The Roll Call (subscription required) has an article entitled "Republicans Warn MLB on Soros Bid," in which prominent Capital Hill Republicans, including Tom Davis, the Chairman of the Government Reform Committee who hilariously views his committee's subject matter as centering on the baseball steroid issue, warn baseball against allowing a group that includes George Soros to purchase the Washington Nationals even if they are the high bidder:
"Davis, whose panel also oversees District of Columbia issues, said that if a Soros sale went through, 'I don't think it's the Nats that get hurt. I think it's Major League Baseball that gets hurt. They enjoy all sorts of exemptions' from anti-trust laws."
Other leading Republicans suggest additional forms of harassment, including denying funding for a new D.C. baseball stadium that would otherwise have been made available. And, as the Roll Call article helpfully notes, quoting several other prominent Republican Congressmen, there are plenty of other things Congress could do and presumably would.
I'm so glad these guys believe in limited government.
UPDATE: And on the same theme, here is a story about an attempt by House Energy and Commerce Committee chair Joe Barton to threaten and harass scientists for producing a study confirming that there is a global warming problem.
There are thousands of these stories.
Monday, June 27, 2005
Sunday, June 26, 2005
U.S. exceptionalism
If you think about it, this is just amazing:
"The extraordinary decision by an Italian judge to order the arrest of 13 people linked to the Central Intelligence Agency on charges of kidnapping a terrorism suspect here dramatizes a growing rift between American counterterrorism officials and their counterparts in Europe. European counterterrorism officials have pursued a policy of building criminal cases against terrorism suspects through surveillance, wire-taps, detective work and the criminal justice system. The United States, however, has frequently used other means since Sept. 11, 2001, including renditions - abducting terror suspects from foreign countries and transporting them for questioning to third countries, some of which are known to use torture."
The fact that the United States, under the GW Bush Administration, should stand for lawlessness and torture, and against the rule of law that European countries continue to defend, is no small thing. While our foreign policy has, in the past 60 years, included such episodes as CIA assassinations, the Phoenix program in South Vietnam, participation in coups eliminating elected governments, etc., this is a step beyond in a certain sense. We are substituting kidnapping and torture for the rule of law where both are available options, and treating European allies as if they were not legitimate sovereigns whom we need to respect. And I will stick to my comment in an earlier post that, for the Bush Administration, torturing foreign suspects (including innocent ones accidentally included in some broader sweep) is not just a case of the ends justifying the means; to a considerable extent the torture is the end (otherwise why be so indifferent to possible innocence, lack of intelligence value, etc.?)
In terms of why this sort of U.S.-European divergence is taking place, well obviously 9/11 happened here. I was certainly up for torture of al Qaeda people in the days after I witnessed (from a mile away) the WTC attack. And also there is the old argument about the extent of American exceptionalism, sometimes given a positive spin about our leaving Europe behind but also capable of a negative spin that emphasizes the ugly side of American religious fundamentalism.
But a political science-type explanation about institutional structure might have a lot to say as well. I recently heard a talk by a colleague who is in the early stages of a sociological study concerning another recent instance of American exceptionalism - the political rise of the death penalty here, in contrast to its abolition in Europe. The history of the death penalty in the two places is, I gather, pretty much parallel through the point in the late 60s and early 70s when it became a "social issue" here - at first linked to law and order concerns and perhaps, on a symbolic level, the broader social unrest of the era. Now, of course, the death penalty is part of the Jeb Bush-style "culture of life" (save the unborn and brain-dead; kill, torture, and persecute the living).
Why did the death penalty disappear in Europe, however? Apparently public opinion there was as opposed to its abolition as it was here. The difference was that the political elites imposed it on the public there, and none of the competing political forces decided to use it as a wedge issue against the others. In other words, cartelization of the policy process by the elite resulted in forcing an unpopular policy change on the western European countries. (Whether this was good or not depends on what you think about the death penalty and about policymaking more generally. I am just trying to be descriptive here.) In the US, by contrast, while a portion of the political elite wanted to do this, others seized on the issue and forced the retention of the death penalty through democratic politics. At conferences where US and European criminal law types who opposed the death penalty would meet, apparently the latter would tell the former: "Your country is too democratic - that's why you can't do the right thing on this issue.")
If political institutions are the key here, what comes to mind is the difference between parliamentary systems and the US approach, including not just the separate Presidency but primaries, lack of top-down selection of candidates, etc.
Depending on what you think about particular policies, it's possible that the US institutional design is better on some issues and the European design better on others. Going back to the Framers, both too little responsiveness and too much can be a problem.
This post is long enough already, so I will save for a subsequent post my political economy explanation of why US politics has gone so far astray in the last few years. The cause I have in mind is actually unrelated to all this.
"The extraordinary decision by an Italian judge to order the arrest of 13 people linked to the Central Intelligence Agency on charges of kidnapping a terrorism suspect here dramatizes a growing rift between American counterterrorism officials and their counterparts in Europe. European counterterrorism officials have pursued a policy of building criminal cases against terrorism suspects through surveillance, wire-taps, detective work and the criminal justice system. The United States, however, has frequently used other means since Sept. 11, 2001, including renditions - abducting terror suspects from foreign countries and transporting them for questioning to third countries, some of which are known to use torture."
The fact that the United States, under the GW Bush Administration, should stand for lawlessness and torture, and against the rule of law that European countries continue to defend, is no small thing. While our foreign policy has, in the past 60 years, included such episodes as CIA assassinations, the Phoenix program in South Vietnam, participation in coups eliminating elected governments, etc., this is a step beyond in a certain sense. We are substituting kidnapping and torture for the rule of law where both are available options, and treating European allies as if they were not legitimate sovereigns whom we need to respect. And I will stick to my comment in an earlier post that, for the Bush Administration, torturing foreign suspects (including innocent ones accidentally included in some broader sweep) is not just a case of the ends justifying the means; to a considerable extent the torture is the end (otherwise why be so indifferent to possible innocence, lack of intelligence value, etc.?)
In terms of why this sort of U.S.-European divergence is taking place, well obviously 9/11 happened here. I was certainly up for torture of al Qaeda people in the days after I witnessed (from a mile away) the WTC attack. And also there is the old argument about the extent of American exceptionalism, sometimes given a positive spin about our leaving Europe behind but also capable of a negative spin that emphasizes the ugly side of American religious fundamentalism.
But a political science-type explanation about institutional structure might have a lot to say as well. I recently heard a talk by a colleague who is in the early stages of a sociological study concerning another recent instance of American exceptionalism - the political rise of the death penalty here, in contrast to its abolition in Europe. The history of the death penalty in the two places is, I gather, pretty much parallel through the point in the late 60s and early 70s when it became a "social issue" here - at first linked to law and order concerns and perhaps, on a symbolic level, the broader social unrest of the era. Now, of course, the death penalty is part of the Jeb Bush-style "culture of life" (save the unborn and brain-dead; kill, torture, and persecute the living).
Why did the death penalty disappear in Europe, however? Apparently public opinion there was as opposed to its abolition as it was here. The difference was that the political elites imposed it on the public there, and none of the competing political forces decided to use it as a wedge issue against the others. In other words, cartelization of the policy process by the elite resulted in forcing an unpopular policy change on the western European countries. (Whether this was good or not depends on what you think about the death penalty and about policymaking more generally. I am just trying to be descriptive here.) In the US, by contrast, while a portion of the political elite wanted to do this, others seized on the issue and forced the retention of the death penalty through democratic politics. At conferences where US and European criminal law types who opposed the death penalty would meet, apparently the latter would tell the former: "Your country is too democratic - that's why you can't do the right thing on this issue.")
If political institutions are the key here, what comes to mind is the difference between parliamentary systems and the US approach, including not just the separate Presidency but primaries, lack of top-down selection of candidates, etc.
Depending on what you think about particular policies, it's possible that the US institutional design is better on some issues and the European design better on others. Going back to the Framers, both too little responsiveness and too much can be a problem.
This post is long enough already, so I will save for a subsequent post my political economy explanation of why US politics has gone so far astray in the last few years. The cause I have in mind is actually unrelated to all this.
Monday, June 20, 2005
Mysteries of the New York Mets
Although I remain a New York Mets fan, as I apparently have no psychic choice, I have now reached the point, as I do nearly every year, where I start rooting for them to lose so that they will not make more insanely self-destructive trades near the trading deadline. Since I am scarcely alone in viewing the Mets management this way – the entire vast army of Mets bloggers has the same view, and is proven right, while the management is repeatedly proven wrong, year after year after year - we have a puzzle on our hands, related to the “Moneyball” puzzles that have attracted much attention (including in the legal academy) lately. The question is why baseball owners, who have strong incentives to act rationally in terms of winning cost-effectively, are usually so much stupider than interested fans.
Briefly on the Mets, taking their set of player contracts as given, they have good reason to want to win. But while they treat their best pitcher (Martinez) as their #1, their second best pitcher (Heilman) is used strictly in mop-up situations where the game appears to be out of hand, even though he has a streak of shutout innings that’s been going on for several weeks. Their third best pitcher (Seo) is in the minor leagues. Yesterday, their philosophy of doing this was really tested, when they put Heilman in a game they were losing 6-1, but then scored 4 runs to make it close. Not to worry; manager Willie Randolph was equal to the challenge. He pulled Heilman and put in the team’s worst pitcher (DeJean), who promptly gave up 4 runs to put the game out of reach. It’s a good thing that pitchers who have been removed aren’t allowed back in, or Randolph might have reinserted Heilman once the game was safely out of reach. Meanwhile, he bats his best hitter (Wright) seventh, and has been quite vocal at times about his eagerness to bat Wright eighth. The reason for this, he says, is that Wright is still young and needs to earn a higher spot. (Never mind that in about a full season he has vastly outperformed everyone else on the team.) Meanwhile, the equally young Reyes is kept for months in the lead-off spot (he has finally been dropped to #2), notwithstanding that he has the lowest on-base average on the team and that on-base average is vital at the top of the order.
A couple of broader Mets-related (but not just Mets-related) mysteries are the following. One reason so many New York teams are persistently bad is that they are wildly impatient and grab at fading big names for too much money. They refuse to take the short-term hit and rebuild. The reason for this, we always hear, is that the New York fans are too impatient; you can’t make them wait. Leave aside for the moment that actually the New York fans, so far as I can tell, continually lament their teams’ not rebuilding properly. Taking it from a rational choice standpoint, the claim is that you need to have a higher discount rate in New York than, say, San Diego because success this year is more important and valuable. But if success NEXT year and the year after is also more important and more valuable, then the discount rate for owners in the two cities should be the same. The only explanation I can see is that myopia and hyperbolic discounting are harder to resist when the current year stakes are absolutely (albeit not relatively) higher. But baseball owners have a pretty strong incentive to get it right. Not only is there a lot of money at stake, but in a city like New York they get pilloried in the press if they fail to build a winning team.
A second, related mystery is baseball teams’ inability to grasp the admittedly counter-intuitive but fundamental economic idea that sunk costs are sunk. If you can’t do anything about them, you might as well move on and optimize given where you stand. Yet we always hear that teams can’t “afford” not to play the guys to whom they are paying huge salaries (e.g., Tom Glavine). Needless to say, they will be paying these guys huge salaries whether they play them or not (and in Glavine’s case they will owe him a way above value salary for next year if he pitches enough for his option to vest). So you would think it would make sense to use the players who give you the best chance to win, regardless of past mistakes in offering high salaries to the wrong people.
Michael Lewis’ “Moneyball” became a hot item in legal academic circles due to people’s interest in the limits of rational choice, since one of Lewis’ main points was that Billy Beane was succeeding with a low-budget team by exploiting market irrationalities, in particular under-appreciation of the importance of on base percentage. An interesting point here is that the Athletics seem at the moment to be failing, although maybe by the end of the year they will be moving back up again. To some extent this may be chance, but if enduring it can also be explained on two main grounds: that Beane’s financial disadvantage has grown even greater over the last couple of years, and that this particular market irrationality has narrowed because his success (and that of the book) has helped to correct the market’s under-appreciation of on-base average. The guys at Long-Term Capital saw their arbitrage advantages shrink, too, although frankly (Nobelists or not) I would expect Beane to show greater shrewdness in adapting than they did.
In terms of why the Mets and so many teams would be so persistently irrational, despite the market forces pushing towards rationality, I would offer two main explanations. The first is the weakness of competitive market forces. With barriers to entry, a cartel making it harder for anyone to go out of business, and the difficulty of buying a team (especially with owners having non-economic reasons for ownership), the forces instilling discipline are not very strong. (Although perhaps strong enough to create very slow movement towards more accurately valuing on base average.) Corporate governance types in the Chicago school like to emphasize the takeover market, but I personally would put greater relative weight on the fact that really bad businesses fail or at least experience enormous reduction in their market share and economic significance. Second, rightly identified by Michael Lewis, especially in his afterword in the paperback version, is agency costs. The insiders in baseball have a stake in self-perpetuation and much less stake than the owners in whether a given team succeeds, and owners who lack expertise have a hard time overcoming this.
Still, it’s hard to explain why Willie Randolph, after thirty years in baseball, lacks the elementary sense that a nine year old with Strat-o-Matic cards would almost certainly have. Call it the New York Mets’ special mojo.
Briefly on the Mets, taking their set of player contracts as given, they have good reason to want to win. But while they treat their best pitcher (Martinez) as their #1, their second best pitcher (Heilman) is used strictly in mop-up situations where the game appears to be out of hand, even though he has a streak of shutout innings that’s been going on for several weeks. Their third best pitcher (Seo) is in the minor leagues. Yesterday, their philosophy of doing this was really tested, when they put Heilman in a game they were losing 6-1, but then scored 4 runs to make it close. Not to worry; manager Willie Randolph was equal to the challenge. He pulled Heilman and put in the team’s worst pitcher (DeJean), who promptly gave up 4 runs to put the game out of reach. It’s a good thing that pitchers who have been removed aren’t allowed back in, or Randolph might have reinserted Heilman once the game was safely out of reach. Meanwhile, he bats his best hitter (Wright) seventh, and has been quite vocal at times about his eagerness to bat Wright eighth. The reason for this, he says, is that Wright is still young and needs to earn a higher spot. (Never mind that in about a full season he has vastly outperformed everyone else on the team.) Meanwhile, the equally young Reyes is kept for months in the lead-off spot (he has finally been dropped to #2), notwithstanding that he has the lowest on-base average on the team and that on-base average is vital at the top of the order.
A couple of broader Mets-related (but not just Mets-related) mysteries are the following. One reason so many New York teams are persistently bad is that they are wildly impatient and grab at fading big names for too much money. They refuse to take the short-term hit and rebuild. The reason for this, we always hear, is that the New York fans are too impatient; you can’t make them wait. Leave aside for the moment that actually the New York fans, so far as I can tell, continually lament their teams’ not rebuilding properly. Taking it from a rational choice standpoint, the claim is that you need to have a higher discount rate in New York than, say, San Diego because success this year is more important and valuable. But if success NEXT year and the year after is also more important and more valuable, then the discount rate for owners in the two cities should be the same. The only explanation I can see is that myopia and hyperbolic discounting are harder to resist when the current year stakes are absolutely (albeit not relatively) higher. But baseball owners have a pretty strong incentive to get it right. Not only is there a lot of money at stake, but in a city like New York they get pilloried in the press if they fail to build a winning team.
A second, related mystery is baseball teams’ inability to grasp the admittedly counter-intuitive but fundamental economic idea that sunk costs are sunk. If you can’t do anything about them, you might as well move on and optimize given where you stand. Yet we always hear that teams can’t “afford” not to play the guys to whom they are paying huge salaries (e.g., Tom Glavine). Needless to say, they will be paying these guys huge salaries whether they play them or not (and in Glavine’s case they will owe him a way above value salary for next year if he pitches enough for his option to vest). So you would think it would make sense to use the players who give you the best chance to win, regardless of past mistakes in offering high salaries to the wrong people.
Michael Lewis’ “Moneyball” became a hot item in legal academic circles due to people’s interest in the limits of rational choice, since one of Lewis’ main points was that Billy Beane was succeeding with a low-budget team by exploiting market irrationalities, in particular under-appreciation of the importance of on base percentage. An interesting point here is that the Athletics seem at the moment to be failing, although maybe by the end of the year they will be moving back up again. To some extent this may be chance, but if enduring it can also be explained on two main grounds: that Beane’s financial disadvantage has grown even greater over the last couple of years, and that this particular market irrationality has narrowed because his success (and that of the book) has helped to correct the market’s under-appreciation of on-base average. The guys at Long-Term Capital saw their arbitrage advantages shrink, too, although frankly (Nobelists or not) I would expect Beane to show greater shrewdness in adapting than they did.
In terms of why the Mets and so many teams would be so persistently irrational, despite the market forces pushing towards rationality, I would offer two main explanations. The first is the weakness of competitive market forces. With barriers to entry, a cartel making it harder for anyone to go out of business, and the difficulty of buying a team (especially with owners having non-economic reasons for ownership), the forces instilling discipline are not very strong. (Although perhaps strong enough to create very slow movement towards more accurately valuing on base average.) Corporate governance types in the Chicago school like to emphasize the takeover market, but I personally would put greater relative weight on the fact that really bad businesses fail or at least experience enormous reduction in their market share and economic significance. Second, rightly identified by Michael Lewis, especially in his afterword in the paperback version, is agency costs. The insiders in baseball have a stake in self-perpetuation and much less stake than the owners in whether a given team succeeds, and owners who lack expertise have a hard time overcoming this.
Still, it’s hard to explain why Willie Randolph, after thirty years in baseball, lacks the elementary sense that a nine year old with Strat-o-Matic cards would almost certainly have. Call it the New York Mets’ special mojo.
Friday, June 17, 2005
Mea culpa, subject to the Nuremberg defense
A reporter was asking me today why we have such a terrible problem with the alternative minimum tax (AMT), which is on the verge of being bigger rather than the regular tax, leaving most people (at least in a few years) in the position of having to deal with both systems. "Why" meaning, not how is it a problem, or even how as a technical matter did it become a problem (which is a consequence of the failure to index its exemption amount for inflation), but why was it permitted to become such a problem?
Once the system, with its unindexed exemption amount, was in place, no one had a short term political interest in fixing it. The Clinton Administration pursued other priorities. The George W. Bush Administration has affirmatively relied on it for Iraq war-style budgeting deception, since the rise of the AMT greatly lowered the revenue estimates for the 2001 and 2003 tax cuts without people realizing that the (relatively) low estimates relied upon widespread denial of the tax cuts via the AMT. So there is a politically satisfying (from a cynical standpoint) story of negligence rising to malignance as the problem approached and nothing was done.
But I'm convinced that a sheer element of accident played a role as well. Now for the mea culpa and the Nuremberg defense. I was on the Congressional staff that worked on designing the AMT during the 1986 tax reform process. Needless to say, my colleagues and I were only following orders. We certainly knew about indexing, which had recently been introduced for regular tax purposes. So I was wondering recently why we didn't index the AMT exemption amount. I don't remember for sure, but here is what I think. We probably were not allowed to index it within the five-year window for which revenue estimates were being done, since this would have required more money to be raised from rich people or business in some other, presumably more visible and politically painful, way. So why didn't we try to get it indexed to inflation beginning after the 5-year period? That would probably have been easy to do. The answer, I think, is that no one thought of it or realized it would be necessary. We weren't used to enacting such deferred changes. And presumably we figured Congress would get around to fixing the problem long before it became serious.
Suppose the AMT exemption had been indexed to inflation, beginning, say, in 1992. It's possible that politicians would have eliminated the indexing to pay for something else, putting us back where we now stand. But this is far from certain. Had we gotten to 2001 with indexing, it certainly would have been harder for the Bush Administration to eliminate indexing as a way of disguising the size of the tax cuts than to simply rely on the AMT in place. So accident was probably very important.
This is hardly unique to recent tax policy. In the same conversation with the reporter, it occurred to me that the 1986 tax reform probably wouldn't have happened if there hadn't been a Treasury Secretary in 1984 (Donald Regan) who happened to be willing to let the staff design an ambitious tax reform plan. Suppose James Baker, who took over Treasury the next year and helped pass tax reform, had already been there in 1984. It's hard to believe that he would have let the staff develop such a plan. Yet Reagan Administration personnel decisions may not have reflected any intention regarding the encouragement of tax reform by having Regan rather than Baker there in 1984. This was simply a by-product of other forces determining the personnel decisions.
Likewise, I've been told that it is to some degree an accident of personnel in place that led the current Administration to be as honest as it has been about the fact that private accounts are not a free-lunch solution to the Social Security financing gap. Karl Rove may have permitted the senior economic staff in place to commit the Administration to a non-free-lunch stance out of post-election hubris that he wishes he could take back, but he would not even have faced the issue had free-lunchers from the first term senior economic staff (and I don't mean Glenn Hubbard or Paul O'Neill) still been there.
Once the system, with its unindexed exemption amount, was in place, no one had a short term political interest in fixing it. The Clinton Administration pursued other priorities. The George W. Bush Administration has affirmatively relied on it for Iraq war-style budgeting deception, since the rise of the AMT greatly lowered the revenue estimates for the 2001 and 2003 tax cuts without people realizing that the (relatively) low estimates relied upon widespread denial of the tax cuts via the AMT. So there is a politically satisfying (from a cynical standpoint) story of negligence rising to malignance as the problem approached and nothing was done.
But I'm convinced that a sheer element of accident played a role as well. Now for the mea culpa and the Nuremberg defense. I was on the Congressional staff that worked on designing the AMT during the 1986 tax reform process. Needless to say, my colleagues and I were only following orders. We certainly knew about indexing, which had recently been introduced for regular tax purposes. So I was wondering recently why we didn't index the AMT exemption amount. I don't remember for sure, but here is what I think. We probably were not allowed to index it within the five-year window for which revenue estimates were being done, since this would have required more money to be raised from rich people or business in some other, presumably more visible and politically painful, way. So why didn't we try to get it indexed to inflation beginning after the 5-year period? That would probably have been easy to do. The answer, I think, is that no one thought of it or realized it would be necessary. We weren't used to enacting such deferred changes. And presumably we figured Congress would get around to fixing the problem long before it became serious.
Suppose the AMT exemption had been indexed to inflation, beginning, say, in 1992. It's possible that politicians would have eliminated the indexing to pay for something else, putting us back where we now stand. But this is far from certain. Had we gotten to 2001 with indexing, it certainly would have been harder for the Bush Administration to eliminate indexing as a way of disguising the size of the tax cuts than to simply rely on the AMT in place. So accident was probably very important.
This is hardly unique to recent tax policy. In the same conversation with the reporter, it occurred to me that the 1986 tax reform probably wouldn't have happened if there hadn't been a Treasury Secretary in 1984 (Donald Regan) who happened to be willing to let the staff design an ambitious tax reform plan. Suppose James Baker, who took over Treasury the next year and helped pass tax reform, had already been there in 1984. It's hard to believe that he would have let the staff develop such a plan. Yet Reagan Administration personnel decisions may not have reflected any intention regarding the encouragement of tax reform by having Regan rather than Baker there in 1984. This was simply a by-product of other forces determining the personnel decisions.
Likewise, I've been told that it is to some degree an accident of personnel in place that led the current Administration to be as honest as it has been about the fact that private accounts are not a free-lunch solution to the Social Security financing gap. Karl Rove may have permitted the senior economic staff in place to commit the Administration to a non-free-lunch stance out of post-election hubris that he wishes he could take back, but he would not even have faced the issue had free-lunchers from the first term senior economic staff (and I don't mean Glenn Hubbard or Paul O'Neill) still been there.
Thursday, June 16, 2005
Another conference
I’ve been silent here lately due to a just-completed trip to La Jolla, first to attend a rather unusual conference and then for a brief family vacation.
The conference, entitled “Taxation, Economic Prosperity, and Distributive Justice,” was run by the Social Philosophy and Policy Center out of Bowling Green, Ohio, with support from the Liberty Fund, which I gather is a very active funding organization. I gather that both the Center and the Fund have a strong libertarian focus, although it appears with considerable open-mindedness and willingness to talk to non-like-minded people.
The conference had about 15 active participants. Three were public economics types (Michigan economist Joel Slemrod, USC law prof Ed McCaffery, and me). One was a tax historian (Elliot Brownlee of UC Santa Barbara), one a legal scholar with general interests (Kevin Kordana of Virginia), and the rest were conservatives or libertarians (including Jonathan Macey of Yale Law School and Richard Wagner of George Mason Economics) who do not accept welfare economics.
I remember once attending a Critical Tax Conference in Buffalo in which there were just a few public economics types and the rest were mainly in critical legal studies. The interplay was similar, except that the dialogue was with people who rejected our approach from the left rather than from the right. Both occasions were quite civil, however, which is more than one can always say of conferences that are limited to tax professors from law schools.
This time around, I attracted considerable (albeit courteous) flak for taking an openly utilitarian perspective in analyzing household tax and transfer issues (e.g., treatment of married couples versus singles, secondary earners, households with and without children, etc.). To many of the other attendees, utilitarianism and Rawls both lead straight to Sweden, a destination to be regarded with great distaste, partly on empirical grounds (via high estimates of government malevolence and incompetence), but mainly on the view that the rights of the individual to his [no women at this conference] talents and labor and the currently observed pre-tax market return thereto are paramount.
One of the pro-libertarian papers wrestled with the problem of (1) agreeing that a traveler facing death from starvation or exposure (in peril through no fault of his own) could violate property rights by breaking into an empty cottage, without (2) embarking on the road to Sweden via generalization of the point that need may outweigh property rights. Another paper posited that justice consists of people getting what they deserve, with symmetrical distaste for the case where good people get less than they deserve and that where bad people get more. I noted that this is not a very beneficent standard, especially given that none of us is perfect. The author, who just the previous day had been pressing me on the tensions between utilitarianism and our moral intuitions, replied that, yes, he completely rejects beneficence as a moral principle. (As for me, I’ll take mercy over justice any day of the week.)
Jonathan Macey’s paper mentioned that Robert Nozick argues for the primacy of property rights - “rather convincingly, I might add” - an aside on which he does not elaborate. He then argues for a constitutional amendment expanding the takings clause of the Fifth Amendment so that taxation, just like seizing someone’s house, requires “just compensation.” Unclear what this is supposed to mean given the problem of pricing public goods, not to mention evaluating the effects on property values of the basic legal system (police, enforcement of contracts, etc.), or for that matter national defense. I would not expect this proposal to get very far.
The conference, entitled “Taxation, Economic Prosperity, and Distributive Justice,” was run by the Social Philosophy and Policy Center out of Bowling Green, Ohio, with support from the Liberty Fund, which I gather is a very active funding organization. I gather that both the Center and the Fund have a strong libertarian focus, although it appears with considerable open-mindedness and willingness to talk to non-like-minded people.
The conference had about 15 active participants. Three were public economics types (Michigan economist Joel Slemrod, USC law prof Ed McCaffery, and me). One was a tax historian (Elliot Brownlee of UC Santa Barbara), one a legal scholar with general interests (Kevin Kordana of Virginia), and the rest were conservatives or libertarians (including Jonathan Macey of Yale Law School and Richard Wagner of George Mason Economics) who do not accept welfare economics.
I remember once attending a Critical Tax Conference in Buffalo in which there were just a few public economics types and the rest were mainly in critical legal studies. The interplay was similar, except that the dialogue was with people who rejected our approach from the left rather than from the right. Both occasions were quite civil, however, which is more than one can always say of conferences that are limited to tax professors from law schools.
This time around, I attracted considerable (albeit courteous) flak for taking an openly utilitarian perspective in analyzing household tax and transfer issues (e.g., treatment of married couples versus singles, secondary earners, households with and without children, etc.). To many of the other attendees, utilitarianism and Rawls both lead straight to Sweden, a destination to be regarded with great distaste, partly on empirical grounds (via high estimates of government malevolence and incompetence), but mainly on the view that the rights of the individual to his [no women at this conference] talents and labor and the currently observed pre-tax market return thereto are paramount.
One of the pro-libertarian papers wrestled with the problem of (1) agreeing that a traveler facing death from starvation or exposure (in peril through no fault of his own) could violate property rights by breaking into an empty cottage, without (2) embarking on the road to Sweden via generalization of the point that need may outweigh property rights. Another paper posited that justice consists of people getting what they deserve, with symmetrical distaste for the case where good people get less than they deserve and that where bad people get more. I noted that this is not a very beneficent standard, especially given that none of us is perfect. The author, who just the previous day had been pressing me on the tensions between utilitarianism and our moral intuitions, replied that, yes, he completely rejects beneficence as a moral principle. (As for me, I’ll take mercy over justice any day of the week.)
Jonathan Macey’s paper mentioned that Robert Nozick argues for the primacy of property rights - “rather convincingly, I might add” - an aside on which he does not elaborate. He then argues for a constitutional amendment expanding the takings clause of the Fifth Amendment so that taxation, just like seizing someone’s house, requires “just compensation.” Unclear what this is supposed to mean given the problem of pricing public goods, not to mention evaluating the effects on property values of the basic legal system (police, enforcement of contracts, etc.), or for that matter national defense. I would not expect this proposal to get very far.
Tuesday, June 07, 2005
AEI tax reform panel
Yesterday (Monday, June 6), I appeared at an AEI tax reform panel related to the rollout of a new tax reform book AEI is publishing, with chapters by lots of the main contributors to the tax reform debate.
The speakers on the first panel were Bob Hall of flat tax fame and Michael Graetz, discussing his plan that I have had a couple of posts about. Hall, interestingly, disclaimed the "flat tax" label, since his tax, after all, has two brackets (zero plus the positive rate). He called the flat tax label brilliant but inaccurate marketing of the plan, attributable to certain other individuals who co-designed it. He also expressed great sympathy for the David Bradford X-tax idea of having yet more brackets and thus more progressivity. Rabushka is not with him on this, however.
I asked Graetz a question reflecting the viewpoint in my last post on his plan, i.e., why would you give low-wage workers freedom from having to file any tax return rather than several thousand dollars of tax saving from a zero bracket. His reply was civil and in a good spirit, but I will admit I was not persuaded. The two main points I recall him making were (a) his payroll tax credit will address the low-end distributional problems, and (b) he has other compelling reasons for favoring his plan, e.g., avoid treaty problems that more radical breaks with current US tax practice might lead to. On (a), I continue to believe he is stuck with a dilemma resulting from the basic tradeoff between good distributional results and low-end simplification. You need information about people to treat them properly in a distributional sense, and that means, I think, that you are roughly back where you started in terms of the complexity they face. I can't say that I am sure exactly where he stands on the spectrum between more simplification and better modulated distribution. On (b), I just would say that I regard this as less of an important constraint. In principle one can renegotiate treaties (especially if one is the US and the changes don't hurt other countries in any way), and it would be nice to get a better system going in the long run.
Big consensus from everyone in the room was that the biggest problem facing tax reform is not defining a good tax base; it is the political economy problem of getting a decent plan enacted and then protecting it from the politicians and lobbyists. Death by a thousand cuts, to quote a recent Graetz title. Unfortunately, no one knows how to do this. Political economy is much harder and less determinate than straight economics.
Panel 2, which I moderated, had Kevin Hassett describing David Bradford's plan since David could not do so, and Casey Mulligan of the U of Chicago Economics Dept presenting his contrarian view that inefficient taxes are better because they constrain inefficient spending. My comment to Kevin was that I wasn't entirely sure David had found the right balance between good optics and handling transition problems. David tilted towards the latter in his last few years of working on the X tax, but perhaps too much at the expense of the former, e.g., through the use of income tax style depreciation timing plus interest on basis to make it the present value equivalent of expensing. This is an issue that I would have liked to discuss with David in this setting. Casey's point I objected to in a way that I couldn't, without unduly taking time from audience questions, make sufficiently clear. It was that he unduly treats "government spending" as a stand-in for "allocative effects of government policy." This is one of the main things I am writing about in my book in progress, tentatively called "The Use and Abuse of Fiscal Language."
Panel 3 was Ron Pearlman, noting the problems with going piecemeal towards a consumption tax without cutting back interest deductions, and Bill Gale with a general overview of these and other problems with all of the plans. By then I guess I was flagging (the sessions went straight through with no break), so I have nothing particular to add although both talks were good.
The speakers on the first panel were Bob Hall of flat tax fame and Michael Graetz, discussing his plan that I have had a couple of posts about. Hall, interestingly, disclaimed the "flat tax" label, since his tax, after all, has two brackets (zero plus the positive rate). He called the flat tax label brilliant but inaccurate marketing of the plan, attributable to certain other individuals who co-designed it. He also expressed great sympathy for the David Bradford X-tax idea of having yet more brackets and thus more progressivity. Rabushka is not with him on this, however.
I asked Graetz a question reflecting the viewpoint in my last post on his plan, i.e., why would you give low-wage workers freedom from having to file any tax return rather than several thousand dollars of tax saving from a zero bracket. His reply was civil and in a good spirit, but I will admit I was not persuaded. The two main points I recall him making were (a) his payroll tax credit will address the low-end distributional problems, and (b) he has other compelling reasons for favoring his plan, e.g., avoid treaty problems that more radical breaks with current US tax practice might lead to. On (a), I continue to believe he is stuck with a dilemma resulting from the basic tradeoff between good distributional results and low-end simplification. You need information about people to treat them properly in a distributional sense, and that means, I think, that you are roughly back where you started in terms of the complexity they face. I can't say that I am sure exactly where he stands on the spectrum between more simplification and better modulated distribution. On (b), I just would say that I regard this as less of an important constraint. In principle one can renegotiate treaties (especially if one is the US and the changes don't hurt other countries in any way), and it would be nice to get a better system going in the long run.
Big consensus from everyone in the room was that the biggest problem facing tax reform is not defining a good tax base; it is the political economy problem of getting a decent plan enacted and then protecting it from the politicians and lobbyists. Death by a thousand cuts, to quote a recent Graetz title. Unfortunately, no one knows how to do this. Political economy is much harder and less determinate than straight economics.
Panel 2, which I moderated, had Kevin Hassett describing David Bradford's plan since David could not do so, and Casey Mulligan of the U of Chicago Economics Dept presenting his contrarian view that inefficient taxes are better because they constrain inefficient spending. My comment to Kevin was that I wasn't entirely sure David had found the right balance between good optics and handling transition problems. David tilted towards the latter in his last few years of working on the X tax, but perhaps too much at the expense of the former, e.g., through the use of income tax style depreciation timing plus interest on basis to make it the present value equivalent of expensing. This is an issue that I would have liked to discuss with David in this setting. Casey's point I objected to in a way that I couldn't, without unduly taking time from audience questions, make sufficiently clear. It was that he unduly treats "government spending" as a stand-in for "allocative effects of government policy." This is one of the main things I am writing about in my book in progress, tentatively called "The Use and Abuse of Fiscal Language."
Panel 3 was Ron Pearlman, noting the problems with going piecemeal towards a consumption tax without cutting back interest deductions, and Bill Gale with a general overview of these and other problems with all of the plans. By then I guess I was flagging (the sessions went straight through with no break), so I have nothing particular to add although both talks were good.
Friday, June 03, 2005
Cause for anxiety
One of our three cats is missing. Buddy, aka Budzo, aka Spud, aka Spudringo, aka Buddy Von Beastingham, a brown tabby with a pointed snout and impressive stripes, got out into our enclosed backyard two days ago, went over the fence into a neighboring yard, and has not been seen (at least by us) since. He is a very active one year old "fixed" male who doesn't sleep much by species standards and has one of the great cat swaggers, as if to say "I'm not looking for trouble, but if it finds me that's okay." Very sweet-tempered and affectionate (he is a face-licker), although I wouldn't want to be the mouse that met him.
We're hoping that he's okay, and also that he will come back. Even cats that purr loudly while shoving their heads against their owners' hands are not always averse to accepting better offers, defined presumably in terms of food. Perhaps Scott Boras is advising him. Then there is the possibility of house arrest, although we have been spreading posters in the hope that he will be recognized and returned. Other possibilities are best not thought about.
I gather cats sometimes come back weeks or even months later. But tough times in the interim, for adults as well as kids.
UPDATE: He's back, after an evidently excellent 5-day adventure that culminated with his meowing loudly to us from a neighbor's balcony several houses away. The balcony seemed impossible to enter or exit other than through the house, where no one was home. He agreed that it was impossible to exit, and is not telling how he got there, but with help from inside the house he is back.
After eating and drinking for perhaps the first time in days, he's asking us to let him out again.
This is related, I think, to why Social Security should offer a fixed real life annuity without portfolio choice.
We're hoping that he's okay, and also that he will come back. Even cats that purr loudly while shoving their heads against their owners' hands are not always averse to accepting better offers, defined presumably in terms of food. Perhaps Scott Boras is advising him. Then there is the possibility of house arrest, although we have been spreading posters in the hope that he will be recognized and returned. Other possibilities are best not thought about.
I gather cats sometimes come back weeks or even months later. But tough times in the interim, for adults as well as kids.
UPDATE: He's back, after an evidently excellent 5-day adventure that culminated with his meowing loudly to us from a neighbor's balcony several houses away. The balcony seemed impossible to enter or exit other than through the house, where no one was home. He agreed that it was impossible to exit, and is not telling how he got there, but with help from inside the house he is back.
After eating and drinking for perhaps the first time in days, he's asking us to let him out again.
This is related, I think, to why Social Security should offer a fixed real life annuity without portfolio choice.
Thursday, June 02, 2005
Fun headline
From the New York Times: "North Korea Calls Cheney a 'Bloodthirsty Beast'."
Of course, it takes one to know one.
Of course, it takes one to know one.
Watergate redux
It was, of course, comical to read about convicted Watergate felons piously condemning Mark Felt for whistle-blowing. But hearing from the various conspirators reminded me of one of the most interesting aspects of the afterplay, which is how surprisingly Haldeman and Ehrlichman (not among the commentators because they have died) became sympathetic figures after the whole thing was over, showing more detachment and greater humanity than I, at least, expected. Indeed, absurd though it seemed back in April 1973 when Nixon called them two of the finest public servants he had known, Haldeman turns out to have deserved at least a dollop of such commendation for his sense (revealed in the diaries that came out afterwards, although I have only read about them) of the importance of knowing when to ignore Nixon when Fearless Leader was flying off the handle, as often he was.
Wednesday, June 01, 2005
Tax shelters
According to the May 30 Tax Notes Magazine, Eric Solomon, the acting Treasury Deputy Assistant Secretary for Tax Policy, suggests that Congress, with respect to anti-tax shelter legislation, "take a moment, take a breath, and take a look at what has happened, what is going on, and what the effect is of the legislation and the enforcement initiatives." In other words, no more legislating in the area, please, for now.
Solomon, a truly public-spirited public servant (under both Clinton and Bush, no less) whom I greatly admire, has a point. Congress has a way, when an issue is on the public agenda, of passing a flurry of responses without much overall deliberation or coordination.
The one disagreement I have with Solomon on this concerns the idea of putting the economic substance/business purpose requirement for tax shelters in the Internal Revenue Code, rather than having it just be case law. This is a problematic issue, and both the Treasury and tax practitioners have tended to oppose doing this. One reason I think it is nonetheless a good idea is that several court decisions recently have suggested a lack of understanding or acceptance of the requirement, and indeed I am told that a couple of recent decisions have cited Congress's non-enactment of the statutory rule as indicating that they shouldn't rely on it. (This is bad statutory interpretation, by the way, since non-enactment both need not indicate dislike of the requirement and is not a legislative act.)
Note, moreover, that Justice Scalia's increasingly influential "textual" and anti-purposive approach to statutory interpretation suggests that the Supreme Court might throw out the economic substance line of cases at some point if there is no hook in the Internal Revenue Code indicating that Congress wants it to stay.
Solomon, a truly public-spirited public servant (under both Clinton and Bush, no less) whom I greatly admire, has a point. Congress has a way, when an issue is on the public agenda, of passing a flurry of responses without much overall deliberation or coordination.
The one disagreement I have with Solomon on this concerns the idea of putting the economic substance/business purpose requirement for tax shelters in the Internal Revenue Code, rather than having it just be case law. This is a problematic issue, and both the Treasury and tax practitioners have tended to oppose doing this. One reason I think it is nonetheless a good idea is that several court decisions recently have suggested a lack of understanding or acceptance of the requirement, and indeed I am told that a couple of recent decisions have cited Congress's non-enactment of the statutory rule as indicating that they shouldn't rely on it. (This is bad statutory interpretation, by the way, since non-enactment both need not indicate dislike of the requirement and is not a legislative act.)
Note, moreover, that Justice Scalia's increasingly influential "textual" and anti-purposive approach to statutory interpretation suggests that the Supreme Court might throw out the economic substance line of cases at some point if there is no hook in the Internal Revenue Code indicating that Congress wants it to stay.
Update on Graetz tax reform plan
Michael Graetz let me know he was offended by the tone of my admittedly snarky earlier post on his tax reform plan. Without meaning to make our little dispute any worse, since it’s probably better for both of us (not to mention our many mutual friends) to retain civil relations, here is a fuller critique, overlapping a bit with my earlier one but offering a different emphasis.
I feel that Michael’s plan, although presented as major tax reform, does too little to justify its worsening distribution in the zero to $100,000 range.
Michael’s replacement of an income tax by a consumption tax for people earning under $100,000 has only minor significance. People at those income levels don’t save much anyway. The really important change is his eliminating individual or household-level taxation for people in that range. He puts them purely in a business-level tax that fails to adjust for personal circumstances, other than through a sketchy proposal involving employer-administered payroll tax credits.
The income tax today has an effective zero bracket amount. And it taxes people earning $90,000 at significantly higher marginal and average rates than people earning $20,000. The opportunity to do this is why all prior tax reformers I am familiar with, other than the national sales tax proponents who don’t like progressivity to begin with, have considered retention of individual-level taxation to be essential. Are all of the other tax reform proponents, going back at least to Nicholas Kaldor in 1955, wrong? I really don’t think so.
Michael trumpets the claimed benefit of getting the IRS out of lower earners’ lives by eliminating their need to file. But just how important is this, weighed against the distributional benefits of retaining individual-level taxation?
Suppose the VAT rate is 14 percent, as Michael says it might be, but that we would like to have a zero bracket for up to $20,000 of earnings, which the flat tax but not Michael’s methodology makes possible. Consider a low-wage worker without children earning $20,000, for whom the zero bracket would eliminate $2,800 of tax liability. Michael would rather eliminate this individual’s filing requirement, even if we are just talking about W-2s that report earnings, than save him $2,800 of tax by having a zero bracket. I wonder how many people earning $20,000 would thank Michael for this. Note, by the way, that he proposes to offset the tax increase on poor people for those with children – but, not apparently, other poor people.
Unless Michael’s payroll tax credit can sufficiently do the job, he is effectively taking the position that there would be no case for tax progressivity if the top income in our society were $100,000. Given the huge economic difference between earning $100,000 and earning zero, this should rightly be questioned by anyone who believes in progressivity.
It seems to me that Michael cannot deal properly with the low-end distribution problem unless he brings back the very income measurement ideas, on an individual or household basis, that he claims to be throwing out. If he puts the measurement function in some other part of the fiscal system, then he has given up the simplification.
He suggests that employers could provide payments to low earners (as part of the regular paychecks) that are related to family size. I find this suggestion problematic. Outsourcing the distributional work of the tax system to private businesses that are not going to want to bother with it strikes me as a recipe for mischief. Are they supposed to check on the childen’s Social Security numbers? Will they be reluctant to hire workers with lots of children unless the child benefits are foregone, even if the IRS at some point would pay them back? By the way, I gather that relatively few eligible people seek monthly EITC benefits today, even though allowed under the law, in part because they don’t want to share personal information with their employers. Yet Michael seems to assume that periodic, employer-administered payments to low-wage workers will be feasible under his system.
Michael also makes a serious error to the extent that payroll tax credits do not depend on the worker’s overall circumstances apart from the claimed number of children. Once you have issues such as people with several part-time or successive jobs, or college kids working over the summer, you risk either having a badly misdirected subsidy or else being right back where you started, in terms of simplification. And if he proposes to have the government cross-check it all so that workers don’t have to file returns (although they might, depending on his plan, get letters in the mail saying that they have to pay something back), again one wonders about the feasibility. Is it really that important to eliminate filing based on simple W-2s, which would permit distributional adjustments to be made much more easily?
But let’s suppose Michael offers simplification at the low end, albeit potentially at a big equity cost in the portion of the income distribution where a dollar matters the most. Even so, I believe he has misdirected his simplification efforts, and missed 95 percent of the problem.
On the high-income and business end, he mainly limits himself to a bit of hand-waving about partial book-tax conformity, a nice idea in theory but one that is unlikely to work well in practice. I have said nice things about book-tax conformity myself recently, more or less offhand, but I do think it is hard to push this idea very far. For example, the marketplace pressure to state book income high might change if the tax system started relying on it more. And what about Congress monkeying with the tax rules so as to create ever greater divergence - or, for that matter, monkeying with the accounting rules?
So it looks as if Michael basically leaves us with the same old system, with all of the problems he decries, for everything and everyone above the $100,000 level.
Where are the dominant administrative, compliance, and tax planning burdens of the income tax? The answer is that they overwhelmingly relate to high-earners and businesses. Here people not only face complicated issues, but can throw enormous resources at them.
A properly directed tax simplification effort would focus on the billions of dollars that are being spent, but in a social sense wasted, by those groups both on lawful tax planning and on questionable tax shelters. Under Michael’s plan, you’d still have all the game-playing and line-drawing that we see today, drawing on such tax rules as the realization requirement, the myriad interest expense rules, the distinction between debt and equity, the treatment of contingent convertible bonds as opposed to debt plus a separate option, etcetera. So the billions of dollars that are being wasted today on tax planning, compliance, and administration, and the stories about outrageous scams, would continue. [To give Michael a bit of credit, he has in the past been associated with a “CBIT” proposal for corporate tax reform that would wash away the main implications of the debt-equity distinction. That doesn’t seem to be a part of his current plan.]
A progressive consumption tax, unlike Michael’s plan, would greatly simplify the taxation of business and high-earners, while also retaining equity at below $100,000 of income. It also could easily be more progressive at the high end, when we consider the tax planning opportunities that a realization income tax offers. The only virtue that Michael’s plan offers against all this is the greatly overstated benefit he ascribes to filing no tax return instead of simplified returns based on W-2s.
To suggest that progressive consumption taxes are politically unrealistic, Michael notes the failure of the Nunn-Domenici plan. But that example proves little. Although there were good progressive consumption tax prototypes out there, Nunn and Domenici, for some reason, decided to reinvent the wheel, and got it wrong. Their unfortunate detour from a sensibly designed progressive consumption tax does not establish his broader claim that such a tax is unrealistic.
Michael notes that no other country has a progressive consumption tax. That is true, and sobering for advocates of such a system. But he fails to note that no other modern, economically advanced country has his plan either. While nearly all such countries have an income tax/VAT mix, I do not know of any that comparably restricts the reach of individual or household-level taxation. Other countries, like other tax reform proponents, recognize the need to individualize tax burdens based on personal circumstances.
Michael closes his chapter by suggesting that perhaps his proposal is politically impossible. This leaves me wondering even more about his stated ground for rejecting progressive consumption taxation, since he’s now pleading guilty to the same problem.
So I don’t believe that Michael’s plan belongs on the roster of those that are seriously worth considering.
I feel that Michael’s plan, although presented as major tax reform, does too little to justify its worsening distribution in the zero to $100,000 range.
Michael’s replacement of an income tax by a consumption tax for people earning under $100,000 has only minor significance. People at those income levels don’t save much anyway. The really important change is his eliminating individual or household-level taxation for people in that range. He puts them purely in a business-level tax that fails to adjust for personal circumstances, other than through a sketchy proposal involving employer-administered payroll tax credits.
The income tax today has an effective zero bracket amount. And it taxes people earning $90,000 at significantly higher marginal and average rates than people earning $20,000. The opportunity to do this is why all prior tax reformers I am familiar with, other than the national sales tax proponents who don’t like progressivity to begin with, have considered retention of individual-level taxation to be essential. Are all of the other tax reform proponents, going back at least to Nicholas Kaldor in 1955, wrong? I really don’t think so.
Michael trumpets the claimed benefit of getting the IRS out of lower earners’ lives by eliminating their need to file. But just how important is this, weighed against the distributional benefits of retaining individual-level taxation?
Suppose the VAT rate is 14 percent, as Michael says it might be, but that we would like to have a zero bracket for up to $20,000 of earnings, which the flat tax but not Michael’s methodology makes possible. Consider a low-wage worker without children earning $20,000, for whom the zero bracket would eliminate $2,800 of tax liability. Michael would rather eliminate this individual’s filing requirement, even if we are just talking about W-2s that report earnings, than save him $2,800 of tax by having a zero bracket. I wonder how many people earning $20,000 would thank Michael for this. Note, by the way, that he proposes to offset the tax increase on poor people for those with children – but, not apparently, other poor people.
Unless Michael’s payroll tax credit can sufficiently do the job, he is effectively taking the position that there would be no case for tax progressivity if the top income in our society were $100,000. Given the huge economic difference between earning $100,000 and earning zero, this should rightly be questioned by anyone who believes in progressivity.
It seems to me that Michael cannot deal properly with the low-end distribution problem unless he brings back the very income measurement ideas, on an individual or household basis, that he claims to be throwing out. If he puts the measurement function in some other part of the fiscal system, then he has given up the simplification.
He suggests that employers could provide payments to low earners (as part of the regular paychecks) that are related to family size. I find this suggestion problematic. Outsourcing the distributional work of the tax system to private businesses that are not going to want to bother with it strikes me as a recipe for mischief. Are they supposed to check on the childen’s Social Security numbers? Will they be reluctant to hire workers with lots of children unless the child benefits are foregone, even if the IRS at some point would pay them back? By the way, I gather that relatively few eligible people seek monthly EITC benefits today, even though allowed under the law, in part because they don’t want to share personal information with their employers. Yet Michael seems to assume that periodic, employer-administered payments to low-wage workers will be feasible under his system.
Michael also makes a serious error to the extent that payroll tax credits do not depend on the worker’s overall circumstances apart from the claimed number of children. Once you have issues such as people with several part-time or successive jobs, or college kids working over the summer, you risk either having a badly misdirected subsidy or else being right back where you started, in terms of simplification. And if he proposes to have the government cross-check it all so that workers don’t have to file returns (although they might, depending on his plan, get letters in the mail saying that they have to pay something back), again one wonders about the feasibility. Is it really that important to eliminate filing based on simple W-2s, which would permit distributional adjustments to be made much more easily?
But let’s suppose Michael offers simplification at the low end, albeit potentially at a big equity cost in the portion of the income distribution where a dollar matters the most. Even so, I believe he has misdirected his simplification efforts, and missed 95 percent of the problem.
On the high-income and business end, he mainly limits himself to a bit of hand-waving about partial book-tax conformity, a nice idea in theory but one that is unlikely to work well in practice. I have said nice things about book-tax conformity myself recently, more or less offhand, but I do think it is hard to push this idea very far. For example, the marketplace pressure to state book income high might change if the tax system started relying on it more. And what about Congress monkeying with the tax rules so as to create ever greater divergence - or, for that matter, monkeying with the accounting rules?
So it looks as if Michael basically leaves us with the same old system, with all of the problems he decries, for everything and everyone above the $100,000 level.
Where are the dominant administrative, compliance, and tax planning burdens of the income tax? The answer is that they overwhelmingly relate to high-earners and businesses. Here people not only face complicated issues, but can throw enormous resources at them.
A properly directed tax simplification effort would focus on the billions of dollars that are being spent, but in a social sense wasted, by those groups both on lawful tax planning and on questionable tax shelters. Under Michael’s plan, you’d still have all the game-playing and line-drawing that we see today, drawing on such tax rules as the realization requirement, the myriad interest expense rules, the distinction between debt and equity, the treatment of contingent convertible bonds as opposed to debt plus a separate option, etcetera. So the billions of dollars that are being wasted today on tax planning, compliance, and administration, and the stories about outrageous scams, would continue. [To give Michael a bit of credit, he has in the past been associated with a “CBIT” proposal for corporate tax reform that would wash away the main implications of the debt-equity distinction. That doesn’t seem to be a part of his current plan.]
A progressive consumption tax, unlike Michael’s plan, would greatly simplify the taxation of business and high-earners, while also retaining equity at below $100,000 of income. It also could easily be more progressive at the high end, when we consider the tax planning opportunities that a realization income tax offers. The only virtue that Michael’s plan offers against all this is the greatly overstated benefit he ascribes to filing no tax return instead of simplified returns based on W-2s.
To suggest that progressive consumption taxes are politically unrealistic, Michael notes the failure of the Nunn-Domenici plan. But that example proves little. Although there were good progressive consumption tax prototypes out there, Nunn and Domenici, for some reason, decided to reinvent the wheel, and got it wrong. Their unfortunate detour from a sensibly designed progressive consumption tax does not establish his broader claim that such a tax is unrealistic.
Michael notes that no other country has a progressive consumption tax. That is true, and sobering for advocates of such a system. But he fails to note that no other modern, economically advanced country has his plan either. While nearly all such countries have an income tax/VAT mix, I do not know of any that comparably restricts the reach of individual or household-level taxation. Other countries, like other tax reform proponents, recognize the need to individualize tax burdens based on personal circumstances.
Michael closes his chapter by suggesting that perhaps his proposal is politically impossible. This leaves me wondering even more about his stated ground for rejecting progressive consumption taxation, since he’s now pleading guilty to the same problem.
So I don’t believe that Michael’s plan belongs on the roster of those that are seriously worth considering.
Monday, May 30, 2005
Revenge of the Sith
I must say that I found Star Wars III quite boring. Just endless battles and duels punctuated with Lucas's trademark dialogue. Even the visuals become too little by trying to be too much. But it would have been incredibly rude to say this to certain close blood relatives who live for the saga.
As for the ostensible Bush references, a reviewer somewhere noted that this isn't quite the right movie to criticize people for seeing things in black and white. But it would be a kick if we learned (a la Palpatine) that Bush actually is also Osama Bin Laden.
As for the ostensible Bush references, a reviewer somewhere noted that this isn't quite the right movie to criticize people for seeing things in black and white. But it would be a kick if we learned (a la Palpatine) that Bush actually is also Osama Bin Laden.
Thursday, May 26, 2005
Musical interlude
Musical note for the likeminded: Brian Eno is releasing, on June 14, his first rock album in 25 years or so. Since I am about to head to JFK (conference in Palo Alto), I suppose his Music for Airports is what I really need, but I am bringing my own supply (have IPod & Walkman, will travel).
A strong recommendation for Belle and Sebastian's just-released Push Barman to Open Old Wounds, a collection of their last few years' singles and EP tracks, perhaps superior to any of their albums since Tigermilk. I already have all the tracks, but if you don't, then try Tigermilk followed by either If You're Feeling Sinister or this.
Also released this week were new albums by Stephen Malkmus and Sleater-Kinney, making this a pretty good week although unfortunately, in my case, not soon enough for my West Coast flight. Oh well, but at least I am still catching up on some old Captain Beefheart albums.
A strong recommendation for Belle and Sebastian's just-released Push Barman to Open Old Wounds, a collection of their last few years' singles and EP tracks, perhaps superior to any of their albums since Tigermilk. I already have all the tracks, but if you don't, then try Tigermilk followed by either If You're Feeling Sinister or this.
Also released this week were new albums by Stephen Malkmus and Sleater-Kinney, making this a pretty good week although unfortunately, in my case, not soon enough for my West Coast flight. Oh well, but at least I am still catching up on some old Captain Beefheart albums.
Sometimes a cliche is not just a cliche
"Orwellian" is one of the most overused words around - but - what else can you really say when the Bush Administration denounces Newsweek for a single-sourced story that we now know was essentially true (i.e., the incidents happened even if the military was not on the verge of confirming this officially), and blaming Newsweek for disturbances that its own on-site military officials said were totally unrelated?
When you think of all the lies and deceptions that the Administration fostered in its rush to Iraq, and the horrendous harm it has done to our country's standing in the Muslim world and elsewhere through all the torture and murder perpetrated through its deliberate policies, this one is so far beyond belief that ... I don't even know how to finish the sentence. Utterly, utterly astonishing. When people in the future look back at this, they will be dumbfounded.
The type of mindset one needs to perpetrate and accept this type of blatant hypocrisy doesn't seem compatible with respect for democratic institutions, which is one reason I worry that the forces behind the Bush Administration are unique in U.S. history.
UPDATE: Looking further through the on-line Times I see that Amnesty International has "listed the abuse of detainees at Abu Ghraib prison in Iraq, the detention of prisoners at Guantánamo Bay, Cuba, and the so-called rendition of prisoners to countries known to practice torture as evidence that the United States 'thumbs its nose at the rule of law and human rights.'"
It would be nice to be able to disagree with this. And from the self-centered perspective of an American, it would be nice if our country's leadership at least did not apply this worldview to domestic affairs.
A bit more from Amnesty International:
"'It's not because the United States is the worst human rights abuser in the world but because it's the most influential,' said Kenneth Roth, the executive director of Human Rights Watch, via phone from New York. 'United States disregard for international human rights standards is damaging those standards,' he said, referring to some governments with poor human rights records 'citing the U.S. record to justify their own.'
In a separate telephone interview, Dr. Schulz of Amnesty International USA acknowledged his organization had used 'strong language' because it felt that 'the United States has betrayed a very fundamental principle that this country stands for.'"
So this is not left wing, Jean Paul Sartre-style hypocrisy and double standards. It is a reflection of how far this country has fallen since January 20, 2001.
When you think of all the lies and deceptions that the Administration fostered in its rush to Iraq, and the horrendous harm it has done to our country's standing in the Muslim world and elsewhere through all the torture and murder perpetrated through its deliberate policies, this one is so far beyond belief that ... I don't even know how to finish the sentence. Utterly, utterly astonishing. When people in the future look back at this, they will be dumbfounded.
The type of mindset one needs to perpetrate and accept this type of blatant hypocrisy doesn't seem compatible with respect for democratic institutions, which is one reason I worry that the forces behind the Bush Administration are unique in U.S. history.
UPDATE: Looking further through the on-line Times I see that Amnesty International has "listed the abuse of detainees at Abu Ghraib prison in Iraq, the detention of prisoners at Guantánamo Bay, Cuba, and the so-called rendition of prisoners to countries known to practice torture as evidence that the United States 'thumbs its nose at the rule of law and human rights.'"
It would be nice to be able to disagree with this. And from the self-centered perspective of an American, it would be nice if our country's leadership at least did not apply this worldview to domestic affairs.
A bit more from Amnesty International:
"'It's not because the United States is the worst human rights abuser in the world but because it's the most influential,' said Kenneth Roth, the executive director of Human Rights Watch, via phone from New York. 'United States disregard for international human rights standards is damaging those standards,' he said, referring to some governments with poor human rights records 'citing the U.S. record to justify their own.'
In a separate telephone interview, Dr. Schulz of Amnesty International USA acknowledged his organization had used 'strong language' because it felt that 'the United States has betrayed a very fundamental principle that this country stands for.'"
So this is not left wing, Jean Paul Sartre-style hypocrisy and double standards. It is a reflection of how far this country has fallen since January 20, 2001.
Monday, May 23, 2005
The wheels of the gods grind slowly ...
Grover Norquist professes puzzlement that his name is plastered all over the infamous Jack Abramoff's billing records. Despite the fact that they work closely together on lobbying and politics alike (to them there is no distinction) and have been close friends and associates since college, Grover insists: "He took the path I didn't take, which was to go make money as a consultant, and I decided to build A.T.R." Don't be so hard on yourself, Grovesterino - may I call you that? - I'm sure you've done fine, too.
If Grover does end up being driven undercover or even doing time, he does at least have a career in comedy to look forward to. Check out this hilarious passage from the above link:
"Earlier this month, Americans for Tax Reform sent letters to the Coushatta tribe of Louisiana and the Saginaw Chippewas of Michigan, saying there 'may be some confusion' about the reason some were invited into White House meetings in earlier years. 'Recent press reports appeared to suggest that some staff of your tribe's previous leadership thought that they were making a contribution to A.T.R. in order to be invited to a White House event,' the letter said."
I wonder how they could have gotten that silly idea?
If Grover does end up being driven undercover or even doing time, he does at least have a career in comedy to look forward to. Check out this hilarious passage from the above link:
"Earlier this month, Americans for Tax Reform sent letters to the Coushatta tribe of Louisiana and the Saginaw Chippewas of Michigan, saying there 'may be some confusion' about the reason some were invited into White House meetings in earlier years. 'Recent press reports appeared to suggest that some staff of your tribe's previous leadership thought that they were making a contribution to A.T.R. in order to be invited to a White House event,' the letter said."
I wonder how they could have gotten that silly idea?
Sunday, May 22, 2005
Best reason yet for 70s nostalgia
William Bundy's "A Tangled Web: The Making of Foreign Policy in the Nixon Presidency" has a final sentence that I find very melancholy now, although it wasn't when Bundy published the book in 1998:
"If there is any single lesson from the Nixon era that stands out above all others, it is that a pattern of deception, of Congress and the American people, is in the end doomed to failure."
Even if bellbottom jeans were tacky, those certainly were the days.
"If there is any single lesson from the Nixon era that stands out above all others, it is that a pattern of deception, of Congress and the American people, is in the end doomed to failure."
Even if bellbottom jeans were tacky, those certainly were the days.
More on the laughable Thomas Friedman
This review is not as funny as the one I linked previously here. But it does show, if you read to the next to last paragraph, that the man has written a huge doorstop on international economics, blurbed by the likes of Nobel economist Joseph Stiglitz, without understanding comparative advantage, which is the single most important idea in international economics and has been known for nearly two centuries.
Saturday, May 21, 2005
David Bradford memorial at Princeton
Dave's memorial was a lovely event, albeit on a horribly cold and wet day, in which it was amazing (even for such an occasion) how completely positive everyone's feeling about him were. Apparently, he was easygoing even as an adolescent (!). Also interesting how he had several different parts of his life that people in one part didn't always know about because he was reticent about personal stuff.
Anyway, here is a copy of my remarks at the ceremony:
The first time I ever talked at any length with David will always be a bright spot in my memory. I was in New York City, because I was considering relocating from Chicago to NYU, and NYU’s law dean, John Sexton, had hooked me up with David so that we could discuss the possibility of running a tax policy colloquium together. I remember this trim, vigorous man with a shock of white hair and an amazingly warm smile plus enthusiasm to match. We took a long walk around the Central Village and Soho, and talked about what we could do. It was the beginning of a 10-year run that ought to have continued for another 10 years at least.
David was great to go to battle with, although by “battle” I just mean trying to have a good and enlightening session that everyone, including us, would learn from and enjoy. And it’s amazing to me, in retrospect, how much his enjoyment contributed to mine and that of everyone else in the room. He enjoyed the dialogue, the jokes when they came, and the attempt to understand things better. And he definitely enjoyed the food. I generally picked the restaurants where we continued the conversations with a small group, and I only realized after the terrible thing had happened how much of my own enjoyment was bound up in finding new places that I hoped David would like.
I have never known anyone as willing and interested as him when it came to discussing and pursuing disagreements in an amiable and open-minded spirit. A mutual friend from another university tells the story of how, while still quite junior, he first got to know David, who at the time was running the Public Economics program at the National Bureau of Economic Research. The colleague who tells this story had written a paper that David was strongly inclined, as an initial matter, to disagree with.
For quite a few eminent people whom I have met in academics, the next step, had they been in David’s position, would have been obvious. They would have thought: this guy’s an idiot; he’s junior and I’m not; I don’t like him; he’s certainly not presenting that paper at my forum.
David’s reaction was different. He found it interesting and noteworthy that someone else, by the appearance of things intelligent and thoughtful, viewed the issue so differently than he did. So he called this much more junior person on the phone and said: let’s get together and discuss it. I gather they hit it off personally, which was not hard to do with David, and, after a number of lengthy discussions, David decided that he agreed with the view the paper took.
Not to make him too much of a teddy bear - David was tough on sloppy thinking, and willing to argue as vigorously as he was willing to be argued with. But his enjoyment of it all, and the total absence of anything resembling anger or vanity or pretense, meant that nearly everyone took it well.
I think of David whenever I pass the coffeehouses in the West Village where we used to meet on Wednesday nights to plan the next day’s session. And of course all the restaurants. There are too many of those places. I miss him when I want to compare notes about an idea, or current events, or someone we both know. It was consistently delightful to spend time with him, and of course I learned a great deal, as I think just about everyone who spent time with him did.
We had all these jokes together, as well as a set of ongoing serious dialogues, whether about topics of professional interest, or the war in Iraq, or Daniel Dennett, or behavioral economics, or the instances where I took a skeptical view of someone’s behavior and he was just too nice to see it that way. He really couldn’t imagine, for example, that other people would ever be rude or nasty or disingenuous, because he so completely lacked any such inclinations himself.
Although obviously life is very unfair sometimes, or we wouldn’t be here today for this occasion, in terms of personal reputation you reap what you sow. Gundel has told me how amazing she and other family members found the outpouring of love and warmth and concern that came in from people around the world who knew David professionally, or even just had met him a couple of times. I myself heard from a lot of people who didn’t want to presume on the family’s time, but who felt the same way about him as do all of us here today.
For myself, the long view to take is simply that I am fortunate to have known David for as long as I did. And a feeling of celebration and joy, not sorrow however strong the grounds for it, is what I know he would have wanted people to express and to feel today. So thanks, David, and much though I will miss you I will be thinking of you in the years ahead as if you were still here.
Anyway, here is a copy of my remarks at the ceremony:
The first time I ever talked at any length with David will always be a bright spot in my memory. I was in New York City, because I was considering relocating from Chicago to NYU, and NYU’s law dean, John Sexton, had hooked me up with David so that we could discuss the possibility of running a tax policy colloquium together. I remember this trim, vigorous man with a shock of white hair and an amazingly warm smile plus enthusiasm to match. We took a long walk around the Central Village and Soho, and talked about what we could do. It was the beginning of a 10-year run that ought to have continued for another 10 years at least.
David was great to go to battle with, although by “battle” I just mean trying to have a good and enlightening session that everyone, including us, would learn from and enjoy. And it’s amazing to me, in retrospect, how much his enjoyment contributed to mine and that of everyone else in the room. He enjoyed the dialogue, the jokes when they came, and the attempt to understand things better. And he definitely enjoyed the food. I generally picked the restaurants where we continued the conversations with a small group, and I only realized after the terrible thing had happened how much of my own enjoyment was bound up in finding new places that I hoped David would like.
I have never known anyone as willing and interested as him when it came to discussing and pursuing disagreements in an amiable and open-minded spirit. A mutual friend from another university tells the story of how, while still quite junior, he first got to know David, who at the time was running the Public Economics program at the National Bureau of Economic Research. The colleague who tells this story had written a paper that David was strongly inclined, as an initial matter, to disagree with.
For quite a few eminent people whom I have met in academics, the next step, had they been in David’s position, would have been obvious. They would have thought: this guy’s an idiot; he’s junior and I’m not; I don’t like him; he’s certainly not presenting that paper at my forum.
David’s reaction was different. He found it interesting and noteworthy that someone else, by the appearance of things intelligent and thoughtful, viewed the issue so differently than he did. So he called this much more junior person on the phone and said: let’s get together and discuss it. I gather they hit it off personally, which was not hard to do with David, and, after a number of lengthy discussions, David decided that he agreed with the view the paper took.
Not to make him too much of a teddy bear - David was tough on sloppy thinking, and willing to argue as vigorously as he was willing to be argued with. But his enjoyment of it all, and the total absence of anything resembling anger or vanity or pretense, meant that nearly everyone took it well.
I think of David whenever I pass the coffeehouses in the West Village where we used to meet on Wednesday nights to plan the next day’s session. And of course all the restaurants. There are too many of those places. I miss him when I want to compare notes about an idea, or current events, or someone we both know. It was consistently delightful to spend time with him, and of course I learned a great deal, as I think just about everyone who spent time with him did.
We had all these jokes together, as well as a set of ongoing serious dialogues, whether about topics of professional interest, or the war in Iraq, or Daniel Dennett, or behavioral economics, or the instances where I took a skeptical view of someone’s behavior and he was just too nice to see it that way. He really couldn’t imagine, for example, that other people would ever be rude or nasty or disingenuous, because he so completely lacked any such inclinations himself.
Although obviously life is very unfair sometimes, or we wouldn’t be here today for this occasion, in terms of personal reputation you reap what you sow. Gundel has told me how amazing she and other family members found the outpouring of love and warmth and concern that came in from people around the world who knew David professionally, or even just had met him a couple of times. I myself heard from a lot of people who didn’t want to presume on the family’s time, but who felt the same way about him as do all of us here today.
For myself, the long view to take is simply that I am fortunate to have known David for as long as I did. And a feeling of celebration and joy, not sorrow however strong the grounds for it, is what I know he would have wanted people to express and to feel today. So thanks, David, and much though I will miss you I will be thinking of you in the years ahead as if you were still here.
Friday, May 20, 2005
Social Security deform
Sometimes I wonder if it makes sense to quote other blogs that are well-known enough (especially compared to mine) that most interested readers might have seen them already. But I couldn't pass up this nugget from Brad DeLong, concerning the Bush Administration's Social Security activities:
"It is a clown show, an episode of stupidity of a jaw-dropping magnitude:
"1. The administration's Social Security gurus shove Bush out there with talking points saying that we need to act now to pass the Bush plan, because starting in 2017 Social Security will start taking resources away from the rest of the government and that's a very bad thing--and then they roll out a plan in which Social Security starts taking resources away from the rest of the government in 2011.
"2. The administration's Social Security gurus shove Bush out there with talking points saying that passing the Bush plan is essential because if we don't the Social Security trust fund balance will hit zero in 2041, and big benefit cuts will then be necessary--and then they roll out a plan in which the Social Security trust fund balance hits zero in 2030.
"3. The administration's Social Security gurus shove Bush out there with talking points about the importance of restoring actuarial balance to Social Security--and then they roll out a plan which closes less than a third of the 75-year funding gap (and refuse to specify the plan in sufficient detail to allow anyone to do a longer-run analysis)."
This is what people mean when they say, a la the Paul O'Neill book, that this is the first Administration in modern U.S. history that does not have a policymaking process.
"It is a clown show, an episode of stupidity of a jaw-dropping magnitude:
"1. The administration's Social Security gurus shove Bush out there with talking points saying that we need to act now to pass the Bush plan, because starting in 2017 Social Security will start taking resources away from the rest of the government and that's a very bad thing--and then they roll out a plan in which Social Security starts taking resources away from the rest of the government in 2011.
"2. The administration's Social Security gurus shove Bush out there with talking points saying that passing the Bush plan is essential because if we don't the Social Security trust fund balance will hit zero in 2041, and big benefit cuts will then be necessary--and then they roll out a plan in which the Social Security trust fund balance hits zero in 2030.
"3. The administration's Social Security gurus shove Bush out there with talking points about the importance of restoring actuarial balance to Social Security--and then they roll out a plan which closes less than a third of the 75-year funding gap (and refuse to specify the plan in sufficient detail to allow anyone to do a longer-run analysis)."
This is what people mean when they say, a la the Paul O'Neill book, that this is the first Administration in modern U.S. history that does not have a policymaking process.
Thursday, May 19, 2005
David Bradford tribute at National Tax Association meeting
These were my comments today on David at an NTA Tax Reform panel that was dedicated to him. Regular readers will note some thematic overlap with my Wall Street Journal piece.
In tax reform circles, David Bradford is best known as a leading, or really the leading, consumption tax advocate. But he was an unusual sort of advocate. In law, we think of an advocate as someone who’s paid to take a position. Thus, if you’re arguing in front of the Supreme Court, it somehow turns out that all issues and precedents favor your client.
Academics who take an advocacy stance in public policy ought to be different than this, but all too often they are not. We could all tell stories about people torturing the data until it confesses, or trimming their sails to retain political influence, or endorsing debased versions of their pet proposals in the hope of making a sale.
David could not have been more different. He was an advocate only in the best sense of having a considered view.
David first encountered tax reform when he went to the Treasury in the 1970s and developed what became Blueprints. During that time, he acquired what became a lifelong preference for consumption taxation. This preference stood on two main grounds. The first and main one was that he didn’t think it made sense to base a portion of distribution policy, as does an income tax, on whether one has a taste for sooner or later consumption. Second, as an economist who was willing to talk to tax lawyers – a trait I always found endearing – he came to see just how much complexity and tax planning come out of trying to tax the second half of the Haig-Simons income formula, change in net worth.
While a consumption tax advocate, David was one of such almost excessive intellectual scrupulousness that he absolutely refused to make quite reasonable arguments in its favor that weren’t at the core of his considered view, such as that a consumption tax might be more efficient or might increase national saving. He also objected strongly to claims that the transition to a consumption tax could result in a lump sum wealth tax that people would neither see coming nor expect to recur. He did a great deal to advance our understanding of income to consumption tax transition, which he showed amounted to wiping out income tax basis. But I think he started from the instinct that the claim of a free lunch from an efficiency standpoint was simply too convenient to be true.
David came to worry so much about transition when the rates change from year to year in a cash flow style tax that he spent much of his last few years trying to fix the problem. He actually made the X-tax a lot more complicated-looking so that rate changes wouldn’t cause big distortions or anomalies at the boundary between tax years.
Needless to say, this was not a problem that he needed to address in terms of the politics of promoting the X-tax. If anything, he was making his system a harder sell by muddying the optics, but he did it because he actually cared above all about intellectual scrupulousness and about a system that would work as well as possible in practice. He would have said: leave it to the politicians to make omissions or compromises that worsened the system but made it enactable. That wasn’t his job.
The funny thing during this period was how David kept moving towards income tax-style accounting, reflecting that a Haig-Simons income tax, or even one using accounting rules to get there approximately, doesn’t face significant transition issues from rate changes. I used to kid David that, once he finally persuaded everyone else in the world to favor a consumption tax, he would turn into the world’s last remaining income tax advocate.
It’s hard to predict the future, & I’m personally not sanguine that a progressive consumption tax, which he over time persuaded me to favor, is actually where we are headed. But if we do ever get there, David will deserve a lot of credit for laying the intellectual groundwork, both in terms of how to think about the systems and in terms of institutional design.
If you compare David to Henry Simons, who did so much to make comprehensive income taxation a dominant intellectual norm, the comparison is very much in David’s favor. Simons’ main argument for income taxation was formalistic. He argued: we have an income tax, and this is what income really is. Thus, in his book Personal Income Taxation, he disputed Irving Fisher’s advocacy of a consumption style base mainly on the ground that it wasn’t really “income.” David believed in a much more fundamental style of policy analysis.
Indeed, one of David’s greatest strengths was his insistence on breaking everything down to fundamentals. For example, whenever he heard anything about taxing capital, he would say: What’s that? There is risk. There is waiting. There are returns to labor or to having a good opportunity or a good idea. But “capital,” in the way it is often used, doesn’t mean anything, or else it means too many things.
Everyone who is interested in tax reform could learn a lot from David Bradford. If they decide to agree with him about the X-tax or the Blueprints cash flow tax, great. But I personally would settle for general acceptance not just of his level of intellectual scrupulousness but also of his insistence on careful and precise analysis.
In tax reform circles, David Bradford is best known as a leading, or really the leading, consumption tax advocate. But he was an unusual sort of advocate. In law, we think of an advocate as someone who’s paid to take a position. Thus, if you’re arguing in front of the Supreme Court, it somehow turns out that all issues and precedents favor your client.
Academics who take an advocacy stance in public policy ought to be different than this, but all too often they are not. We could all tell stories about people torturing the data until it confesses, or trimming their sails to retain political influence, or endorsing debased versions of their pet proposals in the hope of making a sale.
David could not have been more different. He was an advocate only in the best sense of having a considered view.
David first encountered tax reform when he went to the Treasury in the 1970s and developed what became Blueprints. During that time, he acquired what became a lifelong preference for consumption taxation. This preference stood on two main grounds. The first and main one was that he didn’t think it made sense to base a portion of distribution policy, as does an income tax, on whether one has a taste for sooner or later consumption. Second, as an economist who was willing to talk to tax lawyers – a trait I always found endearing – he came to see just how much complexity and tax planning come out of trying to tax the second half of the Haig-Simons income formula, change in net worth.
While a consumption tax advocate, David was one of such almost excessive intellectual scrupulousness that he absolutely refused to make quite reasonable arguments in its favor that weren’t at the core of his considered view, such as that a consumption tax might be more efficient or might increase national saving. He also objected strongly to claims that the transition to a consumption tax could result in a lump sum wealth tax that people would neither see coming nor expect to recur. He did a great deal to advance our understanding of income to consumption tax transition, which he showed amounted to wiping out income tax basis. But I think he started from the instinct that the claim of a free lunch from an efficiency standpoint was simply too convenient to be true.
David came to worry so much about transition when the rates change from year to year in a cash flow style tax that he spent much of his last few years trying to fix the problem. He actually made the X-tax a lot more complicated-looking so that rate changes wouldn’t cause big distortions or anomalies at the boundary between tax years.
Needless to say, this was not a problem that he needed to address in terms of the politics of promoting the X-tax. If anything, he was making his system a harder sell by muddying the optics, but he did it because he actually cared above all about intellectual scrupulousness and about a system that would work as well as possible in practice. He would have said: leave it to the politicians to make omissions or compromises that worsened the system but made it enactable. That wasn’t his job.
The funny thing during this period was how David kept moving towards income tax-style accounting, reflecting that a Haig-Simons income tax, or even one using accounting rules to get there approximately, doesn’t face significant transition issues from rate changes. I used to kid David that, once he finally persuaded everyone else in the world to favor a consumption tax, he would turn into the world’s last remaining income tax advocate.
It’s hard to predict the future, & I’m personally not sanguine that a progressive consumption tax, which he over time persuaded me to favor, is actually where we are headed. But if we do ever get there, David will deserve a lot of credit for laying the intellectual groundwork, both in terms of how to think about the systems and in terms of institutional design.
If you compare David to Henry Simons, who did so much to make comprehensive income taxation a dominant intellectual norm, the comparison is very much in David’s favor. Simons’ main argument for income taxation was formalistic. He argued: we have an income tax, and this is what income really is. Thus, in his book Personal Income Taxation, he disputed Irving Fisher’s advocacy of a consumption style base mainly on the ground that it wasn’t really “income.” David believed in a much more fundamental style of policy analysis.
Indeed, one of David’s greatest strengths was his insistence on breaking everything down to fundamentals. For example, whenever he heard anything about taxing capital, he would say: What’s that? There is risk. There is waiting. There are returns to labor or to having a good opportunity or a good idea. But “capital,” in the way it is often used, doesn’t mean anything, or else it means too many things.
Everyone who is interested in tax reform could learn a lot from David Bradford. If they decide to agree with him about the X-tax or the Blueprints cash flow tax, great. But I personally would settle for general acceptance not just of his level of intellectual scrupulousness but also of his insistence on careful and precise analysis.
Wednesday, May 18, 2005
Nuking the nuclear Doctor Frist
Why, in this blog, am I taking such an interest in the nuclear option, which isn't exactly a tax, budgetary, or entitlements topic?
Well, if I plug the Go-Betweens and Fiery Furnaces here, then why not the nuclear option. But there is another reason, bringing it closer to home professionally.
I'm currently writing a book, tentatively entitled "The Use and Abuse of Fiscal Language," that discusses the often poor relationship between fiscal terminology (taxes, spending, deficits, etc.) and underlying substance, such as the allocative and distributional effects of policies however labeled. One of my interests in the book is the long-term fiscal problem we face - in part how to think about it and devise measures for various distinct considerations (such as effects on generational distribution as opposed to policy sustainability), but also just how bad the problem may get and why our political system is letting it potentially get so bad.
Rightly or wrongly, I have discerned that a very important cause is the crazy, and in a historical sense un-American (just as Bin Ladenism and fascism are alien to our best traditions) ideology of the radical right that has taken over first the Republican Party and then, more tenuously, the country. Other instances of seeing these guys at work - lying and twisting language, insisting on total victory, turning on cue like a flock of birds, shredding any notion of cooperation with political rivals or of valuing legal and institutional norms, etc. - are therefore of professional interest, you see. There, I've explained it.
If there's one thing I look forward to, by the way, it's the day (if it comes) when I get to return to being a plague-on-both-your-houses-style political observer, rather than being so appalled by one side that I am forced to sound like I am on the other team however out of place I would actually feel there.
Anyway, after this lengthy windup, here's the pitch, a delightful excerpt from today's Senate floor debate, courtesy of the "Think Progress" website:
SEN. SCHUMER: Isn’t it correct that on March 8, 2000, my colleague [Sen. Frist] voted to uphold the filibuster of Judge Richard Paez?
SEN. FRIST: The president, the um, in response, uh, the Paez nomination - we’ll come back and discuss this further. … Actually I’d like to, and it really brings to what I believe - a point - and it really brings to, oddly, a point, what is the issue. The issue is we have leadership-led partisan filibusters that have, um, obstructed, not one nominee, but two, three, four, five, six, seven, eight, nine, ten, in a routine way.
Gee, that Frist is one smooth talker. Silver-tongued devil ...
Well, if I plug the Go-Betweens and Fiery Furnaces here, then why not the nuclear option. But there is another reason, bringing it closer to home professionally.
I'm currently writing a book, tentatively entitled "The Use and Abuse of Fiscal Language," that discusses the often poor relationship between fiscal terminology (taxes, spending, deficits, etc.) and underlying substance, such as the allocative and distributional effects of policies however labeled. One of my interests in the book is the long-term fiscal problem we face - in part how to think about it and devise measures for various distinct considerations (such as effects on generational distribution as opposed to policy sustainability), but also just how bad the problem may get and why our political system is letting it potentially get so bad.
Rightly or wrongly, I have discerned that a very important cause is the crazy, and in a historical sense un-American (just as Bin Ladenism and fascism are alien to our best traditions) ideology of the radical right that has taken over first the Republican Party and then, more tenuously, the country. Other instances of seeing these guys at work - lying and twisting language, insisting on total victory, turning on cue like a flock of birds, shredding any notion of cooperation with political rivals or of valuing legal and institutional norms, etc. - are therefore of professional interest, you see. There, I've explained it.
If there's one thing I look forward to, by the way, it's the day (if it comes) when I get to return to being a plague-on-both-your-houses-style political observer, rather than being so appalled by one side that I am forced to sound like I am on the other team however out of place I would actually feel there.
Anyway, after this lengthy windup, here's the pitch, a delightful excerpt from today's Senate floor debate, courtesy of the "Think Progress" website:
SEN. SCHUMER: Isn’t it correct that on March 8, 2000, my colleague [Sen. Frist] voted to uphold the filibuster of Judge Richard Paez?
SEN. FRIST: The president, the um, in response, uh, the Paez nomination - we’ll come back and discuss this further. … Actually I’d like to, and it really brings to what I believe - a point - and it really brings to, oddly, a point, what is the issue. The issue is we have leadership-led partisan filibusters that have, um, obstructed, not one nominee, but two, three, four, five, six, seven, eight, nine, ten, in a routine way.
Gee, that Frist is one smooth talker. Silver-tongued devil ...
Memorials for a good man
Tomorrow (Thursday) I will be in Washington, giving a brief memorial talk concerning David Bradford at a National Tax Association tax reform panel. The next day, I will be in Princeton giving a brief talk concerning David at a memorial service on campus. Completely different talks, of course, because one is a more professional setting and the other more personal.
I will post both talks here after giving them.
I will post both talks here after giving them.
Tuesday, May 17, 2005
Update on the nuclear option
Norman Ornstein at AEI explains the utter lawlessness of the "nuclear option" with far more precise institutional knowledge than I could muster on this topic in my earlier post:
The Senate is on the verge of meltdown over the nuclear option, an unprecedented step that would shatter 200 years of precedent over rules changes and open up a Pandora's box of problems in the years ahead. The shaky bipartisanship that holds the Senate together--in a way that is virtually absent in the House--could be erased. Major policy problems could be caught up in the conflict. The Senate itself would never be the same.
Let us put aside for now the puerile arguments over whether judicial filibusters are unprecedented: They clearly, flatly, are not. Instead, let's look at the means used to achieve the goal of altering Senate procedures to block filibusters on judicial nominations.
Without getting into the parliamentary minutiae--the options are dizzying, including whether points of order are "nested"--one reality is clear. To get to a point where the Senate decides by majority that judicial filibusters are dilatory and/or unconstitutional, the Senate will have to do something it has never done before.
Richard Beth of the Congressional Research Service, in a detailed report on the options for changing Senate procedures, refers to it with typical understatement as "an extraordinary proceeding at variance with established procedure."
To make this happen, the Senate will have to get around the clear rules and precedents, set and regularly reaffirmed over 200 years, that allow debate on questions of constitutional interpretation--debate which itself can be filibustered. It will have to do this in a peremptory fashion, ignoring or overruling the Parliamentarian. And it will establish, beyond question, a new precedent. Namely, that whatever the Senate rules say--regardless of the view held since the Senate's beginnings that it is a continuing body with continuing rules and precedents--they can be ignored or reversed at any given moment on the whim of the current majority.
There have been times in the past when Senate leaders and presidents have been frustrated by inaction in the Senate and have contemplated action like this. Each time, the leaders and presidents drew back from the precipice. They knew that the short-term gain of breaking minority obstruction would come at the price of enormous long-term damage--turning a deliberative process into something akin to government by the Queen of Hearts in "Alice in Wonderland."
Rule XXII is clear about extended debate and cloture requirements, both for changing Senate rules (two-thirds required) and any other action by the Senate, nominations or legislation (60 Senators required). Ignored in this argument has been Senate Rule XXXI, which makes clear that there is neither guarantee nor expectation that nominations made by the president get an up-or-down vote, or indeed any action at all.
It reads: "Nominations neither confirmed nor rejected during the session at which they are made shall not be acted upon at any succeeding session without being again made to the Senate by the President; and if the Senate shall adjourn or take a recess for more than thirty days, all nominations pending and not finally acted upon at the time of taking such adjournment or recess shall be returned by the Secretary to the President, and shall not again be considered unless they shall again be made to the Senate by the President."
By invoking their self-described nuclear option without changing the rules, a Senate majority will effectively erase them. A new precedent will be in order--one making it easy and tempting to erase future filibusters on executive nominations and bills. Make no mistake about that.
The precedent set--a majority ignoring its own rules to override longstanding practice in one area--would almost inexorably make the Senate a mirror image of the House, moving the American system several steps closer to a plebiscitary model of government, and the Senate closer to the unfortunate House model of a cesspool of partisan rancor.
The Senate is on the verge of meltdown over the nuclear option, an unprecedented step that would shatter 200 years of precedent over rules changes and open up a Pandora's box of problems in the years ahead. The shaky bipartisanship that holds the Senate together--in a way that is virtually absent in the House--could be erased. Major policy problems could be caught up in the conflict. The Senate itself would never be the same.
Let us put aside for now the puerile arguments over whether judicial filibusters are unprecedented: They clearly, flatly, are not. Instead, let's look at the means used to achieve the goal of altering Senate procedures to block filibusters on judicial nominations.
Without getting into the parliamentary minutiae--the options are dizzying, including whether points of order are "nested"--one reality is clear. To get to a point where the Senate decides by majority that judicial filibusters are dilatory and/or unconstitutional, the Senate will have to do something it has never done before.
Richard Beth of the Congressional Research Service, in a detailed report on the options for changing Senate procedures, refers to it with typical understatement as "an extraordinary proceeding at variance with established procedure."
To make this happen, the Senate will have to get around the clear rules and precedents, set and regularly reaffirmed over 200 years, that allow debate on questions of constitutional interpretation--debate which itself can be filibustered. It will have to do this in a peremptory fashion, ignoring or overruling the Parliamentarian. And it will establish, beyond question, a new precedent. Namely, that whatever the Senate rules say--regardless of the view held since the Senate's beginnings that it is a continuing body with continuing rules and precedents--they can be ignored or reversed at any given moment on the whim of the current majority.
There have been times in the past when Senate leaders and presidents have been frustrated by inaction in the Senate and have contemplated action like this. Each time, the leaders and presidents drew back from the precipice. They knew that the short-term gain of breaking minority obstruction would come at the price of enormous long-term damage--turning a deliberative process into something akin to government by the Queen of Hearts in "Alice in Wonderland."
Rule XXII is clear about extended debate and cloture requirements, both for changing Senate rules (two-thirds required) and any other action by the Senate, nominations or legislation (60 Senators required). Ignored in this argument has been Senate Rule XXXI, which makes clear that there is neither guarantee nor expectation that nominations made by the president get an up-or-down vote, or indeed any action at all.
It reads: "Nominations neither confirmed nor rejected during the session at which they are made shall not be acted upon at any succeeding session without being again made to the Senate by the President; and if the Senate shall adjourn or take a recess for more than thirty days, all nominations pending and not finally acted upon at the time of taking such adjournment or recess shall be returned by the Secretary to the President, and shall not again be considered unless they shall again be made to the Senate by the President."
By invoking their self-described nuclear option without changing the rules, a Senate majority will effectively erase them. A new precedent will be in order--one making it easy and tempting to erase future filibusters on executive nominations and bills. Make no mistake about that.
The precedent set--a majority ignoring its own rules to override longstanding practice in one area--would almost inexorably make the Senate a mirror image of the House, moving the American system several steps closer to a plebiscitary model of government, and the Senate closer to the unfortunate House model of a cesspool of partisan rancor.
Silly season at the US Treasury Department
The New York Times reports that the Bush Administration, or more specifically the Treasury Department (although I suspect political input), is now yelling at China for keeping the dollar too strong against the Chinese yuan by buying hundreds of billions of dollars in Treasury securities. Indeed, we are apparently threatening unspecified retaliation.
This is pretty hilarious on several levels. One is that the Chinese are subsidizing us by enabling us to buy their imports more cheaply. But the main one is that the Chinese are contributing enormously to funding our profligate budget policy by gobbling up all those Treasuries. Who knows when the "hard landing" would start if they weren't doing it? Moreover, I would say they are being very unwise from their own financial standpoint. Not only they are probably quite under-diversified, but they are making what strikes me as a very risky bet, given the long-term U.S. budget picture and evident lack of political will to start addressing it seriously.
Imagine if the Chinese saw the error of their ways, or bowed to the threat, by changing their market stance on US Treasuries from buy to sell. The ramifications would be world-wide, but we would probably feel them the most.
How are we planning to retaliate, anyway? Maybe by defaulting on the bonds or printing money to devalue them? That's probably the best threat we have in terms of effects on them, leaving aside the effects on us.
In making these threats, the Bush Administration reminds me of the story about the scorpion that stung the frog that was carrying it across the stream. "Why did you do that?" the frog asked as it started to die and the scorpion started to drown. "It's just my nature," answered the scorpion.
This is pretty hilarious on several levels. One is that the Chinese are subsidizing us by enabling us to buy their imports more cheaply. But the main one is that the Chinese are contributing enormously to funding our profligate budget policy by gobbling up all those Treasuries. Who knows when the "hard landing" would start if they weren't doing it? Moreover, I would say they are being very unwise from their own financial standpoint. Not only they are probably quite under-diversified, but they are making what strikes me as a very risky bet, given the long-term U.S. budget picture and evident lack of political will to start addressing it seriously.
Imagine if the Chinese saw the error of their ways, or bowed to the threat, by changing their market stance on US Treasuries from buy to sell. The ramifications would be world-wide, but we would probably feel them the most.
How are we planning to retaliate, anyway? Maybe by defaulting on the bonds or printing money to devalue them? That's probably the best threat we have in terms of effects on them, leaving aside the effects on us.
In making these threats, the Bush Administration reminds me of the story about the scorpion that stung the frog that was carrying it across the stream. "Why did you do that?" the frog asked as it started to die and the scorpion started to drown. "It's just my nature," answered the scorpion.
Monday, May 16, 2005
A not very good idea
Michael Graetz's tax reform idea, which Graetz pushes at every possible juncture like a little kid trying to let the teacher know that he really, really needs to go to the bathroom, has been getting some play lately, so I thought I would address it.
On the plus side, I decided not to call it a "bad idea" in the heading of this entry, because that would be overstating things considerably. Bad compared to what? Surely better than present law. But bad, I would say, compared to some other prominently discussed tax reform ideas, such as the X-tax or the cash flow consumption tax.
Graetz's big idea is to combine the income tax with the consumption tax, having a flat-rate version of the latter apply to everyone while the income tax applies only to people with taxable income above $X (say, $100,000). In his 1997 book, in order to make the rates sound good, he very sneakily quoted estimates concerning revenue-neutral tax rates that were unrealistic because they had what tax analysts call a "cliff" like you wouldn't believe. To illustrate, suppose that his income tax rate was 25%, and that his version would only apply to people who earned $100,00 or more. He pitched rates that were based on the idea that someone with income of $99,999.99 would pay no income tax, while someone at $100,000 would pay $25,000. He realized that no sensible system could actually be designed this way, but wanted his sales pitch to sound good and evidently did not much care if this reflected trickery.
But on to the Graetz plan. Its main point is to eliminate, he says, 100,000,000 unneeded tax returns. After the gambit I described above, one is hardly inclined to trust him on this number. But yes, all else equal, it would be nice if fewer people, especially in the lower ranges, needed to worry about filing income tax returns.
Keep in mind, however, that poorer people would still have to figure out income, earnings, or some such thing for various other purposes, such as the earned income tax credit (whatever form it would now take), along with welfare, Food Stamps, Medicaid, rent subsidies, etc. So he's really reducing compliance burdens for the middle class, not the poor. Also, what about home mortgage interest deductions, charitable contribution deductions, etc.? Not that we necessarily need these things, the former especially, but does it really seem politically plausible that we won't still have them? So we are now probably down way below 100,000,000 fewer returns.
Thus, the benefit Graetz trumpets is being greatly oversold. How about what he doesn't do?
The really big money, in terms of administrative waste from our current system, is in business taxation and the upper income echelons, not the folks at the bottom, who may find their tax returns annoying but only spend limited resources on planning and return preparation. Think of all the billions of dollars that businesses spend on tax planning, ranging from the totally permissible to outright sheltering. A company can't even raise funds without a lot of wasteful tax planning going on in order to determine what labels to put, for federal income tax purposes, on the instruments it issues (e.g. debt, equity, options, etc.). Rich people as well as businesses spend enormous resources on tax planning and compliance, constituting waste from a societal standpoint even if it is completely above-board. All this is due far less to deliberate income tax preferences than to structural problems with the existing income tax (the realization requirement, the debt versus equity distinction in corporate tax law, etc.).
This enormous and costly mess would remain intact under Graetz's scheme, except perhaps for a minor benefit from income tax rate reduction, whereas the X-tax and the cash flow consumption tax would reduce the tax planning and compliance issues very substantially.
So Graetz's plan, which is predicated on reducing administrative and compliance costs, almost completely misses the predominant source of such costs. Good job, Michael.
Lately Graetz has been saying that the way to transition into his system politiclaly is by repealing the regular tax and letting the alternative minimum tax (AMT) take over. This suggesion is not entirely unmotivated, I would guess, by a tincture of vanity. Graetz proposed replacement of the regular tax with the AMT back in the 1980s, and thus he may think that he will look like a prophet if it actually happens now. By the way, he failed to foresee in the 1980s what a mess it would be when both systems were applying at the same time, as has been increasingly happening recently.
What he conveniently overlooks today is the fact that the AMT these days is rather a mess, and not really the system one would choose as a tax reform template. For example, it does not allow personal exemptions for dependent children, whereas family size clearly should affect tax liability. (See my recent article, posted on SSRN, entitled "Households and the Fiscal System," available here) The AMT also unreasonably denies what the Code calls "miscellaneous itemized deductions" for certain costs of earning income. And the AMT doesn't allow state and local income tax deductions to individuals. Thanks a lot, say the blue states. In truth, there is something to be said for denying these deductions, but once again this is an issue that needs to be tackled directly. We are not going to back into it just by purporting to use the AMT, and once we are adjusting the base to include elements of the regular tax it is no longer quite true, in any meaningful way, that we are keeping one tax and dropping the other.
Although I am expecting little from the Tax Reform Commission given the overall political context (otherwise I might hope for something, as there are some very good people there), I would certainly be disappointed if the Graetz plan was the best they could come up with. There are much better plans out there, and I hope they will have the good sense to say so.
On the plus side, I decided not to call it a "bad idea" in the heading of this entry, because that would be overstating things considerably. Bad compared to what? Surely better than present law. But bad, I would say, compared to some other prominently discussed tax reform ideas, such as the X-tax or the cash flow consumption tax.
Graetz's big idea is to combine the income tax with the consumption tax, having a flat-rate version of the latter apply to everyone while the income tax applies only to people with taxable income above $X (say, $100,000). In his 1997 book, in order to make the rates sound good, he very sneakily quoted estimates concerning revenue-neutral tax rates that were unrealistic because they had what tax analysts call a "cliff" like you wouldn't believe. To illustrate, suppose that his income tax rate was 25%, and that his version would only apply to people who earned $100,00 or more. He pitched rates that were based on the idea that someone with income of $99,999.99 would pay no income tax, while someone at $100,000 would pay $25,000. He realized that no sensible system could actually be designed this way, but wanted his sales pitch to sound good and evidently did not much care if this reflected trickery.
But on to the Graetz plan. Its main point is to eliminate, he says, 100,000,000 unneeded tax returns. After the gambit I described above, one is hardly inclined to trust him on this number. But yes, all else equal, it would be nice if fewer people, especially in the lower ranges, needed to worry about filing income tax returns.
Keep in mind, however, that poorer people would still have to figure out income, earnings, or some such thing for various other purposes, such as the earned income tax credit (whatever form it would now take), along with welfare, Food Stamps, Medicaid, rent subsidies, etc. So he's really reducing compliance burdens for the middle class, not the poor. Also, what about home mortgage interest deductions, charitable contribution deductions, etc.? Not that we necessarily need these things, the former especially, but does it really seem politically plausible that we won't still have them? So we are now probably down way below 100,000,000 fewer returns.
Thus, the benefit Graetz trumpets is being greatly oversold. How about what he doesn't do?
The really big money, in terms of administrative waste from our current system, is in business taxation and the upper income echelons, not the folks at the bottom, who may find their tax returns annoying but only spend limited resources on planning and return preparation. Think of all the billions of dollars that businesses spend on tax planning, ranging from the totally permissible to outright sheltering. A company can't even raise funds without a lot of wasteful tax planning going on in order to determine what labels to put, for federal income tax purposes, on the instruments it issues (e.g. debt, equity, options, etc.). Rich people as well as businesses spend enormous resources on tax planning and compliance, constituting waste from a societal standpoint even if it is completely above-board. All this is due far less to deliberate income tax preferences than to structural problems with the existing income tax (the realization requirement, the debt versus equity distinction in corporate tax law, etc.).
This enormous and costly mess would remain intact under Graetz's scheme, except perhaps for a minor benefit from income tax rate reduction, whereas the X-tax and the cash flow consumption tax would reduce the tax planning and compliance issues very substantially.
So Graetz's plan, which is predicated on reducing administrative and compliance costs, almost completely misses the predominant source of such costs. Good job, Michael.
Lately Graetz has been saying that the way to transition into his system politiclaly is by repealing the regular tax and letting the alternative minimum tax (AMT) take over. This suggesion is not entirely unmotivated, I would guess, by a tincture of vanity. Graetz proposed replacement of the regular tax with the AMT back in the 1980s, and thus he may think that he will look like a prophet if it actually happens now. By the way, he failed to foresee in the 1980s what a mess it would be when both systems were applying at the same time, as has been increasingly happening recently.
What he conveniently overlooks today is the fact that the AMT these days is rather a mess, and not really the system one would choose as a tax reform template. For example, it does not allow personal exemptions for dependent children, whereas family size clearly should affect tax liability. (See my recent article, posted on SSRN, entitled "Households and the Fiscal System," available here) The AMT also unreasonably denies what the Code calls "miscellaneous itemized deductions" for certain costs of earning income. And the AMT doesn't allow state and local income tax deductions to individuals. Thanks a lot, say the blue states. In truth, there is something to be said for denying these deductions, but once again this is an issue that needs to be tackled directly. We are not going to back into it just by purporting to use the AMT, and once we are adjusting the base to include elements of the regular tax it is no longer quite true, in any meaningful way, that we are keeping one tax and dropping the other.
Although I am expecting little from the Tax Reform Commission given the overall political context (otherwise I might hope for something, as there are some very good people there), I would certainly be disappointed if the Graetz plan was the best they could come up with. There are much better plans out there, and I hope they will have the good sense to say so.
The death of law and rules
One under-appreciated aspect of the ongoing "nuclear option" controversy in the U.S. Senate is what it tells us about the current health of the idea, predominant in U.S. political culture for the last couple of centuries, that laws and rules should be followed in an honest way. Apparently very few on the right believe in this idea any more (despite all the blather about "strict constructionist" judges), and without it democracy and the rule of law are in great danger.
Whatever the merits of filibusters - and certainly both sides are wildly opportunistic on this question - it is unambiguously the case that the "nuclear option" gambit is unlawful, albeit that there is no enforcement mechanism to stop it if it gets the 50 votes needed to let Cheney settle it.
The basic underlying point here is that the Senate governs itself by rules that cannot be changed without 60 or 67 votes. But interpretation of the existing rules requires only a majority vote. This is a sensible and workable way to run things. Both sides may want some measure of minority protection since they know they will occasionally be in the minority. (Call it risk aversion.) If everything required 60+ votes, then only a super-majority could ever do anything. But if everything required only 51 votes, there would be no minority protection.
So the existing distinction is a reasonable and sensible way to carve things up. But it requires some modicum of good faith behavior in interpreting what the current rules say. Inevitably there are ambiguities about whether a given motion is plausible rule interpretation or rule change, but there are also very clear cases on one side of the line or the other.
Ruling filibusters of judicial nominations improper under the current rules is unambiguously a rule change, not rule interpretation. And the argument that the existing rule is unconstitutional, because the Senate is supposed to advise & consent on nominations is so ludicrous, given the Senate's leeway to decide its internal rules that determine how it decides whether to consent, that even the National Review and Wall Street Journal (I think both, though I'm not 100% sure) have admitted as much.
Acting unlawfully, and in bad faith given the rules, used to be frowned at, but no more. Not just sleazoid politicians but conservative megaphones such as the NR & WSJ take the view that this just doesn't matter. All that matters is getting the results they want, winning the showdown, etc.
This is how Saddam Hussein used to think about law, and no doubt still does.
And of course it is no isolated instance. Think of my colleague in law teaching, John Yoo at Berkeley, treating the international anti-torture rules as merely so many loopholes to be skated through, and then proclaiming that the 2004 election had completely settled the issue. Or think more generally about the Bush Administration/neocon view that in the international realm laws and rules merely constrain the US, which can do whatever it likes since it supposedly has enough power. It never occurs to them that laws and rules can constrain others, too. But the domestic manifestations of this attitude are more troubling if you are an American and thus subject to what they do domestically.
These are not your grandfather's conservatives. Edmund Burke would be physically ill if he saw these people in action. And the question of where it stops is pretty clear - it doesn't, other than among the libertarian conservative wing that understandably (and thank goodness) is out of sympathy with a lot of what this Administration does.
Suppose a right-wing President used a Reichstag fire-type pretext to declare martial law and suspend elections, constitutional rights, etc. What portion of the conservative commentariat, or of the Republican membership in Congress (leaving aside about 5 or 6 Senators, and about 2 members of the House) would object? Is there any possible ground on which they would even consider objecting?
Whatever the merits of filibusters - and certainly both sides are wildly opportunistic on this question - it is unambiguously the case that the "nuclear option" gambit is unlawful, albeit that there is no enforcement mechanism to stop it if it gets the 50 votes needed to let Cheney settle it.
The basic underlying point here is that the Senate governs itself by rules that cannot be changed without 60 or 67 votes. But interpretation of the existing rules requires only a majority vote. This is a sensible and workable way to run things. Both sides may want some measure of minority protection since they know they will occasionally be in the minority. (Call it risk aversion.) If everything required 60+ votes, then only a super-majority could ever do anything. But if everything required only 51 votes, there would be no minority protection.
So the existing distinction is a reasonable and sensible way to carve things up. But it requires some modicum of good faith behavior in interpreting what the current rules say. Inevitably there are ambiguities about whether a given motion is plausible rule interpretation or rule change, but there are also very clear cases on one side of the line or the other.
Ruling filibusters of judicial nominations improper under the current rules is unambiguously a rule change, not rule interpretation. And the argument that the existing rule is unconstitutional, because the Senate is supposed to advise & consent on nominations is so ludicrous, given the Senate's leeway to decide its internal rules that determine how it decides whether to consent, that even the National Review and Wall Street Journal (I think both, though I'm not 100% sure) have admitted as much.
Acting unlawfully, and in bad faith given the rules, used to be frowned at, but no more. Not just sleazoid politicians but conservative megaphones such as the NR & WSJ take the view that this just doesn't matter. All that matters is getting the results they want, winning the showdown, etc.
This is how Saddam Hussein used to think about law, and no doubt still does.
And of course it is no isolated instance. Think of my colleague in law teaching, John Yoo at Berkeley, treating the international anti-torture rules as merely so many loopholes to be skated through, and then proclaiming that the 2004 election had completely settled the issue. Or think more generally about the Bush Administration/neocon view that in the international realm laws and rules merely constrain the US, which can do whatever it likes since it supposedly has enough power. It never occurs to them that laws and rules can constrain others, too. But the domestic manifestations of this attitude are more troubling if you are an American and thus subject to what they do domestically.
These are not your grandfather's conservatives. Edmund Burke would be physically ill if he saw these people in action. And the question of where it stops is pretty clear - it doesn't, other than among the libertarian conservative wing that understandably (and thank goodness) is out of sympathy with a lot of what this Administration does.
Suppose a right-wing President used a Reichstag fire-type pretext to declare martial law and suspend elections, constitutional rights, etc. What portion of the conservative commentariat, or of the Republican membership in Congress (leaving aside about 5 or 6 Senators, and about 2 members of the House) would object? Is there any possible ground on which they would even consider objecting?
Friday, May 13, 2005
Actual Social Security reform
For those who want a broader and more thoughtful take on Social Security reform than either side has been providing these days, I recommend this piece by Eugene Steuerle. Even if you don't agree with it all (and I agree with most of it), it goes way beyond shrieking like a parrot either "Private accounts - private accounts" or "No change needed yet - no change needed yet."
Even so thoughtful a proposal as the Diamond-Orszag plan, described in detail here under the April 7 date, is constrained by the terms of the exercise, which, rather than attempting full optimization, largely consisted of showing how one could restore Social Security's solvency without greatly changing its policy content.
Even so thoughtful a proposal as the Diamond-Orszag plan, described in detail here under the April 7 date, is constrained by the terms of the exercise, which, rather than attempting full optimization, largely consisted of showing how one could restore Social Security's solvency without greatly changing its policy content.
Casting idea
Perhaps these two could do A Simple Life together in 2009, now that Nicole Richie is said to be feuding with one of them (I forget which).
Friday, May 06, 2005
What a surprise
I am shocked, shocked by this latest revelation that President Bush willfully pushed for false intelligence if necessary (and it was) to support the decision he had made by summer 2002 (long before he piously declared that it was a last resort) to invade Iraq.
Wednesday, May 04, 2005
There is a time to be big, not petty - but the time isn't now
If the Yankees' collapse is for real, and I am increasingly thinking that perhaps it is, I must confess that I will enjoy every second of it, at least for a long while. I have begun watching their games, which I can't remember ever doing before. I am not vengeful, however. After ten or so lean years to make up for everything up to now, I will have no objection to their winning the AL pennant once every 14 years and the World Series once every 30 years (i.e., right at the major league average).
Monday, May 02, 2005
Why and what sort of Social Security
Bush's plan, everyone now understands, is to turn Social Security into a program just for the poor.
The standard liberal/left/Democratic response is offered, naturally enough, by Paul Krugman, who says:
"It's an adage that programs for the poor always turn into poor programs. That is, once a program is defined as welfare, it becomes a target for budget cuts.
You can see this happening right now to Medicaid ..."
My take on this is quite a bit different than Krugman's, although the quoted statement has some truth. (But then again, over the years Medicaid has grown quite rapidly. The latest proposed cuts do not at this point establish much of a trend. They are fairly small and contested even among Republicans. Plus Bush wants to cut Social Security for the middle class as well as Medicaid for the poor.)
Anyway, let's grant Krugman's point for the sake of argument. The problem with it, as an argument for keeping Social Security a middle class program so that it will remain progressive, is that, when we camouflage things, they sometimes become the thing we are pretending they are, rather than what we really want them to be. In other words, you universalize Social Security and Medicare, and while you're at it muddy their transfers so they are hard to see, and what you end up with is a huge program that crowds out other budget items and is not itself enormously progressive on a lifetime basis. Thus, giving the middle class a stake so the programs will endure is a bit like giving Scrooge (pre-transformation) a huge cake so that Tiny Tim will get a couple of crumbs.
There is a better rationale for keeping Social Security a universal program rather than just poor relief. The argument, a dirty word in many circles but nonetheless apt and justified here, is paternalism. People are prone to save too little of their lifetime incomes for retirement. By taxing people when they are young and giving them benefits when they are old, Social Security and Medicare in effect force them to save. They can respond by saving less on the outside, but not by zeroing out their future benefits by borrowing against them in advance. The paternalistic limit only hits people who would otherwise save too little. If you are saving enough anyway and adjust for this forced saving component, you aren't hurt at all (leaving aside the analytically distinct question of the program's transfer content).
This type of program makes a great deal of sense. And it is not only paternalism. Also moral hazard, since we would presumably rescue people who entered retirement with nothing saved, so we might as well make them save it for themselves.
Anyway, this is a rationale for a universal program, although in the upper tiers it is unlikely to make much difference.
One could say that Bush recognizes this via the private accounts element of his plan. But the problem there is that people's bedrock tier of saving oughtn't to be invested riskily. From a rational planning standpoint, you start with a fixed real life annuity, and build the 401(k)'s et al on top of that. And if the forced saving is all you have, then it should be invested safely rather than riskily.
This point is pretty familiar already to people who have been following the debate - Peter Orsag, for example, made it eloquently in his testimony before the Ways and Means Committee, which I mentioned in an earlier post. So I will close here.
The standard liberal/left/Democratic response is offered, naturally enough, by Paul Krugman, who says:
"It's an adage that programs for the poor always turn into poor programs. That is, once a program is defined as welfare, it becomes a target for budget cuts.
You can see this happening right now to Medicaid ..."
My take on this is quite a bit different than Krugman's, although the quoted statement has some truth. (But then again, over the years Medicaid has grown quite rapidly. The latest proposed cuts do not at this point establish much of a trend. They are fairly small and contested even among Republicans. Plus Bush wants to cut Social Security for the middle class as well as Medicaid for the poor.)
Anyway, let's grant Krugman's point for the sake of argument. The problem with it, as an argument for keeping Social Security a middle class program so that it will remain progressive, is that, when we camouflage things, they sometimes become the thing we are pretending they are, rather than what we really want them to be. In other words, you universalize Social Security and Medicare, and while you're at it muddy their transfers so they are hard to see, and what you end up with is a huge program that crowds out other budget items and is not itself enormously progressive on a lifetime basis. Thus, giving the middle class a stake so the programs will endure is a bit like giving Scrooge (pre-transformation) a huge cake so that Tiny Tim will get a couple of crumbs.
There is a better rationale for keeping Social Security a universal program rather than just poor relief. The argument, a dirty word in many circles but nonetheless apt and justified here, is paternalism. People are prone to save too little of their lifetime incomes for retirement. By taxing people when they are young and giving them benefits when they are old, Social Security and Medicare in effect force them to save. They can respond by saving less on the outside, but not by zeroing out their future benefits by borrowing against them in advance. The paternalistic limit only hits people who would otherwise save too little. If you are saving enough anyway and adjust for this forced saving component, you aren't hurt at all (leaving aside the analytically distinct question of the program's transfer content).
This type of program makes a great deal of sense. And it is not only paternalism. Also moral hazard, since we would presumably rescue people who entered retirement with nothing saved, so we might as well make them save it for themselves.
Anyway, this is a rationale for a universal program, although in the upper tiers it is unlikely to make much difference.
One could say that Bush recognizes this via the private accounts element of his plan. But the problem there is that people's bedrock tier of saving oughtn't to be invested riskily. From a rational planning standpoint, you start with a fixed real life annuity, and build the 401(k)'s et al on top of that. And if the forced saving is all you have, then it should be invested safely rather than riskily.
This point is pretty familiar already to people who have been following the debate - Peter Orsag, for example, made it eloquently in his testimony before the Ways and Means Committee, which I mentioned in an earlier post. So I will close here.
Thursday, April 28, 2005
Bush's press conference
As I decode Bush's Social Security gabbing at the press conference today, he is saying:
1) Private accounts today, private accounts tomorrow, private accounts forever. Of course, this could just be what he says until it's time to cut a deal. But I think he is digging himself in pretty deep on this one.
2) Other than for current and near retirees, any and all benefit cuts are on the table, so long as they don't make benefits smaller than they are today. In other words, massive cuts relative to the current law baseline are fine with him, but he isn't going to take the lead in proposing any. Indeed, without bipartisan cover all he will propose is the next item, which has the protective coloration of sounding progressive. (We know enough about his views on progressivity to realize that he is only clutching at this reed due to his weak political position.)
3) Again with a bit of code language, he likes the Pozen plan I mentioned two posts ago, in which wage indexing remains at the bottom of the distribution but it shifts up to purely price indexing at the top. I gather that this plan, at least in its present form, is oddly designed such that it hammers the folks in the middle pretty hard, but who's counting.
By the way, the Pozen plan alone would not prevent benefits from rising in both nominal and real terms, because average indexed monthly earnings, the key term in the Social Security benefits formula, will tend to be higher over time for people in the same relative income tier. (E.g., people in the same relative position in the wage distribution as those who average $30,000 today will average more than that in the future, even leaving aside inflation.)
So Bush is conceivably willing to make the benefits formula significantly less generous than it is today, even leaving aside the wage indexing aspect. But needless to say he isn't going to take the lead in saying so, and no one else is going to, so this is a purely academic point.
4) People need "real assets" to have real retirement security. But let's rephrase that more realistically. They need real assets that are bought on margin with real debt. So they need to add a net position to their portfolios that the market values at zero, despite its positive expected return (unless gobbled up by fees), due to its significant downside risk.
Does anyone remember Albert Brooks and the nest egg in "Lost in America"? Bush wants people to bet the nest egg.
All those nauseating fake smiles were hard on me, having just eaten. He has all these exaggerated mannerisms that I guess his TV coaches have given him. And I think his accent turns folksier when he knows he is fibbing more than usual.
I found the best way to watch the press conference was to switch every few seconds between channels 4 and 5 (NBC and Fox), since, in NYC at least, Fox's broadcast was a few seconds behind. So by doing this (although I refrained when he discussed Social Security) I got to hear half of what he said twice, and the other half not at all. If anything, it made more sense that way.
E.g., "I am confident/ I am confident/ As our progress continues/ As our progress continues/ Vladimir assured me/ Vladimir assured me/And we will keep talking/ And we will keep talking/ A murderous dictator/ A murderous dictator/ But it was not working/ It was not working." Etc.
The exaggerated mannerisms were especially rich when you got to see them twice in rapid suggestion. Highly recommended for all audiences.
UPDATE ON THE POZEN PLAN: Click here for Jason Furman's more knowledgeable comments. What a surprise that the Bush "progressive" plan is much more less progressive than advertised, hitting as it does the "well-off," defined as people with earnings over $20,000 per year.
1) Private accounts today, private accounts tomorrow, private accounts forever. Of course, this could just be what he says until it's time to cut a deal. But I think he is digging himself in pretty deep on this one.
2) Other than for current and near retirees, any and all benefit cuts are on the table, so long as they don't make benefits smaller than they are today. In other words, massive cuts relative to the current law baseline are fine with him, but he isn't going to take the lead in proposing any. Indeed, without bipartisan cover all he will propose is the next item, which has the protective coloration of sounding progressive. (We know enough about his views on progressivity to realize that he is only clutching at this reed due to his weak political position.)
3) Again with a bit of code language, he likes the Pozen plan I mentioned two posts ago, in which wage indexing remains at the bottom of the distribution but it shifts up to purely price indexing at the top. I gather that this plan, at least in its present form, is oddly designed such that it hammers the folks in the middle pretty hard, but who's counting.
By the way, the Pozen plan alone would not prevent benefits from rising in both nominal and real terms, because average indexed monthly earnings, the key term in the Social Security benefits formula, will tend to be higher over time for people in the same relative income tier. (E.g., people in the same relative position in the wage distribution as those who average $30,000 today will average more than that in the future, even leaving aside inflation.)
So Bush is conceivably willing to make the benefits formula significantly less generous than it is today, even leaving aside the wage indexing aspect. But needless to say he isn't going to take the lead in saying so, and no one else is going to, so this is a purely academic point.
4) People need "real assets" to have real retirement security. But let's rephrase that more realistically. They need real assets that are bought on margin with real debt. So they need to add a net position to their portfolios that the market values at zero, despite its positive expected return (unless gobbled up by fees), due to its significant downside risk.
Does anyone remember Albert Brooks and the nest egg in "Lost in America"? Bush wants people to bet the nest egg.
All those nauseating fake smiles were hard on me, having just eaten. He has all these exaggerated mannerisms that I guess his TV coaches have given him. And I think his accent turns folksier when he knows he is fibbing more than usual.
I found the best way to watch the press conference was to switch every few seconds between channels 4 and 5 (NBC and Fox), since, in NYC at least, Fox's broadcast was a few seconds behind. So by doing this (although I refrained when he discussed Social Security) I got to hear half of what he said twice, and the other half not at all. If anything, it made more sense that way.
E.g., "I am confident/ I am confident/ As our progress continues/ As our progress continues/ Vladimir assured me/ Vladimir assured me/And we will keep talking/ And we will keep talking/ A murderous dictator/ A murderous dictator/ But it was not working/ It was not working." Etc.
The exaggerated mannerisms were especially rich when you got to see them twice in rapid suggestion. Highly recommended for all audiences.
UPDATE ON THE POZEN PLAN: Click here for Jason Furman's more knowledgeable comments. What a surprise that the Bush "progressive" plan is much more less progressive than advertised, hitting as it does the "well-off," defined as people with earnings over $20,000 per year.
Wednesday, April 27, 2005
Save $14.99!!
Rather than buying the new Springsteen CD, simply pretend you have. Stand up for 3 minutes of fist-pumping and air guitar, then sit down for 3 minutes of solemn silence, pretending to focus on an Artist At Work. Repeat several times. Good exercise, and you can save the money for the new Go-Betweens album that is coming out next week. (Proof that I don't always prefer 70s nostalgia to 80s nostalgia.)
Senate Finance Committee hearings on Social Security
Yesterday's Senate Finance Committee hearings on Social Security, the presentations from which are available here, had several interesting features. One was the hearing title, "Proposals To Achieve Sustainable Solvency, With and Without Personal Accounts."
The focus, in other words, is on the fiscal problem, not the Bush plan. "Sustainable solvency," by the way, is a phrase associated with the Diamond-Orszag (relatively Democratic-style) plan to restore Social Security's long-term solvency through a mix of tax increases and benefit cuts. It relates to the battle between 75-year and infinite horizon perspectives. As I have noted before, a 75-year fiscal perspective is inadequate since the out years predictably turn bad based on expected demographic trends, with the consequence that if we fixed the problem just for 75 years and there were absolutely no surprises in the next couple of decades, we would nonetheless face the financing problem all over again as soon as enough of the out years had moved inside the 75 year window. Diamond and Orszag propose 75-year sustainable solvency, i.e., at the 75 year point things are in good shape looking past a bit, and although this is less conceptually pure than the infinite horizon (which avoids arbitrary jumps in one's discount rate for the future as one moves from inside to outside the budget window), it is really good enough, for all practical purposes, if done right.
Senator Grassley, the Senate Finance Committee chair, is making it as clear as he possibly can that, as per the hearing title, the aim behind legislation he might report out is to address the fiscal gap, not to push the Bush plan.
Democrats have two reasons not to go along with this, however, one a bit crass but the other involving sensible prudence. The crass one is that they are hammering the Republicans to death on Social Security right now, so why help them out of the hole by choosing this moment for unpopular bipartisan compromise after all that the Bush-DeLay-Frist forces have been doing for years on everything else? The prudent reason for non-cooperation is that, no matter what Grassley says or indeed means, he absolutely cannot make any credible guarantee that, no matter what bill leaves the Committee and passes the Senate, it will not be amended in conference to be a pure Bush Social Security phase-out plan and nothing else. You reap what you sow, and the Republicans need a complete change in leadership before they can credibly offer good-faith compromise deals to the Democrats.
As for the hearing itself, four speakers. Michael Tanner of Cato and Peter Ferrara, formerly of Cato, simply offered the usual privatization line. Ferrara seems to think there is a free lunch via higher stock market returns, leaving aside risk, and ignoring the point that markets must be flawed, not working well as he generally tends to believe, if borrowing to hold stock (a net position that the financial markets value at zero) is actually a money machine. Tanner rightly points out that there really is a Social Security fiscal problem, whether one calls it a "crisis" or not, but condemns the current system as a one-size-fits-all cookie cutter approach to forced saving. The problem with this view, as noted by Peter Orszag in his remarks, is that anyone in his or her right mind would want a relatively secure fixed real life annuity as the bottom rung, in effect, of his or her retirement saving. The rest of one's saving, if one has the ability and the sense to save more, is where different risk-return preferences, betting preferences on the performance of different instruments, etc., have a reasonable place.
Speaker # 3 was Robert Pozen of MFS Investment Management, who has been involved in Social Security reform planning for some time. I am willing to give him two cents or so of credit for offering an idea that purports at least to increase Social Security progressivity in a manner that the Administration apparently finds acceptable. This is to continue indexing benefits to rising wage levels among low-earner beneficiaries, but gradually shift to mere price indexing (i.e., for inflation not real wage growth) as one moves up the scale towards the top. Pozen calls his proposal "progressive indexing."
The way Pozen proposes to do it has serious flaws, some of which Peter Orszag addresses in his role as Speaker # 4. For example, it hits the middle more than one might think from Pozen's description, and if done with Bush privatization endangers actual repayment of the effective loans to high earners. It also has the odd feature of cutting benefits more (relative to the current baseline) if our economy does better than expected, the contrary of what one might think makes sense. To be sure, measuring cuts relative to today's baseline is a dumb perspective, unduly privileging current law, unless one agrees that wage indexing actually makes sense. But I would say it does (in the sense that a stable, fiscally sound, and optimal program would have it), as illustrated by the considerations that (a) with just price indexing the value of retirement benefits in effect heads to zero, relative to the size of the economy, over the infinite horizon, and (b) if we think of Social Security as requiring a minimum level of forced retirement saving, on the ground that any less is likely to be irrational, we might want to think in terms of replacing some decent percentage of one's salary level just before retirement, albeit self-financed by the worker if we have no reason to make a net lifetime transfer to her through Social Security.
So I probably wouldn't include progressive indexing, even modified from the Pozen version, in my preferred Social Security fix. But, properly redesigned, it shouldn't be ruled out as part of a bipartisan compromise package down the road if Republicans find it easier to swallow than other progressive benefit adjustments.
Orszag's remarks, although in some respects I might nitpick or quibble with them, are so much more sophisticated than anything else that is being said prominently about Social Security that, as Brad DeLong puts it, "in a good world, [he] would be in the White House running Social Security reform." Compare, for example, Gregory Mankiw, loyally bleating on about the importance of "choice" in a setting where its relevance is much less than would usually be the case, and you would think Orszag had at least 50 more IQ points and a much better post-graduate education if you didn't give Mankiw credit for having to toe the Administration line (and possibly doing the nation some good by staying there, if he has helped influence the Bush Administration towards greater candor, such as in the decision to admit that private accounts are not a free lunch).
The focus, in other words, is on the fiscal problem, not the Bush plan. "Sustainable solvency," by the way, is a phrase associated with the Diamond-Orszag (relatively Democratic-style) plan to restore Social Security's long-term solvency through a mix of tax increases and benefit cuts. It relates to the battle between 75-year and infinite horizon perspectives. As I have noted before, a 75-year fiscal perspective is inadequate since the out years predictably turn bad based on expected demographic trends, with the consequence that if we fixed the problem just for 75 years and there were absolutely no surprises in the next couple of decades, we would nonetheless face the financing problem all over again as soon as enough of the out years had moved inside the 75 year window. Diamond and Orszag propose 75-year sustainable solvency, i.e., at the 75 year point things are in good shape looking past a bit, and although this is less conceptually pure than the infinite horizon (which avoids arbitrary jumps in one's discount rate for the future as one moves from inside to outside the budget window), it is really good enough, for all practical purposes, if done right.
Senator Grassley, the Senate Finance Committee chair, is making it as clear as he possibly can that, as per the hearing title, the aim behind legislation he might report out is to address the fiscal gap, not to push the Bush plan.
Democrats have two reasons not to go along with this, however, one a bit crass but the other involving sensible prudence. The crass one is that they are hammering the Republicans to death on Social Security right now, so why help them out of the hole by choosing this moment for unpopular bipartisan compromise after all that the Bush-DeLay-Frist forces have been doing for years on everything else? The prudent reason for non-cooperation is that, no matter what Grassley says or indeed means, he absolutely cannot make any credible guarantee that, no matter what bill leaves the Committee and passes the Senate, it will not be amended in conference to be a pure Bush Social Security phase-out plan and nothing else. You reap what you sow, and the Republicans need a complete change in leadership before they can credibly offer good-faith compromise deals to the Democrats.
As for the hearing itself, four speakers. Michael Tanner of Cato and Peter Ferrara, formerly of Cato, simply offered the usual privatization line. Ferrara seems to think there is a free lunch via higher stock market returns, leaving aside risk, and ignoring the point that markets must be flawed, not working well as he generally tends to believe, if borrowing to hold stock (a net position that the financial markets value at zero) is actually a money machine. Tanner rightly points out that there really is a Social Security fiscal problem, whether one calls it a "crisis" or not, but condemns the current system as a one-size-fits-all cookie cutter approach to forced saving. The problem with this view, as noted by Peter Orszag in his remarks, is that anyone in his or her right mind would want a relatively secure fixed real life annuity as the bottom rung, in effect, of his or her retirement saving. The rest of one's saving, if one has the ability and the sense to save more, is where different risk-return preferences, betting preferences on the performance of different instruments, etc., have a reasonable place.
Speaker # 3 was Robert Pozen of MFS Investment Management, who has been involved in Social Security reform planning for some time. I am willing to give him two cents or so of credit for offering an idea that purports at least to increase Social Security progressivity in a manner that the Administration apparently finds acceptable. This is to continue indexing benefits to rising wage levels among low-earner beneficiaries, but gradually shift to mere price indexing (i.e., for inflation not real wage growth) as one moves up the scale towards the top. Pozen calls his proposal "progressive indexing."
The way Pozen proposes to do it has serious flaws, some of which Peter Orszag addresses in his role as Speaker # 4. For example, it hits the middle more than one might think from Pozen's description, and if done with Bush privatization endangers actual repayment of the effective loans to high earners. It also has the odd feature of cutting benefits more (relative to the current baseline) if our economy does better than expected, the contrary of what one might think makes sense. To be sure, measuring cuts relative to today's baseline is a dumb perspective, unduly privileging current law, unless one agrees that wage indexing actually makes sense. But I would say it does (in the sense that a stable, fiscally sound, and optimal program would have it), as illustrated by the considerations that (a) with just price indexing the value of retirement benefits in effect heads to zero, relative to the size of the economy, over the infinite horizon, and (b) if we think of Social Security as requiring a minimum level of forced retirement saving, on the ground that any less is likely to be irrational, we might want to think in terms of replacing some decent percentage of one's salary level just before retirement, albeit self-financed by the worker if we have no reason to make a net lifetime transfer to her through Social Security.
So I probably wouldn't include progressive indexing, even modified from the Pozen version, in my preferred Social Security fix. But, properly redesigned, it shouldn't be ruled out as part of a bipartisan compromise package down the road if Republicans find it easier to swallow than other progressive benefit adjustments.
Orszag's remarks, although in some respects I might nitpick or quibble with them, are so much more sophisticated than anything else that is being said prominently about Social Security that, as Brad DeLong puts it, "in a good world, [he] would be in the White House running Social Security reform." Compare, for example, Gregory Mankiw, loyally bleating on about the importance of "choice" in a setting where its relevance is much less than would usually be the case, and you would think Orszag had at least 50 more IQ points and a much better post-graduate education if you didn't give Mankiw credit for having to toe the Administration line (and possibly doing the nation some good by staying there, if he has helped influence the Bush Administration towards greater candor, such as in the decision to admit that private accounts are not a free lunch).
Tuesday, April 26, 2005
Aesthetic (?) crimes
You expect a certain amount of lying from everyone in politics, but even without ethical constraints there ought to be aesthetic ones on insulting one's readers' intelligence. Bushites are pretty lax about this principal, however. (Relativism at work??)
In the Bolton confirmation battle, several other bloggers, such as Matt Yglesias, have rightly flogged William Kristol for his ludicrous assertion that Bolton is being challenged on the ground that he "disagreed with--he even disliked!--a couple of bureaucrats." To the contrary, Yglesias notes: "The relevant point here isn't that Bolton was brusque with some lower-tier officials. It's that the behavior -- however you want to characterize it -- was aimed distorting the intelligence assessments received by the American people and by the President of the United States."
Apparently, the centralized directive that must go out from Rove headquarters or some such place (otherwise, how could all pro-Bush commentators repeatedly turn on cue like a flock of birds) is saying to take this line. As I am an American Enterprise Institute visiting scholar (believe it or not - but the fact is that AEI activities include serious analysis, not just flackery), I was tipped off to David Frum's publicly available AEI piece, entitled "The War Against Bolton." Here we learn that Colin Powell's publicly acknowledged intervention against Bolton means that Powell is "playing for the very grandest of stakes," and that "his true antagonist is the President himself." If Bolton goes down, supposedly, "nominees to foreign-policy positions will be on notice that Powell's endorsement or veto could make or break their careers," ostensibly aiding Powell financially as well as reputationally.
An aside - if you don't deliberately distort intelligence assessments and lie to direct superiors, you probably have less need than Frum suggests to "stop by Powell's office for a session of forelock-tugging before [your] Senate hearings." But that is a mere detail.
Sliming of Powell was only to be expected once he acted against Bolton. And, hey, we can't all be as ethical as Tom DeLay (I mean, exactly as ethical, neither more nor less). Frum does at least get originality points for inaugurating this angle of attack, unless others in the flock of birds have already been doing so as well.
But the laugh line for me is Frum's throwaway insistence at the end (presumably to prop up his character assassination) that "the arguments against the Bolton nomination are so flimsy and absurd that they don't even ask to be believed." After all, Frum continues, Bolton is not among the 500 worst bosses in Washington, and is charged at most with "alleged lapses in etiquette."
I guess one should expect Bush and Bolton supporters to regard distorting intelligence assessments and trying to destroy the independence and integrity of the analytical process as an etiquette violation at worst. But what about Frum's breach of etiquette in so insulting his readers' intelligence?
In the Bolton confirmation battle, several other bloggers, such as Matt Yglesias, have rightly flogged William Kristol for his ludicrous assertion that Bolton is being challenged on the ground that he "disagreed with--he even disliked!--a couple of bureaucrats." To the contrary, Yglesias notes: "The relevant point here isn't that Bolton was brusque with some lower-tier officials. It's that the behavior -- however you want to characterize it -- was aimed distorting the intelligence assessments received by the American people and by the President of the United States."
Apparently, the centralized directive that must go out from Rove headquarters or some such place (otherwise, how could all pro-Bush commentators repeatedly turn on cue like a flock of birds) is saying to take this line. As I am an American Enterprise Institute visiting scholar (believe it or not - but the fact is that AEI activities include serious analysis, not just flackery), I was tipped off to David Frum's publicly available AEI piece, entitled "The War Against Bolton." Here we learn that Colin Powell's publicly acknowledged intervention against Bolton means that Powell is "playing for the very grandest of stakes," and that "his true antagonist is the President himself." If Bolton goes down, supposedly, "nominees to foreign-policy positions will be on notice that Powell's endorsement or veto could make or break their careers," ostensibly aiding Powell financially as well as reputationally.
An aside - if you don't deliberately distort intelligence assessments and lie to direct superiors, you probably have less need than Frum suggests to "stop by Powell's office for a session of forelock-tugging before [your] Senate hearings." But that is a mere detail.
Sliming of Powell was only to be expected once he acted against Bolton. And, hey, we can't all be as ethical as Tom DeLay (I mean, exactly as ethical, neither more nor less). Frum does at least get originality points for inaugurating this angle of attack, unless others in the flock of birds have already been doing so as well.
But the laugh line for me is Frum's throwaway insistence at the end (presumably to prop up his character assassination) that "the arguments against the Bolton nomination are so flimsy and absurd that they don't even ask to be believed." After all, Frum continues, Bolton is not among the 500 worst bosses in Washington, and is charged at most with "alleged lapses in etiquette."
I guess one should expect Bush and Bolton supporters to regard distorting intelligence assessments and trying to destroy the independence and integrity of the analytical process as an etiquette violation at worst. But what about Frum's breach of etiquette in so insulting his readers' intelligence?
Sunday, April 24, 2005
Recent reading and listening
Reading Charles Freeman's The Closing of the Western Mind while all this Pope stuff has been going on [6 column NY Times headline I expected to see a couple of weeks ago: "Pope Still Dead"] made for a not uninteresting juxtaposition. And William Bundy's A Tangled Web offers a convincing debunking of the Nixon foreign policy mystique. I will have to work in some mindless but well-written fiction next.
Before Elliott Smith wrote pretty music to slit one's wrists to (although,as Nixon would say, I don't condemn him for it), he was in Heatmiser, a more grunge-influenced group that is well worth hearing. On Mic City Sons, their last album, his mature style had clearly emerged but it benefited from being just part of the mix.
Before Elliott Smith wrote pretty music to slit one's wrists to (although,as Nixon would say, I don't condemn him for it), he was in Heatmiser, a more grunge-influenced group that is well worth hearing. On Mic City Sons, their last album, his mature style had clearly emerged but it benefited from being just part of the mix.
If Frank Luntz had worked for the Empire in the original Star Wars movie ...
... news reports would be referring to the "Freedom Star, which Democrats call the Death Star."
We have already seen the shenanigans whereby privatization, the longstanding Republican term for a proposed Social Security change, became overnight a verboten term, indicating anti-Republican bias on the part of anyone who used it.
We now, as Josh Marshall and friends have conclusively shown, have the term "nuclear option," invented and popularized by the Republicans, being called in the media the Democrats' term for what the Republicans supposedly call the "constitutional option."
Marshall and others focus on the stupid, supine, ignorant press's role in buckling to whatever the Republicans say, displaying less short-term memory than an advanced Alzheimer's victim. But I am curious about all the conservative cadres who, even if not holding a White House appointment, take their cues from the Luntz/Rove types every day in such a humiliatingly servile fashion. Are they completely lacking in pride and self-respect? Or is it just that war is peace and freedom is slavery?
We have already seen the shenanigans whereby privatization, the longstanding Republican term for a proposed Social Security change, became overnight a verboten term, indicating anti-Republican bias on the part of anyone who used it.
We now, as Josh Marshall and friends have conclusively shown, have the term "nuclear option," invented and popularized by the Republicans, being called in the media the Democrats' term for what the Republicans supposedly call the "constitutional option."
Marshall and others focus on the stupid, supine, ignorant press's role in buckling to whatever the Republicans say, displaying less short-term memory than an advanced Alzheimer's victim. But I am curious about all the conservative cadres who, even if not holding a White House appointment, take their cues from the Luntz/Rove types every day in such a humiliatingly servile fashion. Are they completely lacking in pride and self-respect? Or is it just that war is peace and freedom is slavery?
Friday, April 22, 2005
Puncturing pomposity
The New York Press, a free weekly that is unusual for its Village Voice-type market segment in being conservative or libertarian rather than liberal or left, has a hilarious column today trashing Thomas Friedman's latest 500-page doorstop. I think I agree with Friedman about a lot of things, such as being pro-free trade - I say I think so, because I have always found him way too unreadable to find out for sure - but that's no defense of bad writing and mushy thinking.
Subscribe to:
Posts (Atom)
