Sunday, December 26, 2010

A cure for Boxing Day blues?

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

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

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

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

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

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

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

Wednesday, December 22, 2010

The Caped Crusader

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

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

Slides for my talk on a corporate tax panel next month

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

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

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

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

Tuesday, December 21, 2010

Updated NYU Tax Policy Colloquium Schedule

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

(All sessions meet on Thursdays from 4-5:50 pm in Vanderbilt 208, NYU Law School)

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

Monday, December 20, 2010

Overheard in the NYC subway today

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

Little child: "Are we underground?"

Parent: "Yes."

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

Not sure I understood this comment either.

Sunday, December 19, 2010

Scratch one more "reunion tour" off the list

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

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

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

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

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

Wednesday, December 15, 2010

Earth to Doug Holtz-Eakin

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

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

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

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

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

Album of the year?

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

Tuesday, December 14, 2010

Thought experiment

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

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

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

Efficient markets problem

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

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

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

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

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

Monday, December 13, 2010

Coming soon, but probably not to a town near you

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

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

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

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

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

Getting It versus Miller Lite Beer

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

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

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

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

Sunday, December 12, 2010

Derivatives pirates

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

Friday, December 10, 2010

NYU Tax Policy Colloquium, spring 2011 schedule

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

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

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

Should Obama consider proposing a progressive consumption tax?

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

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

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

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

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

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

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

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

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

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

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

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

Thursday, December 09, 2010

Continued progress on international tax book

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

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

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

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

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

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

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

Further pivoting towards (partial) optimism

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

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

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

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

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

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

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

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

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

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

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

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

Wednesday, December 08, 2010

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

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

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

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

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

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

Tuesday, December 07, 2010

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

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

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

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

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

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

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

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

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

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

Monday, December 06, 2010

The deal on extending the tax cuts

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

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

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

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

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

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

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

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

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

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

Unilateral Presidentially declared payroll tax holiday??

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

"1. Let the Bush tax cuts expire.

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

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

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

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

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

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

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

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

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

"6. Rinse and Repeat."

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

Jack then continues the blog entry as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Friday, December 03, 2010

Two perspectives on tax reform

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

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

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

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

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

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

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

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

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

Thursday, December 02, 2010

Marketing Getting It one reader at a time

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

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

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

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

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

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

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

Why does the White House keep making preemptive concessions?

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

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

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

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

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

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

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

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

We will see.

Wednesday, December 01, 2010

Postponed book talk

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