Kitten update

Here's a recent photo of our 5-month-old kittens, Gary and Sylvester.  Sorry for the low quality here from my iPhone, probably the lighting's fault as well as mine.  That of course is a string hanging over the edge that they like to swat and pull at - it isn't Gary's tail.

They can be hard to photograph well, despite their being almost ridiculously adorable, because, when they're not sleeping, it's a bit like trying to photograph a whirlwind.  Like the drummer in Spinal Tap, they believe in having a good time ALL THE TIME.  And like the Steve Martin character's former girlfriend in Dead Men Don't Wear Plaid, the word "No" isn't in their vocabulary.

While caught in a subway delay the other day, I was trying to think of what would be the LEAST apt or applicable adjectives that one could possibly come up with to describe these little fellas. The best (i.e., worst) descriptors that occurred to me included: corrupt, jaded, cynical, languid,and blasé.  Further suggestions welcome.

Death of Robert Bork

I am sorry to hear of the death of Robert Bork.  He taught one of the few law school courses that I actually found memorable, when I was a Yale law student back in the day.  The class was Antitrust, in which he had written a notable book called The Antitrust Paradox.

This was a lucid and influential exposition of what one might call the modern Chicago approach to antititrust, committed to economic efficiency (as opposed to, say, protecting small producers) and very skeptical of then-prevailing judicially activist antitrust doctrines.  In addition to presenting powerful economic arguments for the Chicago view, I recall that it also discussed the enactment of the Sherman Antitrust Act of 1890.  Here, candor compels me to say that its historical argument - that consumer welfare and economic efficiency were in fact the dominating policy aims of the Sherman Act - is probably not credible, but it would be nice if it had been true (as those are the aims that I agree with Bork in wanting antitrust law to advance).

Bork's class was memorable due to his clear exposition of the case for the Chicago approach and his entertaining combativeness.  At that point, the Chicago view had not yet swept the U.S. academic and legal worlds as it soon would, although there were already people around (such as me) who were predisposed to give it favorable consideration.  So the class included a small group of liberal law students, not incredibly well-versed in basic economic reasoning, who would try to debate him.  I well remember, at the end of the first class, one such student coming up to him and saying something like: "Can I make an appointment to meet you in your office?  I'm pretty sure that I can persuade you that you are wrong."

Good luck with that, I would have said to myself if the phrase had been current at the time.  But I was amused, and less than sanguine about this student's chances of success.  Unfortunately, I never got to hear the upshot.

The last time I saw Bork was probably at a Yale Law School cocktail party for students and professors, in the courtyard a few days before I graduated.  I went up to him to say how much I had enjoyed the class.  He did not particularly know me, as it had been a large class, and I didn't get the sense that he particularly wanted to speak to me, but no matter.

It was sad to see him get embittered in later years.  These things can happen in the public eye, unless you have a very thick skin.

Social Security and chained CPI (wonky rather than argumentative discussion)

Leaks from the fiscal cliff negotiations have been focusing a lot of attention on the proposal to cut future Social Security benefits, relative to their projected nominal growth rate under current policy, by basing their annual increase on "chained CPI," rather than the currently used version of the consumer price index.  Chained CPI grows more slowly because it assumes that consumers respond to changing relative price levels by shifting their consumption from more expensive goods to cheaper ones.  For example, if the price of beef rises relative to that for chicken, people respond by buying less beef and more chicken, so their expenditure levels don't rise as much as if they kept the proportions constant as prices rose differentially.  Chained CPI takes this into account, in such a way as to produce lower annual rises in the CPI measure.

Though this might require a longer discussion than I have time or space for here, the underlying question has a lot to do with assumptions about people's utility that we cannot easily test.  For example, the effect on my utility of the above relative price shift between beef and chicken depends on how I value each of them.  In effect, what is my consumer surplus from each, per unit of consumption, at different price levels.

While this may sound abstruse, there are good reasons why we might wish we knew the answer.  Suppose I am going to buy a fixed real-life annuity, but I can opt for using either regular CPI or chained CPI.  Obviously, in an arm's length transaction with the annuity company in which I have $X to spend, the advantage to me of picking chained CPI is that I would get to start with a higher annual benefit.

Social Security in effect hands retirees a fixed real life annuity.  The rationale for this is that people might otherwise under-save for retirement (or late retirement), so we give them a minimum "forced saving" level that is the same for all periods, reflecting that consumption often is separate between periods but has declining marginal utility in each period.  (E.g., better one dinner tonight and one in a year, than two dinners on one of the two nights and zero on the other.)

So there is a constant-benefit-level comparison to be made, as between CPI and chained CPI real life annuities that have the same present value because the latter starts higher.

In the case of Social Security, then, there are two distinct questions to ask.  The first is whether benefits should be cut relative to current law, while the second is whether a chained CPI methodology does better than the existing one in keeping the marginal value of the last dollar of consumption that you can fund through your Social Security benefits the same as between periods.

Hence, the question of whether the nominal growth rate of Social Security benefits should be pegged to chained CPI rather than regular CPI is distinct from that of whether benefits should be cut.  For example, suppose chained CPI is the better measure but that benefit levels ought to be raised, all things considered.  Then the correct response would be to switch to chained CPI and over-correct for the year one benefit increase that would make this budgetarily neutral.  (As I think about this, the actual optimal policy problem is more complicated still - for example, one may want to distinguish between age cohorts in measuring what would be a present value-neutral change.)

An underlying problem, of course, is that, since the underlying issue pertains to utility, there really is no extremely robust right answer even to the pure analytical question of how CPI ought to be computed.  For example, my CPI may differ from yours, since my market basket is different (even at the same income level) reflecting differences between our utility functions.

If you are trying to figure out how inflation distinctively affects seniors, from the point of view of optimal CPI design (distinguishing this from the question of how much their benefits should rise and fall), it is pretty obvious that healthcare is a large piece of the whole - larger than it generally is for people in younger age cohorts.  With healthcare prices generally rising faster than the overall inflation rate, even (for seniors) counting out-of-pocket costs that Medicare and Medicaid don't cover, chained CPI presumably loses credibility as a "neutral" approach.  This tentatively suggests to me that, even if we want to impose Social Security benefit cuts, this may not be a great way to do it.

Another day, another article posted at SSRN

Today I posted yet another article at SSRN, this time a very short one (just 13 pages, or about 4,250 words) concerning a topic in the ongoing fiscal cliff negotiations.  Its title is "The Bucket and Buffett Approaches to Raising Taxes on High-Income U.S. Individuals," and you can download it here.

The abstract is as follows:

"In the aftermath of the 2012 U.S. presidential election, while there is increasing consensus that high-income individuals’ taxes should increase, there is considerable disagreement about how this might best be done. In particular, while some favor raising upper-bracket marginal income tax rates, others prefer an approach that I call distributionally selective base-broadening. Here the idea is to restrict or deny the benefit of various tax preferences in such a way as to target the impact of the base-broadening on high-income individuals who have such items. An inevitable byproduct of such an approach is that different individuals will in effect face different tax bases.

"This brief article, prepared for a forthcoming tax policy forum in the Canadian Tax Journal, assesses two such approaches that have received recent attention. The first is a 'bucket' approach to limiting the use of particular tax preferences, endorsed by the 2012 Romney campaign. The second is the so-called 'Buffett tax,' endorsed at one point by the Obama Administration.  It argues that, while either might conceivably be better than politically feasible alternatives, they have significant defects that should be kept in mind as well, and in some respects bring to mind the much-reviled alternative minimum tax."

Debt ceiling fight?

If the Republicans want to pivot from the Bush tax cuts to a fight over raising the debt ceiling, I think that the Obama Administration should be more than willing to let them (although perhaps it should not signal in advance just how willing).

Once a debt ceiling fight starts, I think the response is pretty simple.  Scorched-earth rhetoric (phrases such as "blackmail," "extortion," "disloyal," "sick," "perverted," and "economic treason") would not be out of place.  You don't really need to be civil with blackmailers who are threatening to set a torch to the U.S. and global economies, and to tarnish for generations the U.S. government's credit rating on world capital markets, if they don't get their way.

Then, if the Republicans pull the trigger, either the 14th amendment option and/or the platinum coin option, both of which have been discussed elsewhere, could bring the whole thing to a satisfying close.  Indeed, the main question might end up being to what extent the Republican leadership should be humiliated, rather than being offered a moderately face-saving climbdown.  It's probably best to be nice, even though they wouldn't deserve it, and that is likely to be Obama's instinct as well (perhaps even to excess).

Presidents who "stand tall" to save the U.S. from disaster generally benefit politically from doing so.  If the Republicans want to respond by impeaching Obama in the House of Representatives, that's their privilege, and they've already shown that they like doing this to second-term Democratic presidents.  As I recall, that worked out great for them in the 1998 midterm elections.  If they are hoping for low turnout in 2014, along the pattern of 2010 rather than 2008 or 2012, impeachment by the House is an excellent way for them to ensure that they will not get it.

Legally, the issues have been much discussed elsewhere, and insofar as there is any answer (although the normative criterion for devising answers to open constitutional questions is unclear), Obama's position would be highly plausible at a minimum (as I recall, especially on the "platinum coin" option, but really on both).  If the five Republicans on the Supreme Court want to unleash a global economic calamity by reaching to strike it down, I suppose they can, but that again would fall on them.

NYU Tax Policy Colloquium update

I've previously posted the speaker schedule for the NYU Tax Policy Colloquium, which I will be co-leading this winter/spring with Bill Gale, but I now have a full list of paper titles (albeit potentially, in some cases, placeholders that will change):

1. January 22 – David Kamin, NYU Law School, Are We There Yet?: On a Path to Closing America's Long-Run Deficit.

2. January 29 – Edward McCaffery, USC Law School, Bifurcation Blues: The Problems of Leaving Redistribution Aside.

3. February 5 – Jake Brooks, Georgetown Law School, Taxation, Risk, and Portfolio Choice: The Treatment of Returns to Risk Under a Normative Income Tax.

4. February 12 – Lilian Faulhaber, Boston University School of Law, Charitable Giving, Tax Expenditures, and the Fiscal Future of the European Union.

5. February 26 – Peter Diamond, MIT Economics Department, The Case for a Progressive Tax: From Basic Research to Policy Recommendations.

6. March 5 – Darien Shanske, University of California at Hastings College of Law, A Proposal for a New Property Tax Infrastructure.

7. March 12 – Dhammika Dharmapala, U. of Illinois Law School, Competitive Neutrality among Debt-Financed Multinational Firms.

8. March 26 – Sarah Lawsky, University of California at Irvine Law School, Unknown Probabilities and the Tax Law.

9. April 2 – Alan Viard, American Enterprise Institute, Progressive Consumption Taxation: The Choice of Tax Design.

10. April 9 – Brian Galle, Boston College Law School, A Nudge is a Price.

11. April 16 – Leslie Robinson, Tuck Business School, Dartmouth College, Internal Ownership Structures of Multinational Firms.

12. April 23 – Larry Bartels, Department of Political Science, Vanderbilt University, Inequality as a Political Issue in the 2012 Election.

13. April 30 – Itai Grinberg, Georgetown Law School, A Governance Structure to Mediate the Battle Over Taxing Offshore Accounts.

14. May 7 – Raj Chetty, Harvard Economics Department, Active vs. Passive Decisions and Crowd-Out in Retirement Savings Accounts: Evidence from Denmark.

All sessions will be held at NYU Law School (at a second-floor room in Vanderbilt Hall) from 4 to 6 pm on Tuesdays, are open to interested non-NYU people, and will be followed by small group dinners.

New articles posted on SSRN

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."

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.

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.

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.

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).

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.

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.

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.

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.

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.

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.

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.

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?)

Post-storm update

Life is a bit grim right now, in the aftermath of Hurricane Sandy.  Those of us below 30th Street in New York City are without electrical power in our homes, and will probably remain so for at least several days.  There are worse fates, but it is not very enjoyable.

Due to pockets of better conditions around here, I've actually been able to work a bit, although getting oneself to focus mentally is another matter.  Classes have been canceled for the entire week, and I suppose next week remains uncertain, along with the question of makeup classes.

I have, however, been able to look at and think about materials that I will be using for the next paper on my agenda, which I have committed to write for "100 Years of the Income Tax" conferences that will be held in early 2013 at Florida State Law School and USC Law School.

I had been thinking of doing some sort of "Important Early Income Tax Thinkers, Then & Now" paper, possibly looking at the likes of E.R.A. Seligman, Haig, Fisher, T.S. Adams, etcetera.  But as soon as I stuck a foot in the water, it became obvious to me that the one I am interested in writing about is Henry Simons.  This partly reflects personal connections (e.g., I feel as if I have a cross-generational mentorship link to Simons, through Walter Blum at the University of Chicago Law School), but it also reflects Simons' extraordinary combination of intellectual modernity and otherness.

So I now have both a tentative title and, more importantly, a plan of action.  "Henry Simons, Then and Now," with four main topics, each to be discussed with a presentist (more than a historical) eye to what we may learn from it all today:

(1) Simons: a different kind of libertarian

(2) Why progressive redistribution?

(3) Why an income tax?

(4) How should we design the income tax?

Each part should have a number of (at least to me) interesting and surprising features, not discovered by me, although I have my own perspective to add, but not generally well-known.

Great big sigh of relief

I have completed a first draft (except for a brief conclusion) of an article, entitled "Should Social Security and Medicare Be More Market-Based?," that I will be using as the basis for the Ann F. Baum Memorial Elder Law Lecture, which I will be delivering at the University of Illinois College of Law on March 4, 2013.

Once I've received comments from a couple of readers (and written an abstract plus the conclusion), I anticipate posting it on SSRN.

I will have to update it for the results of the presidential election, as references in the article to the Obama Administration and the Social Security and Medicare plans that were issued by Congressman Paul Ryan might need modification.  (Likewise, a Bowles-Simpson-style grand bargain after Obama won, or the repeal of existing Medicare for people under age 55 if Romney won, would need to be acknowledged and incorporated.)  But the issues will still be there in any event.

Paul Krugman on the worst case scenario if Romney wins

In a live interview at the Huffington Post, Krugman says the following:

"I think there's a real chance that he'll manage to pursue a policy in the first couple of years that simultaneously blows up the deficit and depresses the economy. Tax cuts for the rich, who won't spend them, and slash spending for the poor and the middle class, who will be forced to cut back. And so we end up managing to have a simultaneous deficit explosion and double-dip recession....

"I'm not seeing a lot of evidence that he [Romney] really does understand it [economics]. People say he's a smart guy, but it's not visible in his statements, and it's not visible in his off-the-cuff reactions either."

As we've all learned over the last 12-plus years, Krugman has a startlingly good track record when he makes predictions.  But, while I certainly share his sense of the lack of verbal evidence that Romney is intelligent or understands economics, I note that there are indications, from time to time, that Romney does indeed know about the basic Keynesian stimulative story.  And several of his economic advisors have made statements in the past suggesting that they favor fiscal stimulus (as well as more aggressive Fed policies) when there is a Republican president.

So the question is how Romney could meet his commitments to cut taxes on the rich and spending on the middle class and the poor - which I think the Republicans in Congress and the commentariat would be demanding, even if we agree that he is devoid of actual policy views beyond general plutocratic sentiment - and yet avoid a double-dip recession, which he knows would not be good for him politically.  Pushing the Fed to be more aggressive is probably not enough, given its lack of strong tools, although I am certain he would try it far more aggressively than Obama has.

One possibility is that a Democratic Senate would give him running room to simply do nothing and let the economy continue recovering slowly by itself.  But a Republican House plus Fox News would still be all over him, and he might be able to peel off a couple of conservative Democratic Senators to vote for his budget policies even if Republicans don't have the majority.  Hard to think that he wouldn't do this, despite the political virtues of having an excuse, if it is indeed possible.  He does, after all, seem to want to look effective and strong.

How else could he get out of the box?  Well, it strikes me that war with Iran (or anyone else who proves conveniently available) would certainly be one way to go about it.  This would create a scapegoat, allow stimulative spending in pursuit of the war, and perhaps inoculate him politically for a while via the rally-round-the-flag phenomenon that we commonly observe in times of foreign policy crisis.

Has Krugman therefore missed out on what is actually the worst case scenario here?

A dangerous trend?

 Here is a picture of our new kittens, Gary (the striped gray one) and Sylvester (the black-&-white).  We've had them for just over 6 weeks (they were not quite two months old when we got them), and during this time their combined body weight has increased from 2.9 pounds to 8 pounds.

Hmmm ... Say their weight triples every 7 weeks.  If this trend continues for the next 6 months, we will at some point be in deadly danger.  You wouldn't think it to look at them, though.

Inquisitive and playful little fellas, as you might imagine.

How strange

I was at a website (for the Washington Monthly), and, to my great surprise, came across an ad for this.  The next step, I suppose, is auctioning off the movie rights.

Chuck Schumer makes a good point

From an interview with Ezra Klein:

"When Republicans say the first thing you do when you do deficit reduction is reduce rates, it would be like Democrats saying the first thing you do when you do deficit reduction is provide free Medicare at age 55. We’d like to do that! But it won’t bring the deficit down. That’s for sure.

"It just makes no sense and I’m surprised so many have swallowed it for so long. If your number one goal is deficit reduction, you don’t start out by lowering the rates. You don’t need a PhD in economics to understand that."

UPDATE: Okay, it's true that lowering the rates may lessen the magnitude both of the existing distortions in the tax system, and of political incentives to create more loopholes via exclusion or deferral.  But as an economic matter (contrary to the mantra of "broaden the base, lower the rates") a broader base and a higher rate are complements, not substitutes.

The moral and political philosophy of Mitt Romney

Building on a couple of throwaway items in my last post, I am happy to report that the Mitt Romney Philosophy Project is off to a great start.

We have so far the following:

(1) Maximax: welfarist social welfare function that accords absolute priority to increasing the single best-off individual's welfare.

This term can actually be found here in the decision literature: "In decision theory,  the optimistic (aggressive) decision making rule under conditions of uncertainty.  It states that the decision maker should select the course of action whose best (maximum) gain is better than the best gain of all other courses of action possible in given circumstances."

 Sounds as plausible to me as the infinite risk aversion behind the Rawlsian maximin.

(2) Minimin: inverted welfarist social welfare function that accords absolute priority to lowering the single worst-off individual's welfare.

Alas, when I did an online search for this principle all I could find was that it is someone's nickname. 

(3) Veil of arrogance: the starting assumption that you are the richest, smartest, and worthiest person in the society being described; helps to motivate the adoption of maximax.  Also (since you are disgusted by others' inferiority to you) contributes to the appeal of minimin.

(4) Primary goods: the things that every rational individual is assumed to want.  Obvious examples would include Caymans investments, tax shelters, the carried interest rule, Swiss bank accounts, and car elevators.

(5) The original position: Where you stand after you have received government subsidies (so long as they aren't from entitlements or poverty programs), but before you have paid any federal income taxes.

(6) Veil of ignorance: voters' rightful state concerning your plans if you win the election.

(7) Deceptive equilibrium: a state of balance or coherence as between your listeners' beliefs and what they think are your beliefs; arrived at by a process of unilateral rhetorical adjustment.

Am I missing anything here?

A few things I learned at today's NYU-UCLA Tax Policy Conference

Here are a few interesting things I heard  at today's NYU-UCLA Tax Policy Conference (organized around the theme of "100 years of the income tax," but covering a broad array of topics).

1) As David Kamin discussed, suppose we agree that federal income tax revenues will be relatively constant.  Then distributional issues within the income tax will be more important on the bottom end of the income scale than on the top end, for reasons that I can illustrate with the following hypothetical.

Suppose a certain candidate for president wins the election, and enacts the following tax plan:  Everyone in the "47 percent" group that paid no federal income taxes this year gets hit with a $1,000 federal income tax bill.  We then bundle the amounts received into a number of $10 million checks, and hand these to the individuals who we have determined are the very wealthiest people in our society.  (We start with the very richest and keep heading on down the income scale, until we run out of checks.)

[Quick, snarky aside: When you look at Romney's entire set of budget proposals (insofar as they can be discerned), including on the spending side such as Medicaid, this thought experiment is probably far less redistributive towards the top than what he is actually planning, even if one believed him about income tax revenue neutrality for the broader top bracket as a whole.  No worries, however.  Rawlsians sometimes talk about "maximin," but you get to a very different policy place if you believe, as it appears Romney does, in "maximax,"* accompanied by a dollop of "minimin."**  But I digress.]

Seemingly, the headline item here is bundling big checks (in the form of income tax refunds) to give to very rich people.  But the distributional impact is actually greater on the low end than on the high end, because losing $1,000 has a much greater impact on the life circumstances of a poor person than gaining $10 million has on those of a very rich person.

The takeaway here is that the tax system's effect on income distribution in society is likely to be more significant at the bottom of the income distribution than at the top, if you don't raise the issue of the level of tax revenue and how it is being used. Or to put it differently, if you are concerned about wealth concentration at the top, issues of tax rates and tax base design within a constant-revenue framework are probably not where you should place most of your chips.  By contrast, it is fairly easy to have significant effects on the bottom, such as through items like the earned income tax credit and child tax credit that played significant roles - at one time, with Republican support - in creating the policies underlying the 47% pseudo-factoid.

2) Would an increase in the top rate tax hurt "job-creating entrepeneurs"?  As Leonard Burman noted, to the limited extent it actually mattered, it might actually help those guys attract relative to others in the top bracket  The entrepeneurs, as owner-employees, can effectively get expensing for their own capital-creating labor services if they underpay themselves.  The relative tax preference for such activity is increased if you raise the top individual rate.

3) Why is the income tax marriage penalty so politically prominent today?  In part, because, as Anne Alstott discussed, stable, long-term marriage (often with two earners) is statistically correlated with being high-income.  So you have behavior that is arguably a tag for "ability" in the sense that we use it in the tax policy literature, and that is relatively inelastic, creating tax policy arguments in its favor - but also guaranteeing political controversiality, because (a) these are the people who have political clout, and (b) as Albert Hirschman might have put it, you're most likely to use voice when you aren't using exit.

*Maximax would presumably be a version of welfarism in which the only thing that matters is increasing the single best-off individual's welfare.

**Minimin would presumably be an inverted version of welfarism in which the only thing that matters is lowering the single worst-off individual's welfare.

UPDATE: A reader (my brother) suggests expanding on the notion of Romney as a philosopher.  "Instead of Rawls' 'veil of ignorance,' we would have Romney's 'veil of arrogance,' the starting assumption with which you approach any discussion of possible social arrangements is that you are the richest [and I would add worthiest] person in the society being described."

Conference at NYU Law School on Friday, October 19

Tomorrow, the Second Annual NYU-UCLA Tax Symposium will be taking place at NYU Law School.  I will miss the opening session, as I teach a class at that time, but may report here afterwards on anything of particular blogging interest.  It should be an excellent conference.

The Internal Revenue Code at 100, October 19th, 9:00 AM to 5:00 PM

Breakfast and Registration 8:30-9:00 a.m. Greenberg Lounge

Introduction/Opening Remarks 9:00-9:20 a.m.

Deborah Schenk, Marilynn and Ronald Grossman Professor of Taxation, NYU Law School and Editor-in-Chief, Tax Law Review

Business Tax Panel 9:20-10:50 a.m.

Moderator: Josh Blank, Professor of Tax Practice; Faculty Director, Graduate Tax Program, NYU Law School

1. Kimberly Clausing, Thormund A. Miller and Walter Mintz Professor of Economics, Reed College

2. Steven Bank, Professor of Law, UCLA Law School

3. Noël Cunningham, Professor of Law, NYU Law School and Mitchell Engler, Professor of Law, Cardozo Law School

Break 10:50-11:05 a.m.

Inequality Panel 11:05 a.m. -12:35 p.m.

Moderator: Jason Oh, Acting Professor of Law, UCLA Law School

1. David Kamin, Assistant Professor of Law, NYU Law School

2. Eric Zolt, Michael H. Schill Distinguished Professor of Law, UCLA Law School

3. Len Burman, Daniel Patrick Moynihan Professor of Public Affairs, Maxwell School, Syracuse University

Lunch break 12:45-1:45 p.m.

International Tax Panel 1:45 - 3:15 p.m.

Moderator: Daniel Shaviro, Wayne Perry Professor of Taxation, NYU Law School

1. Mitchell Kane, Professor of Law, NYU Law School

2. David Lenter, Legislation Counsel, Joint Committee on Taxation

3. John Steines, Professor of Law, NYU Law School

Break 3:15 – 3:30 p.m.

Politics Panel 3:30 – 5 p.m.

Moderator: Kirk Stark, Professor of Law, UCLA Law School

1. George Yin, Edwin S. Cohen Distinguished Professor of Law and Taxation, Thomas F. Bergin Teaching Professor, University of Virginia School of Law

2. Anne Alstott, Jacquin D. Bierman Professor of Taxation, Yale Law School

3. Joseph Thorndike, Director, Tax History Project, Tax Analysts

What to expect when you're not expecting

Today I gave a lunch talk in midtown Manhattan, at the Covington Retreat for International Tax Executives, entitled "The Prospects for Corporate and International Tax Reform: What to Expect When You're Not Expecting."  Slides (which I used as lecture notes rather than as slides) that give a detailed overview of my talk are available here.

The basic topic is why I don't expect major corporate and international tax reform to happen - or, if it happens, to be very stable - not just for obvious political reasons but also due to the fundamental dilemmas we face once we are forced, by the existence of the individual income tax, to sign on to entity-level corporate income taxation.

Among other things, it offers first-ever full details of the fictional "Shaviro tax reform plan," which I confidently assert could and would happen shortly, apart from the unfortunate fact that it actually can't and won't happen.  (This is a device to help explain why changes that depart from it, by reason of being administratively feasible as it is not, are inevitably so unsatisfying.)

Has Romney gotten away with not releasing any pre-2010 tax returns?

It certainly appears that way, although the 2009 return, unlike the one he recently released for 2011, had a decent chance of being very interesting (for example, no net capital gain, hence adjusted gross income was probably below $1 million - not to mention, the chance of a Swiss bank account-related amnesty).

I guess it goes to show that sometimes, if you keep on stonewalling long enough, the press just gets bored and it works.

Not close enough for government work

Romney apparently proposes to pay for $4.8 trillion worth of rate cuts with a $25,000 deduction cap that would raise about $730 billion.  Sorry, but offering one-seventh of the needed funding is not quite close enough for me.

Cynicism and dishonesty in tax reform debate (although, perhaps, what else is new?)

With all the questions that I keep getting about the Romney tax plan and the Tax Policy Center study, I think it's worth reviewing briefly what the Romney people (a group that includes some talented and well-informed economists) undoubtedly know.

They know, as well as any of their critics, that it is impossible for Romney to cut the tax rate by 20 percent, achieve revenue neutrality, avoid a "middle-class" (including upper middle class) tax increase, and keep high earners' taxes from declining overall - especially when they are also committed to preserving current law rules that treat saving and investment relatively favorably.  If they don't know this, they should have their PhDs taken away, and be sent to the corner wearing dunce caps.  But trust me, they know this, and surely they have told Romney.

But the Romney campaign's first calculation evidently was that it made sense politically for him to promise all these incompatible things anyway.  Olkay, that's kind of par for the course, but the follow-up steps were more innovative.

The second calculation was that, if you keep it vague enough and supply virtually no details, you can rebut any attempt to show that it's impossible by saying "That's not how we'd do it."  How can anyone estimate something that has been specifically set up with an eye to making it impossible to estimate?

There is also, of course, a two-birds-with-one-stone aspect to all this.  No tax reform proponent wants to admit in advance that he or she is targeting popular items - say, the home mortgage interest deduction, the exclusion for employer-provided health insurance, and the charitable contributions deduction.  So we understand that they will be a bit shy about admitting all this up front.  But that was only part of the dodge - making the claims impossible to evaluate was the other part.

The Romney camp may have been surprised when the Tax Policy Center actually took on the conundrum they had set, by releasing a study based on reasonable (and generally favorable) assumptions.  So at this point the Romney people made a third calculation.  Let's get people in our camp to issue something that takes issue with the TPC and at least seems to support our stance, they decided.  Then, before long, we will be able to say that we have "six studies" in our favor.  (Why six?  I think because the phrase just sounds better than five studies or even seven.  It's crisp and alliterative.)

Never mind that most of these are not really "studies," and never mind that the honest ones among them - the majority - don't actually support the Romney claims that all of the promises could simultaneously be met, in defiance of simple arithmetic.  They just show how one could arguably come closer than the TPC assumed was possible, in one dimension or another, often by making another dimension worse.  But never mind all that.  You just keep saying "six studies," and what remains in fact a conscious lie by the Romney campaign shifts firmly (they are hoping) into murky "he said / she said" territory, so far as the public debate is concerned.

What's distinctive about all this?  Maybe not so much.  In JFK's 1960 campaign for president, he talked a lot about the "missile gap" between the U.S. and the Soviet Union, which did not in fact exist (or rather, it favored us, not them), and which some reports say he was told during the campaign did not exist.  It's even been claimed that the Eisenhower Administration could have definitely rebutted the claim, but had policy reasons for not disclosing what they knew, and that the Kennedy campaign deliberately took advantage of this expected reticence.  If so, then that was pretty raw as well.

But I do find the Romney camp's tactics here insulting, contemptuous, smarmy, and too clever by half.  It shows a basic political style that we will get to know all too well if Romney wins the election.

Great minds think alike, part 2

Matthew Yglesias criticizes David Brooks for loading the rhetorical dice in favor of the Romney-Ryan approach to slowing long-term Medicare growth, as distinct from the Obama Administration approach, via use of the term "market-based."  In particular:

"Brooks says Obama's plan to do this with price controls is doomed for political economy reasons. A politically powerful coalition of elderly people and health care providers will block it. That's certainly plausible. But what's the alternative?

"Brooks says the alternative is to insert an additional layer of rent-seekers into the dynamic by contracting Medicare services out to private health insurance companies ....

"If you read the column, I think that what you'll find is that basically all the analytical work is being done by a project of ideological labeling. Brooks describes this as a plan that works 'through a market system' featuring 'normal market incentives.' He twice calls it a 'market-based approach' and once refers to critics as scoffing at 'market-based strategies.' The idea of a market has positive emotional resonance with many people, so if you convince them that you have a 'market-based' alternative to price controls that will sound good. But a system of government-funded subcontractors is only market-based if you squint at it really funny. Or, rather, it's very much a market but it's a market for political influence."

Fair enough.  But one reason this particularly interested me is that I am currently writing an article about Social Security and Medicare financing and reform, called "Should Social Security and Medicare Be More Market-Based?"  I use the term neutrally rather than (like Brooks) to load the rhetorical dice, and indeed I am mainly skeptical about the family of reform proposals that are thus described.

Yglesias makes a valid point, albeit that (as he recognizes) the issue devolves into one of comparative political economy, with none of the alternatives being likely to inspire much optimism.  But another point about Social Security and Medicare design is the following: If "more market-based" is always better, based on the view that rational consumers are optimizing under conditions of robust competition and in the absence of serious market failure, you will see no need for Social Security and Medicare to begin with.  For example, why would we require people to save for retirement, and to have health insurance at that point, as Social Security and Medicare effectively do even under the more market-based plans?  Why, for that matter, does the most recent Ryan Social Security plan (from 2010) limit the investment options that people are granted to relatively safe and well-diversified ones?  For that matter, why does it forbid retirees to keep right on betting on stock and bond prices, as it does by saying that they cannot choose retirement annuities with payoffs that depend on asset performance?  These, too, are "non-market-based" approaches relative to the alternatives.  Indeed, if you wanted to be as "market-based" as it was possible to be, you would simply abolish the programs, perhaps with a cash payout for the value of whatever existing interests one chose to recognize.

As I note in the current (as yet unposted) draft, "In effect, proponents have conceded the principle that [pure market approaches] should be limited or even denied in some respects, and all that remains is 'haggling over the price.'  So the merits of [a more market-based approach] cannot simply be assumed here, even if we favor it in many other settings.  Rather, they need to be specifically demonstrated in relation to Social Security’s [and Medicare's] accepted purposes."

1986-style tax reform: a good idea whose time has passed

In May 2011, I published an article with the above title, available here. 

My main argument: while it made plenty of sense in the mid-1980s to implement a tax reform plan that financed significant rate cuts (making the overall plan revenue-neutral) by broadening the base, that approach simply does not make sense today.  Given both the long-term U.S. fiscal gap and the worrying increase in high-end inequality since 1986, cutting the rates is simply not a sensible way to use the budgetary gain that could be generated through base-broadening - at least in the individual income tax, although for the corporate tax it's a closer call.

Whether or not the article had any direct influence, the view it takes appears to be gaining ground, at least on the Democratic side of the aisle.  Senator Charles Schumer is quoted here as criticizing the 1986-style approach, which the Bowles-Simpson proposal employs in significant degree, for reasons that are similar to my own.

Along the same lines, you know the old line that everything happens twice, first as tragedy and then as farce.  The 1986 reform certainly wasn't a tragedy, but you can see it being replayed as farce by the Romney campaign, which claims that the budgetary cost of high-end rate reduction would be completely offset by base-broadening measures that they almost entirely refuse to identify (although Romney's riff about the $17,000 ceiling was admittedly a step forward), notwithstanding the fact that it's been shown, as a matter of arithmetic, that the plan would fall at least $1 trillion short of paying for the high-end rate cuts over the next ten years.

The Reagan Administration in 1984 and 1985, rather than playing this cynical game, actually released two comprehensive proposals (the Treasury I and Treasury II plans) showing exactly how proposed rate cuts would be fully financed over a five-year period, on what was estimated to be a distributionally neutral basis.  But this time around, it's apparently going to be done with faith, and trust, and a generous helping of pixie dust (a.k.a. implausible economic growth projections).

Follow-up on the financial transactions tax

Yesterday, as mentioned in the previous post, I participated in a panel discussion at the International Fiscal Association’s annual meeting (held this year in Boston), entitled: “Towards an EU Financial Transactions Tax?” The discussion was chaired by Malcolm Gammie of the UK, and the panelists, besides me, were (1) Manfred Bergmann of the European Commission, who is the principal author of the Commission’s financial transactions tax (FTT) proposal, (2) Francesco Guelfi, an Italian tax lawyer, (3) Axel Haelterman, a Belgian tax professor and tax lawyer, and (4) Urs Kapalle, a Swiss tax lawyer. Thanks are also due to Eric Roeder of the Max Planck Institute, who made sure the whole thing worked out.

A word on the state of the play for the European FTT: as an EU-wide proposal, it is dead as a doornail, having been conclusively rejected this past summer due to some member states’ unyielding opposition (the UK being a key player here). But a number of EU countries are adopting FTTs anyway. For example, Germany and France have already acted, and Spain may joint them soon. FTT proponents are hoping for coordinated adoption by a significant subset of EU countries. So the European FTT is alive, kicking, and potentially still relevant, even if the European Community as a whole is not going to act.

Wholly without regard to the merits, this is a tricky scenario to sustain. Everyone agrees that, given the mobility of financial transactions, a pretty wide scope is needed for them to work. On the other hand, insofar as countries follow the EC proposal’s structure of imposing the taxes on a residence basis, not just where the deal is executed, single-country FTTs (at least for relatively large countries) may actually succeed in generating non-trivial tax revenues, on an ongoing basis, at a relatively low administrative cost.

This, of course, doesn’t tell us that the proposals are a good idea – and not just because there will still be plenty of exit (the English may well be delighted to see FTTs on the books in Germany and France) but due to the broader efficiency costs of a cascading tax that is levied on a gross, per-transaction basis. Case in point: the European Commission estimated that its tax on derivatives would lower trading volume by 75%. They believe that this would mostly have reflected fewer deals, as opposed to tax avoidance via exit. This is not a result that one should like, to the extent that the parties to the eliminated derivative trades are consenting adults who are optimizing for themselves without hurting anyone else. So liking this result has to rest on believing that many of the eliminated transactions are bad ones, e.g., due to externalities (such as their increasing market volatility – except, it is hard to generalize, either theoretically or empirically, about how they affect volatility overall).

As noted in prior posts and in my article on the subject, I am not a huge FTT fan. The two points I see in its favor are as follows:

(1) I believe that there is too much trading, from a social standpoint, in that people invest too much effort in seeking trading gains at the expense of other traders.

(2) That issue aside, I view the FTT as an inefficiently designed tax on capital, borne mainly by investors in general. This hardly sounds like an endorsement so far, but suppose it is more politically feasible than better choices, that a given country has desperate revenue needs that would otherwise be politically hard to meet, and that at least the thing is fairly progressive (albeit more poorly designed than other progressive levies). Then I would hate to be a purist and say no, based on superior alternatives that are unavailable, unless the efficiency costs (relative to the revenue) are on the high end, rather than the low end, of the range that I think possible.

All this makes me in the end a bit agnostic about whether or not to adopt the FTT if the available alternatives are very highly constrained. Sorry to dodge a more definite answer here, but I am not running for office, and spouting a bottom line when one is unsure can turn into mere spitballing.

OK, what I probably would do if less constrained is (a) address income tax (and, outside the U.S., VAT) under-taxation of financial services, (b) adopt the “FAT-2” version of the financial activities tax, in response to apparently durable rents in the financial sector that make me very suspicious of what is going on there (see here for further details), and (c) maybe do something – through the income tax?? somewhere else?? – about the excessive trading issue.

One of the core problems with the FTT not only affects the merits of adopting it, but impedes figuring out how it should be designed. I thought I made this point more articulately at the IFA panel yesterday than I have managed previously, so here’s an effort to repeat what I said (at characteristically high words-per-minute volume) during the session.

Consider having an income tax, a consumption tax, or a carbon tax. In each case we know what we are trying to do and why, and this really helps to inform design choices. The income tax and the consumption tax are attempted (albeit imperfect) measures of material wellbeing, or ability, or ability to pay, or whatever you want to call it. It’s not that we want to discourage income or consumption, but we believe they have informational content about, or correlation with, something else. To a large extent though not 100%, we know what we mean by “income” or “consumption,” and this helps a lot – although not all the time – in making design choices for the system, albeit that we still need to consider a host of other issues (e.g., tax planning, compliance, and administrative costs, not to mention other types of information that are relevant to distribution).

Now take the carbon tax. We know what we don’t like: carbon’s effect on global warming. Happily (or not), all carbon atoms are relevantly the same. So we know what we are trying to tax and why, and this really helps in designing a carbon tax – leaving aside the issue of global cooperation, since the scope of the public good (moderating climate change) is global.

Now let’s turn to the FTT. What are we trying to tax and why? Even if on balance adopting the tax would have good consequences relative to not adopting it, it’s not clear what the “thing” we’re after is. And this makes it really hard, for example, to say how derivatives should be treated under the FTT.

Suppose that what we are after is excessive effort to seek trading gains. Even with just old-fashioned stock trading, it’s not entirely clear how good a proxy gross trading volume is for the thing we have in mind. For example, do we want to tax repos that involve financial instruments? These are transactions in which I “sell” you a financial asset for $X, but we agree that I will buy it back at a given time for $X + $Y, where Y is essentially an interest return. This is really just a way of doing a secured loan, which principally wouldn’t be taxed if it weren’t structured as a repo. (The repo, by contrast, is potentially taxed twice: when I “sell” to you, and when you “sell” back to me.)

Sure, we could put an economic substance rule regarding sales into our FTT, just as the U.S. income tax has (requiring that at least sufficiently clearcut repos be treated as loans, not sales), but no one wants to run the FTT that way – it is supposed to be administratively much simpler and more automatic.

OK, I assumed that we don’t want to tax the repo or the secured lending under the FTT, but suppose it is partly speculation by the lender regarding the asset value. Thus, suppose the lender really is to some extent betting on the value of the secured asset in making the secured loan. Thus, the return of $Y might actually be a speculative bet on the financial asset’s upside – say, with cash settlement rather than physical settlement at the back end, so that there isn’t an asset transfer (in the secured loan version) even then.

Admittedly, this example is a bit picayune. It probably wouldn’t stop us from adopting the FTT, if otherwise we liked it enough, all by itself. But when you start considering the taxation of derivatives, the fact that the underlying goal is a bit murky becomes a real impediment to figuring out how the FTT should operate.

Case 1 is a total return equity swap. Rather than my buying 150 shares of Apple stock for $100,000, and financing it with a loan, the bank and I agree that in one year’s time we will net the following two obligations: (a) I owe them the interest that a $100K loan would have earned them, plus the amount, if any, by which 150 shares of Apple stock declined in value during the year; (b) they owe me an amount equal to the dividends paid plus the share appreciation, if any, for 150 shares of Apple stock during the same one-year period.

Counter-party risk aside, this is economically equivalent to my buying the 150 shares for the $100K loan. So, if we don’t tax it under our FTT – or even, like the European Commission’s proposal, if we tax it at a much lower rate (relative to the $100K “notional principal amount”) than a stock sale – we are simply telling people to replace stock sales with total return equity swaps.

But what about all sorts of other derivative instruments (which can of course be mixed and matched with the above swap if you like)? E.g., an interest rate swap: in one year, I’ll pay you the amount that I would have owed you on a $100K loan at a fixed interest rate, and you’ll pay me the amount that you would have owed me on a $100K loan at a floating rate.

Had we done the actual transaction (the offsetting loans) rather than the swap, the FTT wouldn’t have hit us. So here the derivative is being taxed worse than the underlying, for no obvious reason. What’s more, it isn’t entirely clear that we have a good reason for wanting to tax this swap. Is this socially excessive speculation on the likely direction of interest rate movement? What if I am simply trying to hedge my other economic positions from my business, and the bank is hedging or swapping out everything as well?

Anyway, this discussion has gone on long enough for a blog post (or perhaps too long), but the main point I want to make here is that it’s hard to bridge the gap between the underlying reasons we might have for imposing an FTT and the questions of how to tax various derivative transactions, which (if they were taxed differently) would be run through the blender and the Obscurathon anyway.