Yesterday at the colloquium, we had a very enjoyable and stimulating session on Ed McCaffery's paper, "Bifurcation Blues: The Perils of Leaving Redistribution Aside." This was a very early draft (Ed had kindly offered to go early in the semester), but even as it stands it raises a number of interesting issues.
Not to presume, but it is possible that the concept of "bifurcation" will disappear from the paper at some point. Right at the start, the paper mentions the well-known public finance idea (going back to Richard Musgrave more than 50 years ago, but beyond that back to at least Adam Smith, and so far as I know perhaps the ancient Romans or Babylonians) that, at least as a conceptual matter, we should think separately about efficiency and distribution. AKA, the size of the pie and who gets what.
The paper then mentions the well-known (among academics) argument by Kaplow and Shavell that "legal rules" should aim purely at efficiency, leaving distribution to be handled entirely by the "tax system." "Legal rules" means such things as tort law, contract law, corporate governance rules, product liability, landlord-tenant law, etcetera, etcetera. The "tax system" includes the transfer system.
The basic Kaplow-Shavell argument is that any time we tilt a legal rule away from efficiency to serve distributional ends (e.g., favoring consumers who tend to be poor over business owners who tend to be rich), we both (a) distort labor supply, since money is being shifted from higher earners to lower earners, and (b) distort other stuff as well, such as optimal consumer contracts. By contrast, if we use the tax system to the same end, we just distort (a) but leave (b) alone. They argue that (b) is an additive distortion that is unlikely to mitigate (a), so you are probably just making things worse without increasing the amount of redistribution that you can accomplish.
McCaffery suggests in the paper that he is willing, at least for argument's sake, to accept Kaplow-Shavell as correct regarding the first-best, but that the "bifurcation" they endorse has failed in practice because we have not gotten nearly enough progressive redistribution from the tax system in actual practice.
As I read the piece, this led me to anticipate that he would start saying later on that we should also redistribute in all sorts of other ways, even though they might be inferior in pure efficiency terms, because otherwise, as a political matter, we will end up with too little redistribution (at least based on Ed's preferences, which I'll admit I generally share in this regard).
But that's not at all where the paper goes, at least in the current draft. Instead, its complaint about "bifurcation" has more in common with what I decided one might call the "A Funny Thing Happened on the Way to the Forum" problem.
I don't know if you've seen the uproarious film version of this inspired musical farce, starring Zero Mostel (and featuring the talents of Stephen Sondheim, among others), but it has a famous opening number, "Tragedy Tomorrow, Comedy Tonight." Sub in "efficiency" for "comedy" and "redistribution" for tragedy, and the paper complains that we are being told every night, in effect, "Tragedy tomorrow, comedy tonight." So it is never time, so far as the political system is concerned, for redistribution - despite, in Ed's view, not only his support for it but that of a majority of the American people.
What makes this arguably "bifurcation" is the idea that the two things are always done separately, In particular, he has in mind the adoption of tax cuts that are separated in voters' minds from the spending cuts they may ultimately necessitate (this of course is "starve the beast"), and the hijacking (in his view) of tax policy discussion to focus purely on efficiency and hence the case for low rates. And where this is financed through base-broadening (i.e., 1986-style tax reform) and thus isn't starve-the-beast, it's still limiting the issues on the table to efficiency if everyone agrees that the legislation has to be not just revenue-neutral but distribution-neutral.
I'm not sure how fruitful it is to link this with Kaplow-Shavell or Musgrave's multiple conceptual branches of government as types of "bifurcation." But this at some point becomes just a semantic question.
The paper also critiques the political economy effects of optimal income tax (OIT) theory, which ostensibly has helped in practice to push the case for relatively flat, rather than graduated rates. As it happens, on February 26 our speaker will be Peter Diamond, presenting a paper that offers an OIT-based argument for steeply graduated rates that might reach 70 percent or so at the top. But fair enough, OIT has typically been invoked in support of flattish rates, and for a good logical reason (rates at the low and middle ends are inframarginal for lots more taxpayers than those at the top - for example, if you'll be earning at least $1 million, your marginal incentives are wholly unaffected by the Social Security payroll tax that cuts off at about $110,000).
OIT is definitely not "bifurcation at work," however. If there is one thing that OIT clearly is, it is an effort to link and integrate efficiency considerations with those of distribution in determining what the rate structure.should look like.
Not to mention that it's far from clear how politically relevant OIT has ever been, even though people such as me, in our ruminations and writings, find it a nice instrument for thinking clearly about issues that have real-world relevance.
Moving beyond all the bifurcation talk, the paper's main themes (with my brief comments on them) include the following:
1) The big inequality problem in our society, it argues, is inequality of wealth. That is what the tax system should address, in Ed's view, and is not doing so nearly sufficiently. An interesting question is how this squares with Ed's prior work arguing that saving is good and that we should have a progressive consumption tax. If wealth is the problem, wouldn't you want to tax it? And individuals don't hold wealth unless they both (a) acquire it and (b) retain it, i.e.., by saving some of what they have acquired.
I know Ed disagrees about the view that there is a tension between his diagnosis (wealth inequality is the problem) and his prescription (don't tax wealth until it's spent), but I am not the only reader to believe that the tension was there, at least in this early draft.
2) The paper is extremely critical of the American Taxpayer Relief Act of 2012 (ATRA), which resolved the fiscal cliff showdown, on several grounds.
In particular, it argues that ATRA's distributional effects were blatantly misrepresented by both sides to the political negotiations. Everyone in Washington depicted it as purely a tax increase for upper income individuals, while middle class and poor taxpayers were held harmless. But by far the biggest tax increase that it contained in revenue terms, relative to the rules applying to 2012, was the expiration of the payroll tax holiday. Politicians threw sand in our eyes about this (or perhaps pulled the wool over our eyes and then started throwing sand) by scoring ATRA against a baseline in which the Bush tax cuts continued but the payroll tax holiday expired, which seems logically inconsistent.
As it happens, there is a decent logical argument for this. The payroll tax holiday was always meant by everyone to be temporary. By contrast, the Bush tax cuts were intended by proponents to be permanent, and indeed the Obama Administration's support for letting the high-end tax cuts expire was based on its view about good policy, not about what is current policy. Also, if one wants to condemn the Obama Administration for not fighting to extend the payroll tax holiday (which would have been good macroeconomic policy, while the labor market remains so suppressed), then one is blaming them for something that wouldn't have existed in the first place if they hadn't fought for it in prior go-rounds with the Congressional Republicans.
But on the other hand, yes, I agree that ATRA had big effects relative to the 2012 rules, which certainly offer a relevant datum, and that the "current policy" baseline was certainly all too convenient.for the parties in a way that may have misled millions of Americans and left them quite surprised when they noticed (if they noticed) that their paychecks in January 2013 were suddenly smaller than those from December 2012, all else equal.
3) A very powerful point in the paper concerns the decision in 2012 to extend or restore the estate tax, albeit with exemption levels that will keep 99.7 percent of decedents from being subject to it, while doing absolutely nothing about the tax-free step-up in asset basis at death. If transferring assets by gift or bequest were treated as a realization event, at least over some threshold income level or amount, games and tricks akin to those that clever planners continually deploy against the estate tax would be largely unavailing. Depending on the parameters, the tax liabilities imposed might be far greater. Moreover, at least in some key respects deadweight loss would go down, not up - there would be less tax motivation to hold appreciated assets indefinitely, rather than selling them when otherwise convenient. I agree with Ed that this was a bad outcome, taken as a unit, and that it reflects the interests of rich and powerful taxpayers in a manner that one can, if one likes, choose to find suspiciously convenient.
Wednesday, January 30, 2013
Wednesday, January 23, 2013
As Johny Rotten would say: "There is no reason why"
Try to make sense of Paul Ryan's colloquy with Ezra Klein regarding why, although he considers a disastrous U.S. debt crisis inevitable unless there's a radical change in our fiscal course, there should not even be a penny of tax rate increases as part of a fiscal deal to forestall the disaster. In other words, not just increasing marginal rates, but even reducing tax expenditures (such as allowing them to be claimed at only a 28 percent rate) would apparently be far worse than a cataclysmic global fiscal meltdown.
Ryan should probably be credited with being smart enough to know what silly and evasive nonsense he is spouting. He and his allies have chosen a fixed public political position, and he's not going to back off it just because an enterprising and knowledgeable reporter decides to give him a hard time. But it is fun to see how hard a time he has in defending it credibly (even though he's been around long enough to know the available scripts).
Ryan should probably be credited with being smart enough to know what silly and evasive nonsense he is spouting. He and his allies have chosen a fixed public political position, and he's not going to back off it just because an enterprising and knowledgeable reporter decides to give him a hard time. But it is fun to see how hard a time he has in defending it credibly (even though he's been around long enough to know the available scripts).
First 2013 meeting of the NYU Tax Policy Colloquium
Yesterday we had our first session of the 2013 NYU Tax Policy Colloquium, which is now in its 18th (!!) year. The paper was David Kamin's "Are We There Yet? On a Path to Closing America's Long-Run Deficit."
In a departure from our usual format, we had an extra guest commentator, Peter Orszag. (Not to be confused with Peter Ország.)
Some general throat-clearing up front: I like to use this blog to discuss the colloquium sessions, because they raise topics of general academic, intellectual, and policy interest as very broadly defined. But on the other hand the sessions are off the record, and though I don't think of myself as "press," that's effectively what I am when writing a blog post about a session. Plus, I don't want any of our speakers or other attendees to have any concern either that what they say will be repeated here, or that I am going to use this forum to pursue my side of a disagreement, and explain why I was right and they were wrong (a view that they may not share). So what I do here is ruminate (sounds exciting already, doesn't it) on my thoughts regarding the paper and the issues, along with other things that are in the record. (For example, Peter Orszag has just posted a Financial Times article on topics that were germane to yesterday's discussion.)
The main thrust of David's paper is that our fiscal situation isn't as bad as most believe. In particular, official CBO "alternative scenario" computations of the fiscal gap may be too pessimistic in a couple of respects. One is that they don't credit cost-saving measures in current law as likely to be continued by the Congress. A second is that they don't credit current commitments on both sides of the aisle to restrain indefinitely the level of discretionary spending substantially below historical levels (as a percentage of GDP). A third is that they assume income tax revenues will not be allowed to grow relative to GDP through real bracket creep.
That is, the income tax brackets are adjusted for inflation, but not for the fact that real income is growing. Thus, in theory the time may come down the road when, if the current rate brackets are retained with just inflation indexing, even low-income workers might reach the 39.6 percent bracket. This arguably is contrary to "true" current policy with regard to the rate structure. And it would lead to significant income tax revenue growth relative to GDP that also is arguably contrary to "true" current policy. Key point: none of this concerns whether real bracket creep and income tax revenue growth SHOULD be permitted. The issue is whether "current policy" for purposes of the fiscal baseline should be interpreted it as allowing it or not. CBO says no, David Kamin says maybe yes.
Perhaps the biggest issue in measuring the fiscal gap in long-term budget scenarios is how fast we should expect healthcare expenditures to grow. They have long been exhibiting an unsustainable growth rate relative to GDP. This is the main reason that the long-term scenarios look so dire. But David's article notes that the CBO forecast assumes that Congress will not permit efforts under current law to restrain excess growth to stay in effect indefinitely. On the other hand, it also assumes that at some point the growth rate of healthcare just has to somehow mysteriously slow all by itself, because otherwise the numbers would just get too crazy.
The Kamin article suggests that the CBO alternative scenario should not be so quick to assume that efforts mandated under current law will be shelved by the Congress and thus make the fiscal situation worse. It also argues that we should build into the baseline the significantly slower growth rate for healthcare that BOTH the Obama Administration projections and those under the Paul Ryan plan assert that they would produce. This ostensibly is a "lowest common denominator" area of agreement between the two - they have ostensibly agreed how much healthcare outlays should be allowed to increase, leaving only the question of how to get there methodologically (i.e., on the supplier side under traditional Medicare, or on the consumer side via Ryan's capped vouchers).
I'm not sure I find this persuasive. The two sides disagree so strongly about HOW healthcare growth should be slowed - they would use fundamentally different program designs that are hard to reconcile with each other - and they are so opposed to each other's approaches, as well as arguably retaining significant mutual veto power over each other's plans, that I draw little comfort from their having agreed on paper about the growth rate.
Peter Orszag's Financial Times article offers a different reason for thinking that healthcare growth will slow, based on recent data showing a significant slowdown that he argues (a) is not just from the recession and (b) may well reflect improvements in how Medicare operates. I don't have the expertise in healthcare to have a definite opinion on this, and even the experts would probably agree that, even if what Peter says is highly plausible, we'd need a few more years of data to get really confident about it.
A further underlying issue is the following. The Bush tax cuts, with their expiration dates that were widely expected not to stick, made such a total mockery of the "Current Law" baseline for doing fiscal gap measurements that the whole world pretty much decided to discount that baseline as, well, a mockery. But this required CBO to start exercising judgment about what "current policy" truly is for the alternative scenario that typically gets more attention. The fiscal cliff deal made "current law" less of a total farce than it had been for the last 12 years, so one could possibly advocate returning to it, on the ground that building in all the subjective judgment calls is no longer clearly worth it. But even a "current law" scenario, as it typically is done, ignores such actual features of present law as (a) the current legal effect on Social Security benefits of the Trust Fund's running out in about 20 years, (b) the current legal effect on Medicare Part A benefits of its Trust Fund running out later this decade, and (c) the debt ceiling.
Suppose one were to do a whole-hog "current law" fiscal gap estimate. Given the debt ceiling, if one interpreted current law as causing it to trump the spending rules on the books (despite arguments to the contrary, such as by Buchanan and Dorf), this would mean the fiscal gap was pretty much gone. But this arguably would be unilluminating about the true baseline that we should be considering. So even "current law" as practiced isn't really quite current law. And if we reverted to it as practiced (without the debt ceiling or trust fund limits on spending), then, even if initially it was not too terrible a baseline, would the gameplaying that made it unworkable from 2001 to 2012 just start all over again?
One topic I had in mind but that we didn't end up discussing: Being an analytical or art for art's sake type, rather than being interested just in what policy steps we should actually take, I think it is quite interesting to explore the question of what we mean by the "current path" of policy, what different purposes the baselines that we might use to make fiscal gap estimates can serve, how the measure might be adapted for each purpose, etc. I believe that it's hard to make good ad hoc judgments about measurement issues and such without taking the time to reflect a bit on what you are actually trying to do, and why. This topic of the conceptual underpinnings to fiscal gap measures and the like is one that I have written about in the past, and certainly could return to in the future. (I'm always looking for new topics when I do the colloquium, much like a shark sniffing coastal waters for blood.)
But I think I probably won't take up this topic again, even though there is some interesting territory that one could explore. My sense of things, from past forays into this area, is that very few people share my interest in these questions. For theoretical types, it's just too "applied." For people who are doing work on the fiscal gap, it's too theoretical - they want to go straight to the bottom line.
In a departure from our usual format, we had an extra guest commentator, Peter Orszag. (Not to be confused with Peter Ország.)
Some general throat-clearing up front: I like to use this blog to discuss the colloquium sessions, because they raise topics of general academic, intellectual, and policy interest as very broadly defined. But on the other hand the sessions are off the record, and though I don't think of myself as "press," that's effectively what I am when writing a blog post about a session. Plus, I don't want any of our speakers or other attendees to have any concern either that what they say will be repeated here, or that I am going to use this forum to pursue my side of a disagreement, and explain why I was right and they were wrong (a view that they may not share). So what I do here is ruminate (sounds exciting already, doesn't it) on my thoughts regarding the paper and the issues, along with other things that are in the record. (For example, Peter Orszag has just posted a Financial Times article on topics that were germane to yesterday's discussion.)
The main thrust of David's paper is that our fiscal situation isn't as bad as most believe. In particular, official CBO "alternative scenario" computations of the fiscal gap may be too pessimistic in a couple of respects. One is that they don't credit cost-saving measures in current law as likely to be continued by the Congress. A second is that they don't credit current commitments on both sides of the aisle to restrain indefinitely the level of discretionary spending substantially below historical levels (as a percentage of GDP). A third is that they assume income tax revenues will not be allowed to grow relative to GDP through real bracket creep.
That is, the income tax brackets are adjusted for inflation, but not for the fact that real income is growing. Thus, in theory the time may come down the road when, if the current rate brackets are retained with just inflation indexing, even low-income workers might reach the 39.6 percent bracket. This arguably is contrary to "true" current policy with regard to the rate structure. And it would lead to significant income tax revenue growth relative to GDP that also is arguably contrary to "true" current policy. Key point: none of this concerns whether real bracket creep and income tax revenue growth SHOULD be permitted. The issue is whether "current policy" for purposes of the fiscal baseline should be interpreted it as allowing it or not. CBO says no, David Kamin says maybe yes.
Perhaps the biggest issue in measuring the fiscal gap in long-term budget scenarios is how fast we should expect healthcare expenditures to grow. They have long been exhibiting an unsustainable growth rate relative to GDP. This is the main reason that the long-term scenarios look so dire. But David's article notes that the CBO forecast assumes that Congress will not permit efforts under current law to restrain excess growth to stay in effect indefinitely. On the other hand, it also assumes that at some point the growth rate of healthcare just has to somehow mysteriously slow all by itself, because otherwise the numbers would just get too crazy.
The Kamin article suggests that the CBO alternative scenario should not be so quick to assume that efforts mandated under current law will be shelved by the Congress and thus make the fiscal situation worse. It also argues that we should build into the baseline the significantly slower growth rate for healthcare that BOTH the Obama Administration projections and those under the Paul Ryan plan assert that they would produce. This ostensibly is a "lowest common denominator" area of agreement between the two - they have ostensibly agreed how much healthcare outlays should be allowed to increase, leaving only the question of how to get there methodologically (i.e., on the supplier side under traditional Medicare, or on the consumer side via Ryan's capped vouchers).
I'm not sure I find this persuasive. The two sides disagree so strongly about HOW healthcare growth should be slowed - they would use fundamentally different program designs that are hard to reconcile with each other - and they are so opposed to each other's approaches, as well as arguably retaining significant mutual veto power over each other's plans, that I draw little comfort from their having agreed on paper about the growth rate.
Peter Orszag's Financial Times article offers a different reason for thinking that healthcare growth will slow, based on recent data showing a significant slowdown that he argues (a) is not just from the recession and (b) may well reflect improvements in how Medicare operates. I don't have the expertise in healthcare to have a definite opinion on this, and even the experts would probably agree that, even if what Peter says is highly plausible, we'd need a few more years of data to get really confident about it.
A further underlying issue is the following. The Bush tax cuts, with their expiration dates that were widely expected not to stick, made such a total mockery of the "Current Law" baseline for doing fiscal gap measurements that the whole world pretty much decided to discount that baseline as, well, a mockery. But this required CBO to start exercising judgment about what "current policy" truly is for the alternative scenario that typically gets more attention. The fiscal cliff deal made "current law" less of a total farce than it had been for the last 12 years, so one could possibly advocate returning to it, on the ground that building in all the subjective judgment calls is no longer clearly worth it. But even a "current law" scenario, as it typically is done, ignores such actual features of present law as (a) the current legal effect on Social Security benefits of the Trust Fund's running out in about 20 years, (b) the current legal effect on Medicare Part A benefits of its Trust Fund running out later this decade, and (c) the debt ceiling.
Suppose one were to do a whole-hog "current law" fiscal gap estimate. Given the debt ceiling, if one interpreted current law as causing it to trump the spending rules on the books (despite arguments to the contrary, such as by Buchanan and Dorf), this would mean the fiscal gap was pretty much gone. But this arguably would be unilluminating about the true baseline that we should be considering. So even "current law" as practiced isn't really quite current law. And if we reverted to it as practiced (without the debt ceiling or trust fund limits on spending), then, even if initially it was not too terrible a baseline, would the gameplaying that made it unworkable from 2001 to 2012 just start all over again?
One topic I had in mind but that we didn't end up discussing: Being an analytical or art for art's sake type, rather than being interested just in what policy steps we should actually take, I think it is quite interesting to explore the question of what we mean by the "current path" of policy, what different purposes the baselines that we might use to make fiscal gap estimates can serve, how the measure might be adapted for each purpose, etc. I believe that it's hard to make good ad hoc judgments about measurement issues and such without taking the time to reflect a bit on what you are actually trying to do, and why. This topic of the conceptual underpinnings to fiscal gap measures and the like is one that I have written about in the past, and certainly could return to in the future. (I'm always looking for new topics when I do the colloquium, much like a shark sniffing coastal waters for blood.)
But I think I probably won't take up this topic again, even though there is some interesting territory that one could explore. My sense of things, from past forays into this area, is that very few people share my interest in these questions. For theoretical types, it's just too "applied." For people who are doing work on the fiscal gap, it's too theoretical - they want to go straight to the bottom line.
Friday, January 18, 2013
Final word (I hope) on the debt ceiling crisis
Perhaps I am tempting fate by jumping the gun here, but increasingly the evidence is mounting of Republican climb-down from their threat of nuking the U.S. and world economies unless the Obama Administration does their bidding instead of that of a majority of U.S. voters.
This appears to make it very clear, at least ex post, that the Administration made the right political call by rejecting the constitutional and platinum coin options that a range of commentators, including me, were urging it to consider. Had the Administration said that it would invoke one of those options to avoid default, it seems in retrospect highly likely that the Republicans would not have backed off. Blowing past the debt ceiling would then have been a device to attack Obama for tyranny or illegality or whatever, while being largely shielded from the consequences of default. (There would still have been some significant economic consequences, but the question of public blame might have been more ambiguous.)
The apparently positive playout from the Obama Administration's political strategy does not, of course, undermine the legal arguments that were being made in favor of those courses of action. And the proponents of the various workarounds may also conceivably have strengthened the Administration's position, such as by permitting it to make a powerful statement through disavowal. In other words, arguably we played a useful role in the broader drama, even if we didn't think that was what we were doing.
Obviously, one could ask how certain ex ante the favorable outcome that we appear to be witnessing ex post actually was. In addition, we are not quite through to the other side yet - I will certainly feel silly about this post if we end up facing a debt catastrophe after all.
But suppose the debt crisis does indeed evaporate. For my part, rather than gnashing my teeth over the possibility that the Obama Administration's political judgment may have been better than mine on this matter, I am actually quite relieved. Sitting where I am, sussing out political strategies is just a parlor game. Even just from an intellectual standpoint, it's tangential to the issues on which I would actually want to claim expertise. But what those guys do actually matters.
During Obama's first term, I was frequently distressed to see the Administration making what I considered silly and naive tactical and strategic misjudgments. I would then later conclude that my misgivings had indeed been borne out by events. It certainly feels much better, this time around, to get the idea that they actually know what they are doing.
This appears to make it very clear, at least ex post, that the Administration made the right political call by rejecting the constitutional and platinum coin options that a range of commentators, including me, were urging it to consider. Had the Administration said that it would invoke one of those options to avoid default, it seems in retrospect highly likely that the Republicans would not have backed off. Blowing past the debt ceiling would then have been a device to attack Obama for tyranny or illegality or whatever, while being largely shielded from the consequences of default. (There would still have been some significant economic consequences, but the question of public blame might have been more ambiguous.)
The apparently positive playout from the Obama Administration's political strategy does not, of course, undermine the legal arguments that were being made in favor of those courses of action. And the proponents of the various workarounds may also conceivably have strengthened the Administration's position, such as by permitting it to make a powerful statement through disavowal. In other words, arguably we played a useful role in the broader drama, even if we didn't think that was what we were doing.
Obviously, one could ask how certain ex ante the favorable outcome that we appear to be witnessing ex post actually was. In addition, we are not quite through to the other side yet - I will certainly feel silly about this post if we end up facing a debt catastrophe after all.
But suppose the debt crisis does indeed evaporate. For my part, rather than gnashing my teeth over the possibility that the Obama Administration's political judgment may have been better than mine on this matter, I am actually quite relieved. Sitting where I am, sussing out political strategies is just a parlor game. Even just from an intellectual standpoint, it's tangential to the issues on which I would actually want to claim expertise. But what those guys do actually matters.
During Obama's first term, I was frequently distressed to see the Administration making what I considered silly and naive tactical and strategic misjudgments. I would then later conclude that my misgivings had indeed been borne out by events. It certainly feels much better, this time around, to get the idea that they actually know what they are doing.
Tuesday, January 15, 2013
This and that
The 2013 NYU Tax Policy Colloquium, which I will be co-leading with Bill Gale, starts next Tuesday, Jan 22, at 4 pm in NYU Law School (Vanderbilt Hall, room 208). The first paper, which we'll discuss on that date, is "Are We There Yet?: On a Path to Closing America's Long-Run Deficit," by my NYU colleague David Kamin. Peter Orszag will also be there, as a guest commentator.
The website for the Tax Policy Colloquium is here. The Kamin paper is available for download if you scroll down the page a bit, and other papers for later weeks should be posted fairly soon.
We will probably have dinner slots available after the session. The dinner will be at Lupa, a very nice nearby place, and anyone attending the session is welcome to sign up if we still have slots (the dinner group is capped at 8).
In other news of specialized interest, people who are planning to use the Bankman-Shaviro-Stark casebook, "Federal Income Taxation," this semester should know that we will have a brief update available shortly, covering the most important changes, for Tax I purposes, that were made by the American Taxpayer Relief Act of 2012.
The website for the Tax Policy Colloquium is here. The Kamin paper is available for download if you scroll down the page a bit, and other papers for later weeks should be posted fairly soon.
We will probably have dinner slots available after the session. The dinner will be at Lupa, a very nice nearby place, and anyone attending the session is welcome to sign up if we still have slots (the dinner group is capped at 8).
In other news of specialized interest, people who are planning to use the Bankman-Shaviro-Stark casebook, "Federal Income Taxation," this semester should know that we will have a brief update available shortly, covering the most important changes, for Tax I purposes, that were made by the American Taxpayer Relief Act of 2012.
Possible link (if it works) to my panel this morning
As per my prior post, this morning I took part in an NYSSCPA Breakfast Briefing entitled "After the Cliff: Implications of the American Taxpayer Relief Act" (ATRA).
Topics that we discussed included, among others: how ATRA plus the phase-in of the healthcare legislation are affecting 2013 taxes, the debt ceiling crisis, long-term budgetary issues, and the meaning of and prospects for "tax reform." I had something to say on each of these topics, but pretty much had the floor, near the end of the session, to discuss the last of these topics.
A link to a video of the entire session MAY be available here. I say "may" because I can't get it to load on my computer, but I don't know if this is an idiosyncratic problem.
UPDATE: I gather that the link doesn't work, but that the session will be posted on youtube shortly. When that happens, I will re-post it here.
Topics that we discussed included, among others: how ATRA plus the phase-in of the healthcare legislation are affecting 2013 taxes, the debt ceiling crisis, long-term budgetary issues, and the meaning of and prospects for "tax reform." I had something to say on each of these topics, but pretty much had the floor, near the end of the session, to discuss the last of these topics.
A link to a video of the entire session MAY be available here. I say "may" because I can't get it to load on my computer, but I don't know if this is an idiosyncratic problem.
UPDATE: I gather that the link doesn't work, but that the session will be posted on youtube shortly. When that happens, I will re-post it here.
Monday, January 14, 2013
Budget and tax discussion in NYC on Tuesday, January 15
It's probably a bit last minute for people to make plans about this, but I will be speaking at a session tomorrow morning (Tuesday, January 15) that is open to the public. There will also, I believe, be a publicly available webcast and/or video of the session.
This event is sponsored by the New York State Society of Certified Public Accountants (NYSSCPA), as part of their 2013 Breakfast Briefing Series, and it's entitled "After the Cliff: Implications of the American Taxpayer Relief Act." I believe the topics will include, not just the aforenamed legislation that resolved the "fiscal cliff" standoff, but the upcoming debt ceiling fight, the short-term and long-term budget picture, fundamental tax reform, and entitlements reform.
It will take place from 8:30 to 10:30 am at the NYSSCPA office, 3 Park Avenue (at 34th Street) in NYC, on the 19th floor.
The other panelists will be (1) Laura Saunders of the Wall Street Journal, (2) David A. Lifson, a leading New York CPA, and (3) Richard W. Peach, a senior vice president in the Macroeconomic and Monetary Studies Function at the Federal Reserve Bank of New York.
Added attraction (?) for potential attendees or viewers who know me: I have been growing a beard over the Christmas break, and while it is unlikely to last much longer, it will greet the glare of day tomorrow morning at the session.
This event is sponsored by the New York State Society of Certified Public Accountants (NYSSCPA), as part of their 2013 Breakfast Briefing Series, and it's entitled "After the Cliff: Implications of the American Taxpayer Relief Act." I believe the topics will include, not just the aforenamed legislation that resolved the "fiscal cliff" standoff, but the upcoming debt ceiling fight, the short-term and long-term budget picture, fundamental tax reform, and entitlements reform.
It will take place from 8:30 to 10:30 am at the NYSSCPA office, 3 Park Avenue (at 34th Street) in NYC, on the 19th floor.
The other panelists will be (1) Laura Saunders of the Wall Street Journal, (2) David A. Lifson, a leading New York CPA, and (3) Richard W. Peach, a senior vice president in the Macroeconomic and Monetary Studies Function at the Federal Reserve Bank of New York.
Added attraction (?) for potential attendees or viewers who know me: I have been growing a beard over the Christmas break, and while it is unlikely to last much longer, it will greet the glare of day tomorrow morning at the session.
Thursday, January 10, 2013
The right way to do the platinum coin option
From Steve Randy Waldman, a suggestion regarding how the platinum coin option might actually be implemented:
"The Treasury won’t and shouldn’t mint a single, one-trillion-dollar platinum coin and deposit it with the Federal Reserve. That’s fun to talk about but dumb to do. It just sounds too crazy. But the Treasury might still plan for coin seigniorage. The Treasury Secretary would announce that he is obliged by law to make certain payments, but that the debt ceiling prevents him from borrowing to meet those obligations. Although current institutional practice makes the Federal Reserve the nation’s primary issuer of currency, Congress in its foresight gave this power to the US Treasury as well. Following a review of the matter, the Secretary would tell us, Treasury lawyers have determined that once the capacity to make expenditures by conventional means has been exhausted, issuing currency will be the only way Treasury can reconcile its legal obligation simultaneously to make payments and respect the debt ceiling. Therefore, Treasury will reluctantly issue currency in large denominations (as it has in the past) in order to pay its bills. In practice, that would mean million-, not trillion-, dollar coins, which would be produced on an 'as-needed' basis to meet the government’s expenses until borrowing authority has been restored. On the same day, the Federal Reserve would announce that it is aware of the exigencies facing the Treasury, and that, in order to fulfill its legal mandate to promote stable prices, it will 'sterilize' any issue of currency by the Treasury, selling assets from its own balance sheet one-for-one. The Chairman of the Federal Reserve would hold a press conference and reassure the public that he foresees no difficulty whatsoever in preventing inflation, that the Federal Reserve has the capacity to 'hoover up' nearly three trillion dollars of currency and reserves at will."
"That would be it. There would be no farcical march by the Secretary to the central bank. The coins would actually circulate (collectors’ items for billionaires!), but most of them would find their way back to the Fed via the private banking system. The net effect of the operation would be equivalent to borrowing by the Treasury: instead of paying interest directly to creditors, Treasury would forgo revenue that it otherwise would have received from the Fed, revenue the Fed would have earned on the assets it would sell to the public to sterilize the new currency. The whole thing would be a big nothingburger, except to the people who had hoped to use debt-ceiling chicken as leverage to achieve political goals."
And from earlier in the same post:
"The economics of 'coin seigniorage' are not, in fact, rinky-dink. Having a trillion dollar coin at the Fed and a trillion dollars in reserves for the government to spend is substantively indistinguishable from having a trillion dollars in US Treasury bills at the Fed and the same level of deposits with the Federal Reserve. The benefit of the plan (depending on your politics) is that it circumvents an institutional quirk, the debt ceiling. The cost of the plan is that it would inflame US politics, and there is a slim chance that it would make Paul Krugman’s 'confidence fairies' suddenly become real. But note that both of these costs are matters of perception. Perception depends not only on what you do, but also on how you do it. "
"The Treasury won’t and shouldn’t mint a single, one-trillion-dollar platinum coin and deposit it with the Federal Reserve. That’s fun to talk about but dumb to do. It just sounds too crazy. But the Treasury might still plan for coin seigniorage. The Treasury Secretary would announce that he is obliged by law to make certain payments, but that the debt ceiling prevents him from borrowing to meet those obligations. Although current institutional practice makes the Federal Reserve the nation’s primary issuer of currency, Congress in its foresight gave this power to the US Treasury as well. Following a review of the matter, the Secretary would tell us, Treasury lawyers have determined that once the capacity to make expenditures by conventional means has been exhausted, issuing currency will be the only way Treasury can reconcile its legal obligation simultaneously to make payments and respect the debt ceiling. Therefore, Treasury will reluctantly issue currency in large denominations (as it has in the past) in order to pay its bills. In practice, that would mean million-, not trillion-, dollar coins, which would be produced on an 'as-needed' basis to meet the government’s expenses until borrowing authority has been restored. On the same day, the Federal Reserve would announce that it is aware of the exigencies facing the Treasury, and that, in order to fulfill its legal mandate to promote stable prices, it will 'sterilize' any issue of currency by the Treasury, selling assets from its own balance sheet one-for-one. The Chairman of the Federal Reserve would hold a press conference and reassure the public that he foresees no difficulty whatsoever in preventing inflation, that the Federal Reserve has the capacity to 'hoover up' nearly three trillion dollars of currency and reserves at will."
"That would be it. There would be no farcical march by the Secretary to the central bank. The coins would actually circulate (collectors’ items for billionaires!), but most of them would find their way back to the Fed via the private banking system. The net effect of the operation would be equivalent to borrowing by the Treasury: instead of paying interest directly to creditors, Treasury would forgo revenue that it otherwise would have received from the Fed, revenue the Fed would have earned on the assets it would sell to the public to sterilize the new currency. The whole thing would be a big nothingburger, except to the people who had hoped to use debt-ceiling chicken as leverage to achieve political goals."
And from earlier in the same post:
"The economics of 'coin seigniorage' are not, in fact, rinky-dink. Having a trillion dollar coin at the Fed and a trillion dollars in reserves for the government to spend is substantively indistinguishable from having a trillion dollars in US Treasury bills at the Fed and the same level of deposits with the Federal Reserve. The benefit of the plan (depending on your politics) is that it circumvents an institutional quirk, the debt ceiling. The cost of the plan is that it would inflame US politics, and there is a slim chance that it would make Paul Krugman’s 'confidence fairies' suddenly become real. But note that both of these costs are matters of perception. Perception depends not only on what you do, but also on how you do it. "
Call for Papers - 106th Annual NTA Tax Conference
The Call for Papers for the National Tax Association's 106th Annual Conference on Taxation has now gone live. As per my earlier blog entry on this, the conference will be held at the Grand Hyatt Tampa Bay in Tampa, Florida, on November 21 through 23 of this year. Tracy Gordon and I are the program chairs.
All submissions of papers and proposed sessions should be done electronically, and the link is here. The deadline for submissions is May 3, and decisions regarding inclusion will be announced in June.
All submissions of papers and proposed sessions should be done electronically, and the link is here. The deadline for submissions is May 3, and decisions regarding inclusion will be announced in June.
Follow-up on the scrip option
Courtesy of David Kamin, I note some additional issues that the use of scrip might raise. Both as a legal matter and in practical terms (especially for people who are cash-constrained), scrip is not quite the same as cash. Thus, while offering it is probably better than just not paying people, its use would still pose such problems as the following:
--Paying off bonds with scrip would still technically be default. So cash would still be used for that, and also perhaps for various other purposes. So the Treasury would still be prioritizing payments, raising both political and legal issues as well as that of technical feasibility (the computer systems problem).
--It's up to the mysterious wisdom of the bond markets, even if bondholders still get cash, to what extent the use of scrip to pay amounts that were legally due in cash avoids weakening our reputation as a reliable borrower.
--People who are relatively poor and/or cash-constrained would especially face the non-cash equivalence problem. Beyond merely earning zero interest if they just hold onto it (which of course is equally true of cash), they might be hit with a steep discount if they tried to sell or deposit it. This would not merely raise distributional concerns, but might also have a macroeconomic impact on consumer spending - again, if one compares it to finding a way for the government to keep paying out cash, rather than to just doing nothing.
In sum, I certainly agree that using scrip is both (a) likely to be much better than just doing nothing and (b) worth considering as perhaps the ultimate best course to follow. But given these downsides, it is not necessarily the best option. I myself still tend to favor the platinum coin, although ultimately this is an empirical question (turning on how the various alternatives would in fact play out, economically and politically) to which I cannot claim to know the answer.
--Paying off bonds with scrip would still technically be default. So cash would still be used for that, and also perhaps for various other purposes. So the Treasury would still be prioritizing payments, raising both political and legal issues as well as that of technical feasibility (the computer systems problem).
--It's up to the mysterious wisdom of the bond markets, even if bondholders still get cash, to what extent the use of scrip to pay amounts that were legally due in cash avoids weakening our reputation as a reliable borrower.
--People who are relatively poor and/or cash-constrained would especially face the non-cash equivalence problem. Beyond merely earning zero interest if they just hold onto it (which of course is equally true of cash), they might be hit with a steep discount if they tried to sell or deposit it. This would not merely raise distributional concerns, but might also have a macroeconomic impact on consumer spending - again, if one compares it to finding a way for the government to keep paying out cash, rather than to just doing nothing.
In sum, I certainly agree that using scrip is both (a) likely to be much better than just doing nothing and (b) worth considering as perhaps the ultimate best course to follow. But given these downsides, it is not necessarily the best option. I myself still tend to favor the platinum coin, although ultimately this is an empirical question (turning on how the various alternatives would in fact play out, economically and politically) to which I cannot claim to know the answer.
Another way out of the blackmail scenario
Scrip in lieu of bonds or cash, this time courtesy of Ed Kleinbard in the NYT.
The key market question here is whether the scrip would generally be accepted as cash-equivalent, and my guess is that it would.
I agree with the Administration's unwillingness to say in advance that it will actually do any of these things to avoid disaster, since that would reduce the pressure on the blackmailers to act honorably and responsibly. But when the crunch comes, it would be horribly negligent to permit disaster.
The judgment of which escape route to use, among the various alternatives, is quite a tricky one. It involves not just straight-up legal analysis, but also prediction of what politically motivated courts might do, along with forecasting how the markets would react and war-gaming the political playout. Better to have many options than one or none, however, at least if they can make a good call.
The key market question here is whether the scrip would generally be accepted as cash-equivalent, and my guess is that it would.
I agree with the Administration's unwillingness to say in advance that it will actually do any of these things to avoid disaster, since that would reduce the pressure on the blackmailers to act honorably and responsibly. But when the crunch comes, it would be horribly negligent to permit disaster.
The judgment of which escape route to use, among the various alternatives, is quite a tricky one. It involves not just straight-up legal analysis, but also prediction of what politically motivated courts might do, along with forecasting how the markets would react and war-gaming the political playout. Better to have many options than one or none, however, at least if they can make a good call.
Wednesday, January 09, 2013
Laurence Tribe on the platinum coin option
Courtesy of the Washington Monthly, which asked if the "loophole" of using a $1 trillion platinum coin to avoid a debt limit problem was legally permissible, Tribe answered as follows:
"I don’t think it makes sense to think about this as some sort of 'loophole' issue. Using the statute this way doesn’t entail exploiting a loophole; it entails just reading the plain language that Congress used. The statute clearly does authorize the issuance of trillion-dollar coins. First, the statute itself doesn’t set any limit on coin value. Second, other clauses of 31 USC §5112 do set such limits, but §5112(k)—dealing with platinum coins—does not. So expressio unius strengthens the inference that there isn’t any limit here.
"Of course, Congress probably didn’t have trillion-dollar coins in mind, but there’s no textual or other legal basis for importing this probable intention into the statute. What 535 people might have had in their collective 'mind' just can’t control the meaning of a law this clear.
"It’s also quite clear that the minting of such a coin couldn’t be challenged; I don’t see who would have standing.
"Bottom line: This is a situation where the political and economic considerations, not the legal considerations, have to drive the decision-making about this option. It’s certainly a lot better from just about every perspective than having the nation stuck on either horn of the very real dilemma you outlined below, which I agree offers no plausible way out as long as enough leaders in Congress insist on playing Russian Roulette with our economy and risking our full faith and credit by using the debt ceiling as a bargaining chip as they are threatening to do."
"I don’t think it makes sense to think about this as some sort of 'loophole' issue. Using the statute this way doesn’t entail exploiting a loophole; it entails just reading the plain language that Congress used. The statute clearly does authorize the issuance of trillion-dollar coins. First, the statute itself doesn’t set any limit on coin value. Second, other clauses of 31 USC §5112 do set such limits, but §5112(k)—dealing with platinum coins—does not. So expressio unius strengthens the inference that there isn’t any limit here.
"Of course, Congress probably didn’t have trillion-dollar coins in mind, but there’s no textual or other legal basis for importing this probable intention into the statute. What 535 people might have had in their collective 'mind' just can’t control the meaning of a law this clear.
"It’s also quite clear that the minting of such a coin couldn’t be challenged; I don’t see who would have standing.
"Bottom line: This is a situation where the political and economic considerations, not the legal considerations, have to drive the decision-making about this option. It’s certainly a lot better from just about every perspective than having the nation stuck on either horn of the very real dilemma you outlined below, which I agree offers no plausible way out as long as enough leaders in Congress insist on playing Russian Roulette with our economy and risking our full faith and credit by using the debt ceiling as a bargaining chip as they are threatening to do."
Tuesday, January 08, 2013
How is the debt ceiling blackmail crisis likely to play out?
Four policy analysts at the Bipartisan Policy Center have published an eye-opening set of slides regarding how the debt ceiling blackmail crisis is actually likely to play out. It's available here, and very well worth reading.
The authors ask the following 3 questions, and offer, in the main, the following answers:
(1) What is the "X Date" - that is, the date on which the Treasury will lack sufficient cash to pay all of its bills in full and on time? Although in 2011, "extraordinary measures" bought the Treasury a full 2-1/2 months, this time around it's going to be worse. February is a less fruitful time than the summer for these games, and fewer measures are available this time. Check the slides for the full gory details, which are rich in particular institutional detail. But the bottom line is: the X date is likely to fall between February 15 and March 1.
(2) Once the X Date is reached, what would be the effect on government operations? The answer here is very grim. Consider the approach everyone has been assuming, which is to pay some bills but not others. It's "[u]nclear if [this] is feasible, given the design of Treasury's computer systems." Massive chaos is likely to result. In short, we can sit around a room and say what types of things we would prioritize if we were running the Treasury But actually implementing it might be extremely difficult, even leaving aside the massive political and legal uproar. And think of all the uncertainty for people who are trying to pay their daily bills and have money due from the government. I myself am wondering whether I should file my tax return early, in the event that I might end up with a refund. But suppose I needed a government check in order to pay next month's rent, or else to pay my employees.
"Roughly 40% of the funds owed for the month would go unpaid." This is one reason why Bernanke anticipates rapid and severe macroeconomic disaster once the X Date is reached - without even getting into questions of how our credit rating is affected.
In addition, daily "inflows and outflows do not match up well and are quite 'lumpy.'" For example, on February 15 they estimate that the government will receive $9 billion and owe $52 billion. By contrast, on February 19 it will get $15 billion and owe $16 billion.
This is one reason why I myself consider it quite plausible that the government will end up following the second payment alternative that they suggest, in lieu of prioritization. Here, rather than deciding which bills to pay - which would require the Treasury to "sort and choose from well over 100 million monthly payments" - it would wait to pay each day's bills in full until there was enough cash for the whole thing. Thus, perhaps the bills for X Day + 1 would be paid 2 days late, those for X Day + 2 would be 4 days late, etcetera. (Perhaps, if the Treasury's computers are amenable, they would pay bond creditors daily and do this for everything else.)
(3) What would be the market risks? The 2011 blackmail crisis was relatively cheap, although it will cost us $18.9 billion of extra interest payments over the ten-year period. That equals the positive 2012 revenue estimate for the much disputed Medicare "doc fix." But this time around would be potentially much worse. Billions of dollars worth of bills would go unpaid. There would be chaos, intense media attention, political hysteria, and probably lawsuits. The Treasury is going to have to roll over $500 billion in debt instruments during the period from February 15 to March 15. It will "have to pay higher interest rates to attract new buyers," and it is perhaps even "possible, if unlikely, that not enough bidders would appear."
Rating agency downgrades could also be more extensive and costly this time around. And the market risks beyond the X Date could ripple through to the equity markets (with effects on millions of people's pensions), as well as to our economy and the global financial system. "No guarantee of the outcome; risks are risks."
The authors ask the following 3 questions, and offer, in the main, the following answers:
(1) What is the "X Date" - that is, the date on which the Treasury will lack sufficient cash to pay all of its bills in full and on time? Although in 2011, "extraordinary measures" bought the Treasury a full 2-1/2 months, this time around it's going to be worse. February is a less fruitful time than the summer for these games, and fewer measures are available this time. Check the slides for the full gory details, which are rich in particular institutional detail. But the bottom line is: the X date is likely to fall between February 15 and March 1.
(2) Once the X Date is reached, what would be the effect on government operations? The answer here is very grim. Consider the approach everyone has been assuming, which is to pay some bills but not others. It's "[u]nclear if [this] is feasible, given the design of Treasury's computer systems." Massive chaos is likely to result. In short, we can sit around a room and say what types of things we would prioritize if we were running the Treasury But actually implementing it might be extremely difficult, even leaving aside the massive political and legal uproar. And think of all the uncertainty for people who are trying to pay their daily bills and have money due from the government. I myself am wondering whether I should file my tax return early, in the event that I might end up with a refund. But suppose I needed a government check in order to pay next month's rent, or else to pay my employees.
"Roughly 40% of the funds owed for the month would go unpaid." This is one reason why Bernanke anticipates rapid and severe macroeconomic disaster once the X Date is reached - without even getting into questions of how our credit rating is affected.
In addition, daily "inflows and outflows do not match up well and are quite 'lumpy.'" For example, on February 15 they estimate that the government will receive $9 billion and owe $52 billion. By contrast, on February 19 it will get $15 billion and owe $16 billion.
This is one reason why I myself consider it quite plausible that the government will end up following the second payment alternative that they suggest, in lieu of prioritization. Here, rather than deciding which bills to pay - which would require the Treasury to "sort and choose from well over 100 million monthly payments" - it would wait to pay each day's bills in full until there was enough cash for the whole thing. Thus, perhaps the bills for X Day + 1 would be paid 2 days late, those for X Day + 2 would be 4 days late, etcetera. (Perhaps, if the Treasury's computers are amenable, they would pay bond creditors daily and do this for everything else.)
(3) What would be the market risks? The 2011 blackmail crisis was relatively cheap, although it will cost us $18.9 billion of extra interest payments over the ten-year period. That equals the positive 2012 revenue estimate for the much disputed Medicare "doc fix." But this time around would be potentially much worse. Billions of dollars worth of bills would go unpaid. There would be chaos, intense media attention, political hysteria, and probably lawsuits. The Treasury is going to have to roll over $500 billion in debt instruments during the period from February 15 to March 15. It will "have to pay higher interest rates to attract new buyers," and it is perhaps even "possible, if unlikely, that not enough bidders would appear."
Rating agency downgrades could also be more extensive and costly this time around. And the market risks beyond the X Date could ripple through to the equity markets (with effects on millions of people's pensions), as well as to our economy and the global financial system. "No guarantee of the outcome; risks are risks."
Monday, January 07, 2013
Another debt ceiling argument
Following up on my recent post noting arguments in the vein of "the Constitution is not a suicide pact" in favor of President Obama's power to act unilaterally to raise the debt ceiling, in order to avert the possibility of national and global economic disaster if the Congressional terrorists pull the trigger, I wanted to note yet another argument in favor of the same conclusion.
This is an argument made by Neil Buchanan and Michael Dorf in their recent article, How to Choose the Least Unconstitutional Option: Lessons for the President (and Others) from the Debt Ceiling Standoff, 112 Colum. L. Rev. 1175 (2012). Last month, they published on-line a handy update and short summary that is readily accessible, entitled "Nullifying the Debt Ceiling Threat Once and for All: Why the President Should Embrace the Least Unconstitutional Option," available here.
Their argument is as follows. Suppose that it is illegal for the president to violate a Congressional command by issuing debt in excess of the authorized ceiling. It also, however, is illegal for him to refuse to spend funds appropriated by Congress, and to levy taxes in excess of those authorized by Congress.
Hence, when the debt ceiling weapon goes off, he faces a "trilemma." Since Congress has made it mathematically impossible for him to honor its statutory commands regarding debt issuance, spending, and taxes, he must violate one of the three commands. In doing so, they argue that he must choose the "least unconstitutional" course, or the one which does the least harm to separation of powers concepts.
Suppose he decided to levy new taxes to make up the difference. This would clearly be an unauthorized power grab, involving undue exercise of what are effectively legislative powers. So it would be the wrong way to solve the trilemma.
I'm sure everyone would agree with Buchanan and Dorf about that. But next, they argue, suppose he decides to engage in unilateral prioritizing of expenditure commands. In effect, he decides, I'll honor spending commands A, B, C, and D. But, since that uses up all the money I have available, I will violate spending commands E and F.
It seems to be generally agreed by others that this is what the president can and must do. And there has been discussion (including by me) of such ideas as, say, refusing to spend any money in Congressional districts of members of Congress who are Republicans, or who oppose raising the debt ceiling, etcetera. If the Republicans are thirsting to impeach Obama, then they presumably would just as happily impeach him for this as for breaching the debt limit. But what exactly is he supposed to do, and on what basis? Even if the view that he should respond to the trilemma by cutting spending is correct, there is no law or guidance on the books regarding how he should do this.
Buchanan and Dorf argue that, purely from a constitutional standpoint, this exercise of selectivity (even if made on some more anodyne basis) would be more improper than breaching the debt limit. They are making an argument about basic constitutional substance. The idea is, we should think about the problem in terms of the underlying constitutional concern, which goes to separation of powers and undue exercise of legislative-type authority by the president. Surely just issuing more debt, in order to satisfy specific statutory commands (regarding spending as well as taxes) that Congress has already sent the president does less harm to constitutional values than turning the president into a legislator who decides what to spend and what not.
As they say in the above update: "In thus violating his oath to faithfully execute the laws - all of the laws - of the United States, he would be acting unconstitutionally. The only question [would be] which unconstitutional choice would be least unconstitutional.... A president who chose to set aside the debt ceiling in such a situation would ... be exercising unconstitutional powers in the most restrained manner possible - under the impossible circumstances that Congress would have imposed upon him.... Under the trilemma, the [decision to authorize] additional borrowing would be constitutionally invalid, but because it would be less unconstitutional than the other options, issuing additional debt would be the required choice."
Unless there is evidence of contrary statutory intent - in particular, from past debt ceiling legislation - this strikes me as a good argument to add to the mix. (I should note here that Buchanan and Dorf agree in their update that is not the end of the matter, but raises further issues to discuss.) Also, they appear to be arguing only that the president should issue additional debt, and cannot be constitutionally questioned for doing so, not that the debt issuance itself would be constitutionally valid. In other words, the argument seems to suggest that the debt could be reneged by Congress more straightforwardly than other public debt, which leads to the question of how the bond markets would view it. And I don't doubt that the Congressional terrorists would consider making bellicose statements about how this debt is not valid, will not be honored, etcetera, although one doubts that they would actually follow through on this down the road. So we do get into the problem - also presented, however, by the Fourteenth Amendment and platinum coin options, along with my anti-suicide pact argument about presidential emergency powers - that the bond markets would have to decide, in their mysterious fashion, whether this debt was in fact as good as any other, or at least close enough to require only a very small premium.
This means, however, that we have no fewer than four distinct arguments, each one at a minimum pretty decent, towards the conclusion that terrorism must fail, and that the Congressional Republicans cannot blow up the U.S. and world economies just because they want to impose on everyone else their own minority views that were resoundingly rejected by the voters in the 2012 presidential election. When the crunch comes, I believe that the Administration should do all four - issue platinum coins, say that it has 14th Amendment powers if needed, say that it is taking the least unconstitutional course available to it, and say that it has emergency powers if needed. And to this it should add that it is confident Congress will end up authorizing the additional debt, if any authorization is needed, since to assume otherwise would suggest a degree of recklessness that (it can piously add) no one who cares about our country's welfare would ever seriously consider.
UPDATE: Paul Krugman suggests, as yet another option, "moral obligation coupons," which would state that the U.S. government will pay the stated amounts in a year, but with no "full faith and credit" guarantee. Rather than offering them to the public at discount, he suggests that they be sold for face value to the Fed, which has certaily held dodgier assets in the last few years. Or else they could be issued to vendors and the like, with the assurance that the Fed will promptly buy them for face value.
This is an argument made by Neil Buchanan and Michael Dorf in their recent article, How to Choose the Least Unconstitutional Option: Lessons for the President (and Others) from the Debt Ceiling Standoff, 112 Colum. L. Rev. 1175 (2012). Last month, they published on-line a handy update and short summary that is readily accessible, entitled "Nullifying the Debt Ceiling Threat Once and for All: Why the President Should Embrace the Least Unconstitutional Option," available here.
Their argument is as follows. Suppose that it is illegal for the president to violate a Congressional command by issuing debt in excess of the authorized ceiling. It also, however, is illegal for him to refuse to spend funds appropriated by Congress, and to levy taxes in excess of those authorized by Congress.
Hence, when the debt ceiling weapon goes off, he faces a "trilemma." Since Congress has made it mathematically impossible for him to honor its statutory commands regarding debt issuance, spending, and taxes, he must violate one of the three commands. In doing so, they argue that he must choose the "least unconstitutional" course, or the one which does the least harm to separation of powers concepts.
Suppose he decided to levy new taxes to make up the difference. This would clearly be an unauthorized power grab, involving undue exercise of what are effectively legislative powers. So it would be the wrong way to solve the trilemma.
I'm sure everyone would agree with Buchanan and Dorf about that. But next, they argue, suppose he decides to engage in unilateral prioritizing of expenditure commands. In effect, he decides, I'll honor spending commands A, B, C, and D. But, since that uses up all the money I have available, I will violate spending commands E and F.
It seems to be generally agreed by others that this is what the president can and must do. And there has been discussion (including by me) of such ideas as, say, refusing to spend any money in Congressional districts of members of Congress who are Republicans, or who oppose raising the debt ceiling, etcetera. If the Republicans are thirsting to impeach Obama, then they presumably would just as happily impeach him for this as for breaching the debt limit. But what exactly is he supposed to do, and on what basis? Even if the view that he should respond to the trilemma by cutting spending is correct, there is no law or guidance on the books regarding how he should do this.
Buchanan and Dorf argue that, purely from a constitutional standpoint, this exercise of selectivity (even if made on some more anodyne basis) would be more improper than breaching the debt limit. They are making an argument about basic constitutional substance. The idea is, we should think about the problem in terms of the underlying constitutional concern, which goes to separation of powers and undue exercise of legislative-type authority by the president. Surely just issuing more debt, in order to satisfy specific statutory commands (regarding spending as well as taxes) that Congress has already sent the president does less harm to constitutional values than turning the president into a legislator who decides what to spend and what not.
As they say in the above update: "In thus violating his oath to faithfully execute the laws - all of the laws - of the United States, he would be acting unconstitutionally. The only question [would be] which unconstitutional choice would be least unconstitutional.... A president who chose to set aside the debt ceiling in such a situation would ... be exercising unconstitutional powers in the most restrained manner possible - under the impossible circumstances that Congress would have imposed upon him.... Under the trilemma, the [decision to authorize] additional borrowing would be constitutionally invalid, but because it would be less unconstitutional than the other options, issuing additional debt would be the required choice."
Unless there is evidence of contrary statutory intent - in particular, from past debt ceiling legislation - this strikes me as a good argument to add to the mix. (I should note here that Buchanan and Dorf agree in their update that is not the end of the matter, but raises further issues to discuss.) Also, they appear to be arguing only that the president should issue additional debt, and cannot be constitutionally questioned for doing so, not that the debt issuance itself would be constitutionally valid. In other words, the argument seems to suggest that the debt could be reneged by Congress more straightforwardly than other public debt, which leads to the question of how the bond markets would view it. And I don't doubt that the Congressional terrorists would consider making bellicose statements about how this debt is not valid, will not be honored, etcetera, although one doubts that they would actually follow through on this down the road. So we do get into the problem - also presented, however, by the Fourteenth Amendment and platinum coin options, along with my anti-suicide pact argument about presidential emergency powers - that the bond markets would have to decide, in their mysterious fashion, whether this debt was in fact as good as any other, or at least close enough to require only a very small premium.
This means, however, that we have no fewer than four distinct arguments, each one at a minimum pretty decent, towards the conclusion that terrorism must fail, and that the Congressional Republicans cannot blow up the U.S. and world economies just because they want to impose on everyone else their own minority views that were resoundingly rejected by the voters in the 2012 presidential election. When the crunch comes, I believe that the Administration should do all four - issue platinum coins, say that it has 14th Amendment powers if needed, say that it is taking the least unconstitutional course available to it, and say that it has emergency powers if needed. And to this it should add that it is confident Congress will end up authorizing the additional debt, if any authorization is needed, since to assume otherwise would suggest a degree of recklessness that (it can piously add) no one who cares about our country's welfare would ever seriously consider.
UPDATE: Paul Krugman suggests, as yet another option, "moral obligation coupons," which would state that the U.S. government will pay the stated amounts in a year, but with no "full faith and credit" guarantee. Rather than offering them to the public at discount, he suggests that they be sold for face value to the Fed, which has certaily held dodgier assets in the last few years. Or else they could be issued to vendors and the like, with the assurance that the Fed will promptly buy them for face value.
Revised article on Social Security and Medicare
I have posted on SSRN a revised version of my article, Should Social Security or Medicare Be More Market-Based? Available here. This is not a major revision, however. The law review editors at the University of Illinois Law School, where I will be delivering the talk as their annual Baum Lecture on Elder Law on March 4, wanted more citations than I had put in the initial draft.
Sunday, January 06, 2013
P.G. Wodehouse isn't just "literary comfort food"
I must very definitely disagree with what a fellow Wodehouse fan has written, in reviewing a recently published volume of Wodehouse letters.
Says Ed Park in a Bookforum post:
"It’s easy to think of Wodehouse (1881–1975) as the purveyor of literary comfort food. The flyleaves of Overlook Press’s Collector’s Wodehouse editions would make excellent wallpaper for a sanatorium, and simply seeing the spines on a shelf never fails to soothe me. A friend mentions that any random Wodehouse is his go-to subway reading—perfect for dipping into, no emotional commitment, it doesn’t matter if you don’t finish it. Indeed, you might have already finished it: The remarkable consistency and volume of his output means you can be pretty far into something before it dawns on you that you’ve read it before. Even his titles are designed to blur the lines. I couldn’t be trusted to tell you the difference between Mulliner Nights and Mr. Mulliner Speaking, Heavy Weather and Summer Lightning, Carry On, Jeeves and Very Good, Jeeves, though I’ve read them all. (I think.)"
To my mind, this is true of MOST of Wodehouse's work. Indeed, recently, while on vacation and having run low on hard-copy books, I was (re-)reading a Wodehouse novel from the 1920s that I happened to have on my Kindle as a free download,. I found it pleasant, forgettable, and wholly unnecessary to finish. So I left it in the middle and went on to something else, once I had gotten my virtual hands on a more interesting Kindle download.
But this is not true of all of Wodehouse's work. From the 1930s through the 1950s, he wrote a number of books - maybe one out of every three to five that he penned in that period - that went far beyond the admittedly formulaic norm. Let's name a few: The Code of the Woosters, Jeeves in the Morning (known in the UK as Joy in the Morning), Thank You Jeeves, Right Ho Jeeves, Laughing Gas, probably Uncle Fred in the Springtime though I'd need to check. These have a mad intensity, along with in some cases an inversion of classic formula (e.g., Bertie's goal is NOT to get married), that make them, dare I say, stunningly brilliant and memorable, wildly hilarious and NOT like the rest of his work that they in many ways formally resemble. These few are really masterpieces.
So I don't consider Wodehouse at all a consistent writer. His professionalism, skill, and sentence-by-sentence writing ability were extremely consistent. Likewise his general approach and sensibility. But he would nonetheless be forgettable and forgotten if not for the small number of his works that stand out as at a much higher level, and yet that also potentially can make you like the rest of his work more, as a roughly similar albeit far paler reflection of what you loved so much.
What is Wodehouse "about" in his best work? Does he need to be "about" something (or must he in fact be "about" something, whether he knows it or not), given how great these works are? I am not a writer about literature, so I am not the best person to analyze or describe what is there. But part of it has to do with a kind of infantilism - rejection of responsibility and sobriety and seriousness and correctness in favor of not wanting to grow up. There's obviously a sexual aspect to this. (Though Wodehouse lived a normal married life, it's significant that Bertie's prime goal in many of the books is to avoid getting married.)
It resembles a bit the spirit behind Lewis Carroll's savage satires of sententious "improving" poetry (such as the original Father William verse) in the Alice books. But beyond that I will leave it to others to say just what makes the best Wodehouse novels so extraordinary.
Says Ed Park in a Bookforum post:
"It’s easy to think of Wodehouse (1881–1975) as the purveyor of literary comfort food. The flyleaves of Overlook Press’s Collector’s Wodehouse editions would make excellent wallpaper for a sanatorium, and simply seeing the spines on a shelf never fails to soothe me. A friend mentions that any random Wodehouse is his go-to subway reading—perfect for dipping into, no emotional commitment, it doesn’t matter if you don’t finish it. Indeed, you might have already finished it: The remarkable consistency and volume of his output means you can be pretty far into something before it dawns on you that you’ve read it before. Even his titles are designed to blur the lines. I couldn’t be trusted to tell you the difference between Mulliner Nights and Mr. Mulliner Speaking, Heavy Weather and Summer Lightning, Carry On, Jeeves and Very Good, Jeeves, though I’ve read them all. (I think.)"
To my mind, this is true of MOST of Wodehouse's work. Indeed, recently, while on vacation and having run low on hard-copy books, I was (re-)reading a Wodehouse novel from the 1920s that I happened to have on my Kindle as a free download,. I found it pleasant, forgettable, and wholly unnecessary to finish. So I left it in the middle and went on to something else, once I had gotten my virtual hands on a more interesting Kindle download.
But this is not true of all of Wodehouse's work. From the 1930s through the 1950s, he wrote a number of books - maybe one out of every three to five that he penned in that period - that went far beyond the admittedly formulaic norm. Let's name a few: The Code of the Woosters, Jeeves in the Morning (known in the UK as Joy in the Morning), Thank You Jeeves, Right Ho Jeeves, Laughing Gas, probably Uncle Fred in the Springtime though I'd need to check. These have a mad intensity, along with in some cases an inversion of classic formula (e.g., Bertie's goal is NOT to get married), that make them, dare I say, stunningly brilliant and memorable, wildly hilarious and NOT like the rest of his work that they in many ways formally resemble. These few are really masterpieces.
So I don't consider Wodehouse at all a consistent writer. His professionalism, skill, and sentence-by-sentence writing ability were extremely consistent. Likewise his general approach and sensibility. But he would nonetheless be forgettable and forgotten if not for the small number of his works that stand out as at a much higher level, and yet that also potentially can make you like the rest of his work more, as a roughly similar albeit far paler reflection of what you loved so much.
What is Wodehouse "about" in his best work? Does he need to be "about" something (or must he in fact be "about" something, whether he knows it or not), given how great these works are? I am not a writer about literature, so I am not the best person to analyze or describe what is there. But part of it has to do with a kind of infantilism - rejection of responsibility and sobriety and seriousness and correctness in favor of not wanting to grow up. There's obviously a sexual aspect to this. (Though Wodehouse lived a normal married life, it's significant that Bertie's prime goal in many of the books is to avoid getting married.)
It resembles a bit the spirit behind Lewis Carroll's savage satires of sententious "improving" poetry (such as the original Father William verse) in the Alice books. But beyond that I will leave it to others to say just what makes the best Wodehouse novels so extraordinary.
Thursday, January 03, 2013
National Tax Association - 2013 Annual Meeting
From November 21-23, 2013, which is a Thursday through Saturday the week before Thanksgiving, the National Tax Association will be holding its 106th Annual Conference on Taxation, at the Grand Hyatt in Tampa Bay, Florida. The official call for papers will be up on the NTA website soon, but for now you can find a mention of the conference here.
As it happens, this year I will be co-chairing the program committee for the conference, along with Tracy Gordon of the Brookings Institution.
We will be eager for input, in the form of paper submissions and panel proposals, and also are hoping to get the benefit of a strong program committee. Again, the official solicitation will be posted soon.
More on this in due course, but I thought I'd get the initial word out now. One obvious goal I'll have is to reach out to people in the legal community (both academics and practice), who have always had a significant presence at the NTA (especially in recent years), but perhaps at times less so than economists and government people. As you can see here, a central point and function of the NTA is "bringing together government, corporate, academic, and independent tax professionals–a rich mix of federal and state legislators and administrators; taxpayer representatives; tax lawyers and accountants; professors, librarians, and other scholars; students and interested citizens."
As it happens, this year I will be co-chairing the program committee for the conference, along with Tracy Gordon of the Brookings Institution.
We will be eager for input, in the form of paper submissions and panel proposals, and also are hoping to get the benefit of a strong program committee. Again, the official solicitation will be posted soon.
More on this in due course, but I thought I'd get the initial word out now. One obvious goal I'll have is to reach out to people in the legal community (both academics and practice), who have always had a significant presence at the NTA (especially in recent years), but perhaps at times less so than economists and government people. As you can see here, a central point and function of the NTA is "bringing together government, corporate, academic, and independent tax professionals–a rich mix of federal and state legislators and administrators; taxpayer representatives; tax lawyers and accountants; professors, librarians, and other scholars; students and interested citizens."
Constitutional trial balloon
Suppose that the Republicans are actually willing to destroy the U.S. credit rating for the foreseeable future, and to plunge the U.S. and world economies into a severe depression, unless they get their way on various issues - these being, of course, issues that they either did not even dare raise in the 2012 election, or else raised but lost on.
Anyway, suppose that they do this - despite their continuing unwillingness to name the spending and entitlements cuts that they allegedly seek - and that the Obama Administration is at least considering not folding again. (What may happen is that the Republicans will decide to destroy the U.S. economy and credit rating unless OBAMA identifies the spending and entitlements cuts that they want, whereupon they will center the 2014 Congressional campaign on denouncing him for those cuts.)
What can the Administration unilaterally do, in order to prevent the global economic catastrophe that the Republicans are threatening to impose? There are already two legal theories out there: the 14th Amendment option, invoking presidential power to prevent questioning of the federal debt, and the "platinum coin" option, exploiting an apparent loophole within legal restrictions on the federal government's legal authority to pay bills by printing money.
I believe that these two options are plenty good enough under the circumstances, but the Obama Administration keeps saying that its lawyers don't buy them. One hopes that the Administration will rethink this if necessary, but let me just throw out an alternative constitutional argument. I do this tentatively or as a trial balloon since I am not a constitutional lawyer.
This is to exercise otherwise unconstitutional (by hypothesis) presidential emergency powers to prevent a national disaster. As Abraham Lincoln famously said, the Constitution is not a suicide pact. Now, he faced a much worse emergency, in the form of armed insurrection against the U.S. government, rather than a debt default. But on the other hand he was claiming the authority to exercise far more dangerous powers - suspending habeas corpus, which is a core constitutional liberty.
If President Obama asserted that the threat of default, loss of our credit rating, and catastrophic economic consequences empowered him to authorize further debt issuance, he would on the one hand be expanding the definition of "emergency" a bit, in a potentially dangerous way. But on the other hand he would be asserting it in favor of a very innocuous departure from federal law (under the assumption, which I consider false, that he does not have the power to act under the Fourteenth Amendment or via the platinum coin trick). All he would be doing is spending money that Congress authorized and indeed instructed him to spend, instead of allowing a disastrous federal default.
Constitutional law is shot through with "balancing" approaches of one kind and another. Can one argue for interpreting presidential emergency powers this way? The idea would be that this is a big enough national emergency to permit the unilateral exercise of presidential power to do something that is both innocuous (i.e., simply following spending laws on the books) and desperately necessary to our country's wellbeing, even though it isn't a big enough national emergency to authorize his making a bigger (i.e., actual) power grab.
Anyway, suppose that they do this - despite their continuing unwillingness to name the spending and entitlements cuts that they allegedly seek - and that the Obama Administration is at least considering not folding again. (What may happen is that the Republicans will decide to destroy the U.S. economy and credit rating unless OBAMA identifies the spending and entitlements cuts that they want, whereupon they will center the 2014 Congressional campaign on denouncing him for those cuts.)
What can the Administration unilaterally do, in order to prevent the global economic catastrophe that the Republicans are threatening to impose? There are already two legal theories out there: the 14th Amendment option, invoking presidential power to prevent questioning of the federal debt, and the "platinum coin" option, exploiting an apparent loophole within legal restrictions on the federal government's legal authority to pay bills by printing money.
I believe that these two options are plenty good enough under the circumstances, but the Obama Administration keeps saying that its lawyers don't buy them. One hopes that the Administration will rethink this if necessary, but let me just throw out an alternative constitutional argument. I do this tentatively or as a trial balloon since I am not a constitutional lawyer.
This is to exercise otherwise unconstitutional (by hypothesis) presidential emergency powers to prevent a national disaster. As Abraham Lincoln famously said, the Constitution is not a suicide pact. Now, he faced a much worse emergency, in the form of armed insurrection against the U.S. government, rather than a debt default. But on the other hand he was claiming the authority to exercise far more dangerous powers - suspending habeas corpus, which is a core constitutional liberty.
If President Obama asserted that the threat of default, loss of our credit rating, and catastrophic economic consequences empowered him to authorize further debt issuance, he would on the one hand be expanding the definition of "emergency" a bit, in a potentially dangerous way. But on the other hand he would be asserting it in favor of a very innocuous departure from federal law (under the assumption, which I consider false, that he does not have the power to act under the Fourteenth Amendment or via the platinum coin trick). All he would be doing is spending money that Congress authorized and indeed instructed him to spend, instead of allowing a disastrous federal default.
Constitutional law is shot through with "balancing" approaches of one kind and another. Can one argue for interpreting presidential emergency powers this way? The idea would be that this is a big enough national emergency to permit the unilateral exercise of presidential power to do something that is both innocuous (i.e., simply following spending laws on the books) and desperately necessary to our country's wellbeing, even though it isn't a big enough national emergency to authorize his making a bigger (i.e., actual) power grab.
Tuesday, January 01, 2013
The fiscal cliff deal
I don't have anything especially distinctive to add, relative to others in the commentariat, on the deal that's just been reached. Taking as given the impossibility of addressing the long-term fiscal situation, both because the voters wouldn't stand for it and because the Republicans are not (in my view) a responsible or serious group that one can deal with, it could certainly have been worse.
The biggest problem, as others have noted, is that Obama appears to be a once-in-a-generation lame and inept bargainer, who can take even a strong hand and not get all that much, because he is so predictably ready to fold. But again this is not mainly an issue about the New Year's Eve deal itself, which is more or less defensible as a one-off solution. Rather, it's about the debt ceiling crisis to come in a few weeks.
That is the one that really counts. I think the Administration should play that, not merely as hard as they are saying they will now, but about 20 levels harder. I would not just refuse to negotiate, but would have Administration officials use words such as treason, sabotage, and terrorism. And I would use the legal recourse that many others have discussed to prevent a default from happening. Whether it's the 14th Amendment option or purely discretionary decisions on what not to spend (e.g., everything in the districts that have recalcitrant Republican representatives), I would play this very hard and have, I believe, virtual certainty of winning an overwhelming political victory. But even if Obama would do this, which I doubt, there is no way on earth that the Republican Congressional leadership could actually be persuaded that he was planning to do this. They (at least think they, and probably do) know him too well.
But that's for the future. So what about this time around? Let's run through the main features listed in the January 1 New York Times:
Income tax rates - Apart from the problem of undermining Obama's negotiating credibility, I regard raisin the point at which the 39.6 percent rate kicks in from $250K (in previous Administration stands) to $400K, as a reasonable concession in exchange for sufficient consideration, and the question is whether he got enough. Tax rates will have to go up for the bottom 98% at some point, and I'd support greater rate increases at the high end, but that wasn't going to happen this time around anyway. In a less politically constrained environment, a much better idea would have been increasing the rate at $250K starting immediately, and restoring pre-2001 rates with just a year or two lag for countercyclical purposes, but again that wasn't going to happen, and I accept the Administration's political judgment that one couldn't really hold out for that.
Dividend and capital gains rates - These will now go up (relative to current policy) from 15 percent to 20 percent for high-income individuals. A step in the right direction distributionally, and given that there often is no effective entity-level corporate tax and that these days a lot of labor income camouflages itself as capital gain. Leaving aside structural improvements to the tax system (such as addressing entity-level corporate tax avoidance and taxing asset appreciation at death), there are good reasons why these rates should be below the top individual rate. For example, the dividend change increases the tax system's bias in favor of debt rather than equity financing. But, holding all else constant, I'd on balance be willing to go at least to 20 percent and perhaps higher.
Restoring phase-outs of personal exemptions and itemized deductions - These are stupid and overly complicated ways of creating temporarily higher rates at the top, for the former in particular just in the form of a temporary "bubble" rate. I'd rather not do it this way, but again, defensible if better changes are ruled out.
Alternative minimum tax - Permanently indexing the exemption amounts for inflation is a good thing, given the idiocy of this device.
Estate tax - Its permanence restored, the estate tax ends up with a higher rate than under current policy, but lower than under prior present law given the phaseout of the 2001 deferred repeal. I was for a while quite agnostic about the estate tax, despite its progressivity, but have become a supporter due to (a) the rise in high-end inequality and (b) emergent empirical evidence that people seem to respond less to the estate tax (such as at the work and saving margins), other than through pure tax planning to beat the system, than one would expect in a fully rational model with perfect annuity markets and purely altruistically motivated transfers. In a sense, going higher was politically moot anyway, given Democratic support for super-wealthy individuals who are leading Democratic donors.
Extending low-income tax credits from 2009 - An actual concession from the Republicans here. Not sure why, other than bad negotiating, these are only short-term extensions rather than permanent.
Payroll tax increase - The low-rate "holiday" is allowed to expire. I would have fought hard on this one for a one or two year extension, though I agree with not making the lower rate permanent. Significantly recessionary to allow it to take effect now. And the Administration could have had a great talking point had they fought on this one, concerning the Republicans' cheery indifference to tax cuts for the bottom 90% and to adverse macroeconomic effects.
Unemployment insurance - Glad to see that the benefit expansion has been extended for a year. In a tight labor market, this might have adverse employment effects, but if there is one thing that we don't have now, it's a tight labor market.
Medicare provider payments - Delaying the payment reductions for a year tells you just how serious both parties are about the long-term issue. The Republicans' dishonest 2012 presidential campaign discussion of this issue has helped make the politics worse.
Again, all this is trivial compared to the debt ceiling. If Obama doesn't win that fight by refusing to play, we will all have taken a giant step along the road to becoming a banana republic. If the default happens, with disastrous effects on the U.S. credit rating and on the U.S. and world economies, the people who are responsible will go down in history as the worst traitors and scoundrels we have had on the public stage since secession in 1861.
The biggest problem, as others have noted, is that Obama appears to be a once-in-a-generation lame and inept bargainer, who can take even a strong hand and not get all that much, because he is so predictably ready to fold. But again this is not mainly an issue about the New Year's Eve deal itself, which is more or less defensible as a one-off solution. Rather, it's about the debt ceiling crisis to come in a few weeks.
That is the one that really counts. I think the Administration should play that, not merely as hard as they are saying they will now, but about 20 levels harder. I would not just refuse to negotiate, but would have Administration officials use words such as treason, sabotage, and terrorism. And I would use the legal recourse that many others have discussed to prevent a default from happening. Whether it's the 14th Amendment option or purely discretionary decisions on what not to spend (e.g., everything in the districts that have recalcitrant Republican representatives), I would play this very hard and have, I believe, virtual certainty of winning an overwhelming political victory. But even if Obama would do this, which I doubt, there is no way on earth that the Republican Congressional leadership could actually be persuaded that he was planning to do this. They (at least think they, and probably do) know him too well.
But that's for the future. So what about this time around? Let's run through the main features listed in the January 1 New York Times:
Income tax rates - Apart from the problem of undermining Obama's negotiating credibility, I regard raisin the point at which the 39.6 percent rate kicks in from $250K (in previous Administration stands) to $400K, as a reasonable concession in exchange for sufficient consideration, and the question is whether he got enough. Tax rates will have to go up for the bottom 98% at some point, and I'd support greater rate increases at the high end, but that wasn't going to happen this time around anyway. In a less politically constrained environment, a much better idea would have been increasing the rate at $250K starting immediately, and restoring pre-2001 rates with just a year or two lag for countercyclical purposes, but again that wasn't going to happen, and I accept the Administration's political judgment that one couldn't really hold out for that.
Dividend and capital gains rates - These will now go up (relative to current policy) from 15 percent to 20 percent for high-income individuals. A step in the right direction distributionally, and given that there often is no effective entity-level corporate tax and that these days a lot of labor income camouflages itself as capital gain. Leaving aside structural improvements to the tax system (such as addressing entity-level corporate tax avoidance and taxing asset appreciation at death), there are good reasons why these rates should be below the top individual rate. For example, the dividend change increases the tax system's bias in favor of debt rather than equity financing. But, holding all else constant, I'd on balance be willing to go at least to 20 percent and perhaps higher.
Restoring phase-outs of personal exemptions and itemized deductions - These are stupid and overly complicated ways of creating temporarily higher rates at the top, for the former in particular just in the form of a temporary "bubble" rate. I'd rather not do it this way, but again, defensible if better changes are ruled out.
Alternative minimum tax - Permanently indexing the exemption amounts for inflation is a good thing, given the idiocy of this device.
Estate tax - Its permanence restored, the estate tax ends up with a higher rate than under current policy, but lower than under prior present law given the phaseout of the 2001 deferred repeal. I was for a while quite agnostic about the estate tax, despite its progressivity, but have become a supporter due to (a) the rise in high-end inequality and (b) emergent empirical evidence that people seem to respond less to the estate tax (such as at the work and saving margins), other than through pure tax planning to beat the system, than one would expect in a fully rational model with perfect annuity markets and purely altruistically motivated transfers. In a sense, going higher was politically moot anyway, given Democratic support for super-wealthy individuals who are leading Democratic donors.
Extending low-income tax credits from 2009 - An actual concession from the Republicans here. Not sure why, other than bad negotiating, these are only short-term extensions rather than permanent.
Payroll tax increase - The low-rate "holiday" is allowed to expire. I would have fought hard on this one for a one or two year extension, though I agree with not making the lower rate permanent. Significantly recessionary to allow it to take effect now. And the Administration could have had a great talking point had they fought on this one, concerning the Republicans' cheery indifference to tax cuts for the bottom 90% and to adverse macroeconomic effects.
Unemployment insurance - Glad to see that the benefit expansion has been extended for a year. In a tight labor market, this might have adverse employment effects, but if there is one thing that we don't have now, it's a tight labor market.
Medicare provider payments - Delaying the payment reductions for a year tells you just how serious both parties are about the long-term issue. The Republicans' dishonest 2012 presidential campaign discussion of this issue has helped make the politics worse.
Again, all this is trivial compared to the debt ceiling. If Obama doesn't win that fight by refusing to play, we will all have taken a giant step along the road to becoming a banana republic. If the default happens, with disastrous effects on the U.S. credit rating and on the U.S. and world economies, the people who are responsible will go down in history as the worst traitors and scoundrels we have had on the public stage since secession in 1861.
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