Sunday, January 31, 2010

Continental Airlines good, American Airlines bad

Perhaps I am tempting fate by saying this before I actually board my flight. But purely as a matter of their own self-interest, all readers are urged to prioritize Continental Airlines far, far ahead of American Airlines when making travel plans. Ignore my words, and you may be sorry. As in: unnecessarily delayed for 48 hours or longer in the middle (from your perspective) of nowhere.

i've been spending the weekend (and more of it than I intended) in the Raleigh-Durham-Chapel Hill area, which I am sure is usually lovely, but less so when it is going through what the locals regard as a storm of Biblical proportions, leaving aside the fact that there are no snowstorms in the Bible. (Right? I admit I haven't read it recently.)

The area got hit by 2 or 3 inches of snow and sub-freezing temperatures. In Chicago we used to have a name for this: an unusually mild January weekend. But here it is a once-every-10-years storm that shuts everything down.

American Airlines started canceling flights faster than a Knick fan can say LeBron James, or than a quitting prize fighter can say No mas. Even before the snow started, they had canceled their last Friday evening flight by reason of the approaching storm. I tried to switch my mid-Saturday ticket to an earlier Friday night flight, but missed out solely due to another of the presenters at the conference, who had persuaded the organizers (while I was incommunicado) to switch my panel with his so that HE could get out early. Smart guy, I suppose. University of Chicago economist.

But not to worry, I was still booked on the 4:40 pm Saturday flight, and by then conditions had greatly improved. American Airlnes was having none of this, however - by 7 am that day they had preemptively canceled everything for the day.

This is when their cat and mouse games, reminding me of how our cat Seymour plays with a red, catnip=infused cat toy, really began. They booked me on the 8:10 am out of Durham this morning (Sunday). In dizzying succession they sent me e-mails indicating that the flight was on time, no make that one hour late, no make that 90 minutes late. Then they waited until I had gotten my boarding pass and passed through security to drop the big one: flight canceled, and they had re-booked me to fly to New York at 1:15 pm on MONDAY. More than 48 hours after all precipitation had ceased. In the midst of a bright, sunny day, with no weather disruptions in New York either, and perhaps at this point an inch of snow on the ground, which had been there for more than 24 hours.

When this happens, while having a meltdown is tempting and potentially (for a moment or two) enjoyable, it's better to focus on exploring your options. First I found that the very best American could do for me today wsa get me into Boston in the middle of the afternoon. Then I could try to find a shuttle flight home. But I didn't believe for a second that they were actually flying to Boston today. All uncanceled flights they kept on delaying and delaying, and it seemed likely that this would happen again.

I went back out past security and over to the next terminal to try Continental, which I knew had flown out of Raleigh yesterday when everyone else was canceling. One seat left on the 10:35 am flight to Newark. The very helpful agent got American Airlines to transfer my ticket over (though I would have bought a new one if necessary). What's more, she made a quick phone call and ascertained that the plane is actually sitting here on the ground, ready to leave on time after what I gather is a routine between-flights inspection. Funny how agents will usually decline to let you know this sort of thing, even though it's got to be easy for them to find out.

"We don't like to cancel," she said of Continental's weather policy. "We regard it as a last resort." I have no reason to doubt her.

Given how completely benign the weather conditions are by now (and have been for 24 hours if you don't mind a bit of cold), it is obvious that American's policy is to cancel whenever it is inconvenient to honor their schedule. Since, under the current weather conditions, a rookie pilot could probably land here with his eyes closed (well, on second thought I hope he'd keep them open) the only logical explanation for American's rampant cancellations is that it isn't worth their while to fly in planes that are insufficiently full so they can fly them out again.

That's no way to run a railroad, or rather an airline.

Posting this now in the hope that I am not tempting fate by assuming that we actually depart as scheduled in just 60 minutes ... The Monkey's Paw would certainly know how to have its way with me in these circumstances.

Saturday, January 30, 2010

One darn thing after another

It's been hurry-up-and-wait for me the last few days. First I was hurrying up, and now I am waiting.

I seem to have overbooked myself a bit. On Wednesday, I presented my new paper "The Case Against Foreign Tax Credits" at Penn Law School. On Thursday, tax policy colloquium day at NYU, featuring Ruth Mason and Michael Knoll with their paper, "What is Tax Discrimination?" On Friday, I presented my foreign tax credits paper at a UNC Tax Symposium featuring mostly economists and accountants. (I am the only legal academic here, out of about 70 people, although another was in attendance briefly yesterday and an economist who is a law prof is here.)

A touch of snow down here in North Carolina has given local services the jitters. My 4:40 pm flight was already canceled by 7 am, and I am currently scheduled to leave tomorrow, but I suppose we will see if that actually happens.

The talk at Penn went fine. Interesting questions, no need to rethink the piece except perhaps a bit expositionally.

Mason and Knoll, in their tax competition paper, are taking on cross-border labor questions - essentially just the taxation of commuters (such as between EU countries, a topic of extensive recent European Court of Justice litigation on some rather narrow topics, e.g., giving foreign workers the personal exemption). The analysis they offer, which is founded on adapting the CEN - CIN - CON framework for corporate income taxation to these questions, generally gets called off if I actually move from one country to another, given that I now become a resident of the latter so it's no longer cross-border. (Leaving aside issues of U.S. citizenship, as the U.S. taxes nonresident citizens.) There are some problems with adapting the capital framework to labor, however. For example, labor mobility is much lower, and while a U.S. firm can have operations in both the U.S. and Germany, I probably cannot work in full-time jobs in both countries at the same time.

Okay, on to my foreign tax credit paper presentation here in North Carolina. Here the main points I took away from the session were as follows:

(1) While the central point I make strikes me as verging on obvious - that, from a unilateral national welfare standpoint, a foreign tax payment is no different from any other expense, which means that foreign tax credits induce an undue lack of cost consciousness by taxpayers - not everyone seems to get it. People still seem inclined to regard the problems I point to as merely involving instances of foreign tax credit "abuse." Oh well - this is why I think my paper is important (if I may say so): because apparently the central point I make isn't obvious enough yet. Of course, there is nothing wrong with being obvious ex post if, ex ante, people thought you must be obviously wrong.

(2) While my central point is really that we need to modify how we think about international tax rules, I noted in the paper that a possible consequence of my analysis is that a "burden-neutral" replacement of the current U.S. international tax rules by a system in which foreign taxes were merely deductible but a reduction in the tax rate on outbound investment - say, to about 5% - kept the aggregate burden on outbound the same - might conceivably be desirable. This led to my paper's being discussed as if it were a campaign proposal. Hence, two lines of criticism:

(a) "You're increasing the incentive for U.S. multinationals to report foreign, rather than domestic source income." Yes I am, if you're thinking about the change in rate but have forgotten to keep in mind the by hypothesis constant overall residual U.S. tax on foreign source income. It would have been analytically preferable for people not to forget this.

(b) "You're not also offering cookies," which other proposals would do. Yes, I like cookies too, but this paper is not about them. For example, it is not about exempting foreign source income, which I rule out simply as a policy change at a different margin than the one I'm addressing. It also is not about whether we should lower the domestic U.S. corporate tax rate. I suppose that, in the next draft, I could also propose worldwide carbon taxes to be adopted by all nations, since the draft as it stands does absolutely nothing to address global warming.

Actually, the next draft, which I will post on SSRN once I have the time to make a couple of very modest changes, will place extra emphasis on the fact that this is a thought piece, not something I'm planning to rush down to Treasury or the House and Ways Means Committee as the Shaviro Plan, my Springboard to Power. Perhaps someone else, writing word for word the same paper, would have meant it that way (although I really don't think so). But I am an art for art's sake person, and would rather fix ideas correctly than battle to get my name on a statutory monument.

The tough part about being an author is that you have to combine being open to criticism with being able to recognize when it is just misguided and wrong. It amounts to being able to judge things on the merits despite psychological investment. I certainly have impulses to err in either direction (too rigid, too swayable) - the latter are perhaps slightly the stronger, but with the both of them I feel I have a chance to get it right. My judgment this time is probably clear.

Monday, January 25, 2010

More cowardice?

I am probably not the only person who has been wondering if the word "cowardice" fits Democratic behavior, in the White House and/or on Capital Hill, since the Massachusetts election news. I agree with others who find it overwhelmingly obvious that having the House pass the Senate healthcare bill, even without mutually agreed changes through reconciliation, both (1) is in the Democrats' electoral self-interest for this November and thereafter, given the votes already on record, and (2) for anyone who supported the House bill, is far superior as policy to doing anything less.

Thus, it seems to me that only panic and cowardice could explain their failure to take this obvious step - although I recognize that they may still do it, and that perhaps the muted response so far simply reflects ongoing internal negotiations. Frankly, I would bet a lot of money that (1) they will end up doing virtually nothing, (2) they will pay a huge price for this in November (even though the bill is currently unpopular!), and (3) never in the next 10 years (at least) will they come close to passing anything similar.

These guys make the New York Mets ownership look good, which isn't easy.

I thus had a mental frame in mind when I heard the latest discouraging news, which is that the Obama Administration, in floating a supposed draft version of the State of the Union speech, is proposing to expand the child tax credit WITHOUT making the expanded credit refundable.

As Brad DeLong notes, this means that, "if you earn less than $30K, you get zero. If your cash income is between $30 or $40K, there are nine chances in ten you get zero. If your cash income is between $40K and $50K, there are two chances in three you get zero. Even if your cash income is between $50K and $85K, there is still one chance in four you get zero."

Policymakers in the Obama Administration understand perfectly well that, merely because you put a transfer based on household circumstances into the income tax, there is no good reason why it should be nonrefundable, i.e., limited to this year's income tax liability. It would appear that they are afraid to argue for the policy design that they know is the better one, and for which there are powerful arguments of equity. But even if they suspect that Congress wouldn't enact the credit with refundability, why not at least propose it? Is the lesson they learn from one quirky special election that, from now on, they must talk like anti-income tax, anti-"spending" (based purely on form) Republicans? The battle to be the more Republican-like party in the November election is not one that they can expect to win.

UPDATE: And I guess we've just been scratching the surface. A 3-year discretionary spending freeze, in the middle of a recession, when supposedly they were going to focus on jobs? Readers know I'm in the very, very concerned camp when it comes to deficits, but that is a long-term problem that has little to do arithmetically with the levels of discretionary spending that we are talking about here. In the broader context, this is like scratching a mosquito bite while you're bleeding from the ears (read: revenue inadequacy and entitlements growth). It's insultingly stupid, craven, and tone-deaf, even though they need to address both the long-term picture and the political perceptions that came out of the stimulus. But the frightened defensiveness, the lack of credibility, the complete surrender of intelligent discussion and accompanying tacit admission that the loons on the other side were right all along - are these people complete amateurs in politics as well as economics?

I've grown disgusted at some point - sooner with some, later with others, and of course in varying degrees - by every president since Johnson. (Too young for the only two during my lifetime who came before.) Believe it or not, I tried to find GW Bush tolerable, or at least not in all respects irredeemable, for well over a year. Now it's just a year in, and though I recognize the other side is vastly worse, I may be starting to reach my gag limit again.

There are plenty of smart, principled people working in this administration. Unless they know something I don't, before too many months pass they may want to consider resigning.

Getting It

Here is the cover (back cover to the left of the fold in the middle, front cover to the right) of my novel Getting It, which should be out via iUniverse sometime this year.

Busy times ahead

This Wednesday (1/27) I am presenting my new draft paper, "The Case Against Foreign Tax Credits," at the U of Penn Law School's tax colloquium. Thursday is our colloquium, with an international tax paper by Ruth Mason and Michael Knoll. Then on Friday I present my foreign tax credit paper again at the University of North Carolina Tax Symposium. I will probably post it on SSRN shortly after that.

Next Thursday, February 4, I'm the lead commentator on an international tax paper by Michael Devereux at the NYU Tax Policy Colloquium. Then on Friday, February 5, I present comments on tax, accounting, and financial institutions at our forthcoming conference at NYU, Rethinking the Taxation of Financial Institutions [as well as their accounting and regulatory regimes] in Light of the Recent Crisis." And on Monday, Feb 8, I may be in Washington for informal discussions on some of these topics. Back in Washington on Friday, February 19 (after two more NYU Tax Policy Colloquium sessions on the intervening Thursdays) to discuss my foreign tax credit paper again, this time at the International Tax Policy Forum.

Saturday, January 23, 2010

NYU Tax Policy Colloquium of January 21, 2010

This past Thursday, we discussed Kim Brooks' recently published paper, "Tax Sparing: A Needed Incentive for Foreign Investment in Low-Income Countries, or an Unnecessary Revenue Sacrifice?"

A bit of background may help here, as the term "tax sparing" is generally known only to international tax cognoscenti. To illustrate with an example taken from the paper, suppose Mongolia generally has a 25 percent tax rate, and that the U.S. and Canada have 35 percent rates and impose full worldwide taxation on resident companies, without deferral although with foreign tax credits. A U.S. or Canadian company that earns $100 in Mongolia will pay $25 of tax to the Mongolian government, and $10 of tax (net of the foreign tax credit) to its own home government.

Mongolia then decides that it would like to offer targeted tax incentives, in the form of paying zero tax rather than 25%, for specified new inbound investments. The incentive it would like to offer is targeted in two senses: by investment, as it only applies to activity in the mining sector, and by investor, as it only applies to nonresident (such as U.S. and Canadian) companies. For purposes of the rule, a wholly owned domestic subsidiary of a foreign company qualifies as foreign.

Unfortunately for Mongolia, given the structure of the U.S. and Canadian tax systems (which, in this hypothetical, do not offer deferral), the incentive would not offer any net benefit whatsoever to U.S. and Canadian firms. They would still pay $35 of tax overall, only now it would be 0 to Mongolia and $35 to the home government, rather than 25-10. (In the real world setting where foreign source income of subsidiaries can be deferred for domestic purposes, this does not entirely hold, but the prospect of a repatriation tax still reduces, while not eliminating, the firm's intended benefit from the Mongolian tax incentive.

Mongolia therefore asks the US and Canada to agree to a "tax sparing" clause in their tax treaties. Such a clause commits the signatories to count the source country taxes that WOULD have been paid, but for the targeted tax incentive, as if they actually had been paid. Hence, with a tax sparing clause, a firm investing in Mongolian operations would still be able to claim a $25 foreign tax credit back home, despite actually paying zero, and thus would remain taxable at home only on the $10 residual.

As it happens, Canada (along with the U.K. and Australia) has agreed to tax sparing rules in numerous treaties, whereas the US never has. Back in the late 1950s, the U.S. negotiated such a treaty with Pakistan, but the Senate rejected the tax sparing clause after hearing what was evidently stem-binding oratory from Stanley Surrey. Naturally enough given his general views, Surrey hated tax sparing, which contradicted his preference for fuller worldwide taxation of US companies' outbound investment, and also struck him as perverting the logic of the foreign tax credit rules (by offering credits for taxes that weren't actually paid).

Kim's paper makes two main arguments: that developing countries such as Mongolia shouldn't offer the sorts of targeted tax incentives that tax sparing treaty clauses, and that developed countries such as the US and Canada, where they continue to tax resident firms' worldwide income, should not agree to tax sparing, both because the underlying practice of granting incentives is bad business for the treaty counter-parties that they evidently want to help, and for other reasons of good tax policy (e.g., advancing a policy of capital export neutrality).

I very much like the paper, but quarrel with several points in the analysis. First, whereas the paper is somewhat hostile to tax competition, I'd argue that tax competition between developing countries (such as Mongolia) on the one hand and developed countries (such as the US and Canada) generally is good for the former group. Hence, if targeted incentives are an effective form of tax competition, developing countries may have good reason to use them.

Second, targeting by investor (such as by offering "ring-fenced" tax benefits that are only available to outside multinationals) can benefit developing countries, although I share Kim's general skepticism about incentives that are targeted by investment (such as by being limited to the mining sector).

Third, countries like the US may have good reason, from their own tax policy standpoint, to agree to tax sparing deals. The deals tend both to move the home country's residence-based international tax system in the direction of being an exemption rather than a worldwide system, and to induce resident companies to want to avoid foreign taxes, which is generally in the resident country's self interest. That is, shouldn't the US prefer that US companies (with US shareholders) can benefit after US tax from paying zero rather than $25 per $100 of earnings to the Mongolian government.

As for the Surrey view that granting foreign tax credits for taxes not paid is a perversion of the credit system, I would say, in effect: It's a good thing to pervert the already perverse (so to speak - I am not making a more general philosophical statement about life here). It is perverse, from the standpoint of national self-interest, to make one's taxpayers wholly non-cost conscious with respect to foreign taxes paid. Thus, even if the overall tax burden on outbound investment remained constant (e.g., due to an offsetting rate increase on foreign source income), it would be a good thing to allow foreign tax credits for taxes NOT paid. Only in the Bizarro World of foreign tax credits, in which who gets a given dollar is treated as irrelevant even though in the real world it obviously matters, would tax sparing look so counter-intuitive.

To be sure, this still offers no defense for limiting credits for foreign taxes not actually paid to cases where a targeted incentive did the job, rather than, say, a general rate reduction. Whether Mongolia should prefer targeted or general rate cuts, it's unclear why the US, via tax sparing clauses that apply only to special incentives, should seek to steer it one way rather than the other.

Tuesday, January 19, 2010

The Joint Committee on Taxation's (lack of) institutional independence

Howard Gleckman of the Urban Institute suggests that former Joint Committee on Taxation chief Edward Kleinbard may be hinting at support for abolition of the JCT, or more specifically at transferring its revenue estimating function (and perhaps other functions) to the Congressional Budget Office (CBO).

Specifically, he draws attention to footnote 111 in a recently posted Kleinbard article draft, which says:

"It is the author’s view that the CBO is better suited to this task [i.e., identifying tax subsidies in new legislation] than is the JCT Staff, from the perspective of both the relative stature and the independence of the two organizations. In particular, the JCT Staff is very much staff to the two taxwriting committees, and therefore almost by definition to their Chairmen. The CBO by contrast is organized as an independent agency controlled by the Congress, not Congressional staff, and has a clear statutory mission. Similarly, the Chief of Staff of the JCT serves at the pleasure of the two Chairmen of the taxwriting committees, while the CBO Director is appointed for a fixed term and can be removed only by a majority vote of one chamber of Congress. These differences have real meaning within Congress."

Gleckman responds:

"By turning the scorekeeping over to CBO, Kleinbard would send a powerful signal that these subsidies are, in fact, spending. But what about the broader point? Is CBO more objective than JCT, as Kleinbard suggests?

"I’m not so sure. To an outside observer, JCT has almost always seemed to be a pretty honest arbiter. I can think of only one period, when the staff was directed by Ken Kies more than a decade ago, when many considered JCT more partisan than objective. Similarly, CBO has been remarkably immune from political pressure. Certainly, the current incarnation, headed by Doug Elmendorf, has not been shy about making its best calls about the costs and consequences of health reform. The Democrats who appointed Doug can’t be thrilled, but like his predecessors, Elmendorf has called ‘em as he’s seen ‘em. But so did JCT under Ed and so it does now under his successor, long-time career staffer Tom Barthold."

I agree with Gleckman's bottom line historical judgment as to revenue estimating. But this, I think, reflects that, to this point, committee chairs have mostly seen institutional value to retaining the independence and objectivity of the estimating process. This could change. E.g., it might take no more than a shift to Republican majorities in both Houses of Congress for JCT revenue estimating to be deliberately reduced to hackery - even though the Republicans didn't do this the last time they were in the majority. They may have changed fundamentally, even since 2006. For that matter, with tough budget rules in place, making revenue estimates highly politically consequential, one could imagine the Democrats deciding at some point to undermine JCT revenue estimating integrity. If Elmendorf didn't have his current independence at CBO and instead served at pleasure like the JCT chief, might healthcare estimates in the 2009 legislative process have been affected?

There's also the question of whether one wants an independent tax policy-minded voice in the legislative process. I can't imagine why the Members of Congress would want it, but I certainly do. JCT actually used to function a bit this way, at least as late as the mid-1980s (when I was there as a junior staffer). The ability to do this arose from a combination of self-selection in terms of who worked at the JCT, with the fact that the other staffs weren't big enough or expert enough to get things done without the JCT. The expansion of those staffs has effectively curtailed JCT independence and clout.

Kleinbard's point sounds most provocative if one states it in terms of JCT vs. CBO, given where he recently was. But I think it is really about the current JCT institutional structure versus that at CBO. Moving the non-member, non-committee Hill tax policy staff to a position of greater independence may soon become vital to its continuing to provide credible revenue estimates, and is already long past due if one thinks JCT's de facto more independent status 20 to 40 years ago was a good thing.

One further point goes to hiring further JCT chiefs. In Barthold, the Members of Congress were lucky to have a highly qualified current staff member on hand who evidently wanted the job. But the next time they decide to hire from outside, they may find it hard, without offering CBO-style independence, to get someone as high quality as their recent outside appointees (such as Kleinbard and George Yin). Through no fault of those two gracious individuals, my impression is that others who observed JCT from the outside during their tenures generally concluded that the JCT chief position was not one to envy or ever want.

Friday, January 15, 2010

Upcoming conference at NYU Law School on financial institutions

Rethinking the Taxation of the Financial Sector in the Light of the Recent Crisis

A Workshop co-sponsored by the Office of Tax Policy Research at the University of Michigan and the UNC Tax Center

Douglas Shackelford, University of North Carolina
Daniel Shaviro, NYU Law School
Joel Slemrod, University of Michigan

February 5, 2010
NYU Law School [room assignment TBA]

Agenda Revised as of 1/15/10

Session 1: The Basic Rules: Accounting, Regulation, and Taxation

8:30-9:20 Accounting
Stephen Ryan, NYU Stern School of Business
Douglas Shackelford, University of North Carolina

9:20-10:10 Regulation
Viral Acharya, NYU Stern School of Business
Douglas Elliott, Brookings Institution

10:10-10:25 Break

10:25-11:15 Taxation
Edward Kleinbard, USC Law School
Timothy Edgar, University of Western Ontario Faculty of Law

Session 2: Issues with Existing Regimes

11:15-12:05 Are the objectives of the three regimes compatible and the consequences in harmony?
Daniel Shaviro, NYU Law School
Joel Slemrod, University of Michigan

12:05-1:00 Lunch

1:00-1:50 Taxes, regulation, and financial sector externalities
Presenters: Michael Keen and Victoria Perry, International Monetary Fund
Discussant: Mihir Desai, Harvard Business School and NYU Law School

1:50-2:40 Cross-border mobility, tax and regulatory havens
Presenter: Michael Devereux, University of Oxford
Discussant: Julian Alworth, Bocconi University and EIC, Milan

2:40-2:50 Break

Session 3: Rethinking Taxation of the Financial Sector in Light of Crisis and Reform

2:50-3:40 Transaction taxes
Presenter: Isaias Coelho, Consultant
Discussant: Len Burman, Syracuse University

3:40-4:30 Observations from practice
Douglas Breeden, Duke University
Tom Brantley, Bank of America

4:30-4:40 Break

4:40-5:30 International coordination issues
Presenter: Jack Mintz, University of Calgary
Discussant: Geoffrey Lloyd, OECD

First NYU Tax Policy Colloquium of 2010

Yesterday was our first colloquium session of the year. I've been doing this for 15 years now. The institution has come a long way, and we now have 25+ very strong students. The total audience at the PM session was about 50, with the students (who participated actively) being joined by people from several types of academic institutions as well as practice. We managed to hand it off to the audience much earlier than is the case in other scholarly colloquia I have attended, at NYU and elsewhere.

Our rule of not having the authors present their own papers is a huge benefit. In addition to encouraging the audience to come prepared, it saves us from having 20 wasted minutes at the start. The only thing more boring to me than listening to an author present a paper I have already read carefully is being myself that author, and thus being forced to prepare and deliver as well as listen to said repetitive 20-minute talk. The result of the opening talk is always to diffuse subsequent discussion, since the author presumably touches on all of the main themes. By contrast, when we start out by offering comments on particular aspects, one at a time, we may succeed in stimulating a more focused and in-depth discussion. (With the help of the audience - the model we have in mind as lead discussants is Jason Kidd, not Alan Iverson.)

This week's paper was by Lily Batchelder of NYU and Eric Toder of the Urban Institute, presenting the opening chapters of a book (being co-written with Austin Nichols) entitled "$750 Billion Misspent? Getting More from Tax Incentives." My colleague Mihir Desai was the lead commentator. One of the main issues we raised went to the book's focus. The $750 billion figure is from an OMB measure of the annual cost of provisions officially classified as tax expenditures - in practice, a polyglot of items. By dollar amounts, the 5 biggies on the list, in order, are favorable tax provisions for (1) retirement plans, (2) special capital gains and dividend rates, (3) health insurance, (4) home mortgage interest, and (5) charitable contributions.

The authors are interested, not in officially listed tax expenditures as such, but rather in provisions that they call tax incentives, and describe as "spending" through the tax code that is designed to change behavior and thereby address externalities. They agree that this does not, for example, have anything to do with the special capital gains and dividend rates, which are structural rules related to the niceties of income realization and the double corporate tax.

I would describe their interest as pertaining to allocative rules within the income tax, which we think of as a distributional system, in the sense that the rationale for taxing income is to affect distribution (or distribute tax burdens relative to "ability to pay") rather than to have its admitted effect of discouraging work. Rules addressing purported externalities are an example of allocative rules, but perhaps are just a subset. Thus, if one had to rationalize the exclusion of employer-provided health insurance on allocative grounds, one might call it a response (whether or not a good one) to the adverse selection problems that create market failure in healthcare, rather than as mainly aimed at externalities.

The paper also contains much discussion of allocative rules as responding to internalities (e.g., irrationally failing to save enough due to myopia - a problem that could support positive incentives for retirement saving even in the otherwise inter-temporally neutral context of a consumption tax). We argued that, so far as externalities are concerned, one should think of getting the "price" right whether there are behavioral issues or not. Those issues, in turn, may need to be addressed whether or not one needed to fix externalities in order to ensure that people face the "right" prices. But the externality framework may not have that much to do with most of the big tax incentives that interest the authors, even if (at least for purposes of argument) we accept those rules as good policy reflecting an allocative motivation.

A big part of the project, which may perhaps become more prominent in later drafts, is to pursue in detail possible applications of the idea, from Batchelder's earlier work, of replacing tax incentives that take the form of deductions or exclusions with fixed refundable credits. Thus, for example, rather than a charitable or home mortgage interest deduction, the value of which depends on one's marginal tax rate (and on one's being an itemizer with positive taxable income to offset), one would instead have a rule under which everyone who incurs these items gets a refundable credit for, say, 30% of the amount spent. (Refundable means allowed to exceed the net income tax liability otherwise arising.)

This idea has virtues even if the incentive has nothing to do with externalities, and even if it is a really bad idea. Thus, consider home mortgage interest deductions. If two people in different marginal rate brackets (or only one of whom is an itemizer) are considering buying the same house, one might prefer that it go to the person who values it more, as shown by their offer prices. But if the one who otherwise values it less can make more use of the deductions, the "wrong" person in a pre-tax sense may end up buying it. Uniform refundable credits eliminate this problem.

Batchelder and Toder agree that the credits shouldn't always be uniform, as a matter of optimal subsidy design. For example, if research on charitable giving suggests that high earners are more responsive to the subsidy than low earners, the optimal credit for gifts might be a higher percentage for the former group. And if only poorer people are considered to need a nudge in order to save enough or buy enough health insurance (from the standpoint of their own self-interest, if internalities are the key here), then the optimal credit might be higher for them. Of course, changing the credits as income rises also is an input to marginal rate design, since it can effectively raise the marginal rate on earnings, but that merely complexifies rather than defeating the idea. But in many cases the optimal credit percentage (so far as we can determine it) may be the same for everyone, or may vary based on factors other than earnings.

One way of putting the general point is that, for incentives that take the form of rebating to people a percentage of particular favored outlays, there is in principle an optimal marginal reimbursement rate (MRR). But there is generally no reason to think that this will have anything to do with people's marginal tax rate (MTR), which is established via entirely separate considerations. Tax incentives that take the form of a deduction or exclusion automatically match the MRR to the MTR (creating a MRR of zero once net taxable income for the year is gone), often for no good reason other than unrelated political optics.

Tuesday, January 12, 2010

Two steps forward, two steps back

When Ed Kleinbard was the Chief of Staff of the Joint Committee on Taxation, he led an effort to update tax expenditure analysis and make it more intellectually coherent as well as useful. See, for example, the pamphlet here and the speech here.

I have self-centeredly tended to view this as influenced by my work on tax expenditures, which I confess to regarding as a major intellectual step forward. (See the working paper version here and info re. the published version here.) To be sure, my suggestions were significantly modified by JCT under Kleinbard, reflecting among other things that the audience and institutional setting for their efforts differed from those that mattered to my writing an academic article.

The JCT, post-Kleinbard and under the leadership of Thomas Barthold, has now issued a new pamphlet on tax expenditures, as they do each year to update their revenue estimates. To my non-surprise but disappointment, they appear to have airbrushed the Kleinbard era out of existence on this matter, and reverted to the prior format for describing and presenting tax expenditure estimates - notwithstanding its intellectual flaws and needless controversiality in the traditional presentation, which rightly motivated the evidently short-lived revision.

The interim version of tax expenditure analysis that the JCT used in the last couple of go-rounds was not necessarily in canonically final form, and I could certainly see the point to changing it as desired under new leadership. But simply going back to the old question-begging version strikes me as a bit - oh, I don't know, perhaps closed-minded or incurious or doctrinaire. The JCT can do better.

The Treasury Department provides an interesting contrast. During the Bush Administration years, the Treasury did some interesting and valuable rethinking of the tax expenditure concept that appeared in the Analytical Perspectives section of the annual federal budget. When the Obama Administration took over, this material remained in the federal budget presentation, notwithstanding that it arguably was more politically congenial from a (sane) Republican than from a Democratic perspective (e.g., because it discusses a consumption tax as well as an income tax baseline for tax expenditure analysis). The Treasury approach to rethinking tax expenditure analysis potentially offered the JCT a further choice in how to go forward, but the opportunity does not appear to have been taken.

Tax expenditure analysis was never going to be a political game-changer, as its originator, Stanley Surrey may have fondly wished. But clear thinking has its benefits, and the latest step back isn't enormously helpful in this regard.

Taxing the banks

I don't know the details yet, but it certainly makes sense in principle to impose a tax on companies that can expect to be bailed out if they lose big bets. Relating the tax to the costs they impose (via risky bets) also potentially makes sense. And even though the federal government may have done OK ex post on some of the TARP transactions, this doesn't change the fact that ex ante it took uncompensated risks to the banks' benefit due to the financial system externalities.

Wednesday, January 06, 2010

Book award

I gather that my 2009 publication, Decoding the Corporate Tax, was named a Choice magazine outstanding academic title for 2009. There's a link here, but it appears to be for subscribers only.

The full review, which I may have posted at some earlier point, was as follows:

Lawyers and economists have grave concerns about the corporate income tax because of its complexity, distributional inequities, and, particularly, economic distortions. Shaviro (New York Univ. Law School), a distinguished tax scholar, does a masterful job of bringing the critiques together and explaining their logic in a concise, lucid manner. The arguments involve some arcane economics, corporate finance, and law, but he manages to bring a degree of order from the complexity. Shaviro begins with the questions of why corporations are even taxed and who actually bears the burden of the taxation of corporate income and corporate dividends. He continues with the problem of integration of the tax with individual income taxation, and the taxation of international entities, and beyond. He makes clear why the forces of globalization, worldwide capital mobility, and innovative financial instruments make change more likely, even more necessary, than ever and lays out alternative directions for reform. Shaviro tries hard, at the end, to convince himself that the US political system can yield reforms. This is the first place to go for anyone seeking to understand the corporate income tax maze. Summing Up: Essential. Upper-division undergraduates and above. -- J. L. Mikesell, Indiana University—Bloomington.