Apocalypse soon?

It's distressing when we have a ticking time bomb in the form of the debt limit problem, and today:

(a) McConnell said no deal without massive Medicare cuts, which almost certainly is a response to Tuesday's election. The evident idea is that the Democrats must surrender the ability to flog the Republicans on the Ryan plan, or else he is unwilling to surrender his hostage (i.e., the U.S. and world economies).

(b) Ryan said that any increase in tax revenues is absolutely, unconditionally unacceptable because to him this is a matter of "economic doctrine."

Quick observation on Tuesday's election result

Did voters in upstate New York punish Republicans and the Paul Ryan budget for (a) honestly acknowledging that currently projected healthcare expenditure growth is unsustainable, or (b) proposing to throw poor people off the bus, to be joined by seniors once my age cohort reaches retirement age (but in the cynical hope that current seniors would shrug since they're exempted), in part to help make way for massive tax cuts for the top 1 percent of the income distribution?

If (b), I'd say they deserve the voter response they got. If (a), they are getting the same unfair punishment for acknowledging an aspect of reality that the Democrats faced in 2010.

My hunch is that, if one carefully queried the voters, one would find that it's at least two-thirds (a). But since I think the Republicans deserve what they got for (b) - especially given their 2010 election demagoguery, their threatening to block cost-saving under the current structure, and for that matter their enacting an unfunded Medicare prescription drug benefit in 2003 - my sympathy is extremely limited.

My new Tax Notes article on tax reform

Yesterday, Tax Notes published the article that I've mentioned here several times, "1986-Style Tax Reform: A Good Idea Whose Time Has Passed."

A link is available here.

The abstract goes something like this:

"The Tax Reform Act of 1986 combined base-broadening (such as the curtailment of tax expenditures) with tax rate reduction, in a manner that was designed to be revenue-neutral and distribution-neutral. It thereby established an influential model for tax reform that continues to be cited frequently today. This report argues, however, that while 1986-style tax reform was a good idea in its time, it is no longer appropriate in current circumstances, for three main reasons. First, if tax expenditures are properly viewed as spending through the tax code, then a revenue neutrality norm, in which the budgetary gain from their repeal ostensibly needs to be offset by rate cuts, is intellectually incoherent. Second, the long-term U.S. fiscal gap makes rate-cutting, in particular for individuals, potentially imprudent. Third, if one wants to address rising high-end income concentration in the U.S. since 1986, the option of raising, rather than reducing, the top marginal income tax rates may need to be squarely considered."

Scofflaw?

Though the rule is no cats on the dining room table, it's hard to get too upset with Seymour when he is such a handsome and placid fellow.

I'm back from Singapore, and have more or less readjusted to NYC time. In my absence, summer seems to have arrived in a schedule sense (students have graduated and the place has emptied out for the summer, though I have a LOT of things to do) though unfortunately not in a weather sense.

I'll be on sabbatical this fall, and teaching the Tax Policy Colloquium with Alan Auerbach next winter. During the balance of 2011, I have work-related trips scheduled to Oxford, Louisville, Los Angeles, Vienna, and Sao Paulo, plus no doubt a couple more that aren't currently coming to mind.

Final full day in Singapore

Tomorrow (Friday) is my final full day in Singapore. In addition to teaching my eighth and final marathon-length class over an 11-day span (ah, the narcissism and melancholy of spending too much time as a performer), I will be giving a late-morning hour-long talk to people at the NYU@NUS program generally. At the last minute (i.e., tonight), I have grown verging on enthusiastic, at least given my overall state of near-burnout and fatigue, about this talk.

When I was asked to give this talk, I had nothing more definite in mind than to reprise the main themes of my forthcoming Tax Notes paper, "1986-Style Tax Reform: A Good Idea Whose Time Has Passed." Forthcoming, I should add, this Monday, May 23. I will post a link on this blog as soon as I can; I'm pretty sure this can be done with Tax Notes articles once they're out.

The problems with the approaching talk were twofold (apart from simultaneous classroom preparation). First, although few people have seen my new paper as yet and I haven't widely discussed it, it's been on my mind over the last few months and I've discussed bits and pieces or ideas from it on numerous occasions (e.g., at my Senate Finance testimony earlier this month). Thus, to me it no longer feels quite as fresh as it might at this point. Second, it's U.S.-centric, hence not ideal for a talk in Singapore, especially to people who aren't any more tax-focused than they are U.S.-focused.

But I've been idly discussing Singapore-specific factors with various people during my brief stay here, and now feel qualified (at least for a fairly casual talk to a moderate-sized audience) to take things in a fresher and more locally pertinent direction. Hence, my lunch talk is now entitled (in my own mind; I didn't get to tell the organizers in time for any signage to reflect it), "Tax Reform: Singapore Versus the U.S."

As I've mainly written it out, I'll consider posting the talk's main contents here if, after the session is done, I still feel good about it. This, however, may have to wait until next week, as I am taking a 19 hour flight back home on Saturday morning.

Weekend in Singapore

When not preparing for my next class, going on various food, shopping, and cultural excursions (I've seen all the main Singapore tourist sites in past years), or going to the pool and the gym at my residence hotel, I've been reading James Ellroy's powerful and disturbing My Dark Places, which I picked up in the Borders here on Orchard Road. I may have to read more Ellroy, such as the well-regarded L.A. Quartet, though I wonder if it's possible that My Dark Places is his best.

Singapore ruminations

At the moment, by a strange quirk, it is both my birthday and my younger son's. His comes the day before mine, but as I am in Singapore, where the clock is 12 hours ahead of NYC time, and as it's still before 12 noon, we are currently having a joint birthday, only we won't get to communicate about it directly in simultaneous real time.

Perhaps it's not ideal to be spending one's birthday so far from home and loved ones, but I suppose there are compensations, ranging from my observation that lizards are Singapore's squirrels (they dash into the trees when you approach, then skitter around to keep the trunk between you and them), to a bizarre dream in which I was explaining to Willard Scott (!) that the early Neil Diamond song "Girl, You'll Be a Woman Soon," which was playing on his sound system at a garden party where he was offering people desserts, is better known from the cover version in Pulp Fiction (the only explanation I can offer for this dream is that I had been listening to early Neil Diamond recently and love that song, although it's rather off-kilter, un-PC by today's standards, and strange), to my plan to treat myself to a 5 pm viewing of "Source Code" at the nearby cinema (last showing before it disappears here), followed by a tasty and cheap if quick and informal dinner for one at a local food court (the chicken rice and Malaysian noodles are both excellent, but tonight I may look for something Indian).

Teaching a 3-plus hour daily class under current circumstances, in a small group that one really needs to engage directly (and they seem willing enough), while still adjusting to the time zone change and having had so little time since the end of the NYU semester, can feel a bit challenging even if (I hope) they don't see you sweat. It feels like being a stand-up comic who has dozens of familiar routines lodged somewhere in his cerebellum but hasn't gotten to rehearse them enough recently. Time management (too fast versus too slow), dealing with how I liked talking about a given issue 3 years ago as opposed to now, and balancing spontaneity against control, are among the challenges for which one might prefer to be in better-rested, better-rehearsed, more midseason form. But first days are always the most unsettling; in just a few minutes I'll be venturing forth for Day 2. And not long after that, while my birthday will continue for another 12 hours, my son's will be over.

UPDATE: Felt much better about the Day 2 class, plus I must have been a good boy, as I actually got an in-class birthday cake from the very kind people who run the program here.

Off to Singapore

Tomorrow I am flying to Singapore, where I will be teaching a class (U.S. Personal and Business Income Tax Law), in the NYU @ NUS program at the National University of Singapore, over the 2-week period from May 10 through May 20. 3-1/4 hours per day over 8 days - definitely a grueling journey for faculty and students alike. The readings will include greatest hits from the Tax I casebook of which I'm a co-author (with Klein, Bankman, and Stark), as well as selections from Decoding the U.S. Corporate Tax and my book in progress on U.S. international taxation. We'll also read materials on tax shelters (including some famous U.S. cases) and, if we have time on the last day, discuss fundamental tax reform from a U.S. perspective.

As on my prior two visits to teach at NYU @ NUS, I'm looking forward to meeting the students, as well as to sampling Singapore's great food (such as from street hawkers and at Zam Zam on Arab Street in Little India).

May 3 Senate Finance Committee hearing on tax fairness

Yesterday, I testified before the Finance Committee of the U.S. Senate on fairness or distribution issues in the federal income tax system. You can view a stream of the entire proceedings here, and you can read my full written testimony here or here (the latter corrects an erroneous number from the testimony I actually submitted). In addition, the shorter written remarks that I prepared for my 5-minute slot, and then delivered more or less verbatim (taking exactly 4:57!), are available here.

My remarks emphasized three main points:

(1) Rising high-end income concentration may influence how one thinks about high-end tax rates, in particular as part of a broader tax reform process. In the 1986 tax reform process, people thought about high-end distributional neutrality as purely a function of making before-and-after comparisons for two groups: those earning from $100,000 to $200,000, and those earning more than $200,000. A much more nuanced approach to the high end may be necessary today (e.g., the Fiscal Commission Report looked at the top 20%, 10%, 5%, 1%, and 0.1%).

(2) The big-ticket tax expenditure items (such as home mortgage interest deductions, the employer-provided health insurance exclusion, and charitable deductions), tend to provide benefits that rise relative to income until close to the top of the income distribution, when they start falling as a percentage of income. This makes it quite difficult to achieve distributional neutrality 1986-style at the very top unless one starts addressing items such as the 15% dividend rate, which (a) doesn’t hit wage earners at the very top and (b) arguably isn’t a tax expenditure given the double corporate taxation issue.

(3) If tax expenditures are equivalent to spending through the tax code (as asserted by both the Fiscal Commission and the Ryan Budget plan, and as best illustrated by David Bradford’s weapons supplier tax credit example), then repealing them is not in substance a “tax cut,” and hence doesn’t need to be accompanied by tax rate cuts even if one has some view about tax revenues and the size of government. The ONLY reason to cut individual income tax rates, especially in the face of the long-term fiscal gap, is if the equilibrium one prefers (and can get to) includes lower rates, a point on which I am quite skeptical. More on this in my May 23 Tax Notes piece, “1986-Style Tax Reform: A Good Idea Whose Time Has Passed.”

At the hearing, the Republicans had a coordinated theme decrying the fact that, according to a Joint Committee on Taxation estimate, in 2009 51% of all households paid zero in income taxes. 51 percent is ostensibly a “tipping point” (although in fact it reflected the temporary impact of the recession), and is said to be a concern because you have no “skin in the game” if you pay no income tax, and thus ostensibly will vote under the “fiscal illusion” that government spending is free.

I would question how much political influence we should attribute to Americans who are too poor to pay income tax. Political scientists such as Hacker and Pierson would presumably say, try zero as a good baseline estimate of their influence. If I were looking at a fiscal illusion that government spending is somehow “free,” I would start my analysis with deficit financing. Plus, as I commented at one point, it is a mistake to focus on just one year and just one tax.

One of the Republican Senators at the hearing dismissed the significance of payroll taxes in this regard by noting that they are associated with providing Social Security and Medicare benefits at retirement, rather than going into general revenues. But more specifically, he called payroll taxes merely an “insurance premium.”

If payroll taxes are insurance premiums rather than taxes, and Social Security / Medicare benefits are insurance payouts rather than government spending, I suppose we will need to restate our budgetary accounts a bit.

Another coordinated theme on the Republican side of the aisle was that it's simply wrong to have the income tax system do anything whatsoever to affect distribution. It should simply be about raising revenue to pay for government outlays, period. Anything else is immoral. I replied that, if this is the case, we should definitely have a uniform head tax, under which Bill Gates would pay the same amount of tax as a homeless person. And if this is wrong (and I noted that Margaret Thatcher, who had been lauded earlier in the hearing, ran into some problems with a head tax), and we indeed want to tax something such as income based on some such notion as ability to pay, then we are all really playing the same game, and there is nothing left to complain about at a philosophical level.

I think it came out sounding a bit less harsh than that, but hopefully the point was clear.

One of the Democratic Senators invited me to take some pretty open potshots at the degree of good faith in the tax part of the Ryan budget, but I declined to impugn motives, and simply said that I felt its rate cuts were unwise and that its base-broadening remained entirely unspecified. But I granted that it's a lot easier to criticize popular but bad policies if you have my job than if you are a member of Congress.

Last 2011 NYU Tax Policy Colloquium

Last Thursday, Cheryl Block presented her work in progress, “Tax Justice and the Equitable Distribution of Bailout Costs,” as our last paper of the semester.

The paper posits that public anger over the financial sector bailout, along with reasons for thinking that the anger might in various respects have been justified, suggests the possibility that ability to pay principles don’t provide the best guide to thinking about how the costs of the bailout would equitably be distributed. E.g., is the view that the financial sector ought to pay a distinctive view that we need to think seriously about?

Cheryl agrees that there may be important incentive reasons for making the people who caused (and may again cause) a bailout to be necessary pay for the expected costs of their behavior. Not only ex ante, before they act, but even ex post, if the lesson that is learned will impress itself upon future actors. But she wants to leave the efficiency analysis to one side, for purposes of considering the equity issues as well.

My main criticism of this is that there is a considerable overlap between giving people proper incentives and deciding whether they are blameworthy or not. Our intuitions (in the realm of “distributive desert”) about punishing the guilty, etcetera, have a lot of overlap with the idea of giving people proper incentives (and not minding what they decide if they had the right incentives to consider harm to others, etc.). So it is difficult to pursue this analysis independently of efficiency even if one concludes that one’s (or at least my) admitted emotions of distributive desert (a.k.a. retribution) should be preferred to, say, utility maximization where the two, despite their considerable overlap, prove to be in conflict.

Also, I would say that the financial sector as such can’t pay since it’s not a human being. When we say this we presumably have particular individuals in mind – e.g., in this case, the managers and other highly-paid employees in the financial sector, along with their pals in the rating agencies, captured regulatory agencies, etc.

Just because it’s been a very busy semester, I was relieved to have it come to an end, even though so much of it is very interesting and fulfilling. The students were great and their degree of interest and involvement was exhilarating. Things have hardly let up for me since, however – I testified today before the Senate Finance Committee on equity issues in the income tax (more on this shortly), and am off on Saturday to teach in Singapore for 2 weeks. Pretty fast turnaround there, admittedly adding a bit to the stress, although I am hopeful that the Singapore class will go well too.

Next year (January through April 2012), I’ll be teaching the colloquium on Tuesdays with Alan Auerbach. I’m very much looking forward to doing it with Alan. Thanks to Mihir Desai for collaborating with me in the enterprise over the last two years.