Tax policy colloquium, week 5: Reuven Avi-Yonah’s “Evaluating BEPS”

Yesterday Reuven Avi-Yonah presented the above paper, in front of a packed house.  My thoughts upon reading the paper fell into two main categories:

I.          OECD-BEPS

The paper lauds the aims of the OECD-BEPS process, but concludes that it fell short on both substance and process grounds.  I agree to a significant extent, but (unsurprisingly, given our respective track records) view the issues differently in some respects.

1) What important principles does OECD-BEPS endorse, and might it instead have endorsed?

Reuven has long advocated the primacy in international tax law of what he calls the “single tax principle,” holding that all income should be taxed exactly once, with the key aim being to avoid both double taxation and double non-taxation.  I question this principle’s value, at times a bit harshly, in my international tax book, although perhaps I treat it with a bit more sympathy in a recent short symposium piece.

What’s of interest in the context of the new paper is that it notes a distinct, although not necessarily irreconcilable, principle, that guided the OECD-BEPS process.  It aimed, not just at avoiding double non-taxation (although that was a major aim), but also at “better alignment of taxation with economic activity and value creation.”  For convenience, let’s call this the “alignment principle.”  It holds that each dollar of income not only should be taxed once, but should be taxed by the “right’ country, as defined in terms of where the economic activity and value creation occurred.

Also worth keeping in mind – but in tension with the alignment principle – would be the idea of defining the source of income on a destination basis (i.e., based on where the consumers are), rather than on the origin basis (based on where the production activity occurs).  Reuven has endorsed aspects of this in the past – for example, by suggesting that sales-based formulary apportionment be used in lieu of transfer pricing.  It would tend to source income differently than the OECD-BEPS alignment principle (which is most plausibly interpreted as an origin basis approach), but in both cases, if they were operating properly, source determinations would be less manipulable, and reported profits would be less prone to end up being assigned to tax havens, than under existing practice.

2) Can OECD-BEPS meet its objectives, and, if not, then why not?

Reuven is skeptical, as am I, but our grounds for this, while overlapping, are not identical.  In this regard, we both assign a lot of blame to OECD-BEPS’ retention of the “independent entity” approach, under which commonly owned affiliates are treated as wholly separate (reflecting legal form, rather than economic substance) even if they are engaged in a unitary business.   On the other hand, I am more skeptical than the paper is about the prospects for multilateral cooperation that centers on any consistent approach.

The paper also criticizes OECD-BEPS’ retention of the traditional “benefits principle,” which it notes has dominated international tax doctrine since the 1920s.  Under this principle, when a resident of one country has income in another country, source taxation has priority in the case of active business income, but residence-based taxation plays the lead role in the case of passive income.  More on this in part 2, below.  But I would note that if (as never was even remotely possible), the OECD-BEPS process had ended up endorsing unitary business accounting and sales-based formulary apportionment, then – whether this would have been good or bad on balance – it would have at least made plausible the argument that, assuming sufficiently widespread adoption, multinationals’ tax planning to put income in havens would have been significantly set back. 

Note, however, that since this would be using a destination-based rather than an origin-based approach to determining the source of income, it would have involved not following the “alignment principle.”  Again, however, if the reason for favoring the alignment principle was to reduce manipulability and the assignment of accounting profits to tax havens, this still might accomplish that goal, albeit different means.

3) How well can multilateralism work here?

The paper is far more optimistic about this than I am.  It basically says: given tax competition as a race to the bottom, no country has any real incentive to “defect,” and instead all should cooperate in finding a workable way of taxing multinationals effectively.

I’d offer two main points in response.  First, it’s widely disputed, both in politics and among academics, how one should define both national and global welfare with respect to tax policy towards multinationals.  Imagine trying to resolve a prisoner’s dilemma without clarity about how to measure the end-state payoffs to the players from different sets of choices.

Second, even when cooperation has clear global welfare benefits for all, and even when it’s not a true prisoner’s dilemma, in the sense that everyone can observe what everyone else is doing in real time, and adjust what they are doing accordingly, we don’t always get the cooperation that seemingly should be in everyone’s interest.

Consider carbon taxes and global warming.  Provided that you accept modern science, it’s clear that all countries “should” agree to a suitable carbon tax.  But we don’t exactly see that happening.  This is a classic prisoner’s dilemma – apart from the fact that everyone can see what everyone is doing (or rather not doing) – in that, say the U.S.’s unilateral incentive is to price carbon only at the marginal harm to us from climate change.  Why can’t it easily be solved?  Well, you tell me, but it’s even easier to explain why we don’t see a rush by nations to avoid mutually deleterious international tax competition by agreeing to a particular consistent global regime.

4) Is “constructive unilateralism” the solution?

The paper argues that the U.S. is still enough of a quasi-hegemon to overcome the obstacles to multilateral cooperation by going first (i.e., leading with its chin?).  The basic argument is that, if we reduce our corporate tax rate – say, to somewhere in the range of 20 to 25 percent – and also repeal deferral – so we have worldwide residence-based corporate taxation, with foreign tax credits but also immediate accrual – other countries will follow suit.  I am admittedly skeptical that this would be the upshot of our making this change.

A point of further interest is: What might be going on if, say, the U.S. adopts a particular rule and other countries are then observed adopting a similar rule.  Is this constructive unilateralism in practice?  Even assuming a causal link – i.e., it wasn’t either just coincidence or parallel behavior that perhaps reflected similar, but independently operating, causes – there are at least 3 different things that might be going on.  They have different predictive implications for a case such as the proposed one where we repeal deferral in the hope that others (despite having, in many cases, shifted recently towards the territorial pole) will follow suit.

a) Quasi-hegemony – This is the case where the U.S. gets something to stick out of raw power or influence.  FATCA has had elements of this – the threat of facing a withholding tax or being effectively shut out of market did indeed apparently influence lots of players.  But that was a very particular setting.

b) Stealing a good idea – When Apple makes a hit with the iPhone, its competitors say “Wow, maybe we should do something like that too.”  Indeed, but for patent protection they would likely do it straight out.

Consider the U.S. adoption of CFC rules (under subpart F) in 1962, which was followed by the spread of CFC rules elsewhere in the world.  As I discuss here, there are reasons of self-interest why countries may want to have CFC rules, as a way of protecting the domestic tax base.  I would think that this explanation better fits the actual spread of CFC rules than the hegemon theory.

While countries have reason to protect the tax base by adopting CFC rules, they also have reason for ambivalence about such rules.  Reason 1, they can discourage the use of resident companies to invest either at home or abroad.  Reason 2, they can discourage seeking to avoid foreign taxes, which is contrary to unilateral national self-interest unless there is sufficient tie-in to discouraging domestic base erosion.

The U.S. obviously feels this ambivalence as well.  Even if it was an accident that our check-the-box rules greatly weakened our CFC rules, we’ve deliberately allowed this “mistake” to remain in place for close to twenty years.  So the unilateral national self-interest reasons for having CFC rules, while strong enough to produce widespread adoption of such rules, evidently are not strong enough to consistently persuade either us or others to make the rules particularly tough.  (A worldwide regime without deferral would, of course, be the ultimate set of CFC rules – currently taxing all of one’s CFCs’ income.)

(c) Competing – The U.S. lowered its corporate tax rate in 1986, and many countries subsequently did the same thing.  Suppose we accept that our action in this regard influenced theirs.  The explanation might be, rather than emulation, affirmative tax competition.  Our lowering the rate, and thereby potentially attracting more inbound investment and reported profits (at least, leaving aside the base-broadening aspects of the 1986 change) might not only strike others as a good idea (as under (b) above) but might also make high rates costlier than previously to our competitors.  Under this scenario, our increasing the U.S. tax burden on U.S. multinationals’ foreign source income would not necessarily induce other countries to do the same with respect to their resident multinationals.

II.        REVERSING THE “BENEFITS PRINCIPLE”

Returning to the traditional “benefits principle,” recall the point that, as mentioned by the paper, it was long agreed that active business income should be taxed mainly on a source basis, and passive income mainly on a residence basis. The paper proposes reversing this, and taxing active income mainly on a residence basis, passive income mainly on a source basis. Let's start by looking at the traditional regime, and then at the new arguments here.

What did source country priority for active  business income actually mean, in an era when tax systems were mainly (at least nominally) worldwide rather than territorial?  More particularly, multinationals’ foreign business operations, even if ultimately subject to home country taxation, would immediately face source country taxation.  The home country would offer not only deferral (assuming the use of foreign subsidiaries), but also foreign tax credits.

Passive income, meanwhile, while potentially subject to source country withholding taxes that were creditable in the residence country, would often face withholding tax rates significantly below the taxpayers’ home country income tax rates.  Plus, treaties would typically arrange a reciprocal reduction or even elimination of the withholding tax for each others’ residents.

For active business income in particular, this approach was often rationalized on “benefits” grounds that I find unpersuasive.  First of all, benefit is not high on my list of normative tax principles to begin with.  Also, it seems to treat inbound active investment as if it were pollution, imposing costs on the source jurisdiction that therefore, naturally enough, demands recovery of those costs even if they have a public goods character and thus are not marginally linked.  But countries tend to want inbound investment, which they may view as having positive externalities associated with it, so demanding reimbursement under a benefits theory is a bit of an odd frame here.

A better historical argument for source priority – leaving aside that this simply happens to be what countries agreed to – was that the source country was often in a better position to observe and measure locally earned active business income.

There may also have been an elasticity issue at work here.  Even if companies’ residence was not, as such, highly elastic in the past, the question of which company (from which country) would make a given investment may have been susceptible to tax influence.  This factor is washed out, however, if all would face the same source-based tax.  Plus, arguably source was less elastic in the past, e.g., if high transportation and communications costs meant that one needed to produce locally.

Nowadays, the source of active business income is clearly mobile.  There’s tax competition, lower transportation and communications costs, greater importance of highly mobile intangible factors of production, highly advanced tax planning and profit-shifting technologies, etc.

Thus, there’s much to gain from taxing active business income on a residence basis, rather than a source basis, IF there aren’t similarly bad elasticity problems on that side of the ledger.  This is basically what the paper asserts.  The idea is as follows: all G-20 and EU countries agree to impose worldwide taxation on a residence basis, with a tax rate of at least 20 percent.  This would eliminate the relevance of corporate residence mobility except as to (a) tax rate differences within the permissible range (which therefore might push towards the bottom and (b) tax residence outside this set of countries.  The paper argues, however, that (b) is not a big problem if all of these countries agree to base corporate residence on a meaningful “headquarters” rule.

I am skeptical, however, about the prospects for such agreement, and I’m agnostic about the issue of residence migration outside the EU plus the G-20 under a meaningful headquarters rule.

Just as an aside, if the paper’s suggested approach were indeed adopted and succeeded, arguably there would still be effective source country priority on the taxation of active business income since, with foreign tax credits still being part of the regime, source countries would have every reason to impose taxes up to the typical residence company rate.

Okay, onto passive income.  There’s an ongoing debate regarding whether the main approach to addressing avoidance and evasion in this area should emphasize information reporting (a la FATCA), or the greater use of withholding taxes.  The paper urges the latter, on the ground that cooperation by tax havens can more readily be disposed of under a withholding tax approach than under an information reporting approach.  This is related to an argument in the paper that, because investors are risk-averse, even those in the BRIC countries want to invest predominantly in the US, the EU, and/or Japan.  This ostensibly means that only those 3 sets of actors need agree, in order for a withholding tax regime to be workable and acceptably comprehensive.  I did not entirely understand the argument, for two main reasons.  First, even the risk-averse can certainly earn, say, bank interest or dividends that comes from a Caymans entity and thus is treated as Caymans source (and hard to treat otherwise), even if in substance the underlying $$ are actually invested in the US, the EU, or Japan.  Second, I didn’t fully understand the paper’s distinction between the relative capacity of tax haven intermediaries to undermine withholding taxes, on the one hand, and information reporting, on the other.

Three further thoughts on the Altera appeal

Three further thoughts on the government's decision to appeal the Altera case, as discussed in my prior post:

1) Even though the Tax Court's vehement 15-0 decision makes the appeal look, at least initially, like a big uphill climb, appealing it might make sense even if the government is pessimistic, rather than optimistic, about its prospects.  When a unanimous 15-0 Tax Court throws out the regulations in a key area, the IRS really can't just "non-acquiesce" and move on as if nothing important has changed.  As a practical matter, they need to either (a) get the decision reversed, (b) rewrite the regulations, or (c) accept really bad results as par for the course.  Arguably the most parsimonious response is (a), since even if they lose they can still do (b).

2) Even if they win this case on appeal, they ought to revise the transfer pricing regulations so that the ridiculously outdated "arm's length" approach is not lauded up front as appropriate in all cases.

3) I would consider joining a suitable amicus brief that supported the government's position on appeal.  I don't have the time to consider leading such an effort, but I'd not only sign such a brief if I agreed with its analysis, but I also would be willing to contribute to a collective drafting effort (assuming that the participants found sufficient common ground).  I think such a brief should raise, not only the section 482 issues that are most directly implicated, but also the potential ill effects of effectively telling the Treasury that it must henceforth write regulatory preambles as if they were litigating documents.

Good luck with that (meant seriously, not as snark)

A bit over four months ago, I posted a blog entry on the Altera case, in which a unanimous 15-0 Tax Court struck down the Treasury's cost-sharing regulations (within the transfer pricing regulations) and handed a huge victory to the taxpayer, which wanted to ensure that its overseas profits from work it actually did in the U.S. would never, at least in the foreseeable future, face tax liability anywhere.  Here's part of it:

"Altera ... concerned a regulatory election, under which U.S. taxpayers with foreign affiliates can opt to use an approach called "cost-sharing" for purposes of determining the applicable transfer prices within the group. In the typical case, a U.S. company with U.S. employees who live, say, in California or the Pacific Northwest is creating what it hopes will be valuable intellectual property (IP) that can be profitably exploited worldwide.  Cost-sharing is a device that they use to shunt as much of the overall profits as possible to tax haven subsidiaries in, say, the Cayman Islands.

"Now, in the real world of transactions between unrelated parties there sometimes are actual "cost-sharing" agreements. For example, two companies with complementary skill sets might agree to collaborate on something that they hope will make them both a lot of money.  In such a case, they may agree that the ultimate profit split will be affected by how much $$ each of them has expended in the development process.

"Then there is fake cost-sharing between affiliates, the topic of interest here. Back to our U.S. company. It has all the employees and all of the relevant skills for developing particular IP. But it creates a Caymans affiliate that, in substance, contributes nothing to the process. But the Caymans affiliate does indeed observably purport to contribute cash to help pay for developing the IP. Where did it get the cash?  Easy, the U.S. parent will typically have given it the cash, in exchange for all of its equity, so that the affiliate could hand the cash right back to the U.S. parent via the pretense of paying for a portion of the development costs. The Caymans affiliate may then get, say, 100% of the upside with regard to profits from selling the IP in all countries outside the U.S.

"In short, the typical deal is like (one suspects) almost no actual cost-sharing arrangement in the history of arm's length transactions.  One party (the U.S. parent) contributes everything, while the second party (the Caymans sub) contributes nothing, except for giving back cash that the first party had placed in its bank account 5 minutes earlier.

"It is already giving these transactions too much credit to say that the Caymans affiliate has effectively gotten the entire foreign "upside" in exchange for nothing. Its getting this upside (and thereby "bearing risk" regarding how great this will actually be) is completely meaningless, given common ownership. But in fact no party to a true arm's length cost-sharing arrangement would get the opportunity to make this sort of a deal. You don't get a piece of the upside without bringing something real to the table. So it's fundamentally ludicrous to look at actual arm's length cost-sharing deals for evidence of how a particular item within the broader deal ought to be treated in related-party arrangements.

"Giving away all the foreign upside in exchange for nothing is already a nice feature of supposed cost-sharing arrangements between commonly owned affiliates. But it's better still if, contrary to the supposed logic of section 482 cost-sharing, you can also give disproportionate deductions to the U.S. affiliate. This further increases the proportion of taxable income that can be treated as arising in a tax haven, rather than in the U.S."

I argued that the taxpayer's victory - it not only won the case, but got the regulations under which it would have lost thrown out as an abuse of discretion ((for requiring that incentive compensation be counted in cost-sharing formulas as between affiliates) -not only exposed the farcical nature of applying fictitious "arm's length" standards to related party transactions, but appeared to reflect a decade or more of careful litigation planning by the industry.  Basically, they flooded the regulatory process with lots of content that was probably less designed to persuade the government than to set the stage for litigation in which they could claim abuse of discretion. You put in lots of evidence that you know they think is irrelevant, then when they too swiftly dismiss it you say they have failed to act in a reasoned manner.  The upshot may be that an underfunded Treasury and IRS must henceforth treat the statements they publish explaining new regulations as litigating documents, meant not just to inform taxpayers but to discourage the courts from overruling them.  At a minimum, this might greatly slow down the process of regulatory issuance.

All this is not (necessarily) to say the Tax Court was to blame.  It hung its hat on the Treasury's refusal, to date, to amend the statement in the transfer pricing regulations to the effect that, "in all cases," the standard is arm's length.  So the fact that private parties making true cost-sharing arrangements generally ignore incentive compensation for purposes of the formula - the key issue here - appeared telling even though it has zero economic relevance to the related-party setting.  But in any event, the Tax Court's reliance on the "in all cases" language is what prevented its decision from being as clearly indefensible legally as it is substantively.

Also, I don't dispute that the Treasury generally ought to take seriously the evidence that taxpayers adduce in the reg process - it was just that here, given the absurd nature of the arm's length standard as applied to related party transactions, the evidence offered truly was substantively immaterial.  (There were also some apparently idiotic claims in the record from the regulatory process that the Tax Court repeated unquestioningly - for example, that incentive compensation costs the shareholders zero.  In that case, please let me have some for five cents.)

Anyway, the government has now filed notice of its intention to appeal Altera to the Ninth Circuit.

Tactically speaking, I certainly hope they know what they're doing.  Appealing such a vehement and unanimous Tax Court opinion is not going to be the easiest road imaginable.

Why I don't entirely respect constitutional law (although I agree that we need it)

I accept the political science case for having a Constitution and court system, with the courts having a mandate, a la Marbury v. Madison, to say what the law "is" (and mythically has always been, from the moment when the provision at issue was adopted).  The case involves having a built-in structure and set of constraints (especially if some of them are pretty good, as is the case with many of our amendments), and then empowering professional interpreters who, although obviously and unavoidably political actors who have been selected by other political actors, have some degree of insulation from direct political control by anyone else.

It stops working as well when things get as polarized as they are right now - e.g., when everyone knows that the "answer" to a whole set of heated questions, possibly for decades, depends solely on whether a Democratic or Republican president gets to appoint the deciding 5-4 vote.  But at that point it's not like some other set of institutions will necessarily work better - rather, it means that social institutions may be dangerously falling apart, with no obvious structural or institutional solution being available.

(Along those lines, if I may digress for a moment, I keenly remember a freshman political science class I had in fall 1974 in which the professor - who nonetheless went on to have a highly successful career in his field - based his institutional theories on the "success story" of Lebanon, in which the power-sharing structure of the legislature, according to him, kept all the rival groups happy.  Oops, then 1976 happened - but the point, of course, was that these institutions couldn't handle the stress they were about to face, not necessarily that some other design would have worked better.)

But to return to con law, I want to address Scalia despite the "nil nisi bonum" principle.  I disliked his opinions, mainly because I have different policy preferences, but secondarily because I was repelled by their tone and "holier than thou" presumption, which I found tendentious.  (I was probably influenced by the degree of respect - not the very highest, although they had very high standards - that I believed, when I arrived at the University of Chicago law faculty in 1987, that the senior faculty members, both liberal and conservative, had had for him prior to his departure, initially for an appellate position, several years earlier.)

Because I disliked his positions on policy grounds, and because I was annoyed by his sweeping claims to unique impersonal objectivity (which somehow always came out his way, if it really mattered), I noticed what - if one applied academic standards to his writing - seemed to be the really intellectually shoddy aspects of his work, which might have disqualified it from even being published (other than in a student-edited journal, obviously), had the setting in which he was publishing it been one that required care and rigor.

Big, big "if" there - "if one applied academic standards to his writing."  Obviously, it's not clear that one can or should view judicial decisions this way, or that opinions by judges on the other side would clear the hurdle either, or that it's possible to achieve academic rigor when one is writing a bunch of opinions every term in a 9-judge court.  But still, intellectually I think it's clear that he didn't do better because he didn't care to, and in his setting didn't need to.  And again, it's only fair to note that this is not a comparative analysis of him versus other judges - it's rather him versus what he appeared to be claiming for himself.

Should one be an "originalist"?  It's not entirely clear how one is supposed to assess this, and it is entirely clear that no one ever approaches this question (on either side of the debate) behind the veil, in the sense of not knowing whether it will be good or bad for their independent policy preferences.  (Perhaps the best defense of this type of linkage comes from Dworkin, who argued that of course one will have deep moral views that will inflect everything, so the fact that these views inflect both one's constitutional approach and one's policy preferences is not just cheating.)

Suppose one is an originalist in the sense Scalia claimed to give the term.  Then what role exactly is legal history supposed to play in the analysis?  Although here I am well outside my areas of professional expertise, I believe that this is not entirely specified (or specifiable) either.  The issue isn't quite what people thought at the time, but what particular words ostensibly meant at the time.  But the latter question clearly can be illuminated by all sorts of outside evidence.

Serious academic lawyers who are interested in the relevance of legal history to issues of constitutional interpretation have a pet phrase describing what they know they must, as a matter of good faith and intellectual seriousness, try to avoid or at least minimize: "law office history."  This has been defined as "historical work performed in a law office for advocacy purposes. The phrase 'law office' highlights that it is both advocacy-oriented and unlikely to be good history."

In this regard, as Mark Graber noted in a Balkinization post: "Scalia’s denunciations of affirmative action never engaged with the substantial scholarly literature maintaining that the Republicans who framed the post-Civil War Amendments frequently enacted race-conscious programs.  His aggressive attacks on regulatory takings never engaged with the scholarly debate over whether the conception of regulatory takings even existed in 1789.  His support for corporate contributions in political campaigns refused to tackle antebellum legal decisions holding that states were free to restrict corporate charters in any way the people thought best for the public interest.  He never sought to refute Saul Cornell's influential claim that the right to bear arms in 1791 was the right to be part of a state militia."

Paul Campos makes similar points in an even more scathing Salon post.

Once one is not limited to "originalism," none of this proves that Scalia was "wrong."  Campos notes that one can defend Scalia's results in good faith, if one views the Constitution as a "living document," the meaning of which must evolve to reflect changing circumstances.  But of course Scalia denied doing this.

Even within originalism, this is not to say that Scalia couldn't have engaged with those contrary points and still come out the same way.  Not only is history ambiguous and often debatable, but once one is looking at a text's "original meaning," rather than just at what various people thought at a given time, there is presumably more interpretive space, and the nature of the enterprise (and how a "right answer" is defined, to begin with) is even more ambiguous.

But his not engaging with contrary evidence is a harsh indictment in context - although even here, there is murk regarding how just far one needs to go, in a judicial opinion.  It's not as if the judges can or should be sending out their draft opinions to readers selected by the editors of academic journals, who then will issue them "revise and resubmit" guidelines.  What makes it so devastating is that the things Scalia ignored were so contrary to his claims, and that his ignoring them seemed so suspiciously selective.  Hence the view among many constitutional lawyers that one of Scalia's chief policy arguments for originalism versus, say, legislative history - that it provides constraints, rather than allowing one to pick and choose opportunistically - turns out to be highly questionable at best, and not just in his hands.

Bottom line, with judges we are in the realm of Power, not just that of argumentation and reasoning that is judged based on its merits (one of the things I like about the academic realm - it's far from perfect, but plain old intellectual merit has some weight and influence).  Had Scalia remained at the University of Chicago and published articles making the same arguments as his court opinions, the price of his not engaging properly would have been steep, albeit purely reputational.  (And presumably, following his different incentives and timing constraints, he would have engaged more.)  Once he was at the Court, even his academic writings on the side were going to be judged in the context of his being a Supreme Court Justice.  And obviously this had to be so - his opinions actually became part of the nation's "constitutional law," because a Justice was writing them in actual cases.

I accept that Power matters - how could I dispute this? - but writings that matter due to Power are different than writings that can only matter based on their merits or interest to the reader.  In my field, I don't have to treat anything as authoritative just because X, Y, or Z said it.  There are of course important ideas to explore, which had important authors whose views as to these ideas (and other things) are independently interesting - but based on their independent merits or interest, not due to Power.  (Unless Power is actually one's topic, but then it's being studied, not deferred to.)

This is why I've always liked being in a field where the determination (or, at least, personal assessment) of what and whose work matters, and why, doesn't depend on their job titles.

A golden oldie

Sorry, I couldn't resist posting (or reposting, at almost a six-year lag) this.

Light blogging this week because there was no Tax Policy Colloquium (Tuesday was a legislative Monday to make the days of the week even out over the semester), plus I was out of town and then got sick for a short spell.  Next week we're back in business, with a paper by Reuven Avi-Yonah discussing OECD-BEPS and related international tax issues.

I've been an interested follower of both presidential primary races, but don't have much to add that would fit entirely in the spirit of this blog, although one could certainly wave one's hands and shout a bit about this.

Nonpartisan comment on the Supreme Court vacancy

Whatever one makes of the issue of whether a president with 11 months left in his term should be able to appoint a Supreme Court nominee who, under prevailing custom, would be approved unless major particular objections were found, the current controversy tells you something about the state of constitutional law (and high-level statutory interpretation) these days.

It's not entirely healthy that accidents of exact mortality timing versus the election calendar should affect so enormously the outcome, perhaps for decades to come, of so many consequential legal issues.  It  almost shouts out "Ignore the man behind that curtain!" with regard to how people on the losing side, whichever it may be in the future, will look at 5-4 (and indeed, not just 5-4) decisions that have heated dissents.

Among the broader underlying points is that the rule of law, as a doctrine that requires sufficient consensus for everyone to accept that "you win some, you lose some, and that's just how it is," is of questionable sustainability when the substantive disagreements grow too heated and/or too great.

Indisputable facts

By my lights, Donald Trump actually pulled his punches in the South Carolina debate last night, with regard to 9/11.  While he noted that it happened on the GW Bush Administration's watch, he only made one very oblique reference to the extraordinary negligence that Bush and his colleagues displayed in ignoring vehement, repeated warnings from the intelligence community.

A fuller description is available here, for example.

As the above-linked article makes clear, the Bush Administration's record of astonishing negligence goes well beyond the infamous August 6 briefing, entitled "Bin Laden Determined to Strike in U.S." that prompted Bush to say dismissively to the briefer, "All right, you've covered your ass now."  There were actually weeks of warnings that the Administration obdurately ignored.

Officials in the U.S. intelligence community were waving their arms and screaming; the Bush Administration deliberately ignored them because it had ideological priors about non-state actors.  Also, top people in the Bush Administration were determined to reject and alter Clinton Administration priorities right and left.  Since Bin Laden had been a high-level Clinton priority, for them he was almost automatically a non-priority.

As Trump said at the debate, people make mistakes, so how to evaluate all this (and what relevance it has 15 years down the road) is open for discussion.  There's no "truther" aspect here - although the Bush Administration benefited enormously from its own negligence, in that 9/11 proved a political godsend for them, they were neither smart enough nor evil enough to let it happen on purpose.

But even leaving aside the question of how a Democratic administration would have been judged in the political process for comparable negligence (impeachment probably would have been the least of it), all this certainly means that these silly "Bush kept us safe" mantras should stop forthwith.

We'll never know if a less negligent Administration, one that actually listened to its own intelligence experts rather than pursuing rigid, ideologically predetermined operating assumptions, would have been able to stop 9/11.  However, for a New Yorker such as me who saw the whole thing happen right in front of his face - this was no TV show for those of us in lower Manhattan on that horrible day - it is sickening to reflect on how close lower-level intelligence officials came to putting all the pieces together in time, even with zero help and encouragement from the top.

Returning to current political brouhahas, I have no idea whether Trump will pay at the polls for saying this in South Carolina.  But anyone on the Republican side who thinks that the Jeb-Rubio side of this argument is something they want to get anywhere near discussing in the general election is living in a dream world.  If this is ever openly litigated in public political debate, the verdict they get will be devastating, because the facts are so bad for them.

Tax policy colloquium, week 4: Donald Marron’s "Should We Tax Unhealthy Food and Drinks?"

This week’s colloquium, featuring Donald Marron of the Urban Institute, offered a neck-wrenching change of topic from recent past and future sessions (one of the things I like about our format).  This time around, rather than corporate inversions, the tax treatment of higher education, and public opinion regarding income tax rates, we discussed the question of whether tax instruments should address unhealthy food choices.

The paper (coauthored with Maeve Gearing and John Iselin) is part of a recent flurry of Tax Policy Center publications addressing corrective (often, but not necessarily, Pigouvian) taxes of various kinds.  Other recent entries address, for example, financial transaction taxes, carbon taxes, and how governments might use the revenues from corrective taxes.

As the paper is rooted in recent advances in nutritional science (and what these reveal about continuing uncertainty in the field), I was dismayed to learn of all the now-rejected science that I’ve followed – counseling, for example, avoidance of avocados and eggs (each actually a super-food) based on their fat content.   By reason of all the complexities in how our bodies mediate between inputs and outputs, there are often no straight lines of the sort that were presumed in earlier stages of the science.

For that matter, whom can I sue about the now-refuted claim that teenagers who eat chocolate get way more acne? No empirical relationship whatsoever, and I’ll never get back those lost chocolate-eating years.  But anyway.

The still-provisional nature of nutritional science is only one reason for caution about designing taxes on unhealthy food and drinks.  Even with certainty, one has to assess motivation and, if one wants to do it, issues of design.

Two classic examples of much easier problems pertain to carbon taxes and cigarette taxes.  Carbon taxes, of course, are an externality story.  The great thing about these taxes, from a design standpoint, is that each atom of carbon would have the same marginal effect on global warming as any other atom, if added to the atmosphere at a particular moment.  There are of course problems in measuring the marginal harm, as well as resolving issues of national versus global welfare and (given the immensity of the stakes) arranging multijurisdictional  cooperation, but at least one need not distinguish between, say, “good” carbon atoms and “bad” or neutral ones.

Also much easier than the unhealthy food tax scenario is that of designing cigarette taxes.  Here, despite passive and third-hand smoke, it is probably mainly an internalities story.  Smoking is extremely harmful, and there is evidence that people often want to quit but find this very hard.  Also, despite the Gary Becker-Kevin Murphy “rational addiction” model, there is reason to doubt that smokers should be viewed as having optimized correctly, from their standpoints, via consumption that merely happens to have highly front-loaded benefits.

Marron has elsewhere written about designing taxes to address internalities, and one of the points he makes, in distinguishing them from externalities, could be explained as follows.  Suppose your actions would impose a $5 cost on someone else, and markets plus tort law can’t succeed in making you internalize this cost.  Then a $5 Pigovian tax, designed purely on efficiency grounds, gets your decision metric just right, from the standard of social costs versus benefits.

Now suppose instead that, due to an internality (i.e., a flaw in your capacity to optimize your own choices from the standpoint of your own true self-interest, as you would judge it while being truly reflective), you under-value a cost that a given choice would impose on you by $5.  Assuming one is willing to accept the parallel – which admittedly, raises issues about “true” choice and valuation that are easier to dodge in the externalities setting – the efficient answer is just the same as before.  Even though only you are bearing the costs and benefits of your choice, once again a $5 tax will get things just right.  (BTW, among other problems with this set-up, it works better for consistent undervaluation – e.g., due to hyperbolic discounting – than it does for framing scenarios where we lack a good handle on your “true” preferences or welfare.)

A point that Marron adds is as follows.  Suppose our reason for considering the internalities tax is beneficence, rather than general social efficiency.  That is, we want to make YOU better off.  Then it is noteworthy that the internality tax, even if it improves your marginal decision-making, might leave you worse-off overall.  E.g., suppose you do some of the thing anyway (e.g., because in some instances the true net benefit to you exceeded $5).  Then you may be worse-off overall, despite improving your marginal decision-making, unless we can find a way to return the revenues to you (e.g., via a lump-sum transfer equal to your expected tax costs).

Turning at least to the idea of taxing unhealthy food and drinks, the paper argues that the strongest case offered by current nutritional science for a corrective tax pertains to sugar – and in particular, that which is added to sweetened soft drinks, such as sodas.  Here there may be both an externalities story and an internalities story.  The former mainly pertains to formal and informal health insurance (e.g., emergency room visits as an example of the latter).  For example, diabetes, which is linked to obesity that may result from drinking lots of sweetened soft drinks, may impose large external costs on other consumers and taxpayers.  But the internalities story may be important as well.

BTW, if I may digress, one thing for which I am grateful to my parents is that I never had Coke, Pepsi, etcetera, when growing up.  The first times I tasted such things, I found them disgusting.  I also never had beer until I went to college – the drinking age was 18, in those days – and I also initially found that disgusting.  But while I decided it would be worthwhile to develop a taste for beer, which didn’t take all that bloody long, I also decided NOT to do it for the sodas, which I therefore still find disgusting, and I’m happy to keep it that way.  So I personally have no internalities problem with respect to soft drinks.  (Don’t ask me about extra portions at dinner, however.)  Like Oscar Wilde, I can resist anything except temptation.

Returning to sweetened soft drinks, a big problem that the paper discusses is the lack of a clear dose-response relationship.  Again, for carbon and externalities, it’s the same for all units of carbon.  For cigarettes and internalities, it may be variable, but at least it’s pretty darned high every step of the way.

For sugar – in common with alcohol, another target of corrective taxes that may reflect both externalities and internalities – the variability of the dose-response relationship makes it far harder to figure out how one should implement and design the tax, even assuming good information about average marginal costs (and undervaluation of internal costs).  For some people and at some usage levels, it’s relatively fine; for others and at different usage levels, considerably worse.  But if all possible approaches, including doing nothing, are imperfect, then certainly this instrument belongs on the tastes-good, not-too-filling table of possible revenue options.

Idiocy in the defense of extremism is no virtue

Just on the substance, it's interesting to note the actual content of Rubio's "defense" of Obama as highly competent, albeit anti-American (or at least, anti-America as it has always been).  The bill of particulars appears to consist mainly of the following:

1) Enacting the stimulus bill, which economists almost unanimously agree reduced the severity of the Great Recession, and which reflected standard U.S. macro policy, in response to economic downturns, since the 1930s.

2) Enacting Obamacare, which implemented a Heritage Foundation plan that Mitt Romney previously enacted at the state level and made the centerpiece of his 2008 Republican presidential campaign.

3) Supporting modest limitations on gun ownership, in accordance with the views of perhaps 70 percent of the American public.

4) Deliberately weakening the U.S. abroad, pursuant to a supposed view of U.S. power as evil.  This claim by Rubio is paranoid conspiratorialism - the sort of thing that led William F. Buckley to expel John Birchers from the mainstream conservative movement.  But now it is the credo of one whose claim to the "moderate" or "mainstream" slot among Republican presidential candidates is endangered only by the rising doubts that he can pass the Turing test.

Campaign spin wars

I'll admit it; I quite enjoyed Marco Rubio's epic (whether or not electorally consequential) meltdown yesterday, in which he responded to Chris Christie's accusation that he was just parroting pre-memorized talking points by re-parroting the very same pre-memorized talking points.  "Show it, don't say it" is the advice that writers always get, and Christie was able to do this, by reason of Rubio's unwitting connivance.

While I have nothing unique to add about this little drama, I was interested by some of the follow-up today, which I think actually relates in an odd way to the topic of my last blogpost here (how the "paradox of voting" affects voters' belief formation).

Rubio today naturally tried to spin his constantly repeating the same thing about Obama ("He knows exactly what he's doing") as reflecting that he Cares So Deeply about the argument he was making. The point being, professing deep conviction sounds less pathetic than fessing up to a panicky meltdown.  He even said that this deep belief is why he is running for president (I guess, long-held ambition had nothing to do with it).  But there actually is a reason he was saying it - well, not four times - and whoever's idea this was (perhaps, just that of his handlers), it's an interesting example of being too clever by half, rather than just not clever enough.

The underlying argument that Rubio apparently was making aimed to rebut an argument against him.  Christie was saying: Obama was a bad president (in the Republican view) because he was so inexperienced.  Rubio is also inexperienced.  Hence, let's not make the same mistake again, by picking Rubio.

Note that there's a bit of an ambiguity here.  Christie needn't choose between saying (a) he's an inexperienced candidate so he'll lose the general election, versus (b) he's inexperienced so he'll be a bad president.  On its face, the argument is mainly (b), but inevitably, in an election campaign where the two parties' voters hate each other so much, those on either side are going to care a lot about the potential truth of (a), not just (b).

Yet obviously, no matter what one thinks of Obama as to (b), it's clearly he did pretty well in 2008 and 2012 as to (a).  So Republicans who only believed (b) would face a dilemma, if they rejected (a) and still thought Rubio the strongest November candidate.  This might reduce the overall force of the offered syllogism.  But the Rubio camp evidently wanted to respond anyway.

Someone, and I honestly don't know whether or not Rubio has the wit to think of this (or even understand it) himself, but in any case someone in the Rubio campaign evidently thought: Suppose we say Obama was a good president, not a bad one, by his own ideological lights.  Then seemingly Christie's syllogism is rebutted.  If Obama was good for his side despite being inexperienced, then what the precedent suggests is that Rubio will likewise be good for our side despite being inexperienced.

This is actually terrible political reasoning.  It's an example of what Jeeves in the Wooster books, called being "too elaborate," when he questioned the scheming of the "brilliant but unsound" Catsmeat Potter-Pirbright.  In effect, Rubio is arguing: Obama and I indeed ARE alike in a particular way - but that's good, not bad, in terms of its predictive value, because Obama is actually a good president from his ideological perspective.

Problem #1 - if one side hates a political leader, those on the other side should probably avoid arguing that they're like him in any way.  Embracing the analogy, even just implicitly and to turn it around, is probably not the way to go.

Problem #2 - it mistakes the nature of emotional partisan belief.  From a Republican perspective, one could imagine a debate: is Obama inept, or merely serving goals we detest?  Logic suggests that it can't really be both.  If he likes where we are, then he didn't blunder by getting there.  But when emotionally involved partisans  on one side hate someone on the other side, they have no reason to value being logically consistent in the criticisms they applaud.  They are expressing their feelings.  For whatever broader reasons, which I won't try to explain here, they hate Obama and think he has done terrible things.  So it's emotionally satisfying to hear him being insulted, be it as feckless or as deliberately, effectually "evil."

In the nature of the enterprise - by which I mean, having political beliefs and being invested emotionally (but from the sidelines) in the great game - there's absolutely no reason to choose.  "Gee, he's doing it on purpose, so maybe he's actually smart."  Or, "Gee, he's incompetent, so perhaps he actually means well."  No - recall the voting paradox again.  Audience members who get involved emotionally in politics are not engaged in staking real resources that will affect their personal wellbeing on correctly understanding an individual who is on the other side.  They're not being irrational or stupid - rather, they're acting like sports fans, which is often a good analogy for political belief, when they decline to subject their angry disdain for someone on the other side to rigorous logical parsing.

By contrast, Republicans in Congress who are deciding how to interact strategically with the Administration, or the people in the McCain campaign in 2008 and the Romney campaign in 2012, DO need to evaluate Obama accurately and dispassionately.  They are actually playing against him, in a game that they want to win, and it's useful to understand your foe.  But voters are just spectators.

So the thought, by whomever in the Rubio camp, that praising Obama's skill was a smart political tactic, via the logical impact on the implied analogy between Obama and Rubio, appears not to have as good an understanding of real world politics and voter psychology as I might have expected of someone in the biz.

Again, who's to say whether or not any of this will actually matter politically in the end.  But it's still amusing as an apparent micro-illustration of political actors outsmarting themselves.

Tax policy colloquium, week 3: Lucy Martin’s “The Structure of American Income Tax Policy Preferences” (co-authored with Cameron Ballard-Rosa and Kenneth Scheve)

Yesterday, Lucy Martin of the UNC Political Science Department presented the above paper, discussing survey evidence regarding how Americans think about tax progressivity.  The paper addresses an apparent puzzle: the fact that rising high-end inequality, plus stagnant real income growth for everyone outside the top 0.1 percent, has not yielded greater high-end tax progressivity.

Is this lack of an offsetting tax policy response to rising high-end inequality actually surprising? I’m not all that surprised by it, but it clearly is surprising if one’s baseline assumptions reflect (1) the median voter hypothesis, which holds that the median voter’s policy preferences tend to be enacted, plus (2) a view of voting as being based on narrowly defined economic self-interest.  Under such a view, the median voter should want higher tax rates at the top under these circumstances, and should be expected to succeed in getting it – wholly independently of the question of whether or not this would be a good policy choice – unless she is sufficiently concerned about the efficiency costs on her of the high-end rate increase (or believes that it wouldn’t actually raise revenue).

The two main explanations for the “puzzle” that political scientists have offered are (1) the rich have too much political power for the sentiments of the median voter to carry the day, and/or (2) voters actually aren’t strongly supportive of increasing high-end redistribution – perhaps because they don’t just focus on narrowly defined economic self-interest.

The paper mainly comes out in favor of explanation #2.  It concludes from survey evidence (gathered on yougov, with sampling to replicate characteristics of the general voting population) that, while there is widespread support for mildly progressive tax rates, these sentiments are relatively tepid, and support a progressive rate structure rather like the one that we currently have – rather than one with much higher marginal rates at the top.

However, explanation #1 is not refuted, except insofar as one interprets it as involving affirmative elite override of strongly held popular sentiments.  The fact that the public does not care intensely can plausibly be viewed as leaving the elite free to decide.  The evidence in the paper might come closer to supporting a strong version of explanation #1 if the 2016 election were to lead to the election of a Republican president, along with continued Republican Congressional control in both houses, and this in turn led to the enactment of a flatter rate structure – promised by all leading Republican candidates – that actually would be at variance with the paper’s findings regarding voter sentiment, including that among Republican voters.

Among the paper’s features that I particularly like are its (1) disaggregating between high-end and low-end inequality issues, (2) disaggregating between the issues under study and those of views on government spending and/or the “size of government,” and (3) offering a gauge on voter sentiments’ intensity and elasticity (defined as the rate of change, for one’s preferences regarding tax rates, as the income level that is under consideration changes).

In preparing for the session, I divided my thoughts into two main topics: (1) political science issues, focusing on survey design and one’s theory of voting, and (2) the tax policy takeaways one might glean from the evidence in the article.

1.         VOTING & VOTER PREFERENCES

A) Research design – Here I see four main issues:

(i) Tax base – Marginal tax rates don’t mean much until we know to what they apply. Given the limitations on how much one can lay on the plate of survey respondents, we don’t know what (if anything) they had in mind if they liked, say, a 35% or 40% top rate. How might this relate to – and what would they think about – say, the use of tax shelters, the capital gains rate, or the general non-taxability of unrealized appreciation. These are techie issues, but surely they might have some actual or potential state of mind regarding the relevance (and high likelihood) of significant divergence between taxpayers’ taxable income and their economic income.

For that matter, what about average rate versus marginal rate?  For a top bracket of, say, 35%, were they assuming that this was also the average rate that taxpayers with income in that bracket actually faced as to their taxable income as a whole?

(ii) Taxes only, without direct regard to the use of the funds – In principle, one should always think about tax changes in a long-term balanced budget sense. However, since money is fungible and there are many different possible uses of say, increased high-end revenue, the survey design did not offer any indication regarding how marginal revenues might be used (or ceased to be used).  Instead, to avoid encouraging complete disregard of budgetary considerations, the survey informed respondents when particular choices would affect or greatly affect net revenue levels.

This probably was a better survey design than proposing particular uses of the funds – especially since, if one used too many alternatives, one would both be degrading the results’ statistical significance and requiring respondents to slog through more.  But it did mean that respondents weren’t offered the possibility of taxing the rich more in order to fund something they might like.  Obviously, a savvy politician might make earmarking claims of this kind (like NYC Mayor Di Blasio campaigning for higher taxes on the rich that he said could fund universal pre-K).  It also may have caused revenue-raising higher tax rates at the top to look as if they merely would have imposed burdens on one group without conveying benefits to any other group.

(iii) $375,000 of income and above as the top group – In order to keep the rate brackets similar to those under actual U.S. income tax law at the time that the survey was being designed – which had advantages in terms of figuring out net revenue effects – the study’s top group was people with income of $375,000 or more.  Insofar as actual voter concern today focuses on plutocracy and/or the super-rich – say, the top 0.1%, as opposed to just the top 1% - this meant that one did not learn what the respondents thought about tax rates for people earning at least, say, $1 million or $10 million a year.

(iv) Anchoring – What should we make about the fact that the tax rate structure getting the most support looked rather like what we actually have right now?  Does this mean public sentiment is being honored?  Alternatively, might the causal arrow run the other way, with people taking cues from what is actually on the books?  What would happen if we could run the same test with U.S. voters 60-odd years ago, when the top rate was over 90%?  And if we found that people liked that top rate then, once again we’d have to ponder the direction of the causal arrow, i.e., do the rates reflect preferences or anchor them?  More feasible, of course, would be doing a similar survey in, say, an EU country with higher marginal rates for individuals at the top of the distribution.

B) Theory of what drives voter preferences

The paper identifies three main explanations for voters’ tax policy (and other) preferences: (mainly economic) self-interest, fairness norms, and partisan identity.  Herewith some thoughts on each:

(i) Economic self-interest – Assertions that voters should be expected to vote in their self-interest, generally defined economically, have long struck me as hard to reconcile with the voting paradox.  Here I mean not the range of Condorcet, etc., phenomena, but rather the fact that voting itself is not an economically way of promoting narrowly self-interested outcomes.

Everyone knows the basic issue here.  I once heard (perhaps apocryphally) about a prior-generation professor who apparently told his students that he never voted, even though he cared about political outcomes, because the chance that his vote would alter the outcome was effectively zero.  Therefore, the benefit certainly wasn’t worth the cost, defined in terms of the time he would have to spend on voting.  “What if everyone thought that way?” he was asked.  “Well, then I’d certainly vote,” he replied.

While awareness of the voting paradox surely does reduce turnout, obviously millions of people vote anyway.  But the paradox is still, to my mind, of primary importance in understanding and explaining voter behavior.  Since voting is so irrational, if defined as seeking to realize the dollar value one places on a desired election outcome, divided by the likelihood that it will actually change the outcome, obviously something else is going on.  Consumption? Self-expression? Sense of obligation?  Cooperating rather than defecting with regard to like-minded voters, who face a prisoner’s dilemma insofar as each would rather not bother to vote but they’ll only win if enough of them vote?

Once one is voting based on any of those motives, it is no longer irrational not to vote based on economic self-interest, even if one otherwise acts pursuant to it.  Suppose you just like voting for the candidate with whom you’d hypothetically rather have a beer.  It’s not personally irrational to vote for this person, even if he or she would be bad for one’s economic interests, if this feeling sufficiently flavors one’s enjoyment of the voting act.

More important still, it is now affirmatively irrational – and people damn well know it – to invest significant effort in figuring out which candidate would best serve one’s interests, unless one happens to enjoy the investigative process.  How much time would you spend figuring out what car you ought to buy, if the decision wasn’t up to you but instead would be made by a multi-million person electorate?

Given this point, it verges on being paradoxical that people pay as much heed as they do to the question of which candidates would favor their interests and those of people like them.  I would presume that this reflects feelings of affinity that in turn reflect our having evolved to internalize sincere belief in arguments in favor of our own interests.

But one still doesn’t get a strong prediction that the median voter will respond to high-end inequality in the manner presumed by standard political science models.

Fairness norms – The paper notes that people who favor higher tax rates at the top tend to believe that the most economically successful were mainly lucky, while those who oppose such rates tend to believe that merit and hard work play larger roles.  Likewise – though the issues are somewhat independent – those who favor high tax rates tend to have a lower valuation of the likely efficiency costs than those who oppose such rates.

While this does not contradict the paper, which looks at correlations without proposing specific causal theories, I tend to wonder which way the causal arrow runs.  I would suspect that there is a widespread tendency to take the “progressive” view on both issues as a consequence of one’s (for other reasons) favoring higher rates, and the “conservative” view on both issues as a consequence of one’s (for other reasons) opposing such rates.  In other words, I think people often start with biases and then develop the needed rationalizations, although certainly one ought to aspire to the reverse.

Perhaps more intriguing is the paper’s finding that those who favor high rates at the top tend to lean towards being “reciprocators,” as tested separately within the survey, while those on the anti side tend to lean more towards being “free riders.”  But given this point , along with the voting paradox, it is interesting that conservatives, whom the survey suggests lean towards being on the “free rider” side, have nonetheless done a better job of countering their own internal group prisoner’s dilemma, by maintaining higher voter turnout levels even in non-presidential election years.

Partisan identification – Not surprisingly, this proves to have the strongest predictive value, arguably supporting the observation that following politics is a lot like picking sports teams to root for.

2.         TAX POLICY IMPLICATIONS

Given the structure of the U.S. political system – in particular multiple branches, status quo bias, and partisan entrenchment, frequently yielding gridlock – it’s no surprise that the system hasn’t grown significantly more progressive at the top.  This would require (a) Republicans to lose their veto power at all levels, plus (b) Democrats to support as a bloc enacting a more progressive rate structure.  (The 2013 budget deal did a bit of this, but only by restoring the Clinton-era top rate.)

So it’s not clear what extent we need to look to voter preferences to explain the “puzzle” of limited change to high-end rates.  But nonetheless, because Knowledge is Good (in the words of Emil Faber, but I actually mean it), one does not need policy or outcome relevance in order to find the paper’s analysis interesting.

In any event, however, I see the following three main takeaways for people who favor greater high-end progressivity:

(a) Suppose one favors raising tax rates at the top – even if not to 1960s levels, then at least to something approaching Diamond-Saez-advocated levels on the order of 70%.  The information provided is not encouraging, and suggests that the indicated change would most likely have to reflect intra-elite opinion movements, rather than the empowerment of widespread public sentiment.  While it’s not clear why the elite should be expected to favor higher tax rates, to some extent on itself, note that the conservative movement, unlike its counterpart on the left, has spent the last 4 decades building a powerful policy advocacy infrastructure in Washington.

(b) Efforts to increase high-end progressivity can try to take advantage of earmarking the net revenues for widely supported functions, although the public is far from being wholly naïve regarding the relevance of earmarking given that money is fungible.

(c) Otherwise, efforts to increase high-end progressivity should focus on the tax base and/or the choice of tax instrument.  For example, advocacy of taxing appreciated assets at death and strengthening the taxation of gratuitous transfers might be more fruitful than focusing on the top rate – although clearly these ideas as well could not be expected to benefit from mass movements in their support.

They're sometimes there when you need them, they're sometimes there when you call them

To get through the slog of elliptical machine sessions at the health club, I periodically rediscover old musical favorites that I can use for a few days, until I once again need something fresh. Most recently it's been early Talking Heads, and especially my favorite of their albums, Fear of Music. I consider this a great comedy album, except that it's also lifted into something stranger and more unnerving by its weird intensity.

Great disquisitions, for example, on:

--Air ("Air can hurt you too / Some people say not to worry about the air / Some people haven't had experience with air")

--Cities ("London ... dark in the daytime / People sleep in the daytime / If they want to")

--Heaven ("Heaven is a place where nothing ever happens / There is a party, everyone is there / Everyone leaves at exactly the same time")

--And of course, animals ("Animals are laughing at us / Don't even know what a joke is / They're never there when you need them / They're never there when you call them / They think they know what's best / They're making a fool of us / They ought to be more careful / They're setting a bad example").

David Byrne is the only rock lyricist in history who would worry about someone needing to be more careful or setting a bad example.

Anyway, this got me to thinking about cats, as they are certainly among the main species as to which his  charges might ring true more broadly (although they certainly don't live on nuts and berries).

People less crazy than Byrne's character in Fear of Music might say that cats don't care about their "owners" (or should I say caretakers), but this is not true, certainly as to friendly and socialized cats. They can be very affectionate, want attention, and find what you are doing very interesting.

What they almost always don't have, in the slightest, is a desire to please you, or any concept of doing something because you want them to do it.  And it's not that they don't understand intention.  They can learn all too well, for example, that you don't want them on the counter, or grabbing items of your food that they like. So they won't do it if you are nearby, and will jump down if you approach.

This gap in their social schema, relative to that of humans and dogs, can be frustrating if you actually need them to do something in particular.  (The Coen brothers apparently vowed, after Inside Llewyn Davis, never to use cats again, even though they had three with distinct temperaments available to play the one role.)  But perhaps this makes it seem all the more an honor when they show affection - you know that it's sincere, perhaps I should even say disinterested, in the sense that they aren't trying to get you to reciprocate so as to boost their own self-regard (a potential motivation that I'd attribute to dogs as well as people).