Last night I posted on SSRN the two just-completed article drafts that have occupied most of my time (other than teaching) this fall. Each was prepared for a conference that I am attending in early March. Their topics are rather distinct, both from each other and from the work on international tax policy that has occupied a fair amount of my time over the last couple of years.
First, I've posted here an article entitled "Should Social Security and Medicare Be More Market-Based?" It will be the basis for the Ann F. Baum Memorial Lecture on Elder Law that I am delivering at the University of Illinois Law School on March 4, 2013. The abstract is as follows:
"Contemporary political debate about Social Security and Medicare often conflates the issue of the programs’ long-term fiscal sustainability with that of whether their design should be made more market-based, such as by transforming Social Security into a private accounts program and Medicare into a voucher-based program. In fact, the sustainability and design issues are fundamentally separate.
"This article assesses the case for making the programs more market-based by using two main conceptual vehicles: (1) the model for understanding the programs’ substantive features and rationales that I offered in my books, Making Sense of Social Security Reform and Who Should Pay for Medicare?, and (2) Paul Samuelson’s classic description of Social Security as providing what we would now call an implicit financial instrument that reflects an intergenerational compact. In the end, it reaches largely skeptical conclusions about altering the programs to use either private accounts or vouchers."
Second, I've posted here an article entitled "The Forgotten Henry Simons." I will be presenting this one at a "One Hundred Years of the Federal Income Tax Conference," being held at the Florida State University College of Law on March 1-2, 2013, and described here. I will also be presenting it at a similarly themed conference, to be held at USC Law School on February 7-8, 2013. The abstract for this one is as follows:
"Surely just about everyone in the U.S. federal income tax field has heard of Henry Simons, if only for his famous definition of “personal income.” Few may realize, however, that this proponent of 'drastic progression' in a broad-based income tax was also a self-described libertarian who generally denounced government economic regulation and was arguably the chief architect of the pro-free market law and economics movement at the University of Chicago. This article provides a brief intellectual history of Simons’ work, aiming in particular to explain how and why he combined these seemingly disparate sets of beliefs, and what we may learn from them today."
Wednesday, November 28, 2012
Tuesday, November 27, 2012
Broadening the base versus raising the rate
To raise a given amount of revenue, is it always better to reduce or eliminate deductions than to raise the top marginal rate?
In a word, no.
Assuming the deductions are undesirable subsidies (such as the home mortgage interest deduction, which I certainly would so characterize), rather than, say, costs of earning income, reducing or eliminating them is likely to be preferable to raising the top marginal rate from the standpoint of efficiency.
But tax policy involves a tradeoff between efficiency and distributional concerns. Otherwise, we would simply charge a "lump sum" tax that taxpayers' decisions could not alter - for example, a uniform head tax.
Suppose we are trying to raise a fixed amount of revenue from the top 1 percent of the income distribution. Imposing some sort of a deduction cap is likely to be better in efficiency terms than raising the top rate. But it is also likely to have a less progressive incidence - to hit the people at the very top somewhat less than raising the marginal rate. This reflects that their previously allowable deductions are likely to decline as a percentage of income as their income rises. For example, if your salary goes up from $10 million to $100 million, you probably won't buy a house that is ten times larger (and has a mortgage that is ten times larger). And even if you did, under present law the home mortgage interest deductions would be limited to those arising on $1.1 million of home mortgage loan principal.
I am certainly glad to see that cutting preferential deductions that used to seem politically sacrosanct is now on the table politically. Perhaps a good policy change will result from this. (And I do like the idea from the Romney campaign of capping specified deductions and inclusions, so long as we don't attach fantasy revenue projections to doing so.) But that does not mean that the top rate shouldn't also go up, as a way of reaching the very top of the top more than we would otherwise.
In a word, no.
Assuming the deductions are undesirable subsidies (such as the home mortgage interest deduction, which I certainly would so characterize), rather than, say, costs of earning income, reducing or eliminating them is likely to be preferable to raising the top marginal rate from the standpoint of efficiency.
But tax policy involves a tradeoff between efficiency and distributional concerns. Otherwise, we would simply charge a "lump sum" tax that taxpayers' decisions could not alter - for example, a uniform head tax.
Suppose we are trying to raise a fixed amount of revenue from the top 1 percent of the income distribution. Imposing some sort of a deduction cap is likely to be better in efficiency terms than raising the top rate. But it is also likely to have a less progressive incidence - to hit the people at the very top somewhat less than raising the marginal rate. This reflects that their previously allowable deductions are likely to decline as a percentage of income as their income rises. For example, if your salary goes up from $10 million to $100 million, you probably won't buy a house that is ten times larger (and has a mortgage that is ten times larger). And even if you did, under present law the home mortgage interest deductions would be limited to those arising on $1.1 million of home mortgage loan principal.
I am certainly glad to see that cutting preferential deductions that used to seem politically sacrosanct is now on the table politically. Perhaps a good policy change will result from this. (And I do like the idea from the Romney campaign of capping specified deductions and inclusions, so long as we don't attach fantasy revenue projections to doing so.) But that does not mean that the top rate shouldn't also go up, as a way of reaching the very top of the top more than we would otherwise.
Wednesday, November 14, 2012
Obama's reply to the Republicans on closing income tax "loopholes"
In response to Republicans' suggestion that we get increased tax revenues by letting the Bush tax cuts expire as to the marginal rate at the top - restoring the pre-2001 top rate of 39.6 percent that has always been scheduled to happen within the revenue estimators' official budget window - President Obama is quoted as follows by the Huffington Post:
"But when it comes to the top 2 percent, what I'm not going to do is to extend further a tax cut for folks who don't need it, which would cost close to a trillion dollars. And it's very difficult to see how you make up that trillion dollars, if we're serious about deficit reduction, just by closing loopholes and deductions ...
"The math tends not to work....
"If there was one thing that everybody understood, that was a big difference between myself and Mr. Romney, it was when it comes to how we reduce our deficit, I argued for a balanced, responsible approach -- and part of that included making sure that the wealthiest Americans pay a little bit more ... By the way, more voters agreed with me on this issue than voted for me.
"The only question now is, are we going to hold the middle class hostage in order to go ahead and let that happen?"
There are several things going on here. One is Obama's vehement (at least for now) rejection of the "hostage strategy" that the Congressional Republicans employed so frequently, and often so successfully, during his first term.
But another is his position that restoring the 39.6 percent top rate is not a subject of bargaining, but simply something that is going to happen regardless. Obviously, present law favors him on this, since all of the Bush tax cuts will expire on January 1 if Congress simply does nothing. Only a successful hostage strategy could compel him to accept restoration of the higher top rate as the price of extending lower rates for everyone else, which is a result that both sides favor as a standalone proposition.
But a further interesting angle here arises from the possibility that the Republicans might be more eager than the Democrats to reduce tax preferences, even if targeted at the top end, that both sides increasingly conceptualize as "spending." Then the Republicans' call for capping or restricting tax preferences might end up being, not a substitute for raising the top rate, but a concession from the Democrats (against the background of having already restored the 39.6 percent top rate) in exchange for separate consideration, such as something on the entitlements side.
This still seems a bit fanciful - Republicans demanding higher income tax revenues (as officially measured) that come mainly from the wealthy, in exchange for "spending" cuts elsewhere in the budget. But if sanity prevails on the Republican side (and there have indeed been some hopeful indications, in these admittedly still-early days), then there would at least be a discernible logic to their negotiating this way.
"But when it comes to the top 2 percent, what I'm not going to do is to extend further a tax cut for folks who don't need it, which would cost close to a trillion dollars. And it's very difficult to see how you make up that trillion dollars, if we're serious about deficit reduction, just by closing loopholes and deductions ...
"The math tends not to work....
"If there was one thing that everybody understood, that was a big difference between myself and Mr. Romney, it was when it comes to how we reduce our deficit, I argued for a balanced, responsible approach -- and part of that included making sure that the wealthiest Americans pay a little bit more ... By the way, more voters agreed with me on this issue than voted for me.
"The only question now is, are we going to hold the middle class hostage in order to go ahead and let that happen?"
There are several things going on here. One is Obama's vehement (at least for now) rejection of the "hostage strategy" that the Congressional Republicans employed so frequently, and often so successfully, during his first term.
But another is his position that restoring the 39.6 percent top rate is not a subject of bargaining, but simply something that is going to happen regardless. Obviously, present law favors him on this, since all of the Bush tax cuts will expire on January 1 if Congress simply does nothing. Only a successful hostage strategy could compel him to accept restoration of the higher top rate as the price of extending lower rates for everyone else, which is a result that both sides favor as a standalone proposition.
But a further interesting angle here arises from the possibility that the Republicans might be more eager than the Democrats to reduce tax preferences, even if targeted at the top end, that both sides increasingly conceptualize as "spending." Then the Republicans' call for capping or restricting tax preferences might end up being, not a substitute for raising the top rate, but a concession from the Democrats (against the background of having already restored the 39.6 percent top rate) in exchange for separate consideration, such as something on the entitlements side.
This still seems a bit fanciful - Republicans demanding higher income tax revenues (as officially measured) that come mainly from the wealthy, in exchange for "spending" cuts elsewhere in the budget. But if sanity prevails on the Republican side (and there have indeed been some hopeful indications, in these admittedly still-early days), then there would at least be a discernible logic to their negotiating this way.
A new conservative or Republican tax orthodoxy?
In the aftermath of the election, increasingly people who are conservatives and/or Republicans are taking a new line on tax policy in response to the fiscal cliff (a.k.a. austerity crisis) and/or the longer-term fiscal picture. They are saying that reducing special tax preferences, such as the home mortgage interest deduction and/or the exclusion for employer-provided health insurance, should be on the table as devices for increasing both income tax revenues and (by targeting the tax preference cutback at higher-income individuals) overall tax progressivity.
As I noted in a recent blog post, Speaker Boehner at least arguably suggested this Since that time, Glenn Hubbard has said something favorable about it, and most recently Andrew Biggs, at the American Enterprise Institute, posted this item, entitled "All tax increases are not created equal." And of course the Romney campaign dipped a toe in these waters, so long as one disregards its associated call for reducing tax rates.
Biggs expressly rejects the Grover Norquist line against allowing tax preference repeal to increase income tax revenues, on the ground that the items he would target are best viewed as spending, in line with tax expenditure analysis. Indeed, he argues that, for this reason, Democrats rather than Republicans (once freed from the Norquist pledge) are the ones likely to be opposed to increasing revenues by these means.
While both endorsing and welcoming most of what Biggs says, let me offer a couple of quibbles regarding the following passage, in which he distinguishes deduction cutbacks from marginal rate increases. After noting that tax rate increases induce substitution away from earning taxable income, he argues that deduction cutbacks instead have "what economists call an 'income effect' — people would have less after-tax income, and on average people would work more in order to make up the loss. But the amount they pay on each additional dollar of earnings — their marginal tax rate — stays the same, meaning that the tax change hasn't created any disincentive for them to decrease their work effort. While raising marginal rates would likely hurt economic growth, reducing tax deductions would likely increase it, at least by a modest amount."
(Small side comment: This is not the right time to try to induce people to work harder via the income effect, if we have ongoing high unemployment due to inadequate demand. But this goes to the point that austerity by any means ought to wait a couple for years, or for the definite arrival of improved conditions, before being implemented.)
Returning to Biggs' argument above, I think he over-draws the distinction between raising rates and thus getting substitution effects, and reducing tax preferences and thus ostensibly getting just income effects. Suppose I am considering working more AND using some of the extra income to buy a bigger house. Then, under present law, I may anticipate home mortgage interest deductions that lower the marginal rate at the boundary I am actually considering. So base-broadening actually can have substitution effects away from earning income, in addition to those (which we may want) away from choosing tax-favored assets or consumption.
In addition, if (although he does not propose this) there is any sort of income-related phase-in for tax preference disallowance, that could in effect be a shadow higher marginal rate.
The Romney deduction ceiling approach does not have the latter of these two adverse substitution effects if the dollar ceiling is the same for everyone. But it could have the former, if increasing my income would make me more likely run into the ceiling. So things are a bit more mixed and complicated, but that is not to dispute Biggs' basic point.
One last point I'd add is the following. Suppose we agree with Biggs, me, and the Democrats who take a pro-tax expenditure view that the changes he advocates are actually spending cuts, rather than tax increases, even though they formally show up in budgetary computations as increasing income tax revenues. Then a "balanced" approach in which both tax increases and spending cuts are being used to address the long-term fiscal situation should count this on the spending side, not the revenue side. So base-broadening, by Biggs' own logic, does not mean that the "tax" side has been adequately addressed and thus that tax rates shouldn't or needn't go up.
Note also that, as an economic matter, higher rates and a broader base are complements, not substitutes. The overall efficiency cost of raising the tax rate may decline when the tax is less avoidable because the base has been broadened.
As I noted in a recent blog post, Speaker Boehner at least arguably suggested this Since that time, Glenn Hubbard has said something favorable about it, and most recently Andrew Biggs, at the American Enterprise Institute, posted this item, entitled "All tax increases are not created equal." And of course the Romney campaign dipped a toe in these waters, so long as one disregards its associated call for reducing tax rates.
Biggs expressly rejects the Grover Norquist line against allowing tax preference repeal to increase income tax revenues, on the ground that the items he would target are best viewed as spending, in line with tax expenditure analysis. Indeed, he argues that, for this reason, Democrats rather than Republicans (once freed from the Norquist pledge) are the ones likely to be opposed to increasing revenues by these means.
While both endorsing and welcoming most of what Biggs says, let me offer a couple of quibbles regarding the following passage, in which he distinguishes deduction cutbacks from marginal rate increases. After noting that tax rate increases induce substitution away from earning taxable income, he argues that deduction cutbacks instead have "what economists call an 'income effect' — people would have less after-tax income, and on average people would work more in order to make up the loss. But the amount they pay on each additional dollar of earnings — their marginal tax rate — stays the same, meaning that the tax change hasn't created any disincentive for them to decrease their work effort. While raising marginal rates would likely hurt economic growth, reducing tax deductions would likely increase it, at least by a modest amount."
(Small side comment: This is not the right time to try to induce people to work harder via the income effect, if we have ongoing high unemployment due to inadequate demand. But this goes to the point that austerity by any means ought to wait a couple for years, or for the definite arrival of improved conditions, before being implemented.)
Returning to Biggs' argument above, I think he over-draws the distinction between raising rates and thus getting substitution effects, and reducing tax preferences and thus ostensibly getting just income effects. Suppose I am considering working more AND using some of the extra income to buy a bigger house. Then, under present law, I may anticipate home mortgage interest deductions that lower the marginal rate at the boundary I am actually considering. So base-broadening actually can have substitution effects away from earning income, in addition to those (which we may want) away from choosing tax-favored assets or consumption.
In addition, if (although he does not propose this) there is any sort of income-related phase-in for tax preference disallowance, that could in effect be a shadow higher marginal rate.
The Romney deduction ceiling approach does not have the latter of these two adverse substitution effects if the dollar ceiling is the same for everyone. But it could have the former, if increasing my income would make me more likely run into the ceiling. So things are a bit more mixed and complicated, but that is not to dispute Biggs' basic point.
One last point I'd add is the following. Suppose we agree with Biggs, me, and the Democrats who take a pro-tax expenditure view that the changes he advocates are actually spending cuts, rather than tax increases, even though they formally show up in budgetary computations as increasing income tax revenues. Then a "balanced" approach in which both tax increases and spending cuts are being used to address the long-term fiscal situation should count this on the spending side, not the revenue side. So base-broadening, by Biggs' own logic, does not mean that the "tax" side has been adequately addressed and thus that tax rates shouldn't or needn't go up.
Note also that, as an economic matter, higher rates and a broader base are complements, not substitutes. The overall efficiency cost of raising the tax rate may decline when the tax is less avoidable because the base has been broadened.
Sunday, November 11, 2012
Election reform
It's not going to happen, but we could really use a reform process in this country with regard to how elections are conducted.
An obvious point is voting rights and the convenience of voting. I gather that every genuinely democratic country in the world, except for us, has independent, respected, apolitical voting commissions that control registration, the allocation of voting machines, and everything else about the process to make sure that it is done fairly.
We don't, and, in consequence, we are just asking for huge problems. Imagine if the election had been much closer, and if minorities had responded with less massive outrage to the organized national efforts to disenfranchise them, and if it had all come down to a few thousand contested ballots in Ohio and Florida against the background of huge lines of voters in Democratic areas who had gone home because their areas were under-served.
Early voting aside, there's no reason not to have at least a 24-hour long uniform national election time when voting is open everywhere. I also think voting should be mandatory, with a fine for not voting or something like a refundable tax credit for having done so.
Republicans don't want voting to be easier, of course, but I'm not always convinced that the Democrats do either. By definition, if you are an incumbent, things are working out OK for you, and risking change of some kind by dramatically expanding the effective franchise is potentially disruptive.
Another issue is gerrymandering. The Democrats won more House votes than the Republicans, yet are well in the minority in the House of Representatives because the Republicans, by winning so many state houses in 2010, were able to lock themselves in (until 2020) so pervasively, wasting Democratic votes by giving the Dem districts overly large majorities. Here again, of course, there is a tendency for incumbents on both sides to like the process.
I read extensively in the legal and political science literature on gerrymandering about 20 years ago. At the time, the consensus seemed to be:
(a) it's not as bad a problem as people think, because doing it well is a bit tricky. For example, if you try to win everywhere by 51-49, then you risk losing everywhere in a wave election,
(b) we can't just hand the problem to computers, because how to draw districts is an inherently and properly political question. For example, might we want to keep true neighborhoods together? Should we try to ensure some minority representation? Etcetera.
While I'm no longer current on this literature, I gather that there's been a sea change in the intervening time, simply because the ability to engage in precision gerrymandering has grown so enormously for technological reasons. So the wisdom I described above, especially (a), is no longer persuasive, if it ever was. And so far as (b) is concerned, one can feed the computers loose criteria in designing congressional districts, without permitting them to be politically tailored as they are today.
Political reforms that address the voting process, people's ability to vote, and Congressional district design are too important not to get attention along with the question of campaign finance reform (on which the Supreme Court's current stance remains ludicrous and extremely dangerous even in the aftermath of 2012's big money misfires).
An obvious point is voting rights and the convenience of voting. I gather that every genuinely democratic country in the world, except for us, has independent, respected, apolitical voting commissions that control registration, the allocation of voting machines, and everything else about the process to make sure that it is done fairly.
We don't, and, in consequence, we are just asking for huge problems. Imagine if the election had been much closer, and if minorities had responded with less massive outrage to the organized national efforts to disenfranchise them, and if it had all come down to a few thousand contested ballots in Ohio and Florida against the background of huge lines of voters in Democratic areas who had gone home because their areas were under-served.
Early voting aside, there's no reason not to have at least a 24-hour long uniform national election time when voting is open everywhere. I also think voting should be mandatory, with a fine for not voting or something like a refundable tax credit for having done so.
Republicans don't want voting to be easier, of course, but I'm not always convinced that the Democrats do either. By definition, if you are an incumbent, things are working out OK for you, and risking change of some kind by dramatically expanding the effective franchise is potentially disruptive.
Another issue is gerrymandering. The Democrats won more House votes than the Republicans, yet are well in the minority in the House of Representatives because the Republicans, by winning so many state houses in 2010, were able to lock themselves in (until 2020) so pervasively, wasting Democratic votes by giving the Dem districts overly large majorities. Here again, of course, there is a tendency for incumbents on both sides to like the process.
I read extensively in the legal and political science literature on gerrymandering about 20 years ago. At the time, the consensus seemed to be:
(a) it's not as bad a problem as people think, because doing it well is a bit tricky. For example, if you try to win everywhere by 51-49, then you risk losing everywhere in a wave election,
(b) we can't just hand the problem to computers, because how to draw districts is an inherently and properly political question. For example, might we want to keep true neighborhoods together? Should we try to ensure some minority representation? Etcetera.
While I'm no longer current on this literature, I gather that there's been a sea change in the intervening time, simply because the ability to engage in precision gerrymandering has grown so enormously for technological reasons. So the wisdom I described above, especially (a), is no longer persuasive, if it ever was. And so far as (b) is concerned, one can feed the computers loose criteria in designing congressional districts, without permitting them to be politically tailored as they are today.
Political reforms that address the voting process, people's ability to vote, and Congressional district design are too important not to get attention along with the question of campaign finance reform (on which the Supreme Court's current stance remains ludicrous and extremely dangerous even in the aftermath of 2012's big money misfires).
Friday, November 09, 2012
Just because you're rich doesn't mean you're smart
One of the most astounding things I've read about the election, in its aftermath, was this CBS article, reporting that the Romney campaign, as well as Romney himself and Paul Ryan, were serenely confident, verging on certain, of winning the election. This gives me an amusing mental picture of Romney as Mister Magoo, heading for his own personal (not fiscal) cliff with complete unawareness of the fate that was actually awaiting him.
The underlying issue was the "skewing" or "unskewing" phenomenon that has gotten much attention on-line. Most of the pollsters' likely voters models showed, say, 6 or 7 percent more self-described Democrats than Republicans. This was partly about whether some Tea Party Republican types had started self-reporting as independents out of unease about their party but were still likely to vote Republican, and mostly about demographics, and in particular whether there would be a 2008-style electorate or a 2004 and 2010-style electorate at the polls on November 6. Obviously, underlying demographic trends provided some support for expecting 2008-plus, but there was a line of argument about how poor and young and minority people don't vote as much, etcetera, that could lead to 2004 / 2010-style. So it's not inherently a question as to which the answer just had to be one way or the other.
But here's where the amazing stupidity sets in. A lot of expert pollsters were thinking about this issue and dealing with it in one way or another. The Nate Silver approach reflected assuming that on average these experts, who were researching it seriously and had credibility stakes in getting it right, might get it about right rather than erring systematically in one direction or the other. It's a bit like the efficient market hypothesis (the weak version, holding that, even if the market isn't omniscient, I know I'm not smarter than it is).
But the Mister Magoo-style clowns who were running the Romney campaign - the leader of whom was named Mitt Romney - serenely decided: Oh no, we don't need to worry about that. We know better than everyone else, and don't need to concern ourselves with what the experts think. We just know that we will have a 2010-style electorate. So what if an avalanche of empirical data, produced under a range of assumptions, shows that we are 90% likely to lose? We know that we are 100% likely to win, because we just know what electorate we'll have (the one we want), we just know that independents will break for us (even though this had been empirically refuted prior to the election), etcetera.
So they went to Pennsylvania in the final days, not as a desperate throw of the dice, but to make the tide they saw coming even greater. And Romney rope-a-doped the last debate not just to make himself an Etch-a-Sketch moderate, but also because, why take any chances on blowing it when you're sitting on a sure thing?
What sort of a person would make this mistake when he has every reason of self-interest to try to get it right? (OK, it's true that boosting your own confidence may help you perform well at the end - but you do need to make strategic and tactical choices, and also to set up your own expectations appropriately.)
Being smug, arrogant, and entitled will certainly help you to get this wrong. And having, as I suspect Romney does, a belief that worldly success mirrors personal desert, and that because you are so deserving of course you will get everything you want, helps as well.
But it also helps, in making this mistake, to be a stupid person. As in: Not bright. Not astute. Not thoughtful. Not mentally flexible.
I have never, when hearing Romney speak, or in reading what he said, had the thought: This is an intelligent person talking. You don't have to agree with someone in order to view them as intelligent. No liberal ever questioned Richard Nixon's intelligence. Few conservatives have ever doubted Bill Clinton's. But even when Romney is not uttering deliberately lame and simplistic talking points (as a strategy choice), to me, he has just always sounded stupid, simplistic, and ignorant. (Including, of course, in his infamous "47 percent" talk.) How can you be in public life for almost 20 years and still appear to know so little about both domestic and foreign policy? (Paul Ryan, by contrast, certainly knows how to discuss the issues in his areas, and only sounded similarly out of his depth when discussing foreign policy, which he obviously hasn't studied.)
OK, but there's always the response: If Romney isn't smart, how did he get so rich at Bain? (The flip side of the old gibe that academics may ask themselves late at night: "If you're so smart, why aren't you rich?")
The answer, I think, is that even a monkey could have made money in the way that Bain did, at the time Romney was there In an era of easy credit and rising asset prices, you can't lose by buying a bunch of businesses, leveraging them to the hilt, squeezing out of a lot of cash, and then either selling or defaulting. It's just like the idiots who made money for a while by playing games with subprime loans, and who couldn't lose so long as home equity values kept increasing.
In the private equity world, there certainly are a lot of people who got rich because they were smart. But they actually had to do clever things, such as picking winners (which Bain stopped doing early on, because they decided, no doubt with good reason, that it was too hard).
Imagine having such a man as president - and making, for example, tough foreign policy calls. It would be a chilling thought even if one believes, as I do not, that he would have acted in good faith rather than purely with an eye to personal (and mainly short-term) political advantage.
The underlying issue was the "skewing" or "unskewing" phenomenon that has gotten much attention on-line. Most of the pollsters' likely voters models showed, say, 6 or 7 percent more self-described Democrats than Republicans. This was partly about whether some Tea Party Republican types had started self-reporting as independents out of unease about their party but were still likely to vote Republican, and mostly about demographics, and in particular whether there would be a 2008-style electorate or a 2004 and 2010-style electorate at the polls on November 6. Obviously, underlying demographic trends provided some support for expecting 2008-plus, but there was a line of argument about how poor and young and minority people don't vote as much, etcetera, that could lead to 2004 / 2010-style. So it's not inherently a question as to which the answer just had to be one way or the other.
But here's where the amazing stupidity sets in. A lot of expert pollsters were thinking about this issue and dealing with it in one way or another. The Nate Silver approach reflected assuming that on average these experts, who were researching it seriously and had credibility stakes in getting it right, might get it about right rather than erring systematically in one direction or the other. It's a bit like the efficient market hypothesis (the weak version, holding that, even if the market isn't omniscient, I know I'm not smarter than it is).
But the Mister Magoo-style clowns who were running the Romney campaign - the leader of whom was named Mitt Romney - serenely decided: Oh no, we don't need to worry about that. We know better than everyone else, and don't need to concern ourselves with what the experts think. We just know that we will have a 2010-style electorate. So what if an avalanche of empirical data, produced under a range of assumptions, shows that we are 90% likely to lose? We know that we are 100% likely to win, because we just know what electorate we'll have (the one we want), we just know that independents will break for us (even though this had been empirically refuted prior to the election), etcetera.
So they went to Pennsylvania in the final days, not as a desperate throw of the dice, but to make the tide they saw coming even greater. And Romney rope-a-doped the last debate not just to make himself an Etch-a-Sketch moderate, but also because, why take any chances on blowing it when you're sitting on a sure thing?
What sort of a person would make this mistake when he has every reason of self-interest to try to get it right? (OK, it's true that boosting your own confidence may help you perform well at the end - but you do need to make strategic and tactical choices, and also to set up your own expectations appropriately.)
Being smug, arrogant, and entitled will certainly help you to get this wrong. And having, as I suspect Romney does, a belief that worldly success mirrors personal desert, and that because you are so deserving of course you will get everything you want, helps as well.
But it also helps, in making this mistake, to be a stupid person. As in: Not bright. Not astute. Not thoughtful. Not mentally flexible.
I have never, when hearing Romney speak, or in reading what he said, had the thought: This is an intelligent person talking. You don't have to agree with someone in order to view them as intelligent. No liberal ever questioned Richard Nixon's intelligence. Few conservatives have ever doubted Bill Clinton's. But even when Romney is not uttering deliberately lame and simplistic talking points (as a strategy choice), to me, he has just always sounded stupid, simplistic, and ignorant. (Including, of course, in his infamous "47 percent" talk.) How can you be in public life for almost 20 years and still appear to know so little about both domestic and foreign policy? (Paul Ryan, by contrast, certainly knows how to discuss the issues in his areas, and only sounded similarly out of his depth when discussing foreign policy, which he obviously hasn't studied.)
OK, but there's always the response: If Romney isn't smart, how did he get so rich at Bain? (The flip side of the old gibe that academics may ask themselves late at night: "If you're so smart, why aren't you rich?")
The answer, I think, is that even a monkey could have made money in the way that Bain did, at the time Romney was there In an era of easy credit and rising asset prices, you can't lose by buying a bunch of businesses, leveraging them to the hilt, squeezing out of a lot of cash, and then either selling or defaulting. It's just like the idiots who made money for a while by playing games with subprime loans, and who couldn't lose so long as home equity values kept increasing.
In the private equity world, there certainly are a lot of people who got rich because they were smart. But they actually had to do clever things, such as picking winners (which Bain stopped doing early on, because they decided, no doubt with good reason, that it was too hard).
Imagine having such a man as president - and making, for example, tough foreign policy calls. It would be a chilling thought even if one believes, as I do not, that he would have acted in good faith rather than purely with an eye to personal (and mainly short-term) political advantage.
Wednesday, November 07, 2012
Boehner on the possible terms for a fiscal cliff deal
In his post-election press conference today, Speaker Boehner seemingly drew a line in the sand that actually may not be much of a line, and indeed this might be deliberate. He said he would support new revenues in exchange for spending and entitlements cuts, but not higher tax rates on top earners.
The potentially interesting thing about this is that there are tax rate hikes that don't quite expressly look like tax rate hikes. Consider "PEP and "Pease" under current law - the phaseout of personal exemptions and itemized deductions that are actually best thought of as temporary higher rates for upper income individuals that at some point expire. So the actual effective marginal rate temporarily exceeds the statutory marginal rate, but then the two come back together once the phase-out is done.
PEP and Pease have currently been repealed for the years 2010-2012, but are scheduled to come back next year. But Boehner would surely have to give up more than just accepting PEP and Pease in order to make a larger deal - assuming (as remains unclear) that he and his caucus have any actual interest in doing so.
Most tax policy types don't like the PEP-Pease approach for its lack of transparency. But one who was willing to accept higher marginal rates so long as they were called something else might regard this as a good thing.
Plus, insofar as any new PEP or Pease-style marginal rate increases do indeed expire at some point, the people at the very top of the income distribution (the Sheldon Adelmans of the world), whom I would assume are dearest of all to Boehner's and his allies' hearts, would get the benefit of having their effective marginal rates revert at some point back to 35%. So the not-quite-as-rich would be hit, in a comparative (though not an overall dollars) sense harder than the extremely rich. There are also, by the way, economic efficiency arguments for having the rate decline at the top, which I suppose could be phrased in terms of "job creators.".
Anyway, there is potentially interesting movement here, though I doubt that it will end up amounting to anything.
The potentially interesting thing about this is that there are tax rate hikes that don't quite expressly look like tax rate hikes. Consider "PEP and "Pease" under current law - the phaseout of personal exemptions and itemized deductions that are actually best thought of as temporary higher rates for upper income individuals that at some point expire. So the actual effective marginal rate temporarily exceeds the statutory marginal rate, but then the two come back together once the phase-out is done.
PEP and Pease have currently been repealed for the years 2010-2012, but are scheduled to come back next year. But Boehner would surely have to give up more than just accepting PEP and Pease in order to make a larger deal - assuming (as remains unclear) that he and his caucus have any actual interest in doing so.
Most tax policy types don't like the PEP-Pease approach for its lack of transparency. But one who was willing to accept higher marginal rates so long as they were called something else might regard this as a good thing.
Plus, insofar as any new PEP or Pease-style marginal rate increases do indeed expire at some point, the people at the very top of the income distribution (the Sheldon Adelmans of the world), whom I would assume are dearest of all to Boehner's and his allies' hearts, would get the benefit of having their effective marginal rates revert at some point back to 35%. So the not-quite-as-rich would be hit, in a comparative (though not an overall dollars) sense harder than the extremely rich. There are also, by the way, economic efficiency arguments for having the rate decline at the top, which I suppose could be phrased in terms of "job creators.".
Anyway, there is potentially interesting movement here, though I doubt that it will end up amounting to anything.
Tuesday, November 06, 2012
Obama wins reelection
I'm certainly relieved by this outcome. I didn't consider Romney an even minimally honest or trustworthy human being, and the Republicans are not ready to govern. Through 1992, they were (whether one always or even usually agreed with them or not). But then something went badly wrong, having both internal institutional and broader sociological dimensions, and it has just kept on getting worse.
The Republicans are going to have to return to their senses at some point in order for the United States to be governable, but I don't think there's much chance of this happening right away. Even 2016 seems a bit soon. Perhaps by 2020?
One odd feature here is that the perverse internal forces that make the Republicans so unsuited for the exercise of political power can also make it harder for them to win elections. (Think tea party Senate candidates, going to such lengths offend Hispanics, continually banging the drums of war, and making the all-too-pliable Romney adopt far-right tax and regulatory positions.) All this reflects serious incentive problems inside the Republican Party. What's good for various actors in the party, from Fox News on down, often is bad for the party as a whole. Not sure what the solution is, and it's important for all of our sake that they eventually solve it.
The Republicans are going to have to return to their senses at some point in order for the United States to be governable, but I don't think there's much chance of this happening right away. Even 2016 seems a bit soon. Perhaps by 2020?
One odd feature here is that the perverse internal forces that make the Republicans so unsuited for the exercise of political power can also make it harder for them to win elections. (Think tea party Senate candidates, going to such lengths offend Hispanics, continually banging the drums of war, and making the all-too-pliable Romney adopt far-right tax and regulatory positions.) All this reflects serious incentive problems inside the Republican Party. What's good for various actors in the party, from Fox News on down, often is bad for the party as a whole. Not sure what the solution is, and it's important for all of our sake that they eventually solve it.
One last time on Romney's taxes
Huffington has a blog post today with the perhaps too-hopeful title, "Mitt Romney Haunted By Missing Tax Returns As Campaign Draws To Close."
Not to play favorites with regard to the people quoted, since all of them made valuable contributions, but Ed Kleinbard made the point that "Romney's refusal during his campaign to release his past tax returns betrayed a contempt for the electorate and for the democratic process, which relies on voters having the requisite information to make informed decisions."
George Will noted that the returns Romney didn't disclose must have been pretty bad for Romney to prefer the heat from non-disclosure.
Calvin Johnson is cited for his recent article suggesting that Romney illegally undervalued his investments in order to dodge taxes on two enormous trust funds. This behavior was definitely in penalty territory, and conceivably in fraud territory.
Thomas Krouse is quoted as saying; "This garbage is finally floating to the surface where it can be seen in the light of day... No matter who wins this election -- how is this going to be stopped? It must be stopped ... With the speed of paperwork, you can bleed America dry through tax evasion practically overnight."
I am quoted as saying that the most interesting thing we saw on the 2010 tax return (prepared in the knowledge that it would be disclosed) "the vast array of offshore investment vehicles that plainly reflected a lot of aggressive tax planning" - and this, in what was likely a non-representative year.
Although it didn't make it into the final piece, the reporters asked me what I would have liked to see the most from Romney's undisclosed tax returns. I answered:
(1) His adjusted gross income and tax actually paid for the earlier years. By merely disclosing effective rates (defined as tax paid / AGI), Romney managed to hide from public view the question of how much he used tax planning to have low AGI to begin with. I would guess that, in many or most of the undisclosed years, this man with a net worth in excess of $250 million had less AGI, and paid less federal income tax, than the typical senior law firm associate in a big city.
(2) Of even greater interest would be any information revealing how he valued stock that he contributed to his IRA or transferred to his children through trusts. My guess, from the numbers that we know, is that he missed providing honest and accurate values by a factor of at least one thousand percent.
Not to play favorites with regard to the people quoted, since all of them made valuable contributions, but Ed Kleinbard made the point that "Romney's refusal during his campaign to release his past tax returns betrayed a contempt for the electorate and for the democratic process, which relies on voters having the requisite information to make informed decisions."
George Will noted that the returns Romney didn't disclose must have been pretty bad for Romney to prefer the heat from non-disclosure.
Calvin Johnson is cited for his recent article suggesting that Romney illegally undervalued his investments in order to dodge taxes on two enormous trust funds. This behavior was definitely in penalty territory, and conceivably in fraud territory.
Thomas Krouse is quoted as saying; "This garbage is finally floating to the surface where it can be seen in the light of day... No matter who wins this election -- how is this going to be stopped? It must be stopped ... With the speed of paperwork, you can bleed America dry through tax evasion practically overnight."
I am quoted as saying that the most interesting thing we saw on the 2010 tax return (prepared in the knowledge that it would be disclosed) "the vast array of offshore investment vehicles that plainly reflected a lot of aggressive tax planning" - and this, in what was likely a non-representative year.
Although it didn't make it into the final piece, the reporters asked me what I would have liked to see the most from Romney's undisclosed tax returns. I answered:
(1) His adjusted gross income and tax actually paid for the earlier years. By merely disclosing effective rates (defined as tax paid / AGI), Romney managed to hide from public view the question of how much he used tax planning to have low AGI to begin with. I would guess that, in many or most of the undisclosed years, this man with a net worth in excess of $250 million had less AGI, and paid less federal income tax, than the typical senior law firm associate in a big city.
(2) Of even greater interest would be any information revealing how he valued stock that he contributed to his IRA or transferred to his children through trusts. My guess, from the numbers that we know, is that he missed providing honest and accurate values by a factor of at least one thousand percent.
Monday, November 05, 2012
That beauty sleep appears to be working
Not everyone in my household is on edge either about the election, or about last week's hurricane and blackout along with this week's approaching Nor'easter.
The International Tax Review picks me as one of the "Global Tax 50"
The International Tax Review has picked me as one of the "Global Tax 50, the individuals and organizations we believe have made a substantial impact on tax practice and administration in the last twelve months."
The link is here. Scroll down a bit and you will see my entry, four below Paul Ryan and two below Nicolas Sarkozy, as well as one above Lee Sheppard.
UPDATE: This is of course alphabetical, not a ranking. It's possible that by Wednesday my tax policy influence will clearly exceed Paul Ryan's (then again, the opposite is very possible as well). But I would never presume to think that my influence rivals Lee's.
The link is here. Scroll down a bit and you will see my entry, four below Paul Ryan and two below Nicolas Sarkozy, as well as one above Lee Sheppard.
UPDATE: This is of course alphabetical, not a ranking. It's possible that by Wednesday my tax policy influence will clearly exceed Paul Ryan's (then again, the opposite is very possible as well). But I would never presume to think that my influence rivals Lee's.
Ironictimes.com
Long a favorite quick Monday read, the Ironic Times shows (like Jon Stewart, Stephen Colbert, the Onion, etc.) that these days satire can get deeper into the truth than straight reporting.
Some examples from today's issue:
CANDIDATES MAKE LAST PUSH IN FINAL DAYS OF CAMPAIGN - Obama urges his supporters to get out and vote; Romney urges his supporters to get out and stop them.
Most Foreign Countries Want Obama to Win - Only Switzerland, the Bahamas and the Cayman Islands rooting for Romney.
Bush's FEMA Director, Michael Brown, Criticizes Obama for Responding to Sandy Too Quickly - Should have waited until people were drowning in the streets.
Republicans Kill Nonpartisan Congressional Report on Benefit of Tax Cuts for Rich - As a result we'll never know whether giving millionaires huge tax cuts helps the rest of us.
Fact-Checkers Chastise Both Sides in Final Days - Romney claim Chrysler, GM sending jobs to China deemed false; Obama claim oldest daughter now 5' 9" deemed off by 1/4".
Report: Apple Paying Less Than 2% in Taxes on Foreign Earnings - But what taxes they do pay considerably more elegant, sleek and desirable than those of their competitors.
Some examples from today's issue:
CANDIDATES MAKE LAST PUSH IN FINAL DAYS OF CAMPAIGN - Obama urges his supporters to get out and vote; Romney urges his supporters to get out and stop them.
Most Foreign Countries Want Obama to Win - Only Switzerland, the Bahamas and the Cayman Islands rooting for Romney.
Bush's FEMA Director, Michael Brown, Criticizes Obama for Responding to Sandy Too Quickly - Should have waited until people were drowning in the streets.
Republicans Kill Nonpartisan Congressional Report on Benefit of Tax Cuts for Rich - As a result we'll never know whether giving millionaires huge tax cuts helps the rest of us.
Fact-Checkers Chastise Both Sides in Final Days - Romney claim Chrysler, GM sending jobs to China deemed false; Obama claim oldest daughter now 5' 9" deemed off by 1/4".
Report: Apple Paying Less Than 2% in Taxes on Foreign Earnings - But what taxes they do pay considerably more elegant, sleek and desirable than those of their competitors.
Saturday, November 03, 2012
104 hours mostly in the dark
Well, that was certainly interesting.
Here in lower Manhattan, Hurricane Sandy was an incredible non-event in terms of rain. On the other hand, the winds took down a large part of a tree that might have smashed through our house if it had fallen in a different direction. And then, obviously, there was the real problem, the degree of the ocean's surge, which apparently took Con Edison by surprise.
We had some flickering on Monday as the storm winds were peaking and it was getting towards high tide, but somehow (from the experience of Hurricane Irene and a bit of native optimism) I figured we would be OK. Then, at 8:30 pm that night, kaboom, all the lights went out. We only learned the next day (by walking around town and talking to people) about the gigantic explosion of the 14th Street power plant by the East River.
Then no power, with dropping temperatures in our house (though it never got below 60) and ever-less-fresh milk in the darkened fridge, until last night, at 4:25 am, we got our power back, almost 104 hours after it had gone out.
Since we had running water, and indeed even hot water, the biggest problem was the evenings, which weren't a lot of fun even though we had an array of flashlights and candles. That plus the lack of phone access even via iPhone, since AT&T was dead in most of the Dead Zone. I was spending the days at my office, which had limited power, and having a fairly good time working (as mentioned in an earlier post) on a new article that looks back at the very interesting Henry Simons. The office was also where I could get on the Internet, find out what was happening, and recharge electrical devices.
Walking north past the Dead Zone for dinner was fun, and several enterprising Dead Zone restaurants were operating with limited menus, via candlelight plus gas stoves or ovens. Cash only and no beer unless you're British and like it warm, but it had a certain festive quality. The trick was not to get back home too early. Last night I handled this by going on Stub Hub and getting tickets to the New York Knicks' season opener, which turned out to be a rousing 20-point win over the Miami Heat (with plenty of boos from the crowd for LeBron James - though by now there doesn't seem to be much animus behind it; it's just what we do - and also for Ray Allen).
Something tells me this isn't the last time something like this will be happening around here.
Here in lower Manhattan, Hurricane Sandy was an incredible non-event in terms of rain. On the other hand, the winds took down a large part of a tree that might have smashed through our house if it had fallen in a different direction. And then, obviously, there was the real problem, the degree of the ocean's surge, which apparently took Con Edison by surprise.
We had some flickering on Monday as the storm winds were peaking and it was getting towards high tide, but somehow (from the experience of Hurricane Irene and a bit of native optimism) I figured we would be OK. Then, at 8:30 pm that night, kaboom, all the lights went out. We only learned the next day (by walking around town and talking to people) about the gigantic explosion of the 14th Street power plant by the East River.
Then no power, with dropping temperatures in our house (though it never got below 60) and ever-less-fresh milk in the darkened fridge, until last night, at 4:25 am, we got our power back, almost 104 hours after it had gone out.
Since we had running water, and indeed even hot water, the biggest problem was the evenings, which weren't a lot of fun even though we had an array of flashlights and candles. That plus the lack of phone access even via iPhone, since AT&T was dead in most of the Dead Zone. I was spending the days at my office, which had limited power, and having a fairly good time working (as mentioned in an earlier post) on a new article that looks back at the very interesting Henry Simons. The office was also where I could get on the Internet, find out what was happening, and recharge electrical devices.
Walking north past the Dead Zone for dinner was fun, and several enterprising Dead Zone restaurants were operating with limited menus, via candlelight plus gas stoves or ovens. Cash only and no beer unless you're British and like it warm, but it had a certain festive quality. The trick was not to get back home too early. Last night I handled this by going on Stub Hub and getting tickets to the New York Knicks' season opener, which turned out to be a rousing 20-point win over the Miami Heat (with plenty of boos from the crowd for LeBron James - though by now there doesn't seem to be much animus behind it; it's just what we do - and also for Ray Allen).
Something tells me this isn't the last time something like this will be happening around here.
Thursday, November 01, 2012
Fun times in lower Manhattan during the blackout
As evening approaches, the thing to do is head north on the avenue of your choice. First sign that you are leaving the Dead Zone: at some point (about 16th St if you are on 7th Avenue) iPhones start to work for calling, texting, and e-mail. Keep going, and within a few blocks (25th St on 7th) you will see that building lights and all the traffic lights are on. Stay up in the lighted neighborhoods for a while. Shop for any essentials that aren't sold out, have dinner, and, when you must, you trudge back south to the Dead Zone for home and sleep. (Cabs are available, but what's the hurry?)
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