Tuesday, March 28, 2006

It's come to this (yawn)

This article describes a House GOP revolt against Rove's planning to follow the usual bloody-shirt playbook in the 2006 Congressional campaign:

"Instead of Mr. Rove's pro-security agenda, House Republicans have pressed the White House for greater spending allocations to GOP-held congressional districts that face serious Democratic challengers. The sources said constituents have been judging the candidates by their ability to bring government funding and jobs to their districts.

"'If we can't deliver the pork, then we're out of business,' the senior GOP source said."

From early Pat Boone to late-vintage Elvis in only 12 years ...

Tuesday, March 21, 2006

Tax cut on repatriated earnings

Courtesy of the always-helpful TaxProf Blog, I note that the American Shareholders Assocation has just published a report concerning the recently enacted temporary tax cut on repatriated earnings, permitting U.S. multinationals, for a short time window only, to bring back overseas funds and pay tax on them at only a 5.25% rate rather than the full rate. The report shows that the amount repatriated vastly exceeds amounts projected by the Joint Committee on Taxation. The total is expected to surge past $300 billion, as opposed to a projected total of $130 trillion.

I always thought this was horrible legislation, a view shared by most who were not on the lobbying payroll of the groups seeking it, and shared even by those (including me) who believe that there is much to be said for a permanent low tax rate on repatriated foreign source active business income, or indeed U.S. exemption (making our system a territorial one purely on U.S. source income). The problem lies in the temporary character, which you can't credibly say will be once only. (You can say it, but don't expect anyone to believe you.) So foreign tax repatriations after the window closes will be down, I would expect, not only because pent-up repatriation demand has been satisfied but because people are waiting for the next low-rate holiday.

The unexpected flow of dividends makes the provision even "better" than its enactors expected, from a totally myopic point of view. Current revenues are increased, making the deficit smaller, if enough of these funds would otherwise have remained abroad for now. But future revenues, outside the budget window, are reduced, very likely by a much greater present value than the short-term increase. You can be certain that this gimmick will be used again and again in the coming years - increasing short-term revenues in exchange for damaging the U.S. government's long-term fiscal position. The push to encourage conversion from traditional IRAs to Roth IRAs (the cost of which is back-loaded) is the most prominent example of this, but surely will not stand alone.

I must say I'm not surprised by the under-estimate, even though I'm certain that the Joint Committee did its revenue estimates reasonably and in good faith. There was so much lobbying muscle behind this provision that you knew a lot of money had to be involved.

On the other hand, it's a bit surprising that the companies are willing to pay 5.25%. Current wisdom among the leading international tax economists and lawyers is that the repatriation tax is awfully easy to avoid, so why pay anything? I suspect that it has something to do with accounting. Even if the companies pay more tax than they would have otherwise, management would likely be fine with that if it permitted them to free up deferred tax liabilities that they had booked for financial accounting purposes. As I once heard an investment banker remark, "Saving taxes is all very nice, but reported earnings per share make the world go round."

Monday, March 20, 2006

Of course they do

Today's NY Times headline: "On Anniversary, Bush and Cheney See Iraq Success."

Meanwhile, the Wall Street Journal has an op-ed helpfully explaining how Bush, through Condi, could effectively get a third term.

Tuesday, March 14, 2006

Not recommended

Jonathan Ames' novel, "Wake Up, Sir!" It lured me with the conceit of borrowing Jeeves (or ostensibly an identical namesake) from the Bertie Wooster novels, to be the improbable valet (or do I mean gentleman's personal gentleman") for a contemporary American layabout, but proved thin gruel for as long as I kept going.

On the other hand, Belle and Sebastian's new album is growing on me a bit.

Cost of the Iraq war

Economists Linda Bilmes and Nobel Laureate Joseph Stiglitz have just published a National Bureau of Economic Research Working Paper in which they estimate that the cost of the Iraq war to the U.S. will exceed $1 trillion if our troops return by 2010, or $2 trillion if they stay through 2015. Bilmes and Stiglitz base this estimate, not just on budgetary costs that are officially allocated to the war, but on a comprehensive look at its long-term budgetary effects. Thus, for example, they include increased military recruitment costs and disability payouts by reason of the war, as well as the macroeconomic effects of higher energy prices.

As they note, in 2002 Rumsfeld estimated a total war cost of $50 to $60 billion, with Paul Wolfowitz saying the post-war reconstruction would be free from the U.S. standpoint due to Iraqi oil money. Bush Administration economic advisor Larry Lindsey was harshly rebuked for suggesting that the war's cost might reach $200 billion.

Large numbers are hard to grasp, so let's just put it this way. Rumsfeld's estimate was somewhere around 2 to 5 percent of the total estimated by Bilmes and Stiglitz. Lindsey's supposed over-estimation was 10 to 20 percent.

Monday, March 13, 2006

All you really need to know about Bush

This is an actual quote - not a joke - from a page 1 New York Times article, in tone a pure puff piece, that appeared on Sunday, May 21, 2000. The article is called "GEORGE W. BUSH'S JOURNEY: A Boy From Midland," and tellingly (in retrospect) subtitled "A Philosophy With Roots In Conservative Texas Soil." The author (Nicholas Kristof) quotes Bush childhood friend Terry Throckmorton as follows:

"We were terrible to animals," recalled Mr. Throckmorton, laughing. A dip behind the Bush home turned into a small lake after a good rain, and thousands of frogs would come out.

"Everybody would get BB guns and shoot them," Mr. Throckmorton said. "Or we'd put firecrackers in the frogs and throw them and blow them up."

Funny how unsurprised I was by this.

Friday, March 10, 2006

Random notes

I have discovered my cats' top-secret, feline-eyes-only memorandum detailing their plans for the day:

"1. Hang around kitchen asking for food.
2. Sleep.
3. Hang around kitchen asking for food.
4. Sleep."

No big surprises here, I must admit.

On a wholly different note, lately I've been listening to a self-compiled (via iTunes) album consisting of 18 selections from XTC's Andy Partridge, Fuzzy Warbles volumes 1-6. These records are a weirdly self-indulgent project of Partridge's, involving the release of all sorts of demos and outtakes that XTC or he compiled over the years. Mostly filler or out-takes of released songs, but each of the six volumes has 3 or 4 gems, which you can find through a combination of reading customer reviews on Amazon and playing 30-second song samples on iTunes. So selected, the song quality is if anything higher than on an average XTC album, although the production values are lower. It sounds like it comes from some strange alternative universe in which Paul McCartney had retained all of his talent and taste after leaving the Beatles.

Tuesday, March 07, 2006

New light on old battles

Last Thursday at the NYU Tax Policy Colloquium, our guests were Joe Bankman and David Weisbach, presenting their recent paper on income vs. consumption taxation, available here under the March 2 date. Profuse apologies for getting the title backwards on the cover sheet.

Bankman and Weisbach push a pro-consumption tax line that I have also pushed in print. The basic idea we share is that a consumption tax can be just as progressive as an income tax, while being more efficient and perhaps also doing a better job of ranking people (on a lifetime basis) in terms of how well-off they are.

One of the big points of contention concerns the burden of the consumption tax on future consumption. Income tax advocates commonly complain that, say, Bill Gates and his heirs won't pay consumption tax on their huge fortune until it is actually all spent on consumption, if it ever is. Consumption tax advocates reply that, assuming a perpetual fixed-rate tax, the wealth is already bearing the burden and has merely gotten to defer payment at a market rate of interest (meaning that the deferral does not reduce the present value of the liability). No difference than if wealthy people paid more tax today but did enough extra borrowing to fund the cash flow. And hard to deny if you accept, as most do, that a consumption tax is neutral as to when one consumes, thus supporting the conclusion that wealthy people aren't paying less, in present value terms, merely because they defer spending their wealth. In any event, this is the argument that I and others (such as Bankman and Weisbach) have made.

In the course of the discussion, largely due to Alan Auerbach's efforts as Colloquium co-convenor and lead discussant for the session, it became clear how uncontroversial all this would be if people in fact invariably spent all their wealth before dying. E.g., if Bill Gates actually were guaranteed to spend his entire fortune before heading to that virtual cyber-place in the sky, then his deferring payment at a market interest rate would be accepted by nearly everyone, I think, as good enough to support viewing the unpaid tax as being borne by his wealth today. But of course Gates is not going to consume it all. Instead, at least if he didn't plan substantial charitable bequests, it presumably would all be going to his children.

Since this is what makes income tax advocates cavil at the equivalence claims, it seems clear that the treatment of bequests is at the heart of the income vs. consumption tax debate, even though I and others have been accustomed to describing the debates as wholly separate. Inherited wealth is at the heart of the dispute, even though one could have an income tax or a consumption tax with or without an estate or inheritance tax. (The latter would be paid by recipients of bequests, with the rate structure depending on how much one got rather than on the size of the overall estate. The optical reason for this is that it combats calling the thing the "death tax." The substantive reason is that, if inheritance of concentrated fortunes is the concern, the tax should depend on the degree of concentration that persists.)

Let's back up here a second. How could one possibly support an inheritance tax if one favors consumption taxation? They're often thought inconsistent, because taxing bequests implies taxing saving given that it happens over time.

But in fact there is a separate thread here. Henry Simons, in his "Personal Income Taxation" book, famously urged that gifts be double-taxed (non-deductible by the donor, but included by the donee). In doing so, he was addressing the definition of the consumption piece of the income tax base. He argued that it's clearly consumption by the donor, who does it voluntarily in lieu of spending the money, say, on restaurants or vacations, while at the same time financing current or future consumption by the donee (who indeed is better-off than one who had to render services to get cash). And Simons was clearly correct, in terms of how we might most logically think of the gift as affecting the welfare of the two parties.

Why not double-tax gifts, then? Leaving aside administrative problems (especially when we think of all the gratuituous transfers of services inside a household), the best argument against, developed at some length in work by Louis Kaplow, is that there's an altruistic externality we might not want to discourage, from the fact that a gift dollar in effect purchases $2 of consumption value (by the donor and the donee).

Let's cycle back to the consumption tax. Bequests other than accidental ones (i.e., those left without donative motives because the decedent didn't live long enough to use it all up) "should" be included in the consumption tax base, as consumption by the decedent, if we are looking just at how well-off the decedent is compared to people with the same budget line who simply had different consumption preferences. Then we would also tax the heir, like any other donee, on spending the bequest on consumption. Again, this would seemingly be the right rule in the absence of the altruistic externality. All this leaves unsolved the question of whether taxing gifts just once is the right response to the altruistic externality, as opposed to being, e.g., either too big or too small a benefit (perhaps more likely the latter).

So the treatment of bequests and other gratuitous transfers raises issues that are separate from the income vs. consumption tax question of taxing saving.

Why would we have an estate or inheritance tax, on top of having decided that generally taxing gratuitous transfers once is the way to go? The argument is presumably one of negative externalities to bequests, which worsen the relative position of non-recipients. Again, whatever one thinks of this, it's distinct from the income vs. consumption tax debate.

Final point trying to tie all this together: if we want to tax gratuitous transfers at once, taxing the bequest at death as consumption but then giving some sort of credit to the donee against future income or consumption tax liability as to the amount received would address the multi-generational timing point that income tax advocates hold against the consumption tax. And it would not increase the tax burden on saving or bequests if we could make the tax present value-equivalent to deferring it (via the offset against future tax liability). An issue worth exploring?

The thrill is gone

While the new Belle and Sebastian album is reasonably pleasant, and while I respect the way they have reinvented themselves. moved on to new things, become livelier, etc., I don't find it nearly as compelling as the best of their earlier work.