Oops, one additional point on equal sacrifice theory and classical benefits-based taxation

I see that in my Part 1 post on the Weinzierl paper from yesterday's colloquium I promised to mention something at the end of my Part 2 post, and then I never did.  So I'll add that final point here.

Specifically, I noted that "Mill, in proposing equal sacrifice theory as a replacement for Smith's benefit theory, not only reached a very similar conclusion (flat tax above an exemption for necessities), but cited Smith as an influence and precursor rather than as the dead past that he wanted to bury."  I then offered to make an observation about this overlap.

One interpretation would be that equal sacrifice theory and benefits theory lead to a similar place, e.g., they might plausibly support a flat rate tax.  But, with all due respect for Smith and Mill, I question this because the underlying elasticities on which they turn are both (a) entirely distinct and (b) extremely hard to tease out - not just empirically but as a basic conceptual matter.

Again, under equal sacrifice the key elasticity that drives the optimal rate structure pertains to utility loss per dollar of tax paid as income rises.  This is against the background of a counter-factual hypothetical in which public goods were somehow provided for free.  

Under classical benefits-based taxation, the key elasticity pertains to income gain (reflecting ability enhancement) per dollar of public goods provided as income rises.  Here the counter-factual hypothetical is apparently a state of nature in which we have all the same people, with all the same innate talents, but none of the rudiments needed for a well-functioning economy.

Again, both models lead to a flat rate tax system with an assumed relevant elasticity of 1, based in each case on something that is unknowable.

Why would the relevant elasticities come out the same, causing the Smith benefit tax and the Mill equal sacrifice tax to look so similar?  This seems highly coincidental.  The main explanations that occur to me are:

1) Prominence and salience of 1 as a postulated elasticity.  Perhaps it feels safe and neutral to say that the posited trait grows at a steady rate with income, not faster or slower.

2) Prominence and salience of the flat tax result, which may look intuitively appealing (and also appear to have optical and political economy advantages), suggesting that the causal arrow ran in the other direction, i.e., from the intuitively favored tax rate to the mode of justification.

Either way, I draw an inference that we should not be all that confident that the equal sacrifice and benefit tax rationales are actually doing a whole lot of work.

Matthew Weinzierl's "Revisiting the Classical View of Benefit-Based Taxation," part 2

I broke off the prior post and am starting a new one here just for reasons of length.  This is a continuation that presupposes one's having looked at the prior one.

OK, on from equal sacrifice theory to benefit taxation. The paper that was posted for yesterday's session addresses “classical benefits-based taxation,” under which it is thought that people should pay a fair price for the benefits that they receive from government spending.  These include at a minimum specific public goods that particular programs address (e.g., national defense, the courts, and police protection), and perhaps more broadly the benefits of living in society that has a functioning economy, the rule of law, property rights, infrastructure, education, etcetera.  So once again, as I noted about equal sacrifice theory in the prior post, we are making policy assessments relative to a counterfactual – a hypothetical state of affairs that cannot in fact exist.  Only here, rather than being public goods supplied for free, it is no public goods, and presumably the existence of some version of a state of nature

 As Weinzierl notes, the classical benefits-based approach has been almost wholly eclipsed in the literature, due to challenges both normative (welfare economics and rejection of libertarian entitlement) and descriptive (how value public goods?  What’s the counterfactual from which benefit is measured?).  However, the paper develops a model in which something akin to Mirrlees' optimal income tax (OIT) model can be deployed to describe the basics of a benefits approach.

In Mirrlees, we tax income as a proxy for ability (assumed to be fixed and unalterable), which is itself a reverse proxy for marginal utility (i.e., when it is high, the marginal utility of a dollar is assumed to be low).  In the benefit tax world, we no longer care about utility.  All we care about is benefit from the provision of public goods.  In the paper's model however, income is a proxy for benefit, based on a modification of how ability is used.

In the paper's benefit tax model, ability, while it remains unalterable by the individual who possesses it, is assumed to be a joint product of (i) innate talent and (ii) public goods funded by tax revenue.  Innate talent and public goods are assumed to be complements.  At any talent level, more public goods leads to greater ability (i.e., one can earn more, e.g., by reason of infrastructure, a functioning exchange economy, the rule of law, the existence of educated consumers and workers, social peace enforced by the army and police, etc.).

Just as in Mirrlees, income is a proxy for ability.  But in the benefit tax model what's actually of interest is public goods' magnifying effect on innate talent to create higher ability.

For convenience, let’s assume that ability enhancement by public goods is constant as a percentage of income.  That is, assume an elasticity of 1 for income gain (reflecting higher ability) per dollar of public goods as income rises.  Thus, if I earned $1 million, I got ten times the benefit from public goods of someone who earned $100,000.

Just like under equal sacrifice theory as per the prior post, assuming a particular elasticity (but here a different one) of 1 leads to a flat rate system.  But the benefit tax system should be progressive if high-earners got more relative benefit from public goods than low-earners, and should have declining marginal rates if they got less relative benefit.

Leaving aside the question of normative motivation for embracing such a system, I think that some of the biggest questions that this model raises relate to (1) its dependence on comparisons to a hypothetical counterfactual state of affairs and (2) the concept of innate talent.  As to (1), even apart from the question of what motivates the counterfactual, I don't see we can define it usefully, or have a coherent debate on what it should be assumed to look like (and why).  As to innate talent, I don't think there is such a thing.  The value of any attribute depends on the environment in which it exists.  This is the lesson of evolution – fitness is relative to the environment, and changes when the environment does.  A trivial example is a star athlete with or without popular taste - and a global versus a purely local market - for the sport in which he or she can excel.  But consider as well having good math skills, or an aggressive personal style, or for that matter strong genetic resistance to particular diseases.  The same people or the same skills will do well in some environments and poorly in others.

This is not a problem for Mirrlees because we are assuming the existing environment, in which abilities have particular payoffs.  (Mirrlees does, however, ignore ongoing ability risk as the environment changes).  But it is a big problem for the concept of innate talent, if one is using it as part of the baseline from which to measure benefit from the existence of  a functioning exchange economy and all the rest.

That said, Weinzierl clearly has one of the more interesting and distinctive research agendas among active people in public economics these days.  I will look forward to continuing to follow his  work on non-OIT or at least non-welfarist normative approaches to tax policy.

NYU Tax Policy Colloquium, week 8: Matthew Weinzierl's "Revisiting the Classical View of Benefit-Based Taxation," part 1

Yesterday Matt Weinzierl of the Harvard Business School presented the above paper, as our colloquium crossed the halfway point for 2014.  It's useful to put this paper in the context of others that he has recently written, reflecting an ongoing project of engaging with some of the underlying philosophical issues in tax policy.  While the paper has a lot of math, along with shorthand references to economics ideas (e.g., Cobb-Douglas, Lindahl, and the Samuelson rule for public goods) that potentially make it tough sledding for a legal audience, in fact the set of underlying set of interests may well be a better fit in a law school environment such as ours than in many business schools.

A bit of background may be in order, and indeed is most of what I'll discuss in this post, with the aim of sketching out the underlying project for a broader audience.  Economists and some economist-fellow-traveling law profs, such as myself, regard optimal income taxation (OIT), derived from James Mirrlees' pioneering work in 1971, as a foundational approach for thinking about progressivity, redistribution, and tax rate  design.  OIT generally applies a utilitarian or other welfarist framework in which tax policy's aim is to increase social welfare, defined in terms of utility or subjective wellbeing.  Notions that people are "entitled" to the fruits of their own labor thus play no direct role, although one might view such notions as being transmuted into concern about the incentive effects of taxation.  OIT is all about trading off the adverse incentive effects against the redistributive benefits that are attributed to taking money from people to whom it is thought to have low marginal utility (e.g., because they are wealthy) and giving it those to whom we attribute high marginal utility (e.g., because they are poor).

OIT is thus potentially highly progressive and redistributive.  In practice, not necessarily - this depends on such factors as the elasticity of high-end taxable income, and indeed Mirrlees himself kept finding that a relatively flat rate structure was optimal in various specifications of his model.  But the underlying thought process is not one that, say, a U.S. presidential candidate would want to endorse too openly in the general election, at least judging from the Republicans' attacks and Obama's very cautious defenses of redistributive policy in the 2008 and 2012 presidential elections.

Weinzierl's work seeks to address this evident disconnect between academic and public discourse.  He wants to revive, and put coherent flesh on the bones of, traditional tax policy frameworks that might better capture people's underlying intuitions about tax policy.  The aim is to improve OIT as a positive theory, whether or not one actually finds these frameworks intellectually persuasive.

Perhaps his best-known paper in this vein is the height tax paper that he coauthored with Gregory Mankiw.  Here the argument is as follows.  From an OIT standpoint founded on utilitarianism, taxing tall people by reason of their height ought to be normatively appealing.  The reason is that height is a "tag," statistically correlated with high income and apparently high earning ability.  Insofar as it is fixed, however, one cannot respond to the height tax (unlike to a high rate of income taxation) through tax planning such as working less or sheltering more.  The fact that people might find this tax normatively unappealing, however, shows that they are not utilitarians, at least in a consistent and thoroughgoing sense.  Fair enough, although how one interprets this is open to further debate.  (E.g., what should be the impact on one's own assessment of the merits of utilitarianism?  Observing that we have conflicting normative instincts is just the start, not the end, of the analysis, since we need not view our own moral intuitions or otherwise as evidence of some underlying moral truth that we choose to embrace at the end of the day.

 In any event, Weinzierl's benefit tax paper for our session is more closely linked to a more recent paper of his tax discusses equal sacrifice theory.  Both the benefit tax paper and the equal sacrifice paper discuss normative theories of taxation that had their academic vogue in the past (e.g., Adam Smith advocated the former, and John Stuart Mill the latter), but that have largely been rejected academically despite arguably remaining important in how policymakers and the general public think about the distributional element in tax policy.

Mill’s equal sacrifice theory involves looking at the total utility loss that individuals suffer by reason of paying taxes, compared to a hypothetical counterfactual baseline in which all public goods from government spending could magically have been provided for free.  Against this background, suppose that it just happened to be the case that the total utility loss from one’s paying tax was constant as a percentage of income.  In other words, suppose there was an elasticity of 1 (or actually -1) for the utility loss per dollar of tax paid, as income rises.  Under this assumption taxpayers typically would experience the same loss of utility from paying (a) $2,500 of tax on $10,000 of income, (b) $25,000 of tax on $100,000 of income, and (c) $25 million of tax on $100 million of income.

Under this of course arbitrary assumption, equal sacrifice would call for adopting a flat rate tax, despite the fact that (under standard assumptions) the marginal utility of a dollar would remain far higher for poor than rich taxpayers.  Suppose that changing the above flat-rate system so that the rich would pay more while the poor would pay less would have negligible labor supply effects.  The change would cause poor individuals to gain more utility than rich individuals lost, indicating that a utilitarian ought to favor it. But equal sacrifice theory would say No: the point is to equalize sacrifice, not to maximize utility.

Equal sacrifice can, however, lead to a very progressive system - or for that matter, a very regressive one - depending on one's view as to how fast or slowly the marginal utility of a dollar declines as one's income rises.

Suppose we don’t worry about the motivation for favoring equal sacrifice as a normative theory.  (Weinzierl’s argument on this score is merely that it appears to have wide intuitive appeal, which I think is probably correct.)  It still faces a distinctive informational problem that utilitarianism does not face.  (Both face the problem of defining and measuring utility.)   Under utilitarianism, you merely need to look at the available policy choices, choosing whichever of them you deem to yield the highest level of social welfare.  Under equal sacrifice, you must evaluate all of these alternative choices relative to a counterfactual – a hypothetical state of affairs that cannot in fact exist.  This of course is the imaginary scenario in which public goods could magically have been provided for free.

Why have I spent so much time on this paper, before getting to the benefits tax paper that we actually discussed yesterday?  (I'll turn to that in my next post.)  Because - in common with Weinzierl - I regard the two topics as closely linked.  Indeed, he and I are not the only ones to think so.  Both equal sacrifice and benefit taxation look to some notion of treating distinct individuals in some sense comparably, as an alternative to the OIT / utilitarian approach in which tax policy seeks to improve general or collective welfare.  Mill, in proposing equal sacrifice theory as a replacement for Smith's benefit theory, not only reached a very similar conclusion (flat tax above an exemption for necessities), but cited Smith as an influence and precursor rather than as the dead past that he wanted to bury.  I'll return at the end of the next post to what I make of this Smith-Mill overlap alongside seeming theoretical distinctness.

It's always best to give as well as receive

Just back from a few nights at a lovely Punta Cana resort, recuperating over spring break from the arduous winter.  The highlights included, not just the beach, pool, and warm weather, but also this fella (a rhinoceros iguana, cousin to Central America's green iguanas) and two of his colleagues, who liked to sun themselves in a particular spot at the edge of some woods.

I got the distinct impression that he likes apple (also, banana).

NYU Tax Policy Colloquium, week 7: Stephanie Sikes' "Cross Country Evidence on the Relation Between Capital Gains Taxes, Risk, and Expected Returns"

One of our aims in the Tax Policy Colloquium is to be interdisciplinary.  In addition to law professors plus several economists, we try to invite people from several other disciplines as well.  For some years now we've annually had a paper by an accounting professor, and it's also nice when we learn of suitable on-topic papers by political scientists or philosophers. We've had both in the past though not regularly, and I hope to again in the future.

We also often have papers by tax practitioners.  Indeed, we ought to do this annually, but sometimes I fall short on the invitation front because, while I know a number of practitioners who periodically write papers that I'd love to include, it's often hard to know sufficiently far in advance who has current plans to write such a paper in the right time frame for us.

Anyway, what prompted this opening digression now is the fact that yesterday Stephanie Sikes, from the Accounting Department at Wharton, presented "Cross Country Evidence on the Relation Between Capital Gains Taxes, Risk, and Expected Returns."  This is an empirical study, following up on a previous theoretical paper, that finds evidence against the tax capitalization scenario in which raising capital gains tax rates would tend to lower prices for capital assets, such as newly issued corporate stock.

The logic behind the standard tax capitalization scenario is that, if I'd have to pay higher taxes upon selling an appreciated asset, that reduces the amount I'd be willing to pay for it.  Note that the capital gains tax rate does not apply to all capital income - e.g., it has no bearing on the tax rate for interest income - so one might expect taxpayers to demand equal after-tax returns across differently taxed assets.

Suppose that we are thinking of raising the capital gains rate - say, for distributional reasons.  If the standard scenario does indeed hold, that scenario may reasonably be advanced in opposition to the rate increase, on the ground that lowering issue prices for new securities and raising the required pretax return (i.e., the hurdle rate) will reduce subsequent investment and growth.  Clearly a relevant argument, though not dispositive standing by itself given the multiple effects, both at various margins and on distribution, that the enactment might have.

But the theoretical paper suggests, and the empirical paper finds evidence supporting, the view that this will not necessarily happen because higher capital gains taxes have an insurance function.  Suppose that there is a single capital gains rate applying symmetrically to gains and losses.  (Given the capital loss limitation in U.S. tax law and that of various other countries, this may rest on the taxpayer's expecting to have other capital gains.)  Then the higher the tax rate, the lower the taxpayer's after-tax risk

In short, a symmetric capital gains tax provides insurance that is actuarially fair if the risk-free rate is zero.  It becomes actuarially adverse if that rate is positive, since the risk-free return is included in the tax base, but still the insurance may have net value to taxpayers if not otherwise available.

One of the big questions raised by the paper is why, as the evidence appears to suggest, taxpayers would actually value the risk-sharing properties of the capital gains tax.  After all, they presumably have some ability to optimize risk levels on their own, such as by diversifying and hedging.  This might reflect limitations in capital markets, or else the government's superior ability to handle systematic risk (although, in that case, one must ask where the risk that the government at least nominally absorbs in fact ends up).  There is always a possibility of alternative explanations for the paper's findings, although the authors took reasonable steps to address the main contenders.

Only at NYU Law School

Perhaps I can be forgiven for a spasm of institutional chauvinism.  There is no place like NYU Law School, in the U.S. or indeed around the world, for studying tax law and policy.  A case in point today came from an event that was organized pretty much on the fly, yet drew a strong audience response.

Professor Alfons Weichenrieder of the Economics Department at Goethe University in Frankfurt is a leading researcher in the field of international taxation.  Like several other excellent economists in this field in both the U.S. and Europe, he is interested in understanding the institutional details of how countries' tax systems work, recognizing that one can't otherwise do good empirical research about international taxation.  In addition, like some but not all of the economists whom I have met, he is interested in talking to lawyers.

He was in the U.S. for a conference that we both attended last Friday, and had asked me if, while in the area, he could present a paper at NYU Law School.  We thought that this would be great, the only question being whether we'd be able to deliver a proper audience, but we figured we'd do our best.

The event took place from 6 to 7 pm today.  He presented his paper (co-authored by Martin Ruf) "CFC Legislation, Passive Assets, and the Impact of the ECJ's Cadbury Schweppes Decision."  The background here is that in 2006, in the Cadbury Schweppes decision, the European Court of Justice, on grounds that many fair-minded people find considerably short of being persuasive, held that the U.K. could not use its controlled foreign corporation (CFC) rules to combat tax planning games that placed passive income (via foreign subsidiaries of a U.K. company) in low-tax Ireland, rather than high-tax England, unless the taxpayer was making use of a "wholly artificial" arrangement.

The decision undermined EU countries' ability to address income-shifting games through the use of subsidiaries in low-tax members of the EU.  A number of EU countries, I believe including Germany, responded to the Cadbury Schweppes decision by loosening their CFC rules in the interest of advance compliance.

Using a unique data set concerning German companies, the Weichenrieder-Ruf paper examines the question of whether there are empirical traces suggesting that German companies responded to the new opportunities afforded.  Although the response appears not to have been huge - in part, perhaps, because of uncertainty regarding how aggressively Germany would push on the decision's permitting the disallowance of tax benefits from "wholly artificial" arrangements - there nonetheless are discernible signs that companies responded by holding more passive assets through EU subsidiaries, albeit less through subsidiaries in outside tax havens such as the Cayman Islands.

OK, onto the NYU Law School chauvinism.  One point is simply that we had an event like this, and have many such in the course of a typical semester.  But another point is that, despite a late start on our part in promoting the event (basically because everyone is every busy), we got more than 20 people to show up (and then engage in lively discussion), on short notice, on a Thursday night from 6 to 7 pm, with no food available (other than a Cadbury chocolate bar that Alfons whimsically brought), on a rather specialized topic, for an empirical paper by an economist who is not from the U.S. and thus is not known to most people here, and on a night when many or even most of the tax students who might have come were unavailable because they were going to Washington for a job fair.  The audience included NYU students, NYU faculty, and tax people from outside the institution who are regularly participating members of our broader community.

I tend to doubt that all this could have happened at any other U.S. law school.

NYU Tax Policy Colloquium, week 6: Hines and Logue, Delegating Tax

Yesterday at the NYU Tax Policy Colloquium, Jim Hines and Kyle Logue presented their paper, “DelegatingTax.”  The paper’s main arguments are: (1) Congress does less delegation of lawmaking authority in tax than in other areas of law, such as environmental regulation, (2) the grounds for favoring significant delegation in other areas also apply to tax, and therefore (3) it might be desirable for Congress to increase the degree to which it delegates lawmaking authority in the tax area.

Possible examples of greater delegation that the paper discusses include (a) giving the Fed authority to make tax rate changes for countercyclical reasons, (b) giving greater discretion, with regard to the design of tax preferences either to the Treasury or to subject-matter experts, and (c) empowering a commission, a la the military base-closing commission of some years back, with the authority to make broad determinations with regard to which tax preferences might be eliminated to fund either lower rates (in a 1986-style reform) or else long-term deficit reduction.

This was an interesting paper and I am generally sympathetic to its line of argument.  To be sure, it is hard to pin down what exactly one means by greater versus lesser delegation (although there clearly is some underlying content there).  Moreover, if it could be defined crisply enough, one might want to try to examine empirically the relative delegation in tax versus other areas in the U.S., and as between the U.S. and other countries.

Further thoughts that I had upon reading the paper are contained in the following, which is an expanded and reorganized version of notes that I prepared for myself in order to be ready for the session:

1) What do we mean by delegation of tax lawmaking authority, and where do we tend to find it?

(a) It has something to do with the choice between rules and standards, where the latter might be viewed as involving greater delegation, but is not exactly the same thing.  (E.g., one could delegate either more or less under either a rules-based or a standards-based approach.)

(b) If we are talking about tax delegation, we should keep in mind delegation to the courts, not just to the Treasury Department.  Most judicial decisions on tax in the U.S. involve statutory interpretation, and thus not only could be overturned by Congress ex post, but in many cases could have been headed off ex ante if Congress had wanted to specify more precisely what it meant.  (Often it doesn’t, however – apparently preferring to delegate.)

(c) Congress appears highly inclined to delegate in cases where it is applying very broad legal concepts that have murky or unclear underlying economic content.  Examples include:

            (i) Section 482, which authorizes the Treasury to reallocate taxable income between related parties based on the principles of clear reflection of income and preventing evasion.  Under the regulations, this is generally done under an “arm’s length” standard.  One asks the counterfactual question: “What would the related parties have done if acting at arm’s length?” and tries as best as one can to finesse the problem that this question commonly lacks a coherent, much less discernible, answer.  My point here is not that doing this is a bad idea (not doing it would probably be even worse), but that the difficulty of devising workable principles has apparently induced Congress to punt / delegate.

            (ii) Debt versus equity – This is the re-delegation that failed.  As is well-known, there is no coherent basis on which the tax law can distinguish debt from equity, at least in close or mixed cases, and there also is no particular policy reason for treating them so distinctively.  Congress for decades delegated the whole issue to the courts.  However, in 1969, it passed Code section 385,  instructing the Treasury to issue regulations sorting out the mess.  The Treasury tried for a while, issuing two sets of proposed regulations (if I recall correctly) that it then decided not to finalize.  So delegating / punting the issue to the courts remained the prevailing norm.

            (iii) Economic substance requirement – Case law has long held that tax-motivated transactions will be ineffective if they lack requisite economic substance and/or business purpose.  This is of course a “standard” developed by the courts and for decades left alone by Congress.  When Congress finally codified the economic substance approach, for use in applying penalties, it bent over backwards to make clear that it was not adjusting or revising the prior common law approach in any way, apart from one distinct matter: it provided that taxpayers must meet both the “objective” and “subjective” aspects of the prevailing test, whereas case law had been divided as to whether one needed to satisfy both, or just either one.

2) Is there less tax delegation, and if so why?

(a) Presumably, Congress will only delegate lawmaking authority (or delegate “more” rather than “less” when it realistically has the choice) where the relevant decision-makers conclude that the political benefits of doing so exceed the political costs.

Making a consequential political decision often has both political benefits and costs.  One gets the credit but also the blame; one pleases the winners but also angers the losers.  Given, however, that politicians both often like to exercise power and benefit from doing so (e.g., reputationally and in fundraising), presumably “extra” delegation that was not practically necessary tends to reflect some particular motivation.

Here are 3 representative examples:

            (i) Public interest reasons for delegating: If, say, an independent agency can actually do a demonstrably better job than Congress, and members of Congress believe that on the whole this will be to their political benefit, they may delegate for entirely “good” reasons.  A classic example is delegation of power over monetary policy to the Fed.  (Admittedly, this example risks becoming obsolete in the era of Rand Paul.  I suspect that, if were necessary to pass new legislation retaining the Fed’s current authority over monetary policy, it would fail in the House and be filibustered in the Senate.)

            (ii) Symbolic politics: Here an example is the creation of the Environmental Protection Agency (EPA).  To be clear, I certainly agree that the creation of the EPA was important substantive policymaking, with real effects that I believe were on the whole decidedly good. But to legislators at the time, I would think that it had an important symbolic element: By creating a new agency, one takes the credit for “doing something” about environmental concerns.  But since the EPA is the party actually making decisions that involve tough tradeoffs (or winners versus losers), it gets the blame on the implementation end.

            (iii) Prisoner’s dilemma: Suppose there is broad consensus that we all lose overall from an array of parochial benefits.  But no one wants to give up his or her narrow benefit, unless enough others are doing the same.  Congress’s creation of a military base-closing commission (with Congress to vote the final recommendations up or down, with no amendments permitted) is a classic example.

(b) In practice, agreement to delegation appears to require broad underlying consensus regarding the general policy approach that Congress   However, while broad delegation’s reliance on the existence of underlying consensus appears clear empirically (at least based on casual observation), it is less clear why, as a theoretical matter, this should be so.  One could, for example, imagine political players who strenuously disagree but are mutually uncertain of success handing things over to an arbiter.  But my impression is that this doesn’t generally happen.

(c) The conditions for broad delegation are generally missing in current tax politics.  Politicians appear not to view the political benefit as exceeding the political cost, and an important reason is the lack of underlying consensus.  With respect to particular examples:

            (i) The Fed and tax rates – Even when there was greater consensus than we have today regarding countercyclical fiscal and monetary policy, why would Congress hand over tax rate authority to the Fed?  Isn’t it more fun to get the credit oneself for cutting taxes during recessions?  And while Congress could reasonably have anticipated that it would be less eager to clamp down when there was inflation risk, at least the Fed was still there as a backstop via monetary policy.

            (ii) Design of tax preferences – Here is where one could most readily imagine it happening.  Indeed, there are a couple of small areas in the law (e.g., with regard to low-income housing credits and state agencies) where delegation has indeed expanded a bit.

            (iii) Repealing tax preferences to fund a rate cut or reduce the fiscal gap – This would be just like military base-closing if there were sufficient underlying consensus, along with willingness to lose one’s own favored items so long as others shared in the haircut.  But there simply is no such underlying consensus. What is more, many of the underlying items are just too big for their proponents to be philosophical about losing them even if lots of other stuff is nicked as well.

3) Would more tax delegation be beneficial?

(a) Analogy between delegation to an independent agency and the existence of nonprofit firms – There is a rich law and economics literature concerning when and where we observe the use of nonprofit firms – for example, in charity work, higher education, and the fine arts.  The dominant account, for example from Henry Hansmann’s work, emphasizes that it is a response to the concern (by consumers and/or donors) that here, unlike in many other areas, the standard profit motive would be over-powered and partly misdirected.

Hansmann emphasizes, for example, the role of ambiguous outputs (e.g., higher educational quality, which may be hard to observe, apparently leading to the surmise that tamping down the profit motive may lead to better results.  In a very small piece that I once wrote in this area, I made the additional point that the substitute motivation is somewhat of a black box, which we fill in based on our empirical beliefs concerning the motivations and utility functions of likely nonprofit actors.  This may be why, for example, we don’t observe nonprofit auto repair shops.  Their being nonprofit might mitigate concern that they were using asymmetric information to fool us into overpaying for stuff we don’t need, but there is no theory of altruistically minded nonprofit auto repair workers who would love and respect the process as much as we academics try to respect effective teaching and good scholarship.

Substitute direct political accountability for the profit motive, and independent experts or professionals for nonprofit actors in a charity, and you get a parallel scenario analytically.

(b) Analogy to the Financial Accounting Standards Board (FASB) and the specification of generally accepted accounting principles (GAAP) – Suppose Congress instructed the Treasury to define taxable income, basing it on economic income but subject to reasonable administrative concerns, including use of the realization requirement where Treasury thought it appropriate.  Full stop, subject only to whatever provision Congress separately made for the design and use of tax preferences.

Would this be a good thing?  I am inclined to think so if the Treasury in turn delegated the task to an insulated professional agency.  But admittedly this is just a surmise – if Congress did this (which it won’t), then we would find out how well or poorly it worked.

One reason for thinking that it might be a good thing (leaving aside that it will never happen) is the analogy to FASB and GAAP.  FASB is a somewhat independent and politically insulated agency under the itself-somewhat-independent Securities and Exchange Commission, and it uses its GAAP rules to define financial accounting income.

Most accountants whom I know – and there also are arguably supportive empirical studies – believe that GAAP, financial reporting, and the quality of the information provided to investors by reported earnings would be a lot worse if Congress meddled a lot more than it does in the process.  On the few occasions when Congress has intervened (e.g., when Senator Lieberman, in the late 1990s, successfully bullied them into dropping plans for treating executive stock options as deductible), there is a view that generally or typically it has made things worse.

This naturally inclines one to speculate that similar delegation with respect to defining taxable income would likely be a good thing, if it was done right.  But obviously we don’t know for sure, and an experiment permitting us to find out remains highly unlikely.  I could only see it happening if the U.S. federal income tax became far less important and prominent than it is today (e.g., as tariffs were once a central concern of Congressional policymaking and then ceased to be such).

Talk on my international tax book at Duke Law School

Last Wednesday (February 26), I  gave a talk at the Duke Law School's Tax Policy Colloquium concerning my newly published book, Fixing U.S. International Taxation.

My slides, which aim to present an overview of the book, are available here.  I've published somewhat similar slides, relating to similar talks, in the past, but I am hopeful that this time around the slides provide a somewhat improved quick tour of the book's main content.

It was a good session, and I enjoyed seeing a number of old friends on the Duke and UNC law faculties.