One certainly wants one's articles published, even though a lot of the readership derives from simply posting them on SSRN. But with the way editing and publishing take time, this means that things out of the dead past (from a writer's perspective) keep coming back and clawing at your sleeve, demanding fresh attention. Two articles that I wrote a year or more ago just came back through the transom today: The Case Against Foreign Tax Credits, which is forthcoming in the Journal of Legal Analysis, and The 2008 Financial Crisis: Implications for Income Tax Reform, which is forthcoming in an Oxford University Press volume on taxes and the financial crisis. Both should be out later this year.
Though I've included the SSRN hyperlinks, I'll probably be posting the (modestly) revised quasi-final versions shortly.
UPDATE: I've posted a revised version of The 2008 Financial Crisis, and won't need to revise the posted version of The Case Against Foreign Tax Credits.
Friday, January 28, 2011
Thursday, January 27, 2011
Winter weather blues (make me wanna holler)
Today, for the first time in the 16-year history of the NYU Tax Policy Colloquium, we had to cancel a session for weather reasons. Yair Listokin was scheduled to present his paper Taxation and Liquidity, but the storm shut down NYU for the day and all classes were canceled.
All the more unfortunate given that I was looking forward to a very stimulating discussion. The paper argues that the tax system favors liquid over illiquid assets, leading to over-supply of liquidity with implications ranging from the more mundane though concededly relevant (e.g., overuse of ATMs because people get free checking in exchange for low or no interest on their checking accounts) to the grander and deadlier (e.g., over-securitization and our bloated financial sector).
I tend to question the analysis on several grounds. I don't think liquidity is a unitary consumer good (like milk or new music) as the paper appears to me to posit; rather, there appear to me to be lots of different margins that may operate independently. So overuse of ATMs wouldn't lead to over-securitization. What's more, the ATM example seems to be about how liquidity is exercised, not about how much of it there is (in effect, it's like healthclub pricing, monthly vs. per-visit). The tax bias often may lie the other way (given benefits of the realization requirement for long-held assets). And liquidity, defined as the ability to engage in transactions that draw down or transmute the characteristics of one's wealth holdings, has positive externalities. Being more liquid enables me to execute a transaction with you that may yield surplus to both of us. But, when deciding how much liquidity I want to "buy," I only count the expected benefit to me.
But one important point about these sessions is that often at the end of the day my thinking (and that of others in the room) has changed from where it was at the beginning of the day. I wouldn't enjoy co-running the colloquium nearly as much as I do if my reaction upon reading a piece was always exactly where I ended up at the close of business on Thursday evening. Perhaps, had the session been held, I would have become persuaded during the day either that the analysis I am responding to is different than I thought, or that there are aspects to the merits that I have undervalued or overlooked. The norm we foster here isn't combat but creative interaction, and with the snow we didn't get to do it this time.
I generally try to blog about the issues of interest that were raised in a given colloquium session. Unfortunately, due to over-the-top time congestion, I failed to blog on last week's Joe Bankman paper, Reforming the Tax Preference for Employer Health Insurance.
Joe's paper, coauthored with John Cogan, Glenn Hubbard, and Dan Kessler ("CHK"), works out the implications of a very clever idea that Joe came up with upon seeing an earlier CHK piece, which had argued that making all medical expenses deductible would increase efficiency. The idea was that the "good" effect, eliminating the incentive to over-insure routine medical outlays by running them through employer health insurance programs that thus were over-generous at the low end, would outweigh the "bad" effect of tax-favoring medical consumption relative to other consumption. Joe responded: Fine, but suppose we let you deduct only your EXPECTED, not your ACTUAL, out-of-pocket healthcare expenses? Then we get the good effect from your proposal without the bad effect. They liked the idea enough to suggest a new co-authored paper that would be by BCHK.
Interesting idea, if unlikely to happen, raising the usual issues in healthcare policy of moral hazard (which it would mitigate compared to both current law and CHK) versus adverse selection (which it arguably might worsen).
All the more unfortunate given that I was looking forward to a very stimulating discussion. The paper argues that the tax system favors liquid over illiquid assets, leading to over-supply of liquidity with implications ranging from the more mundane though concededly relevant (e.g., overuse of ATMs because people get free checking in exchange for low or no interest on their checking accounts) to the grander and deadlier (e.g., over-securitization and our bloated financial sector).
I tend to question the analysis on several grounds. I don't think liquidity is a unitary consumer good (like milk or new music) as the paper appears to me to posit; rather, there appear to me to be lots of different margins that may operate independently. So overuse of ATMs wouldn't lead to over-securitization. What's more, the ATM example seems to be about how liquidity is exercised, not about how much of it there is (in effect, it's like healthclub pricing, monthly vs. per-visit). The tax bias often may lie the other way (given benefits of the realization requirement for long-held assets). And liquidity, defined as the ability to engage in transactions that draw down or transmute the characteristics of one's wealth holdings, has positive externalities. Being more liquid enables me to execute a transaction with you that may yield surplus to both of us. But, when deciding how much liquidity I want to "buy," I only count the expected benefit to me.
But one important point about these sessions is that often at the end of the day my thinking (and that of others in the room) has changed from where it was at the beginning of the day. I wouldn't enjoy co-running the colloquium nearly as much as I do if my reaction upon reading a piece was always exactly where I ended up at the close of business on Thursday evening. Perhaps, had the session been held, I would have become persuaded during the day either that the analysis I am responding to is different than I thought, or that there are aspects to the merits that I have undervalued or overlooked. The norm we foster here isn't combat but creative interaction, and with the snow we didn't get to do it this time.
I generally try to blog about the issues of interest that were raised in a given colloquium session. Unfortunately, due to over-the-top time congestion, I failed to blog on last week's Joe Bankman paper, Reforming the Tax Preference for Employer Health Insurance.
Joe's paper, coauthored with John Cogan, Glenn Hubbard, and Dan Kessler ("CHK"), works out the implications of a very clever idea that Joe came up with upon seeing an earlier CHK piece, which had argued that making all medical expenses deductible would increase efficiency. The idea was that the "good" effect, eliminating the incentive to over-insure routine medical outlays by running them through employer health insurance programs that thus were over-generous at the low end, would outweigh the "bad" effect of tax-favoring medical consumption relative to other consumption. Joe responded: Fine, but suppose we let you deduct only your EXPECTED, not your ACTUAL, out-of-pocket healthcare expenses? Then we get the good effect from your proposal without the bad effect. They liked the idea enough to suggest a new co-authored paper that would be by BCHK.
Interesting idea, if unlikely to happen, raising the usual issues in healthcare policy of moral hazard (which it would mitigate compared to both current law and CHK) versus adverse selection (which it arguably might worsen).
Wednesday, January 26, 2011
Radio days
Just did a live (7:15 am EST) radio interview on NPR's Marketplace Morning Report, regarding corporate tax reform. I confirmed that our statutory corporate rate is unusually high, but noted that a rate cut without base-broadening would lose revenue, and that finding pay-fors is unlikely to be easy politically.
Tuesday, January 25, 2011
Tax discussion in the State of the Union Address
Based on the prepared text of the SOTU, President Obama mentioned taxes seven times in the address (leaving aside a reference to "how and where your tax dollars are being spent"). Herewith some quick reactions to each mention:
1) “Thanks to the tax cuts we passed, Americans' paychecks are a little bigger today. Every business can write off the full cost of the new investments they make this year. These steps, taken by Democrats and Republicans, will grow the economy and add to the more than one million private sector jobs created last year.”
OK, might as well take credit for the stimulative effects, though (reflecting political constraints) it wasn't textbook stimulus design.
2) "We need to get behind this innovation [in alternative fuels]. And to help pay for it, I'm asking Congress to eliminate the billions in taxpayer dollars we currently give to oil companies. I don't know if you've noticed, but they're doing just fine on their own. So instead of subsidizing yesterday's energy, let's invest in tomorrow's."
Oil companies' tax breaks have rightly been under fire since at least the 1930s. Some, such as "percentage depletion" offering greater than 100% cost recovery, have indeed gone under the knife over the years. But plenty of oil company tax breaks remain. Among today's big-ticket items, I consider expensing of intangible drilling costs to be especially egregious - in effect, a "drain America first" incentive, as I said in a recent post. But these items are exceptionally well-defended politically. The oilies have enormous political clout and know how to use it.
3) "To compete, higher education must be within reach of every American. That's why we've ended the unwarranted taxpayer subsidies that went to banks, and used the savings to make college affordable for millions of students. And this year, I ask Congress to go further, and make permanent our tuition tax credit – worth $10,000 for four years of college."
We don't need higher education to "compete" with other countries - we need it for our own sake, so people can be more productive and lead better lives. He is noting redesign of loan programs to cut out banks' middleman profit, which I've heard was a genuine success though I don't have much firsthand knowledge on this point. The merits of the tuition tax credit (and who captures the benefit) are also, I believe, a bit disputed.
4) "Over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries. Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change.
"So tonight, I'm asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years – without adding to our deficit."
I won't add much here as I discussed corporate tax reform in a prior post. There's some question as to how far along the Administration is in thinking about this topic. He does not appear to be suggesting that he'll make a proposal, as opposed to commending corporate tax reform to the two parties' attention. Unclear to me what the Republicans would see themselves as gaining if they were to answer the call.
5) [Endorses the Fiscal Commission’s] “conclusion ... that the only way to tackle our deficit is to cut excessive spending wherever we find it – in domestic spending, defense spending, health care spending, and spending through tax breaks and loopholes.”
This is the Republican view that the deficit is just a "spending" problem, not a revenues-versus-outlays problem, with the extra twist of explicitly defining tax expenditures as spending - an approach not echoed, for example, in the House's new "CUTGO" rules.
The tax expenditure "frame," under which repealing, say, the home mortgage interest deduction would be a "spending cut" rather than a "tax increase," is more accepted now than it was 10 years ago, but still in the end an impossible sale to make politically. More on this in my forthcoming (I hope) piece on 1986-style reform.
6) "And if we truly care about our deficit, we simply cannot afford a permanent extension of the tax cuts for the wealthiest 2% of Americans. Before we take money away from our schools, or scholarships away from our students, we should ask millionaires to give up their tax break."
A discussion that obviously is to be continued in the 2012 election and thereafter. If he wins the election but the Republicans end up with both houses of Congress, same impasse as in late 2010. But he might find himself in a stronger position from the much discussed "hostage" standpoint, as he'd have less to lose from letting all of the tax cuts expire (not facing reelection again, and perhaps with economic recovery being a bit further along).
7) "[T]he best thing we could do on taxes for all Americans is to simplify the individual tax code. This will be a tough job, but members of both parties have expressed interest in doing this, and I am prepared to join them."
Even more passive, so far as the Administration's projected role is concerned, than the mention of corporate tax reform. "You first, fellas," he appears to be saying, "but please keep me posted."
1) “Thanks to the tax cuts we passed, Americans' paychecks are a little bigger today. Every business can write off the full cost of the new investments they make this year. These steps, taken by Democrats and Republicans, will grow the economy and add to the more than one million private sector jobs created last year.”
OK, might as well take credit for the stimulative effects, though (reflecting political constraints) it wasn't textbook stimulus design.
2) "We need to get behind this innovation [in alternative fuels]. And to help pay for it, I'm asking Congress to eliminate the billions in taxpayer dollars we currently give to oil companies. I don't know if you've noticed, but they're doing just fine on their own. So instead of subsidizing yesterday's energy, let's invest in tomorrow's."
Oil companies' tax breaks have rightly been under fire since at least the 1930s. Some, such as "percentage depletion" offering greater than 100% cost recovery, have indeed gone under the knife over the years. But plenty of oil company tax breaks remain. Among today's big-ticket items, I consider expensing of intangible drilling costs to be especially egregious - in effect, a "drain America first" incentive, as I said in a recent post. But these items are exceptionally well-defended politically. The oilies have enormous political clout and know how to use it.
3) "To compete, higher education must be within reach of every American. That's why we've ended the unwarranted taxpayer subsidies that went to banks, and used the savings to make college affordable for millions of students. And this year, I ask Congress to go further, and make permanent our tuition tax credit – worth $10,000 for four years of college."
We don't need higher education to "compete" with other countries - we need it for our own sake, so people can be more productive and lead better lives. He is noting redesign of loan programs to cut out banks' middleman profit, which I've heard was a genuine success though I don't have much firsthand knowledge on this point. The merits of the tuition tax credit (and who captures the benefit) are also, I believe, a bit disputed.
4) "Over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries. Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change.
"So tonight, I'm asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years – without adding to our deficit."
I won't add much here as I discussed corporate tax reform in a prior post. There's some question as to how far along the Administration is in thinking about this topic. He does not appear to be suggesting that he'll make a proposal, as opposed to commending corporate tax reform to the two parties' attention. Unclear to me what the Republicans would see themselves as gaining if they were to answer the call.
5) [Endorses the Fiscal Commission’s] “conclusion ... that the only way to tackle our deficit is to cut excessive spending wherever we find it – in domestic spending, defense spending, health care spending, and spending through tax breaks and loopholes.”
This is the Republican view that the deficit is just a "spending" problem, not a revenues-versus-outlays problem, with the extra twist of explicitly defining tax expenditures as spending - an approach not echoed, for example, in the House's new "CUTGO" rules.
The tax expenditure "frame," under which repealing, say, the home mortgage interest deduction would be a "spending cut" rather than a "tax increase," is more accepted now than it was 10 years ago, but still in the end an impossible sale to make politically. More on this in my forthcoming (I hope) piece on 1986-style reform.
6) "And if we truly care about our deficit, we simply cannot afford a permanent extension of the tax cuts for the wealthiest 2% of Americans. Before we take money away from our schools, or scholarships away from our students, we should ask millionaires to give up their tax break."
A discussion that obviously is to be continued in the 2012 election and thereafter. If he wins the election but the Republicans end up with both houses of Congress, same impasse as in late 2010. But he might find himself in a stronger position from the much discussed "hostage" standpoint, as he'd have less to lose from letting all of the tax cuts expire (not facing reelection again, and perhaps with economic recovery being a bit further along).
7) "[T]he best thing we could do on taxes for all Americans is to simplify the individual tax code. This will be a tough job, but members of both parties have expressed interest in doing this, and I am prepared to join them."
Even more passive, so far as the Administration's projected role is concerned, than the mention of corporate tax reform. "You first, fellas," he appears to be saying, "but please keep me posted."
Monday, January 24, 2011
Quasi-talk at ABA Tax Section meeting on tax policy and the long-term fiscal crisis
This past Friday in Boca Raton, I was scheduled to appear on a panel at the ABA Tax Section's Annual Meeting as a discussant for the topic "Tax Policy, the Current Economic Climate, and the Long-Term Fiscal Crisis."
I prepared what I thought were at least moderately amusing slides, setting forth some of my views on this topic, and was looking forward to the session, which I gather was well-attended. I am sure that my panelists Joseph Rosenberg and Ed Kleinbard were characteristically enlightening and excellent. But between weather problems from the East Coast snowstorm the night before and some additional scheduling complications. I was unable to make the panel.
I am told that Eric Solomon graciously volunteered to run through my slides, and even to give his best shot to the peculiar task of "channeling Shaviro" for the purpose. (Probably easier than otherwise if he, like me, is left-handed - likely to affect compatibility of the hard wiring.) My thanks to Eric for this.
In case anyone is interested, I thought I'd post a pdf version of the slides here.
I did manage to make a second scheduled panel, on Saturday January 22, concerning corporate tax reform. (Other panelists were Rosanne Altshuler, Reuven Avi-Yonah, and Ed Kleinbard.) I posted the slides for that talk about a month ago, but for convenience you can also access them here.
I prepared what I thought were at least moderately amusing slides, setting forth some of my views on this topic, and was looking forward to the session, which I gather was well-attended. I am sure that my panelists Joseph Rosenberg and Ed Kleinbard were characteristically enlightening and excellent. But between weather problems from the East Coast snowstorm the night before and some additional scheduling complications. I was unable to make the panel.
I am told that Eric Solomon graciously volunteered to run through my slides, and even to give his best shot to the peculiar task of "channeling Shaviro" for the purpose. (Probably easier than otherwise if he, like me, is left-handed - likely to affect compatibility of the hard wiring.) My thanks to Eric for this.
In case anyone is interested, I thought I'd post a pdf version of the slides here.
I did manage to make a second scheduled panel, on Saturday January 22, concerning corporate tax reform. (Other panelists were Rosanne Altshuler, Reuven Avi-Yonah, and Ed Kleinbard.) I posted the slides for that talk about a month ago, but for convenience you can also access them here.
Sunday, January 23, 2011
Corporate tax reform
The newspapers are full of public statements as well as trial balloons concerning the Administration's possible plans on corporate tax reform.
Judging from the public statements and reported musings that I've seen (e.g., Obama's address from Schenectady lauding GE investment in low-tax countries abroad that created complementary jobs in the U.S.), I imagine that, under the right circumstances, they would be delighted to propose significantly reducing domestic corporate tax rates AND exempting U.S. companies' foreign source active business income. But the right circumstances might have to include (a) revenue-neutrality from the corporate and/or broader business sector, (b) a strong consensus in the tax policy community that the proposal is a big winner in a policy sense, contributing to growth, jobs, efficiency, etc., and (c) presumably some sort of positive judgment about the proposal's political prospects, though I have no idea whether this would mean potential for 2011 enactment or merely that it was a good marker to place down showing where the Administration would like to go over the next 6 years.
Can one significantly reduce corporate tax rates on a revenue-neutral basis? Yes if you repeal enough items - for example, accelerated depreciation, LIFO rules for inventory, the tax break for domestic production, various energy tax breaks for oil and gas, coal, ethanol, alternative fuels, etcetera.
Some of this would be hard to do politically. Energy tax breaks, obviously, are about as sacred as you can get in the political world, though I doubt that more than one in a thousand academics would object to repealing them. My favorite term for oil drilling incentives is that they epitomize a "drain America first" strategy of using up our oil while the foreign flow is still reasonably robust. But I digress.
Accelerated depreciation poses a bit of a dilemma. Even if one in principle likes a consumption tax approach in which everything would be expensed, there is something to be said for moving towards true economic depreciation. Pairing accelerated depreciation with deductible interest expense can lead to better-than-exempt treatment. And having the degree of generosity vary by asset and industry contributes to a poorly designed U.S. industrial policy that distorts resource allocation in the economy. But on the other hand, if you are thinking in terms of stimulating new economic activity in the short term, offering incentives for new investment (such as rapid depreciation) is better-targeted than lowering the rate, which partly gets "wasted" on old investments, or those that were made before the new initiative was announced.
Even if the politics somehow took care of itself, a fundamental problem with the idea of lowering the corporate rate in exchange for broadening the base is the lack of general consensus in the tax policy community regarding where we should head on these matters. There is broad agreement about a lot of things - for example, that the tax rules should not distort debt versus equity choices, or the use of a corporate versus a non-corporate entity. But experts differ considerably about the relative magnitude of various problems, and thus about which should be addressed first and at the expense of addressing others.
In the run-up to 1986 tax reform, there was far more expert consensus. Generally everyone (though perhaps not, say, Boris Bittker) liked the idea of lowering the rates significantly while broadening the base. There were also conflicting choices and directions back then. For example, 1986-era reformers (starting with Bill Bradley in 1983) decided not to aim for a consumption tax instead of an income tax, or to seek corporate integration. But at that time the consensus really was for an income tax, and corporate integration (while widely accepted in principle) didn't have the level of intellectual support it attracted later on.
Today, by contrast, how relatively concerned we should be about (a) the double corporate tax versus (b) the debt-equity distortion versus (c) the line between corporate and non-corporate business taxation - which ones to take on first, and which ones to sacrifice for now - are not comparably subjects of agreement. As a consequence, there is little consensus about how to evaluate relatively large-scale but still incremental (rather than fundamental) changes.
Suppose, therefore, that we have a proposal to lower the corporate rate to 25 percent. How much does it matter if unincorporated businesses don't get the rate reduction? Or if the tax-exempt sector and foreign investors, which indirectly pay tax at the corporate level via their ownership of corporate equity, thereby benefit? Or if the use of corporations becomes a tax shelter for high-income individuals, who then could lower their tax rates from 35% to 25% by incorporating and under-paying themselves as owner-employees?
Again, my point is not just that these issues are hard, but that expert consensus about them is lower than it was for the comparably main-stage issues in 1986. In some respects, the 1986 consensus may have been wrong - readers of this blog or my work may know, for example, that I'd prefer a progressive consumption tax to an income tax (though in 1986 I of course accepted the era's consensus). Today's situation makes it harder to decide what to do & then do it, even if the party and interest group problems of legislative politics can be solved.
BTW, I've mentioned in earlier posts my extreme skepticism about the general desirability these days of 1986-style tax reform, in which the budgetary gain from eliminating tax expenditures is given away via lower rates, rather than being used to improve the long-term fiscal situation. Is corporate tax reform of the sort that the Obama Administration is reportedly contemplating any different?
Yes and no. It's no different in principle. If the tax expenditures that we repeal are really "disguised spending," in the words of the Bowles-Simpson Commission, then "revenue neutrality" is a nonsensical concept - taxes are being reduced in exchange for reducing disguised spending, and standalone preference repeal wouldn't actually be a "tax increase," the optics notwithstanding. And in terms of budget neutrality, when we are so far in the hole fiscally over the long run, why give away any low-hanging fruit without getting any overall budgetary relief from the exercise?
But the case for reducing corporate rates is stronger than that for reducing individual rates, due to pressures of global tax competition (U.S. individuals are not as mobile, or likely to leave for tax reasons, as capital that can go anywhere). So at least the budgetary loss that offsets the budgetary gain from repealing corporate tax preferences has a stronger underlying policy rationale than cutting the individual rates, given where we stand currently.
On international tax issues, there is even less of a consensus than on the domestic tax base. These days, I hear scarcely any support (other than the most tepid) for worldwide taxation of U.S. companies as an end in itself. But there is still strong support for it as a back-up system for defending the domestic tax base, by impeding U.S. companies' efforts to tax-plan their way out of treating income as earned in the U.S. For example, you can build a trap for yourself by reporting all of your income as earned in the Caymans, but then finding that you cannot cheaply access it for other uses without paying a U.S. repatriation tax.
There is simply no consensus at the expert level, at this point, about what would be needed to address this problem sufficiently to make exemption of foreign source active business income a clearly good (or at least innocuous) move.
I myself do feel fairly confident regarding how to do this. My plan is (a) exemption for foreign source active business income - though not for the usual reasons; instead, the main rationale would be that exemption is the only practical way to repeal the hideous Scylla and Charybdis of U.S. international and taxation, which are deferral and foreign tax credits, plus (b) a transition tax on the $1.2 trillion of foreign earnings that U.S. companies have already accumulated abroad, plus (c) unitary business rules for both U.S. and foreign-headed multinationals - that is, we ignore formal entity lines between the U.S. and foreign members of commonly controlled groups, and use some sort of "objective" approach (whether or not it is called or indeed constitutes formulary apportionment) to apportion taxable income between home and abroad. This means no more transfer pricing, at least in a "comparable arm's length price" sense, and it means not caring about intra-group debt or about which members of a worldwide corporate group borrowed from third-party lenders.
But there's as yet no consensus regarding this view. And even if there were, we'd have a lack of consensus about the desirability of doing some parts of my 3-part plan without others (e.g., A from above without B and with only a tincture of C).
Certainly, in terms of anything the Administration could propose this year that bundles a shift to exempting foreign source income with Package X to make the overall international proposal revenue-neutral, there is no realistic Package X that would attract consensus expert support for the overall proposal. And even if there were, the business community would not get behind it, due to the combination of (1) the hope of doing a lot better by eliminating most or all of Package X, and (2) the fact that, even if the net winners from the proposal could be reconciled to accepting it rather than trying to do even better, the net losers are bound to squawk.
For these reasons, I was talking to someone the other day about the prospects for international tax reform, and said that I was getting a bit worried, since I really wish they'd let me complete and publish my international tax book before anything big happens. (For the record, my position is that I was at least half-joking, though I would rather not take a lie detector test on the subject.) He or she replied, in effect: Don't worry, and take all the time you like. This ain't happening any time soon.
That said, I suppose it's not inconceivable that we will go to a 25 percent domestic corporate rate and exemption of foreign source active business income WITHOUT any pay-fors, and thus without any serious effort to address the broader issues. You don't need to rely on broader intellectual consensus if you are simply handing out goodies, rather than mixing them with sour medicine. Obviously, this would totally contradict long-term budgetary concerns, but those concerns don't always constrain political actors, to say the least.
One could certainly imagine a Republican Administration in 2013 doing this - though it seems likely to be a lower priority than their stance on the Bush tax cuts. But is there any chance it could happen sooner? Certainly not if the Obama Administration sticks to what I believe is their current position about doing these things responsibly or not at all. But strange things can happen in politics, unforeseen by the actors and suppressed from speech and consciousness (like a good poker player's awareness that he may need to fold his hand soon) even if subliminally suspected.
Judging from the public statements and reported musings that I've seen (e.g., Obama's address from Schenectady lauding GE investment in low-tax countries abroad that created complementary jobs in the U.S.), I imagine that, under the right circumstances, they would be delighted to propose significantly reducing domestic corporate tax rates AND exempting U.S. companies' foreign source active business income. But the right circumstances might have to include (a) revenue-neutrality from the corporate and/or broader business sector, (b) a strong consensus in the tax policy community that the proposal is a big winner in a policy sense, contributing to growth, jobs, efficiency, etc., and (c) presumably some sort of positive judgment about the proposal's political prospects, though I have no idea whether this would mean potential for 2011 enactment or merely that it was a good marker to place down showing where the Administration would like to go over the next 6 years.
Can one significantly reduce corporate tax rates on a revenue-neutral basis? Yes if you repeal enough items - for example, accelerated depreciation, LIFO rules for inventory, the tax break for domestic production, various energy tax breaks for oil and gas, coal, ethanol, alternative fuels, etcetera.
Some of this would be hard to do politically. Energy tax breaks, obviously, are about as sacred as you can get in the political world, though I doubt that more than one in a thousand academics would object to repealing them. My favorite term for oil drilling incentives is that they epitomize a "drain America first" strategy of using up our oil while the foreign flow is still reasonably robust. But I digress.
Accelerated depreciation poses a bit of a dilemma. Even if one in principle likes a consumption tax approach in which everything would be expensed, there is something to be said for moving towards true economic depreciation. Pairing accelerated depreciation with deductible interest expense can lead to better-than-exempt treatment. And having the degree of generosity vary by asset and industry contributes to a poorly designed U.S. industrial policy that distorts resource allocation in the economy. But on the other hand, if you are thinking in terms of stimulating new economic activity in the short term, offering incentives for new investment (such as rapid depreciation) is better-targeted than lowering the rate, which partly gets "wasted" on old investments, or those that were made before the new initiative was announced.
Even if the politics somehow took care of itself, a fundamental problem with the idea of lowering the corporate rate in exchange for broadening the base is the lack of general consensus in the tax policy community regarding where we should head on these matters. There is broad agreement about a lot of things - for example, that the tax rules should not distort debt versus equity choices, or the use of a corporate versus a non-corporate entity. But experts differ considerably about the relative magnitude of various problems, and thus about which should be addressed first and at the expense of addressing others.
In the run-up to 1986 tax reform, there was far more expert consensus. Generally everyone (though perhaps not, say, Boris Bittker) liked the idea of lowering the rates significantly while broadening the base. There were also conflicting choices and directions back then. For example, 1986-era reformers (starting with Bill Bradley in 1983) decided not to aim for a consumption tax instead of an income tax, or to seek corporate integration. But at that time the consensus really was for an income tax, and corporate integration (while widely accepted in principle) didn't have the level of intellectual support it attracted later on.
Today, by contrast, how relatively concerned we should be about (a) the double corporate tax versus (b) the debt-equity distortion versus (c) the line between corporate and non-corporate business taxation - which ones to take on first, and which ones to sacrifice for now - are not comparably subjects of agreement. As a consequence, there is little consensus about how to evaluate relatively large-scale but still incremental (rather than fundamental) changes.
Suppose, therefore, that we have a proposal to lower the corporate rate to 25 percent. How much does it matter if unincorporated businesses don't get the rate reduction? Or if the tax-exempt sector and foreign investors, which indirectly pay tax at the corporate level via their ownership of corporate equity, thereby benefit? Or if the use of corporations becomes a tax shelter for high-income individuals, who then could lower their tax rates from 35% to 25% by incorporating and under-paying themselves as owner-employees?
Again, my point is not just that these issues are hard, but that expert consensus about them is lower than it was for the comparably main-stage issues in 1986. In some respects, the 1986 consensus may have been wrong - readers of this blog or my work may know, for example, that I'd prefer a progressive consumption tax to an income tax (though in 1986 I of course accepted the era's consensus). Today's situation makes it harder to decide what to do & then do it, even if the party and interest group problems of legislative politics can be solved.
BTW, I've mentioned in earlier posts my extreme skepticism about the general desirability these days of 1986-style tax reform, in which the budgetary gain from eliminating tax expenditures is given away via lower rates, rather than being used to improve the long-term fiscal situation. Is corporate tax reform of the sort that the Obama Administration is reportedly contemplating any different?
Yes and no. It's no different in principle. If the tax expenditures that we repeal are really "disguised spending," in the words of the Bowles-Simpson Commission, then "revenue neutrality" is a nonsensical concept - taxes are being reduced in exchange for reducing disguised spending, and standalone preference repeal wouldn't actually be a "tax increase," the optics notwithstanding. And in terms of budget neutrality, when we are so far in the hole fiscally over the long run, why give away any low-hanging fruit without getting any overall budgetary relief from the exercise?
But the case for reducing corporate rates is stronger than that for reducing individual rates, due to pressures of global tax competition (U.S. individuals are not as mobile, or likely to leave for tax reasons, as capital that can go anywhere). So at least the budgetary loss that offsets the budgetary gain from repealing corporate tax preferences has a stronger underlying policy rationale than cutting the individual rates, given where we stand currently.
On international tax issues, there is even less of a consensus than on the domestic tax base. These days, I hear scarcely any support (other than the most tepid) for worldwide taxation of U.S. companies as an end in itself. But there is still strong support for it as a back-up system for defending the domestic tax base, by impeding U.S. companies' efforts to tax-plan their way out of treating income as earned in the U.S. For example, you can build a trap for yourself by reporting all of your income as earned in the Caymans, but then finding that you cannot cheaply access it for other uses without paying a U.S. repatriation tax.
There is simply no consensus at the expert level, at this point, about what would be needed to address this problem sufficiently to make exemption of foreign source active business income a clearly good (or at least innocuous) move.
I myself do feel fairly confident regarding how to do this. My plan is (a) exemption for foreign source active business income - though not for the usual reasons; instead, the main rationale would be that exemption is the only practical way to repeal the hideous Scylla and Charybdis of U.S. international and taxation, which are deferral and foreign tax credits, plus (b) a transition tax on the $1.2 trillion of foreign earnings that U.S. companies have already accumulated abroad, plus (c) unitary business rules for both U.S. and foreign-headed multinationals - that is, we ignore formal entity lines between the U.S. and foreign members of commonly controlled groups, and use some sort of "objective" approach (whether or not it is called or indeed constitutes formulary apportionment) to apportion taxable income between home and abroad. This means no more transfer pricing, at least in a "comparable arm's length price" sense, and it means not caring about intra-group debt or about which members of a worldwide corporate group borrowed from third-party lenders.
But there's as yet no consensus regarding this view. And even if there were, we'd have a lack of consensus about the desirability of doing some parts of my 3-part plan without others (e.g., A from above without B and with only a tincture of C).
Certainly, in terms of anything the Administration could propose this year that bundles a shift to exempting foreign source income with Package X to make the overall international proposal revenue-neutral, there is no realistic Package X that would attract consensus expert support for the overall proposal. And even if there were, the business community would not get behind it, due to the combination of (1) the hope of doing a lot better by eliminating most or all of Package X, and (2) the fact that, even if the net winners from the proposal could be reconciled to accepting it rather than trying to do even better, the net losers are bound to squawk.
For these reasons, I was talking to someone the other day about the prospects for international tax reform, and said that I was getting a bit worried, since I really wish they'd let me complete and publish my international tax book before anything big happens. (For the record, my position is that I was at least half-joking, though I would rather not take a lie detector test on the subject.) He or she replied, in effect: Don't worry, and take all the time you like. This ain't happening any time soon.
That said, I suppose it's not inconceivable that we will go to a 25 percent domestic corporate rate and exemption of foreign source active business income WITHOUT any pay-fors, and thus without any serious effort to address the broader issues. You don't need to rely on broader intellectual consensus if you are simply handing out goodies, rather than mixing them with sour medicine. Obviously, this would totally contradict long-term budgetary concerns, but those concerns don't always constrain political actors, to say the least.
One could certainly imagine a Republican Administration in 2013 doing this - though it seems likely to be a lower priority than their stance on the Bush tax cuts. But is there any chance it could happen sooner? Certainly not if the Obama Administration sticks to what I believe is their current position about doing these things responsibly or not at all. But strange things can happen in politics, unforeseen by the actors and suppressed from speech and consciousness (like a good poker player's awareness that he may need to fold his hand soon) even if subliminally suspected.
Monday, January 17, 2011
Cats revisited
As long as I am offering corrections (see prior post), I guess I owe one to my cats as well. Having noted their distressing failure to kill an invading mouse a couple of weeks ago, I should note the more recent evidence that they, no less than the New York Jets, know how to vindicate themselves when offered a rematch.
The other day, after everyone (among the humans) had been out for a few hours, a couple of us returned home to find half of a mouse - the lower half, ending in a bloody stump - underneath the dining room table.
We never found the other half, although I guess we could have done stomach X-rays of the three prime suspects.
I have a photo of the half-corpse, but can't quite bear to post it. At the risk of understatement, I would say that it is not an exceptionally lovely sight.
The other day, after everyone (among the humans) had been out for a few hours, a couple of us returned home to find half of a mouse - the lower half, ending in a bloody stump - underneath the dining room table.
We never found the other half, although I guess we could have done stomach X-rays of the three prime suspects.
I have a photo of the half-corpse, but can't quite bear to post it. At the risk of understatement, I would say that it is not an exceptionally lovely sight.
Bowles-Simpson revisited
If you examine the comment thread from my previous post, you will see that a reader argued I had overstated my critique of Bowles-Simpson, and that I largely conceded his point. My main pleading here is that, because I was focusing on my critique of 1986-style reform, I ended up using Bowles-Simpson as a straw man and thus, e.g., treating its revenue gain from tax reform ($180 billion for 2020) as a mere triviality. But what's $180 billion among friends?
Saturday, January 15, 2011
Tax expenditures conference in Loyola (LA)
Yesterday’s conference was reasonably lively. Four panels over 7-1/2 hours went pretty fast. There was widespread consensus among the attendees concerning:
(1) The basic validity or at least value of the tax expenditure concept, so long as one is not overly reductive and broad-brush about it. Ed Kleinbard noted that this is a significant change from where the debate stood 10 or 15 years ago.
(2) The point that, for many though not all of the items commonly classified as tax expenditures, the term “spending through the tax code” is a reasonably descriptive shorthand. I would quibble a bit, saying that the better distinction to draw is between (a) allocative policy aimed at resource allocation and (b) distributional policy aimed who has what. But “spending” is an acceptable lay shorthand for “allocative policy” (such as favoring the coal industry) – although this helps make the point that it is silly to apply the “spending” label to, say, child tax credits, which is a distributional adjustment for family size or the earned income tax credit.
(3) The need to use the budgetary gains from reducing or eliminating bad tax expenditures in the process of addressing the long-term U.S. fiscal gap and avoiding a catastrophic actual or implicit default or collapse in U.S. credit-worthiness.
On (2), a paper-to-be (for now, just PPT slides) by Len Burman and Marvin Phaup proposed that, as a matter of budgetary accounting and for purposes of various budget rules of the present or future, tax expenditures be treated as a tax payment plus an outlay.
To illustrate, consider what has long been my favorite canonical example, David Bradford’s fictional “weapons supplier tax credit” or WSTC. In my version of the example, the government decides to reduce both taxes and spending by $10 billion by (a) eliminating a $50 billion weapons program even though we still want the weapons, and (b) offering the supplier, Acme Industries, $10 billion in WSTCs if it continues furnishing the weapons. Acme uses these to eliminate the taxes it would otherwise have owed. The WSTC is tradable, so it can sell any that it exceed its tax liability to someone else who gets to claim them instead. But for simplicity, let’s assume that Acme would otherwise have owed $11 billion, so it can use the WSTCs itself and lower its federal income tax liability to $1 billion.
When the dust has settled, absolutely nothing has changed. Everyone has the same amount of money as before, and the government has the same weapons as before. But official accounting measures treat both spending and taxes as $10 billion lower than previously.
Under the Burman-Phaup proposal, accounting wouldn’t change either. Acme is treated as having paid $11 billion of tax and received a $10 billion payment from the federal government, even though the WSTC permitted it to net these two transactions without any need for the matching tax flows.
Same proposed treatment for, say, the income exclusion for employer-provided health insurance. Suppose my marginal rate is 35 percent, and that I get to exclude a $10,000 employer-paid health insurance premium from my taxable income. When the federal government computes for official accounting purposes (and any applicable budget rules in the Congress) the amount of overall taxes and spending, my little transaction figures in as a $3,500 tax collection plus a $3,500 federal outlay (i.e., a payment to me offsetting the tax I notionally paid).
Same accounting treatment, presumably, for my excluding the value of the premium for payroll tax purposes, though for the Social Security tax the exclusion won’t affect my liability if I am over the annual ceiling.
The idea is to prevent the use of tax expenditures instead of direct spending from causing the budget picture (or rules) to apply differently when they only differ in form (if the frame viewing this as disguised spending fully applies).
I think this is likely to improve both the informational content of budgetary reporting and the capacity of budget rules to constrain legislation as intended. An obvious application is to the House of Representatives’ new “CUTGO” rule, under which the differential treatment of “tax cuts” on the one hand and “spending” on the other invites legislators simply to repackage the types of “spending” proposals that the Republicans supposedly want to discourage, without changing their substance whatsoever, and thereby evade the rule. Indeed, to make the point clear, the hated “earmarks” that we often hear so much about should presumably get the same opprobrium even if they are cleverly restructured to operate via the tax system with no change in substance.
But now let’s think a bit more broadly about how the proposal invites us to restructure our thinking about tax reform proposals. Suppose we think of the 1986 Act as a budget-neutral, “revenue-neutral,” and distribution-neutral trade of tax expenditure repeal for lower rates. Using the improved frame has no effect on whether the 1986 Act was budget-neutral or distribution-neutral. But it tells us that viewing it as “revenue-neutral” was an illusion based on mistaking form for substance with respect to the repealed tax expenditures that one has agreed were “disguised spending through the tax code” (as the Bowles-Simpson Fiscal Commission Report tells us). Rather, the 1986 Act was a budget-neutral and distribution-neutral cut in both taxes and spending, as reformulated to take into account the point that tax expenditure analysis makes.
Same point for the Fiscal Commission’s proposal to repeal a lot of tax expenditures, but to give back almost all of the budgetary improvement achieved thereby by cutting tax rates (with the top individual rate perhaps declining to as little as 23%). In the cause of narrowing the fiscal gap, and in terms of their own description of tax expenditures, they are greatly reducing taxes – even if not “tax revenues” – with no budgetary motivation whatsoever. The only rationale for cutting the tax rates in this context is that (a) they would otherwise have overshot the target of fiscal balance, and (b) as a policy matter, they happen to like using some of the budgetary surplus thereby created in this particular way. No word on why this is better than some other way of using this surplus, other than that they happen to like lower taxes (a course that has clear efficiency advantages, but is merely one of many possible policy choices).
Based on this line of reasoning, the slides for my commentary at the conference included the following relatively strongly-worded statement:
“For Bowles-Simpson proponents to ponder budget-neutral tax reform is merely insane; for them to ponder revenue-neutral repeal of TEs is also incoherent.”
Insane because one should deploy the budgetary gain from tax expenditure repeal to reduce the fiscal gap, not to fund rate cuts in the face of a huge gap. Incoherent because they are forgetting their own point about tax expenditures if they focus on revenue-neutrality as formally defined.
And I argued that the same point applies to their idea of capping “revenue” as a percentage (such as 21%) of GDP. That feature of their plan also attracted well-deserved flak from other speakers at the conference, who viewed it as overly constraining when we need to be able to respond flexibly to our growing budgetary problems and the general political difficulties in addressing them.
During the question period after my panel, an offsite on-line participant submitted a question to me, based on noting that the above-quoted statement about Bowles-Simpson sounded a bit harsh. Was I saying that adopting it would be worse than where we stand otherwise?
In answering, I felt the questioner had a point, so far as the tone of the bullet point was concerned, because I don’t think Bowles-Simpson as a whole was as bad as I feel they were at that dimension. Yes, for all its limitations (such as underspecified ways of cutting spending growth) it is among the approaches one could reasonably consider deploying in any attempted march away from the cliff of catastrophic fiscal collapse. As it happens, among such plans it’s surprisingly to the right of center for a plan that comes out of a Democratic Administration. If the most liberal plan that could be within plausible responses stands all the way to the left at point 0, and the most conservative such plan stands all the way to the right at point 10, I would say Bowles-Simpson is at about point 8.
Fine, I’d prefer a lower number myself, but having plans at different points along the spectrum is generally constructive, albeit that one might have expected a Democratic Administration (especially one routinely attacked as left-wing) to generate something no higher than point 5. But that doesn’t make the Bowles-Simpson plan insane or incoherent, so from that perspective my comment (if generalized to an assessment of the plan as a whole) was too harsh.
But the error in the Commission’s thinking about and presentation of tax policy issues needs to be made forcefully and clearly if it is to be noticed – and all the more so because this wasn’t just the Commission’s distinctive error, which will cease to matter as such if (as seems likely) its report is swiftly forgotten. The idea that tax reform means a 1986-style trade of base-broadening for lower rates, even in the face of an approaching fiscal crisis that makes budget neutrality entirely the wrong approach, needs to be discredited before the next budget commission (and there will no doubt be many) gets to work.
(1) The basic validity or at least value of the tax expenditure concept, so long as one is not overly reductive and broad-brush about it. Ed Kleinbard noted that this is a significant change from where the debate stood 10 or 15 years ago.
(2) The point that, for many though not all of the items commonly classified as tax expenditures, the term “spending through the tax code” is a reasonably descriptive shorthand. I would quibble a bit, saying that the better distinction to draw is between (a) allocative policy aimed at resource allocation and (b) distributional policy aimed who has what. But “spending” is an acceptable lay shorthand for “allocative policy” (such as favoring the coal industry) – although this helps make the point that it is silly to apply the “spending” label to, say, child tax credits, which is a distributional adjustment for family size or the earned income tax credit.
(3) The need to use the budgetary gains from reducing or eliminating bad tax expenditures in the process of addressing the long-term U.S. fiscal gap and avoiding a catastrophic actual or implicit default or collapse in U.S. credit-worthiness.
On (2), a paper-to-be (for now, just PPT slides) by Len Burman and Marvin Phaup proposed that, as a matter of budgetary accounting and for purposes of various budget rules of the present or future, tax expenditures be treated as a tax payment plus an outlay.
To illustrate, consider what has long been my favorite canonical example, David Bradford’s fictional “weapons supplier tax credit” or WSTC. In my version of the example, the government decides to reduce both taxes and spending by $10 billion by (a) eliminating a $50 billion weapons program even though we still want the weapons, and (b) offering the supplier, Acme Industries, $10 billion in WSTCs if it continues furnishing the weapons. Acme uses these to eliminate the taxes it would otherwise have owed. The WSTC is tradable, so it can sell any that it exceed its tax liability to someone else who gets to claim them instead. But for simplicity, let’s assume that Acme would otherwise have owed $11 billion, so it can use the WSTCs itself and lower its federal income tax liability to $1 billion.
When the dust has settled, absolutely nothing has changed. Everyone has the same amount of money as before, and the government has the same weapons as before. But official accounting measures treat both spending and taxes as $10 billion lower than previously.
Under the Burman-Phaup proposal, accounting wouldn’t change either. Acme is treated as having paid $11 billion of tax and received a $10 billion payment from the federal government, even though the WSTC permitted it to net these two transactions without any need for the matching tax flows.
Same proposed treatment for, say, the income exclusion for employer-provided health insurance. Suppose my marginal rate is 35 percent, and that I get to exclude a $10,000 employer-paid health insurance premium from my taxable income. When the federal government computes for official accounting purposes (and any applicable budget rules in the Congress) the amount of overall taxes and spending, my little transaction figures in as a $3,500 tax collection plus a $3,500 federal outlay (i.e., a payment to me offsetting the tax I notionally paid).
Same accounting treatment, presumably, for my excluding the value of the premium for payroll tax purposes, though for the Social Security tax the exclusion won’t affect my liability if I am over the annual ceiling.
The idea is to prevent the use of tax expenditures instead of direct spending from causing the budget picture (or rules) to apply differently when they only differ in form (if the frame viewing this as disguised spending fully applies).
I think this is likely to improve both the informational content of budgetary reporting and the capacity of budget rules to constrain legislation as intended. An obvious application is to the House of Representatives’ new “CUTGO” rule, under which the differential treatment of “tax cuts” on the one hand and “spending” on the other invites legislators simply to repackage the types of “spending” proposals that the Republicans supposedly want to discourage, without changing their substance whatsoever, and thereby evade the rule. Indeed, to make the point clear, the hated “earmarks” that we often hear so much about should presumably get the same opprobrium even if they are cleverly restructured to operate via the tax system with no change in substance.
But now let’s think a bit more broadly about how the proposal invites us to restructure our thinking about tax reform proposals. Suppose we think of the 1986 Act as a budget-neutral, “revenue-neutral,” and distribution-neutral trade of tax expenditure repeal for lower rates. Using the improved frame has no effect on whether the 1986 Act was budget-neutral or distribution-neutral. But it tells us that viewing it as “revenue-neutral” was an illusion based on mistaking form for substance with respect to the repealed tax expenditures that one has agreed were “disguised spending through the tax code” (as the Bowles-Simpson Fiscal Commission Report tells us). Rather, the 1986 Act was a budget-neutral and distribution-neutral cut in both taxes and spending, as reformulated to take into account the point that tax expenditure analysis makes.
Same point for the Fiscal Commission’s proposal to repeal a lot of tax expenditures, but to give back almost all of the budgetary improvement achieved thereby by cutting tax rates (with the top individual rate perhaps declining to as little as 23%). In the cause of narrowing the fiscal gap, and in terms of their own description of tax expenditures, they are greatly reducing taxes – even if not “tax revenues” – with no budgetary motivation whatsoever. The only rationale for cutting the tax rates in this context is that (a) they would otherwise have overshot the target of fiscal balance, and (b) as a policy matter, they happen to like using some of the budgetary surplus thereby created in this particular way. No word on why this is better than some other way of using this surplus, other than that they happen to like lower taxes (a course that has clear efficiency advantages, but is merely one of many possible policy choices).
Based on this line of reasoning, the slides for my commentary at the conference included the following relatively strongly-worded statement:
“For Bowles-Simpson proponents to ponder budget-neutral tax reform is merely insane; for them to ponder revenue-neutral repeal of TEs is also incoherent.”
Insane because one should deploy the budgetary gain from tax expenditure repeal to reduce the fiscal gap, not to fund rate cuts in the face of a huge gap. Incoherent because they are forgetting their own point about tax expenditures if they focus on revenue-neutrality as formally defined.
And I argued that the same point applies to their idea of capping “revenue” as a percentage (such as 21%) of GDP. That feature of their plan also attracted well-deserved flak from other speakers at the conference, who viewed it as overly constraining when we need to be able to respond flexibly to our growing budgetary problems and the general political difficulties in addressing them.
During the question period after my panel, an offsite on-line participant submitted a question to me, based on noting that the above-quoted statement about Bowles-Simpson sounded a bit harsh. Was I saying that adopting it would be worse than where we stand otherwise?
In answering, I felt the questioner had a point, so far as the tone of the bullet point was concerned, because I don’t think Bowles-Simpson as a whole was as bad as I feel they were at that dimension. Yes, for all its limitations (such as underspecified ways of cutting spending growth) it is among the approaches one could reasonably consider deploying in any attempted march away from the cliff of catastrophic fiscal collapse. As it happens, among such plans it’s surprisingly to the right of center for a plan that comes out of a Democratic Administration. If the most liberal plan that could be within plausible responses stands all the way to the left at point 0, and the most conservative such plan stands all the way to the right at point 10, I would say Bowles-Simpson is at about point 8.
Fine, I’d prefer a lower number myself, but having plans at different points along the spectrum is generally constructive, albeit that one might have expected a Democratic Administration (especially one routinely attacked as left-wing) to generate something no higher than point 5. But that doesn’t make the Bowles-Simpson plan insane or incoherent, so from that perspective my comment (if generalized to an assessment of the plan as a whole) was too harsh.
But the error in the Commission’s thinking about and presentation of tax policy issues needs to be made forcefully and clearly if it is to be noticed – and all the more so because this wasn’t just the Commission’s distinctive error, which will cease to matter as such if (as seems likely) its report is swiftly forgotten. The idea that tax reform means a 1986-style trade of base-broadening for lower rates, even in the face of an approaching fiscal crisis that makes budget neutrality entirely the wrong approach, needs to be discredited before the next budget commission (and there will no doubt be many) gets to work.
Wednesday, January 12, 2011
Slides for my talk at Loyola (LA) Law School conference on tax expenditures
My slides commenting on papers by (1) Linda Sugin and (2) Donald Marron / Eric Toder, but also touching on the Bowles-Simpson report and 1986-style tax reform, at a session to take place this Friday, January 14, in Los Angeles, are available here.
A deafening silence?
Light posting lately reflects not just the early-January slows, but my working on the article concerning 1986-style tax reform that I mentioned in the prior post, along with my preparations for the conferences I am attending in Los Angeles later this week and Boca Raton next week, on which more in due course.
Tuesday, January 04, 2011
New Tax Notes article that I hope to write soon
I am hoping that I can somehow find the time in the next couple of months to write a piece I would plan to place in Tax Notes, entitled "1986-Style Tax Reform: A Good Idea Whose Time Has Passed."
By 1986-style tax reform, I refer to broadening the tax base while reducing the rates, so that the change is revenue-neutral (an incoherent concept since the "taxes versus spending" distinction is economically nonsense; a better term would be "budget-neutral") and perhaps also distribution-neutral. I still think it was clearly the right thing to do back then, but times have changed and trying to do it again under current circumstances makes about as much sense today as putting Paul and Ringo back on the road for a "Beatles reunion tour."
While I need an article-length format to lay things out as I would like, I will say here that engaging in a politically very painful exercise (base-broadening) for no net budgetary improvement, in the face of a long-time fiscal gap, strikes me as borderline idiotic. Under current circumstances, why would rate cuts be the best way to "spend" the budgetary improvement from the tax base changes? Especially given that income tax rates for individuals are significantly lower than they were pre-1986 Act.
There also are other important aspects I want to touch on: more on revenue-neutral versus budget-neutral, importance of the rise of consumption tax ideas, change in political dynamics since the mid-1980s, obviously the rise of the fiscal gap, changes in how we might think about the income tax preferences for healthcare and housing, the importance of distributional changes at the top since the 1980s, the arbitrary "package" nature of the 1986 deal and why it actually made practical sense then but does not now, etcetera.
The point is not to give up on improving the tax system, but to use base-broadening to lower the fiscal gap, rather than doing it for no net budgetary gain.
UPDATE: After putting the question to my internal Time Triage Analysis Center, I've decided to write (or at least start) this article now. Turnaround time will I hope be not too long, as by later in the month I'll be facing multiple competing time commitments.
By 1986-style tax reform, I refer to broadening the tax base while reducing the rates, so that the change is revenue-neutral (an incoherent concept since the "taxes versus spending" distinction is economically nonsense; a better term would be "budget-neutral") and perhaps also distribution-neutral. I still think it was clearly the right thing to do back then, but times have changed and trying to do it again under current circumstances makes about as much sense today as putting Paul and Ringo back on the road for a "Beatles reunion tour."
While I need an article-length format to lay things out as I would like, I will say here that engaging in a politically very painful exercise (base-broadening) for no net budgetary improvement, in the face of a long-time fiscal gap, strikes me as borderline idiotic. Under current circumstances, why would rate cuts be the best way to "spend" the budgetary improvement from the tax base changes? Especially given that income tax rates for individuals are significantly lower than they were pre-1986 Act.
There also are other important aspects I want to touch on: more on revenue-neutral versus budget-neutral, importance of the rise of consumption tax ideas, change in political dynamics since the mid-1980s, obviously the rise of the fiscal gap, changes in how we might think about the income tax preferences for healthcare and housing, the importance of distributional changes at the top since the 1980s, the arbitrary "package" nature of the 1986 deal and why it actually made practical sense then but does not now, etcetera.
The point is not to give up on improving the tax system, but to use base-broadening to lower the fiscal gap, rather than doing it for no net budgetary gain.
UPDATE: After putting the question to my internal Time Triage Analysis Center, I've decided to write (or at least start) this article now. Turnaround time will I hope be not too long, as by later in the month I'll be facing multiple competing time commitments.
Saturday, January 01, 2011
Working hard over the holiday break
I wasn't doing much of a non-vacation nature, but you can judge for yourself whether these guys were working hard.
Buddy, on the far left, is bagging himself, as usual. In the middle photo, Seymour and Ursula (left to right) show their keen awareness of hot spots in the house. In the third photo, Seymour (with Buddy in the background) catches up on his beauty sleep, which appears to be working.
Their biggest and certainly most excellent adventure of the week involved a gray mouse that had the misfortune to find its way into our house. This proved to be a fatal misstep for the poor creature, but only partly due to the cats' efforts.
They have some of the chops for catching mice, as all cats do by instinct. But I gather that actually killing mice is a learned art from one's mother. Hard to say, at this late date, if any of these guys ever got the full training, but I rather suspect not.
Two nights ago, before going to bed, we noted, from the cats' keen interest, that there must be a mouse under the stove area in the kitchen. Then at about 2:30 in the morning, there was a commotion. Seymour apparently had carried the mouse in his mouth to the foot of our bed, where he jumped up and started catching and releasing it.
This game, however splendid from his standpoint, was a bit disturbing to our sleep. But then, worse still, he let the mouse escape. I felt it skitter past my head and pillow, after which it jumped down to the floor and went behind a heating unit in the wall, from which neither we nor the cats could reach it readily. That was it for the first night. We all went back to sleep, knowing that this was just the first round.
The mouse next was spotted behind a chair in the late afternoon on New Year's Eve. This led to multiple chases by our feline tag team. Some of the chases resembled outtakes from a Marx Brothers movie (which we were watching on TMC during breaks in the action), and a few led to temporary feline capture followed by release.
I hate to criticize (and really, what could possibly be the point of criticizing a cat), but I will say that none of them entirely had the old-fashioned spirit of sticking to a job until it's done. They treated the entire situation like a moderately interesting movie that you stay with only until the next slow scene or commercial break.
Finally some of the humans on the scene, none of whom wanted a live mouse in the house, succeeded in administering the coup de grace and ending the intruder's suffering.