Friday, May 30, 2008

Is there anything McCain actually DOES know about Iraq?

I'm trying to avoid political rants outside my main areas of professional knowledge, but I am really starting to wonder about the old duffer.

We've already seen (from several statements) that he doesn't appear to know the difference between Sunnis and Shiites.

Yesterday he asserted that US troops in Iraq are back down to pre-surge levels in Iraq, which is not true. They're at 155,000, pre-surge was 130,000. This isn't just nitpicking - everyone who follows the issue in the newspaper knows that we are still at surge levels.

He doesn't know that the Iranians are in many ways our allies in Iraq. E.g., both we and the Iranians support the Iraqi government - which notoriously prefers them to us - reflecting that Sadr is more nationalistic and independent. He does not appear to grasp this, although in Republican circles this hardly singles him out.

His hilarious walk through that Baghdad market a year ago deserves to be remembered forever, indeed even if he loses the election. The version where the camera pulls back to show the whole scene remains the best clip I've seen on youtube, other than (a) the Tyree catch and (b) the Battle of Kruger. It showed a truly startling inability or unwillingness to see facts on the ground when they were staring him in the face (in the person of all those snipers and gunships that were protecting him).

I am frankly perplexed by all this. It seems to me that a person with a normal IQ who is interested in foreign policy and who simply reads the newspapers ought to know a lot more about Iraq than he evidently does. I assume he has at least a normal IQ. Is the explanation psychological?

Tuesday, May 27, 2008

Ferdinand the Bull

Many of those with young (or formerly young) children will remember the delightful children's tale of Ferdinand the Bull, who looked fierce but was useless for bullfighting because he just wanted to lie around sniffing the flowers. I was reminded of him by Shadow, our senior cat, when we were out at the country this weekend.

Even when the weather was nice, Ursula was hiding and evidently in no mood to go outside. Buddy was desperate to get out there, but couldn't be trusted safely other than with a harness and very long leash, so he wouldn't dash off and disappear for a couple of days, as he has done before.

Then there was Shadow. At age 17, he is slow-moving and requires only very loose supervision. This picture should convey the essence of his time outside although I didn't get one of him literally sniffing the flowers like Ferdinand (which at some length he did).

In sunlight, the dark fur is very efficient at rapid heat absorption.

Tuesday, May 20, 2008

Huge sigh of relief

With three weeks to spare before I head to Singapore for two weeks of teaching followed by two weeks of touring in Vietnam (mainly Sapa, Halong Bay, and Hoi An), I have finished a first draft of my forthcoming book for the Urban Institute Press, The U.S. Corporate Tax: What Is It, and Where Is It Headed? Although I still have to re-read and edit it carefully, before submitting it and getting comments from various official and unofficial reviewers, it looks like I'm going to meet the submission deadline (end of June), along with the length requirement (no more than 75,000 words, and right now I'm at 68,457).

I generally meet any and all deadlines, but not without reasonable and even at times unreasonable anxiety. (Although, as Bush would say, I sleep reasonably well notwithstanding.)

Chapter headings for the book - which I hope will appeal to policymakers and academics as well as being well-suited to assign as course reading to students in various types of institutions - are as follows:

1. Introduction

Part One: Basics

2. Why Have a Corporate Tax?

3. Efficiency Problems With the Corporate Tax

4. Pillars of Sand in the Structure of the Corporate Tax

Part Two: Economic Theory Meets the Corporate Tax

5. “Old Harberger” Versus “New Harberger” and the Structure of the Corporate Tax

6. The “Old View” Versus the “New View” of Dividend Taxation

7 Debt and Equity: Tradeoff Theory Versus the Miller Equilibrium

Part Three: The International Dimension

8. U.S. International Tax Rules: The Basics

9. International Tax Policy Dilemmas

Part Four: Where Do We Go From Here?

10. The Emerging Brave New World

11. Corporate Integration

12. Other Possible New Directions for the U.S. Corporate Tax

Press interview

I was interviewed earlier today by a reporter for an on-line financial publication concerning my proposal for partial adjustment of publicly traded companies' taxable income towards their financial accounting income. He had gotten the lead from my talk to the National Tax Association the other day.

The interview mainly concerned what I am ostensibly doing to promote this proposal. I tried to tell him up front - I'm not exactly promoting it; rather, I'm saying that it deserves to be considered, but might or might not prove to be meritorious on balance once all of the underlying empirics were nailed down.

He reacted to this with blank incomprehension, evidently regarding it as something to put behind him so he could get on with the interview. In effect, I suppose he viewed it much the same way as you or I would if a car dealer were to say "I'm not saying you should buy this car - just that it's among the cars you should consider." Yeah, right.

I am not exactly in that type of business, however. Indeed, to me it would be more anomalous to claim that a given proposal which raises various open empirical issues definitely IS meritorious, than to say that it is of interest and MIGHT be meritorious. After all, what could possibly be the good-faith basis for opining so definitively? We're not supposed to be George W. Bush out here in academia, issuing pronunciamentos based on the dictates of our guts.

This is one of the problems with playing the public intellectual role. On the one hand, you may have a responsibility to share what you know and believe. And there can be professional benefits to doing this, if only to one's reputation or vanity. But if you cross over, then at some point you are done as a legitimate thinker.

Optimal income taxation and the NBA draft lottery

This evening's NBA draft lottery reminds me that the lottery is a redistributive instrument balancing efficiency against distributive goals in much the same manner as the optimal income tax (OIT) in the public economics literature pioneered by Nobel economist James Mirrlees.

The NBA draft imposes a tax on regular season success by causing it to worsen one's draft position. It thereby promotes competitive balance but weakens incentives to win this year. Ordinarily, this doesn't cause serious incentive problems, but the NBA learned through experience that, when teams sure of missing the playoffs were ranked in strict reverse order in the draft, this could create really perverse incentives, such as trying to lose all your games so you would get a # 1 pick who was a clear standout (such as a David Robinson or Hakeem Olajuwon, back in the day). The NBA responded by weakening the draft's redistributive targeting via the lottery (under which the team with the worst record has only a 25% chance of getting the top pick), so as to weaken the perverse incentive to lose.

One difference between the NBA draft lottery and the OIT is that concern about incentive effects may be more discontinuous in the former than the latter. Under the OIT, any lost labor effort due to the tax wedge between private and social returns is regrettable. In the NBA, the point may be to make sure fans don't feel too upset about the games they are paying to watch, and short of that perhaps it doesn't matter. E.g., perhaps it's not a big problem if one reason the Miami Heat shuts down Shawn Marion for the year is that there's no longer any point to winning anyway, but it would be a big problem for the league if Pat Riley (given the active personnel) coached to lose a given game.

Friday, May 16, 2008

National Tax Association session in Washington

Yesterday I presented my tax and accounting paper at the NTA’s annual spring meeting in Washington. This involved racing through my perhaps 30 minutes worth of Power Point slides in only 20 minutes (I didn’t have time to shorten them). Lillian Mills of the University of Texas was my commentator.

Lillian began her comments by praising my paper (to quote her slides) as “beautifully written;” she subsequently added further kind words to this effect that I will (barely) resist quoting.

Uh-oh, I thought. I felt like the proverbial person who learns that his/her blind date thinks he/she is “really nice” and has a “great personality.” But her comments were fine, both objectively and from my own particular selfish perspective.

Like all other commentators and readers of the article, Lillian focused more on the 50 percent taxable income adjustment proposal that I offer than on the general analysis. This was inevitable once I made the proposal, albeit contrary to my preferences. I would want the proposal to get, say, 30 percent of the total attention, with the general analytics getting the rest, but instead the only choice I had when writing the paper was for the proposal to get 0 percent of the attention (if I omitted it) or else 90 percent. So it goes.

Not surprisingly, Lillian was a bit of a skeptic about the proposal. (I put it this way because most people with accounting backgrounds react this way, just like tax scholars tend to hate proposals that would monkey with the income tax to serve “outside” objectives.)

In substance, her main concern was that giving taxable income effects to financial accounting income would reduce the latter’s value relevance in practice. But most of the research she cited in support of this conclusion appeared to deal with making the financial accounting treatment follow the tax definition of income, rather than simply changing the incentive structure for reporting financial accounting income while the measure that was applied (one hopes) remained the same.

Other good points that she made I will address by revising the article rather than going through them here.

Also at the same session was Jim Hines, presenting his paper (first given at NYU last fall) arguing for exemption of US multinationals; outbound business investment on grounds of capital ownership neutrality (CON) and national ownership neutrality (NON). I am a big fan of Jim and his work. But much of the paper seemed to involve arguing by analogy, which one normally would expect more from lawyers than economists. And I remain mystified by Jim’s apparent position that, when choosing between taxes that distort on various margins, one should aim for zero distortion at one of the margins (pertaining to cross-border ownership). Usually one assumes that it is better to have small distortions on all of the margins than to set any of them to zero and thereby require (in a balanced budget setting without lump sum taxes) that the other distortions be larger. Why is it so clear that exemption for foreign source income is preferable to modestly taxing outbound investment in order to finance a slightly lower domestic rate?

A final note: I missed the earlier NTA panel at which economists with various of the presidential campaigns (or affiliated with the Democrats or Republicans generally) addressed tax policy in relation to the 2008 election. Among them was Doug Holtz-Eakin, whom I have criticized in a couple of earlier posts for his role as a front man and (apparently) unapologetic spokesman for the loonily irresponsible tax cut proposals that have been emerging from the McCain campaign. But I thought of Doug, during the later panels, whenever presenters from the Treasury Department or the Joint Committee on Taxation repeated the usual boilerplate by stating that the views they were expressing were purely personal, rather than attributable to their employers.

Holtz-Eakin, I was thinking – and perhaps all of the economists working for the campaigns – would be well-advised, for the next six months, to say the opposite whenever he makes an economic policy statement: “The views I am expressing are those of the __ campaign only. They should not be attributed to me personally.”

Wednesday, May 14, 2008

Oops, rounding error

Stan Collender reminds us that Bush in 2000 promised to eliminate the national debt by the end of this decade.  Instead, it is more than $9.3 trillion and rising by $1.59 billion per day.

On a par with his other achievements.

Joint Committee on Taxation addresses tax expenditure analysis

This past Monday, the JCT issued a pamphlet taking on an important conceptual issue, tax expenditure analysis, and making what I think are significant strides in how to rescue the analysis, and its important informational content, from sterile debates about what constitutes a "normal" tax base. The JCT's main move is to distinguish between (a) narrow subsidies, which on their face depart from the usual treatment of a broader category of items, evidently reflecting Congressional intent to affect resource allocation, and (b) what the pamphlet calls "tax-induced structural distortions," such as quirks arising by reason of the realization requirement. The JCT also proposes to measure negative tax subsidies (i.e., allocatively-minded penalties) as well as positive ones.

My writings on tax expenditures (such as in chapter 8 of Taxes, Spending, and the U.S. Government's March Toward Bankruptcy) are similar in spirit although different in some details (e.g., how to classify the earned income credit). So I am delighted to see the JCT taking up the cause of making the analysis more useful and less mired in pointless debates, such as that between income and consumption tax advocates, that are orthogonal to its informational content.

I first got interested in writing about the topic some years ago, when I was a commentator at an AEI event in which Bruce Bartlett criticized tax expenditure analysis because he saw it as a device used by income tax advocates to peddle their side of the ongoing debate. I agreed with him that it had been used this way, going back to Stanley Surrey, but argued that it has more general informati0nal content, and can advance agendas such as his (favoring small government and identifying departures from it) no less than Surrey's. Plus one need not have an agenda in order to favor more crisply identifying cases in which Congress conceals what seem clearly to be allocative policies (e.g., favoring a particular type of investment) by embedding them in a seemingly distributionally motivated instrument (such as a general income or consumption tax).

My favorite example of the core point made by tax expenditure analysis remains one that I got from David Bradford. Let's cut both taxes and spending by $50 billion, David pretended to urge, by zeroing out $50 billion of military spending (to buy advanced weapons) and enacting instead $50 billion worth of "tradable tax credits" that would go to the very same weapons suppliers for the very same weapons. At the end of the day, everything would be exactly the same, but taxes and spending would each be reported as $50 billion lower. Without a tax expenditure concept, it is hard to show as crisply that nothing in this scenario has genuinely changed.

Thursday, May 08, 2008

Release of candidates' spouses' tax returns

Cindy McCain is refusing to release her separately-filed tax returns as part of the disclosure process generally demanded in a Presidential campaign. In 2004, Teresa Heinz Kerry similarly refused to release her returns for most of the campaign, although on October 16 of that year she released the front two pages of her 2003 tax return.

Perhaps all this focus on candidates' tax returns is a bit over-blown. I remember the big hoodoo when Hillary Clinton released her returns earlier this year, which turned out to be no big deal except that it provided interesting background on just how much the Clintons have earned (and a bit on the general details of how Bill earned some of it). But if disclosure is the norm, it strikes me as quite illogical to provide an out for spousal income simply by reason of separate filing. If it's germane to understanding the candidate's overall financial circumstances (assuming that's one reason for the norm of releasing the returns), separate filing seems likely, in most actual marital situations, to be quite irrelevant.

A further point of interest is that separate filing is usually a bad idea from a tax planning standpoint. So, if the McCains get away with this (as the Kerrys, admittedly, largely did), then effectively spousal disclosure is required unless the candidate is especially motivated to want to avoid it. Not exactly an ideal filter.

Monday, May 05, 2008

Hillary's next move

She is truly emerging as one of Wellesley's and Yale Law School's great "anti-elitists." I'm expecting her to denounce the theory of evolution any day now. If the U.S. had more Islamic than anti-Islamic voters, no doubt she would call for restoring the veil.

At least her feelings about economists are mutual. Long before the current campaign, very few economists who knew her in the Bill Clinton Administration had anything good to say about her. At best, they would remember what their mothers told them and decline to say anything at all.

Back from Israel

I am back from a very pleasant week in Israel, jet-lagged after a 6 hour plane delay that kept me in the Ben Gurion Airport from 9 pm to 5:30 am, but more or less functioning.

Yoram Margalioth of the University of Tel Aviv Law School was my very gracious host, and I also enjoyed meeting other Israeli tax academics (such as Tsilley Dagan, Yitzhak Hadari, Jacob Nussim, and Avi Tabbach). On my last day there, I gave two talks, one on my tax & accounting paper that is forthcoming in the Georgetown Law Journal, and the other on the content of an as yet unwritten paper that is tentatively called "The Intellectual State of the Play in U.S. International Taxation." There was some good discussion, including from students who read the tax & accounting paper (which I presented at a tax colloquium).

But of course the best part, apart from the hospitality of Yoram and others, was touring Israel. Highlights included Jerusalem, Masada, the Dead Sea, the ruins at Caesarea, and the Golan Heights. And of course all the hummus, pita, Jerusalem bagels, and other such delicacies that are available there. Highly recommended as a tourist site and as someplace for U.S. tax academics to visit.

On the downside, I didn't think Continental Airlines lived up to the billing that they give themselves for service in all those quite amusing TV commercials.