More on the Murphy decision

A few more comments on Judge Ginsburg's shoddy, reckless, and foolish opinion:

1) The whole tone is one of absurdly showy "I'm a great judge!!" He's preening before an imaginary audience.

2) He assumes without argument that the enactors of the 16th Amendment intended their current understanding of the term "incomes" to be constitutionally binding, as opposed to anticipating that experience could rightly bring refinements in the understanding.

3) Amazing disregard of policy and common sense. By policy here, I don't mean tax policy. I mean sound judicial policy in deciding where to intervene, based on what courts are and are not good at doing. Ginsburg apparently thinks that this type of reasoning has no place in constitutional (or one presumes statutory) interpretation, even in the face of ambiguity.

The silly path he takes here, of using antiquated accounting concepts to say that return of "capital," compensation for purely psychic injury, etc. cannot be taxed is one that the courts tried right after the Sixteenth Amendment was passed. Within a few decades, they gave up, because they realized they could not do it well. The sorts of line-drawing judgments that it requires call for a legislatve response. So the courts got out of the business of fine-tuning the boundaries of what cash inflows are and aren't taxable.

In other words, it was sound judicial policy to leave this sort of thing to Congress, or else it was bound to become a complete mess. Are judges supposed to ignore this? Must we assume that the enactors wanted all future courts to ignore it?

Policymaking by judges can get a bad name because it can mean "my preferences regarding controversial political issues." But to jump from that to saying that judges cannot make reasonable judgments about where they can and can't do a good job, given their institutional characteristics, is something else entirely.

4) Ginsburg has one policy-minded hobby horse in the opinion. He abhors the idea that, under the Sixteenth Amendment, Congress can define income however it damn pleases. But again, if common sense were permitted under his theory of judging (if his biases can even be dignified with such a term), he would recognize that this (simply including gross and net receipts of cash) is not the place where policing by the courts is needed to make sure that our government remains one of limited and enumerated powers.

5) Can the rules taxing imputed interest on original issue discount bonds constitutionally be sustained under Ginsburg's view? I doubt the folks in 1918 anticipated that either. What's more, if I arrange a pure arbitrage where I deduct cash interest that is offset by imputed interest accruals, is it unconstitutional to deny the deductions? (After all, while we're at it, why not sweep away as well the idea that deductions are merely a matter of legislative grace. An income concept requires them.)

6) Ginsburg draws a constitutional wall around the issue of whether damages are paid for pain & suffering, etc. or for lost wages. In practice, these are extremely interchangeable categories in terms of actual settlements or jury awards? Constitutionally irrelevant as well?

7) Quick question for any reader who has the time to look into this: has Ginsburg been involved in any of the D.C. Circuit's opinions regarding Bush's claims of essentially dictatorial and unlimited war powers? If he has supported Bush's claims, he is flat-out guilty of hypocrisy in the first degree. No one (John Yoo notwithstanding) could seriously maintain that Bush's interpretation of his war powers follows from original intent. Rather, the claim would have to be that the powers have to evolve to meet today's needs, etc. - a theory of constitutional interpretation that cannot be squared with Ginsburg's opinion here.

That's what I'm talkin' about

Another bit of tax news I noted while on vacation is that the IRS, as reported by David Cay Johnston in the NY Times, is using private collectors to get unpaid tax revenues, even though this costs more than 20 cents on the dollar, in lieu of the 3 cents per dollar that it would cost to hire more revenue agents to do the collecting. Plus, from a social standpoint, it's probably best NOT to make the tax collectors' incentive too strong by letting them, as private parties, keep a part of the take. As Paul Krugman pointed out, this is why we have moved beyond tax farming.

My wife saw to the heart of it, however. I told her about the Johnston story and she replied (kidding, of course): "Yes, but if we hired more revenue agents, the government would be bigger."

That (meaning that type of thinking) is exactly what my forthcoming book is about, I told her.

Back from vacation

Now that I am back, I will shortly be addressing the decision in Murphy v. U.S. which has tax folk all excited. Here Judge Douglas Ginsburg of the D.C. Circuit wrote an opinion holding that the IRS cannot constitutionally treat cash damages for injury as "income." Two quick thoughts, admittedly before reading it, are: (a) I am inclined to wonder if the good Judge has graduated from marijuana, his vice in the good old days, to crack cocaine; and (b) under the radical right judges we have these days, all kinds of doctrine that has been good since the 1930s is up for grabs. In income tax law, this definitely includes the Gregory and Knetsch cases, establishing the business purpose & economic substance doctrines that keep IRS revenue collections above a flat zero.

Fun for the likes of me, I suppose. to have more things to write & rail about.

Daniel Henninger, meet Adolf Hitler (but I think you've already met)

Point in common, among others, is the Big Lie technique.

Henninger, WSJ columnist, has an op-ed today entitled "Democrats Knifed Lieberman on Eve of Airliner Plot."

"That was unfortunate timing this week for the Lamont Democrats ... [blah blah blah] ... Yes, we know, they support the war on terror but are merely against George Bush's war in Iraq. How does that work?"

Then more nonsense in the same vein.

Henninger must realize that the U.S. intelligence establishment sees no positive contribution of the war in Iraq to fighting terrorism - indeed, the contribution is massively negative. But this is less important than dishonestly stoking fear in the desperate effort to avoid the reckoning this November.

One amusing aspect of the recent debate has been the back and forth about whether the Democrats are discredited peaceniks as in the Vietnam era.

Hello? Does anyone really think we should have stayed in Vietnam past 1975?

UPDATE: The "unfortunate timing" was absolutely no coincidence. I had immediately thought of this possibility - deliberate timing to make the Democrats look bad right after the primary - but dismissed it, given that the Brits were involved, even though the plot had apparently been under surveillance for more than a year.

But now we learn the following from NBC News:

"A senior British official knowledgeable about the case said British police were planning to continue to run surveillance for at least another week to try to obtain more evidence, while American officials pressured them to arrest the suspects sooner. The official spoke on condition of anonymity due to the sensitivity of the case.

"In contrast to previous reports, the official suggested an attack was not imminent, saying the suspects had not yet purchased any airline tickets. In fact, some did not even have passports."

Why bother with an extra week of surveillance that might yield valuable added information when there's an opportunity to embarrass the Democrats, and sleazy hacks like Daniel Henninger are waiting to pounce?

Max Sawicky is wrong

At this point, I frankly have more respect for the centipede I crushed on the staircase at my kids' behest just a few minutes ago than I have for Joe Lieberman. The centipede, while unwelcome in our home and almost indecently multi-legged, at least was not sleazily exploiting terror problems, which Bush has made worse, as evidence that anti-Bush sentiment is treason. (Indeed, I don't recall the centipede's mentioning Bush at all, although then again I didn't give it much time.) But still, let's give Joe one iota of credit for something from a few years ago.

In 2003, Lieberman introduced S. 1915, the Honest Government Accounting Act, attempting to create budget rules, based on the log-term fiscal gap, that were designed to push the U.S. government back towards solvency. The legislation was far from perfect - and characteristically, was tilted towards the Republicans (institutionally and their policy preferences) in a couple of telling ways - but still I'd call it one of the more responsible and far-sighted legislative efforts of recent years.

Today Max Sawicky takes a shot at this legislation, calling it bad economic policy that will stay even if Joe goes.

Alas, I think it will go away and stay away, whereas Joe shows signs of sticking like a Greenwich deer tick.

With all due respect, which I do have for Max Sawicky, he is wrong, as in w-r-o-n-g. He thinks we shouldn't do long-term fiscal projections. I hope he doesn't live his life that way (e.g., is he planning to retire some day? Or send still-young kids to college?). Of course the future is uncertain, but that's another way of saying it's risky, and to the risk-averse this makes the future problems bigger, not smaller, than if their scope were certain.

Herewith Max:

"The saving grace of this novel regime of fiscal policy is that you can eliminate a $72 trillion 'present value' liability with a law mandating the dedication of all future revenues from the colonization of Jupiter. If fact, in the expectation that such a colonization will bring in even more revenues, one could offset this extra dough with new spending, right now. Honestly."

Exactly right, and rightly so, if in fact future revenues from the colonization of Jupiter have an expected present value of $72 trillion. I think it's fair to say they are more like zero, and I propose to count them today at exactly that value.

If Max's point is that politically influenced estimators will do bogus things when they look long-term, I would respond: OK, let's have good estimates instead, by independent people, and if he thinks short term estimates are better he must have been delighted with the recent Republican gimmick of using tax cuts to pay for tax cuts (i.e., conversion of traditional IRAs into Roth IRAs, raising money short-term but losing billions over time), which was based on the short time horizon that he prefers.

Max also complains that long-term accounting is "fuel for bad, radical reforms in Social Security and Medicare that would take effect well before the Jupiter bonanza." Again wrong. Take Bush's Social Security "plan" of 2005. Long-term accounting showed that it did nothing to reduce the fiscal gap. Or take Bush's prescription drug benefit. Long-term accounting showed that it cost an estimated $18 trillion, not the phony-baloney 10-year estimate that was held down through deferred implementation. And as for the Medicare/healthcare crisis, closing one's eyes is not going to make it go away. Better gradual smaller cuts than deferred but ultimately bigger cuts.

You have to separate out the analytics from the politics a little more crisply than Max seems inclined to.

Sorry for the peevish tone, Max. I'm really angry at other people (Senator Joe for one), not you. But I really don't see why thoughtful and responsible people on the left can't accept the value of rational long-term budget planning. I thought it was the Bushes and Liebermans of the world who reject rationality when they don't like the answers it gives them.

Quote of the day

This comes from Richard Haass, who is president of the Council of Foreign Relations, was the Middle East advisor to the National Security Council under the first President Bush, and served under Colin Powell in the State Department in the current Bush's first term. It's in response to the current Bush's optimism that the horrors in Lebanon present a wonderful opportunity to create a new and better Middle East:

"An opportunity? Lord, spare me. I don't laugh a lot. That's the funniest thing I've heard in a long time. If this is an opportunity, what's Iraq? A once-in-a-lifetime chance?"

A canticle for Lieberman

Here's hoping that the man's political career ends next Tuesday, third-party line notwithstanding. Thanks, for once, to the New York Times for its excellent editorial explaining why he must go. And if David Brooks is stupid enough actually to believe, as he wrote, that challenging Lieberman in the primary constitutes an "inquisition," then I truly pity him.

One thing I've always been curious about: did Lieberman actually want the Gore-Lieberman ticket to lose the 2000 Presidential election, or did it merely seem that way?

So much for the Laffer Curve

Herewith Jason Furman, courtesy of the U.S. Treasury Department.

I suppose they'll have to fire the real economists there and find people who are willing to make false estimates.

Just as clarification, the Laffer Curve is an economically valid idea. Only, for taxing labor income (the main component of the income tax), rates might have to go up to 80 or 90 percent before it would start to apply. So it's not exactly relevant with regard to the Bush tax cuts. (For capital gains, by contrast, the Laffer Curve may kick in at 30 to 40 percent, although it's hard to disentangle temporary from permanent effects.)

My article "Permanent Income and the Annual Income Tax"

Another article draft of mine is now available on-line, here.

The abstract goes something like this:

Under a prominent and influential economic model known as the permanent income hypothesis, people's decisions depend on their expected lifetime income, not their current income. If completely true, this hypothesis would have radical implications for tax, transfer, and entitlements policy. For example, unless modified by other information, it would suggest replacing the income tax with a consumption tax, establishing lifetime income averaging, viewing Social Security as irrelevant other than as a system for transferring lifetime resources between individuals, and dramatically changing welfare law to base aid purely on people's lifetime income, as distinct from their current circumstances. However, incomplete markets and departures from rational behavior, by shortening people s planning horizons, weaken some of permanent income's implications and refute others.

Eric Solomon update

Thanks to the efforts of Ellen Aprill and Paul Caron, among others, a law profs' petition in favor of Eric Solomon's confirmation is rapidly gaining signatures. There will also be a petition from former Treasury officials and Congressional staffers, along with that from tax lawyers at the New York State Bar Association.

Deciding not to enforce the estate tax

A recent New York Times article noted that the Bush Administration has decided to gut estate tax enforcement by having the IRS fire 45% of its estate tax lawyers. The article quotes estate tax lawyer Sharyn Phillips to the effect that the cuts are a “back-door way for the Bush administration to achieve what it cannot get from Congress, which is repeal of the estate tax.”

Pretty unusual stuff, not to enforce a set of laws on the books that raise so much money relative to the IRS staff involved. And, of course, no surprise if estate tax lawyers don't like it, as it moves in the direction of an open invitation not to file estate tax returns even when legally due.

My first thought on reading the news was: Why doesn't Bush just invoke his war power claims to nullify the estate tax? After all, how can he fight terrorism if the U.S. economy is being hurt as much by the tax as he claims?

Indeed, since Grover Norquist, speaking on NPR in 2003, compared the estate tax to the Holocaust, why not have Bush simply proclaim that it IS terrorism?

Endangered nomination

The post of Assistant Secretary of the Treasury for Tax Policy has been vacant for a very long time, and finally the Bush Administration has nominated someone: Eric Solomon, who has been a high-ranking Treasury tax official since the Clinton Administration. I lauded this nomination in an earlier post. Solomon is nonpartisan and, more importantly, one of the really good people in government (a dying breed in these highly political days).

Senator Baucus, the top Democrat on the Senate Finance Committee, has announced that he intends to block the nomination until the Bush Administration develops a plan to narrow the $290 billion tax gap (i.e., the estimate of annual taxes that are legally due but not paid). Baucus defends this on the ground that the issue is important, although he agrees that Solomon is "a good public servant and certainly a tax expert."

This strikes me as a really bad idea on Baucus's part, notwithstanding that it would be nice to lower the tax gap. (By the way, while some of the barriers to doing so are political - politicians don't want to turn loose the IRS on voters and campaign contributors - this may to some extent be a bipartisan problem although the Republicans surely do much more to fan anti-tax sentiment.)

The Treasury has been falling apart before our eyes as good public servants leave because they realize they are not being allowed to do tax policy - their motivation for accepting salaries that are below what they could get in the public sector. The Assistant Secretary for Tax Policy can do a lot of good, and Solomon in particular surely would, even though the Treasury has lost so much of its influence. Moreover, Solomon really deserves to be confirmed. Making life hard (or harder) for good public servants is not really what we need these days. (By the way, he is an acquaintance whom I have met a few times and had minor dealings with professionally, but not someone I know well enough to count as a friend. There is no unstated agenda here.)

I gather that a group of New York tax lawyers are circulating a petition in support of Solomon's nomination and urging that Baucus retract his opposition. If law professors or other academics get into the act, I would certainly sign. Eric Solomon should be confirmed as promptly and painlessly as possible.

Bush's next veto?

The New York Times has just posted an article entitled "Scientists Plan to Rebuild Neanderthal Genome."

I especially liked the last paragraph:

"If the Neanderthal genome were fully recovered, it might in principle be possible to bring the species back from extinction by inserting the Neanderthal genome into a human egg and having volunteers bear Neanderthal infants. There would, however, be great technical and ethical barriers to any such venture."

Drunk again?

Bush behaved so boorishly and outlandishly at the G-8, even by his standards, that one has to wonder.

Fun movie

Saw an enjoyable documentary last night, "Wordplay," about the sub-culture of crossword puzzle fanatics and their annual tournament. Celebs who participated (in the documentary, not the tournament) included Bill Clinton, Jon Stewart, Mike Mussina, and the Indigo Girls.

Seeing Clinton these days always reminds me of his successor. When he does the NY Times crossword puzzle in pen, the punch lines almost write themselves. For Bush, the Highlights word find? Probably too challenging.

My article "Welfare, Cash Grants, and Marginal Rates"

Not sure if I've posted some other link for this in the past, but this is a forthcoming article of mine, the abstract for which is as follows:

"Marginal rates are frequently analyzed based solely on taxes, without regard to benefit phase-outs that have exactly the same incentive and distributional effects as increasing positive taxes. This myopia reflects the notion, rooted in our current fiscal language, that “taxes” and “spending” are fundamentally different. In fact, however, the difference is purely one of labeling.

"Among the ill consequences of this confusion between substance and labels is the political unfeasibility of demogrant or negative income tax proposals. These proposals often are criticized for seemingly providing universal and unconditional cash grants. In fact, however, cash grants can be just as conditional or selective as benefits that are labeled as “welfare.” Clearer thinking about these matters would expand the realm of politically feasible policy choices, and make excessively high marginal tax rates on people who are escaping poverty easier to avoid."

In work this summer I've finished drafts of papers entitled "Permanent Income and the Annual Income Tax" and "Why Worldwide Welfare as a Normative Standard in U.S. Tax Policy?" To be posted in due course.

My forthcoming Cambridge U. Press book, "Taxes, Spending, and the U.S. Government's March Toward Bankruptcy," appears to be slotted now for the beginning of 2007.

Ron Suskind's "The One Percent Doctrine"

I just finished reading the new Suskind book about the "war on terror." Reported mainly as an anti-Bush screed becomes some of the facts reported in it are embarrassing (to say the least) to our own Dear Leader, it is in fact very balanced in tone. Obviously George Tenet gets favorable treatment, reflecting his cooperation with the author. But in some ways it actually treats Bush and Cheney far more favorably than people like me, who have completely given up on attributing any good faith whatsover to these individuals, would expect from a fairminded account. It portrays them as actually caring a lot about preventing attacks on U.S. soil and as attempting rationally, by their lights, even if misguidedly, to deal with the threat. Bush does, to be sure, turn out to be a thoroughly unpleasant bully who reads less words per day than the average third-grader, and who thinks his time is best spent focusing obsessively on operational details of particular anti-terrorist operations, which he inadvertently prevents the operators from doing properly. And his response to being warned in person about 9/11, in advance, was to say "Okay, you've covered your ass," and go back to his fishing. But still, when one's expectations are low enough it's not hard for these boys to come off better than one expected.

The best insight I got from the book concerns exactly how Cheney and Bush got it wrong. First an application, then the bigger picture. They insisted on torturing the high-value targets (or those Bush had falsely claimed in public were high-value) because they badly wanted results fast. But the CIA tried to tell them that torture doesn't work as well in getting information as building a relationship with the prisoner (good cop/bad cop style) and using it to coax info out of him. This was rejected, in part because even when successful it doesn't work especially fast. But they got so little out of the torture that it seems clear they made the wrong choice, even leaving aside all moral and reputational aspects.

The bigger point concerns Cheney's doctrine, giving the book its title and offering an organizing theme to explain all the insane things they have done, that if there is a 1 % threat of our being attacked we must treat it as an utter certainty. Hence, action is all and analysis worth next to nothing.

There are many reasons why this approach is mistaken, and the book shows this quite well. But let's start by giving Cheney his due. If one is risk-neutral, a 1% chance of 1 million casualties should be treated the same as a 100% chance of 10,000 casualties (i.e., more than 3 times the direct loss of life on 9/11). So yes, low-probability risks of something really bad happening must be taken seriously.

But Cheney's analysis is totally static. In his view, the 1% risk is completely exogenous. It's just there as an isolated event, and we either ignore it or incur large costs to knock it down to 0%.

There is no such thing as eliminating all risks. Facing some set of risks is unavoidable. And they are endogenous - they are affected by what we do. In other words, if you try to knock out those 1% risks one at a time, like people swatting the gopher in that arcade game, you are simply increasing your downside risk if by doing so you create more new risks than you are eliminating. Arguably this is exactly what the US has been doing, if we grant (I would say over-generously) that Saddam represented as much as a 1% risk to us.

More totally static thinking from the big toad with the bad heart: his way of dealing with endogeneity is to say: we'll make everyone so scared of us that no one will dare do anything. But again this looks just at our move without considering the possibility of counter-moves. How would a Cheney type who was running another country (Iran, Russia, etc.) want to react if he saw the US acting the way Cheney wants it to act? Not by meekly knuckling under, one can be quite sure.

We are not the only actors, and we can't control everything by force or by will. That is the core of why Cheney is so completely wrong even on his own terms, and leaving aside all the bad faith and the contempt for every positive value in our law and our history.

Grover's trover

Grover Norquist appears to be - lying? defying credulity? forgetful? you be the judge - in his latest attempt to explain his up-to-the-elbows entanglement in the sleazy Abramoff-Indian tribes scam.

What a surprise.

The "war on terror"

I'm including fewer Bush items when I have nothing distinctive to add, but I couldn't resist this bit from Matt Yglesias:

According to Bart Gellman's review of Ron Suskind's new book the following things are true:

** Al-Qaedist Abu Zubaydah was captured in March 2002.

** Zubaydah's captors discovered he was mentally ill and charged with minor logistical matters, such as arranging travel for wives and children.

** The President was informed of that judgment by the CIA.

** Two weeks later, the President described Zubaydah as "one of the top operatives plotting and planning death and destruction on the United States."

** Later, Bush told George Tenet, "I said he was important. You're not going to let me lose face on this, are you?" and asked Tenet if "some of these harsh methods really work?"

** The methods -- torture -- were applied.

** Then, according to Gellman, "Under that duress, he began to speak of plots of every variety -- against shopping malls, banks, supermarkets, water systems, nuclear plants, apartment buildings, the Brooklyn Bridge, the Statue of Liberty."

** At which point, according to Suskind, "thousands of uniformed men and women raced in a panic to each . . . target."

Line item veto

House and Senate Republicans are advancing legislation that would establish some sort of quasi-line item veto, empowering the President to identify targeted tax and spending provisions and propose their rescission. Congress would vote yes or no on the package as a whole.

The motivation appears to be providing a fig leaf for the Republicans because they are rejecting Democratic calls to restore the pay-as-you-go rules that, for a while, were actually fairly effective. (They ceased being so when Congress started playing ridiculous games with them, such as calling the need to pay for the 2000 census an unanticipated "emergency" that was outside of the rules.) Pay as you go they denounce as a secret plot to prevent extension of the tax cuts. Well, if you want to add trillions to the fiscal gap, it figures that a rule impeding fiscal irresponsibility would get in the way.

It's unclear that the line item veto being proposed makes any difference. The up or down vote on the whole package means that Congress can easily reject it if the stench of bad publicity isn't too strong. Indeed, one obvious game to play is to have Bush posture by pretending to strike down a bunch of items, knowing that Congress will restore them anyway. Also, while the Senate bill would have the Joint Committee on Taxation decide which items are "targeted tax benefits" subject to the rules, based on an objective definition, the House bill would include only the items that were identified by the House Ways & Means and Senate Finance chairs, making it entirely a silly exercise as they could exclude whatever they liked. Even if they tried to include everything that meets the definition (and why should they if they are cutting deals), the definition is still absurdly narrow. "Targeted tax benefits" are those with only one beneficiary. So far as I can tell from my source (the June 19 Tax Notes), the Senate bill may have the same absurdly narrow definition of a targeted tax benefit.

Even a more genuine line item veto has ambiguous effects on deficits and fiscal gaps. What it basically does to the legislative process is shift a bit more power to the President. So, if the President wants to use it to attack earmarks and targeted tax rules, it gives him an extra tool. But if the President wants to use it as a bludgeon, to trade for votes in favor of his own tax cut and spending proposals, he can do that as well. Gee, I wonder which way the current President would be more likely to use it.

The House bill has a provision expressing the sense of Congress that the President should not use his rescission authority as a bargaining tool to secure votes on other legislation. Yeah, right.

Public service message

I thought I had seen a lot of different scams from incoming e-mail, but here is apparently a new one.

Last Friday I got a message from "Internal Revenue Service!" with the enticing subject line: "refund of $63.80."

The message, ostensibly from service@IRS.gov, was as follows:

[IRS Logo]

"After the last annual calculations of your fiscal activity we have determined that you are eligible to receive a tax refund of $63.80. Please submit the tax refund request and allow us 6-9 days in order to process it.

A refund can be delayed for a variety of reasons. For example submitting invalid records or applying after the deadline.

To access the form for your tax refund, please click here.

Regards,
Internal Revenue Service."

Hoping that I wouldn't pay the price for my curiosity, I clicked on the link, and saw that it asked me for full credit card information, which I am not going to provide.

This one is better than the usual Nigerian scam about the million dollars a stranger wants to split with you. Indeed, it's better than the phantom messages, ostensibly from Chase Manhattan or eBay, that I still occasionally get.

Has anyone else out there gotten this one?

Non-death of the non-death tax

By now, most interested readers may already know that efforts to have the Senate approve permanent repeal of the estate ax failed today. (I refuse to call it the "death tax" for two reasons: the renaming is Orwellian language manipulation, and it is less accurate than the old name. The tax really is levied on estates. No one owes the tax solely by reason of dying. For that matter, the gift tax, which has nothing to do with death, is part of the same instrument.)

Under current budgetary circumstances, repealing the estate tax would have been utterly insane. The U.S. fiscal gap makes such a move preposterously bad policy absent offsets to make the change at least revenue-neutral. I also would object to the repeal distributionally if one rules out compensating changes to replace the lost progressivity. And doing it while Medicaid is being cut for supposed deficit reduction reasons is obscenely hypocritical.

Nonetheless, in a sane political and budgetary environment the merits of keeping the estate tax would be a much closer call than many on the left believe. Suppose the fiscal system's overall progressivity would be about the same either way. This assumption could be reasonable, under the right circumstances, for several different reasons. There might be an express political trade-off at some point. The long-term political equilibrium might be such that less progressivity in one way means more in another. And simply as a guide to clear thinking, one should separate the question of how progressive the fiscal system should be from that of this particular instrument's merits.

Suppose we are thinking about efficiency, also known as reducing deadweight loss (i.e., instances where someone is made worse off and no one is made better off). The great virtue of the estate tax as an efficient device for accomplishing redistribution is that some bequests are accidental. People without strong bequest motives may die before they have fully used up their wealth. Since they are not thinking about a tax levied after they die, work and saving are not deterred by the estate tax to the extent that this is the true story.

The great vice of the estate tax, relative to other means of accomplishing comparable overall progressivity, is that deliberate bequests have positive externalities. Suppose you are choosing between blowing all your wealth before you die on conspicuous consumption or leaving it to your kids. The former means that the money is paid out once for market consumption. The latter involves your getting some consumption value out of making the bequest (since we are positing altruism or other warm feelings towards your kids), and then they get to use it in market consumption. So in effect consumption occurs twice rather than once. This point is often put moralistically, as in: Why should we favor the Malcolm Forbes types who throw huge parties before they die over those who scrupulously leave more to their kids. But it is a straight welfare economics point as well.

Anyway, this tradeoff makes the merits of the estate tax an interesting issue for tax policy debate. But in Washington, things go forward or not on a much cruder and more basic level.

Must reading

I don't know how to assess this, but no one who is intellectually honest can dismiss it out of hand. Luckily for all of the major media, this is no constraint on them.

Dynamic scoring of fundamental tax reform: the good news and the bad news

Courtesy of Bruce Bartlett, here is a link to a pdf file of the just-released Treasury study of the dynamic growth effects of the tax reform plans reduced last year to zero acclaim by the Tax Reform Panel.

The good news (leaving aside that none of the plans has a chance of being adopted): the Panel's "Growth and Investment Tax" (GIT) ostensibly would raise national income, over the long run, by somewhere in the range from 1.4% to 4.8%. A straight-up progressive consumption tax ostensibly would do so by 1.9% to 6%. For the Simplified Income Tax (SIT), the predicted growth in national income was only 0.2% to 0.9%, but hey, that's better than nothing.

Bad news item #1: Since the plans are revenue-neutral relative to the Administration's budgetary baseline (present law minus all of the tax cut phase-outs and plus a number of unenacted Bush tax cut proposals), they might very well reduce national income relative to present law (with the phase-outs and no new tax cuts), since they result in a fiscal gap that is trillions of dollars higher.

Bad news item #2: I suspect that the models over-estimate the effects on the capital stock and economic growth of shifting from an income tax to a consumption tax. My reason for suspecting this is technical, rather than reflecting some personal hunch about saving behavior. The recent literature suggesting that income taxation and consumption taxation differ only in their treatment of the real riskless interest rate implies that the two systems are more alike than we have long thought. The real riskless rate has typically been in the 1 to 3% range, whereas the risky rate that I suspect the Treasury models use in predicting behavioral responses is much higher. To my knowledge, economic models generally have not incorporated this point as fully as perhaps they ought. The riskless rate point should also lower estimates of the deadweight loss resulting from inter-asset differences in cost recovery rate. But permanent gaps in the tax base, such as the exclusions of imputed rental income and various fringe benefits, are not directly affected by the change in thinking about timing issues.

One reason I suspect this is the magnitude of the growth rate differences attributed to the GIT versus the SIT. Even leaving aside that the former is partly an income tax while the latter is partly a consumption tax, the significance attributed to the timing point seems (admittedly at a casual glance) rather high, especially when compared with the SIT versus present law. Many economists, including for example Glenn Hubbard, have argued in print that the inter-asset distortions in the tax law are more important than the income vs. consumption tax choice, but the Treasury's dynamic analysis seems to come out the other way. Sure, theory should give way to empirics, but what we have here are estimated empirics that are themselves based on a theory.

New Treasury Secretary

Bush has just named Henry Paulson, the chairman of Goldman Sachs, to replace poor pitiful John Snow as the Treasury Secretary. Past Goldman Sachs chiefs to figure on the national scene include Robert Rubin and Jon Corzine, obviously formidable players.

It's a mystery to me why a person with such a high-powered job would want to be the Treasury Secretary at a time like this.

According to the New York Times, "Republicans had long been pushing for a change at Treasury, arguing that Mr. Snow, despite devoting much of his energy to making the case that the economy had flourished under Mr. Bush, had failed to convince the public at large. Mr. Paulson is known as an ardent and engaging salesman."

That undoubtedly is what the Bush Administration wants him for, since salesmanship is all they ask of a Treasury Secretary (Rove handles the actual economics). Raising, of course, the question of what Paulson thinks he is doing. No doubt they promised him more than this, but why would he believe them? (Or think they could deliver, at this point, even if they were so minded?)

Chuck Schumer is happy, praising Paulson's "experience, intelligence and deep understanding of national and global economic issues." Unfortunately, this is about as relevant to the responsibilities they are likely to give Paulson as the statement in the Times that he prefers birdwatching to playing golf.

UPDATE: The best phrase I've seen about this is that the Bush Administration was so desperate that they resorted to scraping the top of the barrel.

A day late and a dollar short

It's hilarious to see Bush "admitting mistakes" at this late date. The only personal mistake he admits is using tough guy language on a couple of occasions ("bring it on," "dead or alive" ) three and five years ago. But that's apparently behind us now, since he tells us he has learned about "expressing myself maybe in a little more sophisticated manner."

How nice for him to get that off his chest. I won't add anything about the "more sophisticated" bit, although my twelve and ten year old kids thought it was hilarious coming from Bush. Too easy a target.

Turn, turn, turn

Having noticed that Bush has twice in the last month (on 5/1 and 5/22) hailed developments in Iraqi politics as "turning points" in the war there, I thought I'd try to find out just how many turning points there have been. So I did a couple of quick Lexis searches, restricted to the New York Times and the Washington Post. It turns out that, in addition to turning points, there have also been quite a few "milestones." In particular:

July 2003: formation of temporary governing council is an "important milestone."

June 2004: the handover of sovereignty is a "turning point."

January 2005: Iraqi elections were both a "turning point" and a "milestone."

August 2005 and/or October 2005 (not sure if one date is wrong, or, if both are right, whether they relate to different stages): adoption of Iraqi constitution and/or progress towards adoption thereof were "milestones."

December 2005 - Iraqi parliamentary elections were a "major milestone."

Then most recently we have 5/1/06 and 5/22/06, both involving "turning points" that I believe were not exactly the same.

Wow, things are sure going well out there.

Book update

I've finished the third book in the very loosely related trilogy by J. T. Farrell about British imperial decline (Troubles, Siege of Krishnapura, Singapore Grip) and highly recommend it. But in Singapore Grip I thought the anti-colonialist satire was at times a bit overdone. Flawless touch in the first two books, however.

Then I read Richard Condon's The Manchurian Candidate (basis for the 1962 movie that spawned a recent update) - a real hoot and great paranoid fun.

Now I'm reading Daniel Dennett's Breaking the Spell, about religion as an evolutionary phenomenon. I'm finding it a bit too pop in style, and too engaged in laboriously meeting objections to the enterprise that I don't have. Dennett is doing this in the hope of having a bigger impact rather than just preaching to the choir, a worthy goal but one I doubt he'll meet, but in doing so he's certainly weakening the book's appeal to choir members such as me.

At work I'm making great strides on an article I rather like so far, "Permanent Income and the Annual Income Tax," about the use of lifetime versus shorter-term measures of wellbeing in fiscal rules such as taxes and transfers. The summer comes early for legal academics who start teaching in late August, but that's not to say too early.

Fun in the nation's capital

I was in Washington for the spring meeting of the National Tax Association this past Thursday, and the lunch talk was given by Ed Lazear, the labor economist and recent Tax Reform Panel member who is now on Bush's Council of Economic Advisors. Though I realize the job puts pressure on one's public utterances, I was dismayed by the level of sales pitch that I was hearing, all this stuff about how the Administration's tax policy has wonderfully boosted economic growth, increased national saving, etc., etc. E.g., attributing the recent economic growth rate to the tax cuts, rather than to the recessionary trough that the growth came from, and not acknowledging the fairly obvious point that there were also high growth rates after the 1993 tax increases. Claiming that the dividend tax cuts will create vast increases in national saving and economic growth, as predicted by economic theory, blah blah blah.

With no ill will towards Lazear, I must say I found it a bit stomach-turning, even more so than the cardboard cheesecake with raspberry sauce that was sitting in front of me. So I waved my hand like a first grader so I would get to ask the first question, and was I suppose a bit blunt. I noted that economic theory can't predict the consequences of a tax cut in isolation; it needs to be a balanced-budget exercise that includes the offset. I noted that the Administration has vastly increased the fiscal gap, with huge likely negative effects on national saving even if there is no catastrophe. I noted the immense transfers to older generations, from unsustainable tax cuts that will have to be reversed later on plus the Medicare prescription drug benefit, likely to reduce national saving due to the income effect (seniors save less than younger people for lifecycle reasons). Maybe I had one or two more points before I subsided and let Lazear have at it.

I wouldn 't say he answered me, though I can't say I blame him. At some point he started saying something about how, with just a little economic growth, all the deficits will totally disappear. This was a bit thick. So I started to cut in: "There isn't a single reputable expert in the country who believes - "

"I've got the floor now!" was his answer, so I subsided again. He did acknowledge sharing some of my concerns.

No hard feelings, but a job in the Council of Economic Advisors really isn't very good for one's reputation these days.

UPDATE: A Washington Post editorial on Lazear's speech said it all: "Down Is Still Up; The White House continues to tax reality."

Bob Herbert (if anything) understates it

Someone needed to say this in the MSM:

"The Bushies will tell you that it is dangerous and even against the law to inquire into these nefarious activities. We just have to trust the king.

"Well, I give you fair warning. This is a road map to totalitarianism. Hallmarks of totalitarian regimes have always included an excessive reliance on secrecy, the deliberate stoking of fear in the general population, a preference for military rather than diplomatic solutions in foreign policy, the promotion of blind patriotism, the denial of human rights, the curtailment of the rule of law, hostility to a free press, and the systematic invasion of the privacy of ordinary people."

Important military task

According to today's New York Times, "President Bush told President Vicente Fox of Mexico that the use of National Guard troops would only be temporary."

Yes, I think through the November election should just about cover it.

The big question: does Bush get to play dress-up again? Maybe with a Sergeant Pepper outfit and a toy gun?

The next step in budgetary sleaze

Upon reflection (and with thanks to Kirk Stark for nudging me to see it this way), I am disappointed with Congress's lack of imagination in using tax cuts to "pay" for tax cuts, via the IRA conversion rule that raises $6 billion over ten years but increases the fiscal gap by $16.6 billion. Why stop there?

Here's an idea. Take people who are newly graduated from law school or medical school. They might easily have expected career earnings with a present value of, say, $10 million, and expected lifetime income tax liabilities under present law with a present value of, say, $3 million. The income and liabilities are mostly back-loaded, since their earnings would be expected to rise over time. So here's what we do. We let them "prepay" $50,000, which the government will be happy to lend them for 9-1/2 years at zero interest. All who "prepay" are totally exempt from any further income tax liability for the rest of their lives, starting in 10 years. Leaving aside the credibility problems, what a great revenue raiser within the budget window!

Sleazy budget games

I noted in the previous post that the latest tax cuts passing through Congress "raise revenue" to offset a tiny portion of the overall tax cuts by actually losing more revenue, the device being to hurt the government's long-term financing by paying people to convert traditional IRAs into Roth IRAs.

Len Burman at the Urban Institute has the details. The IRA provision in the legislation is scored as a $6.4 billion revenue-raiser over the next ten years. But its estimated long term revenue consequence, in present value terms, is a loss of $16 billion.

Corporate executives who did this sort of thing would go to jail. Come to think of it, there's a pretty good chance that a lot of the people behind this brilliant initiative will end up going to jail, albeit for different reasons.

One last amusing detail: the tax-cutting legislation is entitled the "Tax Increase Prevention and Reconciliation Act." First you put in phony sunsets that hold down the revenue estimates. Then you call extending the tax cuts "Tax Increase Prevention." Then you do it again, since the extension is only for 2 years.

"Orwellian" has become such a cliche - how can we freshen it up when it is needed so regularly?

Tax policy: some good news and some bad news

First the good news: Bush plans to name Eric Solomon the Assistant Secretary of the Treasury for Tax Policy. Solomon, one of the few people I can think of to serve under both the Clinton and Bush Administrations without having a set term, is one of the good people in government. My guess is that more political people didn't want the job or had confirmation issues or both.

The bad news is that the Republicans in Congress have agreed to a $70 billion tax cut bill. That's $70B over two years - it's just temporary extenders of reduced capital gains and dividend rates and AMT relief. So it brings us a larger fiscal gap and only a tiny respite from the nightmare the Republicans caused in 2001 and 2003 with all of their dishonest, rent-extracting phaseouts of new provisions. (Rent-extracting because they make their fat-walleted friends keep lobbying them for extension.)

One way they are going to "pay" for keeping the hit at "only $70B is to lose money for the government over the long run by inducing people to shift from traditional IRAs (deduction upfront, inclusion on the backend) to Roth IRAs (no deduction today, ostensibly no inclusion upon withdrawal). The myopia of a 2-year budget window permits them to present this long-term revenue-losing shift (since people have to be compensated to switch) as revenue raising. So it is as dishonest and irresponsible as most other things in recent tax legislation, if not more so.

Worse news still is that, to keep this at $70B and keep more tax cuts coming in the future, they deliberately left out "extenders" with strong and bipartisan political support, such as the research and development credit. That way, they get to cut taxes still more later on.

Bush I expect to hail this while at the same time grandstanding about how demanding a $20B cut (over 5 years?) in a pork barrel spending bill makes him a deficit hawk.

Elizabeth Bumiller, arch ironist?

Elizabeth Bumiller, the NY Times White House correspondent, aroused my ire last week when her account of the White House Correspondents Dinner mentioned Bush's "comedy" routine but omitted any mention of Colbert.

Today, Bumiller does a little better in her article, "His Legacy and His Library Occupy Bush's Thoughts."

This one at least has a non-lapdog subtext, as in the statement that "Two and a half years before he leaves office, with his popularity at record lows, Mr. Bush is actively thinking ahead to his post-White House life." In other words, to add my own gloss, perhaps he is as eager for his term to end as I am. (Well, he couldn't possibly be AS eager.) That would at least show good judgment.

But I loved this bit:

"'I would like to leave behind a legacy or a think tank, a place for people to talk about freedom and liberty, and the de Tocqueville model, what de Tocqueville saw in America,' Mr. Bush told Mr. Schieffer. 'I would like for there to be a place where young scholars come and write and think and articulate and opine and teach.'"

The jokes here practically write themselves. "Freedom and liberty" is truly an amazing focus, coming as it does from the principal proponent of torture and domestic authoritarianism in U.S. history. De Tocque - who?? No way on earth that Bush has actually heard of him. And yes, scholarship, what a natural legacy for this guy, almost as apt as freedom and liberty.

Glenn Hubbard and Stephen Colbert videos

In case anyone who's interested hasn't seen it yet, here is the link for the amusing Glenn Hubbard video made by students at the Columbia Business School. Suitable for viewing by anyone who knows (or is told) that Glenn reputedly was a candidate for Alan Greenspan's job before it went instead to Ben Bernanke.

But, turning to the Colbert video, words fail me. Give him a Pulitzer Prize for this, throw in the Nobel Peace and Literature Prizes, and it would still fall far short of doing his achievement full justice.

Anniversary celebration

What a nice, if thoroughly traditional, way to celebrate the third anniversary of Bush's "Mission Accomplished" stunt.

Bush is celebrating it with a page from his greatest hits, hailing the formation of a new Iraqi government as a "turning point."

If that by itself isn't encouragement enough, note that he announced the good news after talking with Rumsfeld & Rice about their "surprise visit" to the most fortified spot in the Green Zone.

I am looking forward to more good news whenever Rumsfeld gets around to making a surprise non-visit.

Our friend Grover

Sometimes, when people get books they think may talk about them, the first thing they do is look in the index under their own names. I'm not among these people, but only because I don't expect to figure in indices other than for an occasional scholarly cite.

Today, I got a complimentary copy, from Doubleday, of Matthew Continetti's newly published "The K Street Gang." Perhaps they're hoping I'll mention it in my blog or something. Anyway, I went straight to the index - not for myself, of course, but for Grover Norquist. I was not disappointed. Entries in 3 sub-categories: "ideology," "Indian gaming interests and," "rogue or bogus clients."

The balance between these sub-categories sounds just about right for Grover.

Idiot season

No matter how cynical one is about politics - and I try to set the bar high for myself - it's hard not to get trumped every day of the week. You can't keep up with these guys.

Okay, gasoline prices are way up. What do you expect when Iraq is in flames and Iran will be nuked if Karl Rove concludes that this will pay off electorally in November.

But not to worry, the Democrats have a great plan. Let's suspend the gasoline tax for six months. If the U.S. has monopsony power in the world marketplace, this amounts to saying: let's take the money out of the U.S. government's hands and make sure that foreign governments or oil companies get it instead. Or, if the price does moderate, it says: let's make sure the price signals don't get through and start changing American energy behavior. We wouldn't want to start reducing our international economic vulnerability, after all.

Senator Frist's office, whether or not stupider, is at least funnier. Our friend the timely-trading video diagnostician wants to start mailing out $100 checks to people. No need even to own a car for this one. And the deep thinking behind it is almost as rich as the proposal itself. From today's New York Times:

"David Winston, a Republican pollster who advises the Senate Republican leadership, called the rebate an intuitive way to show voters that Republicans were on their side. 'It is like putting the American family budget ahead of oil company profits, Mr. Winston said. "'How do you help the American families out? Well, give them some money.'"

Not TOO far ahead of oil company profits, however, given that American families are paying for their own checks through the increased fiscal gap. And what's more, the rebate is merely "the signature element of a broader Senate Republican leadership plan announced Thursday that included new incentives for the oil industry to increase its refining capacity and ... would open the Arctic National Wildlife Refuge in Alaska to drilling."

At a certain point there's really nothing left to say.

Another newly posted paper of mine

"Welfare, Cash Grants, and Marginal Rates." available here. The abstract is as follows:

"Marginal rates are frequently analyzed based solely on taxes, without regard to benefit phase-outs that have exactly the same incentive and distributional effects as increasing positive taxes. This myopia reflects the notion, rooted in our current fiscal language, that “taxes” and “spending” are fundamentally different. In fact, however, the difference is purely one of labeling.

"Among the ill consequences of this confusion between substance and labels is the political unfeasibility of demogrant or negative income tax proposals. These proposals often are criticized for seemingly providing universal and unconditional cash grants. In fact, however, cash grants can be just as conditional or selective as benefits that are labeled as “welfare.” Clearer thinking about these matters would expand the realm of politically feasible policy choices, and make excessively high marginal tax rates on people who are escaping poverty easier to avoid."

This one is admittedly a bit of a rehash of past work. I have written about these issues before, but reworked and extended previous writings, while also explicitly linking it to related themes, to serve as chapter 9 of my forthcoming book with the Cambridge U Press, entitled "Taxes, Spending, and the U.S. Government's March Toward Bankruptcy." I then decided (with the Press's kind approval) to break out a revised and shortened version of the chapter to appear in a forthcoming SMU Law Review tax symposium. That, in turn, is the newly posted paper.

Upcoming NYU conference in honor of David Bradford

Coming up on Friday, May 5. This is going to be a serious academic conference, not a tribute session, consistently with what David would have preferred.

Here's the schedule, although the order of the papers still might change:

PANEL 1: ISSUES OF BUDGET MEASUREMENT
Authors:
Jerry Green, Harvard University
Laurence Kotlikoff, Boston University

Discussants:
Daniel Shaviro, NYU
Kent Smetters, University of Pennsylvania

PANEL 2: THE NEW VIEW OF CORPORATE DIVIDENDS
Author:
Roger Gordon, UC San Diego

Discussants:
William Andrews, Harvard University
George Zodrow, Rice University

PANEL 3: FISCAL DECENTRALIZATION
Author:
Wallace Oates, University of Maryland

Discussants:
Harvey Rosen, Princeton University
Charles McLure, Hoover Institution

PANEL 4: THE CHOICE BETWEEN INCOME TAXATION AND
CONSUMPTION TAXATION
Author:
Alan Auerbach, UC Berkeley

Discussants:
Glenn Hubbard, Columbia University
Alvin Warren, Harvard University

PANEL 5: ISSUES OF TRANSITION TO A CONSUMPTION TAX
Author:
Louis Kaplow, Harvard University

Discussants:
James Hines, University of Michigan
Kyle Logue, University of Michigan

PANEL 6: CONSUMPTION TAX IMPLEMENTATION
Author:
David Weisbach, University of Chicago

Discussants:
Edward McCaffery, USC
Joel Slemrod, University of Michigan

Five of the six papers (very shortly to be all six) can be downloaded here.

UPDATE: The order of Panels 5 and 6 has been flipped to accommodate speakers' schedules.

For once I'm glad he's lying

Obviously Bush's pledge to look into "price gouging" on gasoline is a sham. Then again, it probably should be.

Of course, if he hadn't messed up so badly in the Middle East, with more insanity possibly to come, the world price would probably be lower.

A tale of three headlines

1) From today's Washington Post: "Inspectors Find More Torture at Iraqi Jails; Top General's Pledge To Protect Prisoners 'Not Being Followed'."

2) From today's New York Times: "Moves Signal Tighter Secrecy Within C.I.A." The article elaborates that Bush's handpicked CIA director (Porter Goss) is trying "to re-emphasize a culture of secrecy that has included a marked tightening of the review process for books and articles by former agency employees."

3) From today's Wall Street Journal: an opinion column by Natan Sharansky, entitled "Dissident President." Here we learn that Bush is "a man fired by a deep belief in the universal appeal of freedom, its transformative power, and its critical connection to international peace and stability .... Now that President Bush is increasingly alone in pushing for freedom, I can only hope that his dissident spirit will continue to persevere."

... Okay, enough with the deadpan. Somewhere, Andre Sakhorov is vomiting at the thought that the term "dissident" could be so inverted and debased.

Another year done at the NYU Tax Policy Colloquium

We're already gearing up for next year, when my co-convenors (?) will be Alan Auerbach for 7 weeks and Rosanne Altshuler for 7 weeks.

New Fiery Furnaces album

Okay, I was on the fence about buying it, and did so partly to fill out my $25 minimum free delivery from bn.com without losing same-day Manhattan delivery for the Star Wars books one of my kids wanted.

And this same individual scored undeniable points this morning when he heard me playing it and asked: "What exactly do you like about this, Dad?" I threatened him with Captain Beefheart's Trout Mask Replica, and that was that.

True as well, the album sounds a lot of the time like the pretentious arty kids in high school trying to make grand philosophical statements.

But it is on the whole enjoyable and often very much so. Albeit not one of those things that would get one through exercising at the health club. (For that, "EP" is the Fiery Furnaces' best bet.)

Also good (and probably on the whole better) first impressions for the Islands' Return to the Sea, this being the first release by former members of the Unicorns.

Overheated sentence of the day

From today's New York Times article about the possibility of a further White House staff "shake-up," here involving "moving Harriet E. Miers from her job as President Bush's counsel" [to a different White House job?]:

"Mr. Bolten's thinking about Ms. Miers, however tentative, provided an insight into the scale of his ambitions for overhauling the White House staff and, should he proceed, could amount to a test of how far he would be able to go in bringing about change."

Wow, the ambition here is simply breathtaking.

Is sports journalism better than other journalism?

While at the health club this morning, I noticed that ESPN is devoting a lot of lead coverage to the Duke lacrosse players rape charges. From one perspective, this is journalism as usual, focusing on sensationalistic stories about crimes. On the other hand, though, this is sports not national or world news, and from that perspective their spending a lot of time on this story may verge on being admirable. Somehow I don't think of the ESPN viewership base as dying to see this story, but it dramatizes an important message about the distorted culture of professional, or at least male professional, sports (counting big-time college sports as professional).

What a surprise

Bush's new budget chief, replacing Josh Bolton who became chief of staff, is Rob Portman, previously the trade rep. Portman's # 2 moves up to be the new trade rep.

Budget expert Stan Collender's first two points in discussing the Portman appointment were as follows:

"1. Not much budget experience

2. Loyalty to the president may be his biggest asset."

How unusual for this Administration.

I'd add, that Bush sure has a way of getting fresh blood into the Administration, doesn't he. It's a shame that the line about the deck chairs at the Titanic has become such an overused cliche.

My latest paper draft

ABSTRACT: One of the main advantages of consumption taxation that its advocates, including me, have claimed is simplification. However, the extent to which simplification actually would result from a major consumption-based tax reform would depend not only on the compliance and administrative issues raised by the structure of the hypothetical new system, but also by the politics of enactment. This paper, commissioned for a conference concerning consumption-based reform, asks the inevitably speculative question of how the politics of such a reform, if it occurred, would affect (or impair) the end product. The conclusions reached are not very optimistic.

You can download it here.

Prediction (with promise to fess up later if I'm proven wrong)

The U.S. is going to attack Iran this year. The timing will be set for maximum impact on the 2006 U.S. Congressional elections.

For extra credit: not a prediction, but I wouldn't be surprised by the use of tactical battlefield nukes. One important advantage is that this may help to smoke out Democratic opposition, or in the alternative make them more complicit.

Final point to keep in mind: this would lead to much greater protests than invading Iraq (potentially another advantage). Bush claims unlimited Commander in Chief powers to act domestically as he sees fit to prevent harm to the war effort.

Musical update

At first I wasn't enormously enthralled with the new eponymous album (aka the "Gun Album") by the Minus 5 (mainly Scott McCaughey/Peter Buck). The style is just extremely familiar from McCaughey's earlier work and from its roots in late 60s influences. Bur after a few listens I have come to like it. Gap between the relatively cheery sound and the mordant (to put it mildly) lyrics is especially enjoyable.

The best defense of Bush's leaking

The newspapers have been all over the Administration's incessant leaking for political reasons, while any or all disclosure of information by anyone else, including where it exposes crimes, is deemed a treacherous blow to our national security.

Bush has of course the definitional defense - if leaking is defined as anything not by him, then of course he is never guilty of it. But he also has a stronger defense against the claim of having harmed our national security for crass political reasons.

In the latest Libby imbroglio, it turns out that the information the Administration leaked to discredit Wilson was already known to be false.

There you have it. Surely the Administration is safe from any charge of damaging national security through leaks when it is careful to leak only false information (as it did throughout the Iraq war controversy).

But is there anything else wrong with suppressing accurate information while leaking lots of false information? Gee, I'll have to think this over a bit more.

Radio silence

I've been silent for a while due to a death in the family, but plan to resume posting soon.

It's come to this (yawn)

This article describes a House GOP revolt against Rove's planning to follow the usual bloody-shirt playbook in the 2006 Congressional campaign:

"Instead of Mr. Rove's pro-security agenda, House Republicans have pressed the White House for greater spending allocations to GOP-held congressional districts that face serious Democratic challengers. The sources said constituents have been judging the candidates by their ability to bring government funding and jobs to their districts.

"'If we can't deliver the pork, then we're out of business,' the senior GOP source said."

From early Pat Boone to late-vintage Elvis in only 12 years ...

Tax cut on repatriated earnings

Courtesy of the always-helpful TaxProf Blog, I note that the American Shareholders Assocation has just published a report concerning the recently enacted temporary tax cut on repatriated earnings, permitting U.S. multinationals, for a short time window only, to bring back overseas funds and pay tax on them at only a 5.25% rate rather than the full rate. The report shows that the amount repatriated vastly exceeds amounts projected by the Joint Committee on Taxation. The total is expected to surge past $300 billion, as opposed to a projected total of $130 trillion.

I always thought this was horrible legislation, a view shared by most who were not on the lobbying payroll of the groups seeking it, and shared even by those (including me) who believe that there is much to be said for a permanent low tax rate on repatriated foreign source active business income, or indeed U.S. exemption (making our system a territorial one purely on U.S. source income). The problem lies in the temporary character, which you can't credibly say will be once only. (You can say it, but don't expect anyone to believe you.) So foreign tax repatriations after the window closes will be down, I would expect, not only because pent-up repatriation demand has been satisfied but because people are waiting for the next low-rate holiday.

The unexpected flow of dividends makes the provision even "better" than its enactors expected, from a totally myopic point of view. Current revenues are increased, making the deficit smaller, if enough of these funds would otherwise have remained abroad for now. But future revenues, outside the budget window, are reduced, very likely by a much greater present value than the short-term increase. You can be certain that this gimmick will be used again and again in the coming years - increasing short-term revenues in exchange for damaging the U.S. government's long-term fiscal position. The push to encourage conversion from traditional IRAs to Roth IRAs (the cost of which is back-loaded) is the most prominent example of this, but surely will not stand alone.

I must say I'm not surprised by the under-estimate, even though I'm certain that the Joint Committee did its revenue estimates reasonably and in good faith. There was so much lobbying muscle behind this provision that you knew a lot of money had to be involved.

On the other hand, it's a bit surprising that the companies are willing to pay 5.25%. Current wisdom among the leading international tax economists and lawyers is that the repatriation tax is awfully easy to avoid, so why pay anything? I suspect that it has something to do with accounting. Even if the companies pay more tax than they would have otherwise, management would likely be fine with that if it permitted them to free up deferred tax liabilities that they had booked for financial accounting purposes. As I once heard an investment banker remark, "Saving taxes is all very nice, but reported earnings per share make the world go round."

Of course they do

Today's NY Times headline: "On Anniversary, Bush and Cheney See Iraq Success."

Meanwhile, the Wall Street Journal has an op-ed helpfully explaining how Bush, through Condi, could effectively get a third term.

Not recommended

Jonathan Ames' novel, "Wake Up, Sir!" It lured me with the conceit of borrowing Jeeves (or ostensibly an identical namesake) from the Bertie Wooster novels, to be the improbable valet (or do I mean gentleman's personal gentleman") for a contemporary American layabout, but proved thin gruel for as long as I kept going.

On the other hand, Belle and Sebastian's new album is growing on me a bit.

Cost of the Iraq war

Economists Linda Bilmes and Nobel Laureate Joseph Stiglitz have just published a National Bureau of Economic Research Working Paper in which they estimate that the cost of the Iraq war to the U.S. will exceed $1 trillion if our troops return by 2010, or $2 trillion if they stay through 2015. Bilmes and Stiglitz base this estimate, not just on budgetary costs that are officially allocated to the war, but on a comprehensive look at its long-term budgetary effects. Thus, for example, they include increased military recruitment costs and disability payouts by reason of the war, as well as the macroeconomic effects of higher energy prices.

As they note, in 2002 Rumsfeld estimated a total war cost of $50 to $60 billion, with Paul Wolfowitz saying the post-war reconstruction would be free from the U.S. standpoint due to Iraqi oil money. Bush Administration economic advisor Larry Lindsey was harshly rebuked for suggesting that the war's cost might reach $200 billion.

Large numbers are hard to grasp, so let's just put it this way. Rumsfeld's estimate was somewhere around 2 to 5 percent of the total estimated by Bilmes and Stiglitz. Lindsey's supposed over-estimation was 10 to 20 percent.

All you really need to know about Bush

This is an actual quote - not a joke - from a page 1 New York Times article, in tone a pure puff piece, that appeared on Sunday, May 21, 2000. The article is called "GEORGE W. BUSH'S JOURNEY: A Boy From Midland," and tellingly (in retrospect) subtitled "A Philosophy With Roots In Conservative Texas Soil." The author (Nicholas Kristof) quotes Bush childhood friend Terry Throckmorton as follows:

"We were terrible to animals," recalled Mr. Throckmorton, laughing. A dip behind the Bush home turned into a small lake after a good rain, and thousands of frogs would come out.

"Everybody would get BB guns and shoot them," Mr. Throckmorton said. "Or we'd put firecrackers in the frogs and throw them and blow them up."

Funny how unsurprised I was by this.

Random notes

I have discovered my cats' top-secret, feline-eyes-only memorandum detailing their plans for the day:

"1. Hang around kitchen asking for food.
2. Sleep.
3. Hang around kitchen asking for food.
4. Sleep."

No big surprises here, I must admit.

On a wholly different note, lately I've been listening to a self-compiled (via iTunes) album consisting of 18 selections from XTC's Andy Partridge, Fuzzy Warbles volumes 1-6. These records are a weirdly self-indulgent project of Partridge's, involving the release of all sorts of demos and outtakes that XTC or he compiled over the years. Mostly filler or out-takes of released songs, but each of the six volumes has 3 or 4 gems, which you can find through a combination of reading customer reviews on Amazon and playing 30-second song samples on iTunes. So selected, the song quality is if anything higher than on an average XTC album, although the production values are lower. It sounds like it comes from some strange alternative universe in which Paul McCartney had retained all of his talent and taste after leaving the Beatles.

New light on old battles

Last Thursday at the NYU Tax Policy Colloquium, our guests were Joe Bankman and David Weisbach, presenting their recent paper on income vs. consumption taxation, available here under the March 2 date. Profuse apologies for getting the title backwards on the cover sheet.

Bankman and Weisbach push a pro-consumption tax line that I have also pushed in print. The basic idea we share is that a consumption tax can be just as progressive as an income tax, while being more efficient and perhaps also doing a better job of ranking people (on a lifetime basis) in terms of how well-off they are.

One of the big points of contention concerns the burden of the consumption tax on future consumption. Income tax advocates commonly complain that, say, Bill Gates and his heirs won't pay consumption tax on their huge fortune until it is actually all spent on consumption, if it ever is. Consumption tax advocates reply that, assuming a perpetual fixed-rate tax, the wealth is already bearing the burden and has merely gotten to defer payment at a market rate of interest (meaning that the deferral does not reduce the present value of the liability). No difference than if wealthy people paid more tax today but did enough extra borrowing to fund the cash flow. And hard to deny if you accept, as most do, that a consumption tax is neutral as to when one consumes, thus supporting the conclusion that wealthy people aren't paying less, in present value terms, merely because they defer spending their wealth. In any event, this is the argument that I and others (such as Bankman and Weisbach) have made.

In the course of the discussion, largely due to Alan Auerbach's efforts as Colloquium co-convenor and lead discussant for the session, it became clear how uncontroversial all this would be if people in fact invariably spent all their wealth before dying. E.g., if Bill Gates actually were guaranteed to spend his entire fortune before heading to that virtual cyber-place in the sky, then his deferring payment at a market interest rate would be accepted by nearly everyone, I think, as good enough to support viewing the unpaid tax as being borne by his wealth today. But of course Gates is not going to consume it all. Instead, at least if he didn't plan substantial charitable bequests, it presumably would all be going to his children.

Since this is what makes income tax advocates cavil at the equivalence claims, it seems clear that the treatment of bequests is at the heart of the income vs. consumption tax debate, even though I and others have been accustomed to describing the debates as wholly separate. Inherited wealth is at the heart of the dispute, even though one could have an income tax or a consumption tax with or without an estate or inheritance tax. (The latter would be paid by recipients of bequests, with the rate structure depending on how much one got rather than on the size of the overall estate. The optical reason for this is that it combats calling the thing the "death tax." The substantive reason is that, if inheritance of concentrated fortunes is the concern, the tax should depend on the degree of concentration that persists.)

Let's back up here a second. How could one possibly support an inheritance tax if one favors consumption taxation? They're often thought inconsistent, because taxing bequests implies taxing saving given that it happens over time.

But in fact there is a separate thread here. Henry Simons, in his "Personal Income Taxation" book, famously urged that gifts be double-taxed (non-deductible by the donor, but included by the donee). In doing so, he was addressing the definition of the consumption piece of the income tax base. He argued that it's clearly consumption by the donor, who does it voluntarily in lieu of spending the money, say, on restaurants or vacations, while at the same time financing current or future consumption by the donee (who indeed is better-off than one who had to render services to get cash). And Simons was clearly correct, in terms of how we might most logically think of the gift as affecting the welfare of the two parties.

Why not double-tax gifts, then? Leaving aside administrative problems (especially when we think of all the gratuituous transfers of services inside a household), the best argument against, developed at some length in work by Louis Kaplow, is that there's an altruistic externality we might not want to discourage, from the fact that a gift dollar in effect purchases $2 of consumption value (by the donor and the donee).

Let's cycle back to the consumption tax. Bequests other than accidental ones (i.e., those left without donative motives because the decedent didn't live long enough to use it all up) "should" be included in the consumption tax base, as consumption by the decedent, if we are looking just at how well-off the decedent is compared to people with the same budget line who simply had different consumption preferences. Then we would also tax the heir, like any other donee, on spending the bequest on consumption. Again, this would seemingly be the right rule in the absence of the altruistic externality. All this leaves unsolved the question of whether taxing gifts just once is the right response to the altruistic externality, as opposed to being, e.g., either too big or too small a benefit (perhaps more likely the latter).

So the treatment of bequests and other gratuitous transfers raises issues that are separate from the income vs. consumption tax question of taxing saving.

Why would we have an estate or inheritance tax, on top of having decided that generally taxing gratuitous transfers once is the way to go? The argument is presumably one of negative externalities to bequests, which worsen the relative position of non-recipients. Again, whatever one thinks of this, it's distinct from the income vs. consumption tax debate.

Final point trying to tie all this together: if we want to tax gratuitous transfers at once, taxing the bequest at death as consumption but then giving some sort of credit to the donee against future income or consumption tax liability as to the amount received would address the multi-generational timing point that income tax advocates hold against the consumption tax. And it would not increase the tax burden on saving or bequests if we could make the tax present value-equivalent to deferring it (via the offset against future tax liability). An issue worth exploring?

The thrill is gone

While the new Belle and Sebastian album is reasonably pleasant, and while I respect the way they have reinvented themselves. moved on to new things, become livelier, etc., I don't find it nearly as compelling as the best of their earlier work.

Another stake through the already shriveled heart of "starve the beast"

Budget expert Stan Collender explains the following in his "Budget Battles" column (all text here is his, not mine):

The "starve the beast" theory of budgeting they have been using assumed that big deficits would pressure Congress to reduce spending.

It now looks as though the theory is really nothing more than a scary fiscal fairy tale.

If it were true, it would be happening now. The federal budget deficit could be close to or exceed $400 billion for several consecutive years and the five-year moving average deficit has never been higher than it is today.

But instead of making members of Congress consider spending changes, more representatives and senators of both political parties appear less willing to cut spending than ever before.

For example, many of the spending cuts in the Bush fiscal 2007 budget have already been rejected in one way or another. Some were literally dismissed out of hand when many of the most influential and powerful Republicans indicated they would not accept the president's proposals. Other Bush spending changes were rejected one or more times in previous years and have little or no chance of being enacted this year…

How did this happen?

As previous " Budget Battles " columns have pointed out, the beast has gotten so big that the spending cuts needed to reduce it are not politically palatable. The spending changes that are possible won't make enough of a difference for senators and representatives to support them.

The starve-the-beast strategists also seem to have not thought about the possibility that spending increases would be enacted at the same time as tax cuts. The Medicare prescription drug plan, activities in Iraq and Afghanistan, Katrina relief and homeland security together increased the deficit by more than $1 trillion over 10 years at the same time that a series of tax cuts were reducing revenues. Tax cuts alone might have left the deficit manageable; tax cuts plus spending increases did not.

At the same time this was happening, the White House was telling people that the deficit was not a problem so that any interest in moderating the policies that were feeding the beast were swatted away.

This makes the starve-the-beast strategy the latest example of a Washington myth, something that sounds plausible but turns out to be nothing more than fiction.

Bruce Bartlett's Impostor

I’ve been looking forward for some time to reading Bruce Bartlett’s Impostor, and finally I’ve gotten my chance. It’s very much worth reading. Bruce powerfully makes the case that the current Bush Administration has absolutely nothing in common with principled small-government conservatism, is unique among modern U.S. Administrations in having no policy process, is leading us towards fiscal disaster, and that its budget policy cannot rationally be defended from a conservative viewpoint on “starve the beast” grounds.

As readers of this blog may have discerned, these are all views I share, although my philosophical orientation differs from Bruce’s (mainly in my having more of a taste for progressive redistribution and not as strong a prior as he does - albeit some - about market versus government solutions). But he powerfully makes his case, and I am unaware of any thoughtful or intelligent countervailing point of view on his claims, perhaps because none is possible. (Reciting slogans doesn’t count, even if you are Milton Friedman.)

One reason I consider Bruce’s point of view so important, beyond the politics of the current day, is that a solution to our fiscal problems is politically impossible without bipartisanship. Principled people on the right and the left actually agree about a lot, and could make a deal that both agreed was way better than policy today if they were empowered to do so. But national politics has to permit such an alignment, in the manner of the 1983 Reagan-Tip O’Neill agreement that helped sustain Social Security, or the 1986 tax reform. Bruce is one of the first people on the right to really grasp this, e.g., by calling for a VAT, on top of the current set of taxes, as better than just going on the way we’ve been. The Republican Party’s march to the extreme (albeit not small government conservative) right reflects a lot of political factors such as voter turnout patterns, gerrymandering, and the diminished number of battleground states, but it also reflects the ideological climate of partisan trickery uber alles. People like Bruce Bartlett and William Niskanen restore one’s faith in conservatives even if one has areas of persistent disagreement with them.

One of my favorite tidbits: at p. 32, we learn that Glenn Hubbard was “strongly chastised by Bush for telling him that a decision that he, Bush, had made was not good economic policy. Hubbard was told never to tell him that again.” If only Glenn Hubbard would speak frankly in public about this President and Administration, it would be great fun to hear.

Dubai port deal

While I doubt that it actually endangers our national security, it is certainly fitting that a White House that so often has demagogically misused security concerns for its own partisan ends is getting a bit of the same treatment this time. For them to complain would be a bit like Jack the Ripper saying that someone is being too rough.

I also suspect corruption or at least cronyism in this matter, albeit unrelated to the Dubai issue as such, given White House practices in Iraq and elsewhere along with the news reports suggesting that the contract was awarded to a company with prominent friends.

Resignation of Larry Summers

I gather from the Times that Larry Summers is about to resign as Harvard's President. Although he dug his own grave by making various impolitic and questionable statements, I regard this as an unfortunate turn of events. Admittedly judging him from a distance, Summers seemed to be someone who cared about academic standards and about taking teaching obligations seriously, and who, to some extent, ran into interest group opposition that ably took advantage of his blunders.

Cat awards

For the sixth straight year, Shadow has won the Good Guy Award, Feline Category, for our household.

Ursula wins a Purple Heart for coming downstairs while two fifty-pound basset hounds were visiting. They immediately gave chase, baying loudly, but she scampered around the kitchen and back upstairs just in time.

Buddy wins - well, let's just call it the We Love Him Anyway Award. Very sweet-tempered, but with a young cat's taste for excitement.

At a certain point, you just have to laugh

Whittington, out of the hospital, is "deeply sorry" for all the trouble Cheney "has gone through this week."

I'm sorry you shot me! Please forgive me!

Our Vice President

The following statement by the Humane Society of the United States is available here:

"Monday's hunting trip to Pennsylvania by Vice President Dick Cheney in which he reportedly shot more than 70 stocked pheasants and an unknown number of mallard ducks at an exclusive private club places a spotlight on an increasingly popular and deplorable form of hunting, in which birds are pen-reared and released to be shot in large numbers by patrons. The ethics of these hunts are called into question by rank-and-file sportsmen, who hunt animals in their native habitat and do not shoot confined or pen-raised animals that cannot escape.

"The Pittsburgh Post-Gazette reported today that 500 farm-raised pheasants were released yesterday morning at the Rolling Rock Club in Ligonier Township for the benefit of Cheney's 10-person hunting party. The group killed at least 417 of the birds, illustrating the unsporting nature of canned hunts. The party also shot an unknown number of captive mallards in the afternoon.

"'This wasn't a hunting ground. It was an open-air abattoir, and the vice president should be ashamed to have patronized this operation and then slaughtered so many animals,' states Wayne Pacelle, a senior vice president of The Humane Society of the United States. 'If the Vice President and his friends wanted to sharpen their shooting skills, they could have shot skeet or clay, not resorted to the slaughter of more than 400 creatures planted right in front of them as animated targets.'"

Even more fun when you're drunk, of course.

A new front in the anti-tax war

A group called the "Coalition for Tax Competition" has just sent a letter to OMB Director Bolton urging that the U.S. de-fund the Organization for Economic Cooperation and Development" (OECD), due to the latter's strong efforts in recent years to coordinate international responses to tax competition (and, I should add, tax evasion, which is different but can involve the same players).

With Grover Norquist and other anti-tax luminaries being the signatories, their sending this letter to the White House is presumably a formality, in the sense of being merely a PR stage in a coordinated campaign that involved White House participation from the start.

I'll give these guys one thing. The issues raised by tax competition are indeed two-sided. They claim that tax competition is good because it lowers overall tax levels and welfare state funding. Although some on the left (Reuven Avi-Yonah, for example) agree with this albeit seeing it as bad rather than good, I personally feel it's overstated in that the main tax base for all nations - resident individuals' earnings - is not at this point greatly affected. But there are market benefits to reducing the tax systems' cartel power. On the other hand, tax competition can actually be inefficient, since it may simply create tax preferences for mobile businesses that can exploit it and permit tax reduction via wasteful planning transactions. And without cartel power via taxation, it would be impossible to fund public goods. The correct analysis here lies at the margin, and I don't know how it would come out - it depends, for example, on various political imponderables regarding the response to the relatively minor revenue effect.

The signatories also claim that tax competition is good for the U.S. That, of course, depends. They may be right in cases where U.S. individuals who own interests in multinational entities (MNEs) pay less tax to foreign governments by reason of tax competition, and thus possibly more to the U.S. via reduced foreign tax credits. They may also be right in cases where the U.S. can compete successfully with foreign countries for tax base. (Although note that, these days, we have relatively high corporate tax rates.) But they are wrong, from a U.S. national welfare standpoint, in cases where either of these scenarios runs in the other direction - i.e., where we're talking about foreigners' tax payments to the U.S. that would be creditable, or other countries tax-competing with us for a share of the worldwide base.

One point they don't address: the OECD is accused at times, in its anti-tax competition initiatives, of favoring the interests of high-tax developed countries relative to low-tax less-developed countries. Insofar as this is true, the OECD might be serving U.S. interests (and those of our peers) but at the expense of poorer countries. This is certainly open to criticism from a global welfare standpoint.

The easy tiebreaker would be to say: If Grover Norquist is for it, I should be against it. Certainly an excellent rule of thumb, but ultimately too knee-jerk for my taste. This is a subject that could bear being debated more in tax policy circles.

That darn pre-9/11 mindset, I can't seem to shake it

Maybe it's just me, but looking casually at the New York Times I once again had the feeling of having stepped into an alternate universe, totally unimagined in the U.S. before the 2000 election.

First, on page 1, the headline: "Tough U.S. Steps in Hunger Strike at Camp in Cuba." The article explains: "Guards have begun strapping detainees into 'restraint chairs' to feed them through tubes and prevent them from vomiting." Keep in mind, of course, that many, perhaps most, of the detainees at Guantanamo have no connection to terrorism, and were picked up by chance or mistake because the U.S. troops overseas have been operating in places where they simply don't have the local knowledge to figure out who is who.

Inside the paper, news concerning Attorney General Gonzales' performance at Senate hearings concerning the secret wiretapping. He is asked how could the disclosure have hurt national security. Wouldn't you think al Qaeda terrorists already knew that the U.S. might be trying to monitor their communications?

Well, yes, Gonzales agreed. "But if they're not reminded about it all the time in newspapers and in stories, they sometimes forget."

So apparently the harm to national security had nothing to do with disclosing the program itself, but with reminding those zany, forgetful kooks out there that the U.S. is in fact trying to catch them. (Although frankly I wouldn't be too worried, if I were in their shoes - they're being chased by the guys who cornered bin Laden at Tora Bora and did such a great job with the Iraq reconstruction & insurgency, and in New Orleans.)

Gonzales then explained that the program had helped identify "would-be terrorists here in the United States."

For once, the often over-verbose Senator Biden was equal to the occasion.

"Have we arrested those people?" he asked. Gonzales replied evasively. In fact we know there were no arrests - these things are always announced, even when it harms national security, as in the notoriously premature White House leak concerning an arrest in Pakistan in fall 2004.

Finally Biden said: "Well, I hope we arrested them — if you identified them. I mean, it kind of worries me because you all talk about how you identify these people, and I've not heard anything about anybody being arrested."

Okay, so the terrorists the Administration found in the U.S. haven't been arrested yet. But I bet they're on double secret probation or something, at an absolute minimum.

Bush's budget

Amazingly enough, a New York Times editorial had the best line, comparing it to James Frey's "A Million Little Pieces" (as in, an unacknowledged work of fiction). The budget is DOA anyway, and I think adults have better things to do than fussing about the idiotic details of the Bush "plans." As usual it has interesting statistical info of various kinds.

Halftime at the Super Bowl

Had Paul McCartney performed at Super Bowl I (Jan 1967), and the Rolling Stones the next year, that might actually have been worth watching. But 38 years too late isn't exactly a near miss.

Just trying to help

I've been working hard lately on tutoring this tennis & squash player who often plays very well, but keeps on forgetting about patience and composure, with the consequence that he can be too erratic.

Myself.

Budgetary savings, Bush Administration-style

Having just eked out a victory in the House over reducing spending by $39.6 billion over 5 years (i.e., less than $8 billion per year), the Administration is now trotting out its supplemental budgetary request (i.e., outside the supposed Pentagon annual budget of $439.3 billion) of an extra $120 billion for Iraq and Afghanistan for one year.

You know the old saying: One step forward, fifteen steps back.

Jason Furman on robust solvency and dependency indexing for Social Security

Interesting paper today, and one of broader policy interest, at today's Tax Policy Colloquium, which I am running along with Alan Auerbach at NYU Law School this semester.

BTW, the weekly schedule and papers are available on-line here.

Furman addresses what one might call the second-order fiscal problem in Social Security. The first-order problem is the program's existing fiscal gap, recently estimated at about $11 trillion. (And of course the broader U.S. fiscal gap, without which this would be less of a concern.) The second-order problem is that, even if we fixed the first-order problem based on our best estimates as of today, a problem of under- or over-funding would reemerge once there was new information about demographics, wage growth, etc. We can probably be confident that the political system will be unable to handle these changes in a timely fashion, for a range of reasons ranging from voters' loss aversion (relative to current law) to interest group politics to chicken games between Republicans and Democrats re. how to adjust the system.

Furman therefore proposes that changes be evaluated in terms of "robust solvency," i.e., how would their restoration of sustaiability survive changes to economic and demographic forecasts. Built-in features of the system reduce the risk exposure to changes, e.g., in GDP growth, but changes in the worker to dependent ratio, e.g., due to changes in fertility or mortality, are a different matter.

An example of a change that would not meet the robust solvency standard is changing from wage indexing to price indexing of benefits, for affluent seniors or all seniors. The problem with this change, from a robust solvency standpoint, is that, if economic growth is lower (increasing the Social Security funding program), the benefit cut it imposes is smaller (since wage indexing is then less in excess of price indexing), while, if economic growth is higher and benefits cuts are thus less needed, the benefit cut is higher. He therefore considers a shift to price indexing markedly inferior to an identical benefit cut, by an expected-value standard, that lacks this perverse and backwards feature.

As an implementation of robust solvency, Furman proposes dependency indexing, or having taxes and/or benefits adjust automatically to unexpected changes in the dependency ratio. This would make the system self-correcting without requiring the political system to show unexpected maturity in responding in a timely fashion. This idea could be combined with any Social Security reform that created sustainability under current median projections.

I consider this a very creative and worthwhile idea that merits serious consideration at a minimum and incorporation into various reform proposals on the high end.

Briefly on Bush's HSA proposal

I've certainly seen worse things come out of this Administration. E.g., the plan does address some genuine anomalies in existing law, such as the more favorable treatment of insured than uninsured routine coverage, and the difficulty of replicating the benefits of tax-free employer-provided plans if you don't have a large enough pool of employees to satisfy the insurance company's taste for diversified risk.

But of course it figures that once again, as always, the answer is more tax cuts. Also, although the short-term budget picture doesn't show the difference, HSAs that are permanently tax-free have a larger long-term budgetary cost than tax-free savings accounts that merely defer income.

One question I would ask myself before establishing an HSA, if I didn't expect to use it for a while, is how confident one should be, in the face of an enormous fiscal gap, that currently promised future tax benefits will actually be there when one is ready to use them.

Bush's little-known literary bent

A news report today says: "One day after President Bush vowed to reduce America's dependence on Middle East oil by cutting imports from there 75 percent by 2025, his energy secretary and national economic adviser said Wednesday that the president didn't mean it literally."

I'm reminded of the old joke - is it from Monty Python? -

Older man: "Is it for the likes of you that I lost a leg in the War?"

Younger man: "But James, you have both your legs."

Older man: "I was speaking metaphorically, you fool!"