NYU Tax Policy Colloquium, week 10: Steve Rosenthal on who owns shares of US companies' stocks, part 2

 My prior blogpost offered some background concerning the methodology and main findings in Rosenthal's & Burke's Who's Left to Tax? US Taxation of Corporations and Their Shareholders. Here I shift to some preliminary thoughts on what it might mean, and what else we might also want to know.

Let's start  by considering the multiple recent rounds of global corporate rate-cutting, including the unfunded 2017 US corporate rate cut from 35% to 21%. Paul Krugman has noted that the foreign stock ownership figures from Rosenthal and Austin 2016 suggest that this was a bit like handing $700 billion in short-term transition gain to foreign shareholders - rather generous for a foreign aid program. But while most tax policy experts felt that the rate cut was too large, especially given the lack of funding and of adjustments to the individual tax base, they largely agreed that the US corporate rate should be cut below its prior 35% level.

Allow for offsetting adjustments, and most tax policy experts would be happy to go lower still. For example:

--The destination-based cash flow tax, endorsed by such leading economists as Alan Auerbach and Michael Devereux, and briefly considered by the House Republicans on 2017, would lower the US corporate rate to zero. True, there would still have been a tax collected from corporations and other businesses (and sometimes given labels such as "modern corporate tax"), but as I discussed here, that was essentially a value-added tax (VAT), not a corporate income tax.

--The Toder-Viard corporate tax reform plan would lower the US corporate rate to 15%, replacing it (for publicly traded companies) with mark-to-market taxation of the shareholders. An earlier version of the proposal would have eliminated the entity-level tax.

--The Grubert-Altshuler corporate tax reform plan would likewise lower the US corporate rate to 15%, while expanding taxation of shareholders so that they were taxed on the deferral of gain when they realized dividends or capital gains

--The Kleinbard BEIT business tax reform plan would have shifted the taxation of ordinary returns (although not rents) from the entity to the owner level.

All of these proposals (and others) reflect two fundamental premises. The first is that the rising mobility of businesses' tax residence, places of business activity, and places of reported profit supports shifting taxes from the entity level to the owner level. The Rosenthal-Burke paper does not contest this line of thinking.

Second, these proposals (and others) reflect the premise that flow-through taxation of entities, so that their positive net returns are taxed directly to the owners at the owners' tax rates, is the ideal. After all, the entity is just a legal fiction or web of contracts, and the only (or at least most obvious) reason for taxing it directly is just administrative convenience.

Rosenthal's findings challenge this, in a sense. Suppose that the taxes directly borne by certain types of shareholders, leaving aside any that are borne via their ownership interests in the entity (if it is a tapayer), are simply too low. Suppose, perhaps, that we even were counting (or should have been) on the entity-level tax to impose some tax burden on them. Then simply eliminating the entity-level tax, without replacing the lost indirect tax burden, might be undesirable. And if there's no other convenient way to tax these parties similarly, the entity-level corporate tax might even prove to be (with suitable modifications) the best instrument available for the job.

For me, a logical next stage, going beyond the content that would logically fit in the Rosenthal-Burke article, is to think further about each of the groups in the not-directly-taxable 75% that owns most of the existing US corporate equity. Here are some quick preliminary thoughts for each category.

FOREIGN SHAREHOLDERS (40%) - If the US corporate tax rate were reduced to zero, only withholding taxes would continue to apply to this group's earnings through the US businesses in which they own stock. To be sure, for foreign shareholders one needs to start with the incidence question. Even with a robust US corporate tax, to what extent can they be expected to bear the incidence of the entity-level taxes thereby imposed? (Or, for that matter, of the withholding taxes.)

In the long run, one can't make foreign shareholder bear US tax liability under classic "small open economy assumptions." These include assuming full capital mobility, normal returns only (no rents), and that US can't affect worldwide after-tax returns. So, if they can do whatever they like and demand, say, a 6% after-tax return, then a 25% US tax would merely cause them to demand an 8% pre-tax US return, shifting funds elsewhere as needed. They'd be "paying" the tax (even if via the entity), but not bearing it insofar as they were earning the same 6% after-US-tax returns as previously.

This is a nice textbook model, and one worth having in the back of one's mind, but it is not always entirely applicable under real world conditions. The reasons for its often not being true (or at least completely true) may vary somewhat as between their foreign direct investment (FDI) in the US, and their foreign portfolio investment (FPI).

Rents - for FDI, more than FPI, it may be contradicted by the existence of US-specific rents. If a company is earning site-specific rents through its US operations, it will keep earning them here even if they are partly taxed away. The reason this point pertains mainly to FDI, and thus to the foreign owners' US business operations, is that portfolio investors will presumably earn just normal returns (absent some other source of advantage) if they merely buy and sell publicly traded shares of US companies that may themselves be earning rents. For example, if I buy Amazon stock today, the rents that it is expected to earn are already built into the stock price that I will have to pay.

Diversification - If foreigners are eager to hold some US stock as part of a global diversification strategy - given the size of the US economy - then work I have seen (perhaps by the likes of Mihir Desai, Dhammika Dharmapala, and Thomas Brennan?) suggests that the US might have sufficient power to impose some tax on them, in incidence terms. It depends on how much they value any diversification advantages that they can only (or best) achieve in this way.

Value of US incorporation - Suppose foreign shareholders are willing to pay something for the benefits of US incorporation - due, for example, to the quality of US corporate law (e.g., in Delaware), or due to its having brand or branding value. Then they'll pay something for it. 

Transition - Suppose current US corporate stock prices reflect, not only the currently applicable 21% rate, but also the expectation that this rate will continue indefinitely, and is likely to decline as rise. Then Congress suddenly and unexpectedly raises the corporate rate to 28%, which now becomes the new expected mean. Shareholders, including foreign ones, will suffer an immediate transition loss from the change in information. (Stock prices would decline, all else equal, with the revelation that the US government will be increasing its share of corporate profits - assuming, of course, that the expected rate is now higher, not just the nominal statutory rate.)

Imposing tax burdens on foreign shareholders this way raises, of course, the classic time-consistency problem. But there is little present danger that, if we (say) increased the rate to 28% under a Biden Administration, that we would acquire a costly reputation as serial expropriators. (Note: the chance of a 28% rate under Biden has surely been priced into stocks to a degree, but it surely isn't currently considered certain.)

Should we want to impose US tax burdens on foreign shareholders? - Clearly yes if one's framework is the welfare of US individuals. Indeed, from that standpoint, and in a unilateral setting, one would want the revenue-maximizing tax, subject only to counting the welfare costs of getting the revenue to US individuals, such as from deadweight loss that they bear or lost positive externalities (e.g., from inbound investment that raises labor productivity).

Even with an exclusive US welfare focus, the answer might change if one is being strategic, rather than thinking unilaterally. For example, we might regret imposing the tax if it sufficiently increased the extent to which other countries impose tax burdens on US individuals who own stock in foreign corporations.

RETIREMENT ACCOUNTS: Two important distinctions here lie between: (a) defined benefit (DB) and defined contribution (DC) accounts, and (b) tax-favored accounts that get expensing (like traditional IRAs) and those that instead get yield exemption (like Roth IRAs).

DB versus DC - For DB plans that are in midstream - that is, their funding and benefit levels have been pre-set - the corporate tax on the stocks they hold to help fund future benefits may fall on the benefit provider. It gets less of an after-tax return to use towards funding the benefits. But this may shift to the beneficiaries insofar as it increases the default risk. Also, expected corporate tax levels when a DB plan is being created or newly extended will presumably affect what the beneficiaries pay (such as via lower cash salary) and/or what they get. So in that case it won't fall primarily on the owners of the benefit provider.

Insofar as DB is on the way out, rather than still being newly set up like DC benefits, the midstream perspective may be an apt one to take - subject, however, to concern about default risk. This might conceivably reduce one's distributional concern about the tax burden being imposed through the corporate tax on fund assets, if we think the benefit providor's owners are likely to be richer than the beneficiaries.

In DC, by contrast, the retirees holding the corporate shares through the plans are presumably the ones affected. I'll discuss below what one might think about taxing (nominally exempt) retirement saving as such, but the paper notes that these people are very much tilted towards the top 1 percent. Distributionally therefore, and also with regard to ensuring that millions of Americans have adequate rather than inadequate retirement savings, imposing the tax burden via entity-level corporate taxation might be considered just fine.

(Traditional (expensing) vs. Roth (yield-exempt) - These two methods of exempting retirement saving from the normal reach of the income tax are equivalent under a well-known set of assumptions - including, for example, uniform tax rates in all periods and a normal rate of return that is available for one's marginal investments without relevant limitation.

In practice, however, the two methods can play out quite differently, and in ways that are relevant to how we think about imposing tax burdens (via the entity-level corporate tax) on the holders of traditional as compared to Roth accounts. In particular:

(1) Expensing yields better-than-exempt outcomes if the marginal tax rate in deduction years exceeds that in withdrawal years. (Worse than exempt, of course, if the tax rate variation goes the other way.) Intervening statutory rate changes can affect this, along with variations in the amount of one's current-year taxable income.

In the yield-exempt model, seemingly no tax rates matter, since the savings are neither deducted or included. But here the exemption promise lies in the future, and thus is more easily revoked (and more likely to be revoked) than the tax benefit from expensing, once it lies in the past.

All this might make one more eager to tax (at the entity level) traditional than Roth-type retirement saving, if one expects lower future than current tax rates (e.g., due to retirement effects on current-year income). But other differences between the two systems may lean in the other direction.

(2) Under the expensing but not the yield-exempt method, (a) rents, exceeding the normal return and available only in finite quantity, are taxed at retirement, and (b) within the system itself, good luck increases one's tax burden, while bad luck reduces it. Both of these differences, I'd argue, add to the relative desirability of taxing yield-exempt retirement saving, such as via the entity-level corporate tax.

The difference as to rents is why David Bradford, in his classic 1980s Blueprints work, limited yield-exempt to what he called arm's length - e.g., your or my buying Facebook stock today, as opposed to Mark Zuckerberg's founding the company. Rents are one of the main things we want to tax, and if yield -exempt, unlike expensing, is shielding them then we might be glad at least to throw in some entity-level corporate taxation in the middle.

Then there's the luck piece. Ignoring risk premia for simplicity, suppose I have a 10% expected return, in that I will either win 40% or lose 20%, with equal probability. Say that, at a 25% tax rate, I expense $100 and then include at retirement either $140 or $80. So my $25 tax saving upfront is offset either by a $35 tax liability if I win, or $20 if I lose. This gives me a kind of insurance through the tax system.

The tax policy literature (including some of my contributions to it) tends to say: (i) Why not let people bet if they want to?, and (ii) If they want then we can't stop them, e.g., because they will scale the bets up or down to get to the same after-tax position anyway.

But if there's one thing that the empirical literature about retirement saving has taught us, it's that people don't actually do this, at least in tax-favored retirement accounts. (Sophisticated players with lots of money and good financial advice may indeed do it.) For example, we see that people scarcely respond to incentives in this realm, although they do to nudges, and that (per work by Brigitte Madrian) they don't invest nominally more under traditional than Roth IRAs, even though they need to do so if they want to keep the true-after tax retirement saving & payoff constant.

Thus, at the risk of tax policy community apostasy, I'd say that the insurance aspect here may both be desirable and resilient, increasing the motivation to impose a bit of it via entity-level corporate income taxation.

But should we tax retirement saving? - The paper says yes, because tax-favored retirement saving is so upward-tilted in terms of who holds it. The empirical evidence suggesting low salience of and responses to taxing it would  tend to push in the same direction. On the other hand, one might both regret its imposition on those who are not really saving enough for retirement, and believe (as David Bradford did) in tax neutrality as between working period and retirement period consumption.

Taxing nonprofits - For nonprofits such as Harvard with significant stockholdings, lowering the corporate tax rate increases their overall federal tax subsidy for reasons that have nothing to do with how much subsidy we do or should want to provide. In that sense, it seems anomalous. On the other hand, it's true that the optimal subsidy level is hard to determine. Might it be too low, rather than too high? I rather think not, as to the nonprofits that would be most affected (e.g., Harvard, as opposed to a soup kitchen). But this is admittedly a matter for debate.

Does all this mean we should move aggressively to increase effective tax rates under the US corporate tax - The paper notes that all the issues around mobility that have generated corporate tax rate reduction around the world (and academic suggestions to go even further, with suitable replacements for the entity level tax) cannot be wished away merely because we might like some of what the tax long did to be preserved. But I would say that, if one agrees with the paper that the entity-level tax's burden on foreign shareholders and the rich, through one mechanism or another, ought to be preserved or even restored to the extent possible, then there are two distinct paths forward to consider. (And one might do some of each.)

Preserving and restoring entity-level corporate income tazation - Here the logical steps to take - and they are complementary with each other- might include:

1) Raising the US corporate rate,

2) Expanding US taxation of foreign source income, such as by raising the tax rate in GILTI (by addressing both the inclusion percentage and the current 10% QBAI exclusion),

3) Making the source rules harder to avoid, such as via the use of sales-based formulary apportionment or something like it,

4) Imposing tougher anti-inversion rules and/or an exit tax for companies that cease to be US residents, and

5) Expanding the corporate residence rules, e.g., to apply to companies that are either incorporated or headquartered in the US.

The Biden campaign has called for #1 and 2 from the above (along with a book income minimum tax), and if they get the chance should also take a look at # 3 to 5.

Doing it a different way - For foreign individuals with US economic ties that make taxation feasible, one might explore optimal tariffs, along with the usual menu of choices in increasing taxation of the rich. (E.g., wealth taxes, inheritance or other gratuitous transfer taxes, expanded mark-to-market, realization at death, greater income tax rate graduation, etc.)

Let us hope that policymakers who care about the welfare of the United States and its people get a chance to think about these choices in the near future.

NYU Tax Policy Colloquium, week 10: Steve Rosenthal on who owns shares of US companies' stocks, part 1

 Yesterday at the colloquium, Steve Rosenthal presented his paper (coauthored with Theo Burke), Who's Left to Tax? U.S. Taxation of Corporations and Their Shareholders. This is a follow-up to, and refinement of, his eye-opening 2016 piece with Lydia Austin, which showed that the share of U.S. corporate shares owned in immediately taxable form by US taxpayers is far lower than people have thought.

Here in part 1 I'll discuss the paper's main findings, and put them in context. In a follow-up part 2 I'll discuss some of the policy issues raised.

Rosenthal's and Burke's basic methodology is to take the excellent information compiled by the Fed regarding who owns U.S. equity, and to adjust and convert it to answer the question of who owns C corporation stock under the US federal income tax. This requires a lot of careful and well-thought-through adjustments, aided by the fact that the Fed (along with US Treasury staff who need to run revenue estimates) has capable people who are interested in the issue.

The underlying motivation is that, in the classic picture most of us have in mind, US companies (including the US affiliates of foreign companies, are subject to the classic double taxation regime. First the corporation is taxed on its income, then the shareholders are taxed on the receipt of dividends or other distributions, and on capital gains if they sell the stock. But this may be a misunderstanding insofar as the shareholders are not themselves taxable.

Understanding the US tax status of US corporate shareholders is important in a whole lot of contexts. An obvious one is how we should think about corporate integration proposals, which may be premised on preserving one layer of tax. A second is thinking about the transition effects of the 2017 U.S. corporate tax rate cut - e.g., to what extent did foreign individuals reap a short-term transition gain? The actual origin of this long-term project came from Rosenthal's taking a look at the 2016 Hillary Clinton proposal to combat short-termism among US corporate managers by giving the shareholders (via capital gains rates that would have declined over time) incentives to buy and hold for a long time. This was not a good proposal to begin with (on multiple grounds), but Rosenthal realized that it presupposed a lot of shareholders who were subject to the capital gains tax if they sold their stock.

Here is the new paper's main finding. US corporate stock appears to be owned approximately as follows:

--40 percent by foreign shareholders. This includes both foreign direct investment (FDI), as in the case where a foreign multinational has a US subsidiary through which it engages in US business activity, and foreign portfolio investment (FPI), such as in the case where a foreign company or individual owns some shares of, say, Apple, Facebook, or Google stock.

--30 percent by tax-favored US retirement accounts. These include, for example, both defined benefit (DB) and defined contribution (DC) plans, along with both traditional and Roth IRAs.

--5 percent by nonprofits, such as Harvard's $40 billion endowment, insofar as it's invested in stock.

--25 percent by taxable US individuals (leaving aside their interests held through tax-favored retirement accounts.

A few decades ago, the last group's share was 80%, as compared to 25% today. Key reasons for the drop include not only the rise of stockholding through retirement accounts, but also the rise of cross-border stock ownership. The paper shows that, just as foreign ownership of US stocks has increased, so has ownership by US individuals of foreign stocks. Home equity bias has declined sharply in recent decades, which is good news from the standpoint of individuals' diversification but very much mixed news from the standpoint of a given country's fiscal system. (Good to have outside $$ coming in, not so good to have inside $$ going out, maybe also not so good to be more subject than previously to global tax competitive pressures.)

As to their direction, these findings are entirely to be expected. We knew that there is more cross-border equity-holding than previously, and that DC plans along with other stock-funded retirement saving has been on the rise.

But the findings are very surprising in the magnitude of what they show. I gather that, before the 2016 Rosenthal-Austin paper, leading economists figured that the 80% figure for direct taxable shareholding had fallen to, say, 50%. Finding that it is already just half that is an eye-opener that can make a major difference in how we view multiple issues.

Suppose, for example, that one was interested in corporate integration specifically from the standpoint of getting rid of "double taxation." (A more sophisticated view in its favor would focus instead on specific distortions - e.g, in the choice of entity, financial instrument, or timing and form of corporate distributions.) We've already seen the entity-level tax recede substantially, due both to cross-border tax planning and the 2017 cut in the US corporate rate from 35% to 21%. We now see that the effective shareholder rate is way down, due not just to cuts in the capital gains and dividend rates, but also to the decline of directly taxable shareholding. So, just as in the international realm, where concern about "double taxation" has receded relative to that about "double non-taxation" or stateless income, so we might have such a concern in the domestic corporate realm.

As it happens, however, the lessons to be learned from the Rosenthal-Burke findings are more complex and subtle than those suggested by the above account. For one thing, one has to interrogate both viewing the 75% share as not taxed at the owner levels (which depends on further things) and viewing the 25% as taxed (e.g., given the tax-free step-up in basis at death). The one thing we can be sure of is that the findings are important and that we should interrogate them further. I'll do a bit of that in my next blog post.

Literature and Inequality book talk now available online.

 The Zoom book talk I gave on October 15 regarding Literature and Inequality is now available online here.

I speak for about 20 minutes after NYU Law School dean Trevor Morrison introduces the proceedings. Then Branko Milanovic and Kenji Yoshino offer remarks, followed by my very brief response and questions from the audience.

Although I'm capable of being a harsh self-critic, I was pleased with the event both when it happened, and upon rewatching it at the above youtube link. I felt that I was clear, and that I effectively conveyed a lot of information about why I wrote this book, what it does, and why one might want to read it. Branko and Kenji were gracious, articulate, enjoyable to watch, and made interesting points.

Watching the video may actually be fun (at least for some tastes), and one of course you don't have to stay the whole way through (as it's 90 minutes in total).

One interesting point from Kenji was as follows. Law and literature scholarship has from the start been grappling with the question: why would literature be of interest to those working in the realms of law, social science, or philosophy? The dominant answer for decades, dating back to James Boyd White's pioneering work and also emphasized, for example, by Martha Nussbaum, is that literature can activate one's empathy, and permit one to imagine the lives of people living in very different circumstances other than one's own. Thus, one's sympathy and understanding are broadened, etcetera.

Kenji observed that my use of literature is quite different. Not that there's anything wrong with the White-Nussbaum rationale and approach, but I was interested in doing something quite different. Literature often has great ambiguity. Indeed, even bad literature can have this quality, although perhaps it is statistically (so to speak) more common in great literature. Stories, characters, and portrayed social settings can resist simple, straightforward, wholly consistent interpretation, just as one's dreams may pack in multiple layers, meanings, and perspectives.

In illustration, Kenji noted that, in my Jane Austen chapter, I quote a leading scholar who tried to procrusteanize Austen into being a conservative / traditionalist ideologue, but who felt forced to admit that Elizabeth Bennet must have gotten away from her. Kenji agrees with me that surely Austen never intended for Elizabeth to be reduced to the status of spokesman for an ideological viewpoint. Elizabeth's being so rounded a character , and one who contains multitudes, contributes to the complexity and nuance that Pride and Prejudice brings to its portrayal of social conflict amid the top 1 percent in Regency England. Such qualities may be hard to replicate through philosophical or social science approaches.

With extra time to reflect, I would now further add that, in Pride and Prejudice, at least as I read it, Elizabeth really is championing a cause. But it isn't "conservative" or "radical" (as dueling Austen critics would have it) - rather, I see her as championing the claim that personal merit - not birth or wealth - should be the fundamental ranking metric under which people in her broader social circle are judged.

Needless to say, if we were to imagine Elizabeth writing an essay in which she set forth this belief, it would fail to offer the rich insights the novel does. But instead, of course we see her in action and in dialogue - for example, as she battles Lady Catherine de Bourgh, along with Darcy until he capitulates. Elizabeth deploys her fundamental belief in the importance of personal merit, relative to birth and wealth, as she acts under the further influence of her own moods, interests, and needs. She is driven by her faults and prejudices, as well as by her immense virtues, and has a range of motivations that are neither always in perfect harmony with each other, nor entirely within her consciousness or control.

Obviously, we end up deriving a lot more insight about the feel of inequality, in a richly rendered society of a particular era that features these rival ranking metrics, than we would have gotten either from Elizabeth's hypothetical essay, or from anything of that sort that Jane Austen might have written in her own voice, had she not instead had the good sense to write novels.

Literature is not just one thing. Indeed, neither empathy nor ambiguity is always at his core. Also, great literature is not invariably that which is the most empathetic, or the most ambiguous. But I enjoyed hearing from Kenji how my use of literature differed from many previous ones. Perhaps others will take up versions of this angle as well.

Tax Policy Colloquiium, week 9: Michelle Layser's article on place-based tax incentives

 Yesterday at the colloquium, Michelle Layser presented How Place-Based Tax Incentives Can Reduce Geographic Inequality.

There is a degree of consensus (if not 100%) among tax policy scholars that place-based tax incentives - e.g.,  the New Markets Tax Credit or the 2017 Opportunity Zone provisions, which favor business investment in particular areas that are thought especially to need it, relative to investment elsewhere - generally are bad ideas. This is based partly on political economy concerns about doing it properly, but also about underlying views that it will merely shift investment from one place to another with no particular social gain, and that tax benefits to address poverty, inner-city or depressed rural area problems, etc., should be people-based (i.e., go to individuals in need) rather than place-based.

Raj Chetty's recent work regarding mobility and other outcomes, differentiated by zip code, might conceivably lead to rethinking about the current consensus, but it's still at an early stage of being compiled, digested, and understood.

Layser's aim in the paper, is not to defend place-based tax incentives, but to ask (1) what real problems with a geographical component they might actually address, (2) how they ought to be designed in light of those problems, and (3) how well existing place-based tax incentives address these problems. (Spoiler alert: not well at all.) It makes a valuable contribution, including via empirical work regarding Chicago and its worse-off neighborhoods, and here are some of my general thoughts regarding the issues it discusses.

Geographical inequality or geographical deprivation? - The paper's title suggests a focus on geographical inequality. And an interest in inequality often is motivated by equity concerns;. I'd argue, however, that (a) the paper is more about geographical deprivation than inequality, and that its concerns sound very much in efficiency as well as equity.

Suppose that Places A and B both have public parks, but that A's is nicer. This might be viewed as involving geographical inequality, and perhaps as creating an equity case for making them more equal. But that sort of thing is not the paper's main concern.

Now suppose instead that Place B has an oozing toxic waste dump that causes illness and early death to its residents. Once again, B is worse than A but here there is a serious absolute problem, not just a relative one. Oozing toxic waste dumps are both (a) really bad, and (b) not necessarily (until we know more) grounds for site abandonment, as opposed to amelioration.

Whenever a given community has some really bad things going on, or an absence of good things, that suggests the possibility of a huge social return to marginal local investment. (And while relocation may be another option, it may be highly costly.) This potential for a huge social payoff to marginal investment may create a case for place-based or spatial policies.

The paper discusses 3 main types of local problems (all receiving at least some support in the literature) that (in my terminology) suggest the possibility of a high marginal return to local investment. The first is spatial mismatch - the case where communities with potential workers lack convenient access to the places where jobs are. Given jobs' importance to personal and social success, this suggests that there may be positive externalities to connecting the jobs and the people, whether by moving the former or providing better access.

The second is systematic disinvestment, which one might relabel as under-investment that has a bad history and malign causation. Even under-investment alone suggests that there may be initially high marginal returns to putting funds back in to the area.

The third is poor community infrastructure, again suggesting that there may be high marginal payoffs to creating local assets with strong positive externalities.

Place-based policies - Looking beyond the fiscal system, governments of course have place-based as well as non-cash policies. Among other things, they provide public goods and address externalities, often requiring physical investment in a particular space. Thus, one might address spatial mismatch by creating local mass transit facilities (e.g., a metro or rail line with local station). They may combat disinvestment or under-investment by clearing trash, developing lots, furnishing decent housing, etcetera. And they may seek to create adequate community infrastructure, e.g., good local schools and meeting places.

Once one has accepted the case for place-based spending, a further question is that of public versus private provision. If the latter, and if the market hasn't been doing the job adequately, we may consider offering both funding and regulation And once we're offering funding, the ways it could be structured include both direct outlays and the use of tax expenditures.

Public versus private provision turns on classic issues of relative competencies, and the marginal benefits vs. costs of using profit-minded (even if subsidized and regulated) actors. And if we're choosing between direct outlays and tax expenditures, the relevant issues may sound in political economy and optics, along with questions of administrative design. Many of us in the tax policy community may tend towards general skepticism about the use of tax expenditures, based on the frequency of their misuse, but it would be silly to assume that this can never be a good idea.

Bottom line, it's entirely plausible that we might want to use place-based tax expenditures, within the article's definitions, to address the local investment deficits that it identifies and characterizes. One of the article's many virtues is its establishing a framework for evaluating when this might be a good idea, and how such provisions might be structured.

Enlisting the business community - One key feature of tax provisions such as opportunity zones is that they enlist the business communities as allies of the political forces seeking to help disadvantaged communities. The virtue of this is that the people in those communities may need all the allies they can get, if they want to have any hope of influencing legislative outcomes. The downside is that it may lead to cooptation or grifting, with business interests procuring self-enriching policies that have only a fig leaf of ostensibly helping bigger causes. 

There are interesting political economy issues here that might be worth writing about. Just to give three examples from casual observation:

--The political history of Food Stamps suggests that support from agricultural interests was crucial to its political success. It seems clear, however, that poor people did indeed benefit from being given non-cash (but in practice close to cash-equivalent) Food Stamps / SNAP benefits. So this is not at all a story of malign cooptation; rather one of fruitful cooperation.

--Possibly towards the other extreme is the 2017 enactment of Opportunity Zones. Even if these programs have done some net good, which is far from clear, the grifting component appears, at least anecdotally, to have been (unsurprisingly) high indeed. 

--Low-income housing tax credits might be somewhere in the middle. I'm only casually acquainted with the literature, but to my knowledge it suggests that, while things could have been better, they could also have been worse.

Demands on administrative quality - The paper discusses in some detail how programs responding to the 3 main issues identified (spatial mismatch, systematic disinvestment, and poor community infrastructure) would best be structured. In brief, a lot of specific oversight based on careful empirical inquiry would be needed to do it really well. I certainly wonder whether the United States, at either the federal or state and local levels, is still capable of operating a competent administrative state. So much has been willfully destroyed so quickly, and with so little regret or hesitancy by the destroyers. Maybe various states that are either to the north of us or on other continents can still do this sort of thing, but in America we will need to re-learn walking first.

Book talk on Literature and Inequality, part 2

Herewith the second of two blogposts regarding yesterday’s session discussing Literature and Inequality, focusing on the book’s main coverage and content. The book has three parts, each discussing three particular works.

PART 1: ENGLAND AND FRANCE IN THE AGE OF REVOLUTION – Here are quick snapshots of Part 1’s three chapters:

 

1) Austen’s Pride and Prejudice: As Branko Milanovic has pointed out, Darcy and Lady Catherine de Bourgh are in the top 0.1% of contemporary England’s income distribution, but the Bennets are also, if barely, in the top 1 percent. We also see a society in which there appears to be complete ordinal, if not cardinal, consensus about vertical rankings. There also is a thriving aristocratic ethos that posits reciprocal obligations and mutual respect, and that allows plenty of pushback to those who are “lower” within the top tiers. So why aren’t things better than this? Why are the tensions so high, and some of the disputes so nasty?

 

2) Stendhal’s Le Rouge et le Noir: Dark and disturbing though this book may be – reading it, after Pride and Prejudice, feels like switching from a milk bath to an acid bath – in one respect it ought to feel considerably more benign than it does. It shows all sorts of people, at different social levels and in different ways, making a lot of money. One might expect widespread upward economic mobility to serve as an emollient, easing social tensions, but here it seems instead to intensify them. Why should a rising tide rock all the boats?

 

3) Balzac’s Le Pere Goriot and La Maison Nucingen: Among the main features of interest here, besides Rastignac’s relentless arrivisme (and Balzac’s keen portrayal of what motivates it), is the transformation of aristocratic rank from implying stability and a set of values, to its being merely a market commodity like having a nice mansion with well-dressed servants. Written later but set ((until La Maison Nucingen) earlier than Le Rouge et le Noir, it shows further disruptive advancement in the rise of finance and in early nineteenth century France’s capitalist transformation.

 

Other main themes in part 1: Why and how did England and France navigate the capitalist transition so differently? Legacy of the French Revolution, importance of the gentry / “gentleman” concept in England, aristocratic versus capitalist hierarchy.

 

PART 2: ENGLAND FROM EARLY IN THE INDUSTRIAL REVOLUTION THROUGH THE ONSET OF WORLD WAR I

 

1) Dickens’ A Christmas Carol – This cheery tale of the lead character’s serial humiliation – made palatable to us by his fervently embracing it – sets terms for the granting of deference and respect to successful businessmen. The distress of today’s “Scrooge truthers” – libertarians who insist that pre-conversion Scrooge is the story’s true hero – testifies to the potency of Dickens’s dignitary challenge to moneymaking that is shorn of accepting a quasi-familial or aristocratic sense of downward obligation.

 

2) Trollope’s The Way We Live Now – This uncharacteristically angry (for Trollope) attack on the social and cultural threat to English social values from the rise of finance explores scapegoating responses, such as blaming Jews or Americans, but concludes that such rot as there is, is self-inflicted, and that the system is resilient despite it all.

 

3) Forster’s Howards End – Here we see an early parallel to the modern American faceoff between the intellectual elite and the business elite. On its surface seeking reconciliation and a merger between the two groups’ virtues, instead it pitilessly attacks, and portrays the rightful subjugation of, the latter, turning even its famous motto, “Only connect!,” into a battle weapon.

 

Main themes in Part 2 – Dignitary issues raised by the unsettling rise of capitalism & finance; importance of the “gentleman” ethos in softening status rivalries; the relationship of this ethos to English social resilience.

 

PART 3: AMERICA DURING THE FIRST GILDED AGE

 

1) Twain’s & Warner’s The Gilded Age – This root and branch satiric attack on the American success ethic shows also the relative porousness and benignity of American class divides at a point when the Gilded Age – which got its name from the book – was still just in the early takeoff phase.

 

2) Wharton’s The House of Mirth – As New York’s new and old social elites merge over money-worship, their social insecurities fuel competitive savagery, and failure may connote virtue, but also self-alienation and self-hatred.

 

3) Dreiser’s The Financier and The Titan – This almost stenographically accurate recounting of the lead events in the life of an actual Gilded Age robber baron – Charles Yerkes, aka Frank Cowperwood – powerfully dramatizes the tension between extreme high-end wealth inequality, on the one hand, and America’s democratic and egalitarian cultural legacy on the other.

 

Main themes in part 3 – What is so wrong with the United States in plutocratic eras (racism aside)? Why is extreme high-end inequality so toxic here? How does this relate to its tension with democracy, egalitarianism, and the lack since earliest days of a titled aristocratic class?

Book talk on Literature and Inequality, part one

Yesterday was the long-postponed, and I hope not annoyingly over-advertised, Zoom session regarding Literature and Inequality: Nine Perspectives from the Napoleonic Era Through the First Gilded Age. (If not for the pandemic, this event would have taken place live in April.)

I offered initial remarks describing the book, given that, after which Branko Milanovic and Kenji Yoshino offered comments. Then I took questions and comments from the audience. The session was recorded, and I believe will be publicly available soon, in which case I will post the link. But for now, I’ll use text from my PPT slides as the skeleton for a two-part overview of what I discussed at the live session. Part 1 here will offer general background, Part 2 will look at the book itself more closely.

 

Autobiographical backstory – This project offered me a chance to use my artistic / aesthetic side, at the same time as my logical reasoning side, to a greater degree than in some of my more conventional academic work. You know the story – tax policy et al by day; books, films, and music after-hours. Using both at once may happen to a degree if one views writing as an aesthetic and not just utilitarian exercise. But other than in my novel Getting It, combining the two has not always been so easy.

 

Inequality: high-end vs. low-end, not just DMU of isolated consumers – I’ve followed the last two decades’ inequality literature with great interest. But especially early on, I had two concerns about it. The first is that “inequality” isn’t just a unidimensional thing, to be measured in the aggregate, such as via the Gini coefficient. In particular, high-end and low-end inequality – extreme wealth and income concentration at the top, and poverty or deprivation at the bottom – are not symmetric. They raise different types of concerns, and generally are best addressed through different fiscal instruments. This is increasingly widely recognized in the literature now (as noted, for example, in my recent blogpost regarding work by Saez and Zucman).

 

My second concern, with some of the public economics literature in particular, is that its emphasis on declining marginal utility as THE reason for being concerned about inequality was far too narrow. Humans are competitive and comparative social creatures, not just isolated consumers of market commodities plus leisure, and reductive analyses based on the standard price theory models of a “rational” consumer miss a lot of the relevant considerations.

 

The “mapmaker’s dilemma,” social science / humanities – My law review article The Mapmaker’s Dilemma in Evaluating High-End Inequality covers a lot of this ground. Initially this was going to be Chapter 2 of Literature and Inequality, but then I realized it didn’t fit there, and published it separately. This piece’s title is based on the story, from both Gulliver’s Travels and the work of Jorge Luis Borges, in which mapmakers realize that the only way to make a map perfectly accurate is to make it life-size. But alas, that seems to hurt its usefulness. Both maps and all other models must simplify, abstract, and shrink the real world in order to be usable, but then there’s a tradeoff between usefulness and accuracy. Neoclassical economics & price theory have achieved great advances through their version of this, but the sacrifice is more costly for some inquiries than others. Evaluating high-end inequality is a case in point, and here one needs to deploy not only other social sciences but also the humanities, because they explore the subjective experiential side of social life.

  

Piketty 2013, Austen & Balzac – Thomas Piketty’s already-classic 2013 work, Capital in the Twenty-First Century, helped give me the idea that one could fruitfully use works of classic literature – more specifically, realist novels from periods including the early nineteenth century –  in this regard. Piketty derives some nice insights from looking briefly at classic novels by Jane Austen and Honoré de Balzac, but doesn’t exhaust the intellectual possibilities. Also, I thought he got Balzac a bit wrong, by describing the likes of Le Père Goriot as accounts of a “rentier society” in which nothing matters but your inherited wealth, whereas Eugène de Rastignac, the novel’s hero or antihero, is the preeminent arriviste – rising through the judicious use of his talents, such as they are – in all of French literature.

 

Project Fun? – The more I thought about this project, the more it seemed clear that, even apart from the intellectual contributions I hoped it might make, it could be quite enjoyable both to write and to read – more so, perhaps, than the likes of What Are Minimum Taxes, and Why Might One Favor or Disfavor Them? Looking back on my thinking, the one flaw seems to have been that it was actually quite hard to write, albeit fun once I had laboriously taught myself the ropes.

  

“Heading out in new directions without a map” – This is what Paul McCartney later called the Beatles’ process of writing and recording the White Album. They were in a new phase, liberated from their past but done with the psychedelic era. So what next? I faced my own version of this in writing Literature and Inequality. There were really no models out there for the book I wanted to write, nor was I entirely clear at the start just what it was. I had to learn the hard way, through multiple tries, what a given chapter should look like, as well as how they should all fit together. The book consequently took me six years to write (albeit, interspersed with lots of other projects), whereas I usually, when I have the time, write pretty fast.

 

Technical challenges – Even apart from figuring out what chapters should look like – generally involving the selection of a central through line – and how they should all fit together to develop general themes – I had to handle a lot of technical challenges in getting it done. One was to put in exposition as needed, in the form of offering needed background regarding a given book’s plot and main characters – without making it tedious. This was more needed, of course, for a book like Twain’s & Warner’s The Gilded Age than for, say, Dickens’s A Christmas Carol or Austen’s Pride and Prejudice. I had no uniform approach to this, but aimed to solve it case-by-case within the chapter’s flow. It brought to mind the issue any novelist or screenwriter faces, regarding how to supply needed exposition as seamlessly as possible.

 

I aimed to make the book interesting and accessible to both experts (in multiple disciplines) and lay people. If you read one or more publications in the vein of the New York Times, the Washington Post, the New York Review of Books, the Atlantic, the New Yorker, and New York / Los Angeles / Boston Magazine, and you’ve read or at least know (such as through movies) say 3 of the 9 books I cover, then you are within the readership I had in mind.

Teaching on Zoom

 I've now been teaching on Zoom for more than half a semester. I've had a surprisingly good experience with it, but alas that may not carry over so easily to lecturing on Zoom in the spring semester.

The NYU Tax Policy Colloquium on Tuesdays has a public session (links available on request), at which it works pretty well. The upside is that we get attendees all over the world, resulting in larger groups than we've ever had before, with a lot of folks who have interesting comments to contribute. It's a shame that we don't get to meet the author in person, discuss the session over lunch, and then have a small group dinner afterwards. But instead we have an advance Zoom session with the author to discuss the plan, with notes from both of us offered in advance to clarify where we're coming from (we aim at fruitful dialogue, not debate). Then we usually have a small group "happy hour" a couple of hours afterwards, in lieu of the dinner. This actually results in more serious discussions than at an 8-person dinner in lower Manhattan, but without the fun. Also, student attendees can feel left out (although we try to address that), whereas at the dinners we'd personally make sure that they were included at least in one of the discussions (table-wide could be difficult in a noisy restaurant).

The colloquium also has a private session before the public one, just with out students (16 in number - in a regular year, we'd usually be in the mid-20s). I knew one of them from past teaching, but have never met the other 15 in person. Each of them is a discussion leader once (along or with a colleague) for these sessions, and we meet with them in advance on Zoom.

So I really do feel I've gotten to know these people to a degree. On the other hand, I've never been in the same room with any of them (aside from the one whom I knew previously). No chatting before or after class, or at the break in the private session. Almost all participate, and it's easy to keep a queue on Zoom. All things considered, I feel it's worked decently well on the human level, but obviously without COVID I'd rather do it the traditional way. (The public session is a closer call given the tradeoff from having access to a larger virtual than live audience.)

I'm teaching an introductory tax course for 1-Ls in the spring. This, too, will be just on Zoom. Because only 1-Ls and can take it (as one choice among say 6 or 7 electives), the enrollment for this tends to be on the low side, albeit drawing people who are highly interested in the subject. The two challenges there will be getting to know the class, and making the lectures work on Zoom (with participation, of course, but in contrast to a seminar there's much more information to convey).

I know from my experiences as a Zoom attendee, when it's not my session, that paying attention and staying focused is not so easy. The remove from the audience is the main reason why I use PowerPoint outlines when I'm making comments at the public colloquium sessions, which I would never do in the live sessions (at most, I might hand out a one-page sketchy outline, and maybe scribble something in advance on the blackboard).

A lot of prep time is apparently needed to have any chance of making it work. At least it will be live rather than "asynchronous" (the word that seems to be used in lieu of "taped"). Hoping for the best, and I'll certainly do my best.

Tax policy colloquium, week 8: Gabriel Zucman's The Rise of Income and Wealth Inequality from America: Evidence from Distributional Accounts, part 2

 Carrying on with respect to the paper by Gabriel Zucman that we discussed at yesterday's colloquium, here are some thoughts on particular issues raised by the aim of measuring material inequality:

1) Future Social Security benefits - Should these be included in distributional tables, at their expected present value? Does it matter, for this purpose, if they're funded or unfunded?

I'd say it depends on the reasons for concern about inequality that motivate a particular measure, or use thereof. For example, if you're trying to measure the relative expected lifetime material resources available to people at different vertical levels, they absolutely should be included. On the other hand, if you're interested in a snapshot of the present, illiquidity and myopia may render them considerably less relevant, at least with respect to people who are not close to retirement. If you're concerned about social gradient ills, top-down consumption cascades, or unequal political influence, their expected value may likewise have little relevance.

The particular measure that the paper works on developing aims at allocating all current-year national income to one individual or another. This is a worthwhile task, but consider what it misses in the following hypothetical.

Suppose that Congress today votes to have me given a $10 billion bond, to be cashed for that face amount in 2030. Suppose my property rights to it are so clear that it's certain to be paid, and hence is worth $10 billion today (minus the loss of present value from my having to wait ten years for it). Suppose even that I'm forbidden to sell it, and can't expressly borrow against it (i.e., by conveying a security interest to a lender). This is not part of national income - although it would appear in my Haig-Simons income, and perhaps even potentially in my taxable income (if not deemed a grateful nation's gift). But it clearly makes me better-off, and is going to change how I live starting today.

The point is that future benefits, funded or not, may matter to welfare and behavior today - or may not, depending on the particulars of liquidity, one's operative time horizon, etc.

2) Consumer durables - The rental value of consumer durables is excluded from the main income measures in the paper we discussed yesterday, to advance comparability with other countries' existing measures. But the value of home ownership may effectively be included via real estate's inclusion among assets that have imputed returns. There's a strong case that this stuff should more generally be included, at least to get an accurate domestic picture (leaving aside the value of cross-border comparability of measures). And it might compress things a bit given that, for people at the very top, the value of consumer durables may be a smaller percentage of economic income than it is for people more towards, say, the upper middle.

3) Capitalization - One of the biggest disagreements between experts who prepare these measures (including, e.g., Zucman, and our earlier years' colloquium guests Gerald Auten and Eric Zwick) pertains to the capitalization rates that one needs to use in navigating back and forth between income and wealth measures. Suppose, for example, that you're using a 2% capitalization rate. Then $2 of current year capital income implies an asset worth $100, while an asset worth $100 implies $2 of current year income. When a study finds less high-end wealth concentration (and recent increase therein) than Saez and Zucman find, this often reflects the influence of assuming that higher discount and capitalization rates apply to higher-income individuals, on the ground that they are able to earn higher returns.

To illustrate, suppose Ms. Middle has $2 of capital income on her tax return, while Ms. Upper has $6. Applying a uniform capitalization rate of 2%, Middle is deemed to have $100 in capital assets, and Upper $300. But suppose instead that Upper earns a 3% return. Then, while we still infer $100 for Middle, we now infer only $200, not $300, for Upper.

Although I understand the logic, I've always been a bit bemused by this sort of adjustment. Personally, all else equal, I'd rather earn 3% than 2%, and would deem myself better-off if I were doing so. 

The result is also impossible in perfect capital markets where there are no risk differences between assets and also no admixture between labor and capital income. Thus, while I perfectly well accept that it may indeed be true in our world, I'm not convinced that thus lowering Upper's measured wealth, and thus showing the society to be more equal in the scenario where she earns a higher rate of return, I would tend to think of this differently.

Should we say that she has an implicit asset that raises her return from 2% to 3%? Or that it's human capital / conceptually labor income? If it reflects her accepting greater risk (e.g., of a black swan collapse of the stock market), does that downside risk matter, for any of the purposes for which we measure inequality, if people are pretty much ignoring it and ex post the risk never is realized?

4) Value of human capital - Many people dislike the term "human capital" for one reason or another. But, semantics notwithstanding expected future earnings can raise current wellbeing and affect current behavior, in some circumstances no less than tangible or financial wealth.

Consider James Dolan, who as the Madison Square Garden Company's (and thus effectively the New York Knicks') CEO earns $54 million per year. He has job security since he is the owner, and he evidently loves his job, despite his being only a Daniel Snyder away from being indisputably the worst major sports franchise owner in North America. Aren't his expected future earnings part of his current financial status?

Admittedly this example ignores the fact that Dolan is effectively paying his own salary via his ownership interest. But if a CEO without a similar ownership stake shared not only his current salary but his future salary expectations, it would understate his current true position to ignore the present value of expected future earnings.

America's rising high-end inequality in recent decades has largely been fueled by changes in labor income. I think we risk under-measuring it when we don't include this sort of thing.

Should everyone's expected future labor income be included? After all, a 60-year old janitor, earning $20,000 per year, also has an expected present value that one can compute. But the grounds for inclusion are clearer when the individual (a) likes the work and hence wouldn't retire if that were feasible, and (b) has greater rather than lesser access to capital markets to realize this value currently, even if not by formally borrowing against it.

All this doesn't mean so much that human capital should ever be included in these measures, as that we should keep in mind that excluding it may throw off the wealth measure's capacity to illuminate actual high-end inequality (and its various potential derivative consequences).

(5) Individual versus household measures - In measuring high-end inequality, it can make a big difference how one treats, say, spouses. Does one amalgamate them in a single household, and measure inequality as between households? Does one look at individuals separately? If so, does one assume a particular split, such as 50-50, between spouses? This can actually have huge effects on how one measures wealth and income concentration at the top.

In the income tax literature, it's common to note that spouses do not in fact generally share their income and wealth equally. For example, in a heterosexual marriage, it may be common for the man, especially if he is the higher (or only) earner, to have more sway. But this does not rebut the relevance of household-level assets and income to the material circumstances of all household members.

We can define a household as a group of individuals (often cohabiting) who, at least to some degree, pool their collective resources and then allocate them among the members based on internal rules or norms other than just "eat what you kill." These rules may be hard for us to observe, but that does not reduce their potential conceptual relevance

There's a well-known issue in the income tax debate, concerning whether it might matter distributionally if households enjoy economies of scale. (Even if the old saying that "two can live as cheaply as one" overstates it. There may also be non-rival consumption within households. For example, if I am extremely rich, and I newly find a partner (whether or not we are legally married), one might reasonably view the partner as now also being extremely rich, without my really now being any less rich. Even apart from mutually beneficial expenses (e.g., I'd rather vacation with a loved one than all alone), our enjoyment of the status and power that the wealth provides may be to a degree non-rival.

It's hard to determine the "right" way to treat this set of issues. But it can have an anomalously large effect on how we end up measuring high-end inequality. Consider, for example, the relative power and status in multiple realms of the very rich versus the rest of us. How much of a difference does it make, to those of us in the bottom 99%, how equally or unequally spouses in the top, say, 1% or .1% or .01% "share" their income or wealth? Probably a lot less than it may seem to matter when one compares the bottom line results in studies that use different conventions with respect to households.

Tax policy colloquium, week 8: Gabriel Zucman's The Rise of Income and Wealth Inequality from America: Evidence from Distributional Accounts, part 1

Yesterday at the colloquium, Gabriel Zucman presented the above paper, coauthored by Emmanuel Saez. This is a forthcoming Journal of Economic Perspectives paper that discusses increasing the menu of available approaches to measuring material inequality by linking up national macroeconomic accounts to information about individuals and households. Its being written for JEP not only increases its accessibility to a legal audience, but also makes it a great vehicle for teeing up questions that interest me about how to conceptualize measuring material inequality. (I would not be the right person to try to add value regarding various of the technical issues that pertain to using different kinds of data sources.

I will use this blog entry (and the next one) to tee up, without purporting to resolve, two types of conceptual issues in the area. The first is how our reasons for being interested in inequality might affect how to measure it. The second, which I will save for a follow-up blog entry, is how one might think about a number of the particular issues that are raised by efforts to measure inequality. 

Why does inequality matter? - A lot of the concern that would motivate measures such as those in this paper pertains to high-end inequality, or wealth or income concentration at the top. Thus, a lot of the content relates to the top 1, .1, .01. .001, or .0001 percent. 

Even just under utilitarianism, which is but one of many normative theories regarding just distribution (and which incorporates no inequality aversion as such), the problems one might have in mind include the following:

Declining marginal utility - If richer people derive less marginal utility from a dollar's worth of resources than poorer people, the marginal welfare payoff to wealth and income held at the top may be extremely low.

Stress, discord, and social gradient ills - A lot of work in both the social sciences and the humanities suggests that extreme concentration at the top can undermine trust and social concord, not to mention democratic institutions, while also increasing psychological stress at all levels. Richard Wilkinson's and Kate Pickett's The Spirit Level is an important example.

Positional externalities and top-down consumption cascades - People who are not willfully psychologically naive generally agree that it's embedded in our human nature to care about relative position, and to be very prone (at least in a society like ours) to evaluating this in part materially. Robert Frank has applied this analysis to argue that top-down "consumption cascades," a kind of keeping-up-with-the-Jones on steroids, is triggered by substantial and rising high-end inequality.

Top-end political and cultural domination - Anyone who has lived in the United States for any fraction of the last few decades knows what I am talking about here. Political scientists such as Lawrence Bartels and Martin Gilens have documented the degree to which the interests and policy viewpoints of the bottom 99% of the U.S. distribution fail to influence policy outcomes.

Macroeconomic issues (growth, stability, and social mobility) - There is also evidence, albeit some of it still disputed, suggesting that high-end wealth and income concentration reduce economic growth, macroeconomic stability, and also social mobility.

Each of these aims might importantly affect how one measures inequality. For example, an item might increase the lifetime welfare of people at all income and wealth levels, thus making the measure look more equal insofar as it is enjoyed on a roughly per capita basis, yet have no effect whatsoever on one or more of these issues.

Relevance of non-standard consumer choice - This potential gap or even gulf between relative lifetime material welfare at different levels and the evils resulting from extreme high-end inequality is especially enhanced by the frequent failure of standard neoclassical / price theory assumptions about consumers to apply in particular real world settings.

Suppose, for example, that the people in a society exercise consistent rational choice, and have access to perfect and complete financial and other markets. Then everyone's behavior and welfare today would reflect the expected level of their expected retirement benefits, from Social Security and otherwise. For example, even if I were 25, my expected lifetime income, reflecting the value of such benefits, would be allocated by me between periods depending on my preferences. The benefits would be no different than an equal-value cash deposit in my bank account. (Given the assumptions here, I would also be able to swap out the risk.)

In that scenario, not including in one's measure those benefits at their expected value would verge on being malpractice. But once we have illiquidity, incomplete markets, possible myopia, etcetera, the case for inclusion becomes much less clear - and depends on which issues pertaining to inequality one is interested in at the moment.

Likewise, the textbook consumer, operating in complete markets, chooses between commodities with the aim of equalizing the marginal utility derived from the last unit of each. So getting more of anything moves one to a higher indifference curve, and there's no difference between cash and particular commodities that, by assumption, could immediately and costlessly be swapped for other commodities.

This model does not apply, for example, to individuals who get medical treatment that is funded by Medicare or Medicaid. Still less does it apply, for example, to, say, one's per capita share of the benefit (if any) derived from one's government's national defense spending. (This is an item that, for good logical reasons, the paper discusses allocating between individuals at different income levels.)

A final general conceptual point here, before I close out this blog entry so as to discuss particular issues in Part 2, is that a lot of different types of considerations go into designing a measure of a given society's material inequality at a given time. There are, for example:

(1) theoretical issues, such as those noted above,

(2) issues of computational tractability,

(3) issues of comparability, since it is desirable to be able to compare different countries, along with the same country in different eras, using a consistent methodology, and 

(4) issues of clear presentation and public / political impact.

Given all these different considerations, it's vital to keep in mind that measures are just a means to greater understanding, and not themselves the end. Thus, for example, even if we rightly decide that a given item must be excluded from the measures, all things considered, we should not back or fool ourselves into ignoring the systematic influence that it might have had if included.

Also, there is no straight line link between how a given measure comes out, and how severe a given problem that is associated with high-end inequality might actually be in a particular social context.

For example, suppose counterfactually that high-end wealth and income concentration were identical as between the U.S. in 1960 as compared to 2020. (In fact, all of the reputable measures agree that it is significantly higher today.) The fact that consumption norms have apparently shifted both at the very top and further down, in favor of greater and more conspicuous display, might nonetheless make a lot of the high-end inequality problems that we face today significantly worse than those from 60 years ago.

On the other hand, other things that interact with inequality may have gotten better. For example, racism, anti-Semitism, and sexism, each of which interacts toxically with material inequality, surely were in many ways worse in the US in 1960 than 2020, however bad they continue to be today.

Snapshot from forty years ago

I happened to get an email from someone who was a fellow summer associate at a law firm 40 years ago, and with whom I hadn't been in touch since. He mentioned a story that he remembers from back then. 

I was in the law firm's library, and must have been asked what I was doing, as I replied: "Oh, I'm just belaboring the obvious for Chatham." [Name has been changed.]

My correspondent apparently liked that quote, and has been repeating it ever since. The background, apparently, was that "Chatham" didn't like a memo that I had written for him, because it had too much reasoning, and too little case citation. 

This apparently resonated with fellow summer associates (or at least one of them) since hazing the juniors was so key a feature of life at that firm. So others had been there too, in one way or another.

Then again, "Chatham" should certainly be commended for helping me to see, at still a young age, that academics was likely to appeal to me more than writing such memos.

Tax policy colloquium, week 7: my paper on minimum taxes

 This week at the NYU Tax Policy Colloquium, we discussed my paper on minimum taxes. There was an excellent discussion, and I got great comments that will help me in revising the final version that will appear in the Virginia Tax Review. But since I don't discuss the sessions here (as they're off the record), and am not eager at the moment to spend time writing a blogpost describing my own paper, I'll pass this week on the usual post-session blog entry. Back in business next week for Gabriel Zucman's paper (co-authored with Emmanuel Saez), The Rise of Income and Wealth Inequality in America: Evidence from Distributional Macroeconomic Accounts.

Trump's $70,000 haircut deduction

Regarding Trump's $70,000 haircut deductions, many commentators have noted that it isn't inherently fraud to claim something is a deductible business expense, rather than a nondeductible personal one, even if the claim proves incorrect, if there were genuine (or at least arguable) business elements to it.

While that is correct as a general principle, it's not clear how much this would help Trump upon a fuller investigation. This New York Times article, following up on the initial big story, points out not only that the law here, including decided cases, is REALLY clear on haircuts' nondeductibility, but also that there is reason to suspect Trump may have deducted something for which he was reimbursed. That would potentially put us in clear fraud territory if the reimbursement was not included in income.

Switch in upcoming NYU Tax Policy Colloquium schedule

 For those who are following the fall 2020 NYU Tax Policy Colloquium schedule (Zoom links available on request), we've had a swap between two forthcoming papers:

On Tuesday, October 13, from 2:00 to 3:50 pm EST, Gabriel Zucman will present "The Rise of Income and Wealth Inequality in America: Evidence from Distributional Macroeconomic Accounts." This had previously been scheduled for October 27.

On Tuesday, October 27, from 2:00 to 3:50 pm EST, Steve Rosenthal will present "Tax Implications of the Shifting Ownership of U.S. Stock." This had previously been scheduled for October 13.

Trump versus Apple in the tax avoidance realm

 Apparently some people have been saying: It's not so unusual that Trump should use enormous losses to pay very little federal income tax. Lots of rich people and big, profitable corporations do it. E.g., consider how companies like Apple, Amazon, Facebook, and Google may earn huge profits through operations that are run out of the US, and yet pay little federal income tax here.

This view is mistaken in several respects, although the proper takeaways can be a bit complicated. Here are some of the main distinctions that a simple analogy between the two misses:

1) Trump's "methodology" of having huge losses that offset the gains is, I believe, quite unusual - other than in eras characterized by the use of corporate tax shelters (which Treasury and the IRS got under control more than a decade ago). The reason is, it's hard to generate huge losses here to offset large profits there, absent corporate tax shelters, unless you are actually losing a lot of money through cash-hemorrhaging businesses. This, of course, is Trump's "method," but as I discussed in my Just Security piece, it is not one that anyone should want to use.

2) The fact that Trump actually was losing tons of money (we think) lessens the extent to which he was getting away with improper tax avoidance. Those who are bad enough at business to lose a lot of money should pay less tax than those who are better at it, all else equal.

3) From a tax standpoint, what was wrong with Trump's returns, even with only the limited checking from outside sources that the Times was able to do, wasn't his having large losses that he deducted, but his taking a number of positions that appear to go beyond mere aggressiveness to clear erroneousness, of a sort that is plain enough to raise concerns (meriting further investigation) about fraud. I describe several of these items in the Just Security piece.

4) What do companies like Apple, Amazon, Facebook, and Google do to avoid US federal income tax? Well, a lot of things, but perhaps the main one is contriving ways to have taxable income that arguably arose as an economic matter from productive activity in the US arise for tax purposes in foreign jurisdictions, often tax havens, in which these companies have subsidiaries. 

5) This is a totally different method than Trump uses. It suggests that their tax avoidance - defined as paying very little tax in relation to economic income - is much greater than Trump's. They are actually good at business, as well as at tax planning. But most of us would agree that there is a big difference between legal tax avoidance and claiming improper deductions.

6) Are all of the positions that these companies take, and that the IRS fails to challenge successfully, legally correct? That is rather unlikely, since they presumably take positions that might, as a probabilistic matter, be rejected if fully vetted and understood. Even if they never take a position (at least without requisite disclosure) that is not reasonably judged by their lawyers to be "more likely than not" to prevail, legal uncertainty is their friend. This is especially so with an overworked, underfunded IRS that can't afford to hire the very best tax experts to comb through everything, and that inevitably knows less about these companies' facts than they know about their own facts. But despite all this, I hope I am right in concluding that these companies are unlikely to come anywhere close to committing criminal tax fraud.

7) Back to Trump, his being a bad businessman does not as such involve improper (or, for that matter, clever) tax avoidance. But his tax returns, as described by the Times, appear to show BOTH improper deductions and embarrassing (but not improper) losses.

8) Here is another thought that someone expressed to me recently. Do we have any idea whether, as a general matter, the numbers shown on Trump's returns are real ones, as opposed to being made up? No, we don't know that, except insofar as they are independently verified. Simply making up numbers to reduce tax liability is as central a case of tax fraud as one can imagine, but if he was doing that we would need other evidence to show the reported numbers' falsity. In this regard, to paraphrase Reagan's famous words to Gorbachev, "Trust but verify," here I wouldn't trust but I would want to verify pretty much everything.