Obama's next abject surrender is only months away, if that. When the trigger in the plan comes due, he will agree with the Republicans that there can't be big defense cuts, and they will get their way on the rest once again. Meanwhile, there will presumably be a government shutdown surrender on his part before the end of the year.
Even if he wins the 2012 election, it seems obvious that he will capitulate again on the Bush tax cuts (and of course he ostensibly wants to extend all but the top bracket cuts, although that too I take simply to be timorous advance surrender dating all the way back to 2008).
Two points on which Krugman is clearly right: it will hurt the economy, which now will be viewed as entirely Obama's fault; and rewarding blackmail like this is exceptionally dangerous. Sometimes you need to bite the bullet or it will only get worse (even leaving aside the clear alternatives to surrender or default that he ruled out from the start). That would take courage, however, a quality that (along with foresight) Obama appears entirely to lack.
Sunday, July 31, 2011
Thursday, July 28, 2011
This is why we're risking macroeconomic disaster
Commentators are increasingly recognizing that the Reid and Boehner plans are similar, and that both would be significantly recessionary. David Frum recognizes why the difference is apparently worth fighting over:
"The Boehner plan promises to identify big cuts in discretionary spending over the next nine years. But wait a minute. Discretionary spending is appropriated spending. Congress can cut appropriations through the budget process anytime it wants. Why not just … do it? How is it a big win to declare a commitment to do it over a decade to come?
"The answer to that last is that the ordinary budget process requires some cooperation with the Senate and the president. And it was that cooperation that stuck in House Republicans’ craw. The big benefit of the Boehner plan is that it is seen to be imposed – and the current GOP mindset is that it’s better to gain less by show of force than to get more by negotiation."
This is what it comes down to. The Republicans' core goal has very little to do with policy, but rather is to impose a humiliating surrender on Obama and the Democrats. Meanwhile, the Democrats are more than willing to surrender in policy terms, even though the American public (unlike the Democrats themselves) takes the Democrats' side substantively (e.g., with regard to the mix between tax and spending changes). But the Democrats don't want to accept crushing humiliation in the form (as opposed to the content) that the final agreement takes.
Over this dispute - whether the Republicans should be allowed to openly humiliate the Democrats - we face the threat of an economic disaster that could be ten times worse than what happened in 2008.
"The Boehner plan promises to identify big cuts in discretionary spending over the next nine years. But wait a minute. Discretionary spending is appropriated spending. Congress can cut appropriations through the budget process anytime it wants. Why not just … do it? How is it a big win to declare a commitment to do it over a decade to come?
"The answer to that last is that the ordinary budget process requires some cooperation with the Senate and the president. And it was that cooperation that stuck in House Republicans’ craw. The big benefit of the Boehner plan is that it is seen to be imposed – and the current GOP mindset is that it’s better to gain less by show of force than to get more by negotiation."
This is what it comes down to. The Republicans' core goal has very little to do with policy, but rather is to impose a humiliating surrender on Obama and the Democrats. Meanwhile, the Democrats are more than willing to surrender in policy terms, even though the American public (unlike the Democrats themselves) takes the Democrats' side substantively (e.g., with regard to the mix between tax and spending changes). But the Democrats don't want to accept crushing humiliation in the form (as opposed to the content) that the final agreement takes.
Over this dispute - whether the Republicans should be allowed to openly humiliate the Democrats - we face the threat of an economic disaster that could be ten times worse than what happened in 2008.
Tuesday, July 26, 2011
Shorter John Boehner
Lindbergh guilty of the child's death because he dragged his feet paying the ransom.
Sunday, July 24, 2011
Sleeping in high places
Ursula is owling again, as we call it, and also having a nap. The beauty sleep strategy appears to be working.
Wednesday, July 20, 2011
I am not thrilled by the "Gang of Six" tax plan
The Gang of Six plan is unlikely to go anywhere anyway. But, while I realize that political constraints mean one must lower one's standards pretty severely in reaching a judgment, and while I recognize that there may be some good people involved with this who are trying to be constructive, I am unimpressed.
Herewith is the tax portion of the Gang of Six plan in its current form, with comments from me in caps.
"Simplify the tax code by reducing the number of tax expenditures and reducing individual tax rates, by establishing three tax brackets with rates of 8–12 percent, 14–22 percent, and 23–29 percent." I SEE ABSOLUTELY NO REASON FOR LOWERING MARGINAL INCOME TAX RATES WHEN WE HAVE A HUGE FISCAL GAP AND RISING HIGH END INCOME INEQUALITY. SEE MY DISCUSSION HERE OF THE 1986-STYLE TAX REFORM MODEL'S OBSOLESENCE. AND NEEDLESS TO SAY, NO BRAVE WORDS HERE ABOUT WHICH TAX EXPENDITURES TO CURTAIL.
"Permanently repeal the $1.7 trillion Alternative Minimum Tax." ONCE AGAIN, HOW BRAVE THEY'RE BEING - TAX CUTS ARE TRUMPETED, TAX INCREASES DISCUSSED ONLY IN THE MOST GENERAL TERMS.
"Tax reform must be projected to stimulate economic growth, leading to increased revenue." MEANINGLESS IN CONTEXT, AND LIKELY TO BE RELATIVELY TRIVIAL, UNLESS THEY ARE TALKING, AS I DON'T THINK THEY ARE, ABOUT SOMETHING LIKE SHIFTING TO A CONSUMPTION TAX. NOTE THAT REDUCED PROGRESSIVITY MIGHT TEND TO INCREASE ECONOMIC GROWTH, BUT THAT'S A TRADEOFF, NOT UNAMBIGUOUSLY GOOD. IT'S ALSO HARD TO EVALUATE THE GROWTH EFFECTS WITHOUT REFERENCE TO THE "SPENDING" SIDE OF THE PACKAGE.
"Tax reform must be estimated to provide $1 trillion in additional revenue to meet plan targets and generate an additional $133 billion by 2021, without raising the federal gas tax, to ensure improved solvency for the Highway Trust Fund." ONCE AGAIN, WHO NEEDS DETAILS?
"If CBO scored this plan, it would find net tax relief of approximately $1.5 trillion." INSIDE-THE-BELTWAY CODE FOR LOSING REVENUE RELATIVE TO SIMPLY LETTING THE BUSH TAX CUTS EXPIRE. BUT WHY EXACTLY WOULDN'T WE JUST LET THEM EXPIRE? (I REALIZE THAT THIS IMPLICATES THE OBAMA ADMINISTRATION, NOT JUST THE REPUBLICANS.)
"To the extent future Congresses find that the dynamic effects of tax reform result in additional revenue beyond these targets, this revenue must go to additional rate reductions and deficit reduction, not to new spending." WHY WOULDN'T THE TAX SYSTEM'S HYPOTHETICALLY ENHANCED EFFICIENCY SUGGEST USING IT MORE, NOT LESS? THIS IS JUST A VACUOUS SOP TO REPUBLICANS, WHO I DON'T THINK WILL BE IMPRESSED.
"Reform, not eliminate, tax expenditures for health, charitable giving, homeownership, and retirement, and retain support for low-income workers and families." ALREADY BACKING OFF THEIR SUPPOSED KEY REVENUE SOURCE. ONCE AGAIN, THE WAY THEY STRESS THE EXTENT TO WHICH THEY'RE NOT CUTTING, RATHER THAN WHAT THEY WOULD CUT, WHILE POLITICALLY UNDERSTANDABLE, HELPS SHOW THE HOPELESSNESS OF THE ENTERPRISE.
"Retain the Earned Income Tax Credit and the Child Tax Credit, or provide at least the same level of support for qualified beneficiaries." I AGREE, BUT ONCE AGAIN THIS IS A DESCRIPTION OF WHERE THE BUDGETARY IMPROVEMENT ISN'T COMING FROM.
"Maintain or improve the progressivity of the tax code." MIGHTN'T THIS SUGGEST NOT REDUCING THE TOP INDIVIDUAL RATES? IF RATES ARE FLATTER BUT TAXES STILL RISE JUST AS SHARPLY WITH INCOME AS BEFORE, THEN (A) EFFECTIVE MARGINAL TAX RATES HAVEN'T ACTUALLY DECLINED, AND (B) PERHAPS PHASE-OUTS ARE BEING USED TO CREATE HIDDEN MARGINAL TAX RATES.
"Establish a single corporate tax rate between 23 percent and 29 percent, raise at least as much revenue as the current corporate tax system, and move to a competitive territorial tax system." ONCE AGAIN, ALL THE DETAIL IS ABOUT TAX CUTS, FROM REDUCING THE CORPORATE RATE AND ELIMINATING THE TAX ON U.S. COMPANIES' FOREIGN SOURCE ACTIVE BUSINESS INCOME. WHAT ABOUT THE U.S. MULTINATIONALS' TRANSITION GAIN FROM SHIFTING TO EXEMPTION GIVEN THEIR $1.2 TRILLION OR MORE OF FOREIGN EARNINGS THAT ARE ALREADY OUT THERE? AND AGAIN, WHERE ARE THE TAX INCREASES? FOR EXAMPLE, DO THEY PLAN TO COMBINE MAKING CORPORATE DEPRECIATION LESS GENEROUS AS A PAY-FOR WITH BEING MORE PRO-GROWTH? AND WHAT ABOUT U.S. COMPANIES' ABILITY TO REPORT U.S. PROFITS AS ARISING IN TAX HAVENS? NO WORD OF ADDRESSING THAT.
To some extent, I think the disingenuous gobbledygook here (to put it unkindly) reflects a deliberate, well-meaning, and not entirely foolish strategy. E.g., the thought may be that if Republicans were to agree in principle to raising revenues relative to the baseline in which the Bush tax cuts are extended, one huge obstacle to the revenue-raising changes would have been eliminated. But I consider it naive to think that this would actually work. Once the rubber hit the road, the Republicans would go right back to their anti-tax absolutism. And even if they didn't, the taxpayers affected by particular revenue-raising proposals would continue to make the task impossible.
Hard though it might be - and I admittedly don't think that ANYTHING will work politically; our system is just too dysfunctional - I think you have to try to lead with a bit more of the bad news, rather than leaving it all for later. If today, against the urgent backdrop of potential August 2 default, you can't even say what you'd be willing to do to raise some people's taxes, what exactly is supposed to make it easier down the road?
Herewith is the tax portion of the Gang of Six plan in its current form, with comments from me in caps.
"Simplify the tax code by reducing the number of tax expenditures and reducing individual tax rates, by establishing three tax brackets with rates of 8–12 percent, 14–22 percent, and 23–29 percent." I SEE ABSOLUTELY NO REASON FOR LOWERING MARGINAL INCOME TAX RATES WHEN WE HAVE A HUGE FISCAL GAP AND RISING HIGH END INCOME INEQUALITY. SEE MY DISCUSSION HERE OF THE 1986-STYLE TAX REFORM MODEL'S OBSOLESENCE. AND NEEDLESS TO SAY, NO BRAVE WORDS HERE ABOUT WHICH TAX EXPENDITURES TO CURTAIL.
"Permanently repeal the $1.7 trillion Alternative Minimum Tax." ONCE AGAIN, HOW BRAVE THEY'RE BEING - TAX CUTS ARE TRUMPETED, TAX INCREASES DISCUSSED ONLY IN THE MOST GENERAL TERMS.
"Tax reform must be projected to stimulate economic growth, leading to increased revenue." MEANINGLESS IN CONTEXT, AND LIKELY TO BE RELATIVELY TRIVIAL, UNLESS THEY ARE TALKING, AS I DON'T THINK THEY ARE, ABOUT SOMETHING LIKE SHIFTING TO A CONSUMPTION TAX. NOTE THAT REDUCED PROGRESSIVITY MIGHT TEND TO INCREASE ECONOMIC GROWTH, BUT THAT'S A TRADEOFF, NOT UNAMBIGUOUSLY GOOD. IT'S ALSO HARD TO EVALUATE THE GROWTH EFFECTS WITHOUT REFERENCE TO THE "SPENDING" SIDE OF THE PACKAGE.
"Tax reform must be estimated to provide $1 trillion in additional revenue to meet plan targets and generate an additional $133 billion by 2021, without raising the federal gas tax, to ensure improved solvency for the Highway Trust Fund." ONCE AGAIN, WHO NEEDS DETAILS?
"If CBO scored this plan, it would find net tax relief of approximately $1.5 trillion." INSIDE-THE-BELTWAY CODE FOR LOSING REVENUE RELATIVE TO SIMPLY LETTING THE BUSH TAX CUTS EXPIRE. BUT WHY EXACTLY WOULDN'T WE JUST LET THEM EXPIRE? (I REALIZE THAT THIS IMPLICATES THE OBAMA ADMINISTRATION, NOT JUST THE REPUBLICANS.)
"To the extent future Congresses find that the dynamic effects of tax reform result in additional revenue beyond these targets, this revenue must go to additional rate reductions and deficit reduction, not to new spending." WHY WOULDN'T THE TAX SYSTEM'S HYPOTHETICALLY ENHANCED EFFICIENCY SUGGEST USING IT MORE, NOT LESS? THIS IS JUST A VACUOUS SOP TO REPUBLICANS, WHO I DON'T THINK WILL BE IMPRESSED.
"Reform, not eliminate, tax expenditures for health, charitable giving, homeownership, and retirement, and retain support for low-income workers and families." ALREADY BACKING OFF THEIR SUPPOSED KEY REVENUE SOURCE. ONCE AGAIN, THE WAY THEY STRESS THE EXTENT TO WHICH THEY'RE NOT CUTTING, RATHER THAN WHAT THEY WOULD CUT, WHILE POLITICALLY UNDERSTANDABLE, HELPS SHOW THE HOPELESSNESS OF THE ENTERPRISE.
"Retain the Earned Income Tax Credit and the Child Tax Credit, or provide at least the same level of support for qualified beneficiaries." I AGREE, BUT ONCE AGAIN THIS IS A DESCRIPTION OF WHERE THE BUDGETARY IMPROVEMENT ISN'T COMING FROM.
"Maintain or improve the progressivity of the tax code." MIGHTN'T THIS SUGGEST NOT REDUCING THE TOP INDIVIDUAL RATES? IF RATES ARE FLATTER BUT TAXES STILL RISE JUST AS SHARPLY WITH INCOME AS BEFORE, THEN (A) EFFECTIVE MARGINAL TAX RATES HAVEN'T ACTUALLY DECLINED, AND (B) PERHAPS PHASE-OUTS ARE BEING USED TO CREATE HIDDEN MARGINAL TAX RATES.
"Establish a single corporate tax rate between 23 percent and 29 percent, raise at least as much revenue as the current corporate tax system, and move to a competitive territorial tax system." ONCE AGAIN, ALL THE DETAIL IS ABOUT TAX CUTS, FROM REDUCING THE CORPORATE RATE AND ELIMINATING THE TAX ON U.S. COMPANIES' FOREIGN SOURCE ACTIVE BUSINESS INCOME. WHAT ABOUT THE U.S. MULTINATIONALS' TRANSITION GAIN FROM SHIFTING TO EXEMPTION GIVEN THEIR $1.2 TRILLION OR MORE OF FOREIGN EARNINGS THAT ARE ALREADY OUT THERE? AND AGAIN, WHERE ARE THE TAX INCREASES? FOR EXAMPLE, DO THEY PLAN TO COMBINE MAKING CORPORATE DEPRECIATION LESS GENEROUS AS A PAY-FOR WITH BEING MORE PRO-GROWTH? AND WHAT ABOUT U.S. COMPANIES' ABILITY TO REPORT U.S. PROFITS AS ARISING IN TAX HAVENS? NO WORD OF ADDRESSING THAT.
To some extent, I think the disingenuous gobbledygook here (to put it unkindly) reflects a deliberate, well-meaning, and not entirely foolish strategy. E.g., the thought may be that if Republicans were to agree in principle to raising revenues relative to the baseline in which the Bush tax cuts are extended, one huge obstacle to the revenue-raising changes would have been eliminated. But I consider it naive to think that this would actually work. Once the rubber hit the road, the Republicans would go right back to their anti-tax absolutism. And even if they didn't, the taxpayers affected by particular revenue-raising proposals would continue to make the task impossible.
Hard though it might be - and I admittedly don't think that ANYTHING will work politically; our system is just too dysfunctional - I think you have to try to lead with a bit more of the bad news, rather than leaving it all for later. If today, against the urgent backdrop of potential August 2 default, you can't even say what you'd be willing to do to raise some people's taxes, what exactly is supposed to make it easier down the road?
Tuesday, July 19, 2011
Short article on tax reform and the risk of a U.S. budget catastrophe
As is discussed here, the University of Louisville Law Review is holding a Symposium on Federal Deficit Reduction on October 22, 2011. I have agreed to speak at the event, and relatedly to submit a short paper for publication in the symposium issue. Short as in, strict 25 page limit.
I've completed a draft, entitled "Tax Reform Implications of the Risk of a U.S. Budget Catastrophe," taking the form of a VERY swift run through the questions of why we face a potential budget catastrophe, how it might affect one's thinking about income tax reform, and what new taxes might be introduced (e.g., a VAT, carbon tax, financial transactions tax, and/or financial activities tax).
I'll probably post it on SSRN on due course, but am holding off for now because the current draft pretends that there is no impending default crisis with regard to the debt ceiling. The reason for the pretence is that it would be silly to spend time writing about it until we see how it comes out, which will be after my time window for completing the draft but well before the piece is ultimately published. Once that happy time comes, I hope to update and post the draft in fairly short order.
I've completed a draft, entitled "Tax Reform Implications of the Risk of a U.S. Budget Catastrophe," taking the form of a VERY swift run through the questions of why we face a potential budget catastrophe, how it might affect one's thinking about income tax reform, and what new taxes might be introduced (e.g., a VAT, carbon tax, financial transactions tax, and/or financial activities tax).
I'll probably post it on SSRN on due course, but am holding off for now because the current draft pretends that there is no impending default crisis with regard to the debt ceiling. The reason for the pretence is that it would be silly to spend time writing about it until we see how it comes out, which will be after my time window for completing the draft but well before the piece is ultimately published. Once that happy time comes, I hope to update and post the draft in fairly short order.
Newly published article
My article "The Case Against Foreign Tax Credits," 3 Journal of Legal Analysis 65-100 (2011) has now officially come out, and is available on-line here.
Forthcoming book with articles (including mine) on taxation and the financial crisis
The Oxford University Press is publishing "Taxation and the Financial Crisis," edited by Julian Alworth and Giampaolo Arachi. The book is a compilation of articles, including my solo-authored "The 2008 Financial Crisis: Implications for Income Tax Reform" and my co-authored (with Douglas Shackelford and Joel Slemrod) "Taxation and the Financial Sector."
The OUP link for the book is here. SSRN versions of the above articles are here (for the solo piece) and here (for S-S-S).
The pub date isn't until January 2012 or so, but both OUP and Amazon allow advance-ordering. (I know, that's big of them.)
The OUP link for the book is here. SSRN versions of the above articles are here (for the solo piece) and here (for S-S-S).
The pub date isn't until January 2012 or so, but both OUP and Amazon allow advance-ordering. (I know, that's big of them.)
Simon Johnson on debt default
Simon Johnson, whom I consider quite good in his analysis of the financial sector, offers the following view of what the debt default that the Republicans are threatening would look like:
"A government default would destroy the credit system as we know it. The fundamental benchmark interest rates in modern financial markets are the so-called risk-free rates on government bonds. Removing this pillar of the system—or creating a high degree of risk around U.S. Treasurys—would disrupt many private contracts and all kinds of transactions. In addition, many people and firms hold their rainy day money in the form of U.S. Treasurys. The money-market funds that are perceived to be the safest, for example, are those that hold only U.S. government debt. If the U.S. government defaults, all of them will "break the buck," meaning they will be unable to maintain the principal value of the money that has been placed with them.
"The result would be capital flight—but to where? Many banks would have a similar problem: A collapse in U.S. Treasury prices (the counterpart of higher interest rates, as bond prices and interest rates move in opposite directions) would destroy their balance sheets. There is no company in the United States that would be unaffected by a government default—and no bank or other financial institution that could provide a secure haven for savings. There would be a massive run into cash, on an order not seen since the Great Depression, with long lines of people at ATMs and teller windows withdrawing as much as possible.
"Private credit, moreover, would disappear from the U.S. economic system, confronting the Federal Reserve with an unpleasant choice. Either it could step in and provide an enormous amount of credit directly to households and firms (much like Gosbank, the Soviet Union's central bank), or it could stand by idly while GDP fell 20 to 30 percent—the magnitude of decline that we have seen in modern economies when credit suddenly dries up.
"With the private sector in free fall, consumption and investment would decline sharply. America's ability to export would also be undermined, because foreign markets would likely be affected, and because, in any case, if export firms cannot get credit, they most likely cannot produce....
"The Republicans are right about one thing: A default would cause government spending to contract in real terms. But which would fall more, government spending or the size of the private sector? The answer is almost certainly the private sector, given its dependence on credit to purchase inputs. How much could it fall? Take the contraction that followed the near-collapse of the financial system in 2008 and multiply it by 10.
"The government, on the other hand, has access to the Fed, and could therefore get its hands on cash to pay wages. With the debt ceiling unchanged, this would require some legal sleight of hand. But the alternative would clearly be a collapse of U.S. national security—soldiers and border guards have to be paid, the transportation system must operate, and so on. Issuing money in this situation would almost certainly be inflationary, but the Fed might conclude otherwise, because the United States has never been in this situation before, credit is now imploding, and the desperate credit-expansion measures implemented in 2008 proved not to be as bad as the critics feared.
"So this is what a U.S. debt default would look like. The private sector would collapse. Unemployment would quickly surpass 20 percent. The government would shrink, but it would remain the employer of last resort."
"A government default would destroy the credit system as we know it. The fundamental benchmark interest rates in modern financial markets are the so-called risk-free rates on government bonds. Removing this pillar of the system—or creating a high degree of risk around U.S. Treasurys—would disrupt many private contracts and all kinds of transactions. In addition, many people and firms hold their rainy day money in the form of U.S. Treasurys. The money-market funds that are perceived to be the safest, for example, are those that hold only U.S. government debt. If the U.S. government defaults, all of them will "break the buck," meaning they will be unable to maintain the principal value of the money that has been placed with them.
"The result would be capital flight—but to where? Many banks would have a similar problem: A collapse in U.S. Treasury prices (the counterpart of higher interest rates, as bond prices and interest rates move in opposite directions) would destroy their balance sheets. There is no company in the United States that would be unaffected by a government default—and no bank or other financial institution that could provide a secure haven for savings. There would be a massive run into cash, on an order not seen since the Great Depression, with long lines of people at ATMs and teller windows withdrawing as much as possible.
"Private credit, moreover, would disappear from the U.S. economic system, confronting the Federal Reserve with an unpleasant choice. Either it could step in and provide an enormous amount of credit directly to households and firms (much like Gosbank, the Soviet Union's central bank), or it could stand by idly while GDP fell 20 to 30 percent—the magnitude of decline that we have seen in modern economies when credit suddenly dries up.
"With the private sector in free fall, consumption and investment would decline sharply. America's ability to export would also be undermined, because foreign markets would likely be affected, and because, in any case, if export firms cannot get credit, they most likely cannot produce....
"The Republicans are right about one thing: A default would cause government spending to contract in real terms. But which would fall more, government spending or the size of the private sector? The answer is almost certainly the private sector, given its dependence on credit to purchase inputs. How much could it fall? Take the contraction that followed the near-collapse of the financial system in 2008 and multiply it by 10.
"The government, on the other hand, has access to the Fed, and could therefore get its hands on cash to pay wages. With the debt ceiling unchanged, this would require some legal sleight of hand. But the alternative would clearly be a collapse of U.S. national security—soldiers and border guards have to be paid, the transportation system must operate, and so on. Issuing money in this situation would almost certainly be inflationary, but the Fed might conclude otherwise, because the United States has never been in this situation before, credit is now imploding, and the desperate credit-expansion measures implemented in 2008 proved not to be as bad as the critics feared.
"So this is what a U.S. debt default would look like. The private sector would collapse. Unemployment would quickly surpass 20 percent. The government would shrink, but it would remain the employer of last resort."
Monday, July 18, 2011
2012 NYU Tax Policy Colloquium schedule with dates
We now have our schedule apparently set, as follows:
1. January 17 – Michelle Hanlon, MIT Sloan School of Management
2. January 24 – Amy Monahan, University of Minnesota Law School
3. January 31 – Alex Raskolnikov, Columbia Law School
4. February 7 – Victor Fleischer, University of Colorado Law School
5. February 14 – Heather Field, Hastings College of Law
6. February 28 – Dhammika Dharmapala, University of Illinois Law School
7. March 6 – Edward Kleinbard, USC Law School
8. March 20 – Susan Morse, Hastings College of Law
9. March 27 – Stephen Shay, Harvard Law School
10. April 3 – Jon Bakija, Williams College Economics Department
11. April 10 – Lane Kenworthy, University of Arizona Sociology Department
12. April 17 – Yair Listokin, Yale Law School
13. April 24 – William Gale, Brookings Institution
14. May 1 – Rosanne Altshuler, Rutgers Economics Department, and Harry Grubert, U.S. Treasury Department.
All sessions will meet on Tuesdays from 4:00 to 5:50 pm in Vanderbilt 208, NYU Law School.
1. January 17 – Michelle Hanlon, MIT Sloan School of Management
2. January 24 – Amy Monahan, University of Minnesota Law School
3. January 31 – Alex Raskolnikov, Columbia Law School
4. February 7 – Victor Fleischer, University of Colorado Law School
5. February 14 – Heather Field, Hastings College of Law
6. February 28 – Dhammika Dharmapala, University of Illinois Law School
7. March 6 – Edward Kleinbard, USC Law School
8. March 20 – Susan Morse, Hastings College of Law
9. March 27 – Stephen Shay, Harvard Law School
10. April 3 – Jon Bakija, Williams College Economics Department
11. April 10 – Lane Kenworthy, University of Arizona Sociology Department
12. April 17 – Yair Listokin, Yale Law School
13. April 24 – William Gale, Brookings Institution
14. May 1 – Rosanne Altshuler, Rutgers Economics Department, and Harry Grubert, U.S. Treasury Department.
All sessions will meet on Tuesdays from 4:00 to 5:50 pm in Vanderbilt 208, NYU Law School.
Wednesday, July 13, 2011
2012 NYU Tax Policy Colloquium speakers
The 2012 NYU Tax Policy Colloquium, which I will be co-teaching with Alan Auerbach, is taking shape. It will be held in NYU Law School from 4 to 6 pm on Tuesdays, from January 17 through May 1 with the exception of February 21 and March 13.
While the exact match of speakers to dates is still ongoing, our speaker list, in alphabetical order, is as follows:
1) Rosanne Altshuler, Rutgers Economics Department, and Harry Grubert, U.S. Treasury
2) Jon Bakija, Williams Economics Department
3) Dhammika Dharmapala, University of Illinois Law School
4) Heather Field, Hastings College of Law
5) Victor Fleischer, University of Colorado Law School
6) William Gale, Brookings Institution
7) Michelle Hanlon, MIT Sloan School of Management
8) Lane Kenworthy, University of Arizona Sociology Department
9) Ed Kleinbard, USC Law School
10) Yair Listokin, Yale Law School
11) Amy Monahan, University of Minnesota Law School
12) Susan Morse, Hastings College of Law
13) Alex Raskolnikov, Columbia Law School
14) Stephen Shay, Harvard Law School.
While the exact match of speakers to dates is still ongoing, our speaker list, in alphabetical order, is as follows:
1) Rosanne Altshuler, Rutgers Economics Department, and Harry Grubert, U.S. Treasury
2) Jon Bakija, Williams Economics Department
3) Dhammika Dharmapala, University of Illinois Law School
4) Heather Field, Hastings College of Law
5) Victor Fleischer, University of Colorado Law School
6) William Gale, Brookings Institution
7) Michelle Hanlon, MIT Sloan School of Management
8) Lane Kenworthy, University of Arizona Sociology Department
9) Ed Kleinbard, USC Law School
10) Yair Listokin, Yale Law School
11) Amy Monahan, University of Minnesota Law School
12) Susan Morse, Hastings College of Law
13) Alex Raskolnikov, Columbia Law School
14) Stephen Shay, Harvard Law School.
Saturday, July 09, 2011
Oxford international tax conference
I'm back in the NYC area after 4 quick days at the annual summer conference of the Oxford University Center for Business Taxation.
The travel part had its annoying moments. The Dial 7 Carmel car service told me I needed to assume that the ride from Greenwich Village to Newark on the evening of July 4 would take 2 hours. I seriously doubted this, but figured they must know best. Actual trip time: 20 minutes. Very few people leave NYC through the Holland Tunnel or fly out of Newark on a holiday. So I got to Newark more than 3-1/2 hours before my scheduled overnight red-eye flight. Thanks a lot, Dial 7.
The way back was awful in the opposite direction. It took me nearly 4 hours to get home from Newark, counting from the time when my plane landed but was still on the runway. This was partly due to a huge passport & customs backlog from simultaneous flights (although the INS or Customs people did a good job considering the underlying problem). But this time, when I wanted a fast car trip, there were immense Holland & Lincoln Tunnel backups, this being early Friday evening. Suffice it to say that I got quite vexed, and all the more so because my 3 (?) year-old iPhone is showing extreme battery fatigue and thus I was unable to call home saying I was on my way.
It was nice to see lots of old friends at the conference itself. Attendees were a mixed group - mainly economists but also a number of lawyers and accountants. Mainly Europeans but also lots of North Americans, Australians, and several from Asia. Ed Kleinbard and I were the only lawyers to present papers (Stateless Income from him, Corporate Residence Electivity from me), and it was odd how we agree about a great deal yet offer significantly different reform ideas. He wants a worldwide tax without deferral but still retaining foreign tax credits; I'd go for exemption with a transition tax on U.S. companies' existing unrepatriated earnings plus significant improvement of the source rules, in particular to apply to worldwide groups, whether American-headed or not, based on the concept of a unitary business. A key difference in perspective is that he is more focused on data concerning existing U.S. companies, whereas I am more focused on thinking about incentives & opportunities that tax-concerned players may have in the future.
Dhammika Dharmapala presented his co-authored paper (with Mihir Desai) proposing that transfer pricing continue to be used, in lieu of switching to formulary apportionment, but with one big change: the company's internal transfer prices, ostensibly used for purposes such as executive compensation, would be determinative in lieu of looking at ostensibly comparable arm's length prices.
Nearly everyone in the room agreed that (a) the comparable price method is seriously flawed (actually, 2 people disputed this, but they were thinking more about the method in principle than in actual recent practice) and (b) if one is continuing to use a transfer price approach in lieu of switching to formulary apportionment (and in practice the two overlap), then the internal numbers that Desai and Dharmapala want to rely on should indeed be examined as relevant evidence.
As it happens, the discussion brought out the fact that these numbers aren't nearly as widely available as D & D posit. While it may be true, as they assert, that companies need to keep track of internal value (or a decent estimate thereof) for substantive investment and/or compensatory purposes, the dividing lines they use in allocating internal income often have nothing in common with the legal entity lines that the U.S. tax authorities would want to see for transfer pricing purposes. For example, they may break down their "true" internal transfer prices by line of business or by geographical region, rather than on a per-country separate-entity basis.
Still, the paper could have made a modest but unambiguously positive contribution by emphasizing that these numbers may sometimes be available and could well be illuminating. Instead, however, it swings for the fences and claims a lot more. This led at Oxford to a decidedly mixed reception. (The reception would have been worse, except there was a widespread view in the room that Dharmapala was not the party most responsible for the paper's aspects of reckless over-claiming.)
The paper purports to identify a brand-new inefficiency that policymakers need to take very seriously in thinking about transfer pricing. It is as follows: The company accurately transfer-prices for its own internal purposes because it MUST do so in order to make rational economic decisions. But then the darn U.S. government comes along and forces the company to use transfer prices for U.S. tax purposes that place too much income in the U.S. and less, say, in Ireland, Luxembourg, or Singapore. The result is that the U.S. share of taxes on the company's worldwide activities is too high. This in turn causes the poor duped company to think the American operations are less profitable than they really are, because it subtracts taxes ultimately levied that the U.S. affiliate should never have had to pay. The company therefore under-invests in the U.S. and under=pays U.S. executives, while over-investing in Ireland and over-paying its Irish executives, because the U.S. transfer pricing shift has duped it into misjudging the actual economics of its worldwide operations. (NOTE: A careful reading of the paper might suggest modifying this story a bit - e.g., is the point that the company isn't duped but responds rationally to the U.S. over-tax? I only had a chance to read it very quickly and then listen to the presentation.)
But I think I have it right. If so, this is not a real world empirical story that I for one find enormously compelling. I don't agree that companies are in the main constrained to transfer-price accurately (even given the admitted difficulty of getting away with two distinct sets of books). And even if we see a given number in their books, we can't really tell how they are actually using all available information to make their various decisions. What's more, even if it's boring conventional wisdom to say the transfer pricing problem goes the other way (with income being shifted from high-tax countries to tax havens), every now and then the CW is correct. Sometimes the dog actually did bite the man, not the other way around. I would also find it quite startling if the companies couldn't figure out what is going on economically even if the U.S. forces the adoption of transfer prices that diverge from what the company sincerely believes is correct. The new inefficiency that the paper detects is one that I don't expect to hear a lot more about. And more generally, identifying ostensibly brand-new inefficiencies and coming up with new magic bullet solutions isn't always all that it's cracked up to be.
One other presentation at the conference gave me considerable pleasure, albeit purely as an observer and consumer. Unfortunately, I need to be a bit circumspect in describing it. Suffice it to say that a senior and well-known (though not to me personally) empiricist who is clearly passionate about econometrics, and who presents as having very high self-regard in this area, made a seemingly dazzling presentation that the likes of me couldn't assess very well, purporting to find strong empirical results on a contested issue. The commentator who followed to offer a response was very junior, and in tone very modest and understated, along the lines of "I wonder what X would look like if you had tested for that," or "it would be good to have run a control concerning Y, and I wonder what the results would have been." But by the time the commentator was about 2 minutes in (out of 10 minutes total), I realized that something rather extraordinary was going on. The paper was having its throat cut, and huge hunks of flesh were being torn out of it while its blood gushed onto the pavement - all by reason of one gentle knife thrust after another. By the time the full 10 minutes had passed, I would not even say the bloody carcass was lying on the ground twitching - what was left of it came closer to being an inert corpse. The author whose paper had gotten this treatment was scowling and head-shaking, but it got no better when the question period began. In sum, it felt like seeing Ali knock out Liston the first time in 1964, only without the underdog's having any braggadocio whatsoever. From my seat in the peanut gallery, I thought it was great fun, and all the more so because (not previously knowing the commentator) I had so little seen it coming.
The travel part had its annoying moments. The Dial 7 Carmel car service told me I needed to assume that the ride from Greenwich Village to Newark on the evening of July 4 would take 2 hours. I seriously doubted this, but figured they must know best. Actual trip time: 20 minutes. Very few people leave NYC through the Holland Tunnel or fly out of Newark on a holiday. So I got to Newark more than 3-1/2 hours before my scheduled overnight red-eye flight. Thanks a lot, Dial 7.
The way back was awful in the opposite direction. It took me nearly 4 hours to get home from Newark, counting from the time when my plane landed but was still on the runway. This was partly due to a huge passport & customs backlog from simultaneous flights (although the INS or Customs people did a good job considering the underlying problem). But this time, when I wanted a fast car trip, there were immense Holland & Lincoln Tunnel backups, this being early Friday evening. Suffice it to say that I got quite vexed, and all the more so because my 3 (?) year-old iPhone is showing extreme battery fatigue and thus I was unable to call home saying I was on my way.
It was nice to see lots of old friends at the conference itself. Attendees were a mixed group - mainly economists but also a number of lawyers and accountants. Mainly Europeans but also lots of North Americans, Australians, and several from Asia. Ed Kleinbard and I were the only lawyers to present papers (Stateless Income from him, Corporate Residence Electivity from me), and it was odd how we agree about a great deal yet offer significantly different reform ideas. He wants a worldwide tax without deferral but still retaining foreign tax credits; I'd go for exemption with a transition tax on U.S. companies' existing unrepatriated earnings plus significant improvement of the source rules, in particular to apply to worldwide groups, whether American-headed or not, based on the concept of a unitary business. A key difference in perspective is that he is more focused on data concerning existing U.S. companies, whereas I am more focused on thinking about incentives & opportunities that tax-concerned players may have in the future.
Dhammika Dharmapala presented his co-authored paper (with Mihir Desai) proposing that transfer pricing continue to be used, in lieu of switching to formulary apportionment, but with one big change: the company's internal transfer prices, ostensibly used for purposes such as executive compensation, would be determinative in lieu of looking at ostensibly comparable arm's length prices.
Nearly everyone in the room agreed that (a) the comparable price method is seriously flawed (actually, 2 people disputed this, but they were thinking more about the method in principle than in actual recent practice) and (b) if one is continuing to use a transfer price approach in lieu of switching to formulary apportionment (and in practice the two overlap), then the internal numbers that Desai and Dharmapala want to rely on should indeed be examined as relevant evidence.
As it happens, the discussion brought out the fact that these numbers aren't nearly as widely available as D & D posit. While it may be true, as they assert, that companies need to keep track of internal value (or a decent estimate thereof) for substantive investment and/or compensatory purposes, the dividing lines they use in allocating internal income often have nothing in common with the legal entity lines that the U.S. tax authorities would want to see for transfer pricing purposes. For example, they may break down their "true" internal transfer prices by line of business or by geographical region, rather than on a per-country separate-entity basis.
Still, the paper could have made a modest but unambiguously positive contribution by emphasizing that these numbers may sometimes be available and could well be illuminating. Instead, however, it swings for the fences and claims a lot more. This led at Oxford to a decidedly mixed reception. (The reception would have been worse, except there was a widespread view in the room that Dharmapala was not the party most responsible for the paper's aspects of reckless over-claiming.)
The paper purports to identify a brand-new inefficiency that policymakers need to take very seriously in thinking about transfer pricing. It is as follows: The company accurately transfer-prices for its own internal purposes because it MUST do so in order to make rational economic decisions. But then the darn U.S. government comes along and forces the company to use transfer prices for U.S. tax purposes that place too much income in the U.S. and less, say, in Ireland, Luxembourg, or Singapore. The result is that the U.S. share of taxes on the company's worldwide activities is too high. This in turn causes the poor duped company to think the American operations are less profitable than they really are, because it subtracts taxes ultimately levied that the U.S. affiliate should never have had to pay. The company therefore under-invests in the U.S. and under=pays U.S. executives, while over-investing in Ireland and over-paying its Irish executives, because the U.S. transfer pricing shift has duped it into misjudging the actual economics of its worldwide operations. (NOTE: A careful reading of the paper might suggest modifying this story a bit - e.g., is the point that the company isn't duped but responds rationally to the U.S. over-tax? I only had a chance to read it very quickly and then listen to the presentation.)
But I think I have it right. If so, this is not a real world empirical story that I for one find enormously compelling. I don't agree that companies are in the main constrained to transfer-price accurately (even given the admitted difficulty of getting away with two distinct sets of books). And even if we see a given number in their books, we can't really tell how they are actually using all available information to make their various decisions. What's more, even if it's boring conventional wisdom to say the transfer pricing problem goes the other way (with income being shifted from high-tax countries to tax havens), every now and then the CW is correct. Sometimes the dog actually did bite the man, not the other way around. I would also find it quite startling if the companies couldn't figure out what is going on economically even if the U.S. forces the adoption of transfer prices that diverge from what the company sincerely believes is correct. The new inefficiency that the paper detects is one that I don't expect to hear a lot more about. And more generally, identifying ostensibly brand-new inefficiencies and coming up with new magic bullet solutions isn't always all that it's cracked up to be.
One other presentation at the conference gave me considerable pleasure, albeit purely as an observer and consumer. Unfortunately, I need to be a bit circumspect in describing it. Suffice it to say that a senior and well-known (though not to me personally) empiricist who is clearly passionate about econometrics, and who presents as having very high self-regard in this area, made a seemingly dazzling presentation that the likes of me couldn't assess very well, purporting to find strong empirical results on a contested issue. The commentator who followed to offer a response was very junior, and in tone very modest and understated, along the lines of "I wonder what X would look like if you had tested for that," or "it would be good to have run a control concerning Y, and I wonder what the results would have been." But by the time the commentator was about 2 minutes in (out of 10 minutes total), I realized that something rather extraordinary was going on. The paper was having its throat cut, and huge hunks of flesh were being torn out of it while its blood gushed onto the pavement - all by reason of one gentle knife thrust after another. By the time the full 10 minutes had passed, I would not even say the bloody carcass was lying on the ground twitching - what was left of it came closer to being an inert corpse. The author whose paper had gotten this treatment was scowling and head-shaking, but it got no better when the question period began. In sum, it felt like seeing Ali knock out Liston the first time in 1964, only without the underdog's having any braggadocio whatsoever. From my seat in the peanut gallery, I thought it was great fun, and all the more so because (not previously knowing the commentator) I had so little seen it coming.
Sunday, July 03, 2011
Off to Oxford tomorrow
Never a dull moment. Having just returned from St. Maarten, and then worked over the pre-July 4 weekend to finish some projects with deadlines, I am flying to England late on the night of July 4th so as to attend a tax conference at the Saad Business School in Oxford, where I will present my paper on corporate residence electivity. Back in the USA on Friday.
Punting on the river like (though probably not quite like) Lewis Carroll, dinner in an Indian restaurant, and Blackwell's Bookshop await.
Punting on the river like (though probably not quite like) Lewis Carroll, dinner in an Indian restaurant, and Blackwell's Bookshop await.
Wednesday, June 29, 2011
Wrong again, Doug
Doug Holtz-Eakin, pooh-poohing an extended payroll tax holiday that might provide needed stimulus (though admittedly a very ninetieth-best way of doing this) says that, as a matter of economics, it doesn't matter whether you do it on the employer or the employee side. As a matter of economics, this is incorrect.
Standard economic models of tax incidence show that, at equilibrium, it doesn't matter whether you change the tax hit on the employer side or the employee side, because that only affects legal incidence, without transforming the factors that determine economic incidence. But in the short run (i.e, in transition to the equilibrium), it unmistakably DOES matter which side you do it on.
Suppose wages are sticky in the short run, whether for psychological reasons reflecting nominal prices or simply because people have existing short-term contracts. For example, suppose I have a contract with my employer specifying that it will pay me $12 per hour through the end of the year. This is undoubtedly an incomplete contract - it doesn't provide, for example, that this is conditioned on assuming continuation of current payroll tax policy, such that we will agree to the same "true" after-tax wage no matter which side Congress might pick for a payroll tax holiday. If the payroll tax is cut on the employee side, I pocket the increased after-tax income. No renegotiation until the next go-round (where it would more likely occur if the holiday were ongoing or expected to recur) Likewise, if the payroll tax is suspended on the employer side, it pcokets the extra change.
True, supply and demand are going to be affected, but the point is that to a considerable degree all this takes time to unfold.
So while Doug is likely right about permanently changing the payroll tax on one side or the other (leaving aside details such as the fact that minimum wage laws don't adjust for payroll tax nominal incidence), he is clearly wrong about the economics of, say, another one-year payroll tax holiday that is enacted with little advance notice and great uncertainty in advance about whether it would in fact happen.
There's a distributional difference in who pockets the money, and also a stimulative difference since the workers may on average have higher marginal propensity to consume than the owners of the businesses that would pocket the transition gain the other way around.
To be sure, it's still a far-from-great stimulus choice, given that even the richest workers get the payroll tax holiday as to their wages up to the Social Security tax cap, plus the fact that high-earners get more than those earning less than the cap amount.
I also realize that it's not going to happen, as the Republicans have finally located a class of tax cuts that they don't like - those that would be potentially stimulative in the run-up to 2012.
But nonetheless, let's try to discuss it honestly without misapplying standard economics truisms (about long-term incidence) outside their proper realm of application.
Standard economic models of tax incidence show that, at equilibrium, it doesn't matter whether you change the tax hit on the employer side or the employee side, because that only affects legal incidence, without transforming the factors that determine economic incidence. But in the short run (i.e, in transition to the equilibrium), it unmistakably DOES matter which side you do it on.
Suppose wages are sticky in the short run, whether for psychological reasons reflecting nominal prices or simply because people have existing short-term contracts. For example, suppose I have a contract with my employer specifying that it will pay me $12 per hour through the end of the year. This is undoubtedly an incomplete contract - it doesn't provide, for example, that this is conditioned on assuming continuation of current payroll tax policy, such that we will agree to the same "true" after-tax wage no matter which side Congress might pick for a payroll tax holiday. If the payroll tax is cut on the employee side, I pocket the increased after-tax income. No renegotiation until the next go-round (where it would more likely occur if the holiday were ongoing or expected to recur) Likewise, if the payroll tax is suspended on the employer side, it pcokets the extra change.
True, supply and demand are going to be affected, but the point is that to a considerable degree all this takes time to unfold.
So while Doug is likely right about permanently changing the payroll tax on one side or the other (leaving aside details such as the fact that minimum wage laws don't adjust for payroll tax nominal incidence), he is clearly wrong about the economics of, say, another one-year payroll tax holiday that is enacted with little advance notice and great uncertainty in advance about whether it would in fact happen.
There's a distributional difference in who pockets the money, and also a stimulative difference since the workers may on average have higher marginal propensity to consume than the owners of the businesses that would pocket the transition gain the other way around.
To be sure, it's still a far-from-great stimulus choice, given that even the richest workers get the payroll tax holiday as to their wages up to the Social Security tax cap, plus the fact that high-earners get more than those earning less than the cap amount.
I also realize that it's not going to happen, as the Republicans have finally located a class of tax cuts that they don't like - those that would be potentially stimulative in the run-up to 2012.
But nonetheless, let's try to discuss it honestly without misapplying standard economics truisms (about long-term incidence) outside their proper realm of application.
Sunday, June 26, 2011
A site for sore eyes on vacation
Same species as a much-beloved pet I had some 40 years ago (not being allowed a cat or dog). OK, he wasn't quite equivalent, but nonetheless preferable to nearly all possible alternatives to those two supremely pet-adapted species.
I read recently that iguanas are no longer a legal pet in NYC, but that they are considered surprisingly intelligent and with distinctive personalities (which fits my memory). Don Ig Juan, as my father named him, was easygoing and friendly. He loved tuna cat food most of all, blueberries second, and would wait eagerly for me to finish my own breakfast and come to hand-feed him. It's true that he would rather pompously nod his head up and down, dewlap under the neck extended out, when he saw his reflection (another male iguana) in the mirror. But then he would lose interest, apparently realizing that the mirror rival wasn't real.
We ended up giving him to the Staten Island Zoo, leaving me a lifelong fan of this attractive and interesting species, although the fella or gal in this photo skittered off into the canopy below, having no reason to appreciate my bona fides.
Thursday, June 23, 2011
A bit of unintended tax history on vacation
I am currently on vacation for a week in the delightful Caribbean island of St. Martin (for the French part) and St. Maartin (for the Dutch part). This is apparently the world's smallest island to have two separate sovereigns, as the French vs. Dutch division remains operative to this day (and dates back continuously to 1648).
It turns out that the Dutch part of the island (we are staying in the French part but plan to go to a beach on the Dutch part tomorrow) used to be part of the Netherlands Antilles, which is famous in U.S. tax planning history as, in effect, the Cayman Islands of an earlier era.
Until the late 1980s, and thus overlapping with my earliest professional years, the Netherlands Antilles was THE place of choice to have a tax haven affiliate for U.S. international tax planning purposes. As it happens, the reason had to do with the application of a U.S.-Dutch tax treaty, whereas the Caymans often "works" today for entirely non-treaty reasons. But still, the word "Netherlands-Antilles" means something to me that it probably wouldn't if I were 10 years younger.
It turns out that the Dutch part of the island (we are staying in the French part but plan to go to a beach on the Dutch part tomorrow) used to be part of the Netherlands Antilles, which is famous in U.S. tax planning history as, in effect, the Cayman Islands of an earlier era.
Until the late 1980s, and thus overlapping with my earliest professional years, the Netherlands Antilles was THE place of choice to have a tax haven affiliate for U.S. international tax planning purposes. As it happens, the reason had to do with the application of a U.S.-Dutch tax treaty, whereas the Caymans often "works" today for entirely non-treaty reasons. But still, the word "Netherlands-Antilles" means something to me that it probably wouldn't if I were 10 years younger.
Monday, June 20, 2011
Banana republic watch
Today's New York Times article about the push for another repatriation tax holiday shows how ill-functioning our political system is. Tax holidays work best if they are credibly "once and once only" offers. The last tax holiday was only 6 years ago, and we are already potentially doing it again?
As the article mentions, the predominant academic consensus from last time around is that it mainly led to dividends and share buybacks, not extra jobs et al. Money is fungible. And while in principle even the shareholder payouts might be considered stimulative, one would not expect the recipients to have a very high marginal propensity to consume.
Another banana republic aspect to this is the emphasis being placed on the point that the taxes raised by the dividend tax holiday would lower the budget deficit. Yes, but in expected present value terms they would increase the long-term U.S. fiscal gap, as to a considerable degree companies would simply take a small hit today (including a potential accounting hit for supposedly "permanently reinvested foreign earnings") on the view that it was cheaper than paying the full tax in the future.
For this reason, enacting the dividend tax holiday as a way of lowering the current year budget deficit is like improving your current cash flow by going to the local pawnbroker who charges 20% a month, or like a farmer selling the seed corn to raise extra funds. From a budgetary standpoint it is childish, shortsighted, and irresponsible.
Compare to all this the idea that we might shift to an exemption system for U.S. companies' foreign source active business income, but accompanied by (a) greatly improving the source rules so that they apply to all multinationals (taking account of all their affiliates around the world) on a unitary, residence-neutral basis and (b) enacting a one-time transition tax for U.S. companies' pre-effective date unrepatriated foreign source income, with payment of this tax perhaps to be deferrable but effectively with interest. A well-functioning political system would be considering changes like that instead of replicating the behavior pattern of an impatient toddler.
As the article mentions, the predominant academic consensus from last time around is that it mainly led to dividends and share buybacks, not extra jobs et al. Money is fungible. And while in principle even the shareholder payouts might be considered stimulative, one would not expect the recipients to have a very high marginal propensity to consume.
Another banana republic aspect to this is the emphasis being placed on the point that the taxes raised by the dividend tax holiday would lower the budget deficit. Yes, but in expected present value terms they would increase the long-term U.S. fiscal gap, as to a considerable degree companies would simply take a small hit today (including a potential accounting hit for supposedly "permanently reinvested foreign earnings") on the view that it was cheaper than paying the full tax in the future.
For this reason, enacting the dividend tax holiday as a way of lowering the current year budget deficit is like improving your current cash flow by going to the local pawnbroker who charges 20% a month, or like a farmer selling the seed corn to raise extra funds. From a budgetary standpoint it is childish, shortsighted, and irresponsible.
Compare to all this the idea that we might shift to an exemption system for U.S. companies' foreign source active business income, but accompanied by (a) greatly improving the source rules so that they apply to all multinationals (taking account of all their affiliates around the world) on a unitary, residence-neutral basis and (b) enacting a one-time transition tax for U.S. companies' pre-effective date unrepatriated foreign source income, with payment of this tax perhaps to be deferrable but effectively with interest. A well-functioning political system would be considering changes like that instead of replicating the behavior pattern of an impatient toddler.
Thursday, June 16, 2011
Casey Mulligan follow-up
Casey Mulligan complains that, in my preceding post, I misread his article because the first and last paragraphs mention the nontaxation of imputed rent point. The references are perhaps a bit oblique, but I take his point and apologize for the snark.
That said, I still find his analysis inadequate because I really don't think one can assess the home mortgage interest deduction independently of the imputed rent issue. Denying the interest deduction would be an indirect partial repeal of the exclusion, partly reducing its scope (good) but also potentially creating fresh distortions that would not follow from a more direct, even partial, repeal (bad).
I think the good from denying the deduction would outweigh the bad. I would merely have disagreed with Mulligan, rather than finding his analysis as snark-worthy as I did, had he addressed this issue. But, in my view, treating the under-taxation of home ownership in other respects as effectively irrelevant to analysis of the home mortgage interest deduction was a disservice to the readers of his NYT blog entry.
UPDATE: To put it another way, Mulligan says that the Treasury doesn't lose revenue from the mortgage interest deduction as such, assuming deduction and inclusion by the borrower and lender at the same marginal tax rate. OK, fine. But the Treasury does lose an opportunity to recoup some of its losses from the imputed rental exclusion, and that's the whole point of the argument for mortgage interest disallowance.
That said, I still find his analysis inadequate because I really don't think one can assess the home mortgage interest deduction independently of the imputed rent issue. Denying the interest deduction would be an indirect partial repeal of the exclusion, partly reducing its scope (good) but also potentially creating fresh distortions that would not follow from a more direct, even partial, repeal (bad).
I think the good from denying the deduction would outweigh the bad. I would merely have disagreed with Mulligan, rather than finding his analysis as snark-worthy as I did, had he addressed this issue. But, in my view, treating the under-taxation of home ownership in other respects as effectively irrelevant to analysis of the home mortgage interest deduction was a disservice to the readers of his NYT blog entry.
UPDATE: To put it another way, Mulligan says that the Treasury doesn't lose revenue from the mortgage interest deduction as such, assuming deduction and inclusion by the borrower and lender at the same marginal tax rate. OK, fine. But the Treasury does lose an opportunity to recoup some of its losses from the imputed rental exclusion, and that's the whole point of the argument for mortgage interest disallowance.
Wednesday, June 15, 2011
There is no joy in Mudville - Casey Mulligan has struck out
Thanks again to a link in the Tax Prof Blog, I see that Casey Mulligan of the University of Chicago Econ Department is saying that the home mortgage interest deduction is no big deal, hence no particular reason to repeal it. He focuses mainly on the point that "one person’s mortgage interest payment produces interest income for another person or a business. The lender may well owe taxes on the interest income."
My god, but Mulligan has missed the boat on this one. William Turnier pretty much makes the point, back in the Tax Prof blog link, by referencing the Haig-Simons definition of income and calling the home mortgage interest payment consumption-related.
But I would make it a bit clearer still. The problem isn't really the home mortgage interest deduction as such, although it may encourage the sort of excessive home leverage that helped contribute to the 2008 financial crisis. The real problem is the fact that homeowners get to exclude imputed rental income because it isn't derived from an observable market transaction. The home mortgage interest deduction merely builds off that. Its allowance would be uncontroversial if imputed rental income were included.
One can't seriously discuss the home mortgage interest deduction without understanding its relationship to the underlying imputed rent exclusion. This is really basic stuff. Mulligan ought to know, not just before he blogs about the issue in the New York Times, but as a supposedly informed professional in the field of public economics.
He further embarrasses himself by adding the following: "In contrast, consumer durable goods do not enjoy the interest deductions that housing and business capital do. Someone who takes out a car loan to purchase a personal automobile cannot deduct the interest payments from her taxable income, even while the Internal Revenue Service may be collecting taxes on the interest income of the lender. In this regard, tax policy discourages investment in consumer durable goods relative to investment in housing and businesses."
Mulligan apparently is unaware that the personal use of a car generates an economic return that the tax system excludes from income, whereas returns to business investment are at least in principle taxed. Again, this is really elementary stuff. Anyone who purports to do public economics and to have opinions about the tax system ought to know it.
The University of Chicago Law School has a pretty good tax faculty, whose members I am sure would have been happy to bring Mulligan up to speed. But if you don't know that you don't know, I guess it's hard to find out.
My god, but Mulligan has missed the boat on this one. William Turnier pretty much makes the point, back in the Tax Prof blog link, by referencing the Haig-Simons definition of income and calling the home mortgage interest payment consumption-related.
But I would make it a bit clearer still. The problem isn't really the home mortgage interest deduction as such, although it may encourage the sort of excessive home leverage that helped contribute to the 2008 financial crisis. The real problem is the fact that homeowners get to exclude imputed rental income because it isn't derived from an observable market transaction. The home mortgage interest deduction merely builds off that. Its allowance would be uncontroversial if imputed rental income were included.
One can't seriously discuss the home mortgage interest deduction without understanding its relationship to the underlying imputed rent exclusion. This is really basic stuff. Mulligan ought to know, not just before he blogs about the issue in the New York Times, but as a supposedly informed professional in the field of public economics.
He further embarrasses himself by adding the following: "In contrast, consumer durable goods do not enjoy the interest deductions that housing and business capital do. Someone who takes out a car loan to purchase a personal automobile cannot deduct the interest payments from her taxable income, even while the Internal Revenue Service may be collecting taxes on the interest income of the lender. In this regard, tax policy discourages investment in consumer durable goods relative to investment in housing and businesses."
Mulligan apparently is unaware that the personal use of a car generates an economic return that the tax system excludes from income, whereas returns to business investment are at least in principle taxed. Again, this is really elementary stuff. Anyone who purports to do public economics and to have opinions about the tax system ought to know it.
The University of Chicago Law School has a pretty good tax faculty, whose members I am sure would have been happy to bring Mulligan up to speed. But if you don't know that you don't know, I guess it's hard to find out.
Tuesday, June 14, 2011
Very interesting fight among Senate Republicans
With thanks to Tax Prof Blog for the link, I note with considerable interest a current battle in the Senate, in which I gather Republicans' votes will be front and center. Senator Tom Coburn is seeking the elimination of ethanol subsidies that include income tax expenditures, but is being opposed by Grover Norquist due to the no-new-taxes pledge, signed by 40 of the Senate's 47 Republicans and constituting, in my view, a tourniquet around the throat of long-term (and perhaps even short-term) U.S. fiscal sustainability.
Oh, yes. Norquist is on board with eliminating tax expenditures for ethanol, but only so long as Congress ALSO repeals the estate tax. Good one, you Lenin-lover, you.
Coburn's view, which is unambiguously logically correct, is that, even if you are categorically opposed to "tax increases," this has to be defined with at least some modicum of intellectual coherence, such that repealing what are effectively "spending" provisions smuggled into the tax code won't count as tax increases for this purpose. (See more on this point in my recent Tax Notes article, which is available here.)
An alternative view to the one that both Coburn and I take would mean one only cared about the form of particular policies on the books, not about actual economic substance.
I gather that Coburn's plan is not expected to pass. Indeed, the Obama Administration, earning a profiles-in-courage award as usual, apparently opposes the elimination of ethanol subsidies. Nonetheless, it would be a huge positive step if more Republicans adopted the Coburn view (which also was discernible in Congressman Ryan's budget document). Coburn thus deserves great praise on this score, even apart from the ethanol subsidies issue itself (on which he likewise is siding with the angels).
UPDATE: The Coburn amendment failed by one vote. That is, it won (under majoritarian rules) by 59-40, but this left it one vote short of the threshold needed to permit closure and thus avoid filibuster. And of course the Senate these days codes it as a loss if you merely win by a borderline landslide.
I wonder, however, if the amendment was guaranteed to lose by one vote no matter what. The Democratic and/or Republican leaderships may have decided (perhaps even cooperatively) to let as many people as possible vote for it, so they could score a good-guys stance with the voters, so long as it didn't actually prevail. This once happened with the balanced budget amendment in the 1990s - it lost by one vote, but reportedly would have lost by one vote even if it had attracted 10 more "true" supporters.
Oh, yes. Norquist is on board with eliminating tax expenditures for ethanol, but only so long as Congress ALSO repeals the estate tax. Good one, you Lenin-lover, you.
Coburn's view, which is unambiguously logically correct, is that, even if you are categorically opposed to "tax increases," this has to be defined with at least some modicum of intellectual coherence, such that repealing what are effectively "spending" provisions smuggled into the tax code won't count as tax increases for this purpose. (See more on this point in my recent Tax Notes article, which is available here.)
An alternative view to the one that both Coburn and I take would mean one only cared about the form of particular policies on the books, not about actual economic substance.
I gather that Coburn's plan is not expected to pass. Indeed, the Obama Administration, earning a profiles-in-courage award as usual, apparently opposes the elimination of ethanol subsidies. Nonetheless, it would be a huge positive step if more Republicans adopted the Coburn view (which also was discernible in Congressman Ryan's budget document). Coburn thus deserves great praise on this score, even apart from the ethanol subsidies issue itself (on which he likewise is siding with the angels).
UPDATE: The Coburn amendment failed by one vote. That is, it won (under majoritarian rules) by 59-40, but this left it one vote short of the threshold needed to permit closure and thus avoid filibuster. And of course the Senate these days codes it as a loss if you merely win by a borderline landslide.
I wonder, however, if the amendment was guaranteed to lose by one vote no matter what. The Democratic and/or Republican leaderships may have decided (perhaps even cooperatively) to let as many people as possible vote for it, so they could score a good-guys stance with the voters, so long as it didn't actually prevail. This once happened with the balanced budget amendment in the 1990s - it lost by one vote, but reportedly would have lost by one vote even if it had attracted 10 more "true" supporters.
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