NYU Tax Policy Colloquium - spring 2016

The schedule for the 2016 NYU Tax Policy Colloquium, which I will be co-teaching with Chris Sanchirico of U Penn Law School, is now set (as to speakers, though not as yet paper titles).  We'll be meeting on Tuesdays, from 4 to 5:50 pm, at NYU Law School, 40 Washington Square South (i.e. Vanderbilt Hall), room 208.  The speaker list is as follows.

1.  January 19 – Eric Talley, Columbia Law School.

2.  January 26 – Michael Simkovic, Seton Hall Law School.

3.  February 2 – Lucy Martin, University of North Carolina at Chapel Hill, Department of Political Science.

4.  February 9 – Donald Marron, Urban Institute.

5.  February 23 – Reuven Avi-Yonah, University of Michigan Law School.

6.  March 1 – Kevin Markle, University of Iowa Business School.

7.  March 8 – Theodore Seto, Loyola Law School, Los Angeles.

8.  March 22 – James Kwak, University of Connecticut School of Law.

9.  March 29 – Miranda Stewart, Australian National University.

10.  April 5 – Richard Prisinzano, U.S. Treasury Department, and Danny Yagan, University of California at Berkeley Economics Department.

11.  April 12 – Lily Kahng, Seattle University School of Law.

12.  April 19 – James Alm, Tulane Economics Department.

13.  April 26 – Jane Gravelle, Congressional Research Service.

14.  May 3 – Anne Alstott, Yale Law School.

Belated comment on Hillary Clinton's capital gains proposal

I was away on vacation when Hillary Clinton released her capital gains proposal, but figured better late than never, so here are a few words on it now.

Under present law, the top individual tax rate is 39.6%, and this is also the tax rate for short-term capital gains, or items held for less than a year.  Any capital asset that is held longer is taxed at the long-term capital gains rate, which for people in the top bracket is 20%.

The Clinton proposal is pretty simple: require that one hold the asset for six years to get the 20% rate.  In the interim, the applicable rate slowly drops to 36% for (2-3 years), 32% (3-4 years), 28% (4-5 years), and 24% (5-6 years).

The stated aim is to combat "short-termism" by the managers of publicly traded companies (which Clinton calls "the tyranny of today's earnings report").  The idea is to make corporate executives less avid than they presently are (it is argued) to boost the current stock price at the expense of long-term profitability.  Ostensibly, if investors switch to long-termism by reason of the incentive that the rate structure offers for longer-term holding, managers will change, too, so they can remain in step with investors' preferences.

I agree with Victor Fleischer that the proposal "misses the mark" if it aims to change managerial behavior.  Fleischer emphasizes the virtues, in some cases, of more rapid trading if it results in reallocating capital, and more particularly the continuing incentives that arise from managerial compensation design.

I would further emphasize a couple of additional points.  Current law already combats "short-termism," insofar as deferral reduces the present value of the expected capital gains tax and the step-up in basis at death can lead to its complete elimination.  But I don't know anyone who thinks this has a significant (or perhaps any) positive effect on managerial behavior.

Addressing the misalignment of managerial incentives, insofar as it is feasible via tax and regulatory instruments, really requires going inside the company, not just aiming at the investors.  In general this is probably best done through corporate governance rules, although it is not impossible that tax rules could play a positive role.  (E.g., the $1 million ceiling on deductible non-incentive compensation of top executives in publicly traded company has surely hurt things, although how much is a matter of debate, given that "incentive" compensation can be so misaligned from the standpoint of actual long-term investor returns or national economic welfare.)

There are other problems lurking in the area, and at first I was inclined to think that the Clinton proposal might have some relevance to them, but on balance I think pretty much not.  I refer here to the set of issues, sometimes raised in favor of enacting a financial transactions tax (which I have discussed here), pertaining to whether (a) high-speed trading has negative externalities, and/or (b) what Keynes called the "beauty contest" aspects of stock market trading are socially wasteful or even actively destructive.  But here the focus is not on managerial short-termism, but rather on the mis-allocation of societal resources towards rent-seeking activity, along with possible volatility effects on asset markets and real economies.  These are issues that might merit a serious proposal from a leading Democratic candidate - and that might similarly signal that she is proclaiming her independence from Wall Street - but that would look quite different from this one.

Is the Clinton proposal actively harmful?  I don't think so, although it is true that in some cases people would pointlessly hold stocks just a bit longer so that they could lower the applicable tax rate.  And if one wanted to raise the capital gains rate, doing it this way might be better than not doing it at all, even if the time sequence is otherwise pointless.

The change to capital gains taxation that I would urge Clinton to advocate - although I can't speak to its political virtues or demerits - is automatic capital gains realization at death (or when one makes a gift of appreciated property), perhaps only reaching net gain above a dollar ceiling, even though this would reduce the current system's discouragement of short-termism.

Back from Spain

After an enjoyable close-to-two-weeks in Spain (Barcelona, Seville, Madrid, Toledo), I am back in NYC, more or less for the duration.  Among the best things I saw out there were the Gaudi buildings and Sagrada Familia church in Barcelona, and the astoundingly rich collections of Spanish and other European art in the Prado and Thyssen museums in Madrid. It actually got painful trying to see as much as one could, in a day each, of those two collections.  For example, lots of great El Greco (supplemented in Toledo), Velazquez, and Goya. And the Picasso Museum in Barcelona was quite interesting for its early works, pre-fame and fortune and thus predating the emergence of all those trademark mannerisms.