends and capital gains to ensure that corporate income is taxed once. This is inadequate. It would create a tax preference for business income earned through a corporation, as compared to other business income, and worsen problems of lock-in of corporate earnings.
Second, she misconceives the nature of the objections regarding how tax planners would exploit exemption of corporations alongside retention of the income tax in other respects. She thinks the basic problem of using corporations as a tax shelter would be no worse than under present law. Thus, she thinks it dispositive that people don't currently shelter income in corporations as much as one might have feared, even though "corporations can deduct all sorts of things that people can't--rent, cars, utilities, non-mortgage interest payments, and so forth." Hence, there must be big practical deterrents limiting the use of corporations as a tax shelter, that she assumes would carry over.
But that stuff is both relatively penny-ante and generally ineffective under present law, unless one is playing the audit lottery, under the business versus personal line. By contrast, the really big problem that her proposal would invite, which is owner-employees under-paying their own wages so that they could avoid any tax, would require substantial new law to avoid its making huge numbers of high-income people effectively tax-exempt (especially if their stock got stepped-up basis at death).
Recommended reading for McArdle: (1) Ed Kleinbard, An American Dual Income Tax: Nordic Precedents (discussing this issue),
(2) my book Decoding the U.S. Corporate Tax.
Election Day reflections
I did my civic duty this morning (despite the voting paradox), going to P.S. 41 in the West Village this morning to cast an all-Democratic ballot.
It's a good thing that the Republicans have made it unnecessary for me to consider them (as I might have been willing to do, here and there, if they had not gone stark raving mad in 1994 and then just grown continually worse). The reason it's a good thing is that the new voting method in New York State makes it very hard on people who (speaking just in general terms, of course) occasionally need reading glasses but have forgotten to bring them. You need to pore over an awful lot of small print in less than ideal lighting, so it's helpful to have a prior (Column A) to make things easier.
I well remember voting at the same place in 2008. Partly because I got there closer to prime time (for pre-workday voters) but more because of the higher turnout levels, in 2008 I had to wait on a very long line that extended around the block. There were a lot of excited and, yes, angry voters on that 2008 line, sharing the sentiment that today we were going to crushingly reject a party (after 8 long years under its boot) whose leaders' honesty, good faith, competence, and even true patriotism (as opposed to partisanship) we did not respect.
Obviously the feelings are very different this year, though in the absence of a voter line I didn't end up getting a sense of the general (at least West Village) pulse. But speaking for myself, I don't plan to follow the election returns tonight. Tomorrow morning is plenty soon enough to digest the news of what's happened.
How could it have been different? Applying 20-20 hindsight, as the things on the list below vary on how obvious up front they were, it seems clear now that Obama should have done the following:
1) Demand a much bigger stimulus package with more emphasis on stuff that is actually effective, rather than relatively non-stimulative tax cuts designed to get Republican votes. Settle for the best available package (which might not have been much better than what was actually enacted), but make it very clear up front that it was not big enough, and that those opposing a bigger package were to blame if the economy didn't revive faster.
2) On rescuing the financial system, be much more vigorous in ensuring that the insiders who created the problem were not being rewarded. Wipe out the old equity when rescuing firms. Let the Republicans screech about socialism, but give that line the lie by spinning things back into the private sector afterwards. It was vital not to give the public the sense (which turned out to be true) that fat cat insiders were gaming the system and being rewarded for "heads I win, tails you lose" bets with the world economy.
3) Replace Bernanke with a reputable Democratic economist who actually cared about unemployment and was willing to be vigorous in fighting it. Fill all the vacant Fed seats with like-minded people. Unapologetically use recess appointments to the extent necessary. This one, I must admit, I got wrong up front, too. I knew that Bernanke had an excellent academic reputation, and believed (what with his writing about Japan's mistakes) that he would actually try a lot harder and sooner to address the ongoing slump. Evidently his ideological and/or partisan commitments mattered more than I had thought they would. Under current circumstances, his evident concern about inflation reminds me of my cat Ursula, whose job it is to keep crocodiles out of our house, and who has been doing an excellent job (none spotted yet).
4) Recognizing that there would be no Republican support whatsoever for healthcare reform under any circumstances, get something through with Democrats alone by June 2009. On this one, I gather Democratic Senators counseled the Administration to no avail that it was being naive.
Political scientists disagree about the extent to which political tactics make a difference if economic fundamentals are bad. But some of these items might have caused the economic fundamentals to be better than they are, and the rest could have helped make the case that bad stuff was not his fault but rather the product of Republican obstructionism. Too late for any of that now, however.
It's a good thing that the Republicans have made it unnecessary for me to consider them (as I might have been willing to do, here and there, if they had not gone stark raving mad in 1994 and then just grown continually worse). The reason it's a good thing is that the new voting method in New York State makes it very hard on people who (speaking just in general terms, of course) occasionally need reading glasses but have forgotten to bring them. You need to pore over an awful lot of small print in less than ideal lighting, so it's helpful to have a prior (Column A) to make things easier.
I well remember voting at the same place in 2008. Partly because I got there closer to prime time (for pre-workday voters) but more because of the higher turnout levels, in 2008 I had to wait on a very long line that extended around the block. There were a lot of excited and, yes, angry voters on that 2008 line, sharing the sentiment that today we were going to crushingly reject a party (after 8 long years under its boot) whose leaders' honesty, good faith, competence, and even true patriotism (as opposed to partisanship) we did not respect.
Obviously the feelings are very different this year, though in the absence of a voter line I didn't end up getting a sense of the general (at least West Village) pulse. But speaking for myself, I don't plan to follow the election returns tonight. Tomorrow morning is plenty soon enough to digest the news of what's happened.
How could it have been different? Applying 20-20 hindsight, as the things on the list below vary on how obvious up front they were, it seems clear now that Obama should have done the following:
1) Demand a much bigger stimulus package with more emphasis on stuff that is actually effective, rather than relatively non-stimulative tax cuts designed to get Republican votes. Settle for the best available package (which might not have been much better than what was actually enacted), but make it very clear up front that it was not big enough, and that those opposing a bigger package were to blame if the economy didn't revive faster.
2) On rescuing the financial system, be much more vigorous in ensuring that the insiders who created the problem were not being rewarded. Wipe out the old equity when rescuing firms. Let the Republicans screech about socialism, but give that line the lie by spinning things back into the private sector afterwards. It was vital not to give the public the sense (which turned out to be true) that fat cat insiders were gaming the system and being rewarded for "heads I win, tails you lose" bets with the world economy.
3) Replace Bernanke with a reputable Democratic economist who actually cared about unemployment and was willing to be vigorous in fighting it. Fill all the vacant Fed seats with like-minded people. Unapologetically use recess appointments to the extent necessary. This one, I must admit, I got wrong up front, too. I knew that Bernanke had an excellent academic reputation, and believed (what with his writing about Japan's mistakes) that he would actually try a lot harder and sooner to address the ongoing slump. Evidently his ideological and/or partisan commitments mattered more than I had thought they would. Under current circumstances, his evident concern about inflation reminds me of my cat Ursula, whose job it is to keep crocodiles out of our house, and who has been doing an excellent job (none spotted yet).
4) Recognizing that there would be no Republican support whatsoever for healthcare reform under any circumstances, get something through with Democrats alone by June 2009. On this one, I gather Democratic Senators counseled the Administration to no avail that it was being naive.
Political scientists disagree about the extent to which political tactics make a difference if economic fundamentals are bad. But some of these items might have caused the economic fundamentals to be better than they are, and the rest could have helped make the case that bad stuff was not his fault but rather the product of Republican obstructionism. Too late for any of that now, however.
Monday, November 01, 2010
More doom and gloom
Herewith Part One of Martin Sullivan's take (similar to mine and that of pretty much everyone else who's looked at the problem) on the threat of an approaching U.S. fiscal collapse.
UPDATE: Also of related interest, a report by Thomas Hungerford of the Congressional Research Service estimates that extending all of the Bush tax cuts (along with AMT relief) would increase deficits over the next 10 years by $5 trillion. Allowing expiration of the top-bracket tax cuts, as proposed by the Obama Administration, would raise $678 billion over the 10-year period relative to extending everything, and thus would lower the 10-year cost of extension to "only" about $4.3 trillion.
UPDATE: Also of related interest, a report by Thomas Hungerford of the Congressional Research Service estimates that extending all of the Bush tax cuts (along with AMT relief) would increase deficits over the next 10 years by $5 trillion. Allowing expiration of the top-bracket tax cuts, as proposed by the Obama Administration, would raise $678 billion over the 10-year period relative to extending everything, and thus would lower the 10-year cost of extension to "only" about $4.3 trillion.
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