Tuesday, April 24, 2012
Cover story
My article "The Financial Transactions Tax vs. the Financial Activities Tax," which appeared yesterday in Tax Notes, is actually the cover story, illustrated by an amusing faux boxing poster that shows a winning boxer, gloves held high, in between the title's two halves.
Monday, April 16, 2012
TV appearance (sort of)
On tonight's 9 pm NY 1 cable television show, "The Call," hosted by John Schiumo, I will be the first caller (though actually they are going to call me), discussing the so-called Buffett Rule. I call this merely "sort of" a TV appearance because only my smiling visage from an NYU publicity photo will actually appear on-screen.
UPDATE: Oops, false alarm. But it may still happen in a few days.
I'd say that I was ready for my close-up, but since they were going to use a publicity photo I suppose it's already been taken.
FURTHER UPDATE: What I was going to say was that the Buffett Rule is a dumb way of going about a good thing. One-track minds in politics will generally insist on rejecting one half of this statement or the other - emphasizing just the poor design and not the merits of the aim, or just the merits of the aim and not the poor design.
UPDATE: Oops, false alarm. But it may still happen in a few days.
I'd say that I was ready for my close-up, but since they were going to use a publicity photo I suppose it's already been taken.
FURTHER UPDATE: What I was going to say was that the Buffett Rule is a dumb way of going about a good thing. One-track minds in politics will generally insist on rejecting one half of this statement or the other - emphasizing just the poor design and not the merits of the aim, or just the merits of the aim and not the poor design.
Friday, April 13, 2012
Tax policy colloquium on April 10, 2012 - Lane Kenworthy chapters from "Progress for the Poor"
This past Tuesday, Lane Kenworthy of the University of Arizona (Dep't of Sociology) presented some chapters from his book, Progress for the Poor. This was our yearly political scientist session - we try each year to have an accountant and a political scientist, and are also open to philosophers when someone has something suitable, in addition to inviting tax law professors (and others with public economics topics), tax practitioners, and economists.
The parts of the book that we discussed had three main theses. Here's a quick summary, including my main reactions as a reader:
Targeted versus universalistic aid to the poor - There's a long tradition arguing that the best way to help the poor is through "universal" programs such as Social Security. Wilbur Cohen, who helped design Social Security, famously said that a program for the poor will end up being a poor program. Hence, for example, in Social Security the transfers from high-earners to low-earners are smooshed in (that's a technical term) with the program's universal pension aspects, so that the redistributive part of what's going on will be less clear. Kenworthy finds the common assumptions behind universalism plausible in theory but not well-supported by cross-country data.
I'd say it's quite hard to know what to make of the cross-country data, as there as classification issues and so much is going on in each country. But I'd say that (a) the targeted versus universalist distinction is purely a matter of form, since it depends on how you define the program, (b) that's entirely consistent with the standard view, which is about optics rather than substance, and (c) the actual state of the optics seems to be that sometimes universalism fares better, other times targeting. For example, "targeted" welfare has prevailed in lieu of demogrants because it's targeted, and thus avoids the critique: "Why does Bill Gates need a demogrant?" (This critique ignores the economic equivalence of what's called a demogrant program to what's called a targeted welfare program if one treats the demogrant as taxable income and sets up the marginal rate structure the right way.) Given the context-specific optical tradeoff, it's even harder to draw general conclusions than it would otherwise be. I suspect we can't really draw confident general conclusions about how comparatively well "targeting" and "universalism" work in directing aid to the poor - it depends on the issue, the time, the society, and other aspects of the context.
The tax mix: does it matter? - The book notes standard views (from general debate, not the tax policy literature as such) regarding the relative vices and virtues of income taxes, consumption taxes, and payroll taxes. But cross-country data appears to undermine any claim of strong empirical relationships. I'd respond both that the cross-country data are hard to work with, and that all these tax bases are actually a lot more similar and overlapping than non-tax people often realize. Hence, the findings aren't a surprise to me even though I like to spend time thinking about the merits of different tax bases. A further point made by the paper, with which I certainly agree, is that, for aid to the poor, transfers / government services, etc. matter more than which tax system you use.
Are government spending and the size of government LESS different in the U.S. versus elsewhere than people commonly think? Clearly yes, if you count commonly listed tax expenditures as government spending. There are of course various issues in using the tax expenditure terminology that I have written about elsewhere. (E.g., if you treat tax-favored pensions as spending under an income tax but not a consumption tax that effectively provides the same tax treatment, you are relying on mere form to drive your adjusted "spending" measure.) But the big difference between the U.S. and, say, the countries in western Europe lies more in its having a less active "distributional" branch of government than in its having a smaller "allocative" branch.
The parts of the book that we discussed had three main theses. Here's a quick summary, including my main reactions as a reader:
Targeted versus universalistic aid to the poor - There's a long tradition arguing that the best way to help the poor is through "universal" programs such as Social Security. Wilbur Cohen, who helped design Social Security, famously said that a program for the poor will end up being a poor program. Hence, for example, in Social Security the transfers from high-earners to low-earners are smooshed in (that's a technical term) with the program's universal pension aspects, so that the redistributive part of what's going on will be less clear. Kenworthy finds the common assumptions behind universalism plausible in theory but not well-supported by cross-country data.
I'd say it's quite hard to know what to make of the cross-country data, as there as classification issues and so much is going on in each country. But I'd say that (a) the targeted versus universalist distinction is purely a matter of form, since it depends on how you define the program, (b) that's entirely consistent with the standard view, which is about optics rather than substance, and (c) the actual state of the optics seems to be that sometimes universalism fares better, other times targeting. For example, "targeted" welfare has prevailed in lieu of demogrants because it's targeted, and thus avoids the critique: "Why does Bill Gates need a demogrant?" (This critique ignores the economic equivalence of what's called a demogrant program to what's called a targeted welfare program if one treats the demogrant as taxable income and sets up the marginal rate structure the right way.) Given the context-specific optical tradeoff, it's even harder to draw general conclusions than it would otherwise be. I suspect we can't really draw confident general conclusions about how comparatively well "targeting" and "universalism" work in directing aid to the poor - it depends on the issue, the time, the society, and other aspects of the context.
The tax mix: does it matter? - The book notes standard views (from general debate, not the tax policy literature as such) regarding the relative vices and virtues of income taxes, consumption taxes, and payroll taxes. But cross-country data appears to undermine any claim of strong empirical relationships. I'd respond both that the cross-country data are hard to work with, and that all these tax bases are actually a lot more similar and overlapping than non-tax people often realize. Hence, the findings aren't a surprise to me even though I like to spend time thinking about the merits of different tax bases. A further point made by the paper, with which I certainly agree, is that, for aid to the poor, transfers / government services, etc. matter more than which tax system you use.
Are government spending and the size of government LESS different in the U.S. versus elsewhere than people commonly think? Clearly yes, if you count commonly listed tax expenditures as government spending. There are of course various issues in using the tax expenditure terminology that I have written about elsewhere. (E.g., if you treat tax-favored pensions as spending under an income tax but not a consumption tax that effectively provides the same tax treatment, you are relying on mere form to drive your adjusted "spending" measure.) But the big difference between the U.S. and, say, the countries in western Europe lies more in its having a less active "distributional" branch of government than in its having a smaller "allocative" branch.
Cleared for takeoff
My latest article, "The Financial Transactions Tax vs. the Financial Activities Tax," is ready to go (final proofs stage) and will indeed be appearing in Tax Notes on Monday, April 23.
Wednesday, April 04, 2012
Tax policy colloquium on 4/3/12 - Jon Bakija paper on income growth of top earners
Yesterday Jon Bakija of Williams College presented his co-authored paper, "Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data."
The paper looks at an excellent set of 1979-2005 IRS tax return data that includes the self-reported professions and industry sectors of people with high taxable income, in order to shed light on where the rise in income inequality has been coming from. Unsurprisingly, it's mainly salary income, such as of CEOs and people in the financial industry.
Obviously, to the likes of us at the colloquium, the issues of particular interest include the tax policy implications, as well as what light the paper sheds on alternative explanations for rising U.S. income inequality. Globalization and technological change are weakened as explanations - at least, as exclusive ones - by divergence as between countries that one might think were relevantly similar. The U.S. has of course led the way in rising income inequality, with the U.K. being closer to us than anyone else. So other stories must presumably be playing a role, including the reduced influence of social norms in restraining high compensation and an increase in "tournaments" that have a big winner and lots of losers. Reduced marginal tax rates may have played a role as well - though partly just with respect to labeling, such as by encouraging the owners of closely held companies to use S corporations or at least pay out more salary to themselves - but appear to fall well short of serving as a plausible primary explanation.
For my money, one of the big tax policy implications is as follows. Both executive compensation and the rise of the financial industry - again, two huge contributors to the overall story - involve flawed markets in which we have reason to believe that high earnings often do not denote high social value or productivity. While it may be true that the pre-mega stock option corporate executives of the 1950s through the 1980s had at times too weak an incentive to seek greater profitability, it's clear (as Lucien Bebchuk and others have shown) that we have now a fundamentally flawed market, where the incentives are very strong, but misdirected given all the short-termist and other games that executives can and do play. Likewise, financial sector profitability to a large extent reflects bad incentives, whether to find the correct price one second before everyone else (leading to personal gain far in excess of the social gain) or to do the sorts of things that the Greg Smith op-ed talked about.
In principle, one would want to respond to these problems by addressing executive compensation and financial sector issues directly, rather than sweeping in all high-income people whether their income comes from this stuff or not. (Although there would still be further reasons for greater progressivity in light of the changing income distribution - for example, the equity gains from redistribution are greater when the top has pulled so far away from everyone else, and it's more efficient to tax income at high levels when there are lots of people SO wealthy that these taxes are inframarginal for them).
But if one can't respond directly to the governance and financial sector issues, then by raising marginal rates one is not entirely misdirected - they cover a lot of the waterfront here, even though not all of it. So I consider these problems, and the sort of information that the Bakija paper provides, as strengthening the case for higher marginal rates at or near the top.
The paper looks at an excellent set of 1979-2005 IRS tax return data that includes the self-reported professions and industry sectors of people with high taxable income, in order to shed light on where the rise in income inequality has been coming from. Unsurprisingly, it's mainly salary income, such as of CEOs and people in the financial industry.
Obviously, to the likes of us at the colloquium, the issues of particular interest include the tax policy implications, as well as what light the paper sheds on alternative explanations for rising U.S. income inequality. Globalization and technological change are weakened as explanations - at least, as exclusive ones - by divergence as between countries that one might think were relevantly similar. The U.S. has of course led the way in rising income inequality, with the U.K. being closer to us than anyone else. So other stories must presumably be playing a role, including the reduced influence of social norms in restraining high compensation and an increase in "tournaments" that have a big winner and lots of losers. Reduced marginal tax rates may have played a role as well - though partly just with respect to labeling, such as by encouraging the owners of closely held companies to use S corporations or at least pay out more salary to themselves - but appear to fall well short of serving as a plausible primary explanation.
For my money, one of the big tax policy implications is as follows. Both executive compensation and the rise of the financial industry - again, two huge contributors to the overall story - involve flawed markets in which we have reason to believe that high earnings often do not denote high social value or productivity. While it may be true that the pre-mega stock option corporate executives of the 1950s through the 1980s had at times too weak an incentive to seek greater profitability, it's clear (as Lucien Bebchuk and others have shown) that we have now a fundamentally flawed market, where the incentives are very strong, but misdirected given all the short-termist and other games that executives can and do play. Likewise, financial sector profitability to a large extent reflects bad incentives, whether to find the correct price one second before everyone else (leading to personal gain far in excess of the social gain) or to do the sorts of things that the Greg Smith op-ed talked about.
In principle, one would want to respond to these problems by addressing executive compensation and financial sector issues directly, rather than sweeping in all high-income people whether their income comes from this stuff or not. (Although there would still be further reasons for greater progressivity in light of the changing income distribution - for example, the equity gains from redistribution are greater when the top has pulled so far away from everyone else, and it's more efficient to tax income at high levels when there are lots of people SO wealthy that these taxes are inframarginal for them).
But if one can't respond directly to the governance and financial sector issues, then by raising marginal rates one is not entirely misdirected - they cover a lot of the waterfront here, even though not all of it. So I consider these problems, and the sort of information that the Bakija paper provides, as strengthening the case for higher marginal rates at or near the top.
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