Sunday, February 26, 2012
Friday, February 24, 2012
"Suppose the Pentagon wanted to buy a new fighter plane. But instead of writing a $10 billion check to the manufacturer, the government just issued a $10 billion 'weapons supply tax credit.' The plane would still get made. The company would get its money through the tax credit. And politicians would get to brag that they had cut taxes and reduced the size of government!"
Thursday, February 23, 2012
"Here's what I don't get.
"Mitt Romney claims that his new proposal to reduce the top rate of federal personal income tax to 28% will not benefit the top 1%.
"I’m going to limit the deductions and exemptions particularly for the higher-income folks. For high-income folks, we’re going to cut back on that, so that we ensure that the top 1 percent keeps paying the current share they’re paying and more.
"How does the math on this remotely work?
There are two possible answers to this. The first, which I had in mind when I wrote my blog posts (such as here) on the Romney tax plan, and which is consistent with what Romney said above, is that everyone gets tax cuts, hence the rich can pay much less than under current law and still match their "current share" (i.e., their percentage of overall annual income tax liability). Note that, while in this scenario they would be paying the same percentage of overall income tax revenues as previously, they would get much larger tax cuts than anyone else as measured in dollar terms, and would also probably get greater percentage increases in after-tax income. But the Romney camp has carefully picked the measure of progressivity that puts the best distributional face on his plan.
The second answer, which I suspect is true as well, is that the Romney claims are at best misleading. For example, did they use representative individuals on the lower end of the top 1% to make their point? But even if their claim is true for the top 1% as a whole, it's just undoubtedly the case (as Frum suggests) that people in the upper reaches of the top 1% end up paying a smaller tax share than they do today, under any possible measure.
1) Cut the top corporate tax rate on domestic manufacturing income to 25%, with an even lower rate for "advanced manufacuring activities" - To this end, they propose to "reform," rather than repeal, the much-reviled (among experts) domestic production activities deduction. About the only good thing one can say about this is that the gap between 25% and 28% isn't all that great. But it's a terrible idea and makes a bit of a mockery of discussion elsewhere in the Framework of how we should have a more neutral tax system.
2) Expand, simplify, and make permanent the research and experimentation (R & E) tax credit - As I noted in relation to the Romney plan, which states a similar objective, I accept the theoretical case for subsidizing innovation that has positive externalities, but am skeptical about how well this argument matches the actual use of the tax benefit in practice.
3) Higher tax incentives for clean energy - Once again, there is an externalities argument, but one wonders about the desirability of this stuff in practice (plus again advocating these sorts of things can undermine the rationale for general base-broadening).
Overall, the domestic manufacturing piece is by far the most distressing element in the Framework. It is bad enough to cast an ugly shadow on everything else. Bad stuff that the Romney plan doesn't have.
This brings us to the last part of the Framework that I will consider here: "III. Strengthen the International Tax System to Encourage Domestic Investment."
This features a noteworthy table, courtesy of Jane Gravelle's research, entitled "Select Small Countries - U.S. Foreign [Subsidiary] Profits Relative to GDP." We learn here that U.S. companies' claimed profits in Bermuda equal 646% of Bermuda's GDP, while those in the Cayman Islands equal 547% of the Caymans' GDP. Wow, I guess everyone else there must be suffering staggering losses. (Just kidding; that is not in fact what the chart suggests.)
The actual proposals in this section are as follows:
1) Require companies to pay a minimum tax on overseas profits - Using some inference and guesswork, I believe this proposal might work as follows. Suppose the minimum tax rate that we identify is, say, 20%. And suppose further that a U.S. company reports (a) $10 million of U.S. earnings and profits from a Caymans subsidiary, on which it has otherwise paid zero tax, and (b) $10 million of U.S. earnings and profits from a German subsidiary, on which it paid $3 million of German tax. Assume zero taxable repatriations to the U.S. during the year.
If the 20% rate applies to each subsidiary separately, the U.S. company would have to pay $2 million of tax with respect to its Caymans subsidiary, and zero with respect to its German subsidiary. If the minimum tax applies on a worldwide consolidated basis, then the U.S. company has $20 million of foreign subsidiary income, on which it paid $3 million of tax, so it would owe just $1 million overall. In effect, the choice between these two options is equivalent to the choice, under foreign tax credit limitations, between allowing and trying to impede "cross-crediting."
International tax is a normatively complicated area, on which I am still hoping to complete a substantial book sometime this year (though I also have as many as 3 new articles, only one of them in international, that I may want to write). Suffice it to say for now that this proposal is:
(a) good in the sense that it is probably increasing the U.S. tax burden on actual (as opposed to reported) U.S. source income. (We know that the Caymans income didn't actually arise there economically, and it's plausible that some or a lot of it was shifted through tax planning from the U.S., though it's also plausible that there was income-shifting from Germany to the Caymans).
(b) bad in the sense that this indirect improvement of the source rules only applies to U.S. companies, while having no effect on income-shifting outside of the U.S. by companies that are incorporated abroad. This raises issues concerning the effective tax-electivity of U.S. corporate residence, which I admit to having written about (see here).
(c) good in the sense that the proposal reduces the tax benefit from deferral, which becomes tax-irrelevant to the extent that one will face the minimum tax.
(d) bad in the sense that it treats foreign taxes paid as a dollar-for-dollar substitute for U.S. taxes paid, notwithstanding that we get the money from our own revenues but not, say, from German revenues. This, of course, is my by now familiar (?? - to some readers, at least) critique of foreign tax credits, such as here. The proposal has bad effects on U.S. national welfare insofar as it discourages U.S. companies (owned by U.S. individuals) from trying to save German taxes by shifting income from Germany to the Cayman Islands, albeit potentially good effects (see above) insofar as the income showing up in the Caymans actually was U.S. source.
One complexity in the foreign tax credit area that I perhaps have not sufficiently acknowledged in the past is as follows. As I keep saying, there is no direct reason for us to want U.S. people (through companies they own) to pay higher taxes in Germany rather than lower taxes in the Caymans. But on the other hand, the fact that we observe taxable income in the Caymans tells us that it has been economically shifted from somewhere else - possibly from the U.S., though also possibly from Germany. By contrast, if we see reported taxable income of U.S. multinationals arising in Germany, we have much less reason to think that it actually arose at home. So targeting U.S. multinationals' income that arises in tax havens is indeed a kind of filter for finding that which is relatively likely to actually come from the U.S., although, again, it is a filter that has bad incentive effects since it discourages U.S. companies from trying to save foreign taxes.
One last point about this "minimum tax" is that it isn't actually a "minimum tax" (in the sense of a shadow tax system with a parallel tax base) of the sort that the individual and corporate AMTs have rightly made infamous. Rather, it is a partial repeal of deferral, albeit with a lower tax rate for unrepatriated foreign source income than for that which has been repatriated, subject to providing foreign tax credits.
So it's drawing misguided rhetorical heat for purely semantic reasons, since it is called a "minimum tax." But at the same time, it is inferior to my own preferred approach, which would be as follows:
Step One, repeal deferral and foreign tax credits (making foreign tax credits merely deductible), but accompany this change with a rate cut for foreign source income that makes the overall package [placeholder]-neutral - for example, burden-neutral, or revenue-neutral, or resulting amount of outbound investment-neutral. This results in a no-brainer giant improvement in U.S. national welfare, because it eliminates the distortions associated with deferral and the foreign tax credit.
Step Two, since there is no reason to think that this change applies the optimal rate to foreign source income (a critique that is, however, equally true about present law), raise or lower the rate based on a broader analysis, a key factor in which would be how much market power we have at the U.S. corporate residence margin.
The worst omission in my proposal as stated so far is that it doesn't address the horrendous problems with the U.S. source rules, which would have feedback effects on both the Step One and Step Two determinations. But that needs to be done in any event. My preference is that this be done on a corporate residence-neutral, worldwide consolidation basis. But enough about my own proposals, when I had started writing this post with the Administration's Framework mainly in mind.
1) "Eliminate dozens of business tax loopholes and tax expenditures" - In addition to a general statement about a presumption in favor of eliminating tax expenditures (standing in considerable tension with the document's later advocacy of tax preferences for domestic manufacturing), the White House and Treasury do indeed specifically identify the following items as worthy of repeal: LIFO inventory accounting, oil and gas tax preferences, insurance industry tax benefits and planning loopholes, the carried interest rules, and special depreciation for corporate purchases of aircraft.
OK, as in my critique of the Romney plan, I should note the political feasibility issues here. Harder sledding to enact these base-broadeners than to lower the corporate rate. And, as other commentators have noted, the Democratic base (and perhaps some unaffiliated voters as well) are bound to love some of this stuff, making it less of a profile in courage than otherwise (although the fact that one party's supporters actually favors at least some instances of base-broadening is not exactly irrelevant). But at least the White House is listing the items that it advocates repealing, and is insisting that the overall package should be revenue-neutral without regard to fantasy-based "dynamic scoring."
2) "Reform the corporate tax base to invest savings in cutting the tax rate and reducing harmful distortions - Here they suggest (a) moving towards more neutral (as between assets) economic depreciation, (b) reducing the corporate tax bias towards debt financing, such as by reducing corporations' interest deductions, and (c) "establishing greater parity between large corporations and large non-corporate counterparts," although they call it "essential that any changes in this area ... not affect small businesses."
Certainly (a) has it virtues. Note, however, that, in the middle of an ongoing recession (substantively in terms of persistent unemployment, even if not as officially measured), accelerated depreciation for new assets can be more stimulative than lower rates, making the Administration's proposed package potentially anti-stimulative. Note also that expensing for everything, if set in a thoroughgoing consumption tax framework (rather than plunked into the middle of an income tax) creates full inter-asset neutrality, as attempting imperfectly to design more economic depreciation rules cannot.
I would consider (b), defined as greater debt versus equity neutrality, an important priority. However, disallowing interest deductions (rather than extending them to equity in a proper and budgetarily responsible overall framework) may not be the best way to do it. But the suggested proposal of course reflects the budgetary bind that we are in.
As for (c), they cite prior studies but don't advocate anything in particular. Again, this is an important issue that needs to be addressed in the context of corporate rate reduction.
By the way, one problem with cutting corporate rates while not addressing the relationship between the entity-level and shareholder-level taxes is that it makes the assessment of neutrality between different entities quite confusing. You get very different results if you assume (a) that some shareholder-level tax is going to be paid at some point, versus (b) that the shareholder-level tax can be wholly avoided by holding one's stock until death and then selling it for zero gain due to the tax-free step-up in basis. Unfortunately, in the real world we face both scenarios.
3) "Improve transparency and reduce accounting gimmicks" - Here the aim is to "increase transparency and reduce the gap between book income, reported to shareholders, and taxable income, reported to the IRS. These reforms could include greater disclosure of annual corporate income tax payments."
The last of these points - greater disclosure of annual corporate income tax payments, and also, I would add, of the sources of book versus taxable income differences (which are reportable to the IRS, but confidentially) - is something that I believe would have great value, though not primarily as a corporate tax reform pay-for. I believe someone wrote an article a few years ago about partially adjusting corporate taxable income towards book income, with a key reason for doing it only partially being that the last thing we want is for the Congress to take a greater interest than it already does in how the Financial Accounting Standards Board defines book income.
In sum, there is some real substance here. One would like to have a lot more, but it certainly goes well beyond that in the Romney plan. On that distinction, it would be fair for the Romney people to respond that they do not currently have the resources of the White House and Treasury staffs behind them. Plus, they still need to secure the Republican nomination. And they might certainly score a valid ad hominem point by noting that it's a lot easier for a Democratic administration to name corporate tax revenue-raisers that it favors, than it would be for them to name revenue-raisers for rich people that they favor. But that's part of the point - even if good tax policy instincts are to be found both in the Obama Administration and in a hypothetical Romney Administration, surely it is relevant that the former would likely have an easier time selling the pay-fors to its own party. (Not that either seems likely to succeed in the end.)
My next post will say more about the other two topics in the President’s Framework for Corporate Tax Reform: domestic manufacturing incentives and international taxation.
One last comment here: obviously both the tone and substance of this comment are rather different from those I turned on the Romney proposal in my earlier posts. This fits in with the fact that I will definitely support Obama against Romney (or whoever else gets the Republican nomination) this November. So call me partisan in that regard, if you like. But the fact is that I want to be, and (to the extent the Republicans permit it) try to be, above the fray and even-handed.
As I see it, the Republicans went mad around 1994 and have only gotten worse since. I myself didn't fully realize this until 2002 at the earliest (call me slow on the uptake). They need to return to sanity - as I believe Romney would under different political circumstances, but unfortunately not under our actual ones - and only then can one's quest for balance (both real and perceived) lead to parity of assessment. If you look at the Romney tax plan and the Administration's corporate tax reform framework side-by-side, there is simply a clear difference between them - although also, interestingly, some elements of overlap (e.g., both support corporate base-broadening alongside rate reduction, and for that matter the Romney plan to limit tax benefits for high-income taxpayers may resemble Administration proposals to limit the value of tax benefits in higher brackets).
In my view, it's more genuinely even-handed not to look for false equivalence just so that one will appear more balanced, even as one labors to stay open-minded about any elements of true equivalence.
My standard practice here would be to post the SSRN link, but I'll forego that this time around, because I am planning a rewrite and revised SSRN posting shortly.
I had an enjoyable visit, as well as a good session discussing the paper, and the people there gave me a number of good ideas regarding things to expand on in the next draft. But given the volume of my blog postings today (with something further on the Administration's corporate tax reform plan perhaps still to come, I will settle for posting a link to my slides for the talk. They are available here.
Romney’s first proposal is to enact a “permanent, across-the-board 20 percent cut in marginal rates.” There has been some discussion in a tax professors’ group regarding whether this is actually an accurate description of the plan, but he’d explicitly cut the top individual rate, currently 35%, to 28%.
Needless to say, as a standalone, this would have staggeringly adverse budgetary effects. The plan partly relies on unidentified spending cuts to make the plan budget-neutral as a whole. (Good luck with that.) But it also states that “higher-income Americans in particular will see limits placed on deductions, exemptions, and credits that are currently available. The result will be a pro-growth tax code that still raises the necessary revenue, retains the existing progressivity, and ensure that middle-income Americans see real tax relief.”
Three comments on this. First, the plan could still be losing trillions of dollars in long-term revenue, consistently with this language, since the phrase “raises the necessary revenue” has plenty of weasel room built into it. But it makes a much stronger claim by saying that the plan “retains the existing progressivity” – which obviously is very different from just saying that it would be progressive enough.
Second, just as we don’t learn much about the spending cuts, so there is nothing specific about the limits on deductions, exemptions, and credits that will be placed on higher-income Americans. This is no surprise – could you possibly imagine, not just Romney, but any candidate with hopes of winning the nomination and November election ‘fessing up here to what he is targeting? The items they must have in mind are obvious enough – for example, home mortgage interest deductions, the employer-provided health insurance exclusion, perhaps charitable contributions, etcetera. But the problem is, even if the proponents believe they would do this stuff (and I am willing to accept that they would like to do it), why would anyone imagine for even a second that they will actually end up trying, much less succeeding? It’s not going to happen (unlike the tax rate cuts, which no doubt will happen if the Republicans do well enough in November), and unless they are drinking a lot of spiked kool-aid they ought to know this.
Third, suppose they did manage to retain existing progressivity by limiting upper-income individuals’ deductions, exemptions, and credits. Point one, this implies higher marginal rates in the ranges where the limits are being phased in with rising income, if that is the methodology. (Using flat percentage credits, as proposed by the Obama Administration, could avoid this effect, but it would also limit how much they were taking away, in a way that seems in tension with the strong claim about the bottom line that is being made.) Point two, insofar as high-income people’s average tax liability fails to fall as much as their marginal tax rates, due to the offsets, the already-extravagant claims about the rate cuts’ economic growth effects are undermined. Suppose I’m that mythical savior of the American economy, the super-rich entrepreneurial “job creator,” and my taxes are going down less than my statutory rate would seem to imply. Depending upon my choice parameters, this may greatly dampen the hoped-for incentive effects. For example, if my statutory rate is cut from 35% to 28%, but the actual effective rate on the extra $X that I am considering earning remains the same, goodbye incentive effects at the “earn $X versus don’t bother” margin. All we have left is the admitted efficiency gain of my not needing to use my income in inefficient ways in order to get tax breaks. This is good, so far as it goes, but it isn’t really a “job creators” story.
Romney’s second proposal is to “ensur[e] that families with an annual income below $200,000 will pay no taxes on income from capital gains, interest, and qualified dividends.”
First question: what about effective marginal rates as the exclusion is phased out with rising income?
Second question: what about people who have less than $200,000 of income (as measured by the tax system) due to tax planning, such as the use of shelters? An example might be a super-rich guy who gets all of his labor income as capital gains from the favorable tax treatment of carried interests, and then uses loss harvesting from his stock portfolio to push towards zero on that. (Note that Romney himself apparently did this to a degree in 2009, though he still had a seven-figure taxable income, and that his 2010 tax return suggests that, at least via blind trusts, he was engaging in transactions that the IRS had listed as tax shelters.)
Third question: What about the tax planning bonanzas that this implies, especially for people who are below $200,000 by reason of their other tax planning?
Romney also wants to repeal what he calls the "death tax" (this is actually the estate tax, falsely relabeled by reason of a 1990s Republican rebranding exercise), and the alternative minimum tax. Lots of revenue at stake here (although the AMT otherwise has next to no defenders), not to mention lots of progressivity from the estate tax.
Romney's third proposal is to cut the corporate rate to 25%, with the revenue loss to be partly offset by corporate base-broadening. This is conceptually similar to the Administration proposal (although that would only cut the rate to 28%), and it (laudably) lacks the ridiculous special rules for domestic manufacturing in the Administration's proposal, but we aren't told what any of the base-broadeners would be. Plus, the claim that financing would also come from "greater revenue from increased economic activity," no doubt to be estimated quite optimistically, makes one wonder about the claim that it would be revenue-neutral.
No acknowledgement whatsoever - though this is a big problem under the Obama Administration's plan as well - that the use of corporations may become a tax shelter (such as, for self-underpaid employee-owners) if the corporate rate is less than the individual rate. True, in the Romney plan the gap is seemingly only 3 percentage points, since he'd cut the top individual rate to 28%. But what about all the bubble rates that would inevitably result from restricting all kinds of tax benefits to people with less than $200,000 of income? I would not be surprised if that ended up putting a lot of juice back into the game of "stuffing" both labor and capital income into corporate entities.
Romney's fourth proposal is to "strengthen and make permanent the R & D Tax Credit." OK, granted, in theory there may be positive externalities to innovation that support offering subsidies to research and development activity. But it is unclear to what extent the R & D tax credit actually goes in practice to the sorts of activity that we should actually want to subsidize. Lots of it, I gather, is for stuff like changing the seeds on hamburger buns or developing new iPad game apps.
Romney's fifth proposal is to "switch to a territorial tax system." But there is no related discussion of strengthening the source rules, which I would call a needed concomitant unless we want to make a total joke out of the capacity of the corporate tax to back up the individual tax, by taxing tomorrow's new start-up billionaires at the entity level even if they are able to avoid tax (as is trivially easy for an incorporate owner-employee) at the individual level.
Finally, Romney's sixth proposal is to "repeal the corporate alternative minimum tax (AMT)." This is not a huge deal any more, but the short ensuing discussion confirms that the proponents want to make sure that businesses get both low rates and favorable cost recovery. OK, fine, that's the philosophy here, but it does have revenue and (possibly) distributional effects that may undermine the plan's underlying claims.
Final words, from the Tax Policy Center (albeit predating this Romney campaign pronouncement):
"The Romney plan would reduce federal tax revenues substantially. TPC estimates that on a static basis, the Romney plan would lower federal tax liability by $600 billion in calendar year 2015 compared with current law, roughly a 16 percent cut in total projected revenue. Relative to a current policy baseline, the reduction in liability would be roughly $180 billion in calendar year 2015."
The TPC also estimates (based on earlier Romney campaign pronouncements) that the result would be a huge increase in after-tax high-end income concentration in the U.S. This generally doesn't credit Romney with the undisclosed tax increases that ostensibly are planned for high-income individuals via their use of various tax benefits, but until they put more on the table there is really no good reason to credit them with this.
Perhaps I gave him too much credit on one ground. One reason he has struggled so as a candidate is that his capacity for empathy, and for understanding people with different life circumstances than his own, appear to be at a borderline Asperger’s level. This has hurt him as a candidate, but it could also adversely affect his decision-making, such as with regard to distributional issues and creating broad-based opportunity, even if we posited that he had full implementation power plus the right incentives. Someone who is apparently emotionally convinced that his worldly success shows that he is better than other people, and deserves better, and that they are just envious if they feel otherwise – beliefs that he appears to sincerely hold, may not be well-suited to making good choices in 2013 or 1935, even if he’d have been fine in 1956 or 1988. But the more general problem I posited is that he would not in fact, as president, have either the posited power or the right incentives.
Anyway, let’s pivot from that to his tax plan. Now, this is obviously a campaign document, responding to the vicissitudes of both the ongoing Republican primary contest and the anticipated general election contest that would follow. But the record is very clear, going decades back, that presidents generally end up trying to do what they proposed during the campaign, even if their earlier motivations reflected pre-election circumstances. But anyway, Glenn Hubbard, who is one of Romney’s top economic advisors and very probably hopes to reprise his prominent Bush II Administration role if Romney wins, tells us: “If you take the spending and tax pieces together, it’s a narrative of the policy agenda and life under a Romney presidency.”
A quick word in passing: If there is going to be a Republican president, one would certainly hope that he was being advised by the likes of Glenn Hubbard, who is intellectually serious and knowledgeable. Then again, I don’t personally feel that Glenn’s presence in the Bush II Administration led to good tax or budget policy, although I agree that it probably would have been even worse had he not been there. (For example, given the big tax cuts that they were bound to shoot for in 2003, at least Glenn induced them to push towards corporate integration, a policy that, if done right, clearly makes sense.)
Romney may also be getting tax policy advice from Columbia law school dean David Schizer , whose support for Romney is attested to here. As with Hubbard, this could be viewed as good in two senses: as evidence both that Romney is in fact getting tax policy advice from smart and knowledgeable people, and that he has a preference for getting advice from such people.
OK, one last thing before we get to the tax plan itself. I’m sure that its wiser proponents, if asked to defend it candidly and in private, would note that, insofar as it is reckless and fiscally irresponsible (as I think it is), this should be placed in the Republican political context that inevitably constrains Romney. After all, just look at how much more reckless and crazy the other Republicans’ plans are. Romney is definitely signaling that he is less far out past the Oort cloud than they are. And while this has electoral calculations behind it as well (it’s presumably part of the general election pivot towards the center that he is planning), I’d accept that it correctly depicts an actual difference between him and the other Republican candidates.
But what about the plan itself? Given the length of this blog post, I will save this discussion for my next one.
But some folks from the Washington Post asked me for a quick preliminary response, which I got back to them a bit on the late side because I spent much of yesterday on an airplane from California back to NYC. Anyway, it's now up on their website here, along with comments from various other people (e.g., Len Burman and Doug Holtz-Eakin).
If you're just interested in what I had to say, it was as follows:
"In general, I like the plan to lower the corporate rate to 28 percent and pay for it through base-broadening — although the disparity this would create between the corporate and top individual rates needs to be dealt with. For example, it affects business entity choices, which the report agrees is important, and encourages self-employed individuals to avoid the top individual rate by using wholly-owned corporate entities and under-paying themselves.
"The focus on a special low rate for domestic manufacturing is unfortunate and egregious, and has zero support from tax experts who are not being paid to support it.
"On the international front, I agree about the importance of addressing income-shifting by U.S. companies that cause all their income to arise for tax purposes in tax havens. But I believe that this is less about jobs, which may not be hugely affected, then about (a) a level playing field between multinationals and other businesses with regard to the tax they face on earning income in the U.S., and (b) progressivity, since high-income individuals who hit “home runs” via corporate entities, such as Google or Facebook, can avoid the corporate tax on their earnings (which is a proxy for taxing them directly) if they can report most of their income as arising in tax havens.
"I’m a bit skeptical about the approach the Administration is suggesting on the international front, but that is not to deny that it might be better than doing nothing. It does reduce the effectiveness of income-shifting and “deferral” maneuvers by U.S. companies, though on the other hand it discourages U.S. companies that are actually investing abroad from seeking to reduce their foreign tax liabilities. The details will be important in judging this more definitively."
Again, all this was preliminary and I hope to post more fully on it in the next couple of days.
I happen to disagree with this (although it might have had a chance of being reasonably true had he been elected president in the very different circumstances of the 1950s through the 1980s). Part of the problem I see is that he is irrevocably committed politically to what I consider a number of bad ideas, such as the views that deregulating the financial sector, cutting taxes for high-income people, and doing much less to help poor people (both the young and the old) are generally the way to go. He also appears to be close to committed to starting a ludicrously misguided war with Iran, that could very well work out, for both the U.S. and the world, about a thousand times worse than our recent adventures in Afghanistan and Iraq.
Is he capable of understanding what I consider the serious flaws with these ideas? Well, probably – I didn’t say that he was irrevocably committed to these ideas intellectually (although he might be – I just don’t know), but that he is irrevocably committed to them politically. And a lot of other things that he almost surely doesn’t believe in are probably now on his list of irrevocable political commitments, such as pandering to the Republican base on social issues in various ways (although I imagine that, no less than Reagan or Bush I, he won’t actually try to do anything with these issues). Of course, the very fact that his lack of core convictions has been so thoroughly exposed gives him less political freedom than he would otherwise have to continue shape-shifting; he’s already played that card too many times to be able to continue playing it.
OK – again, the case for Romney rests on the claim that, if he has the power to make decisions and has the right incentives, he will make the right decisions. Unfortunately, even if he is elected president, we will never get to learn if this is true. He won’t have the power, and he won’t have the right incentives. Grover Norquist recently raised eyebrows at a big conservative meeting by stating bluntly that the virtue of electing someone like Romney, from his standpoint, is that the electee would have to do what he was told by extremists in Congress and the base. I suspect that this is at least 90 percent true.
Plus, because of Romney's political weakness (even if elected) and the pressures he’ll face from both the far right and the Democrats, he generally will not have the right incentives. An example is the war with Iran, which could well be a political net benefit for him (as Iraq was for Bush II, for quite a while) even if it is self-evidently disastrous for the U.S. and the world. The rally-round-the-Commander in Chief syndrome could well do great things for him, especially if the Iranians exact severe retaliatory consequences on us. He is smart enough to know, and perhaps dispassionate enough to value, the fact that even disaster could pay off for him politically.
So the case for Romney is essentially that, if we were electing a dictator for a finite term, with the chief payoff being his public reputation when the term was over (and in particular once all the dust had settled), there’s an argument that he’d be a good choice. But that’s not the choice we face, and this is a key reason (though not the only one) why I have a very negative view of his candidacy.
Case in point: the “tax reform” document that he released yesterday. I will comment on this, when I get a chance, in my next post.
Wednesday, February 22, 2012
On Thursday, I plan to post something on this topic, including the PPT slides that I used for the talk.
Perhaps of more interest to more people, I will also post entries regarding the Obama and Romney tax plans that were released today.
Thursday, February 16, 2012
That was the night Jeremy Lin broke out (one of my kids was there, and I was watching it on TV). If I do say so myself, I had been saying that the Knicks should play him. Not that I foresaw how it would go, but you could tell, even from a few sloppy minutes at the end of blowout games, that he is actually a point guard.
The good news in the last couple of games is that he appears to be adapting as the defenses adapt. In the Toronto game on Monday night, the other team had clearly done its homework, and come up with planned responses that included lots of double teams and beating the living daylights out of him any time he entered the lane. He struggled a bit, but then delivered the astounding final minute. Last night, Sacramento evidently expected him to try to score, so instead he passed.
Sunday, February 6, of course, was the Super Bowl. Here in our fair city, people are still smiling about it. Not just the astounding catch (again) and the amazing final-minute victory (again), but the wildly implausible parallels, which had been going on for weeks, between the current year and 2007/2008. I think of it as the happy, rather than nightmare, version of the repeating loop in the classic English chiller, Dead of Night. Sportswriter Bill Simmons, being a diehard Patriots fan, notices the same thing (as how could he not) but is considerably less enthralled:
"Like every other New England Patriots fan, I spent the hours after Super Bowl XLVI trapped in some sort of catatonic trance. It happened again? Against the same team? How could THAT happen again? This was like watching one of those lazy movie sequels — like Another 48 Hours, or The Hangover Part II — when they don't have any inventive ideas, so they overpay everyone involved and shoot a script with the same beats."
Wednesday, February 15, 2012
Once again, rather than writing a fresh comment on the issues raised by the paper, why don't I offer here an expanded version of the outline that I prepared to help guide discussion at the session:
2 topics: (1) What is electivity & why does it matter, (2) federal-state conformity, in light of broader issues of fiscal federalism.
1. What is electivity & what does it matter?
Paper rightly recognizes that you can have electivity without explicit elections.
E.g., realization of loss versus gain assets with sufficiently cheap financial engineering, no constructive sale rules, no loss nonrecognition rules.
I’d add: you can also have explicit elections that really aren’t what we have in mind.
E.g., consider standard vs. itemized deduction. Arithmetically equivalent to everyone gets the standard deduction, itemized only allowed above a floor that equals the standard deduction.
What do we really have in mind here? Call it taxpayer self-sorting. You choose between Regime A and B, want to minimize the sum of tax liability & deadweight loss (DWL).
Revised itemized deduction with floor still has an element of TP self-sorting if the question is whether to try to get above the floor. E.g., don’t bother with record-keeping or base charitable decisions on expecting to get the subsidy.
How should we analyze the merits of TP self-sorting? While taxpayers presumably aim to minimize the sum of taxes paid & DWL, suppose for simplicity it was JUST one or the other (though in practice, think in terms of ratio).
We’re glad if they self-sort to minimize DWL. But if to minimize tax liability, that’s often bad. In principle, a right amount to pay given relevant attributes (e.g., ability to pay).
Nonetheless, in some cases we might be OK with electing into lower tax liability.
--Federal married filing separately in practice (but a harder question if could elect single filing).
--§338 elections, given lack of a good rationale for treating stock & asset sales differently.
--Domestic check-the-box – Note lack of any evident purpose or rationale. But this reflects other rules in the area. E.g., C corporation status is unavoidable if shares are publicly traded, prior multi-factor test couldn’t impede individuals from using limited partnerships in tax shelters since the test had previously been rigged by the Treasury the other way (to block the self-employed from claiming self-paid fringe benefits), other means (such as the passive loss rules) are used instead to impede tax sheltering.
--International check-the-box – rightly controversial due to large tax stakes. But is it actually a bad thing? Distinguish U.S. MNE avoiding U.S. tax vs. German tax.
SO: ability to elect is good if mainly about DWL or higher taxes that we don’t like, much more questionable if avoiding taxes we might want to impose.
This is the same analysis that we should use for cheaper versus costlier electivity. E.g., how much economic substance, in terms of last week’s paper how hard we fight against regulatory arbitrage. And the fact that there’s so much of it reflects how much arbitrary line-drawing we have in our system.
E.g., in a pure Haig-Simons income tax, with no admin or compliance costs, household issues, etc., the only “elections” are how much to work & save, & how much to invest. Can only reduce income through a “costly” election (such as working less), though how costly determines optimal rates.
But in our actual system we have realization, the cubbyholes for different financial instruments, etc. – so costly vs. cheap electivity issues are pervasive.
Often don’t want electivity to be too cheap (e.g., the Miller equilibrium & debt; realization electivity and strategic trading). This is why, for lots of things, we wouldn’t think explicit elections make sense – their key feature may be cost of zero (apart from the need to decide and keep records).
But by even raising the question of whether state elections should have to follow federal, the paper demonstrates that, just because we have an explicit election, that doesn’t necessarily mean that zero is the right exercise price. One key argument for tying elections together, or requiring that they be consistent, is to make them costlier than otherwise.
The paper discusses cross-border tax arbitrage, which is semantic arbitrage or inconsistent effective electivity. E.g., dual resident companies.
U.S. rule against it in effect says, you can’t deduct affiliate’s losses in the U.S. unless you aren’t suspected of deducting it somewhere else.
Likewise, consider tax vs. accounting semantic arbitrage (e.g., the income measure or debt vs. equity). Separate systems, but may want to require consistency simply to make electivity costlier (my argument on the subject).
4 main propositions before we get to distinctive federal vs. state issues:
(a) Is the right category TP self-sorting, as per the point that an explicit election may be thought of otherwise. (Universal, even under H-S though not lump sum ability tax)?
(b) Is there indeed nothing special about explicit electivity other than its being at the low end, & potentially easier to avoid (by just repealing the election)?
(c) Is tax vs. DWL, & what we think about the tax, the right organizing principle?
(d) Is requiring consistent elections mainly about making elections costlier?
2. Federal-state conformity
As when considering federal-state conformity generally (rather than just re. elections), it’s worth considering 2 perspectives here: state residents acting unilaterally, & all states’ residents acting collectively.
State residents acting unilaterally – I want to distinguish this from “sovereignty” as sometimes used. Expressing political preferences (e.g., how high should taxes be, how allocate among residents) has value. But keep in mind the agency problem with state political actors.
E.g., state officials may value their ability to extract rents from lobbyists.
This makes me want to second-guess the value of state-level discretion, based on voter salience. E.g., cost recovery for particular assets vs. rules for allocating tax burdens between different kinds of households.
Paper notes a dilemma that state political actors face with piggybacking & costly adjustment. Congress imposes revenue externalities that may lead voters to misallocate responsibility. But properly assigning responsibility is already a huge mess, so unclear how much mileage we get from this.
Value of simplification vs. complexity: If just borne by voters, fine to have the state decide for itself.
Residents of all states acting collectively – Here we add externalities that all should in principle agree to eliminate. E.g., harmful state tax competition (incentives for football stadiums & factories, rather than taxes that are sufficiently linked to benefits that there is Tiebout competition).
Consider also complexity externalities. E.g., suppose a state with market power (such as California) had its own debt vs. equity rule, the complexity from which would be borne partly by out-of-staters.
Also tax exportation, such as the NYC hotel tax. One could imagine this being done through the income tax instead, & blocked by a federally imposed conformity requirement (or by a bribe, a la highway funds).
OK, let’s try some examples.
Standard vs. itemized deduction: Once we see this as a universal standard deduction that’s part of the federal rate structure, plus an itemized deduction floor, analysis is simpler. No reason for states to require consistency, apart from their own (internalized) interest in being able to free-ride on federal enforcement for itemized deductions claimed federally.
Joint versus separate marital filing: If state wants a different policy, this is salient to voters. No reason to mind joint filing even if federally separate (including, e.g., same-sex spouses). For separate when federal filing is joint, the only issue is the ability to free-ride on federal-level divisions of income.
Other: For a wide range of tax base things (338 election, sub S election, definition of debt & equity, business cost recovery rules, etc.), there will often be a reason for requiring or rewarding uniformity. E.g., if we think it’s state-level political agency costs & rent-seeking, or bad tax competition (e.g., lower tax rates for sports teams or companies with mobile capital), or tax exportation (e.g., hotel tax rules, even if not in the income tax), there may be good reason for Congress to do more to block states’ distinctive rules than it does under current law.
Tuesday, February 14, 2012
This baseline choice pertains to what people still commonly call the "Bush tax cuts" - rate cuts for individuals that were adopted in 2001 but officially scheduled to expire after 2010, and that more recently were extended two years so that they would expire after 2012. As the Administration's Budget says at page 201, their "adjusted baseline assumes that these tax rate changes are made permanent." The Congressional Budget Office, by contrast, assumes in its budgetary baseline that current law remains in force, meaning that all of the tax cuts are assumed to expire, and budgetary "changes" are measured relative to that.
One semantic consequence of the current policy baseline choice is that the Obama Administration cannot credit itself with "tax cuts" by reason of its support for extending the expiring lower tax rates for people who earn less than $250,000. A second is that the Administration is avowedly seeking to "raise taxes" on people earning more than $250,000, for whom the 36% and 39.6% rates that were ostensibly eliminated in 2001 would reemerge in 2013, rather than keeping those taxes the same (as would follow if one used a current law baseline). And a third is that the Administration can credit itself with deficit reduction by reason of permitting the high-end brackets to increase, rather than facing the question of how it proposes to pay for extending the lower-tier tax cuts.
The politics behind the semantics are clear enough, and to me not wholly unwelcome. The Administration is evidently less afraid than it used to be of Republican attacks based on the usual rhetoric about "job creators" and the supposedly endless need for enacting new tax cuts whether affordable or not. In a post-Occupy Wall Street political environment, it apparently does not entirely mind being charged with plotting a huge tax increase for the top 1 percent.
In addition, the Administration is trying to cut itself some budgetary slack so that it cannot be attacked as harshly on this front. Even this I quasi-welcome, because I believe that short-term budget policy ought to respond to our horrendous (even if very modestly improving) unemployment situation - though I remain very highly concerned about the long run picture (which the Administration when its performance is being evaluated, like the Republicans when they are discussing tax revenues, has a political incentive to sweep under the rug).
But it is not an enormously healthy thing when baseline choices have such a large effect on how fixed sets of policy options are described and (presumably) perceived.
Monday, February 13, 2012
"Getting It by Daniel Shaviro is a compelling read! His quirky, fully developed characters span the personality continuum; no two are alike, and whether or not you LIKE them, you are drawn to them. I might even say that several will elicit compassion. I also appreciate the way Shaviro frames the plot and subplots. Shaviro's unethical, revolting main character devises a brilliant scheme to cover his oversight on a project for a potential long-term deep-pocket client. Much happens -- psychologically and actually -- in the short span of time before the Who-Will-Make-Partner meeting. Finally, while Shaviro's work is fiction, the story leaves the reader pondering the reality of the inner sanctum of some law firms. My husband and I both loved the book and could not wait to see how it ended. We also agreed that Getting It reflects Daniel Shaviro's brilliant mind. Consider...this novel could be the basis of a fascinating one-week seminar on legal ethics in law schools nationwide."
Thursday, February 09, 2012
When you don't have to teach, that's great because you have more time for all of the other things that you may want to do professionally. But you also start to miss it after a while. And though I've still been teaching the Colloquium in the spring, large lecture classes are a genre unto themselves, with a performance aspect and instant feedback from the students' responses.
Those who have taken, but never taught, a lecture class might be startled to learn how fully the person at the front of the room can read the students' general reactions. It's of course pretty easy to tell whether a given class went well or not - and if it was bad, you're eager for a shot at redemption the next time. You only feel you're as good as your last class.
Anyway, I'm looking forward to it, and face a handful of basic structural questions. One is whether to use PowerPoint slides - I did the last two times I taught Tax I, but probably will not this time. Another is how much to aim at a specified rate of progress, as opposed to just seeing how it goes. A third is how to structure calling on people (this remains a common law school tradition, even if no longer done in the Professor Kingsfield manner, and I will probably go randomized).
One of the good things about teaching Tax I is that students tend to find it a much more engaging topic than they had expected. (Of course, this reflects in part that there is nothing easier to beat than low expectations.) I'll consider it a failure unless at least a few unsuspecting enrollees end up being recruited to "the life" (i.e., find themselves wanting to take more tax classes and perhaps even to practice in the area, when they had never expected any such thing).
Wednesday, February 08, 2012
Rather than writing a fresh comment on the issues raised by the paper, why don't I offer here an expanded version of the outline that I prepared to help guide discussion at the session:
1. Effects of current tax law, absent regulatory arbitrage
(a) What is firm size, and when is it a Coase story?
(i) Multi-dimensional (e.g., make-or-buy, assets inside or outside the firm, multi-industry conglomerates, full-time vs. part-time vs. independent contractors)
(ii) What relationship to issues of debt vs. equity choice?
(b) Significance of transfer pricing
(i) Only matters if the “pocket” does (firms, households) – e.g., international transfer pricing, domestic manufacturing deduction
(ii) Irrelevant to well-designed VAT or retail sales tax; can matter in domestic income tax due to the “cascading” tax on inter-firm transactions (from inclusion on one side, capitalization on the other) if not replicated by in-house capitalization rules
(iii) International: pure WW versus territorial (see example at the end of this document)
(c) Separate businesses (loss nonrefundability creates incentives for conglomeration)
(d) Agglomeration (i.e., excess firm size because earnings are retained to avoid the tax on shareholder distributions)
(i) Wouldn’t it be anticipated on the way in?
(ii) New view: uniform distributions tax does not induce lock-in
(iii) International new view: same as domestic, but permanently avoiding the tax may be more credible because the taxable “distributions” are intra-firm
(e) Full-time employees (vs. part-time, independent contractors) – note that companies often want to avoid having full-time employees despite the opportunity to give them tax-free, in lieu of taxable, compensation
(f) Choice of tax rate – any differences between the corporate and individual rates may affect firm or entity choice; the ease of taxable income-shifting through partnerships can be a reason for using them
(g) Debt versus equity
(i) Modigliani-Miller: choice is irrelevant apart from bankruptcy, tax, asymmetric information / agency cost issues
(ii) Tax shield vs. bankruptcy risk tradeoff
(iii) Tradeoffs from agency costs / asymmetric information: debt better in some scenarios, equity in others.
(iv) Miller equilibrium: debt vs. equity is simply an election to pay tax at the corporate rate (via equity) or at one’s own rate (via debt)
2. Regulatory arbitrage
(a) General issue is costly vs. cheap electivity
(b) Examples: check-the-box, anti-avoidance rules, debt vs. equity, rules constraining realization and recognition
(c) Transaction cost tradeoff: more/cheaper vs. fewer/costlier transactions
(d) Need to assess merits of the particular taxes that regulatory arbitrage permits one to avoid (e.g., for tax shelters, debt-equity under Miller, or domestic vs. international check-the-box)
3. Policy implications
Corporate integration? Lowering the corporate tax rate? International?
Make versus buy and the U.S. international tax rules
The U.S. tax rate is 35%, that in Ireland is 12.5%. A U.S. company will use parts made in Ireland (a decision that itself may reflect this tax rate difference) but is choosing between make and buy (i.e., subsidiary vs. arm’s length purchase).
Suppose that separately owned U.S. and Irish firms would earn $16 and $8, respectively. After paying national taxes, they collectively have $10.40 + $7 = $17.40.
(a) Territoriality as inefficiently encouraging “make”
Suppose merger reduced their combined income to $22, but that they could report this as $6 in the U.S. and $16 in Ireland. Now the after-tax is $3.90 + $14 = $17.90.
(b) Pure worldwide as inefficiently encouraging “buy”
Suppose merger increased their combined income to $26, all subject (after foreign tax credits) to U.S. tax. Transfer pricing is irrelevant, but now the after-tax is just $16.90.
(c) Deferral – In principle an indeterminate tradeoff between (a) and (b); in practice we can be confident that (a) is more significant.
Then the punchline:
"Our tax system is based on the concept of 'realization.' Individuals are not taxed until they actually sell property and realize their gains. But this system makes less sense for the publicly traded stocks of the superwealthy. A drastic change is necessary to fix this fundamental flaw in our tax system and finally require people like Warren E. Buffett, Mr. Ellison and others to pay at least a little income tax on their unsold shares. The fix is called mark-to-market taxation.
"For individuals and married couples who earn, say, more than $2.2 million in income, or own $5.7 million or more in publicly traded securities (representing the top 0.1 percent of families), the appreciation in their publicly traded stock and securities would be “marked to market” and taxed annually as if they had sold their positions at year’s end, regardless of whether the securities were actually sold. The tax could be imposed at long-term capital gains rates so tax rates would stay as they were.
"We could call this tax the 'Zuckerberg tax.' Under it, Mr. Zuckerberg would owe an additional $3.45 billion when Facebook went public (that’s 15 percent of the value of the roughly $23 billion of stock he owns). He could sell some shares to pay the tax (and would be left with over $20 billion of Facebook stock after tax), or borrow to pay the tax.
"If his Facebook shares decline in value next year, he’d get a refund."
David has previously published an article more fully explaining the proposal's details.
This is probably not my first-best proposal. Working from scratch, I might be more inclined to go for something like a progressive consumption tax, plus an inheritance tax for reasons requiring fuller explanation than I have room for here. An example of the concerns that the "Zuckerberg tax" proposal raises is the fact that non-publicly traded stock, such as Facebook pre-IPO, would not be reached (reflecting the measurement problems that underlie the realization concept).
I also would feel less sympathetic to the proposal if the corporate-level tax were operating more effectively. There would be much less ground for concern about Jobs', Ellison's, and Zuckerberg's personal income tax bills if their profits were being effectively taxed at the entity level. (Indeed, the huge tax that Zuckerberg is going to pay on exercising his stock options worth $5 billion will be wholly offset, leading to a net tax of zero, if Facebook has enough taxable income to use all the offsetting deductions.) But in fact the companies in these types of examples (looking beyond just Apple, Oracle, and Facebook) often pay very little U.S. income tax, because it is easy to play games with the underlying intellectual property so that it yields taxable income in the Caymans or Bermuda rather than here.
As it happens, we are not in a political world where all of the options are on the table. And if you compare Miller's proposal to, say, the talk emanating from the Obama Administration about a "Buffett rule" that apparently would go off adjusted gross income and be a second alternative minimum tax on top of the first one, it looks pretty good. In particular, the aim is much better if our concern lies with people in the top 0.1 percent who appear to be paying very little tax, whether directly or indirectly - and indeed (as the Ellison case shows) who may be paying far less than they would under a well-designed consumption tax.
So here's hoping that this is not just a one-day story in the New York Times op-ed page, and that the proposal indeed gets serious consideration, including from the Obama Administration.
Thursday, February 02, 2012
A fresh illustration comes from a recent Wall Street Journal blog posting, Laura Saunders' "What Was Mitt's Income in 2009?," available here.
Noting Romney's $4.8 million capital loss carryover to the 2010 tax year, along with other evidence (such as of estimated tax payments) on the 2010 return, Saunders cites Boston CPA Adam Gorlovsky-Schepp for the conclusion that "the Romneys’ 2009 adjusted gross income appears to have been about $6.47 million, with federal income tax of about $1.24 million," whereas "[i]n 2010 they paid nearly $3 million of tax on $21.6 million of income."
Saunders adds: "That would make their effective tax rate 19% in 2009, much higher than the nearly 14% rate they paid in 2010."
Ah, so Romney apparently paid a "fairer" tax rate in 2009 than 2010. Saunders doesn't say this, but may mean to imply that it is a logical conclusion.
Consider, however, that - unless tax planning incompetents were at the helm, which seems unlikely - Romney's 2009 capital losses must have reflected "loss harvesting," or systematically selling stocks that were worth less than their tax basis, while continuing to hold those that were appreciated. Now, despite the horrific stock market events of 2008 and 2009, it is entirely plausible that Romney's stock portfolio remained substantially appreciated on balance, given the massive overall stock market run-up over the two decades preceding 2008. There's certainly no reason to think it likely that he had purchased most of his stocks right at the end of the run-up, or just before the crash.
Given this set of issues, a tax rate computation that is based on Romney's adjusted gross income misses a large part of the picture. You have to think about economic income, not just taxable income, and about a long-term time horizon, not just the current year.
Wednesday, February 01, 2012
In a sense, one could compare the paper to Fellini's 8½. Just as 8½ is a film about not being able to make a film, so this is to some extent a paper about the difficulty of writing a paper.
Alex and I appear to agree, however, that the reason for our lesser success (as the paper uses this term) is our having a tougher job. In particular, tax policy analysis requires considering distribution issues that the rest of law and economics typically brushes aside (and indeed expressly leaves to us), and, with lump-sum taxes ruled out, we are required to labor in the thickets of second-best analysis, which is never particularly clean or clearcut.
I suppose my ego is sufficiently bound up in the question of how our field has performed that I don't especially like reading about our lack of "success" - in particular, when I myself code it (without any substantive disagreement with what Alex says) as a laudable reflection of our having collectively taken on tough and interesting issues of great theoretical complexity and practical importance. And how important are answers and influence, as compared to advancing intellectual understanding? (Which I believe we have collectively done.) Tastes may differ about this.
1) Bruce Bartlett, THE BENEFIT AND THE BURDEN: TAX REFORM, WHY WE NEED IT AND WHAT IT WILL TAKE - This is an excellent, wide-ranging guide to what matters about the U.S. federal income tax system, its history and problems, and where it might go next. Bartlett, who has been a favorite commentator of mine for many years, does a really excellent job of providing a lucid review that deserves (and I think will get) broad readership. Well-designed for citizens and voters without special expertise, but I could also imagine suggesting that students, say in an introductory Tax Policy class, dip into it, as they would learn a lot.
2) Edward J. McCaffery, THE OXFORD INTRODUCTIONS TO U.S. LAW: INCOME TAX LAW, EXPLORING THE CAPITAL-LABOR DIVIDE - Some guy named Shaviro is quoted on the back cover as saying the following: "This is a really excellent guide to the U.S. income tax that combines a powerful theoretical scaffolding with attention to important practical details. Ed McCaffery has the flair to explain clearly and entertainingly both the forest and the trees of our ill-functioning system. I will definitely recommend it to my students." On further review, let me re-endorse these comments. For my students in Tax I the next time I teach it (which will very likely be this fall), I will definitely be asking the bookstore to stock it as recommended reading, and perhaps even taking the view on my syllabus that the time has come to last to give it pride of place as recommended side reading, relative even to the Marvin Chirelstein "blue book" that has been rightly considered indispensable for so many decades (including back when I was a law student).
3) Stephen Leeb, RED ALERT: HOW CHINA'S GROWING PROSPERITY THREATENS THE AMERICAN WAY OF LIFE - This book is out of my area of expertise, and came to my attention through friends. The argument is that natural resource scarcity is a huge threat to the economic future of our country. China enters into the equation in a sense indirectly, on the view that (a) its rising prosperity means that it will be using far larger quantities of scarce and depleting natural resources (such as rare metals) than previously - just as the rise of the Chinese and Indian economies may affect global carbon emissions - and (b) that China, unlike the U.S., is farsightedly taking steps to ensure its own long-term access to these resources, which necessarily comes at the expense of others' access. Leeb argues that China's economic rise is likely to be sustainable, and that its government has been serious and capable in pursuing its population's long-term interest in material betterment. (This is not a conspiracy-theory book about the Chinese, although it does portray their government as surprisingly capable, perhaps a la Singapore on a much larger scale.) With enough terrible things to occupy us already - e.g., global warming, the threats of nuclear weapons dissemination and terrorism, the risk of more financial crises, the long-term U.S. fiscal gap , concerns about whether the U.S. political system is still able to function, etc. - it is hardly welcome to learn that we might have something else to worry about as well. But Leeb makes a serious case that deserves attention, in particular from people who are probably better situated than I am to offer their own judgments about the underlying issues. He makes a powerful and lucid case for his views.