When will the U.S. default?

For my current work in progress, "The Long-Term U.S. Fiscal Gap: Is the Main Problem Generational Inequity?," I recently took a look at the question of how fast, under current budget scenarios, the U.S. debt-to-GDP ratio would explode. The sequence is potentially interesting because capital markets, in determining when U.S. public debt should cease to be considered a safe investment, may look only so far ahead, given not just myopia (which need not be posited here), but (a) the fact that the real issue is credibility, which may be affected by the timing of the exploding debt problem, and (b) the unpredictable psychology of bubble markets.

Luckily for me - as I do theoretical not empirical work - the General Accounting Office recently did a long-term simulation of the projected U.S. debt-to-GDP ratio over time under present policy. It's available via their public website (details available to the curious who contact me if they can't find it themselves).

More specifically, the GAO did 2 simulations, one under the CBO baseline and the other adjusting it to be more realistic (e.g., expiring tax cuts are extended for a while, discretionary spending grows with the economy & population). The CBO baseline is plainly ridiculous - for example, it shows massive budget surpluses from 2010 to 2020 that no one expects will actually happen - so I present below only the figures for the alternative simulation.

YEAR - - - - - U.S. PUBLIC DEBT / GDP (as %)
2008 - - - - - - - - - 37.1
2010 - - - - - - - - - 38.7
2015 - - - - - - - - - 47.1
2020 - - - - - - - - - 60.8
2025 - - - - - - - - - 80.7
2030 - - - - - - - - - 109.2
2035 - - - - - - - - - 145.6
2040 - - - - - - - - - 188.4
2045 - - - - - - - - - 236.6
2050 - - - - - - - - - 290.1
2055 - - - - - - - - - 348.5
2060 - - - - - - - - - 412.0
2065 - - - - - - - - - 480.3
2070 - - - - - - - - - 553.8
2075 - - - - - - - - - 632.0
2080 - - - - - - - - - 714.8

As a bit of background, the all-time U.S. high debt to GDP ratio was 109 percent, right at the end of World War II. BUT - in 1945 it was clear to the world that, with peacetime rapidly approaching, annual budget deficits and thus new debt issuances were about to plunge. This time around, the picture would be radically different absent a credible prospect of voluntary budget reform.

Some people may conclude from this that we still have a bit of time. Maybe so, maybe not, because financial markets can be very forward-looking and even, say, the Chinese government might be able to precipitate the plunge right now (which is not to say they'd ever rationally want to do this).

Open empirical question

Brendan Nyhan suggests that liberal blogger Josh Marshall is guilty of a "smear" when he compares Guiliani's speech at the recently concluded RNC convention to a speech by Josef Goebbels. Nyhan notes that "casual Nazi analogies demean and cheapen the discourse -- it's an easy way to active a series of unflattering associations and attach them to a public figure that you don't like." He then compares Marshall's Nazi analogies to Bush's arguably comparing the Democrats to Vietnamese Communists in his video address to the convention.

Here's my problem with so rapidly dismissing the left side of this, which is comparing the current Republicans to Nazis or fascists. I regard it as a genuinely open empirical question how far these guys are willing to go to destroy American democracy. For my money, the discourse at the RNC convention truly was Nazi or fascist-style: demeaning opponents as less than fully human or at least not American, militarism, outrageously over the top lying (Palin on the Bridge to Nowhere, Guiliani denouncing cosmopolitans, Romney denouncing Eastern elites), claiming that only people from small towns are real Americans, etc. Then there's the executive authoritarianism, the claims the president can lock up anyone indefinitely, lying to get us into wars, government secrecy for everything (including indefensible legal opinions embracing torture), the use of torture itself when its intelligence payoff has pretty much been proven to be negative, complete politicization of the executive branch, use of the Justice Department to throw political foes such as Don Siegelman in jail, and repeated, systematic attempts to intimidate the media and prevent it from questioning even demonstrably false claims (whether about Guanatanamo or Palin's earmark record), etc.

I feel they are destroying civil society and the rule of law, and I honestly don't know how far they would go. Explicit dictatorship? Jailing of the opposition? Reichstag fire style fake terror attacks? (Bush and Cheney have both been quoted considering the equivalent in foreign affairs to create casus bellis with Iraq and Iran.) I don't think that leading Republicans themselves know what they would do or where they are headed beyond the next news cycle, but that doesn't mean that they aren't, via their incentives and inclinations and the pressure of events, headed somewhere very nasty.

At this point, I feel there are reasonable arguments to be made on both sides of this - yes, they are something new in American politics and there really is no limit to how far they would go; or no, it's pretty much still business as usual and neither politics nor government have ever been pretty.

But Nyhan is guilty of simply assuming the no side here. He might be right, but at this point I feel we genuinely don't know.

Siberia sounds toasty by comparison

I gather from a Michael Isikoff blog on the Newsweek site that Doug Holtz-Eakin has been posted from the McCain campaign over to Sarah Palin as director of her domestic policy operation (such as it is).

Wow - what a reward to Doug for having endangered his (previously justifiably high) reputation for all these months by carrying water for the campaign's wildly irresponsible tax and budget policies.

New wine in old bottles

I find the newly released Byrne-Eno album quite charming, even delightful, but am going to pass on the new Brian Wilson (odds seem high against its actually being much good).

Call me old-fashioned, but ...

.. while I think chest-beating invocations of patriotism can be over-done, I still have this crazy belief that elected U.S. national leaders should be, well, pro-U.S., rather than Alaskan nationalists.

Changing seasons

The signs are everywhere. Fresh apricots are no longer available at the local farmers' markets. The weather is less hot and more comfortable - a fact that is nonetheless dispiriting (though not as much as the departed apricots) because one knows where it is headed. And I have taught my first class, which I thought went fine although it always takes a few sessions to establish rapport and rhythm.

Back in NYC

I spent the last few days at an academic conference in Woodstock, VT. Best way to describe the local ambience is to note that even a gas station convenience store had microbrewery wheat beers and fresh whole-grain breads from a local gourmet bakery. I forgot to check for the whimsically named local brand of fresh dark-roasted whole coffee beans, but maybe it was behind the chai.

Big thought for the day

Getting older is like managing the retreat of an Army unit. You know you have to give ground and will eventually lose everything. But in the meantime you want to retreat as slowly as possible, keeping it orderly and preventing a rout. Anywhere you can stand and fight for a while you should if the odds are good enough.

Hence my giving up on squash a year ago but deciding to keep up tennis. After ten months of being unable to play a match I am back on the courts competing, but it takes a lot of exercise, stretching, and rehab to keep the odds of continuing (for decades?) reasonably good.


Then there is our eldest cat Shadow (age 17), for whom the retreat is considerably more advanced. Having already lost his teeth and developed an over-active thyroid that, despite surgery (!), still over-produces enough hormones to kill him if we weren't giving him a pill twice daily plus special food, he now appears to have developed chronic kidney disease. This requires injecting him in the back with fluids once a day, at least for now, I gather simply to slow the ongoing process that might take as long as a couple of years (though then again it might be a lot less). And it requires a change in diet that, I gather, involves retreat on managing the thyroid problem as the kidney issue is more acute.

Despite all the extremely nice cats in the world you can find in shelters that evidently are not finding homes, Shadow is about as good an argument for animal cloning as I have yet met. We adopted him when the men's clothing store he lived in was closing and he started following me around the store when I came back to pick up my garments. Placid, mellow, sweet-tempered, loves people, likes other cats - he makes me proud to be a fellow mammal.

Here he is enjoying the sun, which he may not get to do for much longer.

Krugman on the U.S. corporate tax rate

There's been a lot of focus in tax policy circles on the contention that the U.S. corporate rate is too high, leading to one or more of the following claimed ill effects: (1) competitive disadvantage to U.S. companies abroad (which might or might not affect U.S. national welfare), (2) reduced investment in the U.S., including the inbound, and/or (3) the shifting of reported taxable income, and thus tax revenues, out of the U.S. to other countries with lower rates. It's clear that the U.S. corporate rate, 35%, is these days a bit of an outlier on the high side.

But is that the number that matters? Paul Krugman thinks not:

"Now, the thing you have to realize about corporate taxes is that the statutory rate — the rate you pay after [being] allowed deductions and all that — means very little. That’s because corporations have lots of potential deductions — and can hire the very best accountants to find them, and lawyers to justify them. So any time you see a table that compares the nasty 35% US rate with other countries, you know you’re being snowed.

"A much better indicator is the amount of taxes corporations actually pay. From OECD data (behind a paywall, I think, unfortunately), I get the following for percentage of GDP paid in corporate taxes in some major economies, in 2005:

Canada 3.5
US 3.1
Japan 4.3
France 2.8
Germany 1.7
UK 3.4."

Point taken about the statutory rate standing alone. But that's not to say that Krugman's preferred indicator is any better, or indeed as good. For starters, one has to ask how much economic activity in a given country, relative to GDP, is run through corporations, rather than other forms. Does the U.S. have a greater tendency for business activity to run through partnerships, etcetera? In other words, the correct denominator of the fraction is not necessarily national GDP. For a first cut it's corporate economic activity, though even that isn't quite right because you have to think about the consequences of shifting activity around into or out of corporate solution (and how that's taxed).

Not to mention that the second, shareholder level of tax is important to the assessment as well, although that raises further complications that I won't get into here.

Also, if we are mainly concerned about incentive effects, efficiency, and net U.S. national economic welfare, rather than distribution - and I think that is the main long-term issue here, as I'll explain in a moment - then it's not the average but the marginal U.S. corporate tax rate that we care about. So, insofar as companies can play games to save some tax inframarginally, but can't get to zero or boost up their sheltering when they make more profits, it's possible that they would be paying closer to 35% than to their average rates at the margin. I'm not asserting this, but merely noting that it's possible and that the data Krugman cites don't address it.

But is this a distribution issue, not one of efficiency? Krugman presumably thinks so, and he has a point. Taking as given the level of corporate investment et al, which reflects expectations about effective tax rates, if we then in practice lower or raise the overall corporate effective rate the winners or losers are probably corporate shareholders, who on average are relatively affluent. This is the transition incidence of an unanticipated change in the level of the corporate tax. Thus, corporate shareholders would presumably win (all else equal) from lowering the corporate rate to 25%, given that such a change (though being debated) presumably is not, at this point, considered anywhere close to certain. But if we are talking about a stable equilibrium level of effective taxation of corporate income, then it all depends on the incidence of this tax - which economists increasingly believe, in the open economy era, falls largely on labor rather than capital. (See my forthcoming corporate tax book with the Urban Institute Press, "The U.S. Corporate Tax - What Is It and Where Is It Headed?" - due out in early 2009 - for a fuller discussion of these points.)

If John McCain had written John Lennon's songs

"All we are saying is give war a chance."

"War is the answer
You've gotta let it, you've gotta let it grow."

"War is real, real is war
War is feeling, feeling war
War is wanting to make war."

"Peace is over, if you want it
Peace is over now."

Guiltier pleasures

OK, I admit it. I have been watching and enjoying Project Runway lately. It's especially helpful when I need to get through a bunch of exercises designed to prevent recurrence of any of the six main injuries that have cost me substantial tennis-playing time in recent years. But with the convenience of Tivo I would probably watch it for a season or two in any event.

This past Monday night, however, I sank to depths previously unimagined by watching the Bravo reality show "Date My Ex - Jo and Slade" while running through my exercises. (OK, let's be honest - I've actually tuned in, for half to three-quarters of the program, on each of the last 2 Mondays.)

For sleaziness, stupidity, triviality, excruciating vapidity, and idiotic contrivance, "Date My Ex - Jo and Slade" is truly off the charts. It's pathetic. I don't see how any self-respecting, even moderately intelligent and discriminating person could watch it.

But self-respect is overrated, isn't it? And next Monday is already approaching.

Tempest in a teapot

Speaker Pelosi is saying that the GAO report that came out this week, indicating that two-thirds of all U.S. corporations pay no tax at all, "highlights the need to revisit tax reform to ensure that U.S. companies pay their fair share of taxes."

Now, I certainly agree about the need for tax reform, and for addressing corporate-level tax avoidance, but not based on the GAO report, which was truly a non-event. The fact that lots of corporations pay no taxes means next to nothing when lots of them may be small companies without significant profits. Even the fact that, according to the report, 25% of fairly large companies paid no taxes, while a bit more interesting, does not immediately make one excited given that we have recently had a bit of a recession.

The finding in the report that foreign-controlled U.S. corporations report lower profits than those that are U.S. owned is a bit interesting, and suggests (as the report notes) that the foreign companies may be using transfer pricing to shift profits out of the U.S. (Or perhaps they haven't been doing well here lately.) But I believe the comparison in the report is to U.S.-owned companies generally. A more interesting comparison would be to U.S.-owned multinationals, since they have roughly the same transfer pricing incentives and opportunities as the foreign firms. In other words, the key here may be multinational enterprise, not whether a company is treated as a U.S. resident or not.

Readers should also keep in mind that, insofar as transfer pricing is hurting U.S. revenues, one of its possible policy implications is that the U.S. corporate tax rate should be lower so the incentive to engage in it will be less. Tougher enforcement is also an option, but transfer pricing is notoriously difficult to do right - since there is no underlying there there - and it also leads to very costly compliance and litigation.

So let's have tax reform by all means (not that I expect it by any means), but intellectual honesty suggests not basing it on the GAO report's supposed findings.

Furman and Goolsbee on Obama's and McCain's tax and budget policies

In today's WSJ, lead Obama economists Jason Furman and Austan Goolsbee continue to use the Bush budget baseline (for reasons I understand but regret).

As readers can tell from my past posts, I disagree with plenty of what Obama is proposing, partly though not wholly because I have the luxury of not running a contested political campaign. But I certainly agree with the following paragraph in which Furman and Goolsbee address McCain:

"The McCain plan represents Bush economics on steroids. It has $3.4 trillion more in tax cuts than President Bush is proposing, largely directed at corporations and the most affluent. Sen. McCain would implement these cuts without proposing any meaningful steps to simplify taxes or eliminate distortions and loopholes. In addition, Sen. McCain has floated over $1 trillion in new spending increases but barely any specific spending cuts."

Okay, presumably unlike Obama, Furman, and Goolsbee, I would support McCain's proposed cut in the corporate tax rate to 25% if it were fully financed and accompanied by measures shifting more tax collection to owners and especially owner-employees. (See here, for example.)

But the most interesting bit for me in the above paragraph was the $1 trillion figure they offer concerning spending increases that McCain has floated. I am sure they have something specific in mind to back this up, although possibly the figure could be contested (most likely, on the ground that McCain shouldn't be treated as actually meaning what he said on the campaign trail). But the number surely does not include the costs for all the overseas military activity that McCain is eagerly planning. That stuff can add up (e.g., $2 trillion so far in Iraq).

McCain economist Doug Holtz-Eakin attempts to defend his side's relative budgetary integrity on the ground that they will cut spending vastly compared to the present path or Obama. Color me extremely skeptical. Taking into account the extensive military adventures that McCain, even if not actively planning, will nonetheless find himself irresistibly drawn into starting, the actual balance on projected spending may lie sharply in Obama's favor.

McCain betting odds

In light of the ignorant bellicosity that he's once again trumpeted in the face of the Georgia crisis (see here), I'd posit the following, if he becomes president:

--Over/under for the likely average number of wars we'll be engaged in at any given time during his presidency: 2.5.

--Likelihood of his using nuclear weapons: .3.

On the former, note that we're at 2 wars already (which he is reluctant to reduce to 1) and that he appears to want to fight Russia, China, Iran, and presumably Syria and North Korea.

On the latter, note that Cheney, his only Bush Administration near-twin for bellicosity (!!), reportedly pushed internally for the use of nuclear weapons against Iran. I wonder if the probability I offer is way too low.

The state we're in

The Washington Post has an article today entitled "Obama Tax Plan Would Balloon Deficit, Analysis Finds."

The key point: while Obama (with indisputable accuracy) denounces Bush's "reckless" economic policies that are "mortgaging our children's future on a mountain of debt," he is himself proposing tax changes that would add $3.4 trillion to the national debt, including interest, by 2018, as compared to present law (which has all those Bush tax cuts expiring after 2010).

So that it won't look so bad, Obama uses Bush's fiscal policy baseline, in which it is assumed that all of the tax cuts will be extended (and various other fiscally adverse policies adopted as well). Under the Bush baseline, Obama offers middle class tax cuts without increasing the national debt. (I.e., he finances his tax cuts by scaling back the ones Bush and McCain want to extend.)

Len Burman puts it well in the Post article: "Obama has criticized Bush for his fiscal irresponsibility, and now he's using Bush's baseline as a yardstick by which to measure fiscal responsibility."

Jason Furman, who is running Obama's economics shop and who obviously understands all this, defends using the Bush baseline as part of drawing a clear distinction with McCain, who plans to go way beyond the insane Bush baseline and add more than $5 trillion to the national debt over the next ten years.

And this in turn helps to show why the U.S. political and fiscal system are in such bad shape. As things stand, Obama is proposing unsustainable tax cuts (relative to the present law baseline). Yet he is being (a) trillions of dollars less irresponsible than McCain, and (b) attacked by the McCain campaign, based on repeated and shameless lies, as someone who is proposing to increase people's taxes. (The ads about the tax increase for people earning $42,000, recently exposed by independent fact checkers as having "multiple false and misleading claims," are simply par for the course.) So I'd have to agree that, with the bogus baseline and unsustainable tax cuts, Obama is nonetheless being about as fiscally responsible as it is politically feasible to be in a closely contested presidential campaign.

Gresham's law applies to baselines as well as money - the bad ones drive out the good. In the soundbite world of contemporary politics, you simply can't hold yourself to a more reasonable baseline and then try to explain the difference. No one understands, and no one cares.

This is why we are headed off a cliff - not because the fiscal situation is so bad (although it ain't good), but rather because the contemporary political environment makes rational problem-solving impossible.

And our system's pervasive and growing political failure is not limited to budgetary politics. Think gas prices and the McCain campaign's wildly dishonest use of the drilling "issue."

Not to sound old-fashioned, but to me our country's most serious problem is the decline of civic virtue, mainly on the right (where for many it's been replaced by Leninist ethics). The press and the public can't monitor Rove-style dishonesty and resulting destruction of rational dialogue about problems - you need people on each side who are reciprocally willing to limit it through a kind of cooperative quid pro quo. Instead we get chicken games that may end like the one in Rebel Without a Cause (only it will be the audience that goes off the cliff, not one of the drivers).

Right charge, wrong example

Obama is running an ad attacking McCain for proposing a $4 billion tax break for oil companies right when their profits are way up, and noting that McCain has just gotten $2 million in oil company executive campaign contributions.

I gather the $4 billion is computed simply by applying to the oil companies McCain's proposal to lower the corporate tax rate to 25 percent.

The actual story here is that McCain and/or the RNC got a huge flood of oil company campaign contributions (e.g., from 10 Hess Company executives each of whom gave the max) in the almost immediate aftermath of his flip-flop on offshore oil drilling. No doubt they are also grateful for his gas tax holiday demagoguery given the likelihood that they would pocket the benefit. But in fact their share of the corporate rate cut is not from a proposal that was aimed at them; rather, it's one applying more generally.

Presumably the ad uses the $4 billion figure taken from the general corporate rate cut proposal because the other items are harder to explain non-distractingly in a 30-second narrative.

A bit of an irony here for me is that I personally would favor the corporate rate cut if (a) fully financed so that it does not increase the fiscal gap and (b) accompanied by rules limiting the use of the corporate form as a low-rate tax shelter for high-income individuals (e.g., use of "reasonable compensation" rules to prevent under-payment of salary for tax purposes to high-bracket owner-employees). And I suspect I would oppose Obama's proposed windfall profits tax for oil companies, which the commercial also touts, if I knew more of the details - these tend to be gimmicky and not very good tax instruments.

The basic point of the commercial is important and correct, however, even if its policy content is questionable. McCain is in the tank (so to speak) for the oil companies in ways that lead him to make consciously dishonest proposals to benefit them, e.g., rationalizing the offshore oil drilling in terms of the price of gas when its effect on prices would be so deferred and trivial. And this is a relevant character issue, not just a policy issue.

David Gergen says the obvious

Gergen, not exactly a radical leftist, apparently said on TV this weekend: "When McCain's camp calls Obama "The Messiah" and "The One", he's really calling him "uppity." I'm from the South, and we understand what that means. That's code."

I'm not from the South and yet it's been totally obvious to me. This is the whole point of the "celebrity" dig. Why would McCain consider this a telling criticism, when we live in a celebrity culture, and when McCain himself, self-evidently, has long been a celebrity as well? Because, coming from him, it isn't "uppity." Indeed, not even "presumptuous" (another absurdly thin coding for the racial epithet).

Like Scottie in Hitchcock's Vertigo

That's a bit how I feel watching it happen yet again - the quadrennial attack on the Democratic presidential candidate as "elitist" and "out of touch," launched by Rove & his disciples on behalf of an arrogant multi-millionaire who wants to play War Emperor while handing huge and unsustainable tax breaks to very rich people. And the Democrat, meanwhile, ineffectually ignores the attacks and fails to launch any of the devastating counter-attacks that would seem to be clearly available, thinking mistakenly that playing nice and being less blatantly dishonest will be rewarded.

Maybe it'll end differently this time. But in Vertigo it didn't.

The bogus tax-spending distinction strikes again

While McCain tours the land insisting that Obama plans to raise taxes, his chief economic advisor (leaving aside the buffoonish Phil Gramm), Doug Holtz-Eakin, has admitted publicly that Obama actually plans to cut taxes on balance. Details here.

The ground for finding a net tax cut is that Obama's healthcare package would make heavy use of targeted tax benefits to increase insurance coverage and the like.

Holtz-Eakin, by the way, is using the net tax cut point to argue that Obama's overall policies are fiscally irresponsible. This of course is true enough, albeit comical coming from someone who works in a campaign that is calling for $5.7 trillion of tax cuts over ten years with virtually no significant and credible offsets. (McCain will presumably nonetheless keep on saying that Obama is raising taxes, since the truth has certainly been no constraint for him over the last few weeks of the campaign.)

Anyway, back to the net tax cut point. As I show at some length (but I hope reasonably entertainingly) in my recently published fiscal language book, people treat the taxes versus spending distinction as if it were substantively meaningful (e.g., regarding the size of government or some such thing) even though in fact it is pure form.

A program that is substantively equivalent to targeted tax benefits can always, at least in theory, be provided through direct spending. My favorite example, which I owe to the late economist David Bradford, is reducing both taxes and spending by $50 billion, without substantively changing anything whatsoever, by replacing $50 billion of military spending with a $50 billion "weapons supplier tax credit," which results in the government's getting exactly the same weapons as before while everyone in the society ends up with exactly the same money and incentives.

Whatever the reasons for and against using the tax system to deliver healthcare benefits, it is pretty silly to have the computation of whether one is "cutting taxes' or not depend on it. Or more precisely, it's pretty silly to think that the "cutting taxes" meme means anything until we have dug down into the details a bit more.

One possible takeaway: Obama is increasing the government's role in the economy despite styling these things "tax cuts." True enough, perhaps, although the healthcare sector of the economy is too much of a mess for this necessarily to be bad even if one generally likes less government intervention. (One key problem in the healthcare sector is its mix of generous subsidies with private profit motives, arguably leading to worse incentives than those from either a purely public or purely private system.)

But then again, unsustainable tax cuts like McCain's don't make the government smaller either, even if they take the form of reduced marginal rates and the like, as I also explain in my book.

The actual 2009 budget deficit may exceed $900 billion

Despite my discomfort with using the annual budget deficit as a measure of long-term fiscal problems, I feel the need to say a bit more about the bogus $482 billion number that the Bush Administration has succeeded (through dishonest accounting) in putting into all the headlines. Absolutely everyone seems to be using this number. And yet:

1) It "includes only $70 billion for the wars in Iraq and Afghanistan, which could cost three times that much." So perhaps we should add as much as $140 billion for this.

2) It ignores both Congress's recent reversal of the cut in Medicare reimbursements to doctors and the recent enactment of a massive housing bill. I don't have revenue estimates for these in front of me (I will add them in an update if anyone is kind enough to give me a link), but we definitely are not talking small potatoes,

3) It uses the usual rosy scenario economic forecasting tricks, such as predicting an economic growth rate of 2.2 percent whereas many private sector economists are predicting only 1.7 percent.

Former Bush Treasury Secretary O'Neill is quoted in the above-linked article as saying that the real number is "upward of $500 billion and counting. It's a mind-boggling number." As much as $650 billion, anyone? Under the above, I don't see why not.

Even this, however, is not the best annual deficit number that one can use. In less dishonest times, government officials used the on-budget deficit rather than the unified budget deficit, so they would avoid taking credit for current cash flow surpluses in Social Security given its long-term financing shortfall. The exact same principle suggests excluding current cash-flow surpluses for all ostensibly self-financing government retirement programs (e.g., Medicare part A) that are in long-term deficit.

According to a recent article by Alan Auerbach, Jason Furman, and Bill Gale, excluding these programs would increase the then-estimated 2008 budget deficit by $260 billion (from $357 billion to $617 billion). Again, I don't have the exactly comparable 2009 projected numbers. But it's pretty obvious that adding anything like this to the otherwise corrected but still "unified" 2009 deficit number is likely to leave us well north of $800 billion, and very possibly as high as $900 billion.

Record budget deficit

Bush Administration officials now say this year's budget deficit will set an all-time record by standing at $490 billion, as compared to the budget surplus of $128 billion that Bush inherited.

News media are using the $490 billion number even though it apparently excludes $80 billion of Iraq and Afghanistan war spending.

I can't imagine why the Bush Administration feels compelled to admit there is any deficit at all. If they ignored a further $500 billion of spending - and I don't see why they wouldn't, given that they ignore the war spending without any shred of a rationale or excuse - they could accurately note that there's otherwise a $10 billion surplus, and enjoy the nice headlines from that.

UPDATE: Okay, calling it a record is admittedly dubious given that more meaningful comparisons between years would (a) adjust the nominal deficit for inflation, and (b) report it as a percentage of GDP rather than an absolute dollar amount. But then again, given the deficit's defects as a measure purely of current year cash flows, paying it any attention in lieu of focusing on longer-term measures (such as the fiscal gap) paints too rosy a picture.

No comment necessary

McCain, on ABC's This Week with George Stephanopoulos, explaining why, contrary to what all the economists say, a gas tax holiday would be passed on to consumers after all:

McCain: ... we wouldn't let it happen. We wouldn't let it happen. Americans wouldn't let them absorb that.

Stephanopoulos: How would you prevent that?

McCain: We would make them shamed into it. We of course know how to...American public opinion. And we would penalize them if necessary. But they wouldn't. They would pass it along.

No new stimulus bill?

Budget expert Stan Collender predicts that there will be no new stimulus bill this year, despite politicians' anxiety about being blamed by voters for the continuing economic slowdown, on the very shrewd ground that pursuing further fiscal stimulus might not quite make sense right now either for the Republicans or the Democrats.

I must confess that this is a relief to me (assuming Stan is right), even though I recognize that the macro-economy is continuing to sputter badly. If we generalize the question from whether well-done stimulus might make sense today to that of whether a political rule in favor of doing it is efficacious on balance, I think the better view remains, pretty clearly, no. This was indeed the consensus of the political and policymaking world until it was reversed by Bill Clinton in the 1992 election ("It's the economy, stupid."). After that, no one on either side of the aisle wanted to risk being cast in the public role that George H.W. Bush ended up playing in the 1992 drama. But to me, the fact that Clinton revised the optimal political calculation does not mean that he revised the optimal policymaking calculation, as indeed we saw anew when George W. Bush misleadingly cast the 2003 tax cuts as fiscal stimulus.

Let the Fed handle it, I say, not because it necessarily can, and not because better-functioning political branches of government couldn't chip in as well through counter-cyclical fiscal policy, but because, as Donald Rumsfeld might have put it, we can only go into battle with the political branches that we actually have.

Rewrite hell

The heading of this post is a great overstatement, but I do indeed find myself working these days on revisions to forthcoming publications rather than new work. I have minor revisions to make (but they can still take a bit of time) both to my tax & accounting article that is forthcoming in the Georgetown Law Journal, and to my forthcoming Urban Institute Press book, "The Corporate Tax: What Is It, and Where Is It Headed?"

David Bradford once said that, if you polish a forthcoming piece to the point of perfection, that proves you have misallocated your time, since the marginal value of the last increments of improvement are surely less than the marginal value you could have created by doing something creative and new. I tend to agree (and impatience pushes me in the same direction), though it is also true that when you publish something, it is Part of Your Permanent Record that will follow you for the rest of your life.

Meanwhile, I will be teaching Tax I at NYU in just over 5 weeks, and gather that I have 98 registered students. Hoping it will be fun for one and all (or at least for the great majority), but certainly not an intimate-sized group.

Is McCain really the author of the "surge"?

In a word, no. During the pre-surge years, his subsequent mythmaking nowithstanding, he spent at least 80 percent of the time totally supporting Bush and Rumsfeld and saying that the war was going great. He supported the surge when it came due to a simple kneejerk rule that he follows at all times: among all the politically credible options that are on the table in U.S. foreign policy debate, he always supports the most hawkish and pro-war alternative out there. Putting more soldiers in Iraq fit this simple formula, so he supported it.

Some may still recall that Democrats were saying for years that Bush and Rumsfeld had put too few troops in Iraq given that we were there. But that has been effaced from memory like the war with Eurasia in 1984 once they've switched to fighting Eastasia.

Interesting how Maliki's endorsement of Obama's Iraq plan is not even considered newsworthy in the major U.S. papers. Apparently it didn't happen.

Sorry, I will get back to my fiscal policy topics but every now and then I need to blow off a little steam.

McCain supports longer gas tax holiday!

Yes, three months is no longer enough, and he now wants to make the gas tax holiday longer.

I still don't think he's going far enough. Why not propose generous gas subsidies? Or at least financial rewards for owning a gas guzzler, since he specifically emphasizes the plight of "low income Americans that [sic] are driving the oldest automobiles."

Funny how the one big case in which McCain emphasizes helping low-income Americans is via a proposal that would not actually do so, given the general consensus among economists that the gas tax holiday would not actually lower prices at the pump.

Although then again, it's not even a proposal - rather, it's just a Kabuki gesture - given that he is not actually proposing legislation to implement it. Last I checked, he was still a Senator.

Next stop, Sundance?

I just finished taping a couple of hours with some documentary filmmakers who are bravely preparing a feature on tax reform and the problems with the tax system. They hope to have their film in distribution later this year. It's to be called "An Inconvenient Tax," and you can find out more about it here and here.

Bruce Bartlett on McCain vs. Obama

Bruce Bartlett, a leading conservative critic of contemporary Republicans who have hijacked and besmirched the conservative label, argues on the following grounds that McCain's and Obama's tax policies would be less different than one might think. To preview my response, it would be a better world if Bruce were right in his predictions about what they would do but I'm not convinced that he is right. Anyway, he says the following:

"As for taxes, the next president is probably going to raise them regardless of who is elected. That is because our nation’s fiscal problems are becoming too pressing to ignore. A key reason is that the first members of the baby boom generation will turn 65 during the next administration, qualifying for Medicare and, at 66, for Social Security. Sooner rather than later, fiscal reality will force action on the budget. And with the political impossibility of cutting spending by enough to matter, especially with Democratic control of Congress, the default position will necessarily be higher taxes.

"To be sure, McCain and Obama will raise taxes differently, and that is not unimportant. But the simple idea that Obama will raise taxes and McCain will cut them is nonsense. Every serious budget analyst knows this, even if McCain insists that he can continue all the Bush tax cuts, cut taxes by hundreds of billions of dollars additionally, and still balance the budget. That is impossible. It’s also worth remembering that McCain has never been a stalwart tax cutter, having opposed the Bush tax cuts in 2001 and 2003 on the grounds that they were giveaways to the rich."

This is entirely, indeed verging on indisputably correct if we posit that the next president will follow policies that are not entirely insane. But insanity can prevail for a long time, so I disagree that McCain will raise taxes simply because the fiscal situation makes doing so unavoidable in the long run.

Obviously he will not balance the budget. But until the capital markets go haywire (i.e., the U.S. can no longer sell bonds without paying a huge interest rate premium based on investors' concern about default, whether explicit via non-payment or implicit via hyper-inflation), absolutely nothing stops us from following a fiscal policy that is crazy and unsustainable.

I'm reminded of Mondale's claim during the 1984 campaign that both he and Reagan would raise taxes, and differed only in his being honest enough to admit it. The claim was that deficits would make tax increases necessary no matter what. But Reagan got along just fine in his second term without raising taxes to cut the deficit (although this happened in 1990 and 1993).

One reason Mondale proved wrong was that the fiscal situation actually wasn't incredibly dire back then, except over the very long haul. Now it is quite dire, to the point that disaster is looming, probably in the next ten years or so, if we don't get astoundingly lucky or else have a course correction. But no political force can make us do the sane thing before circumstances turn ugly.

As for McCain, it's true that he wasn't and presumably still isn't a dyed in the wool tax cutter. I don't think he actually knows or cares about taxes any more than the average high school student does. And it's true that he took a more responsible stance in 2001 and 2003. But that was at a time when (a) he was furious at Bush for throwing filth at him in the 2000 presidential campaign and (b) he didn't see his future as necessarily linked to the ruling powers in the Republican party. Now he is institutionally committed to reckless tax cutting even if it remains a matter of personal indifference to him.

Readers may have noticed that I've been criticizing McCain a lot in my blog entries but not saying a whole lot about Obama. This reflects that I'm not necessarily sold to a high degree either on Obama personally (although he appears to be intelligent, and the attacks on him have generally been unfounded and idiotic) or on the institutional commitments of a Democratic nominee. My main reason for supporting him, as one clearly can infer from these columns that I do, is that I fear McCain will be incredibly bad. This basically reflects the institutional commitments that I think McCain has via the Bush-Rove Republican party, plus the fact that he appears to be a dangerous warmonger.

Returning to the tax and budgetary realm, I believe we are headed for the shoals of a fiscal disaster unless the Republicans become sane again, at which point bipartisan solutions may become possible. But they need to lose a few more times before that has any chance of happening. In the short term, McCain like Bush will, I fear, act mainly to make things worse - as Obama might too if political constraints are binding enough (although his advisors know better and he appears to be smart enough to understand what they tell him), but at least in far lesser degree.

Last stand in Vietnam

It's Saturday night here (11 hours later than in NYC), and on Monday morning we start our very long journey back to the States, expecting to be back mid-day on Tuesday (although to our bodies it will be late Tuesday night).

Here are a couple of shots of our Hoi An resort, where we've been spending a pleasant and relaxing last week after the more energetic touring of our earlier days in Vietnam.

More on McCain's "disgrace" comment about Social Security

Fungibility notwithstanding, obviously it would be absurd at this point to deem Social Security's payroll tax revenues as available for any other purpose, such as funding current workers' future benefits, unless one made it a true break-even by treating some other set of equivalent or greater revenues as off the table instead. In that sense, McCain is presumably just showing his ignorance via the "disgrace" comment - perhaps distractedly channeling half-digested talking points from Bush's 2005 Social Security campaign.

But he does actually have a point, which is that absent a clearer link between individual-level taxes and benefits than Social Security currently offers, you get reduced transparency that may have some good effects but also has significant (and to my mind predominant) bad ones.

Keeping the Social Security tax-benefit link unclear has long been rationalized on the left as a device to make the program more progressive than people actually think it is - saying you get your own money back, whereas in fact the hope is that it's being redistributed downward. (This from the benefit formula, although its punch is reduced by the fact that high-income individuals live longer and thus get the life annuity for longer terms.)

But whether or not the muddied tax-benefit link has this arguably desirable effect, it also tends to obscure both generational redistribution from young to old that arguably deserves greater scrutiny, and other quite anomalous redistribution through the program such as from singles and two-earner couples to one-earner couples.

In my Social Security book (see the left-hand side of this blog for a link), I discussed "progressive privatization," a device I thought of much less in terms of the grossly overrated (during the stock market boom) issue of individual investment choice than of making redistribution through the program more transparent.

Anyway, to throw McCain a rare bone here, he tried to explain his comments by arguing that it's unfair for current workers to pay Social Security taxes without their being sure of getting commensurate benefits. One can perhaps credit him with making the point that the program has questionable distributional effects by reason of its obscuring the tax-benefit link (though the problem he refers to is largely a function of sustainability rather than projected benefit levels themselves).

And if that's not enough of a bone, too bad as I have a beach out here in Hoi An to get back to.

Semantic disgrace?

McCain has been drawing heat from the liberal blogosphere for calling Social Security an "absolute disgrace" by reason of the fact that young workers' taxes are used to pay seniors' benefits. They rightly note that he is criticizing a core feature of the program since its inception, thereby suggesting that he is at odds with what remains an exceptionally popular set of policies.

Less noted by anyone thus far is the absurdity of caring about the exact details of cash flow. Money is fungible. If everyone paid exactly the same Social Security taxes and received exactly the same Social Security benefits upon retirement, but the exact dollar bills collected via the payroll tax went into special savings accounts and other funds (from government borrowing or taxes) paid the current benefits, would it make any difference? Only an ass would think so, leaving aside political economy claims about how the cash flow details might affect perceptions and thereby change political decisions.

What matters is how much, on balance, different people get and pay throughout their lives, along with interim timing details if one thinks of Social Security and Medicare as forced retirement saving.

Sapa, Vietnam

After a couple of days trekking in Sapa (mountains in northwestern Vietnam, right by China), we have arrived at the Hoi An resort near Danang in southern Vietnam for our final leg out here. Sapa is striking and beautiful, though easiest to get to if you are short (the night train can be a bit cramped for the taller among us).

A new low

John "100 Years" McCain's claim that he will balance the budget by winning the Iraq and Afghanistan wars (permitting outlays in both countries to go to zero?) deserves some sort of gold medal for ludicrousness and audacity. I assume they were laughing as they formulated this one over in campaign central.

To create a perfect circle, perhaps he should announce that his plan to win those wars is to quintuple expenditures there, given the new flexibility created by his having balanced the budget.

Mysteries of the U.S. presidential campaign

When you are abroad during a U.S. presidential campaign, even with Internet access most of the time, the stuff that is going on back home can seem a bit mysterious once one catches up with it.

Back in 2004, I spent the big Swift-boating month teaching and vacationing in Australia. So, while I knew from nytimes.com and such that it was happening, I couldn't quite grasp how a home-front wartime deserter was able to trash the other guy based on lies so transparent that they should have been laughed at and then ignored. Nor could I grasp why the Kerry campaign didn't do anything about it.

Now after two days offline at Halong Bay I am trying to grasp this bizarre fake scandal regarding Wesley Clark, who is being savaged for saying things that are indisputably true. I gather he was asked why Obama is qualified to be commander in chief when he has never been shot down in a military plane and spent 5 years in POW camp. He answered that this is not really a qualification to be commander in chief - it doesn't involve running large units, making military decisions, etcetera - and added if anything over-elaborate encomia about how he honors what McCain endured, etcetera, etcetera.

This in turn apparently loosed a wave of hysteria about how he's dishonored America, needs to apologize, and so on ad nauseum. The fact that he was respectful and made an indisputably correct observation - McCain's experience may or may not be significant to one's assessment of his abilities and qualifications, but clearly is not itself c of c experience - just doesn't matter.

We are one crazy country these days, and not I fear headed towards greater sanity.

Halong Bay

A 3-hour drive from Hanoi brought us to Halong Bay, where we stayed for two nights on a reasonably luxurious boat and went kayaking through limestone caves, climbing small hills on the islands, and swimming in the warmth of the bay (off the Gulf of Tonkin). A coupla photos may give the basic feel.

McCain's flight suit

This apparently is it, courtesy of the Hoa La Prison in Hanoi (aka the Hanoi Hilton), which is now a museum. I'll admit to feeling a twinge of sympathy for the guy when I saw it, although it's my personal feeling that, in his late-career desperation (last chance for the brass ring and all that), McCain - much like Hubert Humphrey in 1972, for those whose memories go back that far - has definitively thrown his integrity in the trash.

End of class in Singapore

Week 2 of my 2-week Tax Policy stint in Singapore went pretty well. Though I was trying to explain fairly advanced ideas to people who had variable backgrounds in tax law and public economics, with time things kept getting better and it ended up being a good experience on both sides (I think).

Last night, after the last 3-1/4 hour session, I met most of the class for dinner at a hawker center in Chinatown. I almost always find I like students, these included, though, since I don't feel professors should initiate out-of-the-classroom contacts, there is admittedly pre-selection for people who are interested in talking to me.

This brings to mind my look-alike Ringo Starr's response, in an early publicity write-up, to the question, "What sort of people do you like?" He answered "Enyone [sic] who likes me." But I am mocking myself, not the students, when I mention that.

This time, like last year, I ended up teaching people from every continent except Antarctica and Australia. Really very interesting to talk to people from varied backgrounds and yet in many ways part of the same world culture. Those at the dinner were from (among other countries I'm sure), the US, Brazil, Belgium, China, India, Rwanda, and Uganda.

Anyway, here is a beautiful (??) though non-vegetative photo from the Singapore Botanical Gardens.

Random notes from one week plus in Singapore

Lectures would be going well except I am being over-ambitious (good students but they know less about tax than my usual in NYU) and I find myself running out of time each day. Adjustments in the second week should take care of the worst of it.

When on Arab Street, visitors to Singapore should seek out Cafe Zam Zam but avoid Cafe Le Caire (distressingly mediocre for its venue). But our mainstay has been the hawker center near our residence - very good food from a variety of stalls for about $3-4 a meal.

A cabdriver the other day asked if I'm related to Prince Charles. It's usually either that or Ringo Starr. I suspect that I am related to neither, however, unless their Ukrainian/Byelorussian Jewish roots are greater than has previously been reported.

And don't believe the tabloids. These two are just very good friends.

Feeding the sting rays

The Underwater World Aquarium at Sentosa Island in Singapore has a petting tank with tame juvenile sting rays (de-barbed to prevent Steve Irwin replays) that you can feed little bits of squid that you purchase for this purpose. The sting rays are delicate in grabbing the squid without gnawing your hand, an important detail that this picture (showing my arm) may not make clear. You can also pet them in the shallow water tank. They are amazingly silky-smooth and pleasant to the touch.

The 2008 presidential campaign and the fiscal gap

From the Tax Policy Center:

"Although both candidates have at times stressed fiscal responsibility, their specific non-health tax proposals would reduce tax revenues by $3.7 trillion (McCain) and $2.7 trillion (Obama) over the next 10 years, or approximately 10 and 7 percent of the revenues scheduled for collection under current law, respectively. Furthermore, as in the case of President Bush's tax cuts, the true cost of McCain's policies may be masked by phase-ins and sunsets (scheduled expiration dates) that reduce the estimated revenue costs. If his policies were fully phased in and permanent, the ten-year cost would rise to $4.1 trillion, or about 11 percent of total revenues. Both candidates argue that their proposals should be scored against a "current policy" baseline instead of current law. Such a baseline assumes that the 2001 and 2003 tax cuts would be extended and the AMT patch made permanent. Against current policy, Senator Obama's proposals would raise $700 billion, an increase of 2 percent, and Senator McCain's proposals lose $600 billion, a decrease of roughly 2 percent."

Against this background, Obama - less fiscally irresponsible than McCain but by a smaller margin than I would have hoped - deserves a bit of credit for realism and political courage in proposing the "donut hole" payroll tax increase. But that said, and leaving aside that to make no revenue-raising proposal whatsoever would be worse still, I am not wild about this proposal. Generally I prefer base-broadening to raising marginal rates. Plus I favor slowing the rate of entitlements growth. Rate increases are bound to be necessary by one means or another (enacting a VAT, hence increasing its current rate from zero, is merely another genre of this), but I'd prefer to try to do some of the other stuff at the same time. And from an optimal tax standpoint the marginal rate at upper echelons under the Obama proposal is probably too high, although it's true that this is just a wage tax increase, not a capital income tax increase, which from an efficiency standpoint makes it more defensible.

Singapore in a nutshell

I was walking down the street yesterday, and saw a woman walking her dog. Not only did she clean up the dog's mess, but she wiped the dog's bottom afterwards, much as one might with a baby.

Meanwhile, a shot of a performing contortionist in Chinatown.

Scalia flunks History 101

From his dissent in the Boumediene case: “The game of bait-and-switch that today’s opinion plays upon the Nation’s Commander in Chief will make the war harder on us.”

The president is not “the Nation’s Commander in Chief.” He is the commander in chief of the armed forces. Scalia shares the militarized mindset of regimes like that in North Korea. His view of the world does not belong (least of all on the high court) in a country like the United States.

Just before we landed

Photo courtesy of my wife.

After severe jet lag on Day 1 (too exhausted at 7 pm to read a book or even watch Curb Your Enthusiasm without keeling over), we're feeling better today.

Off to Singapore

I leave in a couple of hours for JFK Airport, flying to Singapore to teach Tax Policy over 2 weeks at the NYU@NUS program.  The topics for the 8 classes are (1) public economics, (2) horizontal equity [and lots of related stuff], (3) vertical equity, (4) income versus consumption taxation, (5) corporate taxation, (6) corporate tax shelters, (7) international taxation, and (8) deficits and long-term budgeting.

I had a very good experience teaching this class in Singapore last year.  The students came in knowing virtually nothing about tax law, tax policy, or public economics, but were otherwise strong students and highly motivated, also with a great esprit de corps.  And we pretty much hit it off - among other reasons, because they could see I cared.  Every year is a completely new vibe, however.

Tourism is admittedly a significant part of the motivation for doing this.  We (I'm traveling with my family) will definitely return to Arab Street, the Zum Zum Restaurant, Little India, Chinatown, the Night Safari, the zoo, and the aquarium.  Then, in Vietnam, we'll be staying in Hanoi, Sapa (mountains and hill tribes), Halong Bay (beautiful limestone caves), and Hoi An (resort).

I may post pictures from the trip here from time to time.

Gas tax, the sequel

For McCain, raising the gas tax issue again may verge on being a forced move.  With gas prices up and the stock market down, and with Obama pounding him on the economy and his lack of non-Bush ideas, I don't see where else McCain can go.

This time, the pushback against the gas tax holiday should emphasize more the point that it is unlikely to lower gas prices at the pump, hence it is actually a disguised giveaway to the oil companies rather than a sop to consumers.  Thus, it is just another trademark Republican special interest scam merely dressed up as populism.  The type of thing you'd expect Cheney or Tom DeLay to do.

This pushback has the advantage not only of being true, but of reversing the populist narrative, whereas just calling it irresponsible (although that's true too) would concede the point.

Jason Furman named top economic adviser to the Obama campaign

I count this as very good news, not just because I know Jason but because he has, in my experience over quite a few years, been consistently fair-minded and intellectually honest, even when he took shots for this (an example being the Walmart dust-up a couple of years back).  Among other virtues, Jason has a good understanding of a wide range of tax reform issues, and also of healthcare issues as mediated through the fiscal system (tax and otherwise).  Accordingly, subject to the myriad other factors that would determine the proposals and accomplishments of a hypothetical Obama Administration, the appointment speaks well for what tax and healthcare policy would look like in that state of the world.

I probably agree less with Jason about international tax policy (i.e., the taxation of outbound investment by US multinationals) than about other leading issues, but that's fair enough.

It's my understanding, by the way, that reputable economists on the right generally share my high assessment of Jason.

To be sure, economists and other policy types on the left used to, in bygone days (i.e., until a couple of months ago) think similarly well of Doug Holtz-Eakin.  But that was before Doug either sold his soul for one of the nine rings for mortal men or was placed under the Imperius Curse, depending on whether your taste runs to Middle Earth or Harry Potter.

Jason, however, has previously been through a general election campaign for president.  So I am very hopeful that he, unlike Doug, will sail through again with his reputation intact.  There is also strong reason to hope that the Obama campaign will (continue to) be much more fiscally responsible and intellectually honest than the lost-cause (from this standpoint) McCain campaign.

Vacation reading

I wouldn't entirely call it a vacation, given that I will be doing 28 hours of teaching in Singapore over 8 days, but I'll nonetheless be loaded with vacation reading when I hit the airport tomorrow night.  

Unless I drop one to save weight, I'll have:

1) Ian MacDonald, Revolution in the Head: The Beatles' Records and the Sixties [for the airplane on the way out],

2) Alistair Horne, A Savage War of Peace: Algeria 1954-1962 [Iraq War avant la lettre],

3) Joe Keenan, My Lucky Star [supposed to be a Wodehousean Hollywood novel],

4) Adam Tooze, The Wages of Destruction: The Making and Breaking of the Nazi Economy [not your typical beach read, but highly recommended here & there],

5) Jeannette Walls, The Glass Castle [spouse-recommended memoir],

6) Rick Perlstein, Nixonland [hope it's not too depressing and is analytical not too shrill],

The weight of these is enough to make one think wistfully about the Amazon Kindle.  But if I need more there's always the Borders on Orchard Road out there.

Yes, economists can teach at law schools, but not constitutional law

Doug Holtz-Eakin appears to be branching out a bit from his earlier public economics insights as a McCain adviser, such as in his statements that replacing depreciation with expensing has zero revenue cost and that you can pay for $5.7 trillion in tax cuts over ten years by cutting targeted tax benefits that amount to $30 billion per year.

As the New York Times reports, he is now branching out into constitutional law, at least in the sense of reporting on McCain's apparent constitutional view that the president has unfettered discretion to wiretap Americans, at least in their international communications, no matter what any statutes say or don't say. Holtz-Eakin suggests (though in fairness one could say that he is simply reporting what McCain ostensibly thinks) that only "the ACLU and trial lawyers" disagree with this.

I have supported several economists for appointment to the NYU law faculty, but not to teach constitutional law. This does not appear to be grounds for rethinking that limitation - though, then again, the views Doug reports on constitutional law are every bit as credible as what he has been saying about tax and budget policy lately.

What a kidder

McCain warned yesterday that Obama's policies would create chaos in the Middle East.

Next up, Isiah Thomas warns that Walsh and D'Antoni will make the Knicks a loser.

Summer academic writing

Although my month in Singapore and Vietnam looms, I have begun the first of what I hope will be two articles this summer (probably extending into the fall). Working title: "The Long-Term U.S. Fiscal Gap: Is the Main Problem Generational Inequity?"

Short answer: no, since it is so hard to specify the optimal generational policy. The big problem, I conclude, is inefficiency. I plan to make use of the under-utilized concept of tax smoothing, extended to the expenditure side, in exploring the gap between optimal and actual U.S. budget policy.

Broadly speaking, this is somewhat familiar ground for me. The impetus comes from (1) a Tax Policy Colloquium session with Alan Auerbach a couple of months back, along with (2) my being invited to present a paper at a conference on generational equity, to be held this fall at the George Washington University Law School. I do hope to break some new ground on both the distributional and efficiency issues, however (more on the latter, since on the former my point is more to discuss how little we know).

My second planned article, which I consider more novel but which timing issues compel me to push back, is "The Current Intellectual State of the Play in U.S. International Tax Policy," a topic on which I have blogged a bit, and on which I gave a talk in Israel last month.

Without a cellphone (!!)

I feel as if I have left the 21st century and plunged back into the earlier dark ages. My cellphone broke after many years, and rather than buy a new one (or commit to a two-year plan so I could get one for free) I've decided to get an iPhone.

But what with the pervasive rumors that the new generation iPhone will be out as soon as next week, along with the fact that I am about to leave the country for a month (Singapore followed by Vietnam) and thus couldn't use a cellphone without hefty roaming charges anyway, I decided just to cancel my prior service and sit tight, waiting for July.

So for now I am down to landlines (or borrowing from a family member).

To those who can't imagine it, in most other respects I remain more comfortable than, say, a Survivor contestant.

Mankiw versus DeLong

In Sunday's NY Times, Greg Mankiw had a column calling for a cut in the U.S. corporate tax rate. as per McCain's campaign platform, but with the important difference that Mankiw wants to finance it (assuming it's not providentially in Laffer territory) by increasing the gas tax.

I idly thought for a moment of writing a blog entry saying that I thought this package would be a good idea.  I discuss the reasons for a corporate rate cut in my forthcoming book on U.S. corporate taxation, and am fine with the idea if it is fully financed (such as by raising the gas tax), although I think it also should be linked to shifting more of the taxation of corporate income to the owner level, such as through (a) Ed Kleinbard's cost of capital allowance (COCA) idea of time value of money-style corporate-level deductions and investor-level inclusions for equity as well as debt, and (b) doing more to impute "reasonable compensation" minimum salaries to US resident owner-employees.

Anyway, before doing anything I noted a Brad DeLong blog entry not only denouncing Mankiw but saying that the publication of his column is an example of how MSM publications are headed for the dustbin of history.

Brad's bone to pick reflects either having missed the bit about financing or considering it after-the-fact window dressing with a tendency to mislead the reader into thinking that McCain, no less than Mankiw, is actually inclined to be responsible, which of course he isn't. (McCain would no sooner finance anything than forego endless war.)

The debate has turned into a bit of semantics about how one should read Mankiw's column or think that he anticipated others reading it.  I'm with Mankiw, although it's likely true that the column's net effect on future events is to encourage an unfinanced corporate tax cut.  That's not really one's fault if one states the correct idea and is sufficiently forthright rather than slippery - a test that, in my reading, Mankiw passes.

Reverse spin?

The noise machine message about Scott McClellan's memoir is that he sounds like a left-wing blogger (Karl Rove when it first hit the papers), or that it sounds like a Democrat wrote it (Robert Novak in today's Washington Post).

Another way of saying the same thing would be that a Bush insider has written a memoir confirming the accuracy of the Democrats' and left-wing bloggers' view of the Bush Administration.

Is there anything McCain actually DOES know about Iraq?

I'm trying to avoid political rants outside my main areas of professional knowledge, but I am really starting to wonder about the old duffer.

We've already seen (from several statements) that he doesn't appear to know the difference between Sunnis and Shiites.

Yesterday he asserted that US troops in Iraq are back down to pre-surge levels in Iraq, which is not true. They're at 155,000, pre-surge was 130,000. This isn't just nitpicking - everyone who follows the issue in the newspaper knows that we are still at surge levels.

He doesn't know that the Iranians are in many ways our allies in Iraq. E.g., both we and the Iranians support the Iraqi government - which notoriously prefers them to us - reflecting that Sadr is more nationalistic and independent. He does not appear to grasp this, although in Republican circles this hardly singles him out.

His hilarious walk through that Baghdad market a year ago deserves to be remembered forever, indeed even if he loses the election. The version where the camera pulls back to show the whole scene remains the best clip I've seen on youtube, other than (a) the Tyree catch and (b) the Battle of Kruger. It showed a truly startling inability or unwillingness to see facts on the ground when they were staring him in the face (in the person of all those snipers and gunships that were protecting him).

I am frankly perplexed by all this. It seems to me that a person with a normal IQ who is interested in foreign policy and who simply reads the newspapers ought to know a lot more about Iraq than he evidently does. I assume he has at least a normal IQ. Is the explanation psychological?

Ferdinand the Bull

Many of those with young (or formerly young) children will remember the delightful children's tale of Ferdinand the Bull, who looked fierce but was useless for bullfighting because he just wanted to lie around sniffing the flowers. I was reminded of him by Shadow, our senior cat, when we were out at the country this weekend.

Even when the weather was nice, Ursula was hiding and evidently in no mood to go outside. Buddy was desperate to get out there, but couldn't be trusted safely other than with a harness and very long leash, so he wouldn't dash off and disappear for a couple of days, as he has done before.

Then there was Shadow. At age 17, he is slow-moving and requires only very loose supervision. This picture should convey the essence of his time outside although I didn't get one of him literally sniffing the flowers like Ferdinand (which at some length he did).

In sunlight, the dark fur is very efficient at rapid heat absorption.

Huge sigh of relief

With three weeks to spare before I head to Singapore for two weeks of teaching followed by two weeks of touring in Vietnam (mainly Sapa, Halong Bay, and Hoi An), I have finished a first draft of my forthcoming book for the Urban Institute Press, The U.S. Corporate Tax: What Is It, and Where Is It Headed? Although I still have to re-read and edit it carefully, before submitting it and getting comments from various official and unofficial reviewers, it looks like I'm going to meet the submission deadline (end of June), along with the length requirement (no more than 75,000 words, and right now I'm at 68,457).

I generally meet any and all deadlines, but not without reasonable and even at times unreasonable anxiety. (Although, as Bush would say, I sleep reasonably well notwithstanding.)

Chapter headings for the book - which I hope will appeal to policymakers and academics as well as being well-suited to assign as course reading to students in various types of institutions - are as follows:

1. Introduction

Part One: Basics

2. Why Have a Corporate Tax?

3. Efficiency Problems With the Corporate Tax

4. Pillars of Sand in the Structure of the Corporate Tax

Part Two: Economic Theory Meets the Corporate Tax

5. “Old Harberger” Versus “New Harberger” and the Structure of the Corporate Tax

6. The “Old View” Versus the “New View” of Dividend Taxation

7 Debt and Equity: Tradeoff Theory Versus the Miller Equilibrium

Part Three: The International Dimension

8. U.S. International Tax Rules: The Basics

9. International Tax Policy Dilemmas

Part Four: Where Do We Go From Here?

10. The Emerging Brave New World

11. Corporate Integration

12. Other Possible New Directions for the U.S. Corporate Tax

Press interview

I was interviewed earlier today by a reporter for an on-line financial publication concerning my proposal for partial adjustment of publicly traded companies' taxable income towards their financial accounting income. He had gotten the lead from my talk to the National Tax Association the other day.

The interview mainly concerned what I am ostensibly doing to promote this proposal. I tried to tell him up front - I'm not exactly promoting it; rather, I'm saying that it deserves to be considered, but might or might not prove to be meritorious on balance once all of the underlying empirics were nailed down.

He reacted to this with blank incomprehension, evidently regarding it as something to put behind him so he could get on with the interview. In effect, I suppose he viewed it much the same way as you or I would if a car dealer were to say "I'm not saying you should buy this car - just that it's among the cars you should consider." Yeah, right.

I am not exactly in that type of business, however. Indeed, to me it would be more anomalous to claim that a given proposal which raises various open empirical issues definitely IS meritorious, than to say that it is of interest and MIGHT be meritorious. After all, what could possibly be the good-faith basis for opining so definitively? We're not supposed to be George W. Bush out here in academia, issuing pronunciamentos based on the dictates of our guts.

This is one of the problems with playing the public intellectual role. On the one hand, you may have a responsibility to share what you know and believe. And there can be professional benefits to doing this, if only to one's reputation or vanity. But if you cross over, then at some point you are done as a legitimate thinker.

Optimal income taxation and the NBA draft lottery

This evening's NBA draft lottery reminds me that the lottery is a redistributive instrument balancing efficiency against distributive goals in much the same manner as the optimal income tax (OIT) in the public economics literature pioneered by Nobel economist James Mirrlees.

The NBA draft imposes a tax on regular season success by causing it to worsen one's draft position. It thereby promotes competitive balance but weakens incentives to win this year. Ordinarily, this doesn't cause serious incentive problems, but the NBA learned through experience that, when teams sure of missing the playoffs were ranked in strict reverse order in the draft, this could create really perverse incentives, such as trying to lose all your games so you would get a # 1 pick who was a clear standout (such as a David Robinson or Hakeem Olajuwon, back in the day). The NBA responded by weakening the draft's redistributive targeting via the lottery (under which the team with the worst record has only a 25% chance of getting the top pick), so as to weaken the perverse incentive to lose.

One difference between the NBA draft lottery and the OIT is that concern about incentive effects may be more discontinuous in the former than the latter. Under the OIT, any lost labor effort due to the tax wedge between private and social returns is regrettable. In the NBA, the point may be to make sure fans don't feel too upset about the games they are paying to watch, and short of that perhaps it doesn't matter. E.g., perhaps it's not a big problem if one reason the Miami Heat shuts down Shawn Marion for the year is that there's no longer any point to winning anyway, but it would be a big problem for the league if Pat Riley (given the active personnel) coached to lose a given game.

National Tax Association session in Washington

Yesterday I presented my tax and accounting paper at the NTA’s annual spring meeting in Washington. This involved racing through my perhaps 30 minutes worth of Power Point slides in only 20 minutes (I didn’t have time to shorten them). Lillian Mills of the University of Texas was my commentator.

Lillian began her comments by praising my paper (to quote her slides) as “beautifully written;” she subsequently added further kind words to this effect that I will (barely) resist quoting.

Uh-oh, I thought. I felt like the proverbial person who learns that his/her blind date thinks he/she is “really nice” and has a “great personality.” But her comments were fine, both objectively and from my own particular selfish perspective.

Like all other commentators and readers of the article, Lillian focused more on the 50 percent taxable income adjustment proposal that I offer than on the general analysis. This was inevitable once I made the proposal, albeit contrary to my preferences. I would want the proposal to get, say, 30 percent of the total attention, with the general analytics getting the rest, but instead the only choice I had when writing the paper was for the proposal to get 0 percent of the attention (if I omitted it) or else 90 percent. So it goes.

Not surprisingly, Lillian was a bit of a skeptic about the proposal. (I put it this way because most people with accounting backgrounds react this way, just like tax scholars tend to hate proposals that would monkey with the income tax to serve “outside” objectives.)

In substance, her main concern was that giving taxable income effects to financial accounting income would reduce the latter’s value relevance in practice. But most of the research she cited in support of this conclusion appeared to deal with making the financial accounting treatment follow the tax definition of income, rather than simply changing the incentive structure for reporting financial accounting income while the measure that was applied (one hopes) remained the same.

Other good points that she made I will address by revising the article rather than going through them here.

Also at the same session was Jim Hines, presenting his paper (first given at NYU last fall) arguing for exemption of US multinationals; outbound business investment on grounds of capital ownership neutrality (CON) and national ownership neutrality (NON). I am a big fan of Jim and his work. But much of the paper seemed to involve arguing by analogy, which one normally would expect more from lawyers than economists. And I remain mystified by Jim’s apparent position that, when choosing between taxes that distort on various margins, one should aim for zero distortion at one of the margins (pertaining to cross-border ownership). Usually one assumes that it is better to have small distortions on all of the margins than to set any of them to zero and thereby require (in a balanced budget setting without lump sum taxes) that the other distortions be larger. Why is it so clear that exemption for foreign source income is preferable to modestly taxing outbound investment in order to finance a slightly lower domestic rate?

A final note: I missed the earlier NTA panel at which economists with various of the presidential campaigns (or affiliated with the Democrats or Republicans generally) addressed tax policy in relation to the 2008 election. Among them was Doug Holtz-Eakin, whom I have criticized in a couple of earlier posts for his role as a front man and (apparently) unapologetic spokesman for the loonily irresponsible tax cut proposals that have been emerging from the McCain campaign. But I thought of Doug, during the later panels, whenever presenters from the Treasury Department or the Joint Committee on Taxation repeated the usual boilerplate by stating that the views they were expressing were purely personal, rather than attributable to their employers.

Holtz-Eakin, I was thinking – and perhaps all of the economists working for the campaigns – would be well-advised, for the next six months, to say the opposite whenever he makes an economic policy statement: “The views I am expressing are those of the __ campaign only. They should not be attributed to me personally.”

Oops, rounding error

Stan Collender reminds us that Bush in 2000 promised to eliminate the national debt by the end of this decade.  Instead, it is more than $9.3 trillion and rising by $1.59 billion per day.

On a par with his other achievements.

Joint Committee on Taxation addresses tax expenditure analysis

This past Monday, the JCT issued a pamphlet taking on an important conceptual issue, tax expenditure analysis, and making what I think are significant strides in how to rescue the analysis, and its important informational content, from sterile debates about what constitutes a "normal" tax base. The JCT's main move is to distinguish between (a) narrow subsidies, which on their face depart from the usual treatment of a broader category of items, evidently reflecting Congressional intent to affect resource allocation, and (b) what the pamphlet calls "tax-induced structural distortions," such as quirks arising by reason of the realization requirement. The JCT also proposes to measure negative tax subsidies (i.e., allocatively-minded penalties) as well as positive ones.

My writings on tax expenditures (such as in chapter 8 of Taxes, Spending, and the U.S. Government's March Toward Bankruptcy) are similar in spirit although different in some details (e.g., how to classify the earned income credit). So I am delighted to see the JCT taking up the cause of making the analysis more useful and less mired in pointless debates, such as that between income and consumption tax advocates, that are orthogonal to its informational content.

I first got interested in writing about the topic some years ago, when I was a commentator at an AEI event in which Bruce Bartlett criticized tax expenditure analysis because he saw it as a device used by income tax advocates to peddle their side of the ongoing debate. I agreed with him that it had been used this way, going back to Stanley Surrey, but argued that it has more general informati0nal content, and can advance agendas such as his (favoring small government and identifying departures from it) no less than Surrey's. Plus one need not have an agenda in order to favor more crisply identifying cases in which Congress conceals what seem clearly to be allocative policies (e.g., favoring a particular type of investment) by embedding them in a seemingly distributionally motivated instrument (such as a general income or consumption tax).

My favorite example of the core point made by tax expenditure analysis remains one that I got from David Bradford. Let's cut both taxes and spending by $50 billion, David pretended to urge, by zeroing out $50 billion of military spending (to buy advanced weapons) and enacting instead $50 billion worth of "tradable tax credits" that would go to the very same weapons suppliers for the very same weapons. At the end of the day, everything would be exactly the same, but taxes and spending would each be reported as $50 billion lower. Without a tax expenditure concept, it is hard to show as crisply that nothing in this scenario has genuinely changed.

Release of candidates' spouses' tax returns

Cindy McCain is refusing to release her separately-filed tax returns as part of the disclosure process generally demanded in a Presidential campaign. In 2004, Teresa Heinz Kerry similarly refused to release her returns for most of the campaign, although on October 16 of that year she released the front two pages of her 2003 tax return.

Perhaps all this focus on candidates' tax returns is a bit over-blown. I remember the big hoodoo when Hillary Clinton released her returns earlier this year, which turned out to be no big deal except that it provided interesting background on just how much the Clintons have earned (and a bit on the general details of how Bill earned some of it). But if disclosure is the norm, it strikes me as quite illogical to provide an out for spousal income simply by reason of separate filing. If it's germane to understanding the candidate's overall financial circumstances (assuming that's one reason for the norm of releasing the returns), separate filing seems likely, in most actual marital situations, to be quite irrelevant.

A further point of interest is that separate filing is usually a bad idea from a tax planning standpoint. So, if the McCains get away with this (as the Kerrys, admittedly, largely did), then effectively spousal disclosure is required unless the candidate is especially motivated to want to avoid it. Not exactly an ideal filter.

Hillary's next move

She is truly emerging as one of Wellesley's and Yale Law School's great "anti-elitists." I'm expecting her to denounce the theory of evolution any day now. If the U.S. had more Islamic than anti-Islamic voters, no doubt she would call for restoring the veil.

At least her feelings about economists are mutual. Long before the current campaign, very few economists who knew her in the Bill Clinton Administration had anything good to say about her. At best, they would remember what their mothers told them and decline to say anything at all.

Back from Israel

I am back from a very pleasant week in Israel, jet-lagged after a 6 hour plane delay that kept me in the Ben Gurion Airport from 9 pm to 5:30 am, but more or less functioning.

Yoram Margalioth of the University of Tel Aviv Law School was my very gracious host, and I also enjoyed meeting other Israeli tax academics (such as Tsilley Dagan, Yitzhak Hadari, Jacob Nussim, and Avi Tabbach). On my last day there, I gave two talks, one on my tax & accounting paper that is forthcoming in the Georgetown Law Journal, and the other on the content of an as yet unwritten paper that is tentatively called "The Intellectual State of the Play in U.S. International Taxation." There was some good discussion, including from students who read the tax & accounting paper (which I presented at a tax colloquium).

But of course the best part, apart from the hospitality of Yoram and others, was touring Israel. Highlights included Jerusalem, Masada, the Dead Sea, the ruins at Caesarea, and the Golan Heights. And of course all the hummus, pita, Jerusalem bagels, and other such delicacies that are available there. Highly recommended as a tourist site and as someplace for U.S. tax academics to visit.

On the downside, I didn't think Continental Airlines lived up to the billing that they give themselves for service in all those quite amusing TV commercials.