Thursday, December 21, 2006

Important article

Why isn't Cheney right about the importance of a totally unfettered Executive managing foreign policy and responding to security threats? Even people who are thoughtful and sane, such as Judge Posner in some of his popular writings on these subjects, take the point about the importance of Presidential discretion in terms of energy and effectiveness.

One counter-argument is that an individual's decision quality will likely be more variable, for bad as well good, than the actions of collective institutions such as the U.S. Congress. Obviously, this point seems especially forceful after 6 years with the worst President in U.S. history, a man who knows less, thinks less, reads less, and is less emotionally mature than my 10 and 13 year old children. But of course one shouldn't over-generalize from how bad he is to the Presidency as a long-term institution, except insofar as he so vividly illustrates the variance and downside risk.

The highly regarded Harvard economist Edward Glaeser has an interesting new National Bureau of Economic Research Working Paper, "The Political Economy of Warfare" (# 12738, available on line at but to subscribers only) that could hardly be more timely in illustrating one of the broader problems. His analysis is not new, as he makes very clear up front, but is vital and under-appreciated.

To quote from the introduction:

"Why do countries, both democracies and dictatorships, engage in massively self-destructive wars? ....

"This paper ... presents a model of warfare where leaders benefit from conflict even though the population as a whole loses. Warfare creates domestic political advantages, both for insecure incumbents like Napoleon III and flr long-shot challengers, like Islamic extremists in the Middle East, even though it is costly to the nation as a whole. Self-destructive wars can be seen as an agency cost problem where politicians hurt the nation but increase their probability of political success. This problem becomes more severe if the population can be falsely persuaded that another country is a threat."

The paper's analysis uses a political economy model plus the following historical examples: Napoleon III, Bismarck, the European participants in World War I, and the U.S. from 1896 through 1975.

This is not a paper that will be criticized on the ground that extending the period analyzed would change the empirical conclusions.

Designing institutions without regard to agency costs is not an intellectually defensible course.

Friday, December 15, 2006

Party politics

Interesting article by political scientist Morris Fiorina in the recently published essay collection by Alan Gerber and Eric Patashnik, Promoting the General Welfare.

In "Parties as Problem Solvers," Fiorina notes the argument that he had been making for many years (and that I personally have considered persuasive) to the effect that national politics would function better if the parties were stronger. Several strands to this argument. One is that interest groups are weakened if the parties in effect cartelize and thus reduce any one group's market power. A strand emphasized by Fiorina held that "unified political parties led by strong presidents were more likely to act decisively to meet the challenges facing the country, and when they took their collective performance records to the electorate for ratification or rejection, the voters at least had a good idea whom to reward or blame."

He notes that the 1980s were the high water mark of responsible behavior by relatively united political parties.

He then notes what has happened since:

“In 2002 a Republican administration ostensibly committed to free enterprise endorsed tariffs to protect the U.S. steel industry, a policy condemned by economists across the ideological spectrum. Also in 2002 Congress passed and President Bush signed an agricultural subsidy bill that the left-leaning New York Times decried as an ‘orgy of pandering to special interest groups,’ the centrist U.S.A. Today called ‘a congressional atrocity,’ and the right-leaning Economist characterized as ‘monstrous.’ In 2003 Congress passed and the president signed a special interest-riddled prescription drug plan that was the largest entitlement program adopted since Medicare itself in 1965, a fiscal commitment that immediately put the larger Medicare program on a steep slide toward bankruptcy. In 2004 congressional Republicans proposed and President Bush supported a constitutional amendment to ban gay marriage, a divisive proposal that had no chance of passing. After his reelection, President Bush declared his highest priority was to avert a crisis in a Social Security system he insisted was bankrupt, by establishing a system of personal accounts [that had zero relationship to solvency – my addition], while disinterested observers generally pronounced the situation far from crisis and in need of relatively moderate reform – especially compared to Medicare. In 2005 the Republican Congress passed and President Bush signed a pork-filled transportation bill that contained 6,371 congressional earmarks, forty times as many as contained in a bill signed by an earlier Republican president in 1987. Meanwhile, at the time of this writing Americans continue to die in a war of choice launched on the basis of ambiguous intelligence that appears to have been systematically interpreted to support a previously adopted position.

“The preceding are only some of the more noteworthy lowlights of public policies adopted or proposed under the responsible party government of 2000-05. All things considered, if someone wished to argue that politics in the 1970s [with its lack of party discipline] was better than today, I would find it hard to rebut them. Why?”

Fiorina argues that the reasons for the failure of strong-party government to deliver the anticipated benefits include:

1) The change made politics more conflictual, with winning vs. losing being much more clearcut and all-important, leading to permanent campaigning and the disappearance of any intermittent efforts at actual governance. Party positioning for the next election becomes all-consuming all the time.

2) Voters were offered clearer and more polarized choices than they actually wanted, leading to much less responsiveness to public sentiment in a heterogeneous society.

3) The parties now seek 50% plus one vote, not maximizing their votes, since once you have a majority you can pass almost anything you like (well, Social Security privatization aside) without having to claim a popular mandate.

I offer some explanations of my own for the failure of party government to improve the political process, including a variant of #3, in my new book.

This whole subject requires a lot more thought from political scientists and from everyone who is interested in the proper (or at least adequate) functioning of our government institutions. For now, the only clear takeaway is: Be careful what you wish for, or you just might get it.

Thursday, December 14, 2006

Classic rock?

The new expanded reissue of Pavement's Wowee Zowee is enormous fun and well worth repeated listens. I had previously under-rated this album relative to Pavement's previous two and next one (Slanted & Enchanted, Crooked Rain, Brighten the Corners). Favorite new track: the minute-long, bizarre "Candy Lad," a tag-on to a live track on Disk 2. "Dad, you're into some messed-up music," my older son told me as it played.

Wednesday, December 13, 2006

Good appointment

Peter Orszag has just been named to head the Congressional Budget Office. Good news insofar as he is able to exert any influence, whether on policy or simply on measurement of policy.

Monday, December 11, 2006

Now available

After some delay, my new book, "Taxes, Spending, and the U.S. Government's March Towards Bankruptcy," is indeed available on-line.

Here are the links to it at Amazon and, with a better price, at Barnes & Noble.

I've just come back from a Tax and Corporate Governance conference in Munich, where I presented a paper on the U.S. disclosure and penalty regime for corporate tax shelters, which I will post shortly on SSRN.

A U.K. commentator of mine, hostile to my pro-government stance in the paper, apparently planned to compare me to the Bush Administration as an exporter of evil U.S. ideas that Europe ought to ignore. Luckily, he subsided on this comparison (at least orally) although his written comments may retain the reference.

It's a funny feeling to be an American abroad these days, if people consider you a representative of U.S. policy. One feels decidedly uneasy in a manner that has no precedent in my own lifetime experience as an American.

I told this commentator that his complaining (in connection with me) about the Bush Administration made me feel like Basily Fawlty, in the episode of Fawlty Towers where someone complains to him about Manuel's standard of service in the dining room, and Basil responds: "Do you think I don't know? You only dine here - I have to live with it!"

I do, however, feel a bit more entitled than Basil to dodge the complaint this way, as his power over Manuel somewhat exceeds my degree of influence over U.S. foreign and security policy.

Tuesday, December 05, 2006

Oedipus had nothing on this guy

Bush, discussing his father in a recent interview:

"I love to talk to my dad about things between a father and a son, not policy ...

[Does he consult with his father?] "No ... He understands what I know, that the level of information I have relative to the level of information most other people have, including himself, is significant ...

"I am the commander-in-chief."

Monday, November 27, 2006

Truly sickening speculation

Budget expert Stan Collender predicts the following nauseating sequence of events in budgetary politics next year:

"The Republican ... [current] budget strategy points to a number of things happening early next year.

"First, there will probably be a big confrontation between the White House and Congress on the budget early in the year. The fighting and rhetoric could be vicious. No matter what spending levels are approved by the Democrat-controlled Congress, the White House and congressional Republicans will try to label them as excessive and Democrats will respond that they are better than what Republicans would have produced....

"Second, although few people are talking about it yet, a government shutdown early next year is possible. The best way for Democrats to take away the advantage the veto will give the president will be to send him bills that he will have a very hard time not signing. The way to do this on the punt, pass and kick strategy will be to combine the remaining FY07 appropriations into a single omnibus bill and to send it to the White House just hours before the continuing resolution expires.

"That would force the White House either to agree with the spending levels or to take the blame for shutting down almost all federal domestic departments and agencies. That proved to be politically devastating in 1995 for a group of congressional Republicans who were far more popular, had a higher job approval rating and better fiscal credentials and spokespeople than the current administration. It's hard to imagine how a government shutdown in 2007 would turn out any better.

"Third, the [Republican's current] budget strategy is almost guaranteed to eliminate any possibility of increased political comity at the start of the 110th Congress. Instead, it means that there will be a series of bitter fights between longtime rivals and few will be shaking hands with their counterparts at the end of the game."

Sounds all too plausible to me. Indeed, it's hard to imagine, given who they are, why Bush and Rove wouldn't do this.

Sunday, November 19, 2006

Current song fave

TV on the Radio, "Dirtywhirl."

Thursday, November 16, 2006

Milton Friedman

I gather that Milton Friedman died earlier today.

Friedman was a great economist and will long be remembered. One of my favorite bits in his work is the discussion in his book Capitalism and Freedom of converting transfer programs into cash and effectively creating a negative income tax in lieu of the welfare system.

I didn't know him personally. He was long gone from the University of Chicago by the time I joined the law school faculty there, having exemplified the neoclassical rational actor model by moving to warmer and sunnier climes. I did get to know his son David, a very interesting and quirky thinker.

My favorite story about Friedman, told by a law prof at another institution who has an Econ Ph.D. from an earlier career, concerns Friedman's Presidential lecture at the American Economics Association, famously refuting simplistic versions of Keynesianism that were then widely accepted in the profession. A transmogrified Keynesianism has survived, but with a lot less cant and pretend certainty, and with better if still imperfect microfoundations. Keynesianism today is to some extent a behavioral economics concept, though none the worse for that. Anyway, the story goes that this individual, who had been trained in standard 1960s Keynesianism, walked out of the lecture in a daze, telling himself that everything he had thought he knew was worthless.

Okay, one should never speak ill of the dead, but I do criticize Friedman a bit in my forthcoming book for what struck me as an opportunistic (for his side in politics, not himself) Wall Street Journal op-ed stance on deficits. In the 1980s, when Democrats controlled at least one house of Congress, he was agin 'em. Fast forward to 2001, and he was full speed ahead for tax cuts, blithely stating in the face of 20 years of contrary evidence that the politically allowable deficit is fixed so the only way to cut the size of the government is by cutting taxes.

One of my points in response to this endorsement of "starve the beast" was that it was based on a simplistic misunderstanding of the size of government concept in economic substance, relying on observed gross cash flows to or from the government rather than on actual allocative and distributional effects.

I would like to think I could have persuaded Friedman to view these matters differently, had I known him and had the chance to discuss them with him. And I would certainly be curious to know what he thought about the U.S. government's budget policy as it unfolded over the last few years. To put it mildly, I rather doubt he would have been much enthralled with either the Medicare prescription drug benefit or the Bridge to Nowhere, not to mention ambitious nation-building in far-off and hostile parts of the world.

UPDATE: According to Brad DeLong's post today: "There's a story that at lunch at the White House in 2002 he told George W. Bush exactly what he thought about Bush's unpaid-for tax cuts. We will miss him."


All knowledgeable people appear to agree that the outcome in Iraq is going to be an utter disaster, no matter what. The realistic choice lies between awful alternatives.

For politicians, of course, this means the key to success is to make sure the other guy gets the blame.

Now Bush reportedly wants to send 20,000 more troops there for "one last push." Anyone with half a brain should realize that the chance of this succeeding is zero - not one in a billion, but zero. I am not so fondly reminded of the serial escalations in Vietnam during the 1965 to 1968 period. Each time, we now had enough force. Only, Vietnam in truth was going much better than Iraq. There actually was a South Vietnamese government and army, and the mass murder was between organized political forces that could in theory agree to stop.

Joke I saw on-line recently: Q: "What's the difference between Iraq and Vietnam?" A: "Bush had a plan to get out of Vietnam."

Something else I read on line recently noted that you'd need 500,000 to 600,000 U.S. troops in Iraq for there even to be a chance of success. Even at that troop level, we almost certainly wouldn't succeed. But it would at least make the U.S. forces relevant. At lower levels, the U.S. troops simply do not matter so far as resolving the basic civil war issues is concerned.

Bush is cynical enough to play the blame game by making sure that he asks for more than he can get, so that when he doesn't get it someone else gets the blame.

But I gather he is delusional enough to think that the extra 20,000 actually will work, and thus to demand something that he can actually get. But when it doesn't work, I imagine he will be looking for ways to make sure that the Democrats get the blame.

It's not very edifying for the Democrats to respond by saying to themselves: We need to give him more rope, so he will hang himself instead of us. Probably the best they can do, however, at least until he ups the ante further.

Generally speaking, I think Bush's current strategy is one of deliberately trying to provoke the Democrats. That would be one interpretation of the Bolton renomination (sent to the Senate just 7 minutes after he finished meeting with Pelosi), and of his renominating all the most extreme judges that even the current Congress wouldn't approve. Bush is acting just like the little kid who pinches the boy next to him while the teacher isn't looking, with the plan of starting to screech if the other boy pinches back.

Childish, yes, but certainly more sophisticated strategically than anything he has tried in the Middle East.

There's a lot of stupidity in this country, with a disproportionately large share of it lying inside the Beltway. So it will be interesting, though painful, to see how all this plays out.

Tuesday, November 14, 2006

Medicare prescription drug prices

The question of whether the U.S. government should use its monopsony power on the consumer side of the prescription drug market to negotiate lower drug prices is truly a no-brainer. I verge on thinking that one has to be financially involved with the drug companies, or else woefully uninformed about the U.S. healthcare market, to think otherwise.

In a well-functioning competitive market, the exercise of monopsony power, no less than of monopoly power, leads to inefficiency, from suppressed transactions that would have created social surplus (i.e., value to the consumer in excess of cost to the supplier).

In the market for healthcare services including prescription drugs, however, we have a reasonably competitive market (subject to patents and the like) except for one little detail: consumers are not paying at the margin for what they get.

When you have a functioning market except that consumers aren't paying at the margin for what they get, it can be worse than not having a market to begin with. But certainly, in these circumstances, the argument that exercising monopsony power inefficiently suppresses demand has no credibility.

Wednesday, November 08, 2006

Significance of the election, part 2: the role and meaning of bipartisanship

One of the recurrent themes in this election cycle was "bipartisanship," which I have put in scare quotes for a reason.

Out-of-touch buffoons such as David Broder have this as their mantra, ditto Joe Lieberman, and they interpret it to mean such silly things as (a) if the Republicans commit crimes and election fraud (Abramoff, robocalls, etc.) we must say that both parties do it equally, and (b) if Bush wants to trash the Constitution while actually undermining public safety, and if he wants to say that anyone who opposes him is a traitor, we must be willing to go along with him so that we are not "partisan."

Defining bipartisanship relative to where the players actually stand gives them an incentive to go as far to the extreme as possible, since placating them becomes the norm without regard to whether they are being reasonable. One needs an independent definition of how reasonable each side is being, in order to create incentives to be reasonable.

Actual bipartisanship is needed in this country, however. On foreign affairs, since it's not my specialty I'll just say that we need a rational debate about the various choices we have that is not hamstrung by ugly aspersions. Domestically, we need a deal in which the Republicans agree to raise taxes and the Democrats agree to cut entitlements growth. Neither party can prescribe bad medicine by itself, even the one that it is more willing to prescribe.

This type of public-spirited dealmaking has happened before. Indeed, in the 1980s it happened repeatedly. The 1983 Reagan-O-Neill Social Security compromise is the classic example, but consider as well the 1982 and 1984 deficit reduction packages, Gramm-Rudman Hollings, and the 1990 budget deal. Not to mention the 1988 enactment of catastrophic coverage in Medicare, which, while a political disaster that led to its repeal the following year, involved responsible bipartisanship (the new benefit was fully financed not only in budgetary terms but generationally - seniors didn't get a freebie as in 2003).

You need responsible adults on both sides for this to happen, however. We don't know for sure if the Democrats are willing to be responsible adults, but we know beyond any possible doubt that the current Republican leadership is not willing to do anything even remotely fiscally responsible.

The most important thing about Democratic victories is the following. One can hope and pray that defeat leads the Republicans to reconsider their course, throw out the current cabal of incompetent, criminal lunatics, and go back to where they were with the likes of Reagan, Bush Sr., Dole, Baker, Darman, Stockman, etc.

This is a lot to hope for, and I don't know if the party's internal dynamics permit it. But one trigger of their march to madness (although there were surely deeper sociological causes) was the "lesson" of 1992, whether true or false, that Bush Sr. lost because he raised taxes, and then the "lesson," again whether true or false, that the other course led to their 1994 victories.

I don't know how many defeats it will take for the Republicans to get there. One bad set of midterm election results might not be enough. But a lot rides on whether the Republicans can once again become capable of responsible bipartisanship, so that at least there is a chance of rational policymaking. Just having the Democrats run everything is not the answer, due both to the flaws in their policies, such as their resistance to making the entitlements sustainable, and to the political difficulties they would face even if they tried to be responsible all by themselves.

In the interim, fake bipartisanship has nothing to offer either the Democrats tactically or the nation substantively.

Significance of the election, Part 1: the next 2 years

Obviously I'm glad about the election results, but more for negative than positive reasons. It should help to slow down the criminal, totalitarian cabal that had seized control of both the Republican Party and the country, each of which deserves better (in the former case, referring to honest conservatives). But a healthy political system that can deal with actual social and economic problems is still a long way off, and little progress is likely to be made in anything substantive over the next 2 years. So the good news amounts to, "If you're in a hole, the first thing to do is stop digging."

I have read speculation that the Democrats will restore the paygo rules in the Federal budget. This is a stated part of their public position; the speculative part is that enough Republicans will feel they have to go along. That would certainly be a constructive first step.

Bush's Social Security plan would appear to be dead for the next 2 years, which is fine with me although I hold no brief for the current system. His plan was at best a distraction from addressing Social Security's fiscal problems. It amounted to lending people money so they could buy stock and bond funds on margin. If you think this is a good way to address the fiscal problem here, you should also address your own future expenditure needs (such as saving for retirement) by buying lots of stocks and bonds on margin instead of actually saving anything. Not the course that I would recommend.

The expiring tax cuts need to be addressed at some point, if only so people will know what to expect. The Democrats will not want to extend them, and Bush is probably unamenable to anything else. So perhaps we can expect the chicken games on this to continue through the 2008 election, with everything still unresolved. Likeliest exception: I could imagine an estate tax compromise (much higher exemption amount, lower rate as part of a "permanent" new regime), but only if Bush will sign on to make it veto-proof. Meanwhile the AMT will be growing, and I don't see how they are going to be able to make a deal addressing this, especially with paygo rules in place.

On Medicare, just a wild guess: fix the donut hole in benefits even though it blows a further hole in the budget (with paygo suspended for this purpose), and make a small gesture towards paying for it by authorizing the government to use its monopsony power in negotiating with drug companies? (Which power the Administration might then make sure it did not use.) This of course would amount to digging the hole deeper.

Often I prefer gridlock to the alternatives. But here we have both the contrived crisis of the sunsetting tax cuts and the growing AMT, and the broader march towards insolvency. I will start a fresh post to address the question of how, as a political matter, we might get towards addressing those at some point past the 2008 window.

Tuesday, November 07, 2006

TV notice

Gore Vidal once said that there are only two things you can never do enough. One is to be on TV, amd the other is - well, never mind that.

It's possible that I will be on Bloomberg TV this afternoon at 2 o'clock, speaking fearlessly on the election and entitlements as my remarks are beamed out live to a nationwide audience of hundreds.

Then again, maybe not - I may have gotten back to the bookers a bit too late.

UPDATE: No dice today; maybe at some point in the future.

I had brought my tie in to work, just in case, but at least I didn't get to the point of unnecessarily putting it on.

Sunday, November 05, 2006

Blah versus evil

That, at least, is how I see Tuesday's elections.

Wednesday, November 01, 2006

Reporting without context

The media really has to do better than this brainless, context-less, "he said, she said" pseudo-"balanced" journalism that led them to treat the libelously false Swift boat allegations of the 2004 campaign, disseminated by the campaign of a deserter and draft dodger, as a straight-up news story.

This time around, the White House is gleefully, desperately jumping on Kerry for having said that, if you don't get an education, you could end up in Iraq. This supposedly insults the troops.

Let's start by noting that, beyond any possible dispute, the statement is objectively true. With less education you have less opportunities, and signing up for military service becomes much more relatively attractive. The military option, in turn, looked better in the days when it seemed that one would only risk combat if a genuine miliitary problem arose in the world, as opposed to an Iraq-style war of choice. So the Administration has taken one of the better options that people with low education previously had, and made it far less appealing.

Now we have Bush smirking about how Kerry has insulted the troops and needs to apologize, and the media report it straight up. Bush is the guy who sent the military to Iraq without a plan to establish security, and has had them there as sitting ducks, for several years now, without even giving them adequate body armor. Kind of him to be so protective of their dignity when Kerry makes a true statement about how he has wrecked one of the better opportunities that young people with limited high-wage employment prospects previously had.

Is it too much to ask that the media place this charge in proper context?

If Bush said that Kerry's statement was a code signal to warriors from the planet Zircon, telling them that it was time to invade Earth, and Kerry then denied this, would they report this, too, as he-said-she-said without pointing out that the Bush position was preposterous? No? Then we have established that judgment is needed at some point about which charges are too preposterous to report straight up without context. We are quibbling only about degrees. But degrees are quite important, and the Bush accusation is only a scintilla, if that, distinct from the planet Zircon scenario.

Monday, October 23, 2006

Same old bloody rubbish

I hate to call Bush French or something, but he certainly lives by the slogan: "Toujours l'audace."

He's up to an old trick today, denying that he ever said he wanted to "stay the course" in Iraq. Unfortunately, as Dan Froomkin points out in his Washington Post blog (which is hands-down superior to any print column that the Post regularly publishes), he actually did say "stay the course" repeatedly.

Word of clarification: by repeatedly I mean again and again and again and again.

Now it turns out that Bush, and by strange coincidence his aides, are out there denying in almost identical words that he ever said any such thing.

This brings back the nostalgia for me a bit, because I remember the Social Security debate. Recall that his plan, such as it was (since he disclosed it but declined to endorse it), for many years bore the label "privatization." I argued in my 2000 book, Making Sense of Social Security Reform, that this label was in fact a misnomer for a genre of proposal that in essence would lend people the money to make debt-financed purchases of government-selected stock and bond funds. But they called it privatization anyway, I think sincerely even if inaccurately, because this term had a positive valence in the conservative think tank circles where it spent a couple of decades gestating.

Once Bush was actually proposing it, this handlers started to focus-group the name "privatization," and found that it was a flop with the general public. So, as I discuss in what I considered one of the more amusing sections of my forthcoming book, the name marched ever onward from privatization to private accounts to personal accounts to personalization (this last one being too strained and ludicrous to catch on).

The amazing thing about this march of the fiscal language terms was how shamelessly and egregiously they would accuse anyone of bias who used a term that they had used last week but were no longer using this week.

We have always been at war with Eastasia, not Eurasia, or is it the other way around.

Sunday, October 22, 2006

Tax Reform Act of 1986

Today is the 20th anniversary of the enactment of the Tax Reform Act of 1986. At the time, I had a seat near the action as a Legislation Attorney at the Joint Committee on Taxation. It was easy to be cynical about the political process that led to its enactment, and I was, but compared to today the word Pollyanaish seems fairly apt. Notwithstanding the sleazy "rifleshot" transition rules, exempting particular companies from adverse changes, that we put in, presumably, to buy individual votes. And notwithstanding the core reason for its enactment, which was the "dead cat" problem - few politicians actually wanted it, and they all came to understand fairly early on that the voters didn't really want it, but whoever let it die (Rostenkowski, Packwood, the White House) would have a "dead cat" rotting on his doorstep.

Still, at the time there was an actual policy process, with staffs that had ideals and institutional memories getting to play a role, and there actually were some powerful people who cared at least a bit about good policy (e.g., Don Regan and Dan Rostenkowski), and there was bipartisan cooperation, along with a notion that the voters would reward actual achievement (or at least punish its absence), and there was a sense of fiscal responsibility. It wasn't actually Pollyanna. But it was a functioning political system, sleazy and ignorant to be sure if one should be too high-minded about it, but far as yet from being utterly debased and dysfunctional.

Thursday, October 19, 2006

The Mets lose

Well, they had a good year, and Oliver Perez apparently pitched well in Game 7, and the new Cardinal closer, Wainwright, has an absolutely vicious curveball.

Thursday, October 12, 2006

Act now while supplies last

My book, Taxes, Spending, and the U.S. Government's March Towards Bankruptcy, is coming out at the end of next month (November 30 in-stock date). If I'm not mistaken, it has blurbs supplied by Bruce Bartlett, Richard Epstein, and Jason Furman. Here is the publisher's description:

What's in a word? Plenty, when it's a word such as “taxes,” “spending,” or “deficits” that pervades Washington political debate despite lacking coherent economic content. The United States is moving toward a possible catastrophic fiscal collapse. The country may not get there, but the risk is unmistakable and growing. The “fiscal language” of taxes, spending, and deficits has played a huge and underappreciated role in the decisions that have pushed the nation in this dangerous direction. This book proposes a better fiscal language for U.S. budgetary policy, rooted in economic fundamentals such as wealth distribution and resource allocation in lieu of “taxes” and “spending” and in the use of multiple measures (such as the fiscal gap and generational accounting) to replace misguided reliance on annual budget deficits.

Available for pre-order here from Amazon and here from Barnes & Noble.

At the moment, Barnes & Noble is offering a better paperback price.

Wednesday, October 11, 2006

Quote of the day about U.S. tax politics

From House Ways and Means Chair Bill Thomas, whose epitaph ought to be "There Were Plenty Worse" - and I mean this as high praise, all things considered:

"Don't think in this business that you're dealing with the best and the brightest. You're dealing with the available and the willing."

Sunday, October 08, 2006

Sometimes it's fun to be wrong

Make that, A LOT of fun.

I admit it, I thought the Yankees' chances of beating the Tigers were somewhere in the range of 90 to 95 percent.

Thursday, October 05, 2006

Fool or tool?

David Brooks' op-ed today, a thumb-sucker about how the Foley scandal reveals a "tear in our social fabric," contains the following astounding lines:

"In discussing the Foley case, the political class, with its unerring instinct for the aspect of any story that will be the least important to average Americans, has shifted attention from Foley’s act to Denny Hastert’s oversight of it. It has fled morality to talk about management."

OK, David, we understand that you won't get invited to as many cocktail parties if you don't try to help take the heat off the Republican Congressional leadership. I suppose that would make your life less fun, although perhaps you could use the extra time to do some actual research for your next sociological tract.

But leaving aside the impudence of Brooks' posing as not part of the "political class" but rather as one in touch with "ordinary Americans," does he really think Hastert is being criticized for bad management skills? Or perhaps I should say, does he really think he can con readers into thinking this is the issue being posed?

Deliberately covering up and enabling the actions of a vile sexual predator in order to help the Republicans keep control of Congress is not a "management" issue. If it isn't a moral issue, then I am not entirely clear on what is. Of course, I already know from what I have and haven't read in Brooks that torture isn't a moral issue either.

Also, why is Brooks so sure (or why does he pretend to be so sure) that "average Americans" don't care about the moral issue of supposed moral leadership types treating potential sexual abuse of boys as less important than their retaining as much power as possible?

Wednesday, October 04, 2006

Would Al Gore have prevented 9/11?

As I look at the public information that has dribbled out over the last few years, I increasingly think that the answer is Yes.

I should note that this is nothing particular about Gore. The sense I increasingly get is that just about anyone and everyone who has been a serious Presidential candidate in the last 50 years could also have prevented 9/11.

If this reasoning is correct, then 9/11 would have been prevented, not only by Al Gore, but also (for example) by John McCain, Bill Clinton, Bob Dole, George H.W. Bush, Dick Gephardt, Michael Dukakis, Ronald Reagan, Fritz Mondale, Jimmy Carter, Gerald Ford, Richard Nixon, George McGovern, Hubert Humphrey, Barry Goldwater, and Dwight Eisenhower, to name just a few.

Point 1: It has become clear that the U.S. intelligence community was very, very close to breaking the plot. If the FBI, CIA, and a few others such as local law enforcement had pooled their information a bit sooner and better, they had everything they needed to stop the attacks. The highest levels also fully realized how serious and imminent the al Qaeda threat was, and they tried desperately and repeatedly to get the Bush Administration to pay attention.

Examples include the infamous "Bin Laden determined to attack in U.S." memo, the CIA guys who went to see Bush at his ranch and were told "OK, you've covered your ass," and of course the most recently revealed briefing in which Tenet tried to get Condi Rice and several other top Administration officials to pay attention, but got the brushoff.

What stimulated this line of thinking on my part was Condi's non-denial denial that it was "incomprehensible" that she could have gotten these warnings and paid no attention. Various anti-Bush bloggers naturally riposted along the lines of: "I couldn't have said it better myself."

Given the seriousness of the warnings, it is plausible that any of the above-named actual or hypothetical Administrations would have paid attention. Likewise, would any of them, if invading Iraq, have done absolutely no planning for the occupation whatsoever? And then made absolutely no effort to succeed, such as by bringing in competent staff rather than political hacks? Again, this is a wildly unique Administration. The resistance to making any inquiry into the al Qaeda threat is completely consistent, however, with how they've acted on other occasions before or since. They never pay attention to information that doesn't fit their biases, even when it is in their interest to do so.

Surmise 1, therefore, is that in any Administration but this one there would have been a serious nudge from the top to try to put all of the pieces together. And since we were so close to breaking the plot, Surmise 2 is that this would have done the trick.

So we have this buffoon with a fifth grade reading level, who "knows" that Iraq is going well even though he had never heard of the Sunnis and Shiites until about a year ago, who is campaigning for continued power on the ground that only he can make us safe. Yet not only has he made us much less safe with the Iraq misadventure, as his own intelligence officials have determined, but he heads the one and only conceivable U.S. government that could have bungled the job of preventing 9/11.

I always thought I liked irony, but this one is a bit too rich even for me.

Tuesday, October 03, 2006

My Public Economics class

Today's subject: social insurance.

xtIt's odd how leading economists, including very good ones such as Jonathan Gruber, the author of the textbook I am using, acquiesce to categories that have no economic substance. They could say that they're deferring to common usage, but don't always do so and may not always realize it.

Case in point: Gruber defines social insurance - following prevailing conventional wisdom - in terms of private insurance, which he says is characterized by (1) premiums, (2) event conditioning (i.e., it's paid when and if X happens), and (3) lack of income conditioning. This supposedly explains why Social Security is "social insurance" but the income tax and welfare system aren't.

In fact, insurance is a kind of bet one places to hedge other bets one is forced by circumstances to make with the aim of directing dollars to states of the world where they are expected to have greater marginal value in utility terms. One doesn't insure against horrific events, such as the death of a child, that don't make the marginal dollar more valuable. One does sometimes insure against good things, such as living longer & thus needing more money, or having an untreatable medical condition that becomes treatable.

Let's look at Social Security and the 3 supposed key features. It doesn't meaningfully have premiums absent arm's length exchange. What it has is the arbitrary designation of certain compelled tax revenues as ostensibly earmarked to pay over the long term for the program. Earmarking is an interesting issue, having to do with the effort to create political binding pre-commitment, but has nothing to do with premiums as such. If they ended the earmarking and folded the Social Security premiums into general revenues, absolutely nothing would change beyond bookkeeping unless (as is plausible) actual political decisions changed.

Event conditioning: OK, the Social Security life annuity addresses life expectancy risk and provides insurance against living "too long." Probably not a mode of insurance that the government has to provide on adverse selection grounds, the usual lead argument for government involvement. Rather, the argument is paternalism if people under-save and under-annuitize with a dollop of externalities if they would get public support in the absence of other resources.

But insofar as you expect to live to retirement age, a retirement benefit is not event-conditioned in the usual insurance sense - it relates to an event that just happens at a certain point, rather than one that is risky.

OK, lack of income conditioning. Well, it is pure formalism to say that Social Security isn't income-conditioned. Even leaving aside the payroll tax financing to focus exclusively on the benefit side, we could make it income-conditioned with no change in substance whatsoever if we simply reshuffled existing fiscal rules so that the effect of partial income taxation of Social Security benefits was formally made part of Social Security.

Also, why would anyone say insurance isn't income-conditioned? All insurance other than automobile insurance isn't automobile accident-conditioned. Likewise, insurance that isn't income insurance isn't income-conditioned. By definition, income insurance is income-conditioned and other insurance isn't.

We don't observe much income insurance outside of the fiscal system due to the adverse selection problem. (People expecting low income would disproportionately sign up.) This is why the government provides it through income taxation and welfare, among other fiscal instruments. As recognized in the Mirrlees tradition in optimal income taxation, income insurance via taxes and welfare is the government insurance example sine qua non.

Only, it doesn't have anything that we arbitrarily label as a premium, so the economic substance doesn't count.

Monday, October 02, 2006

Mark Foley and Iran

Anyone who doesn't understand that the Foley affair significantly increases the likelihood of an attack on Iran, as a way of changing the subject, doesn't understand these guys very well.

Non-denial denials

Responding to the Woodward book, Condi Rice calls it "incomprehensible" that she would have brushed off attack warnings from CIA director Tenet, and "ludicrous" that Rumsfeld wouldn't have been returning her calls.

In Washingtonspeak, the use of these terms is synonomous with admitting that the statements are true.

Friday, September 29, 2006

I think they meant "al dente"

A package of Italian pasta that I brought home gives careful bullet point pasta cooking instructions for ignorant Americans. Bullet point # 2 is "Drain pasta with tooth consistence."

Wednesday, September 27, 2006

Statutory mystery explained (?)

As a tax person, I am experienced at reading and construing statutes. So, despite my lack of legal background in the precise area of the military commissions legislation, I thought I would give it a careful read. Having done so, I must say that I am baffled and suspicious.

The stated purpose of the legislation is to "establish[] procedures governing the use of military commissions to try alien unlawful enemy combatants engaged in hostilities against the United States for violations of the law of war and other offenses triable by military commission." Section 948b(a).

Towards this end, the legislation contains two separate definitions of particular interest. One is "unlawful enemy combatant," defined in either of two ways. The first is as "a person who has engaged in hostilities or who has purposefully and materially supported hostilities against the United States or its co-belligerents who is not a lawful enemy combatant" (i.e., a member of regular armed forces somewhere other than the Taliban or al Qaeda). Section 948a(1)(A)(i). Many have noted how broad this language is. E.g., Vice President Cheney characterizes various forms of political dissent in terms that don't fall far short of this.

An "unlawful enemy combatant" is also defined as anyone who "has been determined to be an unlawful enemy combatant by a Combatant Status Review Tribunal or another competent tribunal established under the authority of the President or the Secretary of Defense." Section 948a(1)(A)(ii). Many have noted that this appears to be standardless. You and I are unlawful enemy combatants if Bush or Rumsfeld establishes a tribunal that so finds under whatever standards they happen to prescribe.

But here's where the plot thickens. Again, the legislation serves to to "establish[] procedures governing the use of military commissions to try ALIEN unlawful enemy combatants" (section 948b(a); emphasis added).

To meet that definition, you must also be an "alien," which is separately defined in section 948a(3) as "a person who is not a citizen of the United States."

By virtue of section 948c, "[a]ny alien unlawful enemy combatant is subject to trial by military commission under this chapter."

Thus, there is nothing in the provision that gives separate legal significance to the term "illegal enemy combatant" without the word "alien" in the front.

So the question is: Why does the legislation define a term, "unlawful enemy combatant," that has no legal significance under it whatsoever if not preceded by the term "alien"? Sloppy drafting is one possibility. Skilled tax statutory drafters, at least with the time to check their work, would never leave a freefloating term like that.

But strange times breed mistrust. Is there a reason for gratuitously defining "unlawful enemy combatant" so that it unambiguously can be met by an American citizen, even absent operative provisions in this legislation itself that turn on meeting the definition?

An additional ambiguity here is that the provision I read is a subchapter, and the definitions are stated to apply for purposes of the entire chapter. What are the other subchapters? This may be knowable, but I don't happen to know it.

The upshot: this legislation provides for the use of military commissions solely against non-citizens. But it apparently gratuitously defines "unlawful enemy combatant" in a way that would permit the Administration to determine that an American citizen is such an individual. Indeed, it's purely discretionary with the President and the Secretary of Defense.

It is easy to conclude that the Administration will treat this determination as legally relevant to what it can do to American citizens, even though on the face of the legislation it can't use it to try them before military commissions.

But why bother to try them anyway, especially if you believe that you are empowered to detain and torture illegal enemy combatants indefinitely without any requirement that they be subject to a specified set of trial procedures?

I therefore conclude as follows: The legislation is not directly relevant to the question of what the Administration can do to American citizens. But it provides a statutory basis for describing them as "unlawful enemy combatants," which I would expect the Administration to treat as having further independent legal significance.

UPDATE: Marty Lederman reminds me that the law of war is conventionally interpreted (including in the Supreme Court's Hamdi decision) to permit detention of enemy combatants for the duration of the war for purposes of incapacitation.

The statute therefore arguably provides quite important if indirect statutory support for Bush's claim that he has absolute power of arrest and detention over all citizens as well as non-citizens.

A prediction

Jack Balkin among others has been analyzing the increasingly astonishing torture and detention legislation that is marching through Congress. One important thing in assessing this legislation: one should NOT read it as a lawyer interpreting text in good faith to determine its best meaning. Rather, one should ask oneself two questions: (1) how will Bush Administration officials interpret it, and (2) what recourse outside of Administration channels, and beyond the Administration's control, will it leave to people who are taken into custody. The short answer is: You really don't want to know, especially if you like sleeping soundly at night.

I predict that, if this legislation passes and the Republicans hold Congress, there will be disappearances of American citizens in the next two years. My guess is that it will at least initially be people in the Noam Chomsky camp, rather than those less far to the left, and that it will be unclear whether anyone has actually been taken into custody.

I do think that people closer to the center, such as Frank Rich and Paul Krugman, will genuinely and seriously have to ask themselves (whether or not they write about it) whether they are at risk of being disappeared as well.

Friday, September 22, 2006

And on a lighter note ...

... our cats' main nicknames:

SHADOW: the Big Guy, Captain Goodfellow [he's simply too dignified for anything far beyond these].

URSULA: Baby Girl, Princesska, Honeykins, Ursula Wobble.

BUDDY: Squeaky McGee, Silly Whillikers, Buddy von Beastingham, Spudzilla.


Senators McCain, Warner, and Graham have sprung the trap they appear to have been planning all along, and agreed to legalize and rubber-stamp torture along with Stalinist showtrials in which people are executed on the basis of secret evidence. The highly theatrical charade they conducted does nothing for the values they claim to have been defending, or for American soldiers who might in the future be taken prisoner abroad. But it does provide enormous political aid to Bush, to Republican candidates in the midterm elections, and to McCain's 2008 Presidential campaign. This presumably was the whole idea from the start. The Democrats have only themselves to blame for marching right into the trap.

In a just world, Senator McCain would get to relive his past and re-experience the torture that he has now endorsed. I remember people saying of Hubert Humphrey, a long time ago, that the hunger to be President had eaten away all of the good things that had once been inside him. But Humphrey can't compare to McCain - a man who has now endorsed and will soon have legally enshrined, not torture to save American lives, but needless, pointless, gratuitous torture in the face of a consensus by the experts who actually do interrogations that it is not a useful tool.

I increasingly think of myself not as an American, but as a New Yorker and East Coast resident. I am proud of my culture and society, and will put it up against anyone's. But it is that of my region, not of this country.

Thursday, September 21, 2006

Why has Grover Norquist visited the Bush White House at least 155 times?

Today's New York Times reports that Grover Norquist has visited the Bush White House at least 155 times.

Sleazy Abramoff-related lobbying? Surely you jest. According to the article, "White House spokeswoman Dana Perino said ... [that] it was possible some of Norquist's meetings were with Karl Rove, the president's longtime confidant and political strategist.

"'He is one of a number of individuals who worked to advance fiscal responsibility, which is one of the key aspects of the president's agenda,' Perino said."

Grover Norquist is to fiscal responsibility as Jack the Ripper was to safer working conditions for London prostitutes.

Wednesday, September 20, 2006

Horizontal equity

I'm teaching a Tax Policy course this semester, mainly on distribution issues (my other course focuses on efficiency issues). One funky thing about teaching Tax Policy at NYU Law School is that, since it's a required course for tax LLMs, you can get a lot of people who don't really want to be there. This is no fun if you're the teacher, even if you are agnostic rather than self-righteous about whether, from their standpoint, they ought to care. I actually raised this issue in class on the first day, asking anyone who might have been there for that reason to be a good sport & give it a shot. One way or another, my sense has been that it's working, and that a lot of the people in the class are engaged and interested. I've tried to do my bit, both by encouraging discussion and by trying to pick provocative papers rather than those that are ostensibly (or actually) canonical.

One of today's readings is a well-known 1976 article by Martin Feldstein about horizontal equity. Interesting to me to read this piece now. Provocative and surprising though I would think it was when it came out, time has truly passed it by, which is part of what makes it fun to read.

Feldstein goes against the Haig-Simons orthodoxy (at least among lawyers) of the time, by defining horizontal equity in terms of legal continuity rather than, say, comprehensive income taxation. Thus, no HE violation if you don't tax municipal bond interest and the tax benefit is capitalized into the price, causing the after-tax return to be the same as that on taxable bonds. Pretty obvious once stated, although at the time not widely understood. (Boris Bittker had written about it, however.)

Less impressively, Feldstein's 1976 view of the economics of information seems to be that X is considered 100% certain, then there's a total surprise and it is replaced by Y, which now in turn is considered 100% certain. Meanwhile, he doesn't think of people as generally engaged in portfolio choice under uncertainty with reasonably complete financial markets and the aim of maximizing expected utility given a constantly updated set of expectations. (A jargon-laden mouthful, I realize, but it captures the way that an economist with Feldstein's training ought to conceptualize issues automatically, at least as a starting point. And the rational expectations school in macroeconomics had arisen by 1976.) Meanwhile, the fundamental political economy issue of how we ought to define the optimal scope of binding government pre-commitment - which obviously shouldn't be assumed to arise either in all cases or in none - isn't even in sight.

It's also amusing to see Feldstein in 1976 being so cautious about the case for consumption taxation. With an air of being daring, he says that maybe capital income should be taxed at a lower rate than labor income,. Of course, the modern consumption tax view is that the return to waiting (capital income stripped of risk premia and other such conceptually separate elements) should be taxed at zero.

Harold Wilson once said that a week is a long time in politics. Perhaps academics should be relieved that, for us, a long time is measured instead in decades.

Monday, September 11, 2006

Fish in a barrel

The moment I saw the NY Times front page, inexplicably treating Bush's staged 9/11 milking as screamer-headline news, I correctly guessed that the lead article would say he was "visibly moved." But I missed out on the extra credit - the inevitable mention of the "unscripted stop." Anyone want to bet on whether they scripted the "unscripted stop"?

My wife speculates that the "lessons of that day" Bush will "never forget" (as the Times breathlessly quotes him) must have come out of "My Pet Goat."

I added that Bush certainly seemed to have forgotten the lessons of 9/11 when he pulled all those special forces guys off the Osama trail in Tora Bora so they could head to Iraq.

He says, of course, that "I" not "we" will "never forget." All that the rest of us are supposed to do, in his scenario, is give him the votes to keep on doing what he likes.

I was literally there on the day, about a mile from Ground Zero and with a clear view of the Towers as they burned and fell. (It also happens to be my wedding anniversary, a horrific coincidence that we are finally getting over.)

I find it in bad taste to use 9/11 as an election trick aimed at heading off Congressional investigations of six years of crimes and malfeasance.

Friday, September 08, 2006

Heard on the street

Today, as I was heading home, a nanny was walking with a very little girl plus a baby in a stroller.

"How much is 1 plus 2?" she asked the little girl.


"How much is 21 plus 2?"


"Try again."


I think we've found the next Treasury Secretary.

Wednesday, September 06, 2006

Crasser than ever

Sending Khalid Shaikh Mohammed and the others to Guantanamo and suddenly demanding showtrials as a pre-U.S. election stunt is low and cynical even by Bush's warped standards. He certainly is willing to advertise his priorities to anyone whose eyes are open.

I guess I'm just naive. To me, the question of what we do with the likes of Khalid Shaikh Mohammed actually matters for its own sake. I don't see it as just a subject for political trickery.

Sunday, August 27, 2006


Everyone realizes, of course, that the question of whether Pluto is a "planet" is not a well-defined scientific question, since "planet" is not a well-defined concept in the sense of proton and electron or even species (defined in terms of fertile interbreeding) and star (defined in terms of nuclear fission). It's a term of convenience that we like using to group together the "major" objects circling a star, inherently having fuzzy boundaries.

That being said, I thought Pluto should be excluded from the club, or more precisely that my sense of how the term "planet" is most conveniently used suggests excluding it. In addition to all the differences between it and both the rocky inner planets and the gas giants, the fact that a whole bunch of other objects, not easily distinguished from Pluto, may be out there, suggests to me that we would have too many planets from a convenience standpoint if we didn't give Pluto the old heave-ho. And calling the asteroid Ceres a planet, as the earlier definition would have done, seemed a real violation - again, just of useful and familiar language categories although not of any scientific principle (one can define "planet" however one likes).

But I see a serious flaw in the latest approach taken by the scientific panel, even though I agreed with the result. The problem was how they did it, which brings to mind a judge getting the "right" result in a case of first impression by creating new law that is bound to function poorly in future cases. They emphasized the idea of "dominance," meaning that the would-be planet must be much bigger than anything in its neighborhood.

The problem is that local dominance really doesn't capture what makes us think of some objects as planets. If the Moon were bigger, would we think the Earth wasn't a planet? If Jupiter were a double planet, would we want to boot it from the club? For that matter, does Charon's size have anything to do with the reasons for thinking that maybe we don't want to call Pluto a planet?

If some inexorable law of solar system formation dictated that anything we really wanted to call a planet would fortuitously have the characteristic of local dominance, the spurious use of this special factor to get the "right" result would be harmless error (resorting to legal jargon once again). But I see no reason to think this must be so, even if it generally tends to be. True, in our solar system the inner 8 planets are locally dominant. The Earth is by far the closest to being an outlier (and of course wouldn't be classified as locally dominant if we made the definition more demanding), and this is thought to reflect an extraordinary event - collision with a Mars-sized planetoid in the early years of our solar system. But again this bit of history only goes to show that strange things can and will happen across a range of solar systems (which we are getting ever better at detecting in outer space).

Use of the local dominance factor may have anomalous results as we learn more about the outer reaches of our solar system. E.g., suppose there are 20 locally dominant iceballs out there with eccentric orbits, barely Pluto's size, and one more that's 50 times the size of Earth, less eccentric in its orbit, and closer in, only it's a double planet. Would it be the only non-planet of the bunch? Plus, with all the other solar systems we may detect, the definition is unlikely to consistently give us what we "want."

Given the term "planet's" peculiar linguistic usage and status, it's probably a mistake for scientists to try to come up with a tight definition, even though this ordinarily is the way they do business. They've designed a rule (as in "the speed limit is 55 mph") when what they need is a standard ("unreasonably fast under the circumstances").

Wednesday, August 23, 2006

More on the Murphy decision

A few more comments on Judge Ginsburg's shoddy, reckless, and foolish opinion:

1) The whole tone is one of absurdly showy "I'm a great judge!!" He's preening before an imaginary audience.

2) He assumes without argument that the enactors of the 16th Amendment intended their current understanding of the term "incomes" to be constitutionally binding, as opposed to anticipating that experience could rightly bring refinements in the understanding.

3) Amazing disregard of policy and common sense. By policy here, I don't mean tax policy. I mean sound judicial policy in deciding where to intervene, based on what courts are and are not good at doing. Ginsburg apparently thinks that this type of reasoning has no place in constitutional (or one presumes statutory) interpretation, even in the face of ambiguity.

The silly path he takes here, of using antiquated accounting concepts to say that return of "capital," compensation for purely psychic injury, etc. cannot be taxed is one that the courts tried right after the Sixteenth Amendment was passed. Within a few decades, they gave up, because they realized they could not do it well. The sorts of line-drawing judgments that it requires call for a legislatve response. So the courts got out of the business of fine-tuning the boundaries of what cash inflows are and aren't taxable.

In other words, it was sound judicial policy to leave this sort of thing to Congress, or else it was bound to become a complete mess. Are judges supposed to ignore this? Must we assume that the enactors wanted all future courts to ignore it?

Policymaking by judges can get a bad name because it can mean "my preferences regarding controversial political issues." But to jump from that to saying that judges cannot make reasonable judgments about where they can and can't do a good job, given their institutional characteristics, is something else entirely.

4) Ginsburg has one policy-minded hobby horse in the opinion. He abhors the idea that, under the Sixteenth Amendment, Congress can define income however it damn pleases. But again, if common sense were permitted under his theory of judging (if his biases can even be dignified with such a term), he would recognize that this (simply including gross and net receipts of cash) is not the place where policing by the courts is needed to make sure that our government remains one of limited and enumerated powers.

5) Can the rules taxing imputed interest on original issue discount bonds constitutionally be sustained under Ginsburg's view? I doubt the folks in 1918 anticipated that either. What's more, if I arrange a pure arbitrage where I deduct cash interest that is offset by imputed interest accruals, is it unconstitutional to deny the deductions? (After all, while we're at it, why not sweep away as well the idea that deductions are merely a matter of legislative grace. An income concept requires them.)

6) Ginsburg draws a constitutional wall around the issue of whether damages are paid for pain & suffering, etc. or for lost wages. In practice, these are extremely interchangeable categories in terms of actual settlements or jury awards? Constitutionally irrelevant as well?

7) Quick question for any reader who has the time to look into this: has Ginsburg been involved in any of the D.C. Circuit's opinions regarding Bush's claims of essentially dictatorial and unlimited war powers? If he has supported Bush's claims, he is flat-out guilty of hypocrisy in the first degree. No one (John Yoo notwithstanding) could seriously maintain that Bush's interpretation of his war powers follows from original intent. Rather, the claim would have to be that the powers have to evolve to meet today's needs, etc. - a theory of constitutional interpretation that cannot be squared with Ginsburg's opinion here.

That's what I'm talkin' about

Another bit of tax news I noted while on vacation is that the IRS, as reported by David Cay Johnston in the NY Times, is using private collectors to get unpaid tax revenues, even though this costs more than 20 cents on the dollar, in lieu of the 3 cents per dollar that it would cost to hire more revenue agents to do the collecting. Plus, from a social standpoint, it's probably best NOT to make the tax collectors' incentive too strong by letting them, as private parties, keep a part of the take. As Paul Krugman pointed out, this is why we have moved beyond tax farming.

My wife saw to the heart of it, however. I told her about the Johnston story and she replied (kidding, of course): "Yes, but if we hired more revenue agents, the government would be bigger."

That (meaning that type of thinking) is exactly what my forthcoming book is about, I told her.

Back from vacation

Now that I am back, I will shortly be addressing the decision in Murphy v. U.S. which has tax folk all excited. Here Judge Douglas Ginsburg of the D.C. Circuit wrote an opinion holding that the IRS cannot constitutionally treat cash damages for injury as "income." Two quick thoughts, admittedly before reading it, are: (a) I am inclined to wonder if the good Judge has graduated from marijuana, his vice in the good old days, to crack cocaine; and (b) under the radical right judges we have these days, all kinds of doctrine that has been good since the 1930s is up for grabs. In income tax law, this definitely includes the Gregory and Knetsch cases, establishing the business purpose & economic substance doctrines that keep IRS revenue collections above a flat zero.

Fun for the likes of me, I suppose. to have more things to write & rail about.

Friday, August 11, 2006

Daniel Henninger, meet Adolf Hitler (but I think you've already met)

Point in common, among others, is the Big Lie technique.

Henninger, WSJ columnist, has an op-ed today entitled "Democrats Knifed Lieberman on Eve of Airliner Plot."

"That was unfortunate timing this week for the Lamont Democrats ... [blah blah blah] ... Yes, we know, they support the war on terror but are merely against George Bush's war in Iraq. How does that work?"

Then more nonsense in the same vein.

Henninger must realize that the U.S. intelligence establishment sees no positive contribution of the war in Iraq to fighting terrorism - indeed, the contribution is massively negative. But this is less important than dishonestly stoking fear in the desperate effort to avoid the reckoning this November.

One amusing aspect of the recent debate has been the back and forth about whether the Democrats are discredited peaceniks as in the Vietnam era.

Hello? Does anyone really think we should have stayed in Vietnam past 1975?

UPDATE: The "unfortunate timing" was absolutely no coincidence. I had immediately thought of this possibility - deliberate timing to make the Democrats look bad right after the primary - but dismissed it, given that the Brits were involved, even though the plot had apparently been under surveillance for more than a year.

But now we learn the following from NBC News:

"A senior British official knowledgeable about the case said British police were planning to continue to run surveillance for at least another week to try to obtain more evidence, while American officials pressured them to arrest the suspects sooner. The official spoke on condition of anonymity due to the sensitivity of the case.

"In contrast to previous reports, the official suggested an attack was not imminent, saying the suspects had not yet purchased any airline tickets. In fact, some did not even have passports."

Why bother with an extra week of surveillance that might yield valuable added information when there's an opportunity to embarrass the Democrats, and sleazy hacks like Daniel Henninger are waiting to pounce?

Thursday, August 10, 2006

Max Sawicky is wrong

At this point, I frankly have more respect for the centipede I crushed on the staircase at my kids' behest just a few minutes ago than I have for Joe Lieberman. The centipede, while unwelcome in our home and almost indecently multi-legged, at least was not sleazily exploiting terror problems, which Bush has made worse, as evidence that anti-Bush sentiment is treason. (Indeed, I don't recall the centipede's mentioning Bush at all, although then again I didn't give it much time.) But still, let's give Joe one iota of credit for something from a few years ago.

In 2003, Lieberman introduced S. 1915, the Honest Government Accounting Act, attempting to create budget rules, based on the log-term fiscal gap, that were designed to push the U.S. government back towards solvency. The legislation was far from perfect - and characteristically, was tilted towards the Republicans (institutionally and their policy preferences) in a couple of telling ways - but still I'd call it one of the more responsible and far-sighted legislative efforts of recent years.

Today Max Sawicky takes a shot at this legislation, calling it bad economic policy that will stay even if Joe goes.

Alas, I think it will go away and stay away, whereas Joe shows signs of sticking like a Greenwich deer tick.

With all due respect, which I do have for Max Sawicky, he is wrong, as in w-r-o-n-g. He thinks we shouldn't do long-term fiscal projections. I hope he doesn't live his life that way (e.g., is he planning to retire some day? Or send still-young kids to college?). Of course the future is uncertain, but that's another way of saying it's risky, and to the risk-averse this makes the future problems bigger, not smaller, than if their scope were certain.

Herewith Max:

"The saving grace of this novel regime of fiscal policy is that you can eliminate a $72 trillion 'present value' liability with a law mandating the dedication of all future revenues from the colonization of Jupiter. If fact, in the expectation that such a colonization will bring in even more revenues, one could offset this extra dough with new spending, right now. Honestly."

Exactly right, and rightly so, if in fact future revenues from the colonization of Jupiter have an expected present value of $72 trillion. I think it's fair to say they are more like zero, and I propose to count them today at exactly that value.

If Max's point is that politically influenced estimators will do bogus things when they look long-term, I would respond: OK, let's have good estimates instead, by independent people, and if he thinks short term estimates are better he must have been delighted with the recent Republican gimmick of using tax cuts to pay for tax cuts (i.e., conversion of traditional IRAs into Roth IRAs, raising money short-term but losing billions over time), which was based on the short time horizon that he prefers.

Max also complains that long-term accounting is "fuel for bad, radical reforms in Social Security and Medicare that would take effect well before the Jupiter bonanza." Again wrong. Take Bush's Social Security "plan" of 2005. Long-term accounting showed that it did nothing to reduce the fiscal gap. Or take Bush's prescription drug benefit. Long-term accounting showed that it cost an estimated $18 trillion, not the phony-baloney 10-year estimate that was held down through deferred implementation. And as for the Medicare/healthcare crisis, closing one's eyes is not going to make it go away. Better gradual smaller cuts than deferred but ultimately bigger cuts.

You have to separate out the analytics from the politics a little more crisply than Max seems inclined to.

Sorry for the peevish tone, Max. I'm really angry at other people (Senator Joe for one), not you. But I really don't see why thoughtful and responsible people on the left can't accept the value of rational long-term budget planning. I thought it was the Bushes and Liebermans of the world who reject rationality when they don't like the answers it gives them.

Thursday, August 03, 2006

Quote of the day

This comes from Richard Haass, who is president of the Council of Foreign Relations, was the Middle East advisor to the National Security Council under the first President Bush, and served under Colin Powell in the State Department in the current Bush's first term. It's in response to the current Bush's optimism that the horrors in Lebanon present a wonderful opportunity to create a new and better Middle East:

"An opportunity? Lord, spare me. I don't laugh a lot. That's the funniest thing I've heard in a long time. If this is an opportunity, what's Iraq? A once-in-a-lifetime chance?"

Tuesday, August 01, 2006

A canticle for Lieberman

Here's hoping that the man's political career ends next Tuesday, third-party line notwithstanding. Thanks, for once, to the New York Times for its excellent editorial explaining why he must go. And if David Brooks is stupid enough actually to believe, as he wrote, that challenging Lieberman in the primary constitutes an "inquisition," then I truly pity him.

One thing I've always been curious about: did Lieberman actually want the Gore-Lieberman ticket to lose the 2000 Presidential election, or did it merely seem that way?

So much for the Laffer Curve

Herewith Jason Furman, courtesy of the U.S. Treasury Department.

I suppose they'll have to fire the real economists there and find people who are willing to make false estimates.

Just as clarification, the Laffer Curve is an economically valid idea. Only, for taxing labor income (the main component of the income tax), rates might have to go up to 80 or 90 percent before it would start to apply. So it's not exactly relevant with regard to the Bush tax cuts. (For capital gains, by contrast, the Laffer Curve may kick in at 30 to 40 percent, although it's hard to disentangle temporary from permanent effects.)

Wednesday, July 26, 2006

My article "Permanent Income and the Annual Income Tax"

Another article draft of mine is now available on-line, here.

The abstract goes something like this:

Under a prominent and influential economic model known as the permanent income hypothesis, people's decisions depend on their expected lifetime income, not their current income. If completely true, this hypothesis would have radical implications for tax, transfer, and entitlements policy. For example, unless modified by other information, it would suggest replacing the income tax with a consumption tax, establishing lifetime income averaging, viewing Social Security as irrelevant other than as a system for transferring lifetime resources between individuals, and dramatically changing welfare law to base aid purely on people's lifetime income, as distinct from their current circumstances. However, incomplete markets and departures from rational behavior, by shortening people s planning horizons, weaken some of permanent income's implications and refute others.

Monday, July 24, 2006

Eric Solomon update

Thanks to the efforts of Ellen Aprill and Paul Caron, among others, a law profs' petition in favor of Eric Solomon's confirmation is rapidly gaining signatures. There will also be a petition from former Treasury officials and Congressional staffers, along with that from tax lawyers at the New York State Bar Association.

Deciding not to enforce the estate tax

A recent New York Times article noted that the Bush Administration has decided to gut estate tax enforcement by having the IRS fire 45% of its estate tax lawyers. The article quotes estate tax lawyer Sharyn Phillips to the effect that the cuts are a “back-door way for the Bush administration to achieve what it cannot get from Congress, which is repeal of the estate tax.”

Pretty unusual stuff, not to enforce a set of laws on the books that raise so much money relative to the IRS staff involved. And, of course, no surprise if estate tax lawyers don't like it, as it moves in the direction of an open invitation not to file estate tax returns even when legally due.

My first thought on reading the news was: Why doesn't Bush just invoke his war power claims to nullify the estate tax? After all, how can he fight terrorism if the U.S. economy is being hurt as much by the tax as he claims?

Indeed, since Grover Norquist, speaking on NPR in 2003, compared the estate tax to the Holocaust, why not have Bush simply proclaim that it IS terrorism?

Friday, July 21, 2006

Endangered nomination

The post of Assistant Secretary of the Treasury for Tax Policy has been vacant for a very long time, and finally the Bush Administration has nominated someone: Eric Solomon, who has been a high-ranking Treasury tax official since the Clinton Administration. I lauded this nomination in an earlier post. Solomon is nonpartisan and, more importantly, one of the really good people in government (a dying breed in these highly political days).

Senator Baucus, the top Democrat on the Senate Finance Committee, has announced that he intends to block the nomination until the Bush Administration develops a plan to narrow the $290 billion tax gap (i.e., the estimate of annual taxes that are legally due but not paid). Baucus defends this on the ground that the issue is important, although he agrees that Solomon is "a good public servant and certainly a tax expert."

This strikes me as a really bad idea on Baucus's part, notwithstanding that it would be nice to lower the tax gap. (By the way, while some of the barriers to doing so are political - politicians don't want to turn loose the IRS on voters and campaign contributors - this may to some extent be a bipartisan problem although the Republicans surely do much more to fan anti-tax sentiment.)

The Treasury has been falling apart before our eyes as good public servants leave because they realize they are not being allowed to do tax policy - their motivation for accepting salaries that are below what they could get in the public sector. The Assistant Secretary for Tax Policy can do a lot of good, and Solomon in particular surely would, even though the Treasury has lost so much of its influence. Moreover, Solomon really deserves to be confirmed. Making life hard (or harder) for good public servants is not really what we need these days. (By the way, he is an acquaintance whom I have met a few times and had minor dealings with professionally, but not someone I know well enough to count as a friend. There is no unstated agenda here.)

I gather that a group of New York tax lawyers are circulating a petition in support of Solomon's nomination and urging that Baucus retract his opposition. If law professors or other academics get into the act, I would certainly sign. Eric Solomon should be confirmed as promptly and painlessly as possible.

Thursday, July 20, 2006

Bush's next veto?

The New York Times has just posted an article entitled "Scientists Plan to Rebuild Neanderthal Genome."

I especially liked the last paragraph:

"If the Neanderthal genome were fully recovered, it might in principle be possible to bring the species back from extinction by inserting the Neanderthal genome into a human egg and having volunteers bear Neanderthal infants. There would, however, be great technical and ethical barriers to any such venture."

Tuesday, July 18, 2006

Drunk again?

Bush behaved so boorishly and outlandishly at the G-8, even by his standards, that one has to wonder.

Thursday, July 13, 2006

Fun movie

Saw an enjoyable documentary last night, "Wordplay," about the sub-culture of crossword puzzle fanatics and their annual tournament. Celebs who participated (in the documentary, not the tournament) included Bill Clinton, Jon Stewart, Mike Mussina, and the Indigo Girls.

Seeing Clinton these days always reminds me of his successor. When he does the NY Times crossword puzzle in pen, the punch lines almost write themselves. For Bush, the Highlights word find? Probably too challenging.

Wednesday, July 12, 2006

My article "Welfare, Cash Grants, and Marginal Rates"

Not sure if I've posted some other link for this in the past, but this is a forthcoming article of mine, the abstract for which is as follows:

"Marginal rates are frequently analyzed based solely on taxes, without regard to benefit phase-outs that have exactly the same incentive and distributional effects as increasing positive taxes. This myopia reflects the notion, rooted in our current fiscal language, that “taxes” and “spending” are fundamentally different. In fact, however, the difference is purely one of labeling.

"Among the ill consequences of this confusion between substance and labels is the political unfeasibility of demogrant or negative income tax proposals. These proposals often are criticized for seemingly providing universal and unconditional cash grants. In fact, however, cash grants can be just as conditional or selective as benefits that are labeled as “welfare.” Clearer thinking about these matters would expand the realm of politically feasible policy choices, and make excessively high marginal tax rates on people who are escaping poverty easier to avoid."

In work this summer I've finished drafts of papers entitled "Permanent Income and the Annual Income Tax" and "Why Worldwide Welfare as a Normative Standard in U.S. Tax Policy?" To be posted in due course.

My forthcoming Cambridge U. Press book, "Taxes, Spending, and the U.S. Government's March Toward Bankruptcy," appears to be slotted now for the beginning of 2007.

Wednesday, July 05, 2006

Ron Suskind's "The One Percent Doctrine"

I just finished reading the new Suskind book about the "war on terror." Reported mainly as an anti-Bush screed becomes some of the facts reported in it are embarrassing (to say the least) to our own Dear Leader, it is in fact very balanced in tone. Obviously George Tenet gets favorable treatment, reflecting his cooperation with the author. But in some ways it actually treats Bush and Cheney far more favorably than people like me, who have completely given up on attributing any good faith whatsover to these individuals, would expect from a fairminded account. It portrays them as actually caring a lot about preventing attacks on U.S. soil and as attempting rationally, by their lights, even if misguidedly, to deal with the threat. Bush does, to be sure, turn out to be a thoroughly unpleasant bully who reads less words per day than the average third-grader, and who thinks his time is best spent focusing obsessively on operational details of particular anti-terrorist operations, which he inadvertently prevents the operators from doing properly. And his response to being warned in person about 9/11, in advance, was to say "Okay, you've covered your ass," and go back to his fishing. But still, when one's expectations are low enough it's not hard for these boys to come off better than one expected.

The best insight I got from the book concerns exactly how Cheney and Bush got it wrong. First an application, then the bigger picture. They insisted on torturing the high-value targets (or those Bush had falsely claimed in public were high-value) because they badly wanted results fast. But the CIA tried to tell them that torture doesn't work as well in getting information as building a relationship with the prisoner (good cop/bad cop style) and using it to coax info out of him. This was rejected, in part because even when successful it doesn't work especially fast. But they got so little out of the torture that it seems clear they made the wrong choice, even leaving aside all moral and reputational aspects.

The bigger point concerns Cheney's doctrine, giving the book its title and offering an organizing theme to explain all the insane things they have done, that if there is a 1 % threat of our being attacked we must treat it as an utter certainty. Hence, action is all and analysis worth next to nothing.

There are many reasons why this approach is mistaken, and the book shows this quite well. But let's start by giving Cheney his due. If one is risk-neutral, a 1% chance of 1 million casualties should be treated the same as a 100% chance of 10,000 casualties (i.e., more than 3 times the direct loss of life on 9/11). So yes, low-probability risks of something really bad happening must be taken seriously.

But Cheney's analysis is totally static. In his view, the 1% risk is completely exogenous. It's just there as an isolated event, and we either ignore it or incur large costs to knock it down to 0%.

There is no such thing as eliminating all risks. Facing some set of risks is unavoidable. And they are endogenous - they are affected by what we do. In other words, if you try to knock out those 1% risks one at a time, like people swatting the gopher in that arcade game, you are simply increasing your downside risk if by doing so you create more new risks than you are eliminating. Arguably this is exactly what the US has been doing, if we grant (I would say over-generously) that Saddam represented as much as a 1% risk to us.

More totally static thinking from the big toad with the bad heart: his way of dealing with endogeneity is to say: we'll make everyone so scared of us that no one will dare do anything. But again this looks just at our move without considering the possibility of counter-moves. How would a Cheney type who was running another country (Iran, Russia, etc.) want to react if he saw the US acting the way Cheney wants it to act? Not by meekly knuckling under, one can be quite sure.

We are not the only actors, and we can't control everything by force or by will. That is the core of why Cheney is so completely wrong even on his own terms, and leaving aside all the bad faith and the contempt for every positive value in our law and our history.

Monday, June 26, 2006

Grover's trover

Grover Norquist appears to be - lying? defying credulity? forgetful? you be the judge - in his latest attempt to explain his up-to-the-elbows entanglement in the sleazy Abramoff-Indian tribes scam.

What a surprise.

Tuesday, June 20, 2006

The "war on terror"

I'm including fewer Bush items when I have nothing distinctive to add, but I couldn't resist this bit from Matt Yglesias:

According to Bart Gellman's review of Ron Suskind's new book the following things are true:

** Al-Qaedist Abu Zubaydah was captured in March 2002.

** Zubaydah's captors discovered he was mentally ill and charged with minor logistical matters, such as arranging travel for wives and children.

** The President was informed of that judgment by the CIA.

** Two weeks later, the President described Zubaydah as "one of the top operatives plotting and planning death and destruction on the United States."

** Later, Bush told George Tenet, "I said he was important. You're not going to let me lose face on this, are you?" and asked Tenet if "some of these harsh methods really work?"

** The methods -- torture -- were applied.

** Then, according to Gellman, "Under that duress, he began to speak of plots of every variety -- against shopping malls, banks, supermarkets, water systems, nuclear plants, apartment buildings, the Brooklyn Bridge, the Statue of Liberty."

** At which point, according to Suskind, "thousands of uniformed men and women raced in a panic to each . . . target."

Line item veto

House and Senate Republicans are advancing legislation that would establish some sort of quasi-line item veto, empowering the President to identify targeted tax and spending provisions and propose their rescission. Congress would vote yes or no on the package as a whole.

The motivation appears to be providing a fig leaf for the Republicans because they are rejecting Democratic calls to restore the pay-as-you-go rules that, for a while, were actually fairly effective. (They ceased being so when Congress started playing ridiculous games with them, such as calling the need to pay for the 2000 census an unanticipated "emergency" that was outside of the rules.) Pay as you go they denounce as a secret plot to prevent extension of the tax cuts. Well, if you want to add trillions to the fiscal gap, it figures that a rule impeding fiscal irresponsibility would get in the way.

It's unclear that the line item veto being proposed makes any difference. The up or down vote on the whole package means that Congress can easily reject it if the stench of bad publicity isn't too strong. Indeed, one obvious game to play is to have Bush posture by pretending to strike down a bunch of items, knowing that Congress will restore them anyway. Also, while the Senate bill would have the Joint Committee on Taxation decide which items are "targeted tax benefits" subject to the rules, based on an objective definition, the House bill would include only the items that were identified by the House Ways & Means and Senate Finance chairs, making it entirely a silly exercise as they could exclude whatever they liked. Even if they tried to include everything that meets the definition (and why should they if they are cutting deals), the definition is still absurdly narrow. "Targeted tax benefits" are those with only one beneficiary. So far as I can tell from my source (the June 19 Tax Notes), the Senate bill may have the same absurdly narrow definition of a targeted tax benefit.

Even a more genuine line item veto has ambiguous effects on deficits and fiscal gaps. What it basically does to the legislative process is shift a bit more power to the President. So, if the President wants to use it to attack earmarks and targeted tax rules, it gives him an extra tool. But if the President wants to use it as a bludgeon, to trade for votes in favor of his own tax cut and spending proposals, he can do that as well. Gee, I wonder which way the current President would be more likely to use it.

The House bill has a provision expressing the sense of Congress that the President should not use his rescission authority as a bargaining tool to secure votes on other legislation. Yeah, right.

Monday, June 19, 2006

Public service message

I thought I had seen a lot of different scams from incoming e-mail, but here is apparently a new one.

Last Friday I got a message from "Internal Revenue Service!" with the enticing subject line: "refund of $63.80."

The message, ostensibly from, was as follows:

[IRS Logo]

"After the last annual calculations of your fiscal activity we have determined that you are eligible to receive a tax refund of $63.80. Please submit the tax refund request and allow us 6-9 days in order to process it.

A refund can be delayed for a variety of reasons. For example submitting invalid records or applying after the deadline.

To access the form for your tax refund, please click here.

Internal Revenue Service."

Hoping that I wouldn't pay the price for my curiosity, I clicked on the link, and saw that it asked me for full credit card information, which I am not going to provide.

This one is better than the usual Nigerian scam about the million dollars a stranger wants to split with you. Indeed, it's better than the phantom messages, ostensibly from Chase Manhattan or eBay, that I still occasionally get.

Has anyone else out there gotten this one?

Thursday, June 08, 2006

Non-death of the non-death tax

By now, most interested readers may already know that efforts to have the Senate approve permanent repeal of the estate ax failed today. (I refuse to call it the "death tax" for two reasons: the renaming is Orwellian language manipulation, and it is less accurate than the old name. The tax really is levied on estates. No one owes the tax solely by reason of dying. For that matter, the gift tax, which has nothing to do with death, is part of the same instrument.)

Under current budgetary circumstances, repealing the estate tax would have been utterly insane. The U.S. fiscal gap makes such a move preposterously bad policy absent offsets to make the change at least revenue-neutral. I also would object to the repeal distributionally if one rules out compensating changes to replace the lost progressivity. And doing it while Medicaid is being cut for supposed deficit reduction reasons is obscenely hypocritical.

Nonetheless, in a sane political and budgetary environment the merits of keeping the estate tax would be a much closer call than many on the left believe. Suppose the fiscal system's overall progressivity would be about the same either way. This assumption could be reasonable, under the right circumstances, for several different reasons. There might be an express political trade-off at some point. The long-term political equilibrium might be such that less progressivity in one way means more in another. And simply as a guide to clear thinking, one should separate the question of how progressive the fiscal system should be from that of this particular instrument's merits.

Suppose we are thinking about efficiency, also known as reducing deadweight loss (i.e., instances where someone is made worse off and no one is made better off). The great virtue of the estate tax as an efficient device for accomplishing redistribution is that some bequests are accidental. People without strong bequest motives may die before they have fully used up their wealth. Since they are not thinking about a tax levied after they die, work and saving are not deterred by the estate tax to the extent that this is the true story.

The great vice of the estate tax, relative to other means of accomplishing comparable overall progressivity, is that deliberate bequests have positive externalities. Suppose you are choosing between blowing all your wealth before you die on conspicuous consumption or leaving it to your kids. The former means that the money is paid out once for market consumption. The latter involves your getting some consumption value out of making the bequest (since we are positing altruism or other warm feelings towards your kids), and then they get to use it in market consumption. So in effect consumption occurs twice rather than once. This point is often put moralistically, as in: Why should we favor the Malcolm Forbes types who throw huge parties before they die over those who scrupulously leave more to their kids. But it is a straight welfare economics point as well.

Anyway, this tradeoff makes the merits of the estate tax an interesting issue for tax policy debate. But in Washington, things go forward or not on a much cruder and more basic level.

Friday, June 02, 2006

Must reading

I don't know how to assess this, but no one who is intellectually honest can dismiss it out of hand. Luckily for all of the major media, this is no constraint on them.

Wednesday, May 31, 2006

Dynamic scoring of fundamental tax reform: the good news and the bad news

Courtesy of Bruce Bartlett, here is a link to a pdf file of the just-released Treasury study of the dynamic growth effects of the tax reform plans reduced last year to zero acclaim by the Tax Reform Panel.

The good news (leaving aside that none of the plans has a chance of being adopted): the Panel's "Growth and Investment Tax" (GIT) ostensibly would raise national income, over the long run, by somewhere in the range from 1.4% to 4.8%. A straight-up progressive consumption tax ostensibly would do so by 1.9% to 6%. For the Simplified Income Tax (SIT), the predicted growth in national income was only 0.2% to 0.9%, but hey, that's better than nothing.

Bad news item #1: Since the plans are revenue-neutral relative to the Administration's budgetary baseline (present law minus all of the tax cut phase-outs and plus a number of unenacted Bush tax cut proposals), they might very well reduce national income relative to present law (with the phase-outs and no new tax cuts), since they result in a fiscal gap that is trillions of dollars higher.

Bad news item #2: I suspect that the models over-estimate the effects on the capital stock and economic growth of shifting from an income tax to a consumption tax. My reason for suspecting this is technical, rather than reflecting some personal hunch about saving behavior. The recent literature suggesting that income taxation and consumption taxation differ only in their treatment of the real riskless interest rate implies that the two systems are more alike than we have long thought. The real riskless rate has typically been in the 1 to 3% range, whereas the risky rate that I suspect the Treasury models use in predicting behavioral responses is much higher. To my knowledge, economic models generally have not incorporated this point as fully as perhaps they ought. The riskless rate point should also lower estimates of the deadweight loss resulting from inter-asset differences in cost recovery rate. But permanent gaps in the tax base, such as the exclusions of imputed rental income and various fringe benefits, are not directly affected by the change in thinking about timing issues.

One reason I suspect this is the magnitude of the growth rate differences attributed to the GIT versus the SIT. Even leaving aside that the former is partly an income tax while the latter is partly a consumption tax, the significance attributed to the timing point seems (admittedly at a casual glance) rather high, especially when compared with the SIT versus present law. Many economists, including for example Glenn Hubbard, have argued in print that the inter-asset distortions in the tax law are more important than the income vs. consumption tax choice, but the Treasury's dynamic analysis seems to come out the other way. Sure, theory should give way to empirics, but what we have here are estimated empirics that are themselves based on a theory.