Wednesday, January 30, 2008

Small bit of good news on the pop music front

According to, Dennis Wilson's long-unavailable Pacific Ocean Blue is going to be re-released in a couple of months in an expanded version. This is reputedly a weirdly off-kilter lost gem by the Beach Boys' other gifted songwriter, unavailable for years unless one was willing to pay more than $100.

The other "lost"album in this sense that I have impatiently been awaiting, leaving aside bootlegs such as Neil Young's Chrome Dreams, is Tom Verlaine's Dreamtime, which I have but only as an old 33.

Interesting empirical paper

A new National Bureau of Economic Research Working Paper, "Does Movie Violence Increase Violent Crime?", by Gordon Dahl and Stefano DellaVigna, reaches the interesting conclusion (based on mid-1990s U.S. data) that, at least in the short run, the dominant empirical effect of violent movies goes the other way. That is, more people watching violent movies in the theaters correlates with (and appears to cause) reduced violence.

Their data breaks down violent incidents by hours, with 6 pm to 12 am being the presumed viewing times and 12 am to 6 am the aftermath. For the first of these two periods, violence apparently declines due to incapacitation, i.e., the potentially violent are sitting in theaters watching violent movies instead of wandering the streets. From 12 am to 6 am the effect is even stronger, apparently reflecting substitution. Attendees have chosen going to the movie in lieu of drinking more and getting into violent situations.

Bottom line, "our estimates suggest that in the short run violent movies deter almost 1,000 assaults on an average weekend. While our design does not allow us to estimate long-run effects, we find no evidence of medium-run effects up to three weeks after initial exposure."

I have no dog in this fight, merely finding the result interesting and initially counter-intuitive. Next step, of course, is for someone to propose a Pigovian subsidy for movie violence so we will have the optimal level rather than too few given the positive externality. (Meant as a joke.)

Or, to reverse the big pay-off line in The Rocky Horror Picture Show, "don't be it, dream it."

Tuesday, January 29, 2008

Bush's State of the Union

I didn't watch it - it was just too tempting to have elective root canal surgery instead. Or at least I would have rated that about on a par with watching the speech.

That said, but having read about the speech, just a couple of fairly obvious comments. First, while I certainly dislike earmarks, the hypocrisy here is truly hilarious in its blatancy, when you consider his approach to them during the six years when the Republicans controlled Congress. It's not like he's trying hard to pretend it is anything but a partisan game to him.

Second, for all the childish bluster about vetoing any tax increase that crosses his desk, what exactly does he think he is doing, other than raising future taxes, whenever he procures new unfunded spending?

Friday, January 25, 2008

Too big, too fast, too strong

So what if they're only sixth graders. My younger son's school basketball team won its opener, 17-4, in 24 fast-paced minutes.

UPDATE: A tough four-point loss in Game 2 of the season. Apparently a bit too much Marburying by some of the players.

Tax policy colloquium session on deferred compensation

Yesterday the NYU Tax Policy Colloquium featured a paper by Dan Halperin of Harvard Law School and Ethan Yale of Georgetown Law School concerning deferred compensation and recently enacted Internal Revenue Code section 409A.

For a bit of background flavor, this provision responded to one of Enron's more outrageous scams. Various Enron senior executives had special deferred comp deals that did not have to be disclosed in their financial statements under rules applying at the time or treated as currently taxable. The ground for non-taxability was that individuals using cash accounting don't have to report income currently if it hasn't been paid by the employer and remains unfunded and subject to credit risk.

Leaving aside for the moment the reason for having such doctrines in the cash accounting rules, the Enron deals' compliance with them was a sham. In particular, the moment Enron entered potential financial crisis the amounts were promptly paid (presumably a borderline fraudulent conveyance at the expense of creditors), plus offshore entities may have been used to make sure creditors couldn't actually get at the money.

As one might guess from Enron's association with these deals, the deferred compensation problem actually goes more to corporate governance (concealing and understating executive compensation) than to tax planning. Halperin and Yale show that there is very little tax advantage to deferred compensation if the applicable marginal tax rates are the same for (a) the employer as compared to the employee, and (b) one possible year of inclusion and deduction as compared to another year.

The authors argue that the big tax planning issue is taxpayers using deferred compensation deals to lower the tax rate on the investment return during the period before the compensation is paid. They propose a possible special tax to address this. I argued that the bigger issue might be effective electivity with respect to statutory changes in the tax rate, i.e., using the arrangements to put taxation of the compensation in the most tax-favorable year. The instability of U.S. tax policy and the use of phase-ins, phase-outs, and sunsets arguably increases the importance of this angle. From this perspective, requiring credit risk by strengthening the cash accounting doctrines that Enron flouted can be seen as burdening effective electivity, albeit in an arbitrary and imperfect way, by causing exercise of the when-to-realize election to bear a positive price. This is the same as the rationale for deterring tax sheltering via economic substance rules.

All agreed that current Code section 409A is a mess and that simply barring deferred compensation (i.e., allowing the arrangements to be made, but treating them as giving rise to current tax liability) might be best but is presumed to be politically unavailable.

Bad stimulus legislation

If it were feasible to enact and enforce a constitutional ban on fiscal stimulus legislation, I would support it. The problem isn't with the theory of fiscal stimulus, but the practice. For extremely good reasons, it became generally accepted orthodoxy by the late 1980s that efforts to do it would almost always be bad.

Then Clinton won the 1992 election on "it's the economy, stupid," with stimulus legislation as part of his campaign arsenal. Never mind whether Congress enacted the thing in 1993 (it didn't), but a resounding lesson had been learned by politicians across the political spectrum, not least (but not limited to) George W. Bush.

Stimulus legislation is almost always bad because (a) it comes too late, and (b) it becomes a political excuse to throw dollars around to targeted voters, without regard to the actual merits of the policy. In 2001, we got the first supposed stimulus legislation that was actually timely, but this was because Bush had already decided to do it back in 1999 (to fight off Steve Forbes), and calling it stimulus was merely a change in rationale. Even so, the 2001 tax cuts had virtually nothing to do with what actual stimulus legislation would look like. Rather than giving money to poor people who are more inclined to spend it and/or inducing businesses to increase their activity today, its rationale went purely to long-term structural reform of the system (on which grounds there would have been a case for it but for its fiscal unsustainability, although this is a bit like saying there would be a case for taking arsenic to kill stomach tumors except for the side effects).

Anyway, back to the main point. Politicians are now foaming at the mouth to do these things, both as a way of pandering to voters by mailing them checks and to avoid being blamed or looking like they don't care. The fact that Bush and the Democrats agreed to make a deal on this shows how hungry they are to do something, given how they usually interact.

So what they're doing, the investment incentives aside, is mailing people a bunch of checks several months from now, when it will be too late if there actually is a recession. Why not wait a few months until October, for perfect pre-election timing? Although the Democrats got a small concession or two from Bush on the distribution of the tax cut, it will still be going to people who in general are probably unlikely to spend much more at the margin by reason of getting these little one-time checks.

Does anyone want to offer a guess on whether they will rescind the check-writing program if it turns out by June that we don't have a recession after all?

And what is this foolishness about how it should be styled a tax rebate and hence linked to taxes actually paid? That has zero connection with the stimulus theory, which is that you disburse the money based on marginal propensity to spend it. Plus this is supposedly a one-time, unexpected, ex post adjustment that people weren't supposed to anticipate or see as likely to recur. We don't retroactively encourage more economic activity in 2007 by mailing back a check in June 2008 that is a bit higher if you paid more tax back then. And if we do, because people anticipate that this will happen again, then we are imposing higher marginal rates via the phase-out as 2007 taxable income rises.

What about the fact that, because the government takes in cash and pays out a mix of cash and goods or services, just about everyone in the society pays a positive lifetime net tax? Would it really be a tax rebate if we gave more money to someone who paid zero in 2007 but styled it either an ex post rebate of taxes paid ten years ago or an ex ante rebate of taxes to be paid ten years from now? Why not? Money is fungible.

A truly pathetic performance out of Washington, and not in the least bit surprisingly so.

Tuesday, January 22, 2008

Fiscal stimulus, Rudy-style

Since Rudy asserts that tax cuts always raise revenue, does that mean counter-cyclical fiscal policy, in his world, requires RAISING taxes so as to cut revenues and pump more money into the economy?

Just asking.

Friday, January 18, 2008

Inheritance tax pushback

Yesterday we had our first NYU Tax Policy Colloquium of the semester. This is year 13 for me, shockingly enough, meaning I've been doing it for more than a quarter of my life (certainly a strange thought).

My co-convenor for the first 7 weeks is Kevin Hassett of the American Enterprise Institute. This brings a strong conservative voice of the intellectually honest genre to the table, not a bad thing at a major American law school or indeed for me. I've spent time at AEI in the past and have often considered myself more center than left (because I like redistribution but think markets are important and find political processes & centralized decision-making suspect). Then along came Bush, causing me to foam at the mouth and feel much more left. So a counter-balance is as good for me as I think it is for everyone else in the class or at the sessions.

We discussed Lily Batchelder's work on inheritance taxation, which I've blogged about in the past. But this is the first time I've seen it discussed by someone who is strongly opposed to the bottom line, which is that an optimal tax policy set of tools would include this instrument. I've suggested in past blog entries that points in favor of Lily's approach include the following:

--Including gifts and bequests received, and interacting their tax consequences with consideration of the recipient's other resources, uses more distributionally relevant information than any other alternative on the table (i.e., don't tax bequests, use an estate tax, or tax accessions without regard to the recipient's other resources). This is only an argument for having bequests affect bottom line tax liability, not for having a positive as opposed to a negative tax rate on them.

--Evidence about accidental bequests and lack of donor planning suggests that this is an area where the tax draws less of a real planning response than one might expect under standard economic models. (By real response I mean adjusting one's work and saving in response to the tax, as distinct from hiring an estate lawyer to arrange various rigmaroles.)

Kevin pushed back effectively against this view, which is not to say I always entirely agreed with him. Two of the main points raised were as follows:

1) A soundbite-style misreading of Lily's work might interpret it as follows: most bequest dollars are accidental (i.e., incompletely annuitized taxpayer died before spending everything), such bequests can efficiently be taxed at 100%, hence a very high tax rate is fine. Kevin notes that this line of reasoning would be defective. Even with incomplete annuitization and consequent accidental bequests, in a rational planning model a prospective decedent who also had some altruistic bequest motives would leave more if the residue would go to kids than if it went to the government. This is true, but I concluded the differences on this issue are semantic. Relatively inelastic accidental bequests would affect the analysis in the direction that Lily suggests.

2) Given that gratuitous transfers unfold over time, rather than simply being lateral (e.g., if I don't eat the apple this period, I make a gift of it to someone who also eats it this period), taxing bequests involves taxing returns to capital, leading to the "exploding tax rate" problem with wealth and capital income taxation over long periods generally. Perhaps I am too much of a conceptual purist in wanting to say that the lateral and inter-temporal issues are theoretically distinguishable - in practice taxing the former means taxing the latter. But there are questions of how well very long-term rational planning models capture actual human behavior. E.g., even if a low-rate annual income tax adds up over 30 years to an 80% tax wedge between consuming today and in the future, how responsive are people to this?

Wednesday, January 16, 2008

Redefining tax expenditures

Joint Committee on Taxation chief Ed Kleinbard was recently quoted to the effect that he wants to reshape and revitalize tax expenditure analysis.

This is potentially a very good thing. As per a recent article of mine (in the Tax Law Review) and book chapter (in my book Taxes, Spending, and the U.S. Government's March Towards Bankruptcy), TE analysis was undermined from the start by its being intertwined with (a) support for Stanley Surrey's particular tax policy agenda (progressivity and comprehensive income taxation), and (b) a sideshow concerning whether one could define a normative income tax baseline that everyone could accept.

In illustration, I recall years ago discussing with Bruce Bartlett, at an American Enterprise Institute event, an article he was writing on TE analysis. He was somewhat hostile to the concept because he saw it as a tool of the Surrey agenda, and I pointed out that in many ways he should really like what it does, since stealth spending programs packaged as tax cuts but that increase government intervention in the economy should not be what he likes best. I believe he agreed.

The real point behind TE analysis is analytical and independent of the Surrey agenda. People define taxes and spending based on form, but attribute substance to the formal distinction. Thus, an identical program can appear to make government "smaller" if it's done through the tax system or "bigger" if it's done via direct appropriations.

The underlying conceptual problem is that the taxes-spending distinction even if reformulated is vacuous. So TE analysis uses and reformats a distinction that in the best of all possible worlds would instead be discarded. But a more satisfying distinction lies between distributional and allocative policies - the former aim at who ends up with what, the latter at level and allocation of investment, etc. In the context of a distributionally rationalized income tax, TE analysis can help avoid confusion between what one might call "synthetic spending" that is formally packaged as if distributional - e.g., a "tax cut" - but that is economically equivalent to a direct outlay (and equally needs to be financed). The real contribution that TE analysis can make is to address this confusion and defang it a bit.

I'm hoping that the Joint Committee will adopt changes that move in this direction, making TE analysis both more useful and less controversial.

A Nobel Prize in Economics for Mitt Romney?

Contrary to previously prevailing economic theory, it turns out that Detroit's auto industry can be restored to its 1950s status so long as we (1) replace Washington-style pessimism with optimism, (2) have a President who "fights for every job" (I hope Mitt still gets enough sleep - and who exactly does he fight?), and (3) eliminate fuel efficiency standards.

Who knew? This truly is a new paradigm, or else perhaps a very old one.

Tuesday, January 15, 2008

New achievements in phoniness

Even by his own exalted standards, Romney is outdoing himself with all this talk about personally, as President, rebuilding the traditional auto industry, "fighting for every job" in Michigan, and so forth.

Sunday, January 13, 2008

Guilty pleasure

I recently downloaded Tommy James and the Shondells' Crimson and Clover - the album version, of course.

Not that I'm proud of myself for this ...

Friday, January 11, 2008

No good economist should support a stimulus bill

Let's think in terms of the actual bill we would get, not the hypothetical bill one might design.  It will be late, a Christmas tree loaded with lobbyists' garbage, larded by both parties since otherwise it wouldn't become law, and full of bad new stuff that will just stay on as the business cycle changes.

Latest Rudy follies

Our boy has apparently decided that the way to get back in the Republican race is to offer the biggest, most pandering tax cut of all. An unnamed fiscal policy expert has been quoted in blogs elsewhere as saying that Rudy's tax cut package is "huge," about 4 percent of GDP, or more than twice the size of the Reagan or Bush tax cuts.

Since the present value of all future US GDP under current projections is probably a bit over $800 trillion, this implies that the Rudy tax cuts would add more than $30 trillion to the fiscal gap. This is about 50 percent bigger than Medicare prescription drugs and 3 times bigger than the Social Security shortfall.

Thursday, January 10, 2008

Who's crazier?

Bush says he expects a Mideast peace treaty by the end of his term. Isiah Thomas says the Knicks are headed towards an NBA championship soon, and that all members of his 9-25 team are untouchable.

Wednesday, January 09, 2008

The Bush Administration pays for the Iraq war!

Jason Furman just sent me the following article from the Congressional Quarterly:


Jan. 9, 2008 - 1:31 p.m.

Sparing Trees, Saving Money: The Fiscal 2009 'E-Budget'

By David Clarke, CQ Staff

There will be no delivery truck pulling up to the White House next month to unload freshly printed copies of President Bush's fiscal 2009 budget proposal, which is likely to total more than 2,000 pages.

The White House estimates it would need to order more than 3,000 copies of the books this year in order to provide copies to its own staff, lawmakers and the news media as it has done in the past.

Instead, it will send those eager readers to an Office of Management and Budget Web site ( on Feb. 4, the day Bush will submit his new budget to Congress.

The move is an effort to save money and spare some trees, budget director Jim Nussle said Wednesday. "This step will save nearly 20 tons of paper, or roughly 480 trees," Nussle said in a statement. "In terms of fiscal savings, we estimate the E-Budget will save nearly a million dollars over the next five years."

For those who just can't live without the paper version, the four-volume set can still be ordered from the Government Printing Office. But Nussle urged all potential readers to embrace the E-Budget.

The budget has been online for several years, but this year OMB is hoping to publicize its availability more effectively. "Having an E-Budget also aligns well with the president's E-Gov initiative, which focuses on utilizing technology to make the Federal Government more efficient and to improve transparency in order to better serve citizens, businesses and agencies alike," Nussle said in his statement.


As Jason clearly recognized in sending this to me, it offers an ideal set-up for numerous and diverse punchlines. He offers one, asking whether the $200,000 annual saving "make[s] up for Bush's other fiscal and environmental policies."

For mine, I note that a New York Times article nearly a year ago (available at ) suggests that the Iraq war had cost about $1.2 trillion to date. Call it $240 billion a year. No one seems to have realized that the Administration entirely paid for this - even before the e-budget initiative - simply by NOT printing an extra 3.6 million copies per year of its annual budget. (I assume for simplicity a fixed per unit cost.)

When is the press going to give Bush full credit for this? Liberal bias liberal bias liberal bias.

Friday, January 04, 2008

Freedom is slavery

The Iowa contests have me watching CNN for a couple of nights, which I don't often do (unbearable fatuousness and vapidity, and that's not even counting the politicians).  But in watching discussion of the Republican race, I was struck (though I've noticed this for a while) about how "fiscal conservative" now means someone who favors huge budget deficits.  More specifically, a "fiscal conservative" favors huge and unending tax cuts while having no obligation whatsoever to address the outlay side other than through very vague and general rhetoric.   Thus requiring huge and ever-growing deficits as a matter of simple arithmetic.

Interesting way to use the English language.

2008 NYU Tax Policy Colloquium

The spring semester Tax Policy Colloquium that I have been co-running at NYU since 1996 starts up again on Thursday, January 17, with a 4-6 pm session at Furman Hall, room 120, at NYU Law School. My co-conveners will be Kevin Hassett of the American Enterprise Institute for the first seven weeks, and Mihir Desai of the Harvard Business School for the last seven weeks. The schedule of speakers is as follows:

1. January 17 – Lily Batchelder, NYU Law School, “The Superiority of an Inheritance Tax Over an Estate Tax or No Wealth Transfer Tax.”

2. January 24 – Daniel Halperin, Harvard Law School, “Deferred Compensation Revisited.”

3. January 31 – Kevin Hassett, American Enterprise Institute, “Taxes and Wages.”

4. February 7 – Chris Sanchirico, Penn Law School, The Tax Advantage to Paying Private Equity Funds Managers With Profit Shares: What Is It? Why Is It Bad?

5. February 14 – Sarah Lawsky, George Washington University Law School, paper to be determined.

6. February 21 – Brian Galle, Florida State University Law School, “Fairness and Federalism in Taxation.”

7. February 28 – Jason Furman, Brookings Institution, “Dynamic Distributional Scoring.”

8. March 6 – Mihir Desai, Harvard Business School, paper to be determined.

9. March 13Ruth Mason University of Connecticut Law School, “The Federal Interest in Structurally Coherent State Taxes.”

10. March 27 – Andrea Louis Campbell, MIT, paper to be determined.

11. April 3 – Jonathan Barry Forman, University of Oklahoma Law School, “Making Social Security Work.”

12. April 10 – Alan Auerbach, Berkeley Economics Department, “Long-Term Objectives for Government Debt.”

13. April 17 – David Gamage, Boalt Law School, "On Capital Income Taxation: Refuting the Cases for Consumption Taxation and for Reduced Capital Gains Tax Rates."

14. April 24 – Daniel Shaviro, NYU Law School, “The Optimal Relationship Between Taxable Income and Financial Accounting Income.” (Unless I substitute a chapter or two from my Urban Institute Press book in progress, "The U.S. Corporate Tax: What Is It, and Where Is It Headed?")

Latest reading

After finishing the William Randolph Hearst biography that I noted in an earlier post, I sprinted through two novels, slacker-ironist Benjamin Kunkel's Indecision and dour Ian MacEwan's On Chesil Beach. The latter, though painful, is really good, and makes the former feel in retrospect a bit like amateur hour (though that's too harsh about a largely enjoyable read).

Next week I will begin a semester's hard labor on my school's appointments committee. This may doom my reading for a while, given the tree-slaying tomes by potential hirees or invitees that I will need to spend my weekends slogging through.

Good news from Iowa

At least, that's how I see it. On the Democratic side, I just hope Obama (if elected) doesn't actually believe that he can work "together" with Republican revanchists. But perhaps this is to a degree just astute packaging. And I am hoping he will be elected.

On the Republican side, to backtrack for a moment to 2000, one lesson some people take from the campaign that year is that you shouldn't focus on personality in the shallow, superficial way that the press did in preferring Bush to Gore. But another, very different-sounding lesson (not necessarily inconsistent, however) is that the individual's campaign, including what it tells you about his or her personality, is actually highly pertinent.

Thus, Krugman keeps noting that Bush's campaign platform in 2000 showed how reckless and dishonest he is. I'd add that Bush's odious personal qualities were already on full display, although I along with others didn't fully grasp this. An example is his sadism, which came out in the debate with Gore when he gloated about giving people the death penalty. And of course the ignorance, smirking, arrogance, sense of entitlement, etcetera.

All this is prelude to asking about Romney: Just how bad is he, and how disastrous would it be if he were elected? (As now seems a lot less likely.) The prior might have been that his record suggests adequate competence and intelligence, and the fact that he's pandering so shamelessly is just a matter of rationally chosen political tactics. But I have come to think that it bespeaks more grievous defects that we hopefully will never get to learn about the hard way. Encouraging about the process if he and Rudy fail because the truth about them emerged through it.

One hard thing for me about the last seven years is that I believe in nuance and shades of gray. I don't like utterly despising people and finding them completely without any decency or redeeming qualities. But sometimes that is what you get. Next question, just how bad is McCain. He has done some bad things, such as the torture sell-out to Bush, but often appears to have good as well as bad qualities. And if the Rovean grip on the party is weakened, he might have an easier time expressing them. Then again, if he believes in endless war and a 100 years occupation of Iraq, along with endless tax cuts, the good may not matter enough.

Huckabee is actually a likable person in some ways. I have old friends whom I would tremble to see as president, and whom I wouldn't even recommend as, say, a spouse or parent, but who are enjoyable in the right context due to their having some nice qualities. Whatever one thinks of Christianism in politics or his hostility towards gays, rejection of evolution, etcetera, I have enjoyed his deft skewering of the Republican leadership's arrogant elitism. Plus I am hoping he's on a trajectory to destroy the coalition that has brought us where we are today - and in the best case scenario to lose like Goldwater or McGovern, but with the subsequent tail of George's loss, not Barry's.

Thursday, January 03, 2008

Retail sales tax versus value-added tax

Bruce Bartlett argues against the Fair Tax here:

I generally don't bother discussing the Fair Tax, as it appears to be a dead horse both intellectually and politically. Even assuming one wants a flat rate consumption tax with no zero bracket, why use the retail sales tax model instead of a value-added tax (VAT)? The latter can lead to the same overall result but with better enforcement capabilities since the revenue authorities can cross-check rebates against taxes remitted on inter-business transactions, and since it can be embarrassing for a business to claim rebates on purchases without admitting to any sales on items that are no longer observable in inventory.

That said, I have learned more recently from people in VAT nations that the tradeoff is not quite as clearcut as I had thought. E.g., Europe has had fun lately with "carousel fraud," in which one side to an inter-business transaction claims a rebate, while the other side disappears before paying tax on the offsetting receipt. Also, U of Sydney law prof Graeme Cooper won, to my mind, the 2007 tax article title-of-the-year contest with his SSRN-posted piece, "The Discrete Charm of the VAT," available at, in which he argues that the administrative tradeoffs are closer than various of us had been inclined to believe.