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).