At the Huffington Post, Zach Carter and Ryan Grimm quote the manager of a Romney blind trust as saying that the infamous Swiss bank account was worth about $3 million and generated roughly $1,700 in interest. (I presume this is an annual return.)
Not much of a pretax return there, unless you happen to think that 0.023% sounds good. Indeed, it's so low that even improperly excluding the interest income from U.S. tax (and thus perhaps needing to participate in the 2009 amnesty program) presumably would have been more of a careless oversight than anything calculated.
But this still leaves us with the question of why Romney had the account, given the outright silliness of the manager's claim that it was set up for "diversification" - which, as Carter and Grimm explain, "puzzles tax and investment experts, who note that all of the investment options available in Switzerland are available in American accounts."
Well, duh, it was obviously about the secrecy, though regarding what, and for what ends, remains unknown.
But given that this story is not just about taxes per se - it's about evaluating both Romney as an individual who wants to be our president, and the aspects of the existing tax and financial system that he has come to epitomize - I would certainly second the article's call for disclosure of the relevant Report on Foreign Bank and Financial Accounts, or FBAR, that he must have filed.
... Although, I must admit that I am not holding my breath.
Wednesday, July 18, 2012
Tuesday, July 17, 2012
Book club
I've just finished reading a brilliant, quiet, but in its way brutal and chilling novel, Thomas A. Savage's "The Power of the Dog."
Sometimes info on Amazon serves you better than leafing through the items in a bricks-and-mortar bookstore. (I've always found that I'd need to read for a bit longer than I realistically have, in order to decide whether I like an item or not.) In this case, what put me onto it was seeing on the website that Savage had said his favorite novel was "Mrs. Bridge," by Evan Connell. That novel, too, though in an entirely different way, is quiet yet in its way brutal and chilling. Both are startlingly and yet unobtrusively well-written.
Obviously, both very highly recommended.
Sometimes info on Amazon serves you better than leafing through the items in a bricks-and-mortar bookstore. (I've always found that I'd need to read for a bit longer than I realistically have, in order to decide whether I like an item or not.) In this case, what put me onto it was seeing on the website that Savage had said his favorite novel was "Mrs. Bridge," by Evan Connell. That novel, too, though in an entirely different way, is quiet yet in its way brutal and chilling. Both are startlingly and yet unobtrusively well-written.
Obviously, both very highly recommended.
Could Romney have paid zero U.S. income taxes in 2009?
I've been getting the question in the title to this post, and no one can really answer it without seeing the return itself. But let's take another look at the 2010 return, and see what we can glean from that.
In 2010, Romney paid just over $3 million of tax on $21.6 million of adjusted gross income. Hence, the widely quoted 13.9%. tax rate, which is simply $3M divided by $21.6M.
The main components of the $21.6M were as follows:
(1) About $12.6 million of net capital gain, the great majority of it long-term capital gain (including carried interest payments from Bain) that gets taxed at 15 percent. However, the gross amount of Romney's 2010 capital gains was almost $5 million higher than this. He reduced the net inclusion by deducting $4.8 million of capital loss carryovers from 2009. (If one ignored this deduction and recomputed his 2010 effective rate, it would be $3M / $26.4M , or about 11.4%. See below for discussion relevant to whether one should so recompute it.)
(2) About $3.3 million in interest income, plus $4.9 million in dividends, plus just under $600,000 in Schedule C business income, mainly for speaking fees. So his "ordinary" income (including that which qualified for the 15% tax rate on dividends) totaled about $8.8M, yielding the $21.6M total once one throws in miscellaneous odds and ends.
Okay, let's run the tape in reverse and see what we can figure out about 2009. The gross capital gain may have been significantly higher in 2009 than in 2010, because he was still receiving other payouts from Bain that I would think could have been structured to yield capital gain. [UPDATE: This may be incorrect - the arrangement appears to have been that he'd receive payouts on Bain deals that occurred through 2009, not that he'd receive payouts until 2009 on Bain deals. So perhaps we might expect the gross capital gain for 2009 to be similar to those in 2010, or perhaps lower given overall economic circumstances, rather than higher.)
In any event, we know from the capital loss carryover in the 2010 return that his net capital gain inclusion for 2009 was zero (or more specifically he was allowed to deduct a net capital loss of $3,000). As I've noted in earlier posts, this presumably reflected loss harvesting - the sale of "loss stocks" that presumably had gone down in the 2008-9 stock market collapse, although he may still have retained in his portfolio lots of still-appreciated stocks that he had bought years earlier when the stock market was significantly lower.
OK, so if we are asking what his effective tax rate was in 2009 (the analogy to the widely accepted 13.9% figure for 2010), even if we had the return, this question wouldn't answer itself. We would have to ask ourselves: What is the denominator (i.e., income for the year). Do we want to say zero, despite the gross, as opposed to net, capital gains? Obviously income is a net, not a gross, concept, and the stocks that he sold presumably did really lose value. But with loss harvesting you have to think about the overall portfolio and how it was performing over a longer period of time. (His tax return wouldn't show that, of course.)
So far, this sounds like a scenario that Romney could defend if he released the 2009 return. He has no net capital gain, pays no tax on it, says that this is legitimate because he had stock market losses, and the riposte that he may have used loss harvesting to report losses against a background of overall stock appreciation over a period of years is a bit too refined to do him much political harm.
But could he have paid zero overall in 2009? This would have required zeroing out the ordinary income, which can't be offset by capital losses. Again, in 2010 all this other income added up to about $8.8M. His reluctance to release his 2009 return would suddenly be a lot more understandable if it turned out that he had questionable tax shelter losses offsetting the 2009 equivalent of this income. We have absolutely no direct evidence that he did anything like this. What's more, it would have been irrational for him to engage in this stuff in between presidential runs, and one wouldn't think he'd be irrational. But again, the mystery of his reluctance to release anything further openly invites otherwise unfounded speculation.
In 2010, Romney paid just over $3 million of tax on $21.6 million of adjusted gross income. Hence, the widely quoted 13.9%. tax rate, which is simply $3M divided by $21.6M.
The main components of the $21.6M were as follows:
(1) About $12.6 million of net capital gain, the great majority of it long-term capital gain (including carried interest payments from Bain) that gets taxed at 15 percent. However, the gross amount of Romney's 2010 capital gains was almost $5 million higher than this. He reduced the net inclusion by deducting $4.8 million of capital loss carryovers from 2009. (If one ignored this deduction and recomputed his 2010 effective rate, it would be $3M / $26.4M , or about 11.4%. See below for discussion relevant to whether one should so recompute it.)
(2) About $3.3 million in interest income, plus $4.9 million in dividends, plus just under $600,000 in Schedule C business income, mainly for speaking fees. So his "ordinary" income (including that which qualified for the 15% tax rate on dividends) totaled about $8.8M, yielding the $21.6M total once one throws in miscellaneous odds and ends.
Okay, let's run the tape in reverse and see what we can figure out about 2009. The gross capital gain may have been significantly higher in 2009 than in 2010, because he was still receiving other payouts from Bain that I would think could have been structured to yield capital gain. [UPDATE: This may be incorrect - the arrangement appears to have been that he'd receive payouts on Bain deals that occurred through 2009, not that he'd receive payouts until 2009 on Bain deals. So perhaps we might expect the gross capital gain for 2009 to be similar to those in 2010, or perhaps lower given overall economic circumstances, rather than higher.)
In any event, we know from the capital loss carryover in the 2010 return that his net capital gain inclusion for 2009 was zero (or more specifically he was allowed to deduct a net capital loss of $3,000). As I've noted in earlier posts, this presumably reflected loss harvesting - the sale of "loss stocks" that presumably had gone down in the 2008-9 stock market collapse, although he may still have retained in his portfolio lots of still-appreciated stocks that he had bought years earlier when the stock market was significantly lower.
OK, so if we are asking what his effective tax rate was in 2009 (the analogy to the widely accepted 13.9% figure for 2010), even if we had the return, this question wouldn't answer itself. We would have to ask ourselves: What is the denominator (i.e., income for the year). Do we want to say zero, despite the gross, as opposed to net, capital gains? Obviously income is a net, not a gross, concept, and the stocks that he sold presumably did really lose value. But with loss harvesting you have to think about the overall portfolio and how it was performing over a longer period of time. (His tax return wouldn't show that, of course.)
So far, this sounds like a scenario that Romney could defend if he released the 2009 return. He has no net capital gain, pays no tax on it, says that this is legitimate because he had stock market losses, and the riposte that he may have used loss harvesting to report losses against a background of overall stock appreciation over a period of years is a bit too refined to do him much political harm.
But could he have paid zero overall in 2009? This would have required zeroing out the ordinary income, which can't be offset by capital losses. Again, in 2010 all this other income added up to about $8.8M. His reluctance to release his 2009 return would suddenly be a lot more understandable if it turned out that he had questionable tax shelter losses offsetting the 2009 equivalent of this income. We have absolutely no direct evidence that he did anything like this. What's more, it would have been irrational for him to engage in this stuff in between presidential runs, and one wouldn't think he'd be irrational. But again, the mystery of his reluctance to release anything further openly invites otherwise unfounded speculation.
The presidential campaigns debate international tax policy
I was bemused to see in today's Times that Obama and Romney spent some time yesterday debating a Tax Notes article on U.S. international taxation published by Kim Clausing. She and I recently co-authored an article in the Tax Law Review, and the likes of us are usual toiling far from the harsh glare of an active presidential campaign.
Clausing's article is available as published, though perhaps just for Tax Analysts subscribers, here. If that link doesn't work for you, a working paper version is publicly available here. It makes three main points. First, while there is lots of talk in the U.S. about shifting to a territorial system, under which U.S. companies' foreign source active business income would be exempted from U.S. tax, it makes a lot of difference how one goes about doing this. Many of our peer countries that have shifted to territorial or exemption systems have kept a lot of features in their rules that address efforts by resident multinationals to shift either reported taxable income or the actual locus of investment from the home country to tax havens.
Second, she estimates that, if the U.S. shifted to a pure territorial system without similar features, the U.S. companies would shift their activities in such a manner as to increase employment in low-tax countries by about 800,000 jobs. This is based on empirical estimates regarding various relevant parameters, from her own work and that of other leading empirical researchers in the international tax policy realm.
Third, under normal macroeconomic circumstances, it is plausible, notwithstanding all the recent campaign talk about outsourcing, that this would not result in any net U.S. job loss (although it is possible that lower-wage jobs would replace higher-wage jobs). In a full employment scenario, U.S. employment would merely be reallocated, and indeed there is research suggesting that cheap labor abroad can actually be a complement to particular U.S. jobs. But in the current state of our economy, steeped as it is in a deep recession (whether it meets the official statistical definition or not), with persistent high unemployment and inadequate overall demand, the scenario in which lost jobs here do not end up being replaced any time soon is unfortunately all too plausible.
Against this background, Obama had some fun saying that Romney would create jobs all right, only they wouldn't be created here. Romney's campaign didn't respond directly, but Republicans who spoke to the Times authors made a couple of main assertions. First, they argued political bias. But Clausing is a well-respected researcher - listed, for example, by the International Tax Policy Forum (ITPF) as one of the authors whose research it supports. The ITPF is a respected nonpartisan research organization, but one that is funded by leading U.S. multinationals and definitely could be viewed as lining up on that side of the debate.
Second, the pro-Romney sources noted that territoriality has been favored by Obama advisors as well as by the Bowles-Simpson panel. True enough, but again the key question, if you shift to a territorial system, is exactly how you do it and when.
These are topics that I am writing about right now (and indeed almost literally so, since the moment I finish this post I will be opening my docx file for chapter 4 of my book in progress on international tax policy). So I will have a lot more to say about these issues in the right time and place, but perhaps not right here and now, as there is no simple rifleshot takeaway that would do justice to the entire subject.
Clausing's article is available as published, though perhaps just for Tax Analysts subscribers, here. If that link doesn't work for you, a working paper version is publicly available here. It makes three main points. First, while there is lots of talk in the U.S. about shifting to a territorial system, under which U.S. companies' foreign source active business income would be exempted from U.S. tax, it makes a lot of difference how one goes about doing this. Many of our peer countries that have shifted to territorial or exemption systems have kept a lot of features in their rules that address efforts by resident multinationals to shift either reported taxable income or the actual locus of investment from the home country to tax havens.
Second, she estimates that, if the U.S. shifted to a pure territorial system without similar features, the U.S. companies would shift their activities in such a manner as to increase employment in low-tax countries by about 800,000 jobs. This is based on empirical estimates regarding various relevant parameters, from her own work and that of other leading empirical researchers in the international tax policy realm.
Third, under normal macroeconomic circumstances, it is plausible, notwithstanding all the recent campaign talk about outsourcing, that this would not result in any net U.S. job loss (although it is possible that lower-wage jobs would replace higher-wage jobs). In a full employment scenario, U.S. employment would merely be reallocated, and indeed there is research suggesting that cheap labor abroad can actually be a complement to particular U.S. jobs. But in the current state of our economy, steeped as it is in a deep recession (whether it meets the official statistical definition or not), with persistent high unemployment and inadequate overall demand, the scenario in which lost jobs here do not end up being replaced any time soon is unfortunately all too plausible.
Against this background, Obama had some fun saying that Romney would create jobs all right, only they wouldn't be created here. Romney's campaign didn't respond directly, but Republicans who spoke to the Times authors made a couple of main assertions. First, they argued political bias. But Clausing is a well-respected researcher - listed, for example, by the International Tax Policy Forum (ITPF) as one of the authors whose research it supports. The ITPF is a respected nonpartisan research organization, but one that is funded by leading U.S. multinationals and definitely could be viewed as lining up on that side of the debate.
Second, the pro-Romney sources noted that territoriality has been favored by Obama advisors as well as by the Bowles-Simpson panel. True enough, but again the key question, if you shift to a territorial system, is exactly how you do it and when.
These are topics that I am writing about right now (and indeed almost literally so, since the moment I finish this post I will be opening my docx file for chapter 4 of my book in progress on international tax policy). So I will have a lot more to say about these issues in the right time and place, but perhaps not right here and now, as there is no simple rifleshot takeaway that would do justice to the entire subject.
Monday, July 16, 2012
Rigged financial markets?
This story about big hedge funds getting an advance peek at new information relevant to stock price movements, plus the LIBOR manipulation scandal, really make one wonder about the degree to which financial markets and high-end financial returns are serving the purposes that they are supposed to in a well-functioning market economy.
Why won't Romney release his 2009 tax return?
Increasingly, everyone (including Republicans such as George Will, Matthew Dowd, and William Kristol) agrees that the reason for Romney's reluctance to release any pre-2010 tax return might be that what it would show is worse than all the heat he is taking for non-disclosure.
But what could that be? Well, I certainly don't know either, but here are some salient points:
1) We know from the 2010 tax return, in which he had a net capital loss carryforward from 2009, that he zeroed out his net capital gains - including from carried interest Bain income - in 2009.
2) 2009 was the last year in which he received certain Bain payments as the playout of his "retroactive retirement."
3) It's been hard to understand what benefit he thought he was getting from the Swiss bank account, and there was an IRS amnesty program in 2009 for fraudulent nondisclosure of offshore income. If he had to come clean in 2009, this might be embarrassing, especially given that there was an iron fist inside the IRS leniency offer (i.e., if you held out, they might get you without any amnesty).
From the first two items above, it may be a reasonable guess that Romney had a lot more gross income in 2009 than 2010 and 2011, yet paid less tax or even zero tax.
This might have had to involve, not just zeroing out capital gains via "loss harvesting" in response to the down 2009 stock market. but also creating tax shelter losses to offset ordinary income.
We know from attachments to the 2010 return that some of his "blind trusts" were engaged in transactions identified by the IRS in Notice 2002-35, which pertains to fake loss-generating scams that involved abusing and misinterpreting the notional principal contract regulations. So far as the blind trust aspect of that is concerned, note that Romney himself once called blind trusts an "age-old ruse." But I am unclear about how much to make of the 2010 disclosure, given that it would have undermined expecting to get the tax benefits if the deals at issue were complete scams. So it has struck me as conceivable that the blind trusts did something in the ballpark of required 2002-35 disclosure but less extreme and more legally defensible.
Still, willingness to do extremely aggressive tax sheltering (such as through loss generation from circular flows of cash) in 2009 would not come as a huge surprise, even though it seems like a dumb idea if you are preparing to run for president again. I wonder if the very fact that he was running for president might have led him to figure that he was audit-proof, on the ground that the IRS would look too political if it started challenging things.
I'm not sure how much credence to give this, but a Huffington Post commentator claims that, "according to people close to the situation, Romney would drop out of the presidential race before ever releasing further tax returns." That certainly sounds dire, and a huge 2009 gross income plus huge claimed losses, perhaps even topped off by amnesty income reports, would be one way of getting there.
But what could that be? Well, I certainly don't know either, but here are some salient points:
1) We know from the 2010 tax return, in which he had a net capital loss carryforward from 2009, that he zeroed out his net capital gains - including from carried interest Bain income - in 2009.
2) 2009 was the last year in which he received certain Bain payments as the playout of his "retroactive retirement."
3) It's been hard to understand what benefit he thought he was getting from the Swiss bank account, and there was an IRS amnesty program in 2009 for fraudulent nondisclosure of offshore income. If he had to come clean in 2009, this might be embarrassing, especially given that there was an iron fist inside the IRS leniency offer (i.e., if you held out, they might get you without any amnesty).
From the first two items above, it may be a reasonable guess that Romney had a lot more gross income in 2009 than 2010 and 2011, yet paid less tax or even zero tax.
This might have had to involve, not just zeroing out capital gains via "loss harvesting" in response to the down 2009 stock market. but also creating tax shelter losses to offset ordinary income.
We know from attachments to the 2010 return that some of his "blind trusts" were engaged in transactions identified by the IRS in Notice 2002-35, which pertains to fake loss-generating scams that involved abusing and misinterpreting the notional principal contract regulations. So far as the blind trust aspect of that is concerned, note that Romney himself once called blind trusts an "age-old ruse." But I am unclear about how much to make of the 2010 disclosure, given that it would have undermined expecting to get the tax benefits if the deals at issue were complete scams. So it has struck me as conceivable that the blind trusts did something in the ballpark of required 2002-35 disclosure but less extreme and more legally defensible.
Still, willingness to do extremely aggressive tax sheltering (such as through loss generation from circular flows of cash) in 2009 would not come as a huge surprise, even though it seems like a dumb idea if you are preparing to run for president again. I wonder if the very fact that he was running for president might have led him to figure that he was audit-proof, on the ground that the IRS would look too political if it started challenging things.
I'm not sure how much credence to give this, but a Huffington Post commentator claims that, "according to people close to the situation, Romney would drop out of the presidential race before ever releasing further tax returns." That certainly sounds dire, and a huge 2009 gross income plus huge claimed losses, perhaps even topped off by amnesty income reports, would be one way of getting there.
Thursday, July 12, 2012
What's so special about "small business"?
Both presidential campaigns are eager to portray themselves as champions of "small business." So we have the Romney campaign misleadingly portraying the Obama Administration's proposal to let the top bracket return to 39.6% as in the main a tax increase for "small business." Part and parcel, of course, of their preferred new word for rich people, which is "job creators."
The Democrats, meanwhile, are pushing a bill in the Senate that would offer temporary tax credits for small businesses that hire new employees or increase their payrolls. This at least might be stimulative if it's properly designed, not too gameable, and does not create too many odd incentives at the margin. But there's no reason I can see to limit or direct it to small businesses. A job is a job, and a wage increase is a wage increase.
"Small business" sounds good rhetorically, whether you are trying to put a misleading face on support for the top 0.1%, like the Republicans, or simply trying for a more generally faux-populist tone, like the Democrats. Tax breaks for "big business" certainly don't sound as wholesome. But there is no particular reason to favor one part of the business sector over another, or to give businesses a tax incentive to stay small And even without the rhetorical edge, "small business" often has an advantage over "big business" in mustering political support in Congress, due to the advantages of being decentralized and hence in lots of members' districts, where the "small business" leaders often are prominent local personages and important campaign contributors. (I don't know if Citizens United, in addition to strengthening business interests' hand generally, has increased the political influence of "big business" relative to the more localized sector.)
The Democrats, meanwhile, are pushing a bill in the Senate that would offer temporary tax credits for small businesses that hire new employees or increase their payrolls. This at least might be stimulative if it's properly designed, not too gameable, and does not create too many odd incentives at the margin. But there's no reason I can see to limit or direct it to small businesses. A job is a job, and a wage increase is a wage increase.
"Small business" sounds good rhetorically, whether you are trying to put a misleading face on support for the top 0.1%, like the Republicans, or simply trying for a more generally faux-populist tone, like the Democrats. Tax breaks for "big business" certainly don't sound as wholesome. But there is no particular reason to favor one part of the business sector over another, or to give businesses a tax incentive to stay small And even without the rhetorical edge, "small business" often has an advantage over "big business" in mustering political support in Congress, due to the advantages of being decentralized and hence in lots of members' districts, where the "small business" leaders often are prominent local personages and important campaign contributors. (I don't know if Citizens United, in addition to strengthening business interests' hand generally, has increased the political influence of "big business" relative to the more localized sector.)
Wednesday, July 11, 2012
It's not actually about the Swiss bank account
You know the old joke, where the older man says to the younger one: "Is it for the likes of you that I lost my leg in the war?!?"
Younger man: "But, James, you have both your legs."
Older man: "I was speaking metaphorically, you fool!"
So it is, in a sense, with Romney's recently closed Swiss bank account.
Yesterday I was talking to a reporter about an upcoming story on Romney's tax and financial dealings, and I said about the Swiss bank account: That's probably not the issue at all. But what it is, is a metaphor for the things that actually are disturbing about Romney's highly secretive tax and financial dealings.
Swiss bank accounts have a bad reputation due to history, as well as Hollywood movies. If I recall rightly, in the Bourne movies our hero has a secret bank account there. OK, he's the good guy, but lots of people have historically used Swiss bank accounts over the decades to maintain extreme secrecy - sometimes, from tyrannical home country regimes or potential kidnappers or even spouses, but often because they were trying to conceal ill-gotten gains (e.g., tax fraudsters from countries such as the U.S., or looting dictators from other parts of the world).
Then of course there's the notoriety that Swiss bankers rightly earned for their dealings with high-ranking Nazis during and perhaps after World War II. However irrelevant today, this still helps empower the Swiss bank account as metaphor for other fishy things happening.
But all this has presumably has nothing to do with what makes so many people (including me) uneasy about Romney's financial dealings, as well as his personal and business ethics, such as they are. Now, I am starting to think that no wrongdoing on his part should be entirely ruled out, before there is evidence against it (which he is unwilling to provide), simply on the ground that "he's too smart to do something as crude and stupid as that." Again, Nixon, though no dummy, evidently wasn't too smart to do Watergate. And Romney appears to be so super-aggressive, so complacent about it, and so fundamentally tone-deaf, that he may well have done lots of things that we would have thought he was too smart to do. But still, I'd bet against the outright fraud and evasion that Swiss bank accounts at one time might have helped effectuate - and actually don't any more, in the aftermath of UBS and all that.
I'd say, if the veil ever lifts, reporters should look at all the Caymans stuff, and the $20M to $100M IRA, and the tax planning - was it clearly legally correct? Or was it super-aggressive, and nearing or even crossing lines? Ten to twelve years ago, for example, was he investing in outrageous tax shelter scams (such as Son-of-BOSS)? As distinct from focusing on the Swiss bank account.
In sum, when people say "Ooh, he had a Swiss bank account," while they may be deriving the right conclusion, they are deducing it from the wrong piece of evidence. But there really is a "Swiss bank account problem" - so long as we keep in mind that I am "speaking metaphorically, you fool."
UPDATE: A la the "Taxing Matter" blog, there are a few interesting questions about Romney's Swiss bank account that I didn't mention. Why did he have money there at a low rate of return, when the rationales offered are unpersuasive? Did he report and pay tax contemporaneously, or did he come in afterwards via the voluntary settlement initiative? Does UBS have anything to do with why he closed down the account?
So perhaps not entirely 100 percent just a metaphor.
Younger man: "But, James, you have both your legs."
Older man: "I was speaking metaphorically, you fool!"
So it is, in a sense, with Romney's recently closed Swiss bank account.
Yesterday I was talking to a reporter about an upcoming story on Romney's tax and financial dealings, and I said about the Swiss bank account: That's probably not the issue at all. But what it is, is a metaphor for the things that actually are disturbing about Romney's highly secretive tax and financial dealings.
Swiss bank accounts have a bad reputation due to history, as well as Hollywood movies. If I recall rightly, in the Bourne movies our hero has a secret bank account there. OK, he's the good guy, but lots of people have historically used Swiss bank accounts over the decades to maintain extreme secrecy - sometimes, from tyrannical home country regimes or potential kidnappers or even spouses, but often because they were trying to conceal ill-gotten gains (e.g., tax fraudsters from countries such as the U.S., or looting dictators from other parts of the world).
Then of course there's the notoriety that Swiss bankers rightly earned for their dealings with high-ranking Nazis during and perhaps after World War II. However irrelevant today, this still helps empower the Swiss bank account as metaphor for other fishy things happening.
But all this has presumably has nothing to do with what makes so many people (including me) uneasy about Romney's financial dealings, as well as his personal and business ethics, such as they are. Now, I am starting to think that no wrongdoing on his part should be entirely ruled out, before there is evidence against it (which he is unwilling to provide), simply on the ground that "he's too smart to do something as crude and stupid as that." Again, Nixon, though no dummy, evidently wasn't too smart to do Watergate. And Romney appears to be so super-aggressive, so complacent about it, and so fundamentally tone-deaf, that he may well have done lots of things that we would have thought he was too smart to do. But still, I'd bet against the outright fraud and evasion that Swiss bank accounts at one time might have helped effectuate - and actually don't any more, in the aftermath of UBS and all that.
I'd say, if the veil ever lifts, reporters should look at all the Caymans stuff, and the $20M to $100M IRA, and the tax planning - was it clearly legally correct? Or was it super-aggressive, and nearing or even crossing lines? Ten to twelve years ago, for example, was he investing in outrageous tax shelter scams (such as Son-of-BOSS)? As distinct from focusing on the Swiss bank account.
In sum, when people say "Ooh, he had a Swiss bank account," while they may be deriving the right conclusion, they are deducing it from the wrong piece of evidence. But there really is a "Swiss bank account problem" - so long as we keep in mind that I am "speaking metaphorically, you fool."
UPDATE: A la the "Taxing Matter" blog, there are a few interesting questions about Romney's Swiss bank account that I didn't mention. Why did he have money there at a low rate of return, when the rationales offered are unpersuasive? Did he report and pay tax contemporaneously, or did he come in afterwards via the voluntary settlement initiative? Does UBS have anything to do with why he closed down the account?
So perhaps not entirely 100 percent just a metaphor.
Monday, July 09, 2012
TV non-appearance
Tonight at 7 pm EST on CNN's Erin Burnett Outfront, there will be a feature on Romney's offshore accounts, including the tax planning motivations that one suspects may underlie them. I gather that Erin will name me as a source (via e-mail correspondence) for the basic tax analysis.
Nothing surprising or novel, at least so far as my contribution is concerned. Apart from the secrecy angle, which I assume isn't tax-related (as it's hard to believe Romney would commit outright fraud), I emphasized the tax planning objectives of avoiding (1) certain deduction limitations and (2) the debt-financed UBIT rules. David Miller discusses these issues, and others associated with using offshore entities, in much greater detail (though without specific reference to Romney) here.
Nothing surprising or novel, at least so far as my contribution is concerned. Apart from the secrecy angle, which I assume isn't tax-related (as it's hard to believe Romney would commit outright fraud), I emphasized the tax planning objectives of avoiding (1) certain deduction limitations and (2) the debt-financed UBIT rules. David Miller discusses these issues, and others associated with using offshore entities, in much greater detail (though without specific reference to Romney) here.
Saturday, July 07, 2012
Nice work if you can get it
Making derivatives trades that pay off based on the LIBOR rate, and then getting to rig a fake LIBOR rate so you're guaranteed to win, is certainly a lucrative way to do business.
Am I wrong to be confident that Romney would back the rogue banks on this one, and oppose investigating or sanctioning them?
Am I wrong to be confident that Romney would back the rogue banks on this one, and oppose investigating or sanctioning them?
Friday, July 06, 2012
Romney's IRA again
I am quoted in this Talking Points Memo post, from an interview that I conducted some time back, regarding the extraordinary accumulation of wealth in Romney's IRA, which has more than $100 million in it. The angle that I discuss, though certainly relevant, is not in fact the biggest takeaway from the story.
As I note, while we can't know anything for sure because Romney is so determined to minimize any disclosure, there is reason to surmise that he may have used Caymans "blocker" entities to avoid U.S. unrelated business income tax (UBIT) on IRA-level borrowing. The basic trick is that, instead of borrowing to hold stock that appreciates and pays dividends, you create a Caymans entity that does the borrowing and holds the stock. This would increase the gross assets that the IRA could hold, through what is basically a loophole in the UBIT rules, circumvening their limitation on the use of direct borrowing to create tax-exempt investment income.
In defense of this use of "blocker" entities, not only does it appear to be the case that "everyone does it" (i.e., not just the most aggressive taxpayers), but in addition Congress has looked at the problem and declined to act, plus it is very difficult to devise a compelling rationale for the UBIT rule that Romney may be avoiding. That is, if we allow tax-exempt entities such as IRA vehicles to invest tax-free, why shouldn't the rules let them borrow non-deductibly to invest still more tax-free. There's no tax arbitrage involved here, given that the exemption is symmetric on the inclusion and deduction sides.
Despite this point, one could certainly argue that it is unseemly for a presidential candidate to be using Caymans or other such "blocker" entities to avoid the UBIT. I have no especially strong opinion on this argument, one way or the other, given that the tax planning is widespread, clearly works, and avoids an anti-borrowing rule that lacks any compelling rationale.
The bigger issue raised by Romney's $100 million IRA is whether - as I would have to say seems extremely plausible, just from the otherwise unlikely facts that we know - he grossly undervalued the assets that the IRA holds when he placed them inside, in order to evade - not just avoid - the annual contribution limits. Ed Kleinbard explains the basic issue here. Again, a Romney defender might be factually correct in arguing that "everyone does it" (so long, as by "everyone," we are understood to mean high-flyers like Romney who have access to special insiders' classes of non-publicly traded financial instruments.). But in this case the "it" would be violating the law, not just engaging in a clearly legally effective tax planning strategy. That would certainly strike me as inappropriate, and as raising broader questions about Romney's character and general modus operandi.
Romney says that he takes care to pay the taxes he owes and not a penny more. But of course the law is not always clear, and aggressive tax planning that one expects to get away with (or at least to be able to engage in without fear of getting hit by penalties) is not exactly up to the highest standard.
Everyone assumes that Romney must be tax-planning within the law, because it would be stupid to take chances and besides he is cautious. This reminds me a bit of the arguments a few decades back that of course Nixon wouldn't be involved in planning things like the Watergate break-in, because surely he wasn't that stupid. In assessing the claim about Romney, we should keep in mind that he is extremely aggressive, pushing the limits past where most other people would stop, with regard to little things like telling repeated lies on the campaign trail (e.g., regarding Obama's supposed apology tour). While I'm sure that he is too smart and cautious to have engaged in, let's call it stupid people's tax fraud, such as omitting gross income and claiming fake deductions, his perspective on tax planning may be such that he just doesn't consider it a problem to engage in extremely aggressive tax planning that some people would regard as far out on the abusive tax shelter fringe. It may just be how he does things.
Likewise, his extreme penchant for secrecy (e.g., not disclosing any pre-2010 tax returns) does not necessarily have a relatively innocent explanation, even though one could come up with such explanations. We know, for example, that in 2009 he completely zeroed out his capital gains income from the carried interest fees, but actually showing this would be worse for him than our merely knowing it. So he wouldn't have to be hiding bad stuff in order to be as secretive as he is about prior years' returns. But I see no reason for giving him the benefit of the doubt about this.
As I note, while we can't know anything for sure because Romney is so determined to minimize any disclosure, there is reason to surmise that he may have used Caymans "blocker" entities to avoid U.S. unrelated business income tax (UBIT) on IRA-level borrowing. The basic trick is that, instead of borrowing to hold stock that appreciates and pays dividends, you create a Caymans entity that does the borrowing and holds the stock. This would increase the gross assets that the IRA could hold, through what is basically a loophole in the UBIT rules, circumvening their limitation on the use of direct borrowing to create tax-exempt investment income.
In defense of this use of "blocker" entities, not only does it appear to be the case that "everyone does it" (i.e., not just the most aggressive taxpayers), but in addition Congress has looked at the problem and declined to act, plus it is very difficult to devise a compelling rationale for the UBIT rule that Romney may be avoiding. That is, if we allow tax-exempt entities such as IRA vehicles to invest tax-free, why shouldn't the rules let them borrow non-deductibly to invest still more tax-free. There's no tax arbitrage involved here, given that the exemption is symmetric on the inclusion and deduction sides.
Despite this point, one could certainly argue that it is unseemly for a presidential candidate to be using Caymans or other such "blocker" entities to avoid the UBIT. I have no especially strong opinion on this argument, one way or the other, given that the tax planning is widespread, clearly works, and avoids an anti-borrowing rule that lacks any compelling rationale.
The bigger issue raised by Romney's $100 million IRA is whether - as I would have to say seems extremely plausible, just from the otherwise unlikely facts that we know - he grossly undervalued the assets that the IRA holds when he placed them inside, in order to evade - not just avoid - the annual contribution limits. Ed Kleinbard explains the basic issue here. Again, a Romney defender might be factually correct in arguing that "everyone does it" (so long, as by "everyone," we are understood to mean high-flyers like Romney who have access to special insiders' classes of non-publicly traded financial instruments.). But in this case the "it" would be violating the law, not just engaging in a clearly legally effective tax planning strategy. That would certainly strike me as inappropriate, and as raising broader questions about Romney's character and general modus operandi.
Romney says that he takes care to pay the taxes he owes and not a penny more. But of course the law is not always clear, and aggressive tax planning that one expects to get away with (or at least to be able to engage in without fear of getting hit by penalties) is not exactly up to the highest standard.
Everyone assumes that Romney must be tax-planning within the law, because it would be stupid to take chances and besides he is cautious. This reminds me a bit of the arguments a few decades back that of course Nixon wouldn't be involved in planning things like the Watergate break-in, because surely he wasn't that stupid. In assessing the claim about Romney, we should keep in mind that he is extremely aggressive, pushing the limits past where most other people would stop, with regard to little things like telling repeated lies on the campaign trail (e.g., regarding Obama's supposed apology tour). While I'm sure that he is too smart and cautious to have engaged in, let's call it stupid people's tax fraud, such as omitting gross income and claiming fake deductions, his perspective on tax planning may be such that he just doesn't consider it a problem to engage in extremely aggressive tax planning that some people would regard as far out on the abusive tax shelter fringe. It may just be how he does things.
Likewise, his extreme penchant for secrecy (e.g., not disclosing any pre-2010 tax returns) does not necessarily have a relatively innocent explanation, even though one could come up with such explanations. We know, for example, that in 2009 he completely zeroed out his capital gains income from the carried interest fees, but actually showing this would be worse for him than our merely knowing it. So he wouldn't have to be hiding bad stuff in order to be as secretive as he is about prior years' returns. But I see no reason for giving him the benefit of the doubt about this.
I agree more with the conclusion than with the analysis
A Wednesday op-ed in the New York Times by Yoram Bauman and Shi-Ling Hsu, entitled "The Most Sensible Tax of All," urges U.S. adoption of a carbon tax, with the revenues being used to reduce various taxes on individuals and businesses. A $30 per ton carbon tax, they say, could raise $145 billion a year, or enough to fund a 10 percent reduction in individual and corporate income taxes, repeal of the estate tax, and the enactment of refundable credits or targeted payroll tax cuts to offset the burden of the carbon tax on low-income households.
What's odd about the analysis is that, while the authors note that a carbon tax would be expected to reduce carbon emissions, they argue that it is a good thing wholly independently of the effect on global warming. Even climate skeptics, they say, should support it. They base this conclusion on two arguments: (1) the overall package would "reduce the economic drag created by our current tax system and increase long-run growth by nudging the economy away from consumption and borrowing and toward saving and investment," and (2) it would be a pollution tax.
Here's the problem. I certainly think the case that carbon emissions are contributing to deadly global warming is overwhelmingly strong. Thus, I support the global adoption of carbon taxes. Moreover, while intellectually it's a closer case whether the U.S. should act unilaterally - given that the scope of the problem is global, hence we don't capture all the benefit, there can be "leakage" if carbon-intensive production simply shifts overseas, etcetera - my bottom line is that we should. I base this conclusion not just on the sheer gravity of the global warming problem but also on the hope that U.S. action could promote significant movement in other countries towards taking remedial action.
But just to be a purist, suppose one believed that all this wasn't true - either because one rejected the evidence for global warming, or because one was convinced that U.S. enactment of a carbon tax would have no significant net effect on global carbon emissions. Then the carbon tax would have lost its central rationale, yet Bauman and Hsu would still support it.
This is a bit odd. If carbon weren't a bad, or if taxing it unilaterally had no net effect on it as a bad, a carbon tax would be a very strange design for a consumption tax. And it would only be a pollution tax insofar as emitting carbon correlated with emitting other pollutants that are untaxed or at least under-taxed. This actually might be true - gasoline use, for example, emits carbon but may also be undertaxed as a pollutant in other respects. But the carbon abatement that the tax would encourage presumably wouldn't be the ideal proxy for abating other pollution.
Anyway, all this is academic (but then I am an academic), given that I accept the central premise of a carbon tax, which is that the U.S. should adopt it, even unilaterally at first, in order to address global warming. And I suppose even their argument, even if questionable, would serve a good cause if (as seems unlikely) it helped induce U.S. adoption of a carbon tax. But in the end it is still hard to rationalize taxing carbon unless you recognize and accept that carbon emission has bad effects.
What's odd about the analysis is that, while the authors note that a carbon tax would be expected to reduce carbon emissions, they argue that it is a good thing wholly independently of the effect on global warming. Even climate skeptics, they say, should support it. They base this conclusion on two arguments: (1) the overall package would "reduce the economic drag created by our current tax system and increase long-run growth by nudging the economy away from consumption and borrowing and toward saving and investment," and (2) it would be a pollution tax.
Here's the problem. I certainly think the case that carbon emissions are contributing to deadly global warming is overwhelmingly strong. Thus, I support the global adoption of carbon taxes. Moreover, while intellectually it's a closer case whether the U.S. should act unilaterally - given that the scope of the problem is global, hence we don't capture all the benefit, there can be "leakage" if carbon-intensive production simply shifts overseas, etcetera - my bottom line is that we should. I base this conclusion not just on the sheer gravity of the global warming problem but also on the hope that U.S. action could promote significant movement in other countries towards taking remedial action.
But just to be a purist, suppose one believed that all this wasn't true - either because one rejected the evidence for global warming, or because one was convinced that U.S. enactment of a carbon tax would have no significant net effect on global carbon emissions. Then the carbon tax would have lost its central rationale, yet Bauman and Hsu would still support it.
This is a bit odd. If carbon weren't a bad, or if taxing it unilaterally had no net effect on it as a bad, a carbon tax would be a very strange design for a consumption tax. And it would only be a pollution tax insofar as emitting carbon correlated with emitting other pollutants that are untaxed or at least under-taxed. This actually might be true - gasoline use, for example, emits carbon but may also be undertaxed as a pollutant in other respects. But the carbon abatement that the tax would encourage presumably wouldn't be the ideal proxy for abating other pollution.
Anyway, all this is academic (but then I am an academic), given that I accept the central premise of a carbon tax, which is that the U.S. should adopt it, even unilaterally at first, in order to address global warming. And I suppose even their argument, even if questionable, would serve a good cause if (as seems unlikely) it helped induce U.S. adoption of a carbon tax. But in the end it is still hard to rationalize taxing carbon unless you recognize and accept that carbon emission has bad effects.
Thursday, June 28, 2012
Healthcare Act upheld
So Chief Justice Roberts decided not to strike it down (the other 4 Republicans would have invalidated the healthcare act in full).
He's really threaded the needle here, by finding the mandate to be a tax for purposes of assessing its constitutionality but not for purposes of the Anti-Injunction Act, which would have required that the entire issue be put over. Roberts argues that labeling (whether or not Congress calls it a tax) controls for statutory interpretation purposes but not for constitutional purposes.
At a first glance, Scalia's 65-page dissent is less hysterical and intemperate than we have come to expect from him. I wonder if he thought it had a chance to be the opinion of the Court when he wrote it.
I must say, I still think Roberts' agreement with the other 4 Republicans that the action / inaction line makes the mandate impermissible under the Commerce Clause is just silly. Here is the key Roberts sentence on this issue: "The power to regulate commerce presupposes the existence of commercial activity to be regulated." If you recognize that health insurance is prepayment for future healthcare services, that is a complete non sequitur.
Whether or not the 5-4 Commerce Clause vote against the mandate will prove more broadly consequential in future policy battles, who knows. It may depend on whether there is a political price to pay for relying on the taxing power as a constitutional matter (even though you don't have to expressly label it as a tax for this purpose).
Note, by the way, the implication that Social Security privatization (such as the 2005 Bush proposal) is potentially unconstitutional under the Commerce Clause, and would need the taxing power to be upheld. Likewise, one could probably structure the substance of the Paul Ryan Medicare plan in such a manner as to be beyond Congressional powers under the Commerce Clause challenge, although again this doesn't matter given the taxing power.
Bottom line, evidently Chief Justice Roberts didn't want the Court that bears his name to go out as far and as visibly on a hyper-partisan limb as striking down the Act would have necessitated. I find this cause for relief, although he may continue to act more aggressively, in full cahoots with the other four, when the level of public scrutiny is lower.
He's really threaded the needle here, by finding the mandate to be a tax for purposes of assessing its constitutionality but not for purposes of the Anti-Injunction Act, which would have required that the entire issue be put over. Roberts argues that labeling (whether or not Congress calls it a tax) controls for statutory interpretation purposes but not for constitutional purposes.
At a first glance, Scalia's 65-page dissent is less hysterical and intemperate than we have come to expect from him. I wonder if he thought it had a chance to be the opinion of the Court when he wrote it.
I must say, I still think Roberts' agreement with the other 4 Republicans that the action / inaction line makes the mandate impermissible under the Commerce Clause is just silly. Here is the key Roberts sentence on this issue: "The power to regulate commerce presupposes the existence of commercial activity to be regulated." If you recognize that health insurance is prepayment for future healthcare services, that is a complete non sequitur.
Whether or not the 5-4 Commerce Clause vote against the mandate will prove more broadly consequential in future policy battles, who knows. It may depend on whether there is a political price to pay for relying on the taxing power as a constitutional matter (even though you don't have to expressly label it as a tax for this purpose).
Note, by the way, the implication that Social Security privatization (such as the 2005 Bush proposal) is potentially unconstitutional under the Commerce Clause, and would need the taxing power to be upheld. Likewise, one could probably structure the substance of the Paul Ryan Medicare plan in such a manner as to be beyond Congressional powers under the Commerce Clause challenge, although again this doesn't matter given the taxing power.
Bottom line, evidently Chief Justice Roberts didn't want the Court that bears his name to go out as far and as visibly on a hyper-partisan limb as striking down the Act would have necessitated. I find this cause for relief, although he may continue to act more aggressively, in full cahoots with the other four, when the level of public scrutiny is lower.
Wednesday, June 27, 2012
Offshoring and international taxation
The Obama campaign has recently been running ads in battleground states dubbing Romney the "Outsourcer in Chief," based on a recent Washington Post article that associated Bain with the strategy of replacing American workers with low-wage people in places such as China and India. There is some evidence that this line of attack is quite effective.
I wonder if the focus on outsourcing has implications for the terms of U.S. international tax policy debate. One of the common arguments for strengthening worldwide taxation of U.S. companies, rather than moving towards exemption, is that this would discourage them from relocating factories abroad. While the Obama Administration has been at times on both sides of this debate - offering pro-worldwide budget proposals but expressing conditional sympathy with a shift towards exemption - there might be a political logic to coming down more heavily on the pro-worldwide side. This would permit them to draw a stronger contrast with Romney on real world policy issues, and to back up the "Outsourcer in Chief" claim with an eye to the future not just the past.
Such a move in the presidential campaign would tend to strengthen the longstanding stalemate in U.S. international tax policy debate, relative to the prospect that we will shift to exemption, unless the Republicans win across-the-board in 2012 (in which case what the Democrats think or say might simply not matter).
Just to be clear, all this is speculation about the politics of U.S. international taxation, not my own assessment of how we ought to analyze the substance.
I wonder if the focus on outsourcing has implications for the terms of U.S. international tax policy debate. One of the common arguments for strengthening worldwide taxation of U.S. companies, rather than moving towards exemption, is that this would discourage them from relocating factories abroad. While the Obama Administration has been at times on both sides of this debate - offering pro-worldwide budget proposals but expressing conditional sympathy with a shift towards exemption - there might be a political logic to coming down more heavily on the pro-worldwide side. This would permit them to draw a stronger contrast with Romney on real world policy issues, and to back up the "Outsourcer in Chief" claim with an eye to the future not just the past.
Such a move in the presidential campaign would tend to strengthen the longstanding stalemate in U.S. international tax policy debate, relative to the prospect that we will shift to exemption, unless the Republicans win across-the-board in 2012 (in which case what the Democrats think or say might simply not matter).
Just to be clear, all this is speculation about the politics of U.S. international taxation, not my own assessment of how we ought to analyze the substance.
Tuesday, June 26, 2012
Might inequality actually be narrowing??
Kevin Hassett and Aparna Mathur of the American Enterprise Institute have just published a study entitled "A New Measure of Consumption Inequality." The foreword, by Mathur, offers the following overview of the piece:
"In this study, Kevin A. Hassett and I set out to refute the common claim that inequality has grown to the extent suggested in [Thomas] Piketty and [Emmanuel] Saez’s [recent] work [deriving dire conclusions from the fact that U.S. income equality has so vastly grown in recent years and decades.]
"Economists have widely acknowledged that consumption is a better measure of economic welfare than income. In general, individuals are better able to smooth consumption rather than income over their lifetimes, making consumption a more informative indicator in the study of inequality. Unlike income, consumption remains relatively steady throughout life since individuals borrow during years with low income and save in high-income years. Using consumption as the relevant measure of inequality, most studies conclude that, contrary to popular belief, inequality has remained fairly steady over the past thirty years. Our study retains the focus on consumption inequality and arrives at a similar conclusion .....
"Overall, our analysis reveals a trend toward narrowing of the consumption gap between low-income and other households, contrary to popular perception of the issue. Public discourse can often become skewed in one direction, therefore it is especially valuable to explore new methodologies in evaluating important issues such as the inequality gap, Our conclusion in this study debunks the claim of widening inequality."
A couple of preliminary points in response here. First, Hassett and Mathur don't contradict (nor do they claim to) the Piketty-Saez finding of dramatic increases in income (mainly earnings) inequality. Second, their empirical finding on consumption inequality is indeed both credible and consistent with other studies. The question is what to make of it all. Given what we mean by inequality, and the reasons we might be concerned about it, how should we evaluate the importance of the Hassett-Mathur finding, relative to the Piketty-Saez finding?
On this matter, with all due respect, I must say that I find Mathur's closing claim that the study "debunks the claim of widening inequality" to be extremely wide of the mark - indeed, so much so that it inclines one (not 100% fairly) towards classifying the piece as towards the frivolous advocacy end, rather than the serious scholarship end, of work that AEI publishes. This is unfortunate, because the study's findings are relevant, and they do help to fill out the overall picture concerning inequality that interested analysts and policymakers should keep in mind. I'd certainly think things were even worse if consumption inequality had increased as much over the last 20-odd years as income inequality. But Mathur's argument that consumption is the right standard here begs credulity - even for one, like myself, who has sympathy for a progressive consumption tax, based on arguments that initially seem similar to what she is saying, but in fact are quite different.
OK, let's take a simple comparison, between James the CEO and Joe the factory worker. Suppose that in 1982 their income ratio was 20 to 1 and their consumption ratio was 10 to 1. Then we look at their successors in 2012 (James, Jr. and Joe, Jr.) and find that the income ratio is 200 to 1 but the consumption ratio is still 10 to 1. Does this "debunk[] the claim of widening inequality?"
Mathur's claim that the answer is yes appears to rest on assuming lifetime consumption smoothing. In other words, she is apparently positing that their relative lifetime positions have not changed! To make this really simple, suppose everyone knew his or her lifetime earnings (in present value) up front and engaged in perfect smoothing, i.e., spending the same amount each year. Also, of course, assume zero bequests. (The paper never mentions either bequests or inter vivos inter-generational wealth transfers.) Then the fact that the consumption ratio was still 10 to 1 would show that we were somehow being duped by the rising one-year income gap into thinking that relative lifetime earnings had changed - when in fact they hadn't. (Perhaps, for example, James' earnings had simply become more jammed into his peak earning years.)
As applied to actual people, this cannot possibly be true. Surely the ratio of lifetime earnings, as between CEOs and people on the shopfloor, has sharply diverged since 1982, even if not quite as much as one might initially think from the Piketty-Saez annual data. You simply can't make the numbers work in a believable fashion otherwise. So where is it coming out? Presumably in deferred consumption that departs from the perfect smoothing model, and above all through transfers to one's heirs. Do we really believe that, say, Mark Zuckerberg is smoothing perfectly and that his current year consumption is likely to represent the same percentage of his expected lifetime income as in the case of a factory worker? Leaving out the bequest issue is really not defensible - although I recognize that it raises further issues that it would be hard to discuss adequately in a short and mainly empirical paper.
Another way vastly unequal annual incomes may play out, other than through comparably increased annual consumption, is in terms of retirement and leisure. CEOs can retire earlier than factory workers, if that's what they want to do. That's an aspect of true consumption and welfare that the studies don't capture. (Although in fact high earners often like their work enough to be far less eager to retire, even when this is affordable, than are the people with drudgery jobs.)
Suppose that, in 1982, Joe the factory worker was spending 95% of his income on current consumption, while James was spending just under 50% (consistently with the posited relative ratios). In 2012, we find that Joe, Jr. is likewise consuming 95%, while for James, Jr. it's just under 5%. Has the claim of rising inequality been "debunked"? Do we really think that the ratio between James, Jr.'s lifetime earnings and those of Joe, Jr., is likely to be the same as that for James versus Joe? And can we actually believe that James. Jr. merely has a steeper peak earnings spike than James, rather than hugely increased relative lifetime earnings? That does not strike me as empirically credible.
OK, let's turn to the income versus consumption tax issues that are in the neighborhood, though not expressly invoked by Mathur. As I discuss in my 2007 article, Beyond the Pro-Consumption Tax Consensus, the actual extent of lifetime consumption smoothing is very important to this debate. With perfect lifetime smoothing (and holding the bequest issue to one side, as best resolved via the decision whether or not to have an inheritance or estate tax), the case for preferring consumption taxation to income taxation becomes compelling indeed. But a vulgar version of the lifetime and smoothing-based argument, which mirrors Mathur's statement in the foreword, would clearly be wrong.
Let's look at James, Jr. and Joe, Jr. again, with their 10 to 1 consumption ratio and their 200 to 1 earnings ratio. Suppose, purely for arithmetical convenience, that we would have a flat-rate tax whether it was levied on income or on consumption. Thus, the ratio of their current year tax liabilities would be 10 to 1 under a consumption tax and 200 to 1 under an income tax. Does favoring a consumption tax imply that one really thinks 10 to 1 is the right ratio to keep in mind when comparing these two individuals' relative wellbeing?
The answer is a flat-out No. Consider here two points about the consumption tax. First, if James, Jr. did indeed spend his entire salary this year, the ratio of their curent year tax liabilities would be 200 to 1, not merely 10 to 1. (Again for arithmetical convenience, I ignore the point that Joe, Jr. is only spending 95%, not 100%.) Second, if there's one thing we know about a well-designed consumption tax, it's that it is neutral as between current and future consumption. Thus, James, Jr. lowers his current year consumption tax bill by consuming under 5% - but he does not reduce the present value of his (and his heirs') long-term expected tax liability with respect to these earnings. Thus, in present value-equivalent terms, under the consumption tax he actually is paying 200 times as much tax as Joe, Jr. - not just 10 times as much.
In short, well-thought-out support for consumption taxation rests NOT on the point that current year consumption is the best measure of relative wellbeing - how could it, when extra savings can pay for future consumption? - but rather on the notion that the seeming current-year under-taxation of the bigger saver is actually corrected (at least in theory) over the long run.
It's a well-known fact, by the way, that higher-income people generally spend smaller percentages of their current year income on consumption than do lower-income people. And this reflects departures from uniform smoothing, not just different relationships between peak and average earnings. Ignoring this whole point, which pretty much guarantees that annual consumption differences will lag behind rising annual earnings differences, is not, in this setting, intellectual fair play.
It's a shame that the Hassett-Mathur piece, which provides information that is relevant to the inequality debate, is being oversold to support a clearly false proposition, which is that nothing relevant has changed. But it's still worth reading, and the issue of what significance to ascribe to relatively unchanged consumption ratios does indeed merit further thought.
"In this study, Kevin A. Hassett and I set out to refute the common claim that inequality has grown to the extent suggested in [Thomas] Piketty and [Emmanuel] Saez’s [recent] work [deriving dire conclusions from the fact that U.S. income equality has so vastly grown in recent years and decades.]
"Economists have widely acknowledged that consumption is a better measure of economic welfare than income. In general, individuals are better able to smooth consumption rather than income over their lifetimes, making consumption a more informative indicator in the study of inequality. Unlike income, consumption remains relatively steady throughout life since individuals borrow during years with low income and save in high-income years. Using consumption as the relevant measure of inequality, most studies conclude that, contrary to popular belief, inequality has remained fairly steady over the past thirty years. Our study retains the focus on consumption inequality and arrives at a similar conclusion .....
"Overall, our analysis reveals a trend toward narrowing of the consumption gap between low-income and other households, contrary to popular perception of the issue. Public discourse can often become skewed in one direction, therefore it is especially valuable to explore new methodologies in evaluating important issues such as the inequality gap, Our conclusion in this study debunks the claim of widening inequality."
A couple of preliminary points in response here. First, Hassett and Mathur don't contradict (nor do they claim to) the Piketty-Saez finding of dramatic increases in income (mainly earnings) inequality. Second, their empirical finding on consumption inequality is indeed both credible and consistent with other studies. The question is what to make of it all. Given what we mean by inequality, and the reasons we might be concerned about it, how should we evaluate the importance of the Hassett-Mathur finding, relative to the Piketty-Saez finding?
On this matter, with all due respect, I must say that I find Mathur's closing claim that the study "debunks the claim of widening inequality" to be extremely wide of the mark - indeed, so much so that it inclines one (not 100% fairly) towards classifying the piece as towards the frivolous advocacy end, rather than the serious scholarship end, of work that AEI publishes. This is unfortunate, because the study's findings are relevant, and they do help to fill out the overall picture concerning inequality that interested analysts and policymakers should keep in mind. I'd certainly think things were even worse if consumption inequality had increased as much over the last 20-odd years as income inequality. But Mathur's argument that consumption is the right standard here begs credulity - even for one, like myself, who has sympathy for a progressive consumption tax, based on arguments that initially seem similar to what she is saying, but in fact are quite different.
OK, let's take a simple comparison, between James the CEO and Joe the factory worker. Suppose that in 1982 their income ratio was 20 to 1 and their consumption ratio was 10 to 1. Then we look at their successors in 2012 (James, Jr. and Joe, Jr.) and find that the income ratio is 200 to 1 but the consumption ratio is still 10 to 1. Does this "debunk[] the claim of widening inequality?"
Mathur's claim that the answer is yes appears to rest on assuming lifetime consumption smoothing. In other words, she is apparently positing that their relative lifetime positions have not changed! To make this really simple, suppose everyone knew his or her lifetime earnings (in present value) up front and engaged in perfect smoothing, i.e., spending the same amount each year. Also, of course, assume zero bequests. (The paper never mentions either bequests or inter vivos inter-generational wealth transfers.) Then the fact that the consumption ratio was still 10 to 1 would show that we were somehow being duped by the rising one-year income gap into thinking that relative lifetime earnings had changed - when in fact they hadn't. (Perhaps, for example, James' earnings had simply become more jammed into his peak earning years.)
As applied to actual people, this cannot possibly be true. Surely the ratio of lifetime earnings, as between CEOs and people on the shopfloor, has sharply diverged since 1982, even if not quite as much as one might initially think from the Piketty-Saez annual data. You simply can't make the numbers work in a believable fashion otherwise. So where is it coming out? Presumably in deferred consumption that departs from the perfect smoothing model, and above all through transfers to one's heirs. Do we really believe that, say, Mark Zuckerberg is smoothing perfectly and that his current year consumption is likely to represent the same percentage of his expected lifetime income as in the case of a factory worker? Leaving out the bequest issue is really not defensible - although I recognize that it raises further issues that it would be hard to discuss adequately in a short and mainly empirical paper.
Another way vastly unequal annual incomes may play out, other than through comparably increased annual consumption, is in terms of retirement and leisure. CEOs can retire earlier than factory workers, if that's what they want to do. That's an aspect of true consumption and welfare that the studies don't capture. (Although in fact high earners often like their work enough to be far less eager to retire, even when this is affordable, than are the people with drudgery jobs.)
Suppose that, in 1982, Joe the factory worker was spending 95% of his income on current consumption, while James was spending just under 50% (consistently with the posited relative ratios). In 2012, we find that Joe, Jr. is likewise consuming 95%, while for James, Jr. it's just under 5%. Has the claim of rising inequality been "debunked"? Do we really think that the ratio between James, Jr.'s lifetime earnings and those of Joe, Jr., is likely to be the same as that for James versus Joe? And can we actually believe that James. Jr. merely has a steeper peak earnings spike than James, rather than hugely increased relative lifetime earnings? That does not strike me as empirically credible.
OK, let's turn to the income versus consumption tax issues that are in the neighborhood, though not expressly invoked by Mathur. As I discuss in my 2007 article, Beyond the Pro-Consumption Tax Consensus, the actual extent of lifetime consumption smoothing is very important to this debate. With perfect lifetime smoothing (and holding the bequest issue to one side, as best resolved via the decision whether or not to have an inheritance or estate tax), the case for preferring consumption taxation to income taxation becomes compelling indeed. But a vulgar version of the lifetime and smoothing-based argument, which mirrors Mathur's statement in the foreword, would clearly be wrong.
Let's look at James, Jr. and Joe, Jr. again, with their 10 to 1 consumption ratio and their 200 to 1 earnings ratio. Suppose, purely for arithmetical convenience, that we would have a flat-rate tax whether it was levied on income or on consumption. Thus, the ratio of their current year tax liabilities would be 10 to 1 under a consumption tax and 200 to 1 under an income tax. Does favoring a consumption tax imply that one really thinks 10 to 1 is the right ratio to keep in mind when comparing these two individuals' relative wellbeing?
The answer is a flat-out No. Consider here two points about the consumption tax. First, if James, Jr. did indeed spend his entire salary this year, the ratio of their curent year tax liabilities would be 200 to 1, not merely 10 to 1. (Again for arithmetical convenience, I ignore the point that Joe, Jr. is only spending 95%, not 100%.) Second, if there's one thing we know about a well-designed consumption tax, it's that it is neutral as between current and future consumption. Thus, James, Jr. lowers his current year consumption tax bill by consuming under 5% - but he does not reduce the present value of his (and his heirs') long-term expected tax liability with respect to these earnings. Thus, in present value-equivalent terms, under the consumption tax he actually is paying 200 times as much tax as Joe, Jr. - not just 10 times as much.
In short, well-thought-out support for consumption taxation rests NOT on the point that current year consumption is the best measure of relative wellbeing - how could it, when extra savings can pay for future consumption? - but rather on the notion that the seeming current-year under-taxation of the bigger saver is actually corrected (at least in theory) over the long run.
It's a well-known fact, by the way, that higher-income people generally spend smaller percentages of their current year income on consumption than do lower-income people. And this reflects departures from uniform smoothing, not just different relationships between peak and average earnings. Ignoring this whole point, which pretty much guarantees that annual consumption differences will lag behind rising annual earnings differences, is not, in this setting, intellectual fair play.
It's a shame that the Hassett-Mathur piece, which provides information that is relevant to the inequality debate, is being oversold to support a clearly false proposition, which is that nothing relevant has changed. But it's still worth reading, and the issue of what significance to ascribe to relatively unchanged consumption ratios does indeed merit further thought.
Friday, June 22, 2012
Tribute to Bernard Wolfman
The Harvard Law Review has just published a tribute to the late Bernard Wolfman, available here. I am one of seven contributors, and you can find my piece at the back end (pages 13-16 of the download, at 125 Harv. L. Rev. 1899-1902).
Rather than be generic, I emphasized the ethical core of Bernie's best-known writings, and its continuing relevance today.
Rather than be generic, I emphasized the ethical core of Bernie's best-known writings, and its continuing relevance today.
Constitutional law and the Supreme Court's healthcare decision
Courtesy of Ezra Klein, here is Yale Law School constitutional law professor Akhil Amar on the widespread expectation that the Supreme Court will vote by 5-4 to find the healthcare mandate unconstitutional:
“I’ve only mispredicted one big Supreme Court case in the last 20 years. That was Bush v. Gore. And I was able to internalize that by saying they only had a few minutes to think about it and they leapt to the wrong conclusion. If they decide this by 5-4, then yes, it’s disheartening to me, because my life was a fraud. Here I was, in my silly little office, thinking law mattered, and it really didn’t. What mattered was politics, money, party, and party loyalty.”
Constitutional law is an odd subject. There is only so much there there. Suppose I say that X is better tax policy than Y. I base this claim on a clear framework, and once one accepts this framework - which admittedly is not a forced move unless you go full Kaplow and Shavell on the case for utilitarianism - my claim can in principle be rigorously evaluated under this framework. The assessment becomes in large part empirical, even if the relevant facts are not entirely knowable, and although it's true that "utility" is not quite a single, even in principle measurable, thing.
Constitutional law doesn't have an underlying framework in the same sense. It has some policy content (including in a roughly rule-utilitarian kind of a sense, i.e., how would it be best in the long run to interpret a document such as the Constitution), some linguistic interpretative content, with history and precedent mattering in some way that one can't quite specify. And it has always been true that constitutional scholars on both the left and the right tend to find that the U.S. Constitution, as properly interpreted, has this mysterious tendency to come out the way they like more often than not, on grounds not confined to their policy preferences.
As Klein headlines his piece, "of course the Supreme Court is political" - although his point is not just that con law is inevitably political, but that the Court's being affected by rising partisanship throughout our political system and society is only to be expected.
But constitutional interpretation used to be a kind of formal game that had rules and constraints, limiting (if you operated in at least a modicum of good faith) the extent to which you could always come out however you liked. There was in effect an implicit pact - I on one side will play the game in at least moderately good faith although this constrains my ability to get the outcomes I like, because I believe that you on the other side are doing the same thing. Actual or implied tit-for-tat can keep this a stable state of affairs, at least under the right circumstances.
It's that element of good faith that we are starting to lose. I have the impression that the 5 Republican votes on the Supreme Court do not see their role any differently than say, Senator Mitch McConnell sees his. To give another illustration, if the 2012 presidential election ends up in the Supreme Court just like in 2000, only with different issues - admittedly an extreme longshot - I believe there is a 100% chance that the 5 Republicans will anoint Romney. Precisely reverse the legal issues so that Obama, not Romney, is raising exactly the same arguments, and again it would be 5 Republican votes for Romney. I believe this degree of crass and dishonest partisan result orientation is something relatively new (or at least unusual) in U.S. constitutional history, enhanced by the intoxicating experience that the 5 Republicans who were on the court in 2000 must have felt when they got away with Bush v. Gore and saw how easy it was.
This is a dangerous state of affairs, endangering the U.S. legal and political systems and the rule of law. I agree with Amar that (as paraphrased by Klein) "a 5-4 party-line vote against the mandate would be shattering to the court’s reputation for being above politics." The arguments against it are so ludicrous and paper-thin (e.g., claiming that mandatory health insurance is an end product, not a way of financing healthcare) that only the vast human capacity for self-deception prevents those who argue against the mandate's constitutionality from being consciously in bad faith. And even if the general public doesn't see how corrupt a decision to strike down the mandate would be - given existing precedent and the accepted constitutionality of Social Security and Medicare - elite opinion (on the right as well as the left) clearly does.
The Court's reputation depends, to a large extent, on elite views that last over time, even if these views don't show up in the overnight polling of the general public. But I'm not convinced that the members of the pack of five actually care about that. They just want their side to win today. So I am expecting that they will strike down the mandate and perhaps even the entire Act, even though if Romney had been elected in 2008 and passed exactly the same legislation, it wouldn't even have been challenged. Let's hope that my pessimism is misplaced.
“I’ve only mispredicted one big Supreme Court case in the last 20 years. That was Bush v. Gore. And I was able to internalize that by saying they only had a few minutes to think about it and they leapt to the wrong conclusion. If they decide this by 5-4, then yes, it’s disheartening to me, because my life was a fraud. Here I was, in my silly little office, thinking law mattered, and it really didn’t. What mattered was politics, money, party, and party loyalty.”
Constitutional law is an odd subject. There is only so much there there. Suppose I say that X is better tax policy than Y. I base this claim on a clear framework, and once one accepts this framework - which admittedly is not a forced move unless you go full Kaplow and Shavell on the case for utilitarianism - my claim can in principle be rigorously evaluated under this framework. The assessment becomes in large part empirical, even if the relevant facts are not entirely knowable, and although it's true that "utility" is not quite a single, even in principle measurable, thing.
Constitutional law doesn't have an underlying framework in the same sense. It has some policy content (including in a roughly rule-utilitarian kind of a sense, i.e., how would it be best in the long run to interpret a document such as the Constitution), some linguistic interpretative content, with history and precedent mattering in some way that one can't quite specify. And it has always been true that constitutional scholars on both the left and the right tend to find that the U.S. Constitution, as properly interpreted, has this mysterious tendency to come out the way they like more often than not, on grounds not confined to their policy preferences.
As Klein headlines his piece, "of course the Supreme Court is political" - although his point is not just that con law is inevitably political, but that the Court's being affected by rising partisanship throughout our political system and society is only to be expected.
But constitutional interpretation used to be a kind of formal game that had rules and constraints, limiting (if you operated in at least a modicum of good faith) the extent to which you could always come out however you liked. There was in effect an implicit pact - I on one side will play the game in at least moderately good faith although this constrains my ability to get the outcomes I like, because I believe that you on the other side are doing the same thing. Actual or implied tit-for-tat can keep this a stable state of affairs, at least under the right circumstances.
It's that element of good faith that we are starting to lose. I have the impression that the 5 Republican votes on the Supreme Court do not see their role any differently than say, Senator Mitch McConnell sees his. To give another illustration, if the 2012 presidential election ends up in the Supreme Court just like in 2000, only with different issues - admittedly an extreme longshot - I believe there is a 100% chance that the 5 Republicans will anoint Romney. Precisely reverse the legal issues so that Obama, not Romney, is raising exactly the same arguments, and again it would be 5 Republican votes for Romney. I believe this degree of crass and dishonest partisan result orientation is something relatively new (or at least unusual) in U.S. constitutional history, enhanced by the intoxicating experience that the 5 Republicans who were on the court in 2000 must have felt when they got away with Bush v. Gore and saw how easy it was.
This is a dangerous state of affairs, endangering the U.S. legal and political systems and the rule of law. I agree with Amar that (as paraphrased by Klein) "a 5-4 party-line vote against the mandate would be shattering to the court’s reputation for being above politics." The arguments against it are so ludicrous and paper-thin (e.g., claiming that mandatory health insurance is an end product, not a way of financing healthcare) that only the vast human capacity for self-deception prevents those who argue against the mandate's constitutionality from being consciously in bad faith. And even if the general public doesn't see how corrupt a decision to strike down the mandate would be - given existing precedent and the accepted constitutionality of Social Security and Medicare - elite opinion (on the right as well as the left) clearly does.
The Court's reputation depends, to a large extent, on elite views that last over time, even if these views don't show up in the overnight polling of the general public. But I'm not convinced that the members of the pack of five actually care about that. They just want their side to win today. So I am expecting that they will strike down the mandate and perhaps even the entire Act, even though if Romney had been elected in 2008 and passed exactly the same legislation, it wouldn't even have been challenged. Let's hope that my pessimism is misplaced.
Thursday, June 21, 2012
New Federal Income Taxation casebook edition
The 16th edition of Bankman, Shaviro, and Stark, Federal Income Taxation (the second-leading - but we try harder - casebook for introductory income tax classes in law schools) is now ready for prime time. I just got a copy, and they should be generally available momentarily.
We'll have greatly expanded Internet features this time around, both for adopting faculty and students who use the casebook. But in addition, despite adding new material to remain current, we have struck a vigorous blow against creeping length, the great malady that multiple-edition casebooks tend to have. The 15th edition was 819 pages, but the 16th edition checks in at an at least comparatively svelte 730 pages, reflecting a more than 10 percent reduction.
We'll have greatly expanded Internet features this time around, both for adopting faculty and students who use the casebook. But in addition, despite adding new material to remain current, we have struck a vigorous blow against creeping length, the great malady that multiple-edition casebooks tend to have. The 15th edition was 819 pages, but the 16th edition checks in at an at least comparatively svelte 730 pages, reflecting a more than 10 percent reduction.
Slides from my talk at a recent conference in Tel Aviv
I'm back from this past Monday's 6th Annual Columbia-Ono Conference in Tel Aviv, where I presented a talk at a conference entitled "Corporate Governance, Taxes, and Social Justice."
A PDF version of the PowerPoint slides for my talk, which was entitled "Taxing High-Income Individuals: Should We Aim for the Peak of the Laffer Curve?," is available here.
This is not, or at least not yet, even the skeleton of a paper. But it draws a bit on the second half of my 2011 Tax Notes article, 1986-Style Tax Reform: A Good Idea Whose Time Has Passed. I am perhaps more likely to use a couple of the ideas in the slides in some broader project that I don't yet have in mind, than actually to turn the slides into an article. But before even considering any such thing I have an international tax book in progress that I need to complete, and at least 2 planned articles on very different subjects from this, that are going to take me well into the fall even under an optimistic view.
The conference was fun and interesting. In the morning, in response to a presentation by Lucien Bebchuk concerning new Israeli legislation (on which he advised) that addresses corporate pyramid structures, I noted what I consider the back-to-the-future quality of both corporate governance and tax policy scholarship: namely, that in some ways we have circled back to conclusions, if not modes of analysis, that were mainstream before the full rise of law and economics, then became badly discredited in the high-Chicago era, but more recently have come back in revised form. Just as events of the last 12-plus years, along with the work of scholars such as Bebchuk, have rebutted the view that markets for corporate control work so well that there couldn't possibly be serious governance problems, so "optimal income tax" thinking has importantly changed since the era when low individual rates that were also quite flat were high academic orthodoxy.
Hopefully, the political world will eventually catch on with regard to individual income tax rates - as it has to a degree in the governance realm, albeit subject to fierce resistance. But progress, if any, is fitful and slow at best.
A PDF version of the PowerPoint slides for my talk, which was entitled "Taxing High-Income Individuals: Should We Aim for the Peak of the Laffer Curve?," is available here.
This is not, or at least not yet, even the skeleton of a paper. But it draws a bit on the second half of my 2011 Tax Notes article, 1986-Style Tax Reform: A Good Idea Whose Time Has Passed. I am perhaps more likely to use a couple of the ideas in the slides in some broader project that I don't yet have in mind, than actually to turn the slides into an article. But before even considering any such thing I have an international tax book in progress that I need to complete, and at least 2 planned articles on very different subjects from this, that are going to take me well into the fall even under an optimistic view.
The conference was fun and interesting. In the morning, in response to a presentation by Lucien Bebchuk concerning new Israeli legislation (on which he advised) that addresses corporate pyramid structures, I noted what I consider the back-to-the-future quality of both corporate governance and tax policy scholarship: namely, that in some ways we have circled back to conclusions, if not modes of analysis, that were mainstream before the full rise of law and economics, then became badly discredited in the high-Chicago era, but more recently have come back in revised form. Just as events of the last 12-plus years, along with the work of scholars such as Bebchuk, have rebutted the view that markets for corporate control work so well that there couldn't possibly be serious governance problems, so "optimal income tax" thinking has importantly changed since the era when low individual rates that were also quite flat were high academic orthodoxy.
Hopefully, the political world will eventually catch on with regard to individual income tax rates - as it has to a degree in the governance realm, albeit subject to fierce resistance. But progress, if any, is fitful and slow at best.
Tuesday, June 05, 2012
Upcoming conference appearance
On Monday, June 18, I will be participating in the 6th Annual Columbia-Ono Conference, which is being held at the Ono Academic College in Tel Aviv, Israel. A link for the conference is available here. The morning sessions will be discussing corporate governance, while the afternoon sessions will be discussing taxes and social justice. Though I'm interested in corporate governance, readers may not be surprised to learn that I am speaking in the afternoon.
I won't be presenting a formal paper, but my twenty-minute talk (to be followed by ten minutes of discussion) has the working title "Taxing High-Income Individuals: Should We Aim for the Peak of the Laffer Curve?" I will argue that there are several reasons for answering this question "yes," which I certainly would not have said ten years ago.
The other presenters in the PM session are David Schizer, Reuven Avi-Yonah, Sagit Leviner, Yoram Margalioth, and Yariv Brauner. The papers by Schizer and, I believe, Avi-Yonah (if it's the one that's co-authored by Ohrn) are available on SSRN. I must confess I find myself less than wholly sympathetic with either, although both of the authors are good friends.
Schizer argues that we should refrain from directly addressing the horrendous damage that is being inflicted by the ongoing global economic slump, given the "uncertainties and challenges with traditional Keynesian stimulus," and instead seek to boost employment and growth by ... wait for it ... cutting the U.S. corporate tax rate! While I happen to agree that we should do this under the right overall circumstances, it certainly makes life easier for authors if the answer doesn't have to depend on the question. (Note also that another of the big motivating concerns that the paper mentions up front is the budget deficit, which a stand-alone corporate rate cut would make worse. The paper notes this problem and suggests corporate base-broadening, but is also open to 'mak[ing] up the revenue in other [unspecified] ways.")
To my mind, the fact that macroeconomists disagree does not absolve one of the responsibility to look a bit more deeply into the ongoing under-employment crisis, the seriousness of which really needs to be appreciated. The paper distresses me because I find its analysis facile and convenient. People who believe that academics in the economics and business fields (including related tax law) are overly in the tank to Wall Street will view this paper as confirmatory of their hypothesis (indeed, I know of several who do so view it).
The Avi-Yonah paper is on the other side politically, likely to be congenial to Democrats rather than Romney supporters, as it opposes recent arguments for moving at least somewhat in the direction of consumption taxation. [UPDATE: I previously had a critique of the paper in this blog post, but it's been brought to my attention that I was commenting on a draft that wasn't supposed to be public, as only the abstract has been posted on SSRN. My apologies for this error.]
I won't be presenting a formal paper, but my twenty-minute talk (to be followed by ten minutes of discussion) has the working title "Taxing High-Income Individuals: Should We Aim for the Peak of the Laffer Curve?" I will argue that there are several reasons for answering this question "yes," which I certainly would not have said ten years ago.
The other presenters in the PM session are David Schizer, Reuven Avi-Yonah, Sagit Leviner, Yoram Margalioth, and Yariv Brauner. The papers by Schizer and, I believe, Avi-Yonah (if it's the one that's co-authored by Ohrn) are available on SSRN. I must confess I find myself less than wholly sympathetic with either, although both of the authors are good friends.
Schizer argues that we should refrain from directly addressing the horrendous damage that is being inflicted by the ongoing global economic slump, given the "uncertainties and challenges with traditional Keynesian stimulus," and instead seek to boost employment and growth by ... wait for it ... cutting the U.S. corporate tax rate! While I happen to agree that we should do this under the right overall circumstances, it certainly makes life easier for authors if the answer doesn't have to depend on the question. (Note also that another of the big motivating concerns that the paper mentions up front is the budget deficit, which a stand-alone corporate rate cut would make worse. The paper notes this problem and suggests corporate base-broadening, but is also open to 'mak[ing] up the revenue in other [unspecified] ways.")
To my mind, the fact that macroeconomists disagree does not absolve one of the responsibility to look a bit more deeply into the ongoing under-employment crisis, the seriousness of which really needs to be appreciated. The paper distresses me because I find its analysis facile and convenient. People who believe that academics in the economics and business fields (including related tax law) are overly in the tank to Wall Street will view this paper as confirmatory of their hypothesis (indeed, I know of several who do so view it).
The Avi-Yonah paper is on the other side politically, likely to be congenial to Democrats rather than Romney supporters, as it opposes recent arguments for moving at least somewhat in the direction of consumption taxation. [UPDATE: I previously had a critique of the paper in this blog post, but it's been brought to my attention that I was commenting on a draft that wasn't supposed to be public, as only the abstract has been posted on SSRN. My apologies for this error.]
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