Things I should have known

I was pro-EU for many years, reflecting my dislike of parochial nationalisms, and my analogizing from my belief that, in the U.S., the optimal balance as between the national government and the state governments should be tilted much more towards the national side of the scale than it would be we if we were like Europe.

But U.S. federal government policy is run by a nationally elected president plus a national legislature where all states are represented, not to mention that we're all in the same boat economically even when we don't realize it.  E.g., I was reading the other day about how the S&L crisis was essentially a rich coastal states' bailout of Texas, only no one even thought of it that way, as it just happened automatically.

When you lack both democratically elected (and adequately empowered) federal-level political institutions and a federal-level economic union that operates automatically, one thing you can end up with (as anyone versed in American history can tell you) is the Articles of Confederation. But a very different thing that you can end up with - the EU today - is in its own way just as bad.

Herewith Ben Bernanke, not generally known as a fire-breathing lefty:

"In late 2009 and early 2010 unemployment rates in Europe and the United States were roughly equal, at about 10 percent of the labor force. Today the unemployment rate in the United States is 5.3 percent, while the unemployment rate in the euro zone is more than 11 percent. Not incidentally, a very large share of euro area unemployment consists of younger workers; the inability of these workers to gain skills and work experience will adversely affect Europe's longer-term growth potential....
"Currently, the unemployment rate in the euro zone ex Germany exceeds 13 percent, compared to less than 5 percent in Germany. Other economic data show similar discrepancies within the euro zone between the "north" (including Germany) and the "south." ....
"Germany has effectively chosen to rely on foreign rather than domestic demand to ensure full employment at home, as shown in its extraordinarily large and persistent trade surplus, currently almost 7.5 percent of the country's GDP. Within a fixed-exchange-rate system like the euro currency area, such persistent imbalances are unhealthy, reducing demand and growth in trading partners and generating potentially destabilizing financial flows....
"Germany could help restore balance within the euro zone and raise the currency area's overall pace of growth by increasing spending at home, through measures like increasing investment in infrastructure, pushing for wage increases for German workers (to raise domestic consumption), and engaging in structural reforms to encourage more domestic demand."

But of course they won't.  It's easier just to let everyone else suffer, while also feeling very noble and put-upon.

Bernanke doesn't address the political institutional side, but you can bet that things would be different if an EU-level prime minister and legislature were setting policy, and if the EU was automatically funding social welfare programs in Greece and southern Italy, like the US national government does in Mississippi and South Carolina.

Many U.S. tax people (not just me) have tended to be pro-EU, in part from the U.S. analogy in which we think that limiting internal tax competition to the relatively small state and local tax systems, which themselves face federal judicial review under the dormant commerce clause, gets it more or less right, all things considered. But we have often not been huge fans of the jurisprudence emanating from the European Court of Justice, which at times creates the worst of both worlds by handcuffing national governments' reasonable responses to aggressive tax planning, while lacking the power to impose federal-level uniformity. I don't blame this on the people at the ECJ - it's structural and inherent to the institutional set-up, rather than being particularly their fault.

What I hadn't understood until recently is the similarity between the structural flaws that tax people have seen all too clearly for years in the ECJ model and what we've seen at the macro level between Germany and the European "south" (not just Greece). Without federal-level democratic institutions, legitimacy, or true economic and political integration, you combine the evils of centralized decison-making that ignores reasonable local needs, with the evils of not being centralized enough to advance the common good in an integrated way.  One would have thought you could only one get set of evils at a time, but the EU has advanced our intellectual understanding of federalism by showing that, with a sufficiently perverse institutional design and ruling ideology, you can simultaneously get both.

Obviously, the ECJ looks great compared to these other jokers.

A broader lesson is that, even if greater EU centralization would potentially be good, it does not follow that decentralizing wouldn't also be good, relative to where they are now.  In my view, greatly decentralizing (e.g., dismantling the Euro and reducing ECJ oversight) would be a sizable improvement over the current state of play, even if it would be better still to centralize more, and in the end truly to become a single nation (subject, of course, to people actually wanting to do that).

Jury duty

For the last three days, I've spent most of my time at a New York State criminal courthouse, where I was called for jury duty. Lots of sitting around, but, while sent to a courtroom where they were picking jurors, I never got selected even for voir dire, much less actual jury service.

I was actually selected once for a civil jury - despite my law prof background and my having (long, long ago) taught Evidence and written a couple of articles about statistical probability issues.  But that civil trial settled before the opening statements. Just as well, as I was merely an alternate, so I probably wouldn't have gotten to participate in the jury deliberations.

It's actually quite interesting to see the process from the quasi-inside.  One clear point that I've noticed on more than one occasion is how earnest, or at least apparently earnest (it's hard to know) people are about expressing their views and feelings accurately during the voir dire.  But at the same time a part of the process is designed to overawe them into doing as they are told, in terms of following the law and the judge's instructions.

It would definitely be interesting to serve on a jury sometime, but I was glad not to be chosen this time, for personal reasons relating to set-in-stone vacation plans.

Another article draft that I may post soon

I've recently completed another article draft, one more of the things that I've committed to do before getting back to work on my literature book.  This one was commissioned for an edited volume that is being put together by a friend at another leading law school, on issues related to timing and legislation. My book from 15 years ago, When Rules Change, is well within the topic range of the new volume, but as it happened I didn't want to return to the issues I discussed there.

While the editors have a book contract, I'm not 100% sure this is public information yet, so I will hold off on giving more details.

The piece I've written is a short one by legal standards - under 10,000 words, as indeed was specified by the invite.

Article title: "The More It Changes, The More It Stays the Same? Automatic Indexing and Current Policy."

Opening sentence: "The ancient Greek philosopher Heraclitus famously remarked that you cannot step into the same river twice, to which a disciple supposedly replied that you cannot do so even once."

My topic is automatic adjustment rules in the income tax and Social Security.  E.g., apart from inflation indexing in both, I discuss such automatic indexing possibilities (or actualities) as:

--In the income tax, indexing the rate brackets to prevent real bracket creep, or to respond to vertical distributional changes via the "Rising Tide Tax System," or to provide automatic tax smoothing when a measure of the fiscal imbalance changes.

--In Social Security, disputes over how to measure inflation for indexing purposes, wage indexing in actual Social Security, and proposals to index the normal retirement age for life expectancy changes.

The aim here is conceptual, rather than to endorse specific proposals.  E.g., I discuss indexing's general appropriateness (I consider it just fine if one happens to agree with the policy it advances), the difficulty of defining current policy if that is what one is trying to maintain, and the links between particular proposals that might be debated on seemingly technical grounds and separately conceived policy preferences that might lead one either to support or oppose them.

Aging rock nerds debate "want versus need"

Recently, at an informal academic seminar, a colleague quoted the famous Rolling Stones line to the effect that, while "you can't always get what you want, if you try sometimes you just might find you get what you need."

I couldn't resist responding after the session with Dylan's take on the Want Versus Need issue: "Your debutante knows what you need, but I know what you want."

He struck back with earlier Dylan: "Go 'way from my window, go at your own chosen speed, I'm not the one you want, babe, I'm not the one you need."  He called this classic regulatory command and control - apart from its leaving open the speed choice - since Dylan purports to know both what the other person wants and what she needs.

I responded that negative externalities and asymmetric information provide the classic rationales for regulation.  Here, not only does Dylan evidently find her presence at his window irksome, but he also claims to know more about himself than she does (hence "I'm not the one you want / need"). Both claims are plausible.

Nonetheless, my colleague replied that this is just the usual public interest rhetoric disguising private rent-seeking.  Perhaps he has a point, given that, while the Dylan of mid-60s love-hate songs is frequently compelling, he does not, thank goodness, come off as public-spirited like the earlier folksinger.  ("Ah, but I was so much older then, I'm younger than that now.")

Speaking metaphorically, of course

Here's my EU debt plan: reverse Germany's 1953 debt forgiveness on the ground that they violated the implicit terms by not "paying it forward," call it an equity interest that's deemed to have grown since 1953 at the rate of the German stock market, and then propose a summit meeting covering both the German and the Greek debt.

Revised article posted

I have posted on SSRN a revised version of my article "The Crossroads Versus the Seesaw: Getting a 'Fix' on Recent International Tax Policy Developments."  It's available here.

The changes reflect helpful comments that I received late last month at the 9th annual symposium of the Oxford University Centre for Business Taxation.  In particular, the introduction may now be clearer, In addition, I briefly discuss recent U.S. "patent box" proposals (see pages 5-6, 40-42, and 50), and I have added some needed nuance to my "tagging" discussion of paying low foreign taxes (see page 21).  Otherwise, it's mostly the same.

The Greek referendum

While I have far more sympathy for the Greeks than the Germans in their current standoff, this Vox post helps make the point that it's quite hard to say which referendum outcome would lead to better state of affairs down the road.

If the EU's future will be just like its present, and if the Greeks would be able to manage an independent budget and currency, then exiting the Euro (which a No vote would make more likely) strikes me as the significantly better choice, even though the next few years would be gruesome.

But on the other hand, if the EU were to evolve into a true fiscal state in which Germany would help out Greece the next time around, in the same way that boom areas in the U.S. help out bust areas via automatic fiscal policy instruments, and if a fully autonomous Greek state would have serious governance problems, the merits could lie in the other direction.

I am skeptical that EU internal governance will evolve the right way to make staying with the Euro a good choice for Greece, instead of just a recipe for endless austerity and disregard of their interests relative to those of more powerful countries.  But who really knows on either front.

Vacation reading

While traveling in the UK last week, the books that I got to read included Knausgaard Book 1, and a biography of Lewis Carroll / social history of the Alice books by Robert Douglas Fairhurst.

I liked, and more than that respected, the Knausgaard, but it wasn't a super-easy go when one wants to relax, and I'm not in an immediate rush for Book 2.

I am one of those people whose love of the Alice books (and The Hunting of the Snark) goes extremely deep. They are foundational for me, as they are for many others whom I have known. We used to be an enormous tribe. Indeed, for a sense of the books' cultural valence 50 years ago, consider that John Lennon and Grace Slick both wrote canonical 1960s rock songs that were rooted in them. But for some reason our numbers seem to have shrunk comparatively in recent decades. And for once it isn't the movies' fault - the 2010 version, although its wrong-headedness appalled me, can no more diminish it than did the Disney version 60 years ago.  (Cf. the Colin Firth Darcy, which really has knocked Pride and Prejudice out of its prior cultural orbit.)

Where the Alice books "came from" has always been a hard question. They are in a sense so radical, and the level of imagination, daring, creativity, and wit that they display is so extraordinary, that their fit with a pious, shy, stodgy, and in many ways reactionary Oxford don, with a distinctly creepy (whether or not one deems it actually pedophilic) interest in young children, seems inexplicable, even if also inevitable in the sense that no other sort of person could possibly have written them.

Just one small point, they feature a realistically portrayed 7 and then 7-1/2 year old girl - very sweet, but quite conventional, not to mention naive, sheltered, and snobbish - who also functions simultaneously (and, on the author's part, seemingly effortlessly) as (a) one of the great quest heroes in literature, (b) the books' sole spokesman and undiscouragable champion for the values of sanity, proportion, and common sense, and (c) the badly needed "straight man" (so to speak) for one outrageous high-wire performer after another.

Fairhurst's book is a thorough and fair-minded exploration of what's known or can still be learned about the man (Dodgson / Carroll), the work, and for that matter the subsequent life of the historical Alice. One of the interesting things it depicts is how the "Carroll" side lost ground to the "Dodgson" side as he got older. A second pertains to the interest in children that today would be universally (whether rightly or wrongly) viewed as aberrant and criminal. The book shows how more widely shared tropes of that era help to explain where Dodgson was coming from, allowing him to rationalize and perhaps experience it as nonsexual, in a way that would be impossible today. Even during Dodgson's lifetime, however, views of childhood were changing rapidly in a modern direction. By the time of his death in 1898, in just his mid-sixties, the world had wholly passed him by. Darwin he took in stride, but Freud would have been too much for him. Not so for the Alice books, however, which if anything gained force over time.

As has the The Hunting of the Snark, which I regard as not just great fun, but startlingly prophetic in an oddly gnomic way.  E.g., the map that is "a perfect and absolute blank" - "what I tell you three times is true" - "They threatened its life with a railway share, they charmed it with smiles and soap."

New paper posted on SSRN

I have just posted on SSRN my draft paper, Taxing Potential Community Members' Foreign Source Income, which I wrote for a conference on citizenship and taxation that will be held at the University of Michigan Law School on October 9 of this year.  The paper is available for download here.

The abstract goes as follows:

Recent years have witnessed rising debate, on both sides of the Atlantic, regarding how to define the category of individuals whom a given country classifies as domestic taxpayers, and who thus may be taxable on their foreign source income (FSI) even if they live abroad.  While the United States rules focus distinctively on citizenship, the broader issue is better viewed as pertaining to the taxation of “potential community members” (PCMs) – that is, all those who plausibly might be viewed as members of the home community.

This paper makes two main points regarding the taxation of PCMs on their FSI.  First, the issues turn in large part on drawing a distinction between “us” and “them” – that is, between people whom we classify as members of the home community, and thus whose welfare we care about, and those whom we classify as normatively irrelevant (or less relevant) outsiders.  While such a distinction is inevitable in a world with separate national governments, conventional tax policy and public economics tools shed little direct light on how one might operationalize it.

Second, for PCMs whom a given country classifies as domestic taxpayers, past debate has over-focused on issues of mitigating “double taxation” through exemption or foreign tax credits.  It should instead focus distinctly on the questions of (a) how heavily or lightly one should tax domestic taxpayers’ FSI in particular cases, and (b) how foreign taxes paid should affect domestic liability.  Refocusing the analysis not only helps to inform one’s understanding of the choice between the two standard tools, but also may suggest considering blended approaches that might avoid the worst features of each.

Back from Oxford

I've just returned from the UK, where last week I attended the 9th annual symposium at the Oxford University Centre for Business Taxation.  I gave a talk on my recently SSRN-posted paper, "The Crossroads Versus the Seesaw: Getting a 'Fix' on Recent International Tax Policy Developments."

I won't link to the paper, since I am planning to revise it, and would just as soon have prospective downloaders wait until I have posted the revision.  But the slides for my talk are available here.

After the conference was over, I enjoyed going to the Cotswolds for 3 days of hiking through the countryside.  The paths lead through woods, fields both with and without livestock, and scenic small towns.  Then I was in the charming city of Bath for a couple of days.

One highlight in Bath was getting to meet this individual, who was not actually trying to carry me away to a distant aerie for eating at his pleasure - rather, he is willing, under controlled circumstances, to accept bits of chicken from strangers.