Still having the wrong debate

The New York Times today picks up on the ongoing debate about whether the top bracket should uniquely be left out of extending the expiring Bush tax cuts for individuals. The article refers, inter alia, to the Todd Henderson-Brad DeLong et al brouhaha on which I briefly weighed in last week.

To give one of my main points from last week a bit more emphasis, one of the big problems here is the fundamental mismatch between the rhetoric being used to support letting the top bracket rate cuts expire and the underlying fiscal situation. Extending ANY of the tax cuts is crazy given the looming U.S. fiscal gap, leaving aside only the points that (a) better-directed stimulus than extending the tax cuts may be politically unavailable, and (b) if base-broadening were on the table politically, one might prefer that to letting the rates go up. But again, given that rational alternative courses are unavailable, it verges on insanity to extend any of the tax cuts (other than in the scenario of a temporary extension that the relevant actors agree will be allowed to expire).

The Obama Administration has decided, from the defensive crouch all Democrats have adopted for at least the last 25 years, to support extending all the tax cuts below the top bracket. In other words, Rove's gambit back in 2001 worked: he was able to shift the political baseline to one of permanent tax cuts without having to count the out-year revenue loss. Plus, he got to exercise agenda control 10 years in advance to the Republicans' predictable advantage. But making an exception just for the top-bracket group has encouraged the Obama Administration to trot out rhetoric about billionaire bankers and the like, which genuinely is a poor fit with $250,000 a year even if that income amount is well into the 99th percentile.

So now we have people like Senator Webb of Virginia saying that the cutoff for raising the top rate above the current 35% should be something much higher than $250,000, leading to yet more revenue loss than under the Administration's position if it happens.

Leaving aside the issue of overall revenue loss, however, Webb has his finger on something that merits attention. The issue of billionaire bankers, or more precisely the fact that the very top of the income distribution has pulled far away from everyone else over the last 20 years, clearly is important even if it doesn't support making the long-term fiscal gap even greater by limiting tax cut expiration to the very top of the top. But no matter what the rates are, and no matter how well or poorly one has addressed the fiscal gap, the question of whether tax rates should be higher at the billionaire level than for those merely at the lower end of the 99th percentile deserves thorough analysis.

I should note, however, that, in the optimal income tax (OIT) literature dating back to the rightly Nobel-awarded work of U.K. economist James Mirrlees, there's a result contrary to raising the rate at the very top. The OIT literature seeks to illuminate the proper consequences for tax rate structure of balancing distributional concerns against efficiency concerns (adaptable to any view one has regarding how best to trade them off against each other). But it tends to suggest that tax rates should be relatively flat and indeed eventually declining at the very top - even if one values progressive redistribution a lot.

This OIT-based view has enormous, indeed compelling, logical force within its assumptions. But these assumptions can potentially be challenged. For example, the approach typically treats utility as depending only on one's own consumption. Thus, if someone gets ten times richer while everyone else stays the same, that person wins and no one loses. There might be a strong case for redistribution away from that person, but this would be based purely on the assumption that, due to the declining marginal utility of wealth, other people would get far more utility from a given dollar than he or she would. Simply burning one of that person's dollars (in the sense of causing him to forego it without getting to transfer even a penny to anyone else) can only be bad, under these assumptions, given that everyone's utility counts positively in the social welfare function.

Suppose there is a case that the top 0.1 percent's astonishing pullaway has had bad social consequences, to which one should object in straight utilitarian terms even if one opposes assigning any independent, non-welfare based, weight to equality for its own sake, to non-welfarist "fairness" concerns, etcetera. Then taking away a dollar at the top could potentially have good social welfare consequences even if no piece of it is successfully transferred to anyone else. This would have to be a claim about externalities. It's very contrary to the way economists (and their fellow-travelers such as myself) generally like to think about these issues - and this reluctance is usually quite justified - but, in this setting, potentially compelling albeit needing specific elaboration.

Other stories might also undermine the standard OIT view about flat and eventually declining tax rates at the top. For example, if being at the 99.99th income percentile correlates with enjoying rents, or with being more concerned about positional jockeying versus one's peers than about the consumption that each extra dollar permits one to afford, there could be further support for rising tax rates at high levels. But this is a set of issues that academics ought to be looking at more, whether just because knowledge is good (as they say at Faber College) or in the hope that findings - and yes, it's not just about self-expression - could eventually influence the political process.

New article available on SSRN

I have posted on SSRN my latest article, "The Rising Tax-Electivity of U.S. Corporate Residence," subject of my Tillinghast Lecture at NYU last week.

Link is here. Abstract is as follows:

In an increasingly integrated global economy, with rising cross-border stock listings and share ownership, U.S. corporate residence for income tax purposes, which relies on one’s place of incorporation, may become increasingly elective for new equity. Existing equity in U.S. companies, however, is effectively trapped here, given the difficulty of expatriating for tax purposes absent a bona fide acquisition by new owners.

Both the prospect of rising tax electivity for new equity and the very different situation facing old U.S. equity have important implications for U.S. international tax policy. This paper therefore explores three main questions: (1) the extent to which U.S. corporate residence actually is becoming elective for new equity, (2) the implications of rising electivity for the age-old (though often mutually misguided) debate between proponents of residence-based worldwide corporate taxation on the one hand and a territorial or exemption system for foreign source income on the other, and (3) the transition issues for old equity if a territorial system is adopted.

Another reader's response to Getting It

A lawyer who read Getting It (via a mutual friend, but without knowing the personal connection back to me) says:

"A tale of avarice, greed, back-biting, debauchery, treason, and dishonesty! In other words, an accurate portrayal of the legal profession."

Hey, I just report the facts - I don't invent them.

Watch my Tillinghast Lecture!

Why settle for just my slides, when you can watch the entire lecture via the NYU homepage here, or directly on youtube here.

UPDATE: If I do say so myself, after sampling it for a few minutes it appears to sound reasonably coherent. Those who know something about the topic may actually be able to follow it in this format. The audience in the room had assistance from my PowerPoint slides, through which I scrolled down during the talk, but if you print them out I suppose they can function as a detailed outline.

Most hilarious line of the week

From the Republicans' "Pledge to America,", this year's severely marked-down sequel to the infamous 1994 "Contract with America":

"With common-sense exceptions for seniors, veterans, and our troops, we will roll back government spending to pre-stimulus, pre-bailout levels."

In other words, they're going to avoid touching all the main sources of high government spending and growth therein, while cutting taxes by trillions of dollars over the long haul and pretending that they are concerned about debt and deficits.

UPDATE: I mainly try to steer clear these days of overly strongly worded or emotional-sounding responses to Republican shenanigans, but why not let Andrew Sullivan do the honors:

"Given the gravity of the debt crisis, this is the most fiscally irresponsible document ever offered by the GOP. It is to the far right of Reagan, who raised taxes and eventually cut defense, and helped reform social security to ensure its longterm viability. It is an act of vandalism against the fiscal balance of the US, and in this global economic climate, a recipe for a double-dip recession and default. It is the opposite of responsible conservatism."

PPT slides for my Tillinghast Lecture, "The Rising Tax-Electivity of U.S. Corporate Rresidence

The slides from my talk are available here.

UPDATE: And here's an accompanying photo.

Tillinghast lecture at NYU Law School

Today I gave the 15th annual Tillinghast Lecture on International Taxation, to a group of about 300 people at NYU Law School. The audience mainly consisted of NYU graduate students in the International Tax Program, other NYU students, faculty and staff from the law school, NYU Law School grads, other legal academics, a few economists, and a number of tax practitioners. Mostly from NYC and thereabouts, but a few came from out of town.

I'll post the PowerPoint slides for the talk shortly, and also a link for the underlying paper once it's up on SSRN. (But I am going to do minor revisions first.) While the title is "The Rising Tax Electivity of U.S. Corporate Residence," it ranged more widely than that, discussing many of the basic considerations (as I see them) in the choice of U.S. international income tax regime for corporations. Drab though this may sound to those not in the field, there's actually great complexity and depth to this set of topics, which also may matter economically to a degree.

I knew I had a lot of fairly complicated things to say and very different types of points to make or issues to address, so the problem of how to make it all comprehensible was a challenging one. Especially as I talk quite fast, and am willing to hit a lot of related but distinct topics successively. And I'm also trying to connect simultaneously with multiple audiences (students, sophisticated journalists, practitioners, economists, policymakers, etc.).

Did I worry about any of this in advance? Who, me? Why, yes, as a matter of fact, at least briefly.

This is probably a once-only talk, unlike other recent academic papers that I gave multiple times (typically to 20 or so people at a shot) and thus was able to sharpen up as I went along like an off-Broadway show that starts with previews. But I had put in some time polishing my slides, and also figuring out how best to discuss & explain things, though I absolutely can't stand to do a literal dry run practice talk.

In doing these sorts of public talks (usually, however, shorter talks before smaller audiences), you get to know that you have better days and worse ones, just as one's tennis forehand may be crisp and accurate one day, then into the net or floating long the next. And you always figure that strangers will judge you based on today's performance (just as in tennis, where there's nothing lamer than saying to someone you haven't played before, "Sorry, I'm a bit off today"). But in addition to having thought things through to a fair degree, I discovered early on that I seemed to be in reasonably good form today. So if you were there and found it bewildering, I don't even have the "just an off-day" excuse, inadequate though that would be anyway.

In sum, I felt good about it from a performance as well as a substantive aspect. Also, though I got some good comments, I generally had anticipated them, thus confirming my sense that I am on the right track in thinking about these issues, and have a fair amount to add (only part of it raised in today's paper) even though the topics are by now familiar in the biz.

Pavement concert

Last night in Brooklyn, I got to see a 2-hour set by Pavement from about the 4th row (an approximation, since there was no seating). All it took was getting there not long after the gates opened, and then being willing to stand near the stage for almost 2 hours before they got started, a wait that was mitigated by two warm-up acts, including one with Jenny Lewis (formerly of Rilo Kiley).

My back wasn't especially thrilled by this, but it agreed not to scream too hard or shut down operations, and even recovered swiftly afterwards. Another annoyance was a few drunk twenty-somethings who would shove past people who got there before them and then jump up down screaming the lyrics, physically endangering those near them while also crowding them and blocking their view.

This, however, at least bemused me a bit. The strange angle was that people who would do this sort of thing would actually know Pavement lyrics by heart. They're a bit, well, elliptical for that sort of thing. Take "Summer Babe," seemingly a classic brainless school's-out type of tune about what the title suggests, except that the lyrics begin like this:

"Ice baby / I saw your girlfriend and she was /eating her fingers like they're just another meal / but she waits there / in the levee wash she's / mixin' cocktails with a plastic-tipped cigar." Okay.

Or take "Fin," a stately anthem directed at prison architects, who are urged to send in their blueprints ASAP.

The songs above all made the concert, though the group was high-energy and entertaining as well. Pavement reputedly gave relatively ramshackle or haphazard concerts at times back in the day, but today's standard is more professional (just as rock groups can't take the stage 2 or 3 hours late any more, as the big names used to 30 years ago). So they were revved up and delivered on the songs' musical potential for enjoyable loud performance.

Everyone in the group except for Stephen Malkmus seemed to be a competent but not enormously interesting guy, happy to give a full-tilt concert to the sort of wildly appreciative crowd they probably only got in smaller venues back in the 1990s. There was even football banter between songs. But he, like his songs, is a lot more ambivalent. There's both an evident love for "classic rock," the big anthem, the classic riff, etcetera, along with an accompanying enjoyment of word play and musicianship for their own sakes, and yet at the same time a sardonic and aloof sense of the phoniness and artificiality of rock stardom and public performance conventions.

Late to the fray

Todd Henderson, a University of Chicago law prof who writes about corporations, securities law, and such from what appears to be a classic U of C pro-markets and anti-regulatory perspective, has been having a rough time over the last few days (see, for example, Paul Krugman here) because of a blog post in which he complained about being potentially subject to a tax increase if the expiring Bush tax cuts are not extended for top-bracket taxpayers.

Henderson got into hot water by rightly interpreting a lot of the rhetoric about not extending the top-bracket tax cut as pertaining to how "rich" people should be taxed, as compared to those who are "middle class." The latter group's tax cuts both parties are eager to extend (leaving aside the chance that the Republs will hold their tax cuts hostage to those of the top bracket). Hence, Henderson thought it germane to note how the circumstances of his life prevent him from feeling "rich," even though he is a law prof at a leading school and his wife is a doctor, making for two six-figure professional-level salaries. (My family and I, by contrast, have to get by, if that's the word for it, on just one such salary.)

The word "whining" has been used, and Henderson has been condemned for lack of empathy with people in that portion of the U.S. population (99.5 percent or so) whose households earn less, and in most cases at least 80 percent less, than his, and yet somehow seem to get by. But show me a non-whiner and I'll show you someone who isn't fully human. The important thing is what perspective one ends up taking towards one's own inclination to whine (or should I say, towards the enticing joys of wallowing in it).

Frankly, I can identify emotionally with Henderson's complaint, although I certainly wouldn't have posted such a thing. Emotionally though not intellectually, I very much feel the same way as he does about the "who's rich" question, and I'll bet that the huge majority of people similarly situated in the lower to middle bounds of the 99th percentile have similar feelings.

The reason why is identified by Krugman, as well as by Brad DeLong. The way our society operates these days, people in Henderson's and my tier see those above them who (at least as it seems to us) live way higher on the hog and have no financial worries whatsoever. Suppose I take a long flight on a business trip to Europe or Asia and find myself in the cattle cars, a.k.a. coach. Do you think I close my eyes while staggering with my bag through first and business class? Of course not. We often encounter, and psychologically are inclined to care about, what people above us have (and recall that the income gap between us and the top has skyrocketed over the last 20 years). Plus, we find ourselves strongly encouraged and inclined to want and even expect a whole bunch of things that add up to more than we can easily afford, even if we're in the 99th percentile. But then again, economics is the "dismal science" because it's about choice under scarcity.

Equally or more importantly, there's sufficient economic segregation going on to ensure that many of those in our tier will not get to see a whole lot from the inside regarding the lives of the 99+ percent of households that earn less than we do. (Well, I personally DO get to see some of this, and am emotionally inclined to keep it in mind, but that's just me.)

So the feeling Henderson had is understandably widespread in his (and my) socioeconomic tier. Where he really went wrong, but with substantial encouragement from the rhetoric surrounding the extend-the-tax-cuts debate, is in thinking that the case for allowing top bracket rates to rise rests on the notion that all these people are "rich," a claim that necessarily depends on one's frame of reference. But this is the impression that non-tax and budget experts might have been expected to derive from Obama Administration rhetoric, given that the Administration is urging the extension of all other income tiers' expiring tax cuts.

Brad DeLong's takedown nails this pretty hard, noting the horrific long-term budget problems that we face, which make huge tax increases inevitable. Brad also notes this isn't just because the Democrats like a big public sector - Bush did more than all preceding presidents put together (or at least the net of them) to make the fiscal problem a huge one. But of course this goes to show that the so-called middle class tax cuts shouldn't be extended either - and indeed aren't really being extended other than temporarily, given the payback for everyone that's only a turn or two down the road.

So let me try this quasi-defense (?) of Henderson, who after all could have been my colleague had I stayed at Chicago. The commonly offered public rationale for permitting his annual tax liabiity to go up, via non-extension of the top bracket tax cuts, which is that he is "rich," doesn't jibe with how most (I would surmise) people in his socioeconomic position feel about their lives. This admittedly reflects their myopia, but of a sort strongly encouraged by the circumstances in which they (we) commonly live. But in fact the question of who is "rich" in the proper comparative sense is really beside the point. (It's undisputed, of course, that those in the top bracket are generally richER than those in the lower brackets, even though taxable income is an imperfect measure of comparative material wellbeing.)

As a matter of brute political reality, taxes are going to have to go up, and indeed a lot, for way more than just the "rich" by anyone's definition. Extending the so-called middle class tax cuts is insanity as well (leaving aside the case that the current recession calls for delaying the effective date of rate hikes, at least given other political constraints on fiscal policy). And the Obama Administration (albeit under political duress) has helped perpetuate the misunderstanding that this is all about who's "rich," because no one in politics - and Republicans even less than Democrats - has the incentive or the nerve to speak in full candor about the long-term budget picture, its causes, and likely or feasible solutions.

Back from the mists of time

When I was 17 years old and had just graduated from high school, I decided I was interested in art films (mostly foreign) and spent much of the summer going to see them in now-vanished Manhattan venues such as the Carnegie Hall Cinema and Bleecker Street Cinema. These places were a bit like the Quad Cinema or Film Forum today, except that, instead of emphasizing first runs, revivals, genre festivals, and the like, they mainly went through repertory one-day, double-bill showings of what were then the enshrined classics (Bergman, Antonioni, Godard, Truffaut, Fellini, Satyajit Ray, etcetera - though I believe Hitchcock and the American likes of Hawks and Wilder may have made it into the canon by this time). Needless to say, you couldn't otherwise see most of those films. Even Sony Betamax hadn't been invented yet, and on TV (pre-cable, at least in my household), if there was any chance at all, it would have had to be late night on channel 13. You could see them on college campuses through the student film societies, but that wouldn't be happening for me until the fall.

Early in the summer I saw what was actually (I think) a new release, Truffaut's Day for Night, starring Jacqueline Bisset and Jean Pierre Leaud, among others, and offering a fictional account of the process of a director (played by Truffaut) making a supposed film. One of the more amusing aspects is that the film-within-the-film appears to be quite hokey. It's called "Je Vous Presente Pamela," and the story line is that a young, newly married British woman, brought for the first time by her French husband to his parents' house, falls in love with the father-in-law, leading to melodrama that ends with a shooting and car crash. In the actual film, we see scenes from the fictional film being shot completely out of order, with actors flubbing lines, a cat refusing to drink milk on queue, romantic and other complications on the set continually getting in the way, etcetera.

I just loved the movie (and also, as I recall, Jacqueline Bisset), but for more than 3 decades I had never seen it again. (I once rented a VHS version, back when that was the dominant format, but gave up after 5 minutes because it was excruciatingly badly dubbed.) But I had always wondered if I'd like the movie seeing it again later in life, and also why I had liked it so much. I'm not generally a huge Truffaut fan (though he's often OK) with the exception of The 400 Blows, which I certainly still swear by. One operating theory was that Jacqueline Bisset had a lot to do with it. But when I'd seen her in other movies while a bit older, I hadn't been similarly starstruck (though obviously she was quite beautiful).

I finally decided to get Day for Night from Netflix, have now watched about 2/3, and will finish it in a day or two when I have the time. The verdict: good but not great, and the reason I liked it so much back in the early to mid 1970s was not just Jacqueline Bisset but rather the broader milieu of the film, which gave me an excited nose-to-the-glass sense of finally, at a transition stage in my life, getting an actual full inside glimpse at a sophisticated adult professional and social world.

Getting ready for the Pavement concert tomorrow

To get in the right frame of mind for the Pavement concert at Williamsburg Waterfront tomorrow night (2 tix still available, BTW, for Tuesday night in Central Park), I decided to make my own version of Quarantine the Past, their recently issued greatest hits (if that's the word for it) compilation CD. Just under 80 minutes to fit on a CD for the car, but then I decided to expand it for an iPod playlist with a target ceiling of about 90 minutes (this having something loosely to do with health club exercise times).

Still missing a few vital songs, especially from Crooked Rain, Crooked Rain and Brighten the Corners, and also containing a few quirky picks that might not really belong on a best-of, but at any rate here are my current choices for Best of Pavement, clocking in at 1:29:56:

Box Elder
Summer Babe
Trigger Cut
In The Mouth A Desert
Here
Silence Kid
Elevate Me Later
Stop Breathin’
Unfair
Range Life
We Dance
Rattled By The Rush
Father To A Sister Of Thought
Easily Fooled
Brink Of The Clouds/Candylad
Stereo
Shady Lane
Date With IKEA
Fin
Harness Your Hopes
No Tan Lines
Spit On A Stranger
Major Leagues
The Hexx
...And Carrot Rope

UPDATE: If I'm counting right, they ended up playing 16 of these songs.

More good news for people who like bad news

Desmond Lachman at AEI is predicting that "the Euro will unravel, and soon," which he notes would have disruptive effects extending well beyond Europe itself:

"From a U.S. perspective, a deepening in the eurozone sovereign-debt crisis could threaten the rather feeble U.S. economic recovery now underway. In part, it would do so by weakening the euro against the dollar and by clouding European growth, both of which would diminish U.S. export prospects. The more threatening channel through which it could impact the U.S. economy would be by increasing overall global financial-market risk aversion and by precipitating another global credit-market crunch akin to what occurred in the aftermath of the Lehman bankruptcy in September 2008. This risk is underlined by the fact that global financial institutions are now closely integrated and that U.S. banks presently have around US$1.5 trillion in loans outstanding to Europe."

I don't know Lachman personally or by reputation, but gather that he is well-regarded and a serious person, rather than being one of AEI's more politically minded resident scholars or fellows.

Getting It versus the Coen brothers

The Coen brothers’ Burn After Reading came out two years ago, but I only got around to seeing it on DVD last night. I liked it, and as a family activity in a household with 2 teenagers it was a big success, as the film’s snark level proved highly age-appropriate (though it worked for the adults as well).

For those who haven’t seen Burn After Reading, it's a dark and absurdist farce, mixing a sex comedy with a spy caper, in which a bunch of scoundrels and fools largely fail at everything they try to do (and if it's one against another, they both fail). Like much of the Coen brothers' work, it's in a sense aesthetically radical for a mainstream release with a decent budget, distribution, and well-known stars (such as George Clooney and Brad Pitt). Nearly all of the characters are either unpleasant or stupid, and most are both. Hence, there is no one conventionally to root for in the Hollywood tradition, and if you insist on that you won't like the movie. Moreover, the great thing about the spy plot (if one can call it that, and I'm laughing with not at the Coen brothers in saying so) is that, between a few coincidences and the characters' stupidity, what ends up (or rather keeps on) happening makes absolutely no sense to trained professionals whose job it is to look for purpose and meaning.

I very much identify aesthetically with this type of thing, and thus perhaps it's unsurprising that Getting It has a similar aesthetic. Except, in my novel the comedy comes from grotesque disproportion between the value of the characters' aims (to themselves or anyone else) and the efforts they invest in trying to achieve them, as well as from the characters' self-importance and grandiosity, rather than from stupidity and meaninglessness as such.

But one difference betweeen the two relates to what I think is the main problem that some people who are quite willing to embrace the aesthetically radical or non-mainstream often have with the Coen brothers' movies. At times the Coens so dislike and appear to feel superior to their characters, to whom they can be quite cruel, that it can come off as a bit smarmy on their part and also adolescent. Which is too bad, because there truly is an aesthetically radical element there as well. E.g., consider the delightful cynicism of the endings of, say, Burn After Reading, Barton Fink (which I nonetheless don't entirely like, though parts of it are great, such as the Coens' vicious critique of the otherwise forgotten Clifford Odets), and The Big Lebowski. There really is something in these films that's pretty bracing for a major commercial release, though hard to separate entirely from the aspects one might find too self-satisfied.

In Getting It, I tried to have a bit of compassion even for my most odious characters, without softening them up or giving them redeeming features, and while I could be hard on them I tried not to be gratuitously cruel. I saw them as victims of delusion and false consciousness, and thus in the end to be pitied for that, rather than hated for their bad behavior. "There but for the grace of whatever go I," I was inclined to think while writing it. Hence, I hope it can appeal to people who like the Coen brothers' aesthetic other than when the Coens seem too persuaded that they are much better than their characters.

Swinging for the fences

My book in progress concerning U.S. international taxation, tentatively called "Fixing the U.S. International Tax Rules," is starting to come out pretty assertive regarding how I feel I am changing and advancing the prevailing analysis. This can be risky, because people don't want to hear such claims and may be inclined to resist them, but I feel it's justified.

In Decoding the U.S. Corporate Tax, by contrast, I made no such claim, nor could I have. "Decoding" tried to explain and critically evaluate a rich preexisting literature, but without adding as much that was intellectually new, beyond a sense of the broader context and several dollops of intellectual arbitrage.

Two differences: the underlying academic literature in corporate taxation is much richer than that in international taxation, and I hadn't thought as deeply about the corporate tax issues. That book's motivation was largely pedagogic, indeed born of my frustration when teaching corporate issues in tax policy classes and finding that there was no suitable reading accessibly addressing the issues that I considered most interesting and important. This time, by contrast, more is accessible but the field (in my view) remains intellectually in a far more primitive state.

With apologies for the commercial solicitation

Would anyone from the NYC area like to inquire about 2 Pavement tickets, featuring uberslacker Steven Malkmus from when he was still razor-sharp and at the top of his sardonic game? Central Park, Tuesday Sept 21.

I can't go because I'm giving the annual Tillinghast Lecture on international taxation at NYU on that day, though I did manage to buy tickets to the preceding Sunday show.

Oh, to have been a fly on the wall ...

Doug Holtz-Eakin, in a widely-linked MSNBC interview the other day:

"Let's get away from the politics of personalities. Let's not talk about a Sarah Palin all the time, and let's have, again, a debate about ideas...."

There may be a wound lurking beneath this comment that all those delightedly linking to it (mainly because the interviewer compared Palin fandom to taking cocaine) have missed. I believe Holtz-Eakin, during his days with the McCain presidential campaign, was among the main people tasked with teaching Palin some basic ABCs of public policy and history (e.g., what was the Korean War, who was Margaret Thatcher). That must have been quite an experience for Doug (or anyone in his position) - it's a miracle his hair hasn't all turned gray.

Voting paradox and the 2010 elections

The "voting paradox" is based on the observation that it's irrational to vote in a large-scale election, such as those in the U.S. for President or the members in either house of Congress, if you place any value on your time and define the benefit from voting as the gain to you from increasing the likelihood that the election result will have a favorable effect on policy outcomes, from your perspective. After all, if you value your time at as little as $10 an hour and there are, say, 100,000 voters in the relevant constituency, the amount of time it's likely to be worth spending (even if Siddhartha Gautama is running against Adolf Hitler) is bound to be well under a second.

What makes it an ostensible paradox, of course, is the fact that lots of people actually do vote. And what makes it not really a paradox is the fact that people don't actually vote for the stipulated reason. Rather, voting is a consumer act, generally of an expressive character, hence no more irrational than waiting on line to see a good movie (though, to be sure, the nature of the consumer good is different - pulling the lever isn't in itself that much fun, other than perhaps in November 2008).

I've thought for many years, however, that voting's being an expressive consumer act, not a calculating one given the collective action problem (a prisoner's dilemma) that makes the supposedly "rational" approach so irrational, is vital to many of the defects in our political process. In its own way, declining to be individually "rational" about voting when everyone else out there is going to determine who wins leads to outcomes potentially as destructive socially as the fact that each of us may benefit from driving long distances and running the car's AC without regard to the local or global environmental impact.

If you're buying a car, you both get to decide what car you end up with and bear most of the consequences of whether it's a good or bad car. (Leaving aside problems such as SUV externalities on other drivers.) Hence, there's some reason to try to make a good choice in terms of the effect it will have on outcomes, which is not to say everyone always does so. But when your individual vote has effectively zero effect on your wellbeing and indeed that of the entire world (even if Gautama is running against Hitler), you may have no reason not to approach the decision in a fundamentally unserious way, so far as true effects on outcomes are concerned.

Otherwise, would it have been a pertinent factor in the 2000 election that Bush seemed like a better drinking buddy type than Gore? Would Palin backers be so blithely indifferent to evidence bearing on her true character if, say, their lives individually depended on it, conditioned on their backing her? For that matter, though I was glad about the 2008 presidential election outcome, would all those first-time Obama voters have materialized if it hadn't been a bit like showing you're into the new soft drink or Lady Gaga video?

In 2010, the voting non-paradox helps explain the possibly upcoming Republican landslide. Voting is fun if you're a Republican and eager for that solidaristic expression of anger that many Dems had fun with in 2008. Not so much fun to vote expressively on the other side these days. Plus voters in the middle, insofar as there are any, don't ask themselves questions such as which party's or candidate's views are closer to mine, or what will happen on the ground if Congress changes hands. They just want to vent.

But real outcomes are affected by the sum of votes, no one of which individually matters more than infinitesimally. And electoral outcomes often are taken as if they reflect the next two years' outcome preferences rather than the moment's expressive preferences.

Negotiating with Republicans

I was glad to hear that Peter Orszag will now be a NY Times columnist, as he addresses tax and budget issues from a sophisticated perspective that has considerable overlap with mine. And we'll see how his take on the economy compares to Krugman's, now that he is in private life and free to speak.

In today's inaugural column, Orszag proposes extending the expiring tax cuts through 2012, but with the understanding that they will definitely expire in 2013. The reason (no surprise here, but worth saying in a big-megaphone forum like the NYT): they're unaffordable over the long run, but the recession makes this a bad time to let them expire. The high-income tax cuts he'd rather let expire now, given their limited stimulative impact, but if extending them needs to be part of the legislative deal, he reasonably says, so be it.

I'm fine with this, but the problem is how do we know that they'll be allowed to expire in 2013? Republicans won't agree to this, and even if they did they wouldn't stick to it in 2013. He suggests a firm promise to veto any further extension, but this of course presupposes who will be in the Oval Office in 2013. Not to mention what broader pressures Obama, if still there, might be facing at the time (especially if he's in the Congressional minority, in which case there's a chance of government shutdowns, impeachment proceedings on grounds TBD, etc.).

This is not a criticism of Orszag and his column, but rather of the political and budgetary situation we find ourselves in. Columnists try to propose feasible good ideas, but they are limited by the actually existing set of such things.

Relatedly, Thomas Friedman, in a recent (and characteristically a bit windy) column called the U.S. the "superbroke, superfrugal superpower" that can no longer afford even to do something like the Grenada invasion. But even if that's true, even if we can't afford it (in the sense that doing it would be irrational), as a realistic political matter it doesn't offer the slightest indication that we won't nonetheless be starting multiple unaffordable foreign wars, especially if the White House changes hands in 2012. If William Kristol has the president's ear in 2013, and wants him or her to attack Iran and start a horrific global bonfire that will be devastating for millions of people, why would accelerating the U.S. budgetary crisis put him off?

Final gripe for now pertains to Obama's apparent decision to propose full expensing for equipment through 2011. For once we have a tax cut proposal that actually would be fairly stimulative (especially if the expiration is credible), and that costs less in the long term than the short run (as some investment is merely moved up, but here for countercyclical reasons that's actually the idea rather than a defect). But who's to say this will be allowed to expire either. And needless to say, by doing a Republican-style initiative, he won't win the least bit of reciprocity on any other policy front (such as infrastructure spending), and once again is simply reinforcing their narrative (tax cuts all the time for any and all reasons).

As I've been saying for years, there's no way out of the budgetary crisis without 2 reasonable parties willing to cooperate in the pursuit of sanity (as they were in the 1980s). One of the tragedies of the likely Republican landslide this year, apart from one's concern about how they will use their majority status, is that it will further postpone their much-needed return to sanity (which I at this point no longer expect).

Fun math problem for 8th graders who are baseball fans

My kids are both in high school now, hence too advanced in math for this, but here goes for anyone else whose kids are at the right level (and possibly starting the new school year this week). The other day Nyjer Morgan of the Washington Nationals charged the mound after the pitcher threw behind his head. He got there just before the first baseman, who decked him with a devastating clothesline. The question is: Who was closer to the mound and by how much, if we assume for simplicity that they started on, rather than merely near, the bases closest to them (home plate for Morgan, first base for the clothes-liner).

Doing it in my head, I come up with Morgan about 2.5 feet closer, reflecting that the mound is not perfectly centered inside the diamond. [Infield is square, 90 feet per side, hence 2 isosceles right triangles, but mound is only 60'6" from home plate.)

UPDATE: Jim Wetzler corrects me as follows:

“Not sure your geometry is precisely correct. If the diamond is a square with each side 90 feet long, the lines from home to second base and first to third base are 127.27 feet long (by the Pythagorean theorem). So these lines cross at a point 63.64 feet from all the bases. The batter runs 60.5 feet to the mound. The first baseman runs along the hypotenuse of a right triangle whose two legs are (1) the distance from first base to the center of the square (63.64 feet) and (2) the distance from the midpoint of the square to the mound (3.14 feet). By the Pythagorean theorem, the hypotenuse is 63.72 feet. So the first baseman runs 3.2 feet more than the batter.”

My response: Well done. My own mental process (while watching a Mets game) was less rigorous, as I simply rounded off √2 as 1.4 and ignored (though I was aware of) the fact that the first baseman’s trip is made slightly longer by the fact that the mound is off-center. At least the latter simplification was OK, as it only added .08 to the final total.

I guess I must have written some books other than Getting It

Bill Barnhart, an author (with a recent book about John Paul Stevens) and journalist who will be interviewing me on corporate taxation later this month, recently was kind enough to mention some other book I've written in the last couple of years:

"As New York University law professor Daniel Shaviro remarks in his terrific book, Decoding the U.S. Corporate Tax (The Urban Institute Press):

“'Sometimes we hear of a solution in search of a problem, which someone offers to a baffled world despite the lack of any discernible need for it. Examples include the George W. Bush administration’s endless advocacy of tax cuts, interminable concert tours by the Rolling Stones when they are past age 60, and the live-action theatrical movie version of Scooby-Doo.'”

Reference in the book was to corporate integration, which I said had more point to it than any of the above (i.e., too many rationales rather than none), only what the point is often varies with the proponent.

Another favorable Amazon customer review for Getting It

"Hooked on books" says the following about Getting It:

"I believe that if any book actually makes me laugh out loud at any point, it's worth bringing to others' attention, which is why I'm recommending Dan Shaviro's "Getting It", a satiric look at life among cut-throat young associates (and oblivious pompous partners) at a Washington D.C. law firm. Set a few decades back, and with a pleasantly dated retro feel,it's impressively well written and in parts genuinely funny, even reminiscent at times of some of the funniest passages from some of Richard Russo's earlier novels - which is a major compliment. I think anyone who has had any experience working in the law or dealing with lawyers would enjoy this very quick read, which the author obviously had a lot of fun writing."

Upcoming talks this semester

I'll be traveling less far afield than usual in the fall semester, scheduled so far to give talks at St. John's, Rutgers-Camden, Harvard (tax group not general faculty), an ABA meeting in Chicago, and NYU's Tillinghast Lecture on September 21. At least one more talk is potentially in the works, however.

The best part is that I don't have to fly for any of these talks except for the one in Chicago. Not that I especially mind flying as such, but the long trips to and from the airports, need for early arrival & security check, risk of weather events, etc., take their toll.

At Rutgers-Camden, in addition to discussing a paper at a faculty session, I may try to help scare up student interest in a mid-PM talk about Getting It. Unfortunately, I'm more confident that if they tried it they'd like it, than I am that if I give the talk they will come.

New semester at NYU Law School

I'm on sabbatical (though agreeing to supervise a couple of student papers), but it appears we have a pretty strong incoming LLM class this year. Presumably courtesy of the terrible job market.

Personal milestone?

Some time between 1978 and 1981, I bought a box of staples in the Yale Co-op for $1.25 (or so it says on the box). Today, my wife took the last staples from the box to refill her stapler. I guess it's finally time for another box.

Volcker Commission Report

Today the President's Economic Recovery Advisory Board, chaired by Paul Volcker, released a 126-page report on tax reform options, designed to achieve tax simplification, improved compliance, and corporate tax reform without raising taxes for families that earn less than $250,000 per year.

The Board had no mandate, however, to make recommendations, a la the famous 1984 Treasury "Blue Book" report that led to 1986 tax reform, or the somewhat less successful 2005 Tax Reform Panel under the G.W. Bush Administration.

Given this lack of a mandate, it's no surprise that the report is largely a laundry list of possibilities, stating in fairly general terms the advantages and disadvantages of particular options. E.g., lowering the corporate tax rate would reduce the cost of capital for U.S. companies, but also would lose revenue. Duh.

That comment is perhaps a bit unfair, as in many respects it's a useful compilation - for example, of opportunities to eliminate needless complexity from multiple parallel tax incentives, such as for saving or education, or of the main ways one could change corporate taxation or international taxation, and the main arguments for and against going in each direction.

Still, I imagine that many of the board members and staff people who signed up for this project wish they could have had the opportunity to do more, which they didn't.

I'm not optimistic about major tax reform (good or bad) any time or soon, and although I'd value it if done right I'm not convinced it's the best place to invest one's efforts. I see tax reform as happening (if at all, and I don't think it will) in the context of addressing the fiscal gap by raising taxes and reducing the projected growth rate of spending, via the sort of bipartisan deal that happened several times in the 1980s but does not appear even remotely feasible today.

Depressing reading?

Susan Morse's newly posted short piece, How Australia Got a VAT, makes depressing reading if you keep the U.S. in the back of your mind while going through it. She offers a nice description of how Australia ended up adding a VAT in 2000, absent any of the usual causal elements (severe fiscal crisis, World Bank or IMF pressure, etc.).

What makes the story so positively bizarre, from a very jaded U.S. perspective, is how well the Australian political process worked compared to ours. Rationality, attempts to make good policy, willingness to work together to bridge differences based on not entirely irreconcilable preferences, etcetera. It would almost remind me of Sunday school if I had ever attended one.

You start with a conservative Prime Minister (John Howard) who actually believes a VAT is good tax policy due to its relative efficiency. He apparently decides to promote enactment at least in part for this reason. Opponents raise concerns about its regressivity (they apparently didn't have in mind the transition effect, since at enactment a VAT may function as a one-time wealth tax.) So what happens? They compromise, and put the VAT in a package that has significant progressivity offsets. Concerns of Australia's states are also addressed. Moreover, academics are consulted and play a role in designing and evaluating the package, which I hope readers will forgive me for thinking is a good thing. (Much less likely to happen in the U.S., where we might testify at a Congressional hearing but generally do not get to play inside the process to the same degree as in many other Western countries.)

OK, this isn't a Hollywood fairy tale. For example, Howard initially got elected in part by denying that he had any interest in enacting a VAT, then promptly reversed course (although he did then end up seeking and narrowly getting voter approval). And some of the details seem clearly wrong and driven by optics and poor understanding of the issues - e.g., one important mechanism for addressing progressivity was excluding food from the VAT, whereas what Morse calls a "Michael Graetz-like plan" with higher transfer payments would likely have been far preferable. (Food exclusions are inefficient, poorly targeted as they apply to Whole Foods-type consumers way up the income scale, and create administrative complexity if the boundaries of the exclusion are unclear or in the presence of mixed food plus non-food goods or inputs.)

Still, in the words of Sinclair Lewis, "it can't happen here." (Though Lewis had a bad "it" in mind, the rise of fascism, and was saying that it actually could happen here - whereas I mean that a good thing actually can't.)

And another article

I've just finished a first draft of my new article, "The Rising Tax-Electivity of U.S. Corporate Residence," though I probably won't post it on SSRN until after I deliver it at NYU on September 21 as the Tillinghast Lecture. Some good stuff in it, including (a) what we know about such electivity today, (b) state of the play on the distributional (pertaining to individuals) as well as efficiency issues raised by residence-based entity-level worldwide taxation, and (c) a proposed $200 billion (!) transition tax if the U.S. shifts from its current sort-of-worldwide system to a territorial one. (This number, at this point, is back-of-the-envelope at best, but I think it's reasonably in the ballpark.)

Once I've put this article to bed for the time being, I'll return to my (suspended since late 2009) book in progress, Fixing the U.S. International Tax Rules.

Tom Tomorrow on the supposed "ground zero mosque"

From his latest cartoon, available here:

"A visitor to that hallowed ground might wander several blocks north past the neighborhood strip clubs, off track betting parlor, and fast food joints - and stumble across an Islamic cultural center!

"I'm offended just thinking about it!"

But not to worry, sleazy pols are coming to the rescue.

Palin: "This blasphemecration of sacrosanctified ground is abhorrentible! I refudiate it unequivocately!"

Gingrich: "It's shockingly insensitive! Don't these New Yorkers understand what ground zero means to real Americans?"

Another day, another paper posted on SSRN

Kim Clausing and I have just posted on SSRN our recently completed paper draft, "A Burden-Neutral Shift from Foreign Tax Creditability to Deductibility?"

You can download it here. The abstract is as follows:

Observers of international tax rules have long conflated two distinct effects of the foreign tax credit on multinational firms: the effect on the incentive to invest abroad and the effect on foreign tax sensitivity. With national welfare as the policy objective, we discuss how a burden neutral shift from foreign tax credits to deductibility could be designed to improve distortions associated with insensitivity to foreign taxation without raising aggregate burdens on outward foreign investment. We also provide new evidence suggesting that the tax sensitivity of outward foreign direct investment is indeed reduced for OECD countries using foreign tax credits, in comparison with other OECD countries. Finally, we discuss policy considerations surrounding a possible burden-neutral shift from foreign tax creditability to deductibility.

Keeping one's composure

I've been struggling with a blog post that keeps coming out a bit too strong. The gist of it is that, for reasons such as those discussed here, people like Gingrich and Palin are guilty, not only of odious bigotry against the members of a faith with one billion members worldwide, but of deliberately hurting the United States and, in particular, placing New Yorkers (such as me and my loved ones) at greater risk of becoming victims of terrorism. For crass political advantage and/or the love of hatred for its own sake, they are willing both to do evil and to aid it. I would not forgive them for this if I had a million years.

Bad little bunny

Our furniture's bete noire is a bete brune (Buddy).

This innocent-looking little fellow has also scratched up a couple of pairs of shoes lately, and goes after food on the counter like the Allies storming the Normandy beaches.

After some of his worse outrages, I tell him he's a bad-to-the-bonehead. But it's hard not to laugh.

Betting on your own grades: incentive effects vs. distributional effects

As noted by the Tax Prof blog, the Wall Street Journal has an article today discussing a new on-line service that would permit students to bet regarding their own grades. Supposedly, this would provide incentives for bettors to work harder, as in the case where you wager $50 on getting at least an A-, and thus engage in extra studying to make sure you get there. Critics note that students could also bet against their getting good grades.

I'm not sure I'd want to run this business (even if it were otherwise my sort of thing). The "house" faces problems both of moral hazard (given how one might adjust one's efforts for the direction of one's bet) and adverse selection (given the possibility of inside info, more specific than one's overall GPA, regarding how well one is likely to do in a given class). Or to put it differently, given how the house would have to price the bets in light of moral hazard and adverse selection, the odds are bound to be lousy for students who are not betting on something that they surreptitiously know is actually close to a sure thing. And perhaps the house will end up having to include a very wide bid-ask spread, given that students can game it either way.

In any event, to say that betting in favor of your getting good grades would improve your incentive to do well, we have to posit that it is otherwise under-powered. This might have to do with loved ones who are affected by how you do, but let's instead call it an externality from the standpoint of your future self, whose interests you may fail to consider adequately if other activities are more fun than studying or you just get too bored. (And let's forget about the opposite externality, which is that other students may end up doing better if you do worse.)

Note, however, that, from the standpoint of portfolio theory, betting in favor of your getting a good grade is the very last thing you should do. You already face risk given the genuine unpredictability of how you will do (and any economic or even just psychic stakes in how you fare). Why double down and make your risk-bearing even greater? A savvy investment advisor would tell you to hedge the risk, by betting against yourself as a form of insurance. Indeed, the tax system already does this to a degree, since if you end up earning more (whether from good grades or otherwise) you will pay more tax.

Hence, we face the familiar tradeoff between incentive effects and distributional effects. Do I smell a future Tax Policy exam question here?

And if this gets going, how long before we see the first allegation of a student letting his or her professor in on the grade action?

NYU Tax Policy Colloquium, spring 2011 schedule

I'll be co-teaching the colloquium with Mihir Desai again. Here is our schedule for next winter, a.k.a. the spring semester.

1. January 20 – Joseph Bankman, Stanford Law School
2. January 27 – Yair Listoken, Yale Law School
3. February 3 – David Miller, Cadwalader, Wickersham & Taft LLP
4. February 10 – Michael Keen, International Monetary Fund
5. February 17 – Kenneth Scheve, Yale University Political Science Department
6. February 24 – Allison Christians, Wisconsin Law School
7. March 3 – Adam Rosenzweig, Washington University Law School
8. March 10 – Eric Zolt, UCLA Law School
9. March 24 – Kirk Stark, UCLA Law School.
10. March 31 – Len Burman, Maxwell School of Syracuse University
11. April 7 – Jennifer Blouin, Wharton School, University of Pennsylvania
12. April 14 – Joshua Blank, NYU Law School
13. April 21 – Leandra Lederman, Indiana University Law School
14. April 28 – Cheryl Block, Washington University Law School

All sessions meet on Thursdays, from 4:00 to 5:50 pm, in Vanderbilt 208, NYU Law School.

Getting It sales (first quarter, post-release)

Fewer second quarter sales of Getting It than I had expected, not quite 300 for March through June. I am hoping for 2,000 or so, and feel that it deserves more (including a film), but that remains a long way off.

Death of Dan Rostenkowski

Chicago news outlets are apparently reporting that former House Ways and Means Chair Rostenkowski has died. I was on the Joint Committee of Taxation staff for the 1986 Tax Reform Act, during Rosty's tenure. Whatever else one says about him at any other point in his career, at that time I observed him to be a true statesman and leader. (And I speak as one who is extremely hard to please, when it comes to political figures.)

Down with the home mortgage interest deduction

The 2008 financial crisis made it clear that the home mortgage interest deduction is even worse, and perhaps I should say much worse, than experts had previously thought. The long-obvious (to tax policy types) points against it were that it inefficiently encourages both home consumption relative to other consumption, and home ownership relative to home rental (unless the tax breaks for the latter are commensurately big, as they may have been, say, in the mid-1980s).

But what hadn't been fully appreciated until 2008 was just how devastating the deduction's encouragement of highly leveraged home ownership can be. The deduction probably played an important background role in encouraging the blizzard of crazy U.S. mortgage loans that helped to sink the U.S. and world economy. (Although, to be fair, it's true that problems also arose in countries without a similarly designed tax break for housing, and that many subprime borrowers probably couldn't reasonably expect to get much value from the deduction.)

Now we see its poison playing out in another dimension. An article in today's Wall Street Journal notes that employers are often having a hard time hiring even though unemployment is so staggeringly high. While the problem has multiple causes, one of them is that "getting people to move for work has been especially difficult this time. Often, that is a function of the mortgage and credit problems many potential employees face. In a recent study, Fernando Ferreira and Joseph Gyourko of the University of Pennsylvania, together with Joseph Tracy of the Federal Reserve Bank of New York, found that people who owe more on their mortgages than their homes are worth are about a third less mobile."

Reducing people's mobility, in the event of a downturn that makes it extra-important, through a tax incentive for highly leveraged home ownership, harms us all, not just the prospective worker and employer who would have mutually enjoyed surplus from their job deal if moving were less costly. It has social, political, and revenue costs that are becoming all too familiar.

For one of the less obvious angles, think of Greece's difficulties in getting out from under its budget problems because, given the euro, it can't devalue its currency. Economists note that adjustment would be easier if labor were more mobile between different countries in the EU. But with language and cultural barriers, Greece is relatively stuck, and the adjustment much slower and more painful.

The U.S. obviously has much more of a common culture and language than the EU, which should help us, but when we encourage people to tie themselves down a bit of this may be lost.

Krugman's Paul Ryan takedown

Highlights include "charlatan ... The Ryan plan is a fraud that makes no useful contribution to the debate over America’s fiscal future."

The short version that is clearly correct: It is utterly impossible to propose an even remotely credible plan for restoring long-term fiscal sustainability that involves massive tax cuts, as Ryan's plan does. All the more so if one leaves the spending cuts (as Ryan does) unspecified.

There really is no ground for debate about this - the plan is a fraud for these very simple and clear reasons.

But I would be less sweeping than Krugman in dismissing the entire thing, for one reason that Krugman finesses a bit at the end of the column.

The Ryan plan actually does have one stated idea that potentially would have a significantly positive effect on the long-term fiscal picture. This is to turn Medicare into a voucher plan starting in 2020, and to control the program's currently projected fiscal growth path by capping the vouchers.

Krugman is right that this is politically unlikely to be permitted (other than perhaps in the brink-of-default scenario). But it's less fictional than the unspecified spending cuts, in that voucherizing is a step towards making slower Medicare growth at least administratively more feasible.

The point that I regard as finessing by Krugman is the following: he disagrees with capped voucherization as a policy matter, noting that it would mean that seniors with lesser independent means would be denied future healthcare that, under current policy scenarios, they would get. (By the way, given the march of technology, the denial would mean that seniors were getting worse care, relative to what was contemporaneously technologically available, than seniors today - they might still be getting better care in absolute terms due to medical advances.)

But to disagree with it as a policy matter, when it might actually address long-term sustainability, is different from his critique of the rest of the Ryan plan, which is not just that he disagrees with it (although he does) but that it is a fraud. We should also keep in mind the point that currently projected healthcare growth is bound to slow one way or another, as it's unsustainable. So comparing Ryan's plan to current policy in this regard is not entirely fair, since if growth isn't slowed his way it will have to be done some other way.

Bottom-line message to the media: plans to address fiscal sustainability that include large tax cuts are frauds. They should be mocked or ignored, not treated as Serious & Courageous Bigthink. But we do need to debate how healthcare spending growth will be made to slow. National healthcare (which Krugman favors) offers one possible path. Vouchers in lieu of all the big pillars under current policy - not just Medicare, but also Medicaid and uncapped exclusions for employer-provided health insurance - are another. That's a debate we should have (which is not to say we can, given the utter debasement of political discourse over the last few years). But at least Ryan puts a little bit of it on the table, albeit only 10 years down the road.

What am I currently working on?

Despite all my frivolous posts in recent days on such burning issues as adolescent Triceratops, the supposed U.N. plot against Colorado, and possibly bombastic indie rockers, I actually am reasonably hard at work writing on international tax issues.

My foreign tax credit paper is pretty much final for two publications (long version in the Journal of Legal Analysis, short version in the National Tax Journal), and I am also working with an economist co-author on a follow-up piece with empirical content. More on this in due course.

My main project these days is a piece entitled "The Rising Tax-Electivity of U.S. Corporate Residence," projected to be my Tillinghast Lecture at NYU Law School next month (on Tuesday, September 21) and then an article in the Tax Law Review. I will talk some about what we can tell about the trend described (or rather asserted) in the title, and somewhat more about how it should affect our thinking about international tax issues. I'm reasonably pleased with it so far, as I was with the foreign tax credit paper (and this is not a constant I experience equally with all of my papers), based on a feeling in both cases that the item ought to be (whether or not it actually proves to be) intellectually influential.

Science shocker

First they took away Brontosaurus, renaming it Apatosaurus, and no one said anything.

Then they came and took away Pluto, and again no one tried to stop them.

Now they are taking away Triceratops ...

Though just for the record, I am actually fine with the latter two developments. What's a "planet" is arbitrary (it's a language issue), and yes, Pluto seems more like Ceres and the farther-out Kuiper Belt objects than like the Elite Eight.

And if Triceratops is merely an adolescent Torosaurus, that's fine, good to know.

As for renaming Brontosaurus, this was a bad language decision - why be so rigid about the first-in-time naming rules when it's just about some 19th century guy who's long past caring? Do something dumb like that, and the next thing you know, you'll find yourself renaming Haig-Simons income as Haig-Simons-Schanz, and then also having to add Smith, Malthus, Sax, Garelli, and Seligman to the list of honorees.

Dastardly U.N. plot to take over Colorado

Fear not, however. The Republican gubernatorial candidate who is actually leading in the primary polling is all over it like a cheap suit.

Musical note

I tried to like Arcade Fire's first album but found it too bombastic. Am I missing something?

Grim reminder

David Stockman reminds us that Republicans, or at least important elements in their leadership, used to be sane and responsible, rather than reckless know-nothings.

Greatest fictional lawyers - vote for Bill Doberman!!

The latest issue of the ABA Journal has, as its cover story, "The 25 Greatest Fictional Lawyers (Who Are Not Atticus Finch)." These are not necessarily the fictional lawyers described as being the most able, but rather the best characters who are lawyers. E.g., unclear if Ally McBeal would be on the list otherwise.

You can vote here, and I'd personally be inclined to vote for Vincent "Vinny" Gambini, from the delightful film My Cousin Vinny.

There's also a second list here of "Other Notable Characters That Did Not Fit into Our Top 25." Here we find such personal faves as Tom Hagen from The Godfather and Jackie Chiles from Seinfeld, and there's some indication that fun fictional characters end up here if they are simply too odious and dishonest. For example, Ned Racine of Body Heat is here with the comment that "he's lazy and corrupt — and we like that in a fictional character, but maybe not in a lawyer."

Especially given that last comment, I must put in a word for my own Getting It lead character, Bill Doberman. He definitely belongs on this list, if I do say so myself. OK, if there are ethical standards of any sort, then the "Other Notables" rather than the main list.

I mean, c'mon - Claire Huxtable from the Cosby Show? And on the main list, Arnie Becker from LA Law? Truly a pale shadow of Doberman though some overlap of personality types.

The only excuse the jury that selected the notables can offer for not adding Doberman - but admittedly it's airtight unless we apply a strict liability standard - is that they presumably haven't read Getting It or heard of him.

Unjust $10 Billion Tax Credit for BP??

Far be it from me to say anything nice about BP after the horrendous mess they created in the Gulf of Mexico. Accidents happen, but everything I've read suggests that the company had a reckless culture that made a mockery of prudent and safe practice. They appear even to have been unusual among oil companies (e.g., Exxon is said to have learned from the Valdez spill). And given the immense costs being imposed on others, one is inclined to compare BP's executives with the fools and malefactors at major financial institutions who brought about the current global recession.

But having said that ... I was struck by a story in the Washington Post (h/t to Paul Caron's Tax Prof Blog) airing complaints about the supposedly scandalous fact that BP, by deducting its $32 billion in losses from the spill, is going to save (at a 35 percent corporate rate) almost $10 billion in taxes, which the article notes is half of the amount President Obama got them to pledge to a relief fund (the supposed "extortion" in the eyes of pro-business but anti-market lunatics who apparently believe that tort-feasors should be able to impose harm without paying). Anyway, back to my main point.

Worse still, supposedly, is the fact that this might be a $10 billion "credit" for taxes that BP has already paid. That is, it will show a huge loss for the year or years when it lays out the $32 billion, and use this to get a refund of tax liabilities in prior years when it had positive taxable income.

My recent co-author Doug Shackelford is quoted near the end of the story, shedding some needed light on the subject. First he notes that only the arbitrariness of annual accounting gives rise to the apparently shocking credit for taxes already paid. If BP paid income taxes on multiple years of taxable income at the same time - as surely would be the sensible rule if not for problems of administrative convenience, steady cash flow to the government, etcetera - the same thing would happen without the specter of a horrifying "credit" and "refund." Or, if they'd made $32 billion in January through November and then lost the same amount from the oil spill in December, no one would be surprised by their reporting zero income for the year.

Second, Shackelford notes that "[t]he cost associated with the cleanup and the damage and all that -- that's just another cost of doing business from the tax perspective ... It's viewed no different from paying salaries or other costs they might incur."

This is correct. If BP really loses the $32 billion, of course the normal rule is (and should be) that it gets a deduction, including with carryovers to other taxable years if necessary. So the issue, at least on its face, is a red herring.

A separate issue is whether BP should be fined. Indeed, perhaps fined a lot - say $10 billion on top of the $32 billion of direct compensation for harm. I don't have a particular opinion on this, as I would need to know more about the adequacy of what they're paying, the incentive and deterrence issues, problems of adequately sanctioning reckless behavior, and so forth.

Suppose that BP should be fined $10 billion. Then disallowing the tax deductions happens to get it just right, but not because that happened also to be the value of the deductions.

The expiring tax cuts

Political attention is beginning to focus on the expiring Bush-era tax cuts, so perhaps I should weigh in. The Obama Administration, presumably for reasons of political cowardice (or to put it more kindly, prudence), purports to favor generally extending them except for the top bracket. The Republicans, of course, want to extend all of the tax cuts forever, though probably that's just for starters. They also want vastly increased tax cuts with no financing and no meaningful cuts on the outlay side (at least none they are willing to acknowledge, beyond the occasional Congressman Ryan - who falls way short despite going way beyond what the rest of them would actually do).

Let's analyze this in two parts. First, suppose there were no ongoing recession with shockingly high unemployment that is projected to continue almost as far as the eye can see (exacting enormous social costs that may last far longer than the high unemployment itself). Then, what about the recession and need for stimulus rather than contraction.

Absent the recession, the thought of extending any of the tax cuts would be ludicrous. We are faced with an enormous and growing fiscal gap. There is no indication that the political system can deal rationally with it. The idea of massively cutting taxes relative to the current law baseline verges, against this background, on being criminally negligent.

But is eliminating the tax cuts and generally restoring pre-2001 law really the best way forward? Was the tax law at that point in some kind of Periclean golden age, an acme of perfection? Of course not. So there is plenty to discuss, in terms of revenue-neutral (or better still revenue-raising) tax reform relative to that baseline. Or rather, there would be plenty to discuss if there was anything to discuss, which there isn't for political reasons.

Extend the income tax cuts and enact a VAT instead? Enact a 1986-style base-broadening exercise but with general savings incentives (i.e., consumption tax-type treatment without creating inter-asset distortions)? Enact a carbon tax for revenue as well as global warming reasons? General base-broadening in lieu of the rapidly growing AMT? All these things and more could be on the table, but of course they aren't.

Okay, but what about the recession? Extending the tax cuts is, to a marginal degree, stimulative relative to not doing so. But it is poorly designed as stimulus. If there were any political point to even thinking about it, I might consider a short but finite (and credibly expiring) extension of the tax cuts, plus tax increases (such as a VAT) with postponed effective dates to stimulate sooner activity, plus the much better designed conventional fiscal stimulus that people in the Krugman-DeLong camp are advocating, plus credible long-term retrenchment in entitlements growth, plus a carbon tax. And then on to fundamental tax reform within the revenue parameters. Etcetera.

But in a country with a failing political system there's not a whole lot of point that I can see to nailing down one's preferred details.

If only I liked gardening, like Candide ...

More on the same theme of approaching U.S. default

More on the same theme as Bruce Bartlett from Martin Wolf.

I have been arguing this for several years - in particular, in my recent book Taxes, Spending, and the U.S. Government's March Toward Bankruptcy. The U.S. government is going to default in some way (including implicit or quasi-default of some kind), with a high degree of certainty - not because the economic or demographic trends are so dire, but because our political system is irretrievably broken. And this in turn reflects not just its flawed design but the strange sociological story of the conservative movement, which, for some reason I don't understand, at some point in the last 20 years, decisively rejected any sense of national loyalty (as well as commitment to rationality) in favor of intense group loyalty.

Bruce Bartlett interview in the Economist

This makes enormous sense and is well worth reading.

Crazy stuff

Tennessee Republican Congressman (and gubernatorial candidate in the state's Republican primary) Zack Wamp lauds Texas governor Rick Perry as a "patriot" for urging secession if healthcare reform isn't repealed by 2012. Certainly an interesting and innovative use of the word.

Meanwhile, there's increasing evidence that, if the Republicans gain control of Congress later this year, they plan to pursue impeachment of President Obama.

Fasten your seatbelts, as Bette Davis' character memorably remarked in All About Eve. If control of Congress changes, it's going to be a wild and crazy next 2 years.

Political mystery, a.k.a. naive question

I am trying to figure out why the likes of Senators Ben Nelson and Kent Conrad combine (a) opposing the extension of unemployment benefits on the ground that this adds to the deficit with (b) supporting extension of the Bush tax cuts by reason of the weak economy. These arguments can't really be made together in good faith.

Another reader comment on Getting It

"Lovely writing, fun, and suspenseful, with nice wry observations about humanity as embedded in a law firm."

Martin Feldstein endorses tax expenditure analysis ...

... as well as generally cutting tax expenditures. Today's WSJ op-ed is available as such to subscribers only, but you can find the full text of it on Feldstein's webpage here.

Unfortunately, as a general matter only principled or genuine conservatives, rather than the right-wingers who play the role on TV and dominate the Republican Party, accept the central point of TE analysis that a targeted special-purpose tax cut is substantively equivalent to the hated "government spending."

Book report

Last night I arrived back in NYC, after 2+ weeks in Munich, including a 4-day excursion to the lovely town of Malcesine by Lake Garda in Italy. Though it was very enjoyable I'm also glad to be back, and wish I could leave NYC for longer periods in the winter rather than the summer.

One fun thing about vacations is the chance to do a lot more leisure reading, though I try to maintain this year-round. So herewith my book report from the trip:

1) Michael Lewis, The Big Short - Lewis is always entertaining, and though the bestseller style of telling different individuals' stories might itself seem slight, he consistently gets his finger on important broader themes, here no less than in Liar's Poker and Moneyball. Shocking and distressing to read about the astounding idiocy that cratered the world economy starting in 2007, and it really makes one wonder how/if a market economy can function (which is not to say the alternatives will help).

2) Paul Hodge, Higher Than Everest: An Adventurer's Guide to the Solar System - This little-known item was a delightful vacation read. Written as an adventure travel guide for later in the 21st Century, it whimsically posits that some modest technological advances have made it possible for the reader to visit all of the most fun and exciting spots in the Solar System (mountains on Venus, the ocean beneath Europa's crust, the methane lakes on Titan, "snowboarding" through Saturn's rings, etc.). Beneath this conceit it combines detailed description of what we know about various planets and moons with plausible speculation about how any of these visits might actually be accomplished. Only disappointment is that it was written before some of the most recent developments, e.g., the Huygens probe's Titan landing and Pluto's demotion to planetoid. Time for a revised edition?

3)Valerie Martin, The Confessions of Edward Day - Martin is a very good contemporary fiction writer, best known for Property (narrated by a slaveholder's wife in 1828 Louisiana). This one is set in 1970s New York among aspiring actors. Well-written, some good underlying ideas, but I found the resolution a bit disappointing.

4) Neil MacFarquhar, The Media Relations Department of Hezbollah Wishes You a Happy Birthday - former NYT reporter in the Middle East gives a more inside view than one normally gets of the Arab societies that get so caricatured and demonized out here. But then again, reading about Saudi Arabia was authentically horrifying.

5) Sara Gruen, Water for Elephants - very readable fiction set mainly in a 1931 traveling circus amid the Great Depression. Good reading material for the beach and plane, but a bit of a stunt and could have had more depth. I found myself making invidious comparisons to Getting It, on the view that mine has more motivation and depth of viewpoint (though a farce not a realized world), but that's just me being a bit self-conscious or self-centered.

6) Christopher Isherwood, A Single Man - One day in a man's life, brings to mind Ian McEwan (who may perhaps have learned from it), impressive and affecting, easily the best thing I read on the trip from a pure literary standpoint.

7) Martha Schwab, Ludwig II - brief review of the life of a silly 19th century Bavarian king who, as Bertie Wooster might say, made rather an ass of himself building palaces and worshipping / ordering around Richard Wagner while Bismarck, almost next-door in Prussia, was engaged in considerably more serious work. Ended up being deposed on grounds of insanity and then apparently drowning himself the next day. Of interest because we had visited the Neufschwanstein Castle that he built outside Munich, real-life model for the well-known visual of the Disney castle. The site itself was Disneyland plus short-distance hiking and minus the rides.

Paul McDaniel

I'm greatly saddened to learn of the death of Paul McDaniel. He was a great and pathbreaking scholar - exceptionally fair-minded and intellectually honest even when advocating a particular approach. Paul also was a lovely, kind, and yet spirited man (and good friend when he was at NYU), and an important institutional leader during his time here.

Another reader comment on Getting It

Another airplane reader of Getting It (I frankly think it's ideal for this purpose) concludes:

"Really, it's a great book, I happened to be alternating it with Philip Roth and I think you have a lot more to say than he does . . . although perhaps not the advance sales."

This reader also detects a moralist (in the author) beneath the surface cynicism. Who'd a thunk it?

All too human (from the Munich Zoo)

A word on status issues in the biz

It's always anthropologically or sociologically interesting to attend mixed economist-lawyer gatherings, as I have been doing in Munich and also do with great regularity in the U.S. The overall status relationship between the groups is clear: economists in the aggregate have higher status, although in particular pairwise groupings the lawyer may be higher-status. (Of course, a shared assessment requires that both individuals know who the other is.)

Before saying more, I should interject here that I personally am anti-hierarchical and detest status rankings. Deference makes me very uncomfortable whether I am the giver or the receiver. This is partly personality and partly absorbed ideology (I grew up mostly in the 1960s, which effectively ended in 1972 at the earliest and 1974 at the latest). But if you are a member of the human species, then unless you have Asperger's Syndrome or some such condition, I think you cannot avoid being keenly conscious of status issues in any social milieu that you find yourself in. It's there, whether or not you choose to act as if it matters.

Against this background, economists vary from those having zero interest in talking to lawyers, to those having a negative presumption that is very hard to overcome (even if you know a lot of the secret handshakes), to those who make individualized judgments and are very willing to think that lawyers can have interesting ideas, knowledge, and insights. (I'm equating here intellectual interest in talking to a person with status judgment about her, but in academics these categories exhibit strong overlap.)

So far as all this is concerned, the main difference between Europe and the U.S. is that most of Europe has had significantly less lawyer-economist mixing than the U.S. (One further byproduct for me, of course, is that economists in Europe are less likely than those in the U.S. to know anything about my work, or should I pompously say about "who I am.") But Munich, where I am now, is much more U.S.-like in this regard, as settings such as the Max Planck Institute have allowed much lawyer-economist mixing to occur.

Munich's U-Bahn and the related tax evasion literature

Munich has a clean, modern, far-ranging, very easy-to-use subway system, the U-Bahn, which I gather dates back to the 1972 Olympics. Even without speaking or reading much German, it makes it a breeze to go anywhere in the city or environs that you like. One great feature, also found in D.C., but in NYC almost nowhere, is its electronic signs telling how long till the next train arrives. I am noted among intimates for extreme impatience, at times, when waiting for a train. But it's really about the uncertainty, not the waiting time as such. If the sign says I need to wait 10 minutes, I'm fine with that. For some reason, not knowing when/if it will come is the part I can find difficult. Must be some suppressed early-childhood memory behind this; then again maybe not. (This isn't the script of an early-1950s Hitchcock movie, after all - or at least I hope not.)

The most interesting thing to me about the Munich U-Bahn is the ticketing design. You are legally required to have a valid farecard in order to use the system. And there are signs threatening the mandatory imposition of a 40-Euro fine if you are found without a valid farecard. But to enter the U-Bahn, you don't actually use the farecard in any way - you simply walk in, and should have it in your pocket in case you are asked. But I have yet to see any enforcement, and I suspect that the threat is statistically quite low.

People therefore have the option, at what would appear to be a very low risk, to ride and use the system without paying. Applying the risky investment framework that one finds, for example, in the tax evasion literature, it seems that one's expected fare (at least, counting monetary costs only) must be a lot lower if one cheats than if one buys the required farecard.

Allowing people this cheating option, without making them engage in forced entry (such as by vaulting a turnstile) would be unthinkable in many systems. Surely in New York or Washington one could never do it, and I would suspect that the same holds for London and Paris (which don't allow you just to walk in, unless I am misremembering Paris). Something tells me it wouldn't work in Italy, either, or in most other countries. But Belgium's commuter trains were similar, as I found in May, and the only time I was challenged was when (while jet-lagged) I mistakenly boarded a first-class car.

Evidently, people mostly comply, or else I assume they would have had to build entry barriers. For that matter, Muncheners also largely cross at the corner and wait for green lights (contrary to my practice as a New Yorker), although in a few spots without lights there evidently is an accepted convention of cross-as-you-can.

Returning to the U-Bahn fare system, the other thing I find interesting is that it requires (at least for a short-term person like me) considerable thinking about what is the best option. You can purchase a single ride, or all rides for the day for one person, or all rides for either one day or three days for up to five persons traveling together. I believe there's also a separate option that permits you to ride with a dog. And I gather that there are lots of more long-term options, extending for as long as a year.

With the vagaries of our travel schedule as a family here, I find myself needing to think it through each time, so I can figure out what is likely to be most cost-effective. (Yes, I am complying despite my international tax policy interest in multiple-play prisoner's dilemmas where cooperation fails to emerge.}

So they assume little or no cheating, but have a structure designed to reward good planning by law-abiders.

Live from Munich

Since last Friday, I've been in Munich, splitting my time between touristic activities and work. I'm visiting at the Max Planck Institute - not on the view that physics, no less than novel-writing, should be added to my portfolio, but because of the excellent tax group here, headed by Wolfgang Schon. So far this week, I've given talks on my foreign tax credit paper as well as the S-S-S- financial institutions paper (a revised version of which should be up on SSRN shortly), and have also attended the Richard Musgrave Lecture, given this year at a nearby public economics institute, CES-ifo, by Michael Keen of the International Monetary Fund.

Mick's very interesting paper is similar in spirit to S-S-S (reflecting some dialogue back and forth), but has a formal economic model designed to elucidate the question of whether Pigovian taxes, as opposed to capital adequacy regulations, should be used to address financial institution failure that threatens the broader economy. Broadly speaking, he concludes that taxes should be used to fund government rescue of failing firms, while regulation should be used to prevent failure that the government will permit (a la Lehman Brothers). One problem outside the model is that the government also has to decide on its rescue vs. permit to fail strategy, a hard problem in itself and made worse by time consistency problems. E.g., one wishes one could credibly tell the firms they'll be allowed to fail, but then rescue them ex post where the stakes are high enough. But good luck on the credibility aspect.

Munich is a charming city. It's been warm but not by the standards of what I gather has been a hideous U.S. East Coast heat wave. (About which I would have considered myself estopped from complaining, as I prefer to concentrate my fire on hating the winters.) I've even been able to find nice fruit, particularly in the Viktuellenmarket. This is something that I care about, perhaps more than I should, as farm market fresh fruit is one of the things I love about NYC in the summer. I've certainly had more beer, sausages, and pork products generally than would be typical while in NYC, and I've also observed the intense but benign German soccer mania that came crashing down last night with their defeat by Spain in the World Cup. I even went so far as to find that game enjoyable though I am not generally a soccer fan. It's tactically the same sport as ice hockey though with key parameters that are set very differently (e.g., how fast people and the ball/puck can move, size of the arena, out of bounds vs. boards on the side). So it's all about ball control, advancing into the other team's territory, and centering it in front of the goal, all factors that I can recognize. (For that matter, basketball is pretty close to being in this general sense the same game as well.)

Touristically, we're living in a small private house, doing things that actual Muncheners do, such as shopping and commuting, and have seen various tourist sites, including (on a much somberer note than the rest) a trip to Dachau.

Next week, pure-vacation trip to Lake Garda, then back to Munich & then to New York.

Lyttle-Lytton Contest

Many readers may have heard of the Bulwer-Lytton contest, in which people compete to write the worst opening passage of a hypothetical novel, and a new winner plus a group of runner-ups (a.k.a. dishonorable mentions) are picked each year.

Today, while twiddling my thumbs as I await the evening flight to Munich, I learned of the Lyttle-Lytton contest, an offshoot distinguished by a 33-word maximum length.

Herewith the entry I sent in today:

"Two heads are better than one," tweeted Glorbiss as he dusted off his smoking gamma blaster. Too bad he now had only one left; but then again the now-headless Zamarian now had none.

Notice the many bad elements here. Tweeting while dusting off a smoking gun, er, make that gamma blaster for the badly dated sci fi cliche. Second sentence is a bit obscure about one what (head? blaster?), uses the word "now" thrice in close succession, and clarifies that a now-headless Zamarian now has no head (if that's the referent). Also, exactly 33 words.

This is a hard contest to win, but I'm hoping I'm in play for a dishonorable mention.