I appear to have signed myself up for quite a lot. Here's how the next two months are looking for me at the moment:
Saturday, October 22 – At the University of Louisville Symposium on on Federal Budget and Debt Reduction, I will present my paper on the tax reform implications of the risk of a U.S. budget catastrophe.
Friday, October 28 – At the NYU-UCLA Tax Policy Conference on Healthcare Reform, to be held this year at UCLA, I'll be moderating a panel on Healthcare Reform and the Long-Term Fiscal Outlook. The panel will include papers, on which I may briefly comment, by Howard Gleckman, Daniel Kessler, and Mark Pauly.
Thursday, November 3 – At the annual meeting of the American Association of Attorney-Certified Public Accountants (AAA-CPA), to be held in NYC (east midtown), I'll offer a talk entitled "Fundamental Tax Reform: Can, Should, and Will the U.S. Federal Income Tax Be Replaced by a National Consumption Tax?"
Friday, November 11 – In Chicago at the University of Chicago Tax Conference, I will comment on a paper by Phil West concerning foreign tax credits.
Thursday, November 17 through Saturday, Nov. 19 – On to New Orleans for the National Tax Association's 104th (!) Annual Conference on Taxation. Here I will present my paper on corporate residence electivity, moderate a panel on corporate tax reform, and comment on a couple of international tax papers.
December 1-2 – On to Sao Paulo, Brazil, where I will be the keynote speaker (discussing international tax issues) at a conference held by the Center for Fiscal Studies at Sao Paulo Law School.
December 9 – Heading east for a change rather than west or south, I will fly to Amsterdam and present a short paper on the relative merits of financial transaction taxes (FTTs) and financial activities taxes (FATs) at a conference on taxing the financial sector that will be held at the Amsterdam Centre for Tax Law.
While I expect to get the rest of the year off, no doubt for good behavior, on January 6, 2012, I will be presenting work on international taxation at the University of Florida College of Law in Gainesville.
Thursday, October 13, 2011
The New York Times is as confused about 9-9-9 as everyone else
From today's front-page NYT article on the 9-9-9 plan:
"From that exchange emerged the plan that Mr. Cain calls 9-9-9: a flat 9 percent individual income tax rate, a 9 percent corporate tax rate and a 9 percent national sales tax."
Again, the "corporate tax" here is in fact a sales tax, no less than the sales tax in the plan is a sales tax. These things matter.
By the way, suppose that we didn't have an income tax - say, because Congress had replaced it with a progressive consumption tax, such as either the David Bradford X-tax or a "consumed income tax" on individuals. BTW, as I've discussed in various places, such as here, I would strongly prefer this to the existing income tax, at least if we could make optimistic assumptions about how Congress would actually implement it. (This is a problem that these plans admittedly would share with 9-9-9.)
If that happened, then we wouldn't need a "corporate tax." The main purpose that the corporate income tax serves today is to backstop the income tax on individuals, which would become a joke if people could avoid it by earning their income through corporate entities. Thus, suppose I could hire myself out to "Shaviro, Incorporated," a newly formed corporation to be entirely owned by myself and close family members, and arranged for it to contract with NYU for my teaching services. It would then pay me (to meet current consumption expenses) only a fraction of my actual salary. Unless we either taxed this company directly or made the income currently taxable at the worker or owner level, we would have shot a huge and pointless whole in the income tax.
Many people nonetheless seem to want a "corporate tax" as an end in itself, not just to backstop the income tax if we have one. This appears to reflect the "pathetic fallacy" of personifying corporate entities. As it happens, concern about this way of thinking was an important reason why David Bradford came to prefer the X-tax to a purely individual-level consumed income tax - he thought it would be more salable politically because corporations would literally be taxpayers (i.e., they would be remitting VAT-like payments to the government).
9-9-9 fails to use its "corporate tax" as a proper backstop to the individual tax, given that nonpayment of owner-employees' salary reduces tax liability at the full 9% individual rate. And it gestures towards the public sentiment for a "corporate tax" by doing something that is entirely misleading - although, again, I see no reason to doubt that the proponents are themselves misled. It would be nice if the New York Times could do more to help public understanding on this front.
"From that exchange emerged the plan that Mr. Cain calls 9-9-9: a flat 9 percent individual income tax rate, a 9 percent corporate tax rate and a 9 percent national sales tax."
Again, the "corporate tax" here is in fact a sales tax, no less than the sales tax in the plan is a sales tax. These things matter.
By the way, suppose that we didn't have an income tax - say, because Congress had replaced it with a progressive consumption tax, such as either the David Bradford X-tax or a "consumed income tax" on individuals. BTW, as I've discussed in various places, such as here, I would strongly prefer this to the existing income tax, at least if we could make optimistic assumptions about how Congress would actually implement it. (This is a problem that these plans admittedly would share with 9-9-9.)
If that happened, then we wouldn't need a "corporate tax." The main purpose that the corporate income tax serves today is to backstop the income tax on individuals, which would become a joke if people could avoid it by earning their income through corporate entities. Thus, suppose I could hire myself out to "Shaviro, Incorporated," a newly formed corporation to be entirely owned by myself and close family members, and arranged for it to contract with NYU for my teaching services. It would then pay me (to meet current consumption expenses) only a fraction of my actual salary. Unless we either taxed this company directly or made the income currently taxable at the worker or owner level, we would have shot a huge and pointless whole in the income tax.
Many people nonetheless seem to want a "corporate tax" as an end in itself, not just to backstop the income tax if we have one. This appears to reflect the "pathetic fallacy" of personifying corporate entities. As it happens, concern about this way of thinking was an important reason why David Bradford came to prefer the X-tax to a purely individual-level consumed income tax - he thought it would be more salable politically because corporations would literally be taxpayers (i.e., they would be remitting VAT-like payments to the government).
9-9-9 fails to use its "corporate tax" as a proper backstop to the individual tax, given that nonpayment of owner-employees' salary reduces tax liability at the full 9% individual rate. And it gestures towards the public sentiment for a "corporate tax" by doing something that is entirely misleading - although, again, I see no reason to doubt that the proponents are themselves misled. It would be nice if the New York Times could do more to help public understanding on this front.
Wednesday, October 12, 2011
Follow-up on Cain's 9-9-9 plan and fiscal self-delusion
The more I think about the level of confusion that appears to underlie the 9-9-9 proposal, and to be shared by proponents and skeptics alike, the more extraordinary I find it. This is really Exhibit 1 for teaching some basic economics ideas in high school.
A key part of 9-9-9's intuitive appeal is the idea that, not only is 9 a low number, but the plans three 9's appear to be spread out. 9 percent on the worker, 9 percent on the business, 9 percent on retail sales.
But as I noted in my prior post, the latter two 9's are effectively THE SAME TAX (a few details aside). Only ignorance and naive folk notions of incidence could make them look like two different taxes that are pointed at different players.
Again, the "business tax" is a VAT, which is basically just another way of collecting sales tax. Most experts would say that you can have either a VAT or an RST (retail sales tax), and that the choice should depend on enforceability and administrability issues, but that it's nuts to have both. And if for some crazy reason you do have both, you still shouldn't fool yourself into thinking that you have two distinct taxes in any meaningful economic sense.
OK, time for a simple illustration to make the point. Say I own some land where I grow timber. I cut down a tree, turn the salvageable parts into a nice log, and sell it for $40 to Rawlings Sporting Goods. They turn it into a baseball bat and sell it for $100 to the parents of little Johny and Janey Smith, who will use the bat in their Little League games. Suppose we have a 9% business tax, Cain-style, and a 9 percent sales tax. How does each treat it?
The sales tax ignores the inter-business sale from me to Rawlings. It hits up the sale from Rawlings to the Smiths for $9.
The business tax generates a net tax of zero on the sale from me to Rawlings. More specifically, I owe tax of $3.60 and Rawlings gets a refund / tax reduction of $3.60. In a fuller account I'd build this in as changing the pre-tax price, but let's ignore that complication here. Net result: no tax on the inter-business sale, and once again a tax of $9 on the sale from Rawlings to the Smiths.
In short, these two taxes are the same, except that in the VAT (i.e., the "business tax") there is a paper trail. I might get in trouble if I don't remit the $3.60, since the tax authorities could cross-check the paperwork and note that Rawlings is claiming a $3.60 credit or refund. And if Rawlings claims the refund, but then pretends that the sale to the Smiths didn't happen so it doesn't have to remit $9 to the government, the tax authorities will say: If you bought timber and claimed a refund and you don't have a bat in your showroom, what exactly happened? Why don't you have inventory on hand from the goods you bought and claim not to have sold?
The underlying problem, again, is naive or folk notions of incidence. We think of the retail sales tax as paid by the Smiths, in part because, under common U.S. practice with sales taxes, it's separately stated. Rawlings could have sold the bat for $109 without ever mentioning the tax. It is going to owe the proper RST to the authorities no matter what. But we think of the tax as paid by the Smiths, in part because Rawlings is likely to flag it as a distinct item.
The business tax only looks different for trivial reasons that have nothing to do with economic incidence. Everyone would understand that this, too, was a tax on the Smiths if it was similarly separately stated, e.g., by having a pre-all-taxes price of $91.74. But presumably Rawlings wouldn't do this. In addition, perhaps everyone would understand that it was really on the Smiths, even without such separate statement if, as is the case with VATs around the world, its character as a consumption tax (and effectively an RST substitute) were better understood. The existence of cross-border VAT rebates may help with this as well. But because the tax part isn't separately stated AND people apparently don't realize that it's a VAT, it ends up getting vulgarly conceptualized as a tax on the business.
So two of the 9's in the Cain plan are simply redundant versions of almost the same thing. But what about the 9 that ostensibly falls on wages? That, as per my prior post, is a tax on being among the poor slobs who can't avoid using an explicit wage payment in order to get the compensation they have earned. So it's a tax on not being self-employed and, among the self-employed, on not having enough cash on hand for personal consumption expenses to simply leave all net cash proceeds in the business.
With all due respect to the late Steve Jobs, recall his famous $1 per year salary. Given his wealth-financed personal consumption, he would be paying 18 percent per year. No need to face the 27 percent rate given that he earned it through his Apple stock, on which 9-9-9 would permit him to earn tax-free capital gain whenever he liked.
But isn't it also true under present law that Jobs was untaxed on salary that effectively was earned but not paid? Yes, but that's not the whole story. By not paying the salary, Apple lost a deduction. So, if both Jobs and Apple faced a 35 percent marginal rate on the next dollar included or deducted, there was no net federal income tax benefit from the under-payment. Thus, current law does not favor the wealthy self-employed to anything approaching the same degree as 9-9-9.
In sum, one could think of 9-9-9 as having 3 tax rate brackets. Poor people without a job are taxed at 18 percent, including on the necessities that they can barely afford. The employed poor and middle class people, along with the non-self-employed rich, pay tax at 27 percent. But the wealthy self-employed get their tax rate back down to 18 percent again.
A key part of 9-9-9's intuitive appeal is the idea that, not only is 9 a low number, but the plans three 9's appear to be spread out. 9 percent on the worker, 9 percent on the business, 9 percent on retail sales.
But as I noted in my prior post, the latter two 9's are effectively THE SAME TAX (a few details aside). Only ignorance and naive folk notions of incidence could make them look like two different taxes that are pointed at different players.
Again, the "business tax" is a VAT, which is basically just another way of collecting sales tax. Most experts would say that you can have either a VAT or an RST (retail sales tax), and that the choice should depend on enforceability and administrability issues, but that it's nuts to have both. And if for some crazy reason you do have both, you still shouldn't fool yourself into thinking that you have two distinct taxes in any meaningful economic sense.
OK, time for a simple illustration to make the point. Say I own some land where I grow timber. I cut down a tree, turn the salvageable parts into a nice log, and sell it for $40 to Rawlings Sporting Goods. They turn it into a baseball bat and sell it for $100 to the parents of little Johny and Janey Smith, who will use the bat in their Little League games. Suppose we have a 9% business tax, Cain-style, and a 9 percent sales tax. How does each treat it?
The sales tax ignores the inter-business sale from me to Rawlings. It hits up the sale from Rawlings to the Smiths for $9.
The business tax generates a net tax of zero on the sale from me to Rawlings. More specifically, I owe tax of $3.60 and Rawlings gets a refund / tax reduction of $3.60. In a fuller account I'd build this in as changing the pre-tax price, but let's ignore that complication here. Net result: no tax on the inter-business sale, and once again a tax of $9 on the sale from Rawlings to the Smiths.
In short, these two taxes are the same, except that in the VAT (i.e., the "business tax") there is a paper trail. I might get in trouble if I don't remit the $3.60, since the tax authorities could cross-check the paperwork and note that Rawlings is claiming a $3.60 credit or refund. And if Rawlings claims the refund, but then pretends that the sale to the Smiths didn't happen so it doesn't have to remit $9 to the government, the tax authorities will say: If you bought timber and claimed a refund and you don't have a bat in your showroom, what exactly happened? Why don't you have inventory on hand from the goods you bought and claim not to have sold?
The underlying problem, again, is naive or folk notions of incidence. We think of the retail sales tax as paid by the Smiths, in part because, under common U.S. practice with sales taxes, it's separately stated. Rawlings could have sold the bat for $109 without ever mentioning the tax. It is going to owe the proper RST to the authorities no matter what. But we think of the tax as paid by the Smiths, in part because Rawlings is likely to flag it as a distinct item.
The business tax only looks different for trivial reasons that have nothing to do with economic incidence. Everyone would understand that this, too, was a tax on the Smiths if it was similarly separately stated, e.g., by having a pre-all-taxes price of $91.74. But presumably Rawlings wouldn't do this. In addition, perhaps everyone would understand that it was really on the Smiths, even without such separate statement if, as is the case with VATs around the world, its character as a consumption tax (and effectively an RST substitute) were better understood. The existence of cross-border VAT rebates may help with this as well. But because the tax part isn't separately stated AND people apparently don't realize that it's a VAT, it ends up getting vulgarly conceptualized as a tax on the business.
So two of the 9's in the Cain plan are simply redundant versions of almost the same thing. But what about the 9 that ostensibly falls on wages? That, as per my prior post, is a tax on being among the poor slobs who can't avoid using an explicit wage payment in order to get the compensation they have earned. So it's a tax on not being self-employed and, among the self-employed, on not having enough cash on hand for personal consumption expenses to simply leave all net cash proceeds in the business.
With all due respect to the late Steve Jobs, recall his famous $1 per year salary. Given his wealth-financed personal consumption, he would be paying 18 percent per year. No need to face the 27 percent rate given that he earned it through his Apple stock, on which 9-9-9 would permit him to earn tax-free capital gain whenever he liked.
But isn't it also true under present law that Jobs was untaxed on salary that effectively was earned but not paid? Yes, but that's not the whole story. By not paying the salary, Apple lost a deduction. So, if both Jobs and Apple faced a 35 percent marginal rate on the next dollar included or deducted, there was no net federal income tax benefit from the under-payment. Thus, current law does not favor the wealthy self-employed to anything approaching the same degree as 9-9-9.
In sum, one could think of 9-9-9 as having 3 tax rate brackets. Poor people without a job are taxed at 18 percent, including on the necessities that they can barely afford. The employed poor and middle class people, along with the non-self-employed rich, pay tax at 27 percent. But the wealthy self-employed get their tax rate back down to 18 percent again.
Tuesday, October 11, 2011
Herman Cain's 9-9-9 tax plan
When Cain surged to a more prominent place in the Republican field and discussion of his "9-9-9" tax plan began surfacing, I, along with various others in my field, started getting phone calls from the press about it.
To be honest, I found it hard to focus seriously on the plan. With finite time available, a book I am trying to write, etcetera, I am often reluctant to spend a lot of time learning the details of tax proposals - not just by temporarily high-flying candidates, but also by presidential administrations and Congressional leaders - when I suspect, as frequently and with good justification I do, that they are neither well-designed enough to be of any intellectual interest nor likely enough to be enacted to have any real practical interest.
Nonetheless, I suppose a mea culpa is in order on this score, given that those of us in the tax policy biz have professional responsibilities to communicate with the public when issues in our domain reach the front burner. Thus, I am grateful to Ed Kleinbard for thoroughly analyzing the 9-9-9 plan here, and to Bruce Bartlett for doing so here.
One thing I hope I can contribute here, however, is a more succinct version of some of their key conclusions - Kleinbard's in particular, as Bartlett focuses much of his attention on Cain's apparent long-term plan to replace "9-9-9" with a national sales tax, a proposal that Bartlett has done an excellent job critiquing, such as here.
The really comical thing about Cain's 9-9-9 plan is how much it is a product of silly optics. As Kleinbard shows, it essentially amounts to a 27 percent flat tax on wages that is reduced to 18 percent for owner-employees who have enough liquidity not to need to pay themselves an explicit and observable arm's length wage.
There often is debate about whether, if we went the national consumption tax route, a value-added tax (VAT) or retail sales tax (RST) would be better. I regard the two taxes as in principle identical except that a VAT has better enforcement potential. Cain, however, has both in his plan. The business tax, his second "9," is in the main a VAT, apart from a few odd features such as its making dividends deductible. And Cain's third "9" is explicitly an RST.
Why on earth would you have both a VAT and an RST? I think the reason is that 9-9 sounds better than 18. You get the illusion that the taxes are more different than they actually are. Moreover, each, considered in isolation, seems low.
Along these lines, I have a great idea to eliminate the 35 percent individual income tax rate without losing progressivity or revenue. Here's the plan: replace the 35 percent annual income tax with a 3-3-3-3-3-3-3-3-3-3-3-3 monthly tax on annual income. After all, who's counting if the 12 monthly taxes actually add up to 36 percent annually?
Cain's first "9," of course, is the wage tax on individuals. Again, this is only for people who have to take their labor income in the form of wages because they are not owner-employees who can simply omit the step of paying a wage from their left pocket (the business) to their right pocket (the self-employed worker) - an omission that presumably requires sufficient liquidity to pay one's consumer bills with cash already on hand. But since (as Kleinbard shows) a wage tax is in the long run equivalent to a consumption tax apart from the undermeasurement of owner-employees' true economic wages, we end up with what is really a 27 percent / 18 percent consumption or wage tax, with the lower rate going to the self-employed, but, again, only insofar as they have the liquidity not to need to extract from their businesses the full economic wage. And this is not merely deferral, since in the long run you can simply sell the business and derive capital gain that the 9-9-9 plan would exempt.
As Kleinbard notes, Cain would impose a huge tax increase on lower-income and middle-class Americans, who would lose the benefit of lower income tax rate brackets, including the effective zero bracket that results from personal exemptions and the standard deduction. (To be sure, the payroll tax is first-dollar, but its rate is well below 27 percent even if one counts all of the employer / employee and Social Security / Medicare pieces.) So on the bottom end Cain's plan is shockingly regressive. Even his beau ideal the FAIR tax generally has a universal "prebate" in the amount of estimated poverty-level consumption expenditures.
As for imposing a lower tax rate on highly liquid owner-employees than on those whose work situation requires the payment of an observable arm's length wage, this in practice means that we don't even have a flat rate system, but one in which the rich will frequently pay a lower rate than anyone else. Although the high-end lower rate may in part reflect mere confusion and inadvertence, I am reminded of the gabelle - that is, the salt tax in pre-French Revolutionary France from which nobles and the clergy were exempted.
To be honest, I found it hard to focus seriously on the plan. With finite time available, a book I am trying to write, etcetera, I am often reluctant to spend a lot of time learning the details of tax proposals - not just by temporarily high-flying candidates, but also by presidential administrations and Congressional leaders - when I suspect, as frequently and with good justification I do, that they are neither well-designed enough to be of any intellectual interest nor likely enough to be enacted to have any real practical interest.
Nonetheless, I suppose a mea culpa is in order on this score, given that those of us in the tax policy biz have professional responsibilities to communicate with the public when issues in our domain reach the front burner. Thus, I am grateful to Ed Kleinbard for thoroughly analyzing the 9-9-9 plan here, and to Bruce Bartlett for doing so here.
One thing I hope I can contribute here, however, is a more succinct version of some of their key conclusions - Kleinbard's in particular, as Bartlett focuses much of his attention on Cain's apparent long-term plan to replace "9-9-9" with a national sales tax, a proposal that Bartlett has done an excellent job critiquing, such as here.
The really comical thing about Cain's 9-9-9 plan is how much it is a product of silly optics. As Kleinbard shows, it essentially amounts to a 27 percent flat tax on wages that is reduced to 18 percent for owner-employees who have enough liquidity not to need to pay themselves an explicit and observable arm's length wage.
There often is debate about whether, if we went the national consumption tax route, a value-added tax (VAT) or retail sales tax (RST) would be better. I regard the two taxes as in principle identical except that a VAT has better enforcement potential. Cain, however, has both in his plan. The business tax, his second "9," is in the main a VAT, apart from a few odd features such as its making dividends deductible. And Cain's third "9" is explicitly an RST.
Why on earth would you have both a VAT and an RST? I think the reason is that 9-9 sounds better than 18. You get the illusion that the taxes are more different than they actually are. Moreover, each, considered in isolation, seems low.
Along these lines, I have a great idea to eliminate the 35 percent individual income tax rate without losing progressivity or revenue. Here's the plan: replace the 35 percent annual income tax with a 3-3-3-3-3-3-3-3-3-3-3-3 monthly tax on annual income. After all, who's counting if the 12 monthly taxes actually add up to 36 percent annually?
Cain's first "9," of course, is the wage tax on individuals. Again, this is only for people who have to take their labor income in the form of wages because they are not owner-employees who can simply omit the step of paying a wage from their left pocket (the business) to their right pocket (the self-employed worker) - an omission that presumably requires sufficient liquidity to pay one's consumer bills with cash already on hand. But since (as Kleinbard shows) a wage tax is in the long run equivalent to a consumption tax apart from the undermeasurement of owner-employees' true economic wages, we end up with what is really a 27 percent / 18 percent consumption or wage tax, with the lower rate going to the self-employed, but, again, only insofar as they have the liquidity not to need to extract from their businesses the full economic wage. And this is not merely deferral, since in the long run you can simply sell the business and derive capital gain that the 9-9-9 plan would exempt.
As Kleinbard notes, Cain would impose a huge tax increase on lower-income and middle-class Americans, who would lose the benefit of lower income tax rate brackets, including the effective zero bracket that results from personal exemptions and the standard deduction. (To be sure, the payroll tax is first-dollar, but its rate is well below 27 percent even if one counts all of the employer / employee and Social Security / Medicare pieces.) So on the bottom end Cain's plan is shockingly regressive. Even his beau ideal the FAIR tax generally has a universal "prebate" in the amount of estimated poverty-level consumption expenditures.
As for imposing a lower tax rate on highly liquid owner-employees than on those whose work situation requires the payment of an observable arm's length wage, this in practice means that we don't even have a flat rate system, but one in which the rich will frequently pay a lower rate than anyone else. Although the high-end lower rate may in part reflect mere confusion and inadvertence, I am reminded of the gabelle - that is, the salt tax in pre-French Revolutionary France from which nobles and the clergy were exempted.
Thursday, October 06, 2011
New publication
My co-authored (with Kimberly Clausing) article, A Burden-Neutral Shift from Foreign Tax Creditability to Deductibility?, has now officially appeared in print. It was previously available as an SSRN working paper. The citation is 64 Tax Law Review 431-452 (2011).
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."
It's available for download 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."
It's available for download here.
Tuesday, October 04, 2011
Corporate integration via dividend deductibility
As promised in my prior post, here is the text of my talk at NYU today regarding Reuven Avi-Yonah's co-authored article, The Case for Dividend Deduction. (See prior post for my link to Reuven's article.)
The text refers to a chart I had distributed to attendees, demonstrating that allowing corporations to deduct dividends paid is potentially identical to the seemingly very different system where they are taxed, but dividend distributions to shareholders get the benefit of "imputation" (i.e., corporate-level tax is in effect treated as an advance payment by the shareholders of their taxes on the corporate income). Imputation is or at least was a very common corporate integration system around the world, whereas dividend deductibility is not. I argue that the paper over-distinguishes between the two and that they can be made identical. Anyway, the chart, which offers a simple illustration of the potential equivalence between the two methods, is available here.
Perhaps the most novel point in my talk is one that I under-developed in the text because it would have taken too long to explain it. So here goes. Reuven argues that dividend deduction would be more effective than imputation in encouraging the managers to pay dividends, on the ground they often don't especially care about shareholder taxes but love to get company-level deductions. Thus, even if the two methods of dividend deduction and imputation are in fact economically equivalent, the former will in fact induce greater payouts.
One could certainly challenge this view on multiple grounds, but the one I emphasized, in particular because I thought it was more of a new point, reflects accepting the basic premise (at least arguendo) but then asking what the managers really care about. A common answer, with considerable real world empirical support, would be that they appear to care more about financial accounting income than about income tax liability. So the entity-level tax benefit of dividend deductibility won't affect their behavior as strongly as Reuven anticipates unless there is an accounting benefit. But would there be?
I am not an accountant, but I've played in or near their waters often enough to realize that this is a trickier question than it may initially seem from a lawyer or economist standpoint.
Presumably the financial accounting rules would NOT be revised to allow dividend deductions against financial accounting income, even if newly made deductible against taxable income. But wouldn't financial accounting income reflect the benefit of reducing federal income tax liability through dividend payouts?
Not necessarily. An initial point to keep in mind is that financial accounting often ignores the mere deferral of federal income tax liability. In principle, under dividend deduction, the ultimate corporate tax is zero as all earnings get paid out (or at least an amount equal to taxable income, which is often less than the tax measure of earnings for dividend purposes). So it would seem that the accounting rules in the dividend deduction scenario should either (a) ignore federal taxes on the ground that they're merely temporary, at least until they escape the possibility of being reversed through net operating losses created by dividend deductions, or at least (b) ignore the difference between paying out deductible dividends this year or next year. I'm not in fact sure how it would all end up playing out, but we should recognize that (a) there would be a tricky issue for the accountants to work out and (b) there wouldn't necessarily be a straight accounting benefit for the tax liability effect.
By analogy, consider the accounting rules for the foreign earnings of U.S. companies' foreign subsidiaries. These get the U.S. tax benefit of deferral - that is, they aren't subject to U.S. tax until they actually are repatriated for tax purposes. But companies get no accounting benefit from deferral - they are treated as if the U.S. repatriation taxes were being fully paid on a current basis - unless they solemnly declare to their accountants that the funds are being "permanently" reinvested abroad. Once this happens, the potential future U.S. repatriation taxes are discounted by 100% (i.e., to zero) rather than by zero percent.
Anyway, if the timing of repatriation is effectively ignored in financial accounting on the view that it doesn't matter exactly WHEN it happens (despite the potential effect on the present value of U.S. tax liability, then the same idea might apply, albeit in a somewhat different and (at least to me) unpredictable fashion, with regard to the effect of current versus future dividend payouts on entity-level, purely domestic U.S. income tax liability.
Any accountants out there, your thoughts on this admittedly esoteric issue (either in the comments page here or by e-mail to me) would be of potential interest.
UPDATE: The following is hoisted from the first comment on this blog entry (by Elijah):
"As you suggest (directionally at least), corporations would presumably book a deferred tax asset for undistributed dividends, much in the same manner as they currently book a deferred tax liability for the (non-permanently reinvested) unrepatriated earnings of their foreign subsidiaries. In this manner, they would "ignore" the actual timing of the (tax) deduction and the tax rate (on U.S. earnings) would move towards zero.
"I say 'move towards' because capital needs will prevent corporations from ever truly distributing everything prior to liquidation, which itself may be too remote a possibility for the corporation to consider for financial accounting purposes. Rather, corporations would undoubtedly get into the usual arguments (with their auditors) about how much of the the deferred tax asset could really be realized, and whether some amount of offsetting valuation allowance would be appropriate. This would ultimately be reflected in the (book) tax rate.
"The more interesting question, I think, is whether any of this would influence managers to pay dividends. My initial thought is that it would not. Managers would, theoretically at least, not be able to influence the book tax rate (year to year) by paying dividends in year 1 versus year 2 (or 3, or 4, etc.)."
The text refers to a chart I had distributed to attendees, demonstrating that allowing corporations to deduct dividends paid is potentially identical to the seemingly very different system where they are taxed, but dividend distributions to shareholders get the benefit of "imputation" (i.e., corporate-level tax is in effect treated as an advance payment by the shareholders of their taxes on the corporate income). Imputation is or at least was a very common corporate integration system around the world, whereas dividend deductibility is not. I argue that the paper over-distinguishes between the two and that they can be made identical. Anyway, the chart, which offers a simple illustration of the potential equivalence between the two methods, is available here.
Perhaps the most novel point in my talk is one that I under-developed in the text because it would have taken too long to explain it. So here goes. Reuven argues that dividend deduction would be more effective than imputation in encouraging the managers to pay dividends, on the ground they often don't especially care about shareholder taxes but love to get company-level deductions. Thus, even if the two methods of dividend deduction and imputation are in fact economically equivalent, the former will in fact induce greater payouts.
One could certainly challenge this view on multiple grounds, but the one I emphasized, in particular because I thought it was more of a new point, reflects accepting the basic premise (at least arguendo) but then asking what the managers really care about. A common answer, with considerable real world empirical support, would be that they appear to care more about financial accounting income than about income tax liability. So the entity-level tax benefit of dividend deductibility won't affect their behavior as strongly as Reuven anticipates unless there is an accounting benefit. But would there be?
I am not an accountant, but I've played in or near their waters often enough to realize that this is a trickier question than it may initially seem from a lawyer or economist standpoint.
Presumably the financial accounting rules would NOT be revised to allow dividend deductions against financial accounting income, even if newly made deductible against taxable income. But wouldn't financial accounting income reflect the benefit of reducing federal income tax liability through dividend payouts?
Not necessarily. An initial point to keep in mind is that financial accounting often ignores the mere deferral of federal income tax liability. In principle, under dividend deduction, the ultimate corporate tax is zero as all earnings get paid out (or at least an amount equal to taxable income, which is often less than the tax measure of earnings for dividend purposes). So it would seem that the accounting rules in the dividend deduction scenario should either (a) ignore federal taxes on the ground that they're merely temporary, at least until they escape the possibility of being reversed through net operating losses created by dividend deductions, or at least (b) ignore the difference between paying out deductible dividends this year or next year. I'm not in fact sure how it would all end up playing out, but we should recognize that (a) there would be a tricky issue for the accountants to work out and (b) there wouldn't necessarily be a straight accounting benefit for the tax liability effect.
By analogy, consider the accounting rules for the foreign earnings of U.S. companies' foreign subsidiaries. These get the U.S. tax benefit of deferral - that is, they aren't subject to U.S. tax until they actually are repatriated for tax purposes. But companies get no accounting benefit from deferral - they are treated as if the U.S. repatriation taxes were being fully paid on a current basis - unless they solemnly declare to their accountants that the funds are being "permanently" reinvested abroad. Once this happens, the potential future U.S. repatriation taxes are discounted by 100% (i.e., to zero) rather than by zero percent.
Anyway, if the timing of repatriation is effectively ignored in financial accounting on the view that it doesn't matter exactly WHEN it happens (despite the potential effect on the present value of U.S. tax liability, then the same idea might apply, albeit in a somewhat different and (at least to me) unpredictable fashion, with regard to the effect of current versus future dividend payouts on entity-level, purely domestic U.S. income tax liability.
Any accountants out there, your thoughts on this admittedly esoteric issue (either in the comments page here or by e-mail to me) would be of potential interest.
UPDATE: The following is hoisted from the first comment on this blog entry (by Elijah):
"As you suggest (directionally at least), corporations would presumably book a deferred tax asset for undistributed dividends, much in the same manner as they currently book a deferred tax liability for the (non-permanently reinvested) unrepatriated earnings of their foreign subsidiaries. In this manner, they would "ignore" the actual timing of the (tax) deduction and the tax rate (on U.S. earnings) would move towards zero.
"I say 'move towards' because capital needs will prevent corporations from ever truly distributing everything prior to liquidation, which itself may be too remote a possibility for the corporation to consider for financial accounting purposes. Rather, corporations would undoubtedly get into the usual arguments (with their auditors) about how much of the the deferred tax asset could really be realized, and whether some amount of offsetting valuation allowance would be appropriate. This would ultimately be reflected in the (book) tax rate.
"The more interesting question, I think, is whether any of this would influence managers to pay dividends. My initial thought is that it would not. Managers would, theoretically at least, not be able to influence the book tax rate (year to year) by paying dividends in year 1 versus year 2 (or 3, or 4, etc.)."
Corporate tax reform talk
Today at 12:30 in Greenberg Lounge at NYU Law School, I will be participating in a panel discussion (with Deborah Schenk, Reuven Avi-Yonah, and Deborah Paul), of Reuven's recent co-authored paper, "The Case for Dividend Deduction." Reuven argues here for achieving corporate integration by making corporate dividends deductible at the entity level (and fully taxable to shareholders if they are U.S. taxpayers).
I do not entirely agree with the analysis or conclusions, for reasons that I'll explain. I actually wrote out my remarks in full, including some broader observations about corporate tax reform, so that I would be able to post them here after the session. I'll try to do that this afternoon.
I do not entirely agree with the analysis or conclusions, for reasons that I'll explain. I actually wrote out my remarks in full, including some broader observations about corporate tax reform, so that I would be able to post them here after the session. I'll try to do that this afternoon.
Monday, October 03, 2011
A partially intellectually purist take on the Buffett Rule
President Obama has lately been urging the enactment of tax legislation to implement the "Buffett Rule," which, according to his reelection campaign website, "would require the wealthiest Americans to pay a tax rate at least as high as the middle class."
The basic idea appears to be mathematical, or at least arithmetical. For each individual, you can make an equation where taxes paid are the numerator and some measure of income is the denominator. The Buffett Rule posits that the amount thus computed should be at least as high for the wealthiest Americans as it is for those individuals who are defined as representing the middle class.
Thus, if a middle-class individual earns $50,000 and pays $12,500 in relevant taxes (i.e., one-quarter), then a wealthy individual who earns $100 million should also pay at least 25 percent (i.e., $25 million).
The underlying computation, often called the average tax rate (as compared to the marginal tax rate that applies to your last dollar) is familiar. A number of conceptual problems emerge in trying to use it this way, however.
What's in the numerator? - Presumably not just income taxes, which is the usual Republican ploy to ignore the less progressive levies in our fiscal system. Thus, payroll taxes to finance Social Security and Medicare would presumably be included. But what about the benefits from those programs? Note, for example, that while Social Security taxes, considered in isolation, are extremely regressive, going from 12.4% to zero at around $100,000 of annual earnings, the program as a whole is progressive on a lifetime basis unless high-earners live significantly longer.
Likewise, what about non-federal taxes, which generally are less progressive but may vary significantly? Or the corporate tax, which is indirectly paid by the shareholders? While it has uncertain economic incidence, this issue would exist even if the shareholders paid it directly. What about the expected present value of future taxes on current earnings? This, by the way, is a huge issue in thinking about income tax versus consumption tax progressivity.
What's in the denominator? - Here we presumably don't mean taxable income, or else a system with graduated rates would automatically satisfy the Buffett Rule. But how far are we going towards a measure of economic income? Does all unrealized economic gain count? That would be a huge change, and perhaps a good one, but it would go way beyond anything the Buffet Rule could seriously be thought of as aiming at.
And once you start thinking about items that might be added to the denominator, you may realize that you need to think more about the numerator. Thus, suppose tax-exempt municipal bonds pay 3%, while taxable bonds pay 4%. A high-bracket municipal bondholder is effectively paying an "implicit tax" of 25%. Thus, suppose Warren Buffett holds $100 million in municipal bonds, on which he earns $3 million of tax-exempt income. In performing the computation, rather than adding zero to the numerator and $3 million to the denominator, shouldn't we add $1 million to the numerator and $4 million to the denominator? For a wide range of tax-favored assets, however, these computations will be very difficult to make, and once again far beyond the Buffett Rule's apparently intended scope.
Okay, enough. I understand that this somewhat crude and simplistic idea is in fact a potentially clever marketing device that may serve both (a) to support changes in the direction that I favor, which is increasing the relative tax burdens of the wealthiest Americans in an era when we have massive long-term budgetary shortfalls and they have shot away from the rest of us economically as if propelled by a nuclear rocket launcher, and (b) to dramatize the fact that our current system's progressivity is nothing close to what it may seem if you naively consult the income tax rate tables.
In that sense, the Buffett Rule could have some good effects, relative to the status quo, both on political debate and on the state of the tax law if it leads to some enactment. But it encourages a host of distracting debates about side issues so far as the true points of interest are concerned. And it may discourage focusing more directly on the real issues of tax preferences and after-tax income distribution. And it could lead to the enactment of Rube Goldbergish, alternative minimum tax-style rules, as compared to more straightforwardly broadening the base and increasing high-end marginal rates. Just like the AMT since 1986, moreover, it might be subject to slow-motion unwind, such as legislation removing a particular tax preference from the Buffett tax computation so that the ostensibly wonderful reasons for enacting the item could be fully realized.
So while the Buffett tax may be a clever rhetorical initiative in some respects, I wish they could have come up with something that was substantively more coherent and better. But I suppose that's just one more reason why I'm here (in academics) and they're there (in politics).
The basic idea appears to be mathematical, or at least arithmetical. For each individual, you can make an equation where taxes paid are the numerator and some measure of income is the denominator. The Buffett Rule posits that the amount thus computed should be at least as high for the wealthiest Americans as it is for those individuals who are defined as representing the middle class.
Thus, if a middle-class individual earns $50,000 and pays $12,500 in relevant taxes (i.e., one-quarter), then a wealthy individual who earns $100 million should also pay at least 25 percent (i.e., $25 million).
The underlying computation, often called the average tax rate (as compared to the marginal tax rate that applies to your last dollar) is familiar. A number of conceptual problems emerge in trying to use it this way, however.
What's in the numerator? - Presumably not just income taxes, which is the usual Republican ploy to ignore the less progressive levies in our fiscal system. Thus, payroll taxes to finance Social Security and Medicare would presumably be included. But what about the benefits from those programs? Note, for example, that while Social Security taxes, considered in isolation, are extremely regressive, going from 12.4% to zero at around $100,000 of annual earnings, the program as a whole is progressive on a lifetime basis unless high-earners live significantly longer.
Likewise, what about non-federal taxes, which generally are less progressive but may vary significantly? Or the corporate tax, which is indirectly paid by the shareholders? While it has uncertain economic incidence, this issue would exist even if the shareholders paid it directly. What about the expected present value of future taxes on current earnings? This, by the way, is a huge issue in thinking about income tax versus consumption tax progressivity.
What's in the denominator? - Here we presumably don't mean taxable income, or else a system with graduated rates would automatically satisfy the Buffett Rule. But how far are we going towards a measure of economic income? Does all unrealized economic gain count? That would be a huge change, and perhaps a good one, but it would go way beyond anything the Buffet Rule could seriously be thought of as aiming at.
And once you start thinking about items that might be added to the denominator, you may realize that you need to think more about the numerator. Thus, suppose tax-exempt municipal bonds pay 3%, while taxable bonds pay 4%. A high-bracket municipal bondholder is effectively paying an "implicit tax" of 25%. Thus, suppose Warren Buffett holds $100 million in municipal bonds, on which he earns $3 million of tax-exempt income. In performing the computation, rather than adding zero to the numerator and $3 million to the denominator, shouldn't we add $1 million to the numerator and $4 million to the denominator? For a wide range of tax-favored assets, however, these computations will be very difficult to make, and once again far beyond the Buffett Rule's apparently intended scope.
Okay, enough. I understand that this somewhat crude and simplistic idea is in fact a potentially clever marketing device that may serve both (a) to support changes in the direction that I favor, which is increasing the relative tax burdens of the wealthiest Americans in an era when we have massive long-term budgetary shortfalls and they have shot away from the rest of us economically as if propelled by a nuclear rocket launcher, and (b) to dramatize the fact that our current system's progressivity is nothing close to what it may seem if you naively consult the income tax rate tables.
In that sense, the Buffett Rule could have some good effects, relative to the status quo, both on political debate and on the state of the tax law if it leads to some enactment. But it encourages a host of distracting debates about side issues so far as the true points of interest are concerned. And it may discourage focusing more directly on the real issues of tax preferences and after-tax income distribution. And it could lead to the enactment of Rube Goldbergish, alternative minimum tax-style rules, as compared to more straightforwardly broadening the base and increasing high-end marginal rates. Just like the AMT since 1986, moreover, it might be subject to slow-motion unwind, such as legislation removing a particular tax preference from the Buffett tax computation so that the ostensibly wonderful reasons for enacting the item could be fully realized.
So while the Buffett tax may be a clever rhetorical initiative in some respects, I wish they could have come up with something that was substantively more coherent and better. But I suppose that's just one more reason why I'm here (in academics) and they're there (in politics).
Thursday, September 29, 2011
Can we forget about the 2007 Mets now?
From Nate Silver:
“The following is not mathematically rigorous, since the events of yesterday evening were contingent upon one another in various ways. But just for fun, let’s put all of them together in sequence:
• The Red Sox had just a 0.3 percent chance of failing to make the playoffs on Sept. 3.
• The Rays had just a 0.3 percent chance of coming back after trailing 7-0 with two innings to play.
• The Red Sox had only about a 2 percent chance of losing their game against Baltimore, when the Orioles were down to their last strike.
• The Rays had about a 2 percent chance of winning in the bottom of the 9th, with Johnson also down to his last strike.
"Multiply those four probabilities together, and you get a combined probability of about one chance in 278 million of all these events coming together in quite this way.”
Nate speculates that the outcomes might have been correlated rather than independent, although this might have to depend on statistically hard-to-support claims about systematically "clutch" and "un-clutch" behavior. But he also offers an amusing stick figure illustration, entitled "All Sports Commentary," in which the first person says: "A weighted random number generator just produced a new batch of numbers."
The second one replies: "Let's use them to build narratives."
“The following is not mathematically rigorous, since the events of yesterday evening were contingent upon one another in various ways. But just for fun, let’s put all of them together in sequence:
• The Red Sox had just a 0.3 percent chance of failing to make the playoffs on Sept. 3.
• The Rays had just a 0.3 percent chance of coming back after trailing 7-0 with two innings to play.
• The Red Sox had only about a 2 percent chance of losing their game against Baltimore, when the Orioles were down to their last strike.
• The Rays had about a 2 percent chance of winning in the bottom of the 9th, with Johnson also down to his last strike.
"Multiply those four probabilities together, and you get a combined probability of about one chance in 278 million of all these events coming together in quite this way.”
Nate speculates that the outcomes might have been correlated rather than independent, although this might have to depend on statistically hard-to-support claims about systematically "clutch" and "un-clutch" behavior. But he also offers an amusing stick figure illustration, entitled "All Sports Commentary," in which the first person says: "A weighted random number generator just produced a new batch of numbers."
The second one replies: "Let's use them to build narratives."
Saturday, September 24, 2011
Tales from (near) the Vienna Woods
Last Tuesday night I flew to Vienna to teach a 4-day, 3 hours per day International Tax Policy class to students in a new doctoral program at a tax institute among the economics and business programs at Vienna University. The students are mostly lawyers, but also include people with degrees in economics, business administration, and someone with accounting as well as law. We're halfway done now, with a break for the weekend.
One of the best things about teaching this class is that there's no exam. Instead, the students will write papers. And while it's true that writing exams and grading them are the two worst tasks in a law professor's job, that's not even the main reason it's so incredibly refreshing not to have to do it.
I've assigned a bunch of readings (all by me, including unpublished book chapter drafts, except for the Tax Notes versions of Kleinbard's Stateless Income), but I don't feel I have to lecture on them. If on a given day I think it would be more instructive or fun to discuss X, Y, or Z (provided they are pertinent to the class's topic), that's just fine. No one is wondering about whether that's on the test, or whether stuff in the readings that I'm not discussing is on the test.
Obviously, the danger in such a situation is that the students will be unmotivated. But apart from the fact that they have to write papers, they're only in this program (3 years, but they're just starting) because they're interested in international business taxation, and in some cases possibly in academics or government policy jobs. They all have good work experience and would be insane to do this unless they were highly motivated.
When I teach the Tax Policy Colloquium at NYU, I get the same benefit of students who can take an interest without having to worry about the exam. (I of course don't blame students for worrying about exams when given; it just makes the experience much worse both for me and for them, and makes it much less genuinely educational apart from the admittedly important motivation it provides to take a class seriously.)
Of course, the colloquium is 14 weeks long, and the students have lots more going on, including other classes, family life, and job search. Plus, their opportunity cost is much lower, taking as given that they've decided to go to law school (or to add an LLM degree). Thus, the average level of commitment in the colloquium is bound to be less. But this is not to complain - I've been very happy with my colloquium students over the years, and I believe I've had some success, via various measures, in getting enrollees to self-select for being genuinely interested. It's been a true pleasure to get to know all these students (as one does a bit more in the colloquium than the lecture hall setting), and to learn from as well as teach them.
Meanwhile I've been touristing up a storm, so to speak, in Vienna, to the extent that I am feeling run-down and borderline sick. On Wednesday, after arrival, I went to the Schlossburg Palace & its grounds, including the Vienna Zoo, followed by 3 modern art museums in a complex called the Museum Quarter, topped off with dinner at one of the stalls in a place called the Naschmarkt (best translated as Nosh Market).
On Thursday after class, Demel's and Hotel Sacher's pastry shop followed by the delightful Albertina Museum (also with lots of modern stuff). I may go to an obscure American film there tomorrow (George Ray Hill's The Driver).
On Friday after class, the Kunsthistorische Museum (main Vienna art museum for the Renaissance and surrounding periods) followed by the Natural History Museum, then dinner with my host at a very non-touristy and authentic Vienna restaurant right on the edge of the Vienna Woods.
Today I took a train (1 hour each way) to Bratislava, Slovakia for a day trip. Charming town now that it has recovered from the horrid drabness and failure that the Communists imposed on it. Lots of charming and deliberately whimsical town squares, a few museums, a castle, some towers, coffee and a pastry on the town square, etcetera. Bratislava also has the Danube flowing through it, though it looked green rather than blue. At lunch, a very good Slovakian meal that (along with the pastry that followed) will also serve as my dinner.
As it was sunny and nice and everyone around was having a beer, I decided to do so at lunch as well, although that's certainly not my usual practice (too much the puritanical American, I suppose). Pilsener Urquel was prominently listed on the menu, but I was wondering (since I've heard of it in the US) if it is below the top local standard. I asked the waitress if it was good, and she frowned and said "It's Czech." So I got a Slovakian dark beer instead.
Tomorrow, another art museum & park called the Belvedere, then maybe that George Roy Hill movie. This leaves only Monday and Tuesday after class (I leave early on Wednesday).
I've brought work here, and I certainly could use the time doing it, but somehow when one's away from one's usual places and also has touring opportunities (cue the Puritanical sense of duty again, I suppose, although I really do enjoy it & find it interesting), I just can't find the motivation to do any of it.
One of the best things about teaching this class is that there's no exam. Instead, the students will write papers. And while it's true that writing exams and grading them are the two worst tasks in a law professor's job, that's not even the main reason it's so incredibly refreshing not to have to do it.
I've assigned a bunch of readings (all by me, including unpublished book chapter drafts, except for the Tax Notes versions of Kleinbard's Stateless Income), but I don't feel I have to lecture on them. If on a given day I think it would be more instructive or fun to discuss X, Y, or Z (provided they are pertinent to the class's topic), that's just fine. No one is wondering about whether that's on the test, or whether stuff in the readings that I'm not discussing is on the test.
Obviously, the danger in such a situation is that the students will be unmotivated. But apart from the fact that they have to write papers, they're only in this program (3 years, but they're just starting) because they're interested in international business taxation, and in some cases possibly in academics or government policy jobs. They all have good work experience and would be insane to do this unless they were highly motivated.
When I teach the Tax Policy Colloquium at NYU, I get the same benefit of students who can take an interest without having to worry about the exam. (I of course don't blame students for worrying about exams when given; it just makes the experience much worse both for me and for them, and makes it much less genuinely educational apart from the admittedly important motivation it provides to take a class seriously.)
Of course, the colloquium is 14 weeks long, and the students have lots more going on, including other classes, family life, and job search. Plus, their opportunity cost is much lower, taking as given that they've decided to go to law school (or to add an LLM degree). Thus, the average level of commitment in the colloquium is bound to be less. But this is not to complain - I've been very happy with my colloquium students over the years, and I believe I've had some success, via various measures, in getting enrollees to self-select for being genuinely interested. It's been a true pleasure to get to know all these students (as one does a bit more in the colloquium than the lecture hall setting), and to learn from as well as teach them.
Meanwhile I've been touristing up a storm, so to speak, in Vienna, to the extent that I am feeling run-down and borderline sick. On Wednesday, after arrival, I went to the Schlossburg Palace & its grounds, including the Vienna Zoo, followed by 3 modern art museums in a complex called the Museum Quarter, topped off with dinner at one of the stalls in a place called the Naschmarkt (best translated as Nosh Market).
On Thursday after class, Demel's and Hotel Sacher's pastry shop followed by the delightful Albertina Museum (also with lots of modern stuff). I may go to an obscure American film there tomorrow (George Ray Hill's The Driver).
On Friday after class, the Kunsthistorische Museum (main Vienna art museum for the Renaissance and surrounding periods) followed by the Natural History Museum, then dinner with my host at a very non-touristy and authentic Vienna restaurant right on the edge of the Vienna Woods.
Today I took a train (1 hour each way) to Bratislava, Slovakia for a day trip. Charming town now that it has recovered from the horrid drabness and failure that the Communists imposed on it. Lots of charming and deliberately whimsical town squares, a few museums, a castle, some towers, coffee and a pastry on the town square, etcetera. Bratislava also has the Danube flowing through it, though it looked green rather than blue. At lunch, a very good Slovakian meal that (along with the pastry that followed) will also serve as my dinner.
As it was sunny and nice and everyone around was having a beer, I decided to do so at lunch as well, although that's certainly not my usual practice (too much the puritanical American, I suppose). Pilsener Urquel was prominently listed on the menu, but I was wondering (since I've heard of it in the US) if it is below the top local standard. I asked the waitress if it was good, and she frowned and said "It's Czech." So I got a Slovakian dark beer instead.
Tomorrow, another art museum & park called the Belvedere, then maybe that George Roy Hill movie. This leaves only Monday and Tuesday after class (I leave early on Wednesday).
I've brought work here, and I certainly could use the time doing it, but somehow when one's away from one's usual places and also has touring opportunities (cue the Puritanical sense of duty again, I suppose, although I really do enjoy it & find it interesting), I just can't find the motivation to do any of it.
Tuesday, September 13, 2011
"Go big" letter on deficit reduction
I am one of the more than 60 signers (or, if you prefer, signatories) of a letter to the Joint Select Committee on Deficit Reduction that urges the Committee to "'go big' and develop a large-scale debt reduction package sufficient to stabilize the debt as a share of the economy."
With the studied generality that was needed to get so many signatures, which range across the ideological spectrum from about the medium left to the medium right, the letter continues:
"We believe that a go big approach that goes well beyond the $1.5 trillion deficit reduction goal that the Committee has been charged with and includes major reforms of entitlement programs and the tax code is necessary to bring the debt down to a manageable and sustainable level, improve the long-term fiscal imbalance, reassure markets, and restore Americans’ faith in the political system.
"While we have differences of opinion about the specific policies that should be included in any plan, we all agree that a large-scale, multi-year debt stabilization package is necessary to deal with the fiscal challenges facing the nation."
I was willing to sign the letter because it doesn't contradict (although it also doesn't endorse) the view I share that in the short run we need to boost consumer demand. Also, I certainly agree about the need for entitlement reform and tax reform, although (as discussed here) I would not include rate reduction in the latter.
And while I am very skeptical that anything good is likely to come out of the current political environment in which the Joint Select Committee on Deficit Reduction is operating - requiring me to swallow some qualms about the "go big" advice in signing the letter - I concluded as follows:
(1) waiting for the political environment to improve is not very promising, as it may just keep on getting worse, and
(2) as I discuss here, the threat of fundamental political dysfunction leading to default is great enough that it wouldn't be prudent (as Bush Sr. might have put it) to favor sitting tight and waiting for a more propitious time.
With the studied generality that was needed to get so many signatures, which range across the ideological spectrum from about the medium left to the medium right, the letter continues:
"We believe that a go big approach that goes well beyond the $1.5 trillion deficit reduction goal that the Committee has been charged with and includes major reforms of entitlement programs and the tax code is necessary to bring the debt down to a manageable and sustainable level, improve the long-term fiscal imbalance, reassure markets, and restore Americans’ faith in the political system.
"While we have differences of opinion about the specific policies that should be included in any plan, we all agree that a large-scale, multi-year debt stabilization package is necessary to deal with the fiscal challenges facing the nation."
I was willing to sign the letter because it doesn't contradict (although it also doesn't endorse) the view I share that in the short run we need to boost consumer demand. Also, I certainly agree about the need for entitlement reform and tax reform, although (as discussed here) I would not include rate reduction in the latter.
And while I am very skeptical that anything good is likely to come out of the current political environment in which the Joint Select Committee on Deficit Reduction is operating - requiring me to swallow some qualms about the "go big" advice in signing the letter - I concluded as follows:
(1) waiting for the political environment to improve is not very promising, as it may just keep on getting worse, and
(2) as I discuss here, the threat of fundamental political dysfunction leading to default is great enough that it wouldn't be prudent (as Bush Sr. might have put it) to favor sitting tight and waiting for a more propitious time.
Monday, September 12, 2011
Tax planning by video game developers
Interesting NY Times article about how video game developers such as Electronic Arts have combined aggressive tax planning with equally aggressive lobbying to pay no U.S. tax on $1.2 billion of global earnings, which I would guess were as a fundamental economic matter nearly all generated by talented employees who were living and working in the U.S.
One supplementary fact, not included in the article (reflecting that the information would be hard to find), but of interest substantively, is what taxes were paid on the owner level, given that one of the main tax provisions employed by Electronic Acts (according to the article) was deductions for employee stock options.
Still, even looking at both levels of tax, I rather suspect that Electronic Arts did pretty well.
The article spends quite a lot of time discussing the "architect" of Electronic Arts' strategies in recent years, "Glen A. Kohl, a tax lawyer colorful enough to publicly compare himself to Bruce Springsteen and to joke in the pages of The Wall Street Journal that his dog, Rubin, shared the name of the Treasury secretary under whom he served (Robert E. Rubin).
"After working in the Treasury Department during the Clinton administration, Mr. Kohl entered the private sector and became head of E.A.’s tax department in 2004, leading the company as it aggressively lobbied for a federal tax break on domestic production and set up a matrix of offshore subsidiaries, many in low-tax countries."
Kohl appears not to have been interviewed on the record for the article, but he is also discussed at length later on. It mentions that, before joining Electronic Arts in 2004, he "co-authored a widely-cited proposal urging the federal government to crack down on corporate tax avoidance, warning that 'the tax shelter problem is simply too detrimental to the tax system not to act.' As head of tax at Electronic Arts, he became a noted expert in using foreign subsidiaries to legally, and sharply, cut a corporation’s United States tax bill. As a co-chairman of the Silicon Valley Tax Directors Group, he also moderated a seminar in 2010 that showed technology companies how to use offshore subsidiaries to reassign the licensing of their intellectual property and, in some cases, reduce their effective federal tax rate substantially from 35 percent."
So it's a classic praise / pan, in some ways making him look great (smart, important, influential, creative, effective) but also no doubt prompting invidious musings from many readers about what might underlie the change in persona that appears to have taken hold around 2004 or so.
I should put my own cards on the table here and note that Glen and I are old law school classmates, and that I consider him a friend (hopefully, notwithstanding my topic choice here). Few if any in my law school class were so charismatic, energetic, or widely known and liked. For that matter, he was (and no doubt remains) far less self-important than Bruce Springsteen. Closer in intellectual outlook to Stephen Malkmus minus the diffidence, and coming from me that's high praise.
But the story of his evolution pre-2004 versus post-2003 certainly reflects the sort of incentives people face in the tax and business world - not just financially, although that's obviously very important, but in other ways as well. There are only so many ways to hit the really big leagues, develop and showcase your professional talents, and express your intellectual creativity, especially if you don't choose (or it isn't quite your thing) to toil in the obscure groves of academe, laboring to develop what you consider insights that maybe 300 people will download and 40 or so truly appreciate. And there may be unfortunate social byproducts to how talent thus ends up being directed.
Call it a cautionary tale, with an individually but not socially happy ending.
One supplementary fact, not included in the article (reflecting that the information would be hard to find), but of interest substantively, is what taxes were paid on the owner level, given that one of the main tax provisions employed by Electronic Acts (according to the article) was deductions for employee stock options.
Still, even looking at both levels of tax, I rather suspect that Electronic Arts did pretty well.
The article spends quite a lot of time discussing the "architect" of Electronic Arts' strategies in recent years, "Glen A. Kohl, a tax lawyer colorful enough to publicly compare himself to Bruce Springsteen and to joke in the pages of The Wall Street Journal that his dog, Rubin, shared the name of the Treasury secretary under whom he served (Robert E. Rubin).
"After working in the Treasury Department during the Clinton administration, Mr. Kohl entered the private sector and became head of E.A.’s tax department in 2004, leading the company as it aggressively lobbied for a federal tax break on domestic production and set up a matrix of offshore subsidiaries, many in low-tax countries."
Kohl appears not to have been interviewed on the record for the article, but he is also discussed at length later on. It mentions that, before joining Electronic Arts in 2004, he "co-authored a widely-cited proposal urging the federal government to crack down on corporate tax avoidance, warning that 'the tax shelter problem is simply too detrimental to the tax system not to act.' As head of tax at Electronic Arts, he became a noted expert in using foreign subsidiaries to legally, and sharply, cut a corporation’s United States tax bill. As a co-chairman of the Silicon Valley Tax Directors Group, he also moderated a seminar in 2010 that showed technology companies how to use offshore subsidiaries to reassign the licensing of their intellectual property and, in some cases, reduce their effective federal tax rate substantially from 35 percent."
So it's a classic praise / pan, in some ways making him look great (smart, important, influential, creative, effective) but also no doubt prompting invidious musings from many readers about what might underlie the change in persona that appears to have taken hold around 2004 or so.
I should put my own cards on the table here and note that Glen and I are old law school classmates, and that I consider him a friend (hopefully, notwithstanding my topic choice here). Few if any in my law school class were so charismatic, energetic, or widely known and liked. For that matter, he was (and no doubt remains) far less self-important than Bruce Springsteen. Closer in intellectual outlook to Stephen Malkmus minus the diffidence, and coming from me that's high praise.
But the story of his evolution pre-2004 versus post-2003 certainly reflects the sort of incentives people face in the tax and business world - not just financially, although that's obviously very important, but in other ways as well. There are only so many ways to hit the really big leagues, develop and showcase your professional talents, and express your intellectual creativity, especially if you don't choose (or it isn't quite your thing) to toil in the obscure groves of academe, laboring to develop what you consider insights that maybe 300 people will download and 40 or so truly appreciate. And there may be unfortunate social byproducts to how talent thus ends up being directed.
Call it a cautionary tale, with an individually but not socially happy ending.
Friday, September 09, 2011
New article published on SSRN
I have just published on SSRN an article draft that I prepared over the summer, entitled Tax Reform Implications of the Risk of a U.S. Budget Catastrophe.
The link for downloading the article is here.
The abstract is as follows:
"Despite the demographic causes of the long-term U.S. fiscal gap, only severe dysfunction in our political system, abetted by malfunctioning and discontinuously responsive global financial markets, could lead to a U.S. budget catastrophe. Unfortunately, the risk of disaster appears to be alarmingly high. The rising danger has implications both for income tax reform and for the possible adoption of new tax instruments.
"For income tax reform, the main implication is that base-broadening should be undertaken without accompanying 1986-style tax rate reduction. The threat of a fiscal catastrophe also raises concern about otherwise desirable but potentially revenue-losing reforms, such as to the rules for corporate and international taxation.
"A number of tax instruments not currently used in the U.S. might be appealing even if the reform that included them was revenue-neutral overall. These include a value-added tax (VAT), a carbon tax, and a financial activities tax (FAT), although in my view a financial transactions tax (FTT) would not have comparable merit. All of these instruments potentially gain appeal if they could be used to ease the political prospects for raising overall U.S. tax revenues, and thus for reducing the risk of a budgetary catastrophe."
A few words in further description: I prepared this short article draft pursuant to my obligations as a speaker at the University of Louisville Law Review Symposium on Federal Budget and Debt Reduction, which will be held at the University of Louisville Law School on Saturday, October 22, from 10 am to 4 pm. A link to this conference is available here. The rule for article submissions was 25 pages tops, so my article tries to cover a lot of ground very fast, and inevitably a bit superficially (or at least relying on conclusions from elsewhere that are not substantially defended in the text). That said, it does offer a general perspective on tax reform issues (pertaining to both the existing income tax and possible new instruments) in light of the fiscal dangers that we face.
The link for downloading the article is here.
The abstract is as follows:
"Despite the demographic causes of the long-term U.S. fiscal gap, only severe dysfunction in our political system, abetted by malfunctioning and discontinuously responsive global financial markets, could lead to a U.S. budget catastrophe. Unfortunately, the risk of disaster appears to be alarmingly high. The rising danger has implications both for income tax reform and for the possible adoption of new tax instruments.
"For income tax reform, the main implication is that base-broadening should be undertaken without accompanying 1986-style tax rate reduction. The threat of a fiscal catastrophe also raises concern about otherwise desirable but potentially revenue-losing reforms, such as to the rules for corporate and international taxation.
"A number of tax instruments not currently used in the U.S. might be appealing even if the reform that included them was revenue-neutral overall. These include a value-added tax (VAT), a carbon tax, and a financial activities tax (FAT), although in my view a financial transactions tax (FTT) would not have comparable merit. All of these instruments potentially gain appeal if they could be used to ease the political prospects for raising overall U.S. tax revenues, and thus for reducing the risk of a budgetary catastrophe."
A few words in further description: I prepared this short article draft pursuant to my obligations as a speaker at the University of Louisville Law Review Symposium on Federal Budget and Debt Reduction, which will be held at the University of Louisville Law School on Saturday, October 22, from 10 am to 4 pm. A link to this conference is available here. The rule for article submissions was 25 pages tops, so my article tries to cover a lot of ground very fast, and inevitably a bit superficially (or at least relying on conclusions from elsewhere that are not substantially defended in the text). That said, it does offer a general perspective on tax reform issues (pertaining to both the existing income tax and possible new instruments) in light of the fiscal dangers that we face.
Thursday, September 08, 2011
Is Social Security a Ponzi scheme?
Since Rick Perry keeps calling Social Security a Ponzi scheme, let's examine the accuracy of this characterization.
A true Ponzi scheme has two main elements. First, new investors' contributions are used to pay old investors' benefits. Second, an exploding or unsustainable growth rate is needed to keep the promised or expected benefits coming. (A chain letter where you ask six people to send you a dollar, and they then each ask six people to send them a dollar, is a classic example.)
Social Security has the first of these two elements, reflecting program cash flows and the initial decision, made when the program was started during the Great Depression while millions of seniors faced ineradicable poverty, to start paying benefits to retirees who had not significantly contributed to the program.
This alone, however, is not problematic in the way that the term "Ponzi scheme" inevitably suggests. If you think it is problematic and thus justifies the label, here's another non-exploding and seemingly Ponzi-like scheme for you. My family, like many others, has for countless generations been running this incredibly Ponzi-like scheme called "parenting." As a baby you get these free benefits, paid by your parents via their labor in raising you. Then when you grow up you pay in to the plan (if you have children) by raising your kids.
Surely this is even worse than Social Security. After all, at least in Social Security you pay your taxes before you get your benefits. Here, you get your benefits first! But there's still the key feature that you don't self-finance, i.e., raise yourself from infancy. Instead, each cohort relies on an adjoining one to pay it. Yet somehow this audacious scheme has proved sustainable over time.
So there really is no Ponzi scheme unless an exploding or unsustainable growth rate is needed to keep the promised or expected benefits coming. How does Social Security rank in this regard?
As it happens, the program does not have a well-defined relationship between taxes paid in and benefits that are promised. This depends on how the payroll tax rate and base on the one hand, and the benefit formula on the other hand (each subject to statutory modification at any time), happen to play out given birth rates, life expectancies, wage growth, employment levels, etcetera.
But in Paul Samuelson's famous conceptualization of Social Security in a classic 1958 article, we can think of the program as one in which everyone would get back exactly the amount they paid in if, among other simplifying abstractions, wages and population were constant over time and everyone's life consisted of a fixed "work period" followed by a "retirement period." Throw in population growth and rising real wage levels, and Samuelson foresaw a positive rate of return to Social Security retirees (possibly exceeding the real interest rate, in a Peter Diamond extension of the model) that depended on those two factors. That is, if we imagine payroll taxes being handed over to retirees in a strict pay-as-you-go system, the amount available to be paid over rises if the workforce grows along with wages that are subject to the payroll tax.
There's nothing Ponzi-like about that; it's entirely sustainable. But in actual Social Security, two things went "wrong." One was the baby bust after the baby boom, while the second, more important change was rising post-retirement life expectancies. Having retirees live longer was equivalent to having more of them, and had adverse effects on worker to retiree ratios even if each demographic cohort was larger than the one that came before.
Does this mean that Social Security became a Ponzi scheme after all? Strictly speaking, absolutely not. If we think of Social Security retirement benefits as being adjusted to reflect changing payroll tax revenue levels (even though this is only true, if at all, over the long run), then we'd say that retirees hold an implicit financial instrument, the payoff on which depends on wage and demographic trends. So all that rising life expectancies does in this scenario is cause the payoff to be lower rather than higher than it would otherwise have been. But that's in the nature of the implicit financial instrument - a built-in feature that does not cause Ponzi-like collapse, but merely affects the actual payouts from a program that can keep on running anyway.
This brings us to the point that comes closest to justifying Perry's angry braying about Social Security. The program's retirement benefits do not automatically adjust for these demographic changes. Instead, barring Congressional legislation, they proceed on statutory autopilot (albeit depending in practice on demographic and macroeconomic outcomes). So if adverse demographic changes do not lead to immediate tax or benefit changes, you get a program shortfall that emerges over time, and currently promised benefits become eventually unsustainable without new financing.
That, however, is merely lag in adjusting the actual rules on the books to keep on track with the Samuelson structure that is implied by having a largely pay-as-you-go scheme. And it does not mean that the program will collapse - merely that benefits will need at some point to be adversely adjusted (say, to the tune of 20 or 30 percent) in the absence of increased financing.
Perry is right (words that I must confess I hate typing) insofar as his point is that the current scheme requires adjustment, and that people won't get the full benefits promised by present law unless there is extra financing. But he is very substantially wrong in comparing this to a Ponzi scheme in which, as we well know, the investors (except for the lucky ones who got out fast) end up with nothing.
It would be more accurate to compare Social Security to an investment that has historically produced one rate of return, but which in fact appears likely to offer you a lower rate of return. E.g., suppose stock prices have historically appreciated, over a long period of time, at about 2% annually in real terms. You now hold stocks and are hoping to earn that rate of return. But suppose we can see the future well enough to anticipate that, in fact, you will end up learning less than that (and perhaps even a zero or modestly negative rate of return). That's too bad, but it doesn't make stock market investment a Ponzi scheme.
The negative adjustment to expected returns also obviously does not make mandatory retirement saving (a key feature of Social Security) a bad idea, given that lifetime consumption smoothing is necessary unless you're happy to have two houses and two dinners a day now, followed by none of either when you're old.
In sum, "Ponzi scheme" is really out of place as a description of Social Security, even though the program has financing problems. It's true that there have been some negative shocks to expected returns from the program, and that since it doesn't automatically self-adjust there will be a rising expected long-term program deficit until Congress gets around to adjusting things. But this is way out of Ponzi territory.
What about Medicare? That program is best described as Samuelson-plus. Program participants "bet" not only on economic and demographic trends, but also on the trend in healthcare expenditure relative to GDP. (When that rises, the program becomes costlier under constant benefit design.) What makes Medicare far more fiscally unsustainable than Social Security is the fact that healthcare expenditure levels have been significantly rising relative to GDP - and unsustainably so whether there is a government financing role or not.
Medicare is closer to Ponzi territory if we posit an implicit commitment, not just to the current statutory design, but to covering so large a percentage of seniors' healthcare outlays under a system where they so frequently can get the best procedures that are technologically available at a given moment. The built-in unsustainability comes from purporting to guarantee something that is itself growing at an exploding rate. But that is a piece of the broader healthcare problem that we face, more than an aspect of Medicare as such. So calling Medicare a Ponzi scheme (which even Perry does not seem inclined to do) is less illuminating than saying that healthcare generally is on an unsustainable growth path in our society, that we will need to address in one way or another.
UPDATE: Looking at Perry's statement more closely (although in this post I was more interested in the pervasive "Ponzi scheme" meme than in his murky mental processes), I see that his operating definition appears to be that, if the system is going to go kaput and pay you zero, then from your standpoint it is a Ponzi scheme. That is certainly a reasonable way to define Ponzi schemes. But of course it is wildly inaccurate as applied to Social Security, which is projected to be able (based on expected future Trust Funds) to pay about 75 percent of future retirees' benefits. So he is using what we will charitably call his own facts, rather than the actual ones, in calling Social Security a Ponzi scheme.
Interesting point about Perry: While he obviously feels entitled to his own facts, rather than the actual ones, on global warming, evolution, Keynesian stimulus, Social Security, etcetera, he apparently caused his last two gubernatorial campaigns to run very serious empirical tests regarding how alternative types of campaign expenditures and activities actually contribute to electoral success. See the NY times blog article here. In other words, this would appear to be a guy who (contrary to so much evidence from his cheap talk) actually knows and cares about expertise and empirical proof, in cases where there is something in it for him. But if there is no direct personal benefit to him, then he evidently doesn't care.
A true Ponzi scheme has two main elements. First, new investors' contributions are used to pay old investors' benefits. Second, an exploding or unsustainable growth rate is needed to keep the promised or expected benefits coming. (A chain letter where you ask six people to send you a dollar, and they then each ask six people to send them a dollar, is a classic example.)
Social Security has the first of these two elements, reflecting program cash flows and the initial decision, made when the program was started during the Great Depression while millions of seniors faced ineradicable poverty, to start paying benefits to retirees who had not significantly contributed to the program.
This alone, however, is not problematic in the way that the term "Ponzi scheme" inevitably suggests. If you think it is problematic and thus justifies the label, here's another non-exploding and seemingly Ponzi-like scheme for you. My family, like many others, has for countless generations been running this incredibly Ponzi-like scheme called "parenting." As a baby you get these free benefits, paid by your parents via their labor in raising you. Then when you grow up you pay in to the plan (if you have children) by raising your kids.
Surely this is even worse than Social Security. After all, at least in Social Security you pay your taxes before you get your benefits. Here, you get your benefits first! But there's still the key feature that you don't self-finance, i.e., raise yourself from infancy. Instead, each cohort relies on an adjoining one to pay it. Yet somehow this audacious scheme has proved sustainable over time.
So there really is no Ponzi scheme unless an exploding or unsustainable growth rate is needed to keep the promised or expected benefits coming. How does Social Security rank in this regard?
As it happens, the program does not have a well-defined relationship between taxes paid in and benefits that are promised. This depends on how the payroll tax rate and base on the one hand, and the benefit formula on the other hand (each subject to statutory modification at any time), happen to play out given birth rates, life expectancies, wage growth, employment levels, etcetera.
But in Paul Samuelson's famous conceptualization of Social Security in a classic 1958 article, we can think of the program as one in which everyone would get back exactly the amount they paid in if, among other simplifying abstractions, wages and population were constant over time and everyone's life consisted of a fixed "work period" followed by a "retirement period." Throw in population growth and rising real wage levels, and Samuelson foresaw a positive rate of return to Social Security retirees (possibly exceeding the real interest rate, in a Peter Diamond extension of the model) that depended on those two factors. That is, if we imagine payroll taxes being handed over to retirees in a strict pay-as-you-go system, the amount available to be paid over rises if the workforce grows along with wages that are subject to the payroll tax.
There's nothing Ponzi-like about that; it's entirely sustainable. But in actual Social Security, two things went "wrong." One was the baby bust after the baby boom, while the second, more important change was rising post-retirement life expectancies. Having retirees live longer was equivalent to having more of them, and had adverse effects on worker to retiree ratios even if each demographic cohort was larger than the one that came before.
Does this mean that Social Security became a Ponzi scheme after all? Strictly speaking, absolutely not. If we think of Social Security retirement benefits as being adjusted to reflect changing payroll tax revenue levels (even though this is only true, if at all, over the long run), then we'd say that retirees hold an implicit financial instrument, the payoff on which depends on wage and demographic trends. So all that rising life expectancies does in this scenario is cause the payoff to be lower rather than higher than it would otherwise have been. But that's in the nature of the implicit financial instrument - a built-in feature that does not cause Ponzi-like collapse, but merely affects the actual payouts from a program that can keep on running anyway.
This brings us to the point that comes closest to justifying Perry's angry braying about Social Security. The program's retirement benefits do not automatically adjust for these demographic changes. Instead, barring Congressional legislation, they proceed on statutory autopilot (albeit depending in practice on demographic and macroeconomic outcomes). So if adverse demographic changes do not lead to immediate tax or benefit changes, you get a program shortfall that emerges over time, and currently promised benefits become eventually unsustainable without new financing.
That, however, is merely lag in adjusting the actual rules on the books to keep on track with the Samuelson structure that is implied by having a largely pay-as-you-go scheme. And it does not mean that the program will collapse - merely that benefits will need at some point to be adversely adjusted (say, to the tune of 20 or 30 percent) in the absence of increased financing.
Perry is right (words that I must confess I hate typing) insofar as his point is that the current scheme requires adjustment, and that people won't get the full benefits promised by present law unless there is extra financing. But he is very substantially wrong in comparing this to a Ponzi scheme in which, as we well know, the investors (except for the lucky ones who got out fast) end up with nothing.
It would be more accurate to compare Social Security to an investment that has historically produced one rate of return, but which in fact appears likely to offer you a lower rate of return. E.g., suppose stock prices have historically appreciated, over a long period of time, at about 2% annually in real terms. You now hold stocks and are hoping to earn that rate of return. But suppose we can see the future well enough to anticipate that, in fact, you will end up learning less than that (and perhaps even a zero or modestly negative rate of return). That's too bad, but it doesn't make stock market investment a Ponzi scheme.
The negative adjustment to expected returns also obviously does not make mandatory retirement saving (a key feature of Social Security) a bad idea, given that lifetime consumption smoothing is necessary unless you're happy to have two houses and two dinners a day now, followed by none of either when you're old.
In sum, "Ponzi scheme" is really out of place as a description of Social Security, even though the program has financing problems. It's true that there have been some negative shocks to expected returns from the program, and that since it doesn't automatically self-adjust there will be a rising expected long-term program deficit until Congress gets around to adjusting things. But this is way out of Ponzi territory.
What about Medicare? That program is best described as Samuelson-plus. Program participants "bet" not only on economic and demographic trends, but also on the trend in healthcare expenditure relative to GDP. (When that rises, the program becomes costlier under constant benefit design.) What makes Medicare far more fiscally unsustainable than Social Security is the fact that healthcare expenditure levels have been significantly rising relative to GDP - and unsustainably so whether there is a government financing role or not.
Medicare is closer to Ponzi territory if we posit an implicit commitment, not just to the current statutory design, but to covering so large a percentage of seniors' healthcare outlays under a system where they so frequently can get the best procedures that are technologically available at a given moment. The built-in unsustainability comes from purporting to guarantee something that is itself growing at an exploding rate. But that is a piece of the broader healthcare problem that we face, more than an aspect of Medicare as such. So calling Medicare a Ponzi scheme (which even Perry does not seem inclined to do) is less illuminating than saying that healthcare generally is on an unsustainable growth path in our society, that we will need to address in one way or another.
UPDATE: Looking at Perry's statement more closely (although in this post I was more interested in the pervasive "Ponzi scheme" meme than in his murky mental processes), I see that his operating definition appears to be that, if the system is going to go kaput and pay you zero, then from your standpoint it is a Ponzi scheme. That is certainly a reasonable way to define Ponzi schemes. But of course it is wildly inaccurate as applied to Social Security, which is projected to be able (based on expected future Trust Funds) to pay about 75 percent of future retirees' benefits. So he is using what we will charitably call his own facts, rather than the actual ones, in calling Social Security a Ponzi scheme.
Interesting point about Perry: While he obviously feels entitled to his own facts, rather than the actual ones, on global warming, evolution, Keynesian stimulus, Social Security, etcetera, he apparently caused his last two gubernatorial campaigns to run very serious empirical tests regarding how alternative types of campaign expenditures and activities actually contribute to electoral success. See the NY times blog article here. In other words, this would appear to be a guy who (contrary to so much evidence from his cheap talk) actually knows and cares about expertise and empirical proof, in cases where there is something in it for him. But if there is no direct personal benefit to him, then he evidently doesn't care.
Wednesday, September 07, 2011
What would Nixon do?
The opening of today's New York Times article on President Obama's forthcoming jobs package really turned my stomach:
"The centerpiece of the job creation package that President Obama plans to announce on Thursday — payroll tax relief for workers and perhaps their employers — is neither his first policy choice nor that of many economists. But it is the one that they figure has the best chance of getting Republicans’ support."
So typical of this Administration. They decide up front to advocate what they agree is very far from being the best available, policy - in order to give themselves "the best chance of getting Republicans’ support."
All this notwithstanding that the Administration's actual chance of getting that support is zero. Not 0.00001%. Zero. At least, leaving aside the payment of substantial ransom such as extending the high-end tax cuts. With or without payroll tax relief as a core feature, the Republicans will not agree to pass this legislation. So why would the Administration proceed as if winning their votes was the core design question? (Actually, I'll suggest a rationale below, but it isn't good enough.)
Let's turn our minds back to early 2009 and the big (such as it was) stimulus package. This included lots of tax breaks that the Administration, through its economists, knew would be less effective than alternative programs. They put these in to get Republican support. They got zero Republican support. They kept the tax breaks in anyway, and then of course grossly oversold an inadequately sized package as providing enough to get the economy back on track. Then, when the recovery fell far short of the rhetorical expectations that had been created, the Administration had encouraged the retort that stimulus just doesn't work (as opposed to its having been too small).
Now once again we have a flurry of proposals that are going to be too small in aggregate and deliberately poorly designed, in the hope of getting Republican support, which they have zero chance of getting.
But why did I title this post "What would Nixon do?" OK, I have keen memories of the old Trickster, though I realize that he is ancient history to anyone under the age of 45. But bear with me. One thing we know that Nixon absolutely for sure would have done (because he did it) is use every possible tool he had to push the Fed towards a more stimulative policy. Obama utterly failed to do this, whether through appointments or private sit-downs or public jawboning.
But there is also another standard Nixon trick that, sleazy though it was in context, the Obama Administration ought to think about. Nixon was a big fan of proposing legislation that he knew couldn't be passed, specifically because if it wasn't passed he would get a campaign issue. E.g., supposedly in 1970 he was disappointed by his success in getting the Democratic Congress to pass a tough crime bill that contained provisions that, under the quaint standards of the time, were considered odious by civil libertarians. Nixon had deliberately put these things in the proposed legislation, although they were largely symbolic and expected to have little actual impact on crime, because he wanted the Democrats to refuse to pass the legislation, whereupon he would make it a campaign issue and blame rising crime levels on them. They took the issue away by acceding.
How would such a scenario play out today? If Nixon faced Obama's current political circumstances, he would not be trying actually to enact stimulus legislation. He would know that he had zero chance of getting anything that would make a significant difference. He would want to propose something that the opposition WOULDN'T pass, and that he could then campaign on. (And it is clear this time around, unlike with the 1970 crime legislation, that the Congress won't accede in order to take away the issue.)
We could use a bit of that thinking today. Why not propose something that is actually big, dramatic, and well-designed? And why not make reasonable, economically supportable arguments about why and how much it might actually help? Then Obama could rightly criticize the Republicans and blame the labor market on them when they fail to pass it.
This would not just be Nixon-style maneuvering. It would also help make the correct point that, since at least mid-2009, we have actually been following Republican budget policies and they haven't worked. As things stand, by repeatedly acceding to them, even in what he proposes, he accepts a state of affairs in which they actually set the policy yet he takes the blame.
Meanwhile, Obama is collaborating in basic miseducation of American voters, by adopting all kinds of false or grossly overstated Republican claims about how regulatory burden and budget deficits are responsible for the jobs situation.
If people want Republican policies, they will pick Republicans to implement them. An abler, more courageous, and more farsighted politician than Obama would recognize the importance of laying the intellectual groundwork for good policy over many years.
OK, time is short and it's a bit late for all that now. So admittedly there is one clear political calculation that might explain how Obama is proceeding in his jobs proposal. If he proposed big infrastructure and public spending ideas to hire lots of workers and help get us out of the doldrums, and the Republicans refused to enact it, at least they would have a very strong case that they were acting in good faith. Rather than inviting the campaign charge that they are deliberate economic saboteurs, they would be following their own long-enunciated policy preferences in opposing the legislation. (McConnell has already previewed this by saying they won't enact failed policies, harvesting the legacy of Obama's 2009 overclaiming for the stimulus legislation.)
But even if the Republicans convincingly argued good faith in opposing such a proposal, Obama could still reply that they are wrong, and that they shouldn't be elected in 2012 because they will follow the wrong policies.
Don't call it stimulus, of course - call it creating jobs by hiring lots of people to build things that we need. Don't rely in public rhetoric on Keynesian multipliers that are counter-intuitive. Force the Republicans to argue that there will be no net job creation due to indirect effects - a freshwater economists' claim that is counter-intuitive wholly apart from whether it is right or wrong (and with the collapse of consumer demand I would say that it is clearly wrong).
By instead proposing watered-down, maldesigned, too-small Republican-style jobs legislation, Obama may hope to strengthen the claim that the Republicans are acting in bad faith when they inevitably reject it. But accusations of bad faith, which he will of course make extremely decorously if at all, will only go so far with the voters - especially once he has conceded that in general we need Republican-style policies, which they of course are the better-situated party to keep on providing.
And the reality is even worse. One lesson that voters might very well draw is that, if Republicans engage in bad faith obstructionism whenever a Democrat is president, we'd damn well better put them in charge so that they will have the right incentives. It doesn't make them nice people, but if they will make sure that things go worse when they are not officially in power than when they are, voters could very rationally view this as a good reason for electing them.
"The centerpiece of the job creation package that President Obama plans to announce on Thursday — payroll tax relief for workers and perhaps their employers — is neither his first policy choice nor that of many economists. But it is the one that they figure has the best chance of getting Republicans’ support."
So typical of this Administration. They decide up front to advocate what they agree is very far from being the best available, policy - in order to give themselves "the best chance of getting Republicans’ support."
All this notwithstanding that the Administration's actual chance of getting that support is zero. Not 0.00001%. Zero. At least, leaving aside the payment of substantial ransom such as extending the high-end tax cuts. With or without payroll tax relief as a core feature, the Republicans will not agree to pass this legislation. So why would the Administration proceed as if winning their votes was the core design question? (Actually, I'll suggest a rationale below, but it isn't good enough.)
Let's turn our minds back to early 2009 and the big (such as it was) stimulus package. This included lots of tax breaks that the Administration, through its economists, knew would be less effective than alternative programs. They put these in to get Republican support. They got zero Republican support. They kept the tax breaks in anyway, and then of course grossly oversold an inadequately sized package as providing enough to get the economy back on track. Then, when the recovery fell far short of the rhetorical expectations that had been created, the Administration had encouraged the retort that stimulus just doesn't work (as opposed to its having been too small).
Now once again we have a flurry of proposals that are going to be too small in aggregate and deliberately poorly designed, in the hope of getting Republican support, which they have zero chance of getting.
But why did I title this post "What would Nixon do?" OK, I have keen memories of the old Trickster, though I realize that he is ancient history to anyone under the age of 45. But bear with me. One thing we know that Nixon absolutely for sure would have done (because he did it) is use every possible tool he had to push the Fed towards a more stimulative policy. Obama utterly failed to do this, whether through appointments or private sit-downs or public jawboning.
But there is also another standard Nixon trick that, sleazy though it was in context, the Obama Administration ought to think about. Nixon was a big fan of proposing legislation that he knew couldn't be passed, specifically because if it wasn't passed he would get a campaign issue. E.g., supposedly in 1970 he was disappointed by his success in getting the Democratic Congress to pass a tough crime bill that contained provisions that, under the quaint standards of the time, were considered odious by civil libertarians. Nixon had deliberately put these things in the proposed legislation, although they were largely symbolic and expected to have little actual impact on crime, because he wanted the Democrats to refuse to pass the legislation, whereupon he would make it a campaign issue and blame rising crime levels on them. They took the issue away by acceding.
How would such a scenario play out today? If Nixon faced Obama's current political circumstances, he would not be trying actually to enact stimulus legislation. He would know that he had zero chance of getting anything that would make a significant difference. He would want to propose something that the opposition WOULDN'T pass, and that he could then campaign on. (And it is clear this time around, unlike with the 1970 crime legislation, that the Congress won't accede in order to take away the issue.)
We could use a bit of that thinking today. Why not propose something that is actually big, dramatic, and well-designed? And why not make reasonable, economically supportable arguments about why and how much it might actually help? Then Obama could rightly criticize the Republicans and blame the labor market on them when they fail to pass it.
This would not just be Nixon-style maneuvering. It would also help make the correct point that, since at least mid-2009, we have actually been following Republican budget policies and they haven't worked. As things stand, by repeatedly acceding to them, even in what he proposes, he accepts a state of affairs in which they actually set the policy yet he takes the blame.
Meanwhile, Obama is collaborating in basic miseducation of American voters, by adopting all kinds of false or grossly overstated Republican claims about how regulatory burden and budget deficits are responsible for the jobs situation.
If people want Republican policies, they will pick Republicans to implement them. An abler, more courageous, and more farsighted politician than Obama would recognize the importance of laying the intellectual groundwork for good policy over many years.
OK, time is short and it's a bit late for all that now. So admittedly there is one clear political calculation that might explain how Obama is proceeding in his jobs proposal. If he proposed big infrastructure and public spending ideas to hire lots of workers and help get us out of the doldrums, and the Republicans refused to enact it, at least they would have a very strong case that they were acting in good faith. Rather than inviting the campaign charge that they are deliberate economic saboteurs, they would be following their own long-enunciated policy preferences in opposing the legislation. (McConnell has already previewed this by saying they won't enact failed policies, harvesting the legacy of Obama's 2009 overclaiming for the stimulus legislation.)
But even if the Republicans convincingly argued good faith in opposing such a proposal, Obama could still reply that they are wrong, and that they shouldn't be elected in 2012 because they will follow the wrong policies.
Don't call it stimulus, of course - call it creating jobs by hiring lots of people to build things that we need. Don't rely in public rhetoric on Keynesian multipliers that are counter-intuitive. Force the Republicans to argue that there will be no net job creation due to indirect effects - a freshwater economists' claim that is counter-intuitive wholly apart from whether it is right or wrong (and with the collapse of consumer demand I would say that it is clearly wrong).
By instead proposing watered-down, maldesigned, too-small Republican-style jobs legislation, Obama may hope to strengthen the claim that the Republicans are acting in bad faith when they inevitably reject it. But accusations of bad faith, which he will of course make extremely decorously if at all, will only go so far with the voters - especially once he has conceded that in general we need Republican-style policies, which they of course are the better-situated party to keep on providing.
And the reality is even worse. One lesson that voters might very well draw is that, if Republicans engage in bad faith obstructionism whenever a Democrat is president, we'd damn well better put them in charge so that they will have the right incentives. It doesn't make them nice people, but if they will make sure that things go worse when they are not officially in power than when they are, voters could very rationally view this as a good reason for electing them.
Saturday, September 03, 2011
The New York City subway system is way too metaphysical for me
Apologies if I offered approximately this entry a year or two ago - I had the same experience and it struck me the same way, and I don't recall if I posted about it. But anyway.
Last night I had to take the F train all the way out to Coney Island for a Brooklyn Cyclones minor league baseball game. Today I had to take the F in the other direction, to Roosevelt Island for some early morning tennis.
Each time, a train that was NOT labeled an F train approached on the F track - a D train yesterday, and an E train today.
Each time the garbled PA system said something like the following: "This is a [D/E] train traveling on the F track." I had to make a snap decision: do I take the train or not? The trains that they were labeled as would potentially take me to the wrong place (actually, the D might have worked yesterday, but definitely not the E today). In each case time was of the essence. So should I board the train or not?
Each time I did and it worked out for me. But my view was that, if these trains were traveling on the F track and making F stops, then they were F trains. They were not, at least for the duration of the journey, D or E trains traveling on the F track. A train is defined by the stops it makes.
The MTA, by contrast, appears to be essentialist (is that the right word here?) about train definitions. It thinks of a train as a D train or an E train, if that is its nature or how it is labeled, even while it is traveling on the F track and making only F stops.
Perhaps they could have clarified things a bit, without necessitating the metaphysical dispute, had they said that the trains were "traveling on the F track and making all F stops." Then I would still disagree with them about what the trains really were, but it would have been immaterial instead of causing initial anxiety.
Then again, perhaps I am over-thinking the whole situation a bit.
Last night I had to take the F train all the way out to Coney Island for a Brooklyn Cyclones minor league baseball game. Today I had to take the F in the other direction, to Roosevelt Island for some early morning tennis.
Each time, a train that was NOT labeled an F train approached on the F track - a D train yesterday, and an E train today.
Each time the garbled PA system said something like the following: "This is a [D/E] train traveling on the F track." I had to make a snap decision: do I take the train or not? The trains that they were labeled as would potentially take me to the wrong place (actually, the D might have worked yesterday, but definitely not the E today). In each case time was of the essence. So should I board the train or not?
Each time I did and it worked out for me. But my view was that, if these trains were traveling on the F track and making F stops, then they were F trains. They were not, at least for the duration of the journey, D or E trains traveling on the F track. A train is defined by the stops it makes.
The MTA, by contrast, appears to be essentialist (is that the right word here?) about train definitions. It thinks of a train as a D train or an E train, if that is its nature or how it is labeled, even while it is traveling on the F track and making only F stops.
Perhaps they could have clarified things a bit, without necessitating the metaphysical dispute, had they said that the trains were "traveling on the F track and making all F stops." Then I would still disagree with them about what the trains really were, but it would have been immaterial instead of causing initial anxiety.
Then again, perhaps I am over-thinking the whole situation a bit.
Alice in Wonderland riddles solved
In Alice in Wonderland, as Alice falls down the giant rabbit hole at the start, she keeps asking herself "Do cats eat bats?" And, since she can't answer it anyway, also "Do bats eat cats?"
A definitive evidence answer to the first of these two questions is now available right here.
Another famous riddle from Alice is the Mad Hatter's query, "Why is a raven like a writing desk?" Though both he and the March Hare profess to have not the slightest idea when Alice gives up, some decades later a Lewis Carroll fan (I forget who it was), gave what strikes me as the best possible answer: "Because there's a b in both."
A definitive evidence answer to the first of these two questions is now available right here.
Another famous riddle from Alice is the Mad Hatter's query, "Why is a raven like a writing desk?" Though both he and the March Hare profess to have not the slightest idea when Alice gives up, some decades later a Lewis Carroll fan (I forget who it was), gave what strikes me as the best possible answer: "Because there's a b in both."
Saturday, August 27, 2011
A calm perspective on Irene
"Hurricane? What hurricane?"
UPDATE: It looks like Seymour was right to be so calm about it.
Friday, August 26, 2011
Another of my international tax articles comes out
My paper "The Rising Tax-Electivity of U.S. Corporate Residence," previously posted here, has now officially come out in the Tax Law Review. A link to the published version is available here.
The 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."
In addition to the discussion referenced in the abstract, the paper foreshadows and provides a brief exploration of a somewhat bigger topic: what (in my view) is fundamentally wrong with a lot of contemporary academic international tax policy analysis, and what the analysis should instead look like. Much more on this to come in my book in progress, Fixing the U.S. International Tax Rules.
Some of the building blocks of this analysis also appear in the two main versions of my recent article on foreign tax credits, available here and here. But in Fixing I hope to have it all nailed down more definitively and concisely.
The 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."
In addition to the discussion referenced in the abstract, the paper foreshadows and provides a brief exploration of a somewhat bigger topic: what (in my view) is fundamentally wrong with a lot of contemporary academic international tax policy analysis, and what the analysis should instead look like. Much more on this to come in my book in progress, Fixing the U.S. International Tax Rules.
Some of the building blocks of this analysis also appear in the two main versions of my recent article on foreign tax credits, available here and here. But in Fixing I hope to have it all nailed down more definitively and concisely.
A collective action / externalities rationale for Keynesian stimulus
I'm no longer surprised by the frequency with which good economists - of course, not all of them - fail to understand and apply basic economics reasoning. In the fields I write about professionally, I'd have to say I'm grateful, as it's good for business.
A key reason for these failures is that people get lost in the forest and can only see the trees. They play with models, use math, etcetera, but forget the basic underlying intuitions. Or, they become prisoners of simplifying assumptions that are often (but not always) useful, and forget that these assumptions should only be used conditionally and when appropriate.
Today's example is Robert Barro, who has a Wall Street Journal op-ed today (available outside the paywall here) claiming that Keynesian economics, unlike "regular economics," can't possibly make sense. Thus, with regard to the claim that Food Stamps or unemployment benefits could boost demand and help ease the recession, he concludes:
"There are two ways to view Keynesian stimulus through transfer programs. It's either a divine miracle—where one gets back more than one puts in—or else it's the macroeconomic equivalent of bloodletting."
And elsewhere he says of the at one time uncontroversial Keynesian idea that giving money to the cash-constrained can be stimulative:
"How can it be right? Where was the market failure that allowed the government to improve things just by borrowing money and giving it to people?"
David Glasner responds to Barro as follows:
"But wait a second. What does Barro mean by his query: 'Where was the market failure that allowed the government to improve things just by borrowing money and giving it to people?' Where is the market failure? Hello. Real GDP is at least 10% below its long-run growth trend, the unemployment rate has been hovering between 9 and 10% for over two years, and Professor Barro can’t identify any market failure?"
Glasner then asks whether Barro agrees with the real business cycle theorists who explained that the Great Depression merely reflected millions of workers' rational decision to take a nice long vacation until productivity and therefore wages were higher.
Paul Krugman jumps in as well, and mentions some of the standard points from Keynesian economics for which there is empirical evidence, such as sticky prices and wages.
But I have long thought it reasonably clear (as discussed somewhere in here) that a very familiar tool can do a lot of the work here - collective action problems. Economic models often simplify the world, and in the right setting with good reason, by taking people's preferences as given and assuming away interdependence. But suppose I am deciding whether to spend money on a nice vacation. Even in an entirely rational setting and with a flexibly responding price system, this may depend on how well I expect my business to do over the next few years. Suppose people who are considering whether to patronize my business have exactly the same thought in mind. Their willingness to buy goods and services depends importantly on their confidence that others will be buying their own goods or services. So, when everyone gets scared or anxious, there is a coordination problem. If only everyone could agree to shake hands and continue opening their wallets a bit, the problem would ease, but instead it feeds on itself, as belt-tightening here prompts responsive belt-tightening there.
To throw in another common buzzword, there's an externality here, as each individual's belt-tightening causes others to lean more towards belt-tightening, creating collectively self-fulfilling prophecies about low earnings potential.
Against this background, Food Stamps and unemployment benefits, by getting people to spend more (albeit perhaps more because they were cash-constrained than due to the vacation problem above) can get things moving in the other direction. People whose businesses start doing better change their estimats about how much it makes sense for them to spend, and things may start going the other way.
Back in January 2009, Barro had a WSJ op-ed that was almost as skeptical about stimulus, in which he said:
"[Keynesian theory] implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system."
Seen through the above lens, however, the price system in a recession or depression may be getting it exactly right so far as revealed preferences are concerned. Resources are idle because there isn't enough demand for the production that is being forgone. And given all that the price system is working just fine.
But the seemingly efficient equilibrium is far inferior in human welfare terms to the alternative one that would result if people could coordinate shifting to a higher-expressed demand, higher-output equilibrium.
This presumably is what Glasner means when he says: "Hello. Real GDP is at least 10% below its long-run growth trend, the unemployment rate has been hovering between 9 and 10% for over two years, and Professor Barro can’t identify any market failure?"
And this is why the view that the Great Depression was just a nice long holiday, as people awaited higher productivity that would increase their willingness to swap leisure for work, has never seemed very intuitively persuasive.
But the use of collective action problems and externalities that I suggest here lies outside conventions that economists are accustomed to allowing in their models (which commonly take revealed preferences as given rather than conditional and interdependent, and assume away externalities unless clearly demonstrable like that from pollution). Also, the use I suggest is admittedly a bit informal and ad hoc, which economists may rightly be on guard against. But it is coherent logically, plausible intuitively, and permits one to make more sense of the world. Barro's apparent inability to see that it might be relevant, and thus his entirely misplaced sarcasm about whether Keynesian economics could possibly make sense outside the realm of "divine miracle," is more disappointing than surprising.
A key reason for these failures is that people get lost in the forest and can only see the trees. They play with models, use math, etcetera, but forget the basic underlying intuitions. Or, they become prisoners of simplifying assumptions that are often (but not always) useful, and forget that these assumptions should only be used conditionally and when appropriate.
Today's example is Robert Barro, who has a Wall Street Journal op-ed today (available outside the paywall here) claiming that Keynesian economics, unlike "regular economics," can't possibly make sense. Thus, with regard to the claim that Food Stamps or unemployment benefits could boost demand and help ease the recession, he concludes:
"There are two ways to view Keynesian stimulus through transfer programs. It's either a divine miracle—where one gets back more than one puts in—or else it's the macroeconomic equivalent of bloodletting."
And elsewhere he says of the at one time uncontroversial Keynesian idea that giving money to the cash-constrained can be stimulative:
"How can it be right? Where was the market failure that allowed the government to improve things just by borrowing money and giving it to people?"
David Glasner responds to Barro as follows:
"But wait a second. What does Barro mean by his query: 'Where was the market failure that allowed the government to improve things just by borrowing money and giving it to people?' Where is the market failure? Hello. Real GDP is at least 10% below its long-run growth trend, the unemployment rate has been hovering between 9 and 10% for over two years, and Professor Barro can’t identify any market failure?"
Glasner then asks whether Barro agrees with the real business cycle theorists who explained that the Great Depression merely reflected millions of workers' rational decision to take a nice long vacation until productivity and therefore wages were higher.
Paul Krugman jumps in as well, and mentions some of the standard points from Keynesian economics for which there is empirical evidence, such as sticky prices and wages.
But I have long thought it reasonably clear (as discussed somewhere in here) that a very familiar tool can do a lot of the work here - collective action problems. Economic models often simplify the world, and in the right setting with good reason, by taking people's preferences as given and assuming away interdependence. But suppose I am deciding whether to spend money on a nice vacation. Even in an entirely rational setting and with a flexibly responding price system, this may depend on how well I expect my business to do over the next few years. Suppose people who are considering whether to patronize my business have exactly the same thought in mind. Their willingness to buy goods and services depends importantly on their confidence that others will be buying their own goods or services. So, when everyone gets scared or anxious, there is a coordination problem. If only everyone could agree to shake hands and continue opening their wallets a bit, the problem would ease, but instead it feeds on itself, as belt-tightening here prompts responsive belt-tightening there.
To throw in another common buzzword, there's an externality here, as each individual's belt-tightening causes others to lean more towards belt-tightening, creating collectively self-fulfilling prophecies about low earnings potential.
Against this background, Food Stamps and unemployment benefits, by getting people to spend more (albeit perhaps more because they were cash-constrained than due to the vacation problem above) can get things moving in the other direction. People whose businesses start doing better change their estimats about how much it makes sense for them to spend, and things may start going the other way.
Back in January 2009, Barro had a WSJ op-ed that was almost as skeptical about stimulus, in which he said:
"[Keynesian theory] implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system."
Seen through the above lens, however, the price system in a recession or depression may be getting it exactly right so far as revealed preferences are concerned. Resources are idle because there isn't enough demand for the production that is being forgone. And given all that the price system is working just fine.
But the seemingly efficient equilibrium is far inferior in human welfare terms to the alternative one that would result if people could coordinate shifting to a higher-expressed demand, higher-output equilibrium.
This presumably is what Glasner means when he says: "Hello. Real GDP is at least 10% below its long-run growth trend, the unemployment rate has been hovering between 9 and 10% for over two years, and Professor Barro can’t identify any market failure?"
And this is why the view that the Great Depression was just a nice long holiday, as people awaited higher productivity that would increase their willingness to swap leisure for work, has never seemed very intuitively persuasive.
But the use of collective action problems and externalities that I suggest here lies outside conventions that economists are accustomed to allowing in their models (which commonly take revealed preferences as given rather than conditional and interdependent, and assume away externalities unless clearly demonstrable like that from pollution). Also, the use I suggest is admittedly a bit informal and ad hoc, which economists may rightly be on guard against. But it is coherent logically, plausible intuitively, and permits one to make more sense of the world. Barro's apparent inability to see that it might be relevant, and thus his entirely misplaced sarcasm about whether Keynesian economics could possibly make sense outside the realm of "divine miracle," is more disappointing than surprising.
Monday, August 22, 2011
A quick comment on corporate tax incidence
Lee Sheppard has an article in today's Tax Notes that riffs off Mitt Romney's "corporations are people" comment last week to address corporate tax incidence.
Lee criticizes economic models suggesting that labor bears the main burden of the corporate tax, in part by stating:
"It has even become fashionable to say that labor bears something like 40 to 80 percent of the economic burden of the corporate income tax. This defies common sense. We know that because if labor bore such a significant share of the corporate income tax, corporate managers would not devote so much time and effort to fighting it."
Here's why I believe Lee is wrong about this. The incidence claims are about the long-term difference between equilibria. For example, suppose a country raises its corporate tax rate, within a couple of years this reduces the amount of capital that would otherwise have been invested in the country, and this in turn causes wages to be lower than they would otherwise have been. Proof of the causation in this sequence would demonstrate that labor was bearing some of the corporate tax increase via the wage effect.
In politics, however, people mainly care about short-term transition effects. Thus, suppose that today (without any prior anticipation of this happening) we simply repealed the corporate tax. Ignoring the deficit problems that this would cause, along with the rampant avoidance of the individual income tax that it would empower, who would be the big transition winners? Obviously, shareholders at the moment that the change occurred (or rather was announced) would get a huge increase in share value from eliminating all company-level income tax liability. Managers no doubt would win big-time as well. Meanwhile, wages for the most part would not change immediately.
This not only explains the observable political alignment on corporate tax issues, but is entirely consistent or reconcilable with the long-term incidence story that focuses on labor and wages.
Lee also complains in her article about a recent vote by the American Economic Association not to require disclosure of funding sources. She believes that private funding has undermined the objectivity of research, along with intellectual balance in the corporate and international tax fields. Treading carefully here, as I am on friendly terms both with her and with some of the people whom she might conceivably have in mind, let me just say that I agree this is a serious problem, which cannot be dismissed simply by defending people's good faith and/or incentive to preserve their own intellectual reputations. What is more, from conversations I have had with a variety of people, I can definitively say that many in the field share Lee's concern, including people who do academic research and/or are not fully on her side in the underlying debates.
Lee criticizes economic models suggesting that labor bears the main burden of the corporate tax, in part by stating:
"It has even become fashionable to say that labor bears something like 40 to 80 percent of the economic burden of the corporate income tax. This defies common sense. We know that because if labor bore such a significant share of the corporate income tax, corporate managers would not devote so much time and effort to fighting it."
Here's why I believe Lee is wrong about this. The incidence claims are about the long-term difference between equilibria. For example, suppose a country raises its corporate tax rate, within a couple of years this reduces the amount of capital that would otherwise have been invested in the country, and this in turn causes wages to be lower than they would otherwise have been. Proof of the causation in this sequence would demonstrate that labor was bearing some of the corporate tax increase via the wage effect.
In politics, however, people mainly care about short-term transition effects. Thus, suppose that today (without any prior anticipation of this happening) we simply repealed the corporate tax. Ignoring the deficit problems that this would cause, along with the rampant avoidance of the individual income tax that it would empower, who would be the big transition winners? Obviously, shareholders at the moment that the change occurred (or rather was announced) would get a huge increase in share value from eliminating all company-level income tax liability. Managers no doubt would win big-time as well. Meanwhile, wages for the most part would not change immediately.
This not only explains the observable political alignment on corporate tax issues, but is entirely consistent or reconcilable with the long-term incidence story that focuses on labor and wages.
Lee also complains in her article about a recent vote by the American Economic Association not to require disclosure of funding sources. She believes that private funding has undermined the objectivity of research, along with intellectual balance in the corporate and international tax fields. Treading carefully here, as I am on friendly terms both with her and with some of the people whom she might conceivably have in mind, let me just say that I agree this is a serious problem, which cannot be dismissed simply by defending people's good faith and/or incentive to preserve their own intellectual reputations. What is more, from conversations I have had with a variety of people, I can definitively say that many in the field share Lee's concern, including people who do academic research and/or are not fully on her side in the underlying debates.
Death of Bernard Wolfman
I'm saddened by the death of emeritus Harvard tax law prof Bernard Wolfman, whom I had gotten to know at HLS conferences, and whom I always enjoyed seeing again.
On the academic side of things, the two articles of his that I know best - both diatribes, but in each case justifiably so - are (1) an attack on the Supreme Court's egregious Frank Lyon decision (which upheld a sale-leaseback tax shelter, based on a silly list of 23 factors and a bizarre insistence that 3-party deals are inherently better than 2-party deals), and (2) a critique of Justice William Douglas' tax jurisprudence, which bizarrely switched, I believe it was in 1948, from being routinely pro-government to anti-government (except for one subsequent case, called P.G. Lake, in which Douglas apparently decided that he hated oil company executives even more than the IRS).
Each has some apparent back story. In the Frank Lyon article, I believe one can discern that Wolfman was unhappy on ethical grounds about the behavior of the renowned Erwin Griswold, a tax prof who had been his colleague (and the Harvard Law School Dean) not to mention Solicitor General of the U.S., and who thus carried some clout when he represented the taxpayer before the Supreme Court. In this case, Griswold seems not to have done his best to inform the Supreme Court accurately of the tax stakes in the case (which pertained to tax rate differences, since one of the parties had tax losses that made depreciation deductions unusable). In the Douglas article, Wolfman does not try to explain the reason for the 1948 change of heart, but I wouldn't be surprised if he knew a story that the late Walter Blum once told me, to the effect that Douglas changed sides in tax cases after he was audited, apparently in relation to reimbursements for his wife's travel expenses when he gave speeches. I've never tried to check out this story, but Douglas actually has a somewhat foolish dissent in a case involving this issue that is in my co-authored Tax I casebook. If true, however, bad move by the IRS but not very edifying so far as Douglas is concerned.
One part of Bernie's career that may not be well-known, but that he once told me about at dinner, pertained to his service in World War II. He was in an infantry division on the German front after D-Day, and apparently would have been right at the spot where the Germans attacked in the Battle of the Bulge, except that he was evacuated a few days beforehand due to severe frostbite in his feet. This he attributed to the fact that the U.S. Army, trying to be thrifty, gave its soldiers on the German front - in the middle of what was apparently one of the coldest winters there in the 20th century - footwear that had been designed for fighting in the scorching deserts of North Africa.
On the academic side of things, the two articles of his that I know best - both diatribes, but in each case justifiably so - are (1) an attack on the Supreme Court's egregious Frank Lyon decision (which upheld a sale-leaseback tax shelter, based on a silly list of 23 factors and a bizarre insistence that 3-party deals are inherently better than 2-party deals), and (2) a critique of Justice William Douglas' tax jurisprudence, which bizarrely switched, I believe it was in 1948, from being routinely pro-government to anti-government (except for one subsequent case, called P.G. Lake, in which Douglas apparently decided that he hated oil company executives even more than the IRS).
Each has some apparent back story. In the Frank Lyon article, I believe one can discern that Wolfman was unhappy on ethical grounds about the behavior of the renowned Erwin Griswold, a tax prof who had been his colleague (and the Harvard Law School Dean) not to mention Solicitor General of the U.S., and who thus carried some clout when he represented the taxpayer before the Supreme Court. In this case, Griswold seems not to have done his best to inform the Supreme Court accurately of the tax stakes in the case (which pertained to tax rate differences, since one of the parties had tax losses that made depreciation deductions unusable). In the Douglas article, Wolfman does not try to explain the reason for the 1948 change of heart, but I wouldn't be surprised if he knew a story that the late Walter Blum once told me, to the effect that Douglas changed sides in tax cases after he was audited, apparently in relation to reimbursements for his wife's travel expenses when he gave speeches. I've never tried to check out this story, but Douglas actually has a somewhat foolish dissent in a case involving this issue that is in my co-authored Tax I casebook. If true, however, bad move by the IRS but not very edifying so far as Douglas is concerned.
One part of Bernie's career that may not be well-known, but that he once told me about at dinner, pertained to his service in World War II. He was in an infantry division on the German front after D-Day, and apparently would have been right at the spot where the Germans attacked in the Battle of the Bulge, except that he was evacuated a few days beforehand due to severe frostbite in his feet. This he attributed to the fact that the U.S. Army, trying to be thrifty, gave its soldiers on the German front - in the middle of what was apparently one of the coldest winters there in the 20th century - footwear that had been designed for fighting in the scorching deserts of North Africa.
Tuesday, August 16, 2011
Warren Buffett on taxing the rich
Warren Buffett has drawn considerable attention with his op-ed in Monday's NYT suggesting that tax rates be increased for people at the top of the income distribution:
"Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent....
"But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate.
"My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice."
Some on the right gibe that, if Buffett wants to pay more to the federal government, that's fine; he can do so any time he likes by making a voluntary donation. But Buffett wants people in his income tier generally to pay more tax, not just himself personally, so the critique is wide of the mark. He can't unilaterally achieve the social effects of a higher tax rate on rich people generally all by himself, and it's not especially selfish to ask "Why should I be the only one to pay more?" Perhaps it's equally wide of the mark on the same ground, however, when people on the left complain that those on the right shouldn't take advantage of government subsidies that they argue should be repealed.
As I discussed in my recent Tax Notes article, the policy Buffett advocates of imposing significantly graduated rates at high income levels is in tension with what long was the predominant view suggested by the optimal income tax or OIT literature (which takes distributional concerns into account, not just efficiency). But that consensus is increasingly vanishing, even within the OIT framework. I noted this (and some reasons for the change in views) in my article, and since then the Peter Diamond and Emmanuel Saez's have further spelled out some of the main arguments in The Case for a Progressive Tax: From Basic Research to Policy Recommendations.
Before one swoon too much over Buffett's nobility (though I do indeed find his stance praiseworthy), a caustic comment from David Miller may be in order. David notes that Buffett's "Berkshire Hathaway stock appreciated by $3 billion last year and, unless he is extraordinarily patriotic, there will never be any income tax paid on his unrealized appreciation. So his tax rate on the economic income he earned last year is more like 0.22% ($6.9/$3.039.9). Even if his tax rate on recognized income was increased to 100%, the tax on his economic income would be a little more than 1% ($39.9/$3.039.9). A mark-to-market tax on appreciation at a 15% rate would have raised $450 million in 2010 from Warren Buffett alone!"
David is the author of A Progressive System of Mark-to-Market Taxation, under which current year mark-to-market taxation of publicly traded securities such as Berkshire Hathaway stock would indeed be required, so this is no idle or random suggestion. Buffett presumably will never pay tax on the appreciation due to Code section 1014, which gives assets a tax-free basis step-up at death.
On the other side of the ledger, it is certainly fair to note that Berkshire Hathaway appears to pay tax at something like a 30 percent rate on its financial accounting income, if I am correctly interpreting this. I myself would count this as paid by Buffett, to the extent of his stock ownership. While there are disputes about the economic incidence of the corporate tax, similar questions could be raised about non-corporate business taxes that the owners pay directly.
I myself, if generally empowered to specify tax code changes, would opt both for corporate integration (so that Buffett wouldn't be taxed at two levels on BH's income - though, as it happens, I would prefer to concentrate the tax liability at the shareholder level, without regard to the payment of dividends) and for greater high-end rate progressivity.
Another point well known to those who have been following the budget debate, but perhaps worth mentioning here, is that solving the long-term U.S. fiscal gap realistically requires not just revenue increases from the top end of the income distribution, but extending significantly down the income scale to at least the middle-middle. With an aging population and retirement programs that serve important social purposes (and also are baked in to people's behavior and expectations), raising taxes just at the top will not be sufficient. But raising them at the top as part of the short-term budgetary response (if anything happens from the Gang of Twelve deliberations) would certainly be a start.
"Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent....
"But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate.
"My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice."
Some on the right gibe that, if Buffett wants to pay more to the federal government, that's fine; he can do so any time he likes by making a voluntary donation. But Buffett wants people in his income tier generally to pay more tax, not just himself personally, so the critique is wide of the mark. He can't unilaterally achieve the social effects of a higher tax rate on rich people generally all by himself, and it's not especially selfish to ask "Why should I be the only one to pay more?" Perhaps it's equally wide of the mark on the same ground, however, when people on the left complain that those on the right shouldn't take advantage of government subsidies that they argue should be repealed.
As I discussed in my recent Tax Notes article, the policy Buffett advocates of imposing significantly graduated rates at high income levels is in tension with what long was the predominant view suggested by the optimal income tax or OIT literature (which takes distributional concerns into account, not just efficiency). But that consensus is increasingly vanishing, even within the OIT framework. I noted this (and some reasons for the change in views) in my article, and since then the Peter Diamond and Emmanuel Saez's have further spelled out some of the main arguments in The Case for a Progressive Tax: From Basic Research to Policy Recommendations.
Before one swoon too much over Buffett's nobility (though I do indeed find his stance praiseworthy), a caustic comment from David Miller may be in order. David notes that Buffett's "Berkshire Hathaway stock appreciated by $3 billion last year and, unless he is extraordinarily patriotic, there will never be any income tax paid on his unrealized appreciation. So his tax rate on the economic income he earned last year is more like 0.22% ($6.9/$3.039.9). Even if his tax rate on recognized income was increased to 100%, the tax on his economic income would be a little more than 1% ($39.9/$3.039.9). A mark-to-market tax on appreciation at a 15% rate would have raised $450 million in 2010 from Warren Buffett alone!"
David is the author of A Progressive System of Mark-to-Market Taxation, under which current year mark-to-market taxation of publicly traded securities such as Berkshire Hathaway stock would indeed be required, so this is no idle or random suggestion. Buffett presumably will never pay tax on the appreciation due to Code section 1014, which gives assets a tax-free basis step-up at death.
On the other side of the ledger, it is certainly fair to note that Berkshire Hathaway appears to pay tax at something like a 30 percent rate on its financial accounting income, if I am correctly interpreting this. I myself would count this as paid by Buffett, to the extent of his stock ownership. While there are disputes about the economic incidence of the corporate tax, similar questions could be raised about non-corporate business taxes that the owners pay directly.
I myself, if generally empowered to specify tax code changes, would opt both for corporate integration (so that Buffett wouldn't be taxed at two levels on BH's income - though, as it happens, I would prefer to concentrate the tax liability at the shareholder level, without regard to the payment of dividends) and for greater high-end rate progressivity.
Another point well known to those who have been following the budget debate, but perhaps worth mentioning here, is that solving the long-term U.S. fiscal gap realistically requires not just revenue increases from the top end of the income distribution, but extending significantly down the income scale to at least the middle-middle. With an aging population and retirement programs that serve important social purposes (and also are baked in to people's behavior and expectations), raising taxes just at the top will not be sufficient. But raising them at the top as part of the short-term budgetary response (if anything happens from the Gang of Twelve deliberations) would certainly be a start.
Monday, August 08, 2011
If Obama were shrewd ...
... then, instead of denouncing the S & P downgrade (tempting though that must be given their embarrassing track record and the $2 trillion computational blunder), he would have said "Yes, it's terrible that the Republicans have caused this. This shows how right I was about not endangering our credit, about the need for more revenue and a balanced grand bargain, etcetera."
As things stand, he risks making himself the downgrade's sole owner in the U.S. public mind, without necessarily having any effect on market confidence (downgraded debtors are expected to complain).
But the heading of this post makes it alternative history, along the lines of "What if Lee had won the battle of Gettysburg?".
As things stand, he risks making himself the downgrade's sole owner in the U.S. public mind, without necessarily having any effect on market confidence (downgraded debtors are expected to complain).
But the heading of this post makes it alternative history, along the lines of "What if Lee had won the battle of Gettysburg?".
Sunday, August 07, 2011
Middle Earth alternative history
I've been greatly enjoying Kirill Yeskov's The Last Ringbearer. This is an alternative history / sequel to Lord of the Rings, written from a pro-Mordor, anti-Gandalf/Aragorn/elves viewpoint that is actually highly persuasive (if one can say this about a fictional world). It reviews what we thought we knew but didn't (due to our having only a biased winners' history) about the end of the Third Age, followed by a quest that aims to restore the balance that Gandalf et al had destroyed.
More information, including what I gather are legal downloading options, is available here.
More information, including what I gather are legal downloading options, is available here.
Friday, August 05, 2011
Standard & Poor's expected Treasury bond downgrade
I agree with the S & P downgrade (if advance reports are accurate) in substance. That is, the U.S. has a significant chance of default because of political dysfunction, in particular the Republicans' recently demonstrated callousness about our credit standing and their unwillingness to increase tax revenues under (apparently) any circumstances.
But it's certainly not obvious that the market should care about the downgrade. When major U.S. companies issue bonds, S & P actually has some inside information if they've been consulted during the rating process. There may be conflicts of interest and the smart guys on the other side may snow them, but at least they get to see things that aren't publicly available. As I noted in an earlier post, this is not true in the government bonds setting.
Here's a somewhat farfetched theory as to why the market may care. S & P's willingness to downgrade, as a bid to enhance their "brand," is evidence that they think people in the audience for their performance will consider the downgrade credible. So if I am in the bond market, it is a bit of a Keynes beauty contest thing - someone with a real (reputational) stake has decided that others who are in the bond market will view this as a credibility-enhancing play. Note that pessimists may not directly participate in the market as much as optimists if the market is incomplete because it is costly to go short.
Nonetheless, I'd be unsurprised if there is no market response to the downgrade.
But it's certainly not obvious that the market should care about the downgrade. When major U.S. companies issue bonds, S & P actually has some inside information if they've been consulted during the rating process. There may be conflicts of interest and the smart guys on the other side may snow them, but at least they get to see things that aren't publicly available. As I noted in an earlier post, this is not true in the government bonds setting.
Here's a somewhat farfetched theory as to why the market may care. S & P's willingness to downgrade, as a bid to enhance their "brand," is evidence that they think people in the audience for their performance will consider the downgrade credible. So if I am in the bond market, it is a bit of a Keynes beauty contest thing - someone with a real (reputational) stake has decided that others who are in the bond market will view this as a credibility-enhancing play. Note that pessimists may not directly participate in the market as much as optimists if the market is incomplete because it is costly to go short.
Nonetheless, I'd be unsurprised if there is no market response to the downgrade.
Wednesday, August 03, 2011
Obama's next two chances to capitulate
Both are set for September 30, when House Republicans can both cause a government shutdown (as Stan Collender explains) and force the gas tax to expire unless whatever demands they can think of are met.
By the way, there is no need to limit these demands to spending cuts. There will probably lots of unrelated demands as well. (Healthcare, oil drilling, reversing other regulations they don't like, any tax changes such as a dividend holiday that they happen to favor, etcetera.)
Given what happened the last time around, what would be the argument within Republican circles against playing these to the hilt? After all, neither involves threatening to destroy the full faith and credit of the U.S. government. And even if Obama genuinely plans to stick to his guns this time (not that I'd actually expect him to, closer to zero hour, even if he sincerely believes that he will), how could he possibly communicate this credibly to the Republicans?
By the way, there is no need to limit these demands to spending cuts. There will probably lots of unrelated demands as well. (Healthcare, oil drilling, reversing other regulations they don't like, any tax changes such as a dividend holiday that they happen to favor, etcetera.)
Given what happened the last time around, what would be the argument within Republican circles against playing these to the hilt? After all, neither involves threatening to destroy the full faith and credit of the U.S. government. And even if Obama genuinely plans to stick to his guns this time (not that I'd actually expect him to, closer to zero hour, even if he sincerely believes that he will), how could he possibly communicate this credibly to the Republicans?
Tuesday, August 02, 2011
Three mistaken views contrary to blaming White House incompetence for the debt debacle
It's much more fun to be counter-intuitive than to repeat the obvious. So, when we see overwhelming evidence of egregious and pathetic political failure by the Obama White House, there is no shortage of theories defending them (or at least saying that their political ineptitude was, as an appeals court might say in affirming a trial court judgment, harmless error).
Theory One is that he wanted more spending cuts than Democrats are comfortable with. So the Republicans gave him cover. As in: "See what they're making me do?"
Verdict: True that he had this motivation. Perhaps even true that it influenced his feckless negotiating "strategy." But surely he did not want to get rolled, and so publicly and humiliatingly rolled, by the utter failure of his oft-repeated insistence on getting revenues as well as spending cuts. So bottom line: False.
Theory Two is that he simply had a weak hand to play. Sure, he might not have played it well, but even a competent politician and negotiator wouldn't have done much better.
Verdict: 100% false. The public supported his preference for "balanced" cuts and tax increases. Now, admittedly, public opinion is often close to irrelevant in Washington. But he had a decent hand and failed to play it. Point one: the constitutional option and related gambits, all of which would have gained support from Washington's beloved "strong leadership" meme. Point two: skillful politicians can do much better with hands that are much worse than what he had here. Think Clinton in 1995 after he lost the 1994 election. Or for that matter consider the Republicans taking him on in 2009. If either had performed as abysmally as he did, people would have said: "They just had a bad hand. Nobody could have won with that."
Just because he lost doesn't mean he had an inevitably losing hand. In many ways it was a good hand.
Theory Three is that he's cleverly positioning himself in the center, and letting the Republicans be seen as extremists.
Verdict: Mostly false. People also respect strength, commitment, self-confidence, and success. His pathetic showing is not going to win him the 2012 election. He's disheartened his base, millions of whom will likely stay home. Clinton positioned the Republicans as extremist (when they weren't nearly as far around the bend as they are today) without making himself look like a pathetic loser.
The evidence that Obama has very little understanding of the most basic political tactics and strategy is pretty overwhelming. This is a guy who believes that you start a negotiation by offering LESS than you want, not more so that you can give ground and still do well overall.
Jon Stewart had some rather obvious fun with the December press conference clip where he said that of course the Republicans wouldn't risk the full faith and credit of the U.S. government, so there was no need to negotiate a debt ceiling deal back then. And for the past 6 months his minions have apparently been telling reporters that of course the Republicans will agree to new revenues, because reasonable people can't disagree that it's part of the problem.
He also appears to be strangely arrogant and uneducable about his woefully naive view of political competition. The Bourbons famously "learned nothing and forgot nothing." Obama will evidently learn nothing and forget everything.
Theory One is that he wanted more spending cuts than Democrats are comfortable with. So the Republicans gave him cover. As in: "See what they're making me do?"
Verdict: True that he had this motivation. Perhaps even true that it influenced his feckless negotiating "strategy." But surely he did not want to get rolled, and so publicly and humiliatingly rolled, by the utter failure of his oft-repeated insistence on getting revenues as well as spending cuts. So bottom line: False.
Theory Two is that he simply had a weak hand to play. Sure, he might not have played it well, but even a competent politician and negotiator wouldn't have done much better.
Verdict: 100% false. The public supported his preference for "balanced" cuts and tax increases. Now, admittedly, public opinion is often close to irrelevant in Washington. But he had a decent hand and failed to play it. Point one: the constitutional option and related gambits, all of which would have gained support from Washington's beloved "strong leadership" meme. Point two: skillful politicians can do much better with hands that are much worse than what he had here. Think Clinton in 1995 after he lost the 1994 election. Or for that matter consider the Republicans taking him on in 2009. If either had performed as abysmally as he did, people would have said: "They just had a bad hand. Nobody could have won with that."
Just because he lost doesn't mean he had an inevitably losing hand. In many ways it was a good hand.
Theory Three is that he's cleverly positioning himself in the center, and letting the Republicans be seen as extremists.
Verdict: Mostly false. People also respect strength, commitment, self-confidence, and success. His pathetic showing is not going to win him the 2012 election. He's disheartened his base, millions of whom will likely stay home. Clinton positioned the Republicans as extremist (when they weren't nearly as far around the bend as they are today) without making himself look like a pathetic loser.
The evidence that Obama has very little understanding of the most basic political tactics and strategy is pretty overwhelming. This is a guy who believes that you start a negotiation by offering LESS than you want, not more so that you can give ground and still do well overall.
Jon Stewart had some rather obvious fun with the December press conference clip where he said that of course the Republicans wouldn't risk the full faith and credit of the U.S. government, so there was no need to negotiate a debt ceiling deal back then. And for the past 6 months his minions have apparently been telling reporters that of course the Republicans will agree to new revenues, because reasonable people can't disagree that it's part of the problem.
He also appears to be strangely arrogant and uneducable about his woefully naive view of political competition. The Bourbons famously "learned nothing and forgot nothing." Obama will evidently learn nothing and forget everything.
Recent talk at Oxford summer symposium
I recently noted here my trip to Oxford in early July to present a paper and otherwise participate in an international tax conference. But in the press of events (even my summers are busy these days), I forgot to create a link to the slides from my talk.
At this year's Oxford conference, I presented a talk based on my forthcoming Tax Law Review article, The Rising Tax-Electivity of U.S. Corporate Residence, using revised and condensed slides. A link to the new slides is available here.
I have recently (and FINALLY, after months of intervening obligations, for the most part voluntarily if in some cases ambivalently self-imposed) gotten back to working on a completed revised version of my long-in-progress book on U.S. international taxation. At this point, I think I finally have it conceptualized properly. And I believe that this time, unlike in Decoding the Corporate Tax, which I admittedly like but which was basically (and avowedly) an accessible literature review, I'm making significant new contributions to how people should think about the field. The tax-electivity piece is one of the detours that I voluntarily set for myself because I felt that I needed to get my ideas in better shape first, and (along with my recent foreign tax credit work) it offers in passing some, though by no means all, of the ideas that I plan to detail in the new book.
At this year's Oxford conference, I presented a talk based on my forthcoming Tax Law Review article, The Rising Tax-Electivity of U.S. Corporate Residence, using revised and condensed slides. A link to the new slides is available here.
I have recently (and FINALLY, after months of intervening obligations, for the most part voluntarily if in some cases ambivalently self-imposed) gotten back to working on a completed revised version of my long-in-progress book on U.S. international taxation. At this point, I think I finally have it conceptualized properly. And I believe that this time, unlike in Decoding the Corporate Tax, which I admittedly like but which was basically (and avowedly) an accessible literature review, I'm making significant new contributions to how people should think about the field. The tax-electivity piece is one of the detours that I voluntarily set for myself because I felt that I needed to get my ideas in better shape first, and (along with my recent foreign tax credit work) it offers in passing some, though by no means all, of the ideas that I plan to detail in the new book.
Monday, August 01, 2011
Obama at the car dealership
"There's one thing you should understand before we start talking price. I need this car, and I know you want to be fair to me. We're both better off if we're both happy afterwards.
"I don't have transport - I sent the cab away, and I didn't bring my cellphone. So I promise you right here and now that, no matter what happens, I am not going to another dealership. Again, I need this car, and I know you want nothing more than a satisfied customer.
"So here's what I'm going to do. The sticker price is $24,995? Great. I am offering you $26,000. That's fair, so there's no need for you to hold out for more. Why bargain when we can go right now and just sign the papers?
"What do you say? Deal?"
"I don't have transport - I sent the cab away, and I didn't bring my cellphone. So I promise you right here and now that, no matter what happens, I am not going to another dealership. Again, I need this car, and I know you want nothing more than a satisfied customer.
"So here's what I'm going to do. The sticker price is $24,995? Great. I am offering you $26,000. That's fair, so there's no need for you to hold out for more. Why bargain when we can go right now and just sign the papers?
"What do you say? Deal?"
If we had a parliamentary system ...
... then not only would the party in power after the 2008 election have been able promptly to pass legislation that it wanted, and not only would we have avoided the perverse incentive structure whereby one of the parties has veto power without responsibility, and no incentive whatsoever to cooperate on anything (a point brilliantly grasped by Senator McConnell), but the Democrats would now be able to kick out their leader and elect a new one via party caucus.
Perhaps my mood on this is too dark, but I am thinking that it's about time for people in the Obama Administration who don't want to be associated with its cowardice and ineptitude to start resigning.
Perhaps my mood on this is too dark, but I am thinking that it's about time for people in the Obama Administration who don't want to be associated with its cowardice and ineptitude to start resigning.
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