Friday, February 27, 2009

The recession hits home

The first restaurant I chose for one of our upcoming post-Tax Policy Colloquium dinners turned out to have gone out of business. I first went to it almost 20 years ago. It had been a West Village fixture, and it did a large remodeling not that long ago.

The second place I tried, which as recently as last summer was one of the hot spots in the Meatpacking District, is only open 3 nights a week now. Evidently they're hunkered down and trying to survive the storm. I don't think they'll make it.

Some quick preliminary thoughts on President Obama's federal budget

1) Changing the official baseline to include the costs of patching the AMT and funding the Iraq and Afghanistan wars greatly increases the honesty and transparency of the document. As time goes on, it’s going to be interesting to try to give fair credit while also noting the inevitable instances in which there is still less than 100% straightforwardness and candor. GW B*sh – I don’t think I should print in full here ugly 4-letter curse words – set the bar for honesty so low – 20 feet underground or so – that it’s hard to get back to normal evaluation. And I feel it’s the job of someone like me to hold the new Administration’s feet to the fire a bit, and demand more than one could really politically expect. But they should also be credited for the dramatic change in norm.

2) It’s true that putting the above things into the baseline means one doesn’t have to pay for them in order to maintain the acknowledged baseline. But that perhaps would set the bar a little too high at this early stage.

3) While there are serious empirical questions about the revenue to efficiency payoff from raising top marginal rates, my own judgment is to be fine with going back to 39.6%. Reducing the tax benefit from top-bracket itemized deductions is a step in the right direction as well.

4) The Making Work Pay credit in the current stimulus package reaches too high in the income range to be effective stimulus – it would be much more cost-effective if cut off sooner. Its permanent retention in the budget raises different sorts of issues. Essentially, it lowers marginal tax rates (MTRs) in the lower brackets by a more convoluted mechanism than simply cutting down the Social Security payroll tax. Budgetary accounting in the Social Security Trust Fund is the reason for the indirect methodology. Despite the Making Work Pay credit’s name, I think of its rationale as stronger in distributional than efficiency terms (i.e., it benefits recipients more than it improves overall work incentives since it will often be inframarginal).

5) Turning to the items listed as loophole closers:

--I’m certainly fine with the carried interest change, much discussed in this blog and elsewhere a couple of summers ago, but the devil is in the details – it could easily be (mis-)drafted to accomplish nothing. Senator Schumer a couple of years ago proposed applying the change more broadly than just to hedge funds and the like – e.g., to real estate and oil and gas partnerships. Viewed by many at the time as a deliberate poison pill, this was also clearly a desirable change in the proposal if actually adoptable. I don’t know yet how broadly the Administration is proposing to implement the change.

--Eliminating various oil and gas company preferences also is all to the good. An amusing bit of history for me is the proposal to raise two to six million dollars per year, starting in 2011, by eliminating the oil and gas “working interest” exception to the passive loss rules. I was working on the Joint Committee of Taxation staff in 1986 when this exception was added to the Senate Finance Committee tax reform bill. Trivial though it was, we were told that failing to adopt it would change the committee vote on fundamental tax reform from 20-0 in favor – all to the tune of speeches about how this was the greatest tax bill in history – to at least 11-9 against. I’m almost reminded of the old joke about academics, saying that the fights are so bitter because the stakes are so low.

--Repealing LIFO inventory accounting is probably a good thing as well, despite the view that LIFO provides indirect partial inflation indexing.

--Codifying the economic substance doctrine gets a revenue estimate (rising swiftly to almost a billion dollars in 2019) that seems to be a bit high, given that I regard the change as almost a ceasefire in place, apart from its (a) preventing courts from saying there is no such doctrine and (b) tilting the scales a bit towards a tougher rather than a looser interpretation of the doctrine. I believe past revenue estimates were even higher, however.

--“Implement international enforcement, reform deferral, and other tax reform policies” gets scored at $70 billion for the next 5 years and $140 billion for the five years after that. Sounds a bit ambitious. Most academics in the international tax policy area, including me, are skeptical about both the merits and the feasibility of attempting significantly to increase the taxes paid by U.S. multinationals on investment abroad. Corporate residence (since the outbound taxes only apply to what are treated as U.S. resident corporations) is too weak a reed to bear so heavy a weight. This one bears close watching as the details emerge.

--Extend low tax rates for dividends and capital gains, but put them at 20 percent rather than 15 percent. This is about where I would go as well. As per my book,, while there’s little rationale for the corporate double tax, and in particular for taxing dividends (other than as a backstop to the corporate level tax), it’s probably better to focus any tax reduction on the entity rather than the shareholder level. Capital gains are one case where Laffer curve considerations actually do emerge within the politically and administratively feasible set of tax rates. 20 percent is still well below the revenue maximizing rate (and one would want to be below that). They score this as a revenue loss because the baseline is expiration of the Bush tax cuts, but presumably the change from 15 to 20 percent raises non-trivial revenue.

Thursday, February 26, 2009

Upcoming D.C. panel on "Decoding the Corporate Tax"

Here is a link for a forthcoming event in Washington, D.C., at the Urban Institute (2100 M Street) on Wednesday, March 11, from 9:00 to 10:30 am, discussing my new book on corporate taxation.

Official description of the event is as follows:

Significant reform of the U.S. tax system must include changes in the complex and inefficient way we tax corporations. What direction should reform take? Many have embraced the idea of integrating the corporate and individual tax. But in his forthcoming Urban Institute Press book, Decoding the U.S. Corporate Tax, Daniel Shaviro argues that there are more promising directions for 21st century corporate tax reform. He considers significantly lowering the corporate rate, embracing international tax simplification, and requiring partial conformity between tax accounting and financial income. Panelists will debate these provocative ideas in a lively discussion of Shaviro’s prescriptions for corporate tax reform.
• Rosanne Altshuler, Senior Fellow, Urban Institute and codirector of the Urban-Brookings Tax Policy Center
• Daniel Halperin, Stanley S. Surrey Professor of Law, Harvard Law School and Urban-Brookings Tax Policy Center (visiting)
• Gregory Ip, U.S. economics editor, The Economist, (moderator)
• John Samuels, General Electric, Vice President and Senior Counsel for Tax Policy
• Daniel Shaviro, Wayne Perry Professor of Taxation, New York University School of Law

Wednesday, February 25, 2009

Interview concerning my new book

A brief NYU interview concerning my new book, Decoding the Corporate Tax, is now available here.

AEI session on Viard (ed.), Tax Policy: Lessons from the 2000s

This morning I appeared as a discussant at an AEI book panel in Washington, concerning the above book. I offered comments on 3 excellent papers, by (1) Alan Viard and John Diamond concerning unfinanced tax cuts, (2) Dhammika Dharmapala concerning the 2003 dividend tax cuts, and (3) Alan Auerbach and Kevin Hassett concerning the dividend tax cuts and bonus depreciation.

Power Point slides for my comments, which I tried to make reasonably lively, can be found at the upper right hand side of the webpage here. Among other things, I explore the "Three Bears" theory of the stimulative effects of bonus depreciation, and disagree with Laurence Kotlikoff (a commentator on one of three papers) regarding the definition of rationality.

U.S. fiscal situation

Having found the time to read the Auerbach-Gale fiscal gap paper more carefully than when I recently posted about it, the following points seem especially pertinent:

(1) We have a really huge fiscal sustainability problem that the financial crisis has made significantly worse, but that the stimulus legislation, if its provisions generally expire in a couple of years as expected, affects only slightly. In my recent article about the fiscal gap, what I considered the most reasonable projections (in terms of projected current policy for future years) from the perspective of mid-2008 placed it at $103 trillion, whereas a similar Auerbach-Gale estimate now places it at $118 trillion. This may not be entirely apples to apples, however. Current stimulus initiatives are trivial compared to this if they are indeed temporary.

(2) Paul Krugman and his acolytes like to say that we don’t really have a budget crisis, but rather a healthcare crisis. My common response has been – why would it be just one or the other, when clearly it’s both? The twin crises relate to each other like overlapping circles in a Venn diagram. Medicare, Medicaid, and other healthcare subsidies fit into both, but each also has lots of independent elements (e.g., Social Security and unsustainable tax cuts for the fiscal crisis, employer-provided plans’ long-term feasibility for the healthcare crisis). Against this background, Auerbach and Gale note that the Bush-era tax and spending changes added about as much to the fiscal gap as everything attributed to healthcare does. (This may involve counting Medicare prescription drugs towards both, as it was a Bush-era policy change.)

(3) Deficit accounting for TARP and other Fed or Treasury interventions presents an interesting topic that perhaps has received too little attention. Two alternative methods, as always when we are thinking about deficit accounting versus true long-term accounting, are cash flow on the one hand and economic accrual on the other. The Fed’s activities appear to be getting accounted for on the basis of whichever is lower as between the two. TARP is being accounted for on a present value basis, with only the present value subsidy being added to the deficit. This led to $461 billion of TARP outlays as being scored at only $184 billion, reflecting the present value of expected future recoveries. Fair enough, but the Fed has also extended more than $1 trillion in financial support to banks, corporations, etc., scored at zero on the view that these are just loans, but in fact exposing the Federal government to significant downside risks that presumably have a present value (these are not arm’s length commercial loans) and yet that are ignored for deficit measurement purposes.

(4) It’s stunning to read in Auerbach-Gale that the market for 5-year senior U.S. Treasury bonds is now, for the first time in known history, pricing in a non-trivial default risk. They estimate the market’s perceived default risk for Treasury bonds – within the next 5 years, mind you – at about 6 percent. This estimate admittedly reflects disputable assumptions, e.g., about the percentage recovery people expect in the event of a Treasury default. Arguably, the true figure is either higher or lower. But the world is changing faster than we thought if the prospect of a U.S. Treasury default is already starting to affect world financial markets.

At this point, nasty world capital market events such as a run on the dollar can no longer reasonably be considered impossible even within the relatively short term.

Tuesday, February 24, 2009

But seriously folks

The busier you are, the more you need to waste time. Today, facing numerous pressing tasks, I started from a link at and found my way to an ancient Greek joke book, the oldest known & extant one, which actually can be read on-line here.

Samples of ancient Greek humor, which certainly ought to make us feel better about our own comic tradition, include the following:

An Abderite saw a eunuch talking to a woman and asked if she was his wife. When he replied that eunuchs can’t have wives, the Abderite asked, ‘So is she your daughter then?’”

An egg-head doctor was seeing a patient. ‘Doctor’, he said, ‘when I get up in the morning I feel dizzy for 20 minutes.’ ‘Get up 20 minutes later, then.’

A student dunce is voyaging on a very stormy sea. When his slaves start to wail, he tells them; "Don't worry - in my will I set you all free!"

Cultural overlap notwithstanding (since the Greeks are our precursors), the human genome must have a sequence somewhere for corny jokes.

Monday, February 23, 2009

Upcoming appearances

I was just interviewed regarding my new book Decoding the Corporate Income Tax for the NYU Law website. I'll post the link when it's up.

This Wednesday, I'll be at the American Enterprise Institute for a book panel from 9:00 to 10:30 concerning their newly published paper collection, Alan Viard (ed.), Tax Policy: Lessons from the 2000s. I'll be commenting on 3 articles, all good contributions to the literature, by (1) Viard and John Diamond concerning unfinanced tax cuts, (2) Dhammika Dharmapala concerning lessons learned from the response to the 2003 dividend tax cut, and (3) Alan Auerbach and Kevin Hassett concerning lessons learned from the dividend tax cuts and the temporary adoption of partial expensing for business equipment.

On Wednesday, March 11, I'll be at the Urban Institute for a book panel concerning Decoding. Further details soon.

Gov. Bobby Jindal's family values

One is hardly surprised by Governor Jindal's eagerness to position himself for the 2012 Republican nomination contest by showily turning down a tiny piece of the stimulus funding. But it's sobering to think that there will likely be children going to bed hungry because he decided to grandstand with regard to unemployment benefits.

Sunday, February 22, 2009

Musical and literary update

I've been listening lately to Amy Rigby (among lots of other things), having come across reviews of her new album with Wreckless Eric, which I still don't have (though it's attractively priced as an Amazon mp3 download). Sampling her older stuff, initially I had to get past the fact that stylistically it really isn't anything new - Dylan '66/Byrds folk-rock and late-70s powerpop are among the obvious influences. But she's a great songwriter, witty and acid with a great voice (by which I don't mean her singing voice, although that's very good too). She's in the singer-songwriter genre, but is much less confessional than a portraitist giving a kaleidoscopic view of a demographic (woman in late 20s through 40s dealing with everything internal and external). Radically changing mood and outlook from one track to the next.

Reading for pleasure isn't always easy during a semester, what with the weekly demands of classes, faculty obligations, presentations and conferences, etcetera, but I've just finished, and greatly enjoyed, the Arthur Schlesinger diaries. If you know a fair amount about (and are interested in) the U.S. political scene from the 1950s through the end of the twentieth century, the diaries offer a really engaging inside look, intimate with and opinionated about lots of the big players, and freshened by the lack of foreshadowing since Schlesinger the diarist (unlike a historian writing after the fact) couldn't tell what was going to happen next.

Saturday, February 21, 2009

Tax policy colloquium on Yoram Margalioth's "Employing Statistical Stigma as a Welfare Ordeal"

Last Thursday, we discussed Yoram Margalioth's "Employing Statistical Stigma as a Welfare Ordeal." In the welfare literature, stigma, leading to low take-up of benefits by eligible individuals, has been viewed as purely a bad thing, to be minimized, not only because it inflicts a bad experience on benefit claimants but because it discourages claiming by intended beneficiaries. The paper argues that a special type of stigma (whether or not that's the right name for it) can have desirable properties as a screening device, helping to focus claiming of benefits on the people who really ought to get them, thus permitting greater aid to those people.

Traditional stigma, in the paper's account, is the feeling of being a failure because one is unable to support oneself. As a matter of empirical description, I felt the paper overly viewed this as something purely internal, i.e., if I'm a prospective claimant I hate feeling like a failure, but exposure to others doesn't make it any worse. I would think that, as a common psychological matter, bad as it is to feel like you have failed, letting others know makes it far worse. Better to lick one's wounds in private.

The paper agrees that traditional stigma appears to have no good sorting functions in the form of discouraging claimants who ought to be ineligible but aren't given the imperfection of screening via eligibility rules. But it argues that another type, which it called "statistical stigma," can serve as a helpful screen. Suppose we have a benefit program for people with low earning ability but that some who don't need the benefits manage to con their way in. But suppose that people in the neighborhood both (a) have greater information about ability levels than the government can hope to get in screening for eligibility, and (b) will dislike false claimants, either directly for cheating in a government program or on the view that this is the evidence of broader dishonesty that might infect the claimant's other social dealings. Then being known locally as a claimant would tend to have positive screening characteristics, because those who truly were high-ability would tend to get stigmatized as suspected cheaters more, all else equal.

The point holds intellectually within its defined terms, and skepticism at the session focused mainly on the question of how well it applies to real world settings. We felt it was generally most likely to play a role in cases such as parking in disabled spaces in the shopping center. Among the issues potentially challenging its broader applicability were those of heterogeneity (in neighborhood values, in claimant temperament, etc.) and of traditional stigma's potentially outweighing statistical stigma in various welfare-type settings.

Friday, February 20, 2009

Institutional Foundations of Hackery

The blog post title above is a backhand reference to the title of my recently published book, Institutional Foundations of Public Finance, co-edited with Alan Auerbach, and collecting the excellent papers from a 2006 conference at NYU Law School in honor of David Bradford. But the topic I have in mind is considerably less edifying than David's work or that of any of the authors in that volume. We in academics have it easy, what with tenure plus our internal review mechanisms and prestige competitions. Personal taste aside, I actually find that I have strong career incentives to be honest in following ideas and arguments wherever they properly lead. One earns more respect that way. In our biz, not just hackery, which deserves any punishment it ever gets, but predictability is sometimes penalized - perhaps unduly, since, while it's genuinely a fault, avoiding it through quirky, whimsical schtick can be even worse.

But in other parts of the policy-talk world, hackery can get entrenched like the battling armies at the Marne, grinding up anyone who dares to stick his head up or rather his neck out. (Sorry, too tired to think of a better metaphor.)

Getting to the point, I've been distressed lately by what I hear concerning Bruce Bartlett, who publishes regularly, and generally very interestingly, but has not had a think tank job since the National Center for Policy Analysis fired him in 2005 for daring to criticize George W. Bush.

Bruce is a strong traditional conservative, believing in Reagan-era principles such as free markets and limited government, who became convinced not just of the odiousness of the George W. Bush Administration (from conservative as well as liberal principles), but also of such heresies, from the standpoint of his "base," as the case for a VAT to prevent fiscal collapse and more recently the macroeconomic need for a large-scale stimulus program. Whether he's right or wrong - and I'd say he's usually right - you simply aren't allowed to say these things if you're otherwise on the conservative side. They may not kill you, but they certainly won't hire you.

In much of the media and think tank worlds - certainly on the conservative side, but I suspect it's not entirely limited thereto - the career path that pays is to be a hack, and to stick to the party line, never honestly evaluating issues but saying what you're expected to say.

I'm hoping and tend to believe it's better on the left, but it depends where one looks, and perhaps over time we will see. Certainly there are places where, for example, one might have to watch what one says about Social Security's long-term financing.

The institutionally entrenched command to obey top-down military discipline, or perhaps I should call it Maoist group conformity, not only is unedifying, but leads to debased and dishonest public discourse that literally risks destroying our country. Without honest debate one cannot consistently make sane choices, much less affirmatively good ones.

Perhaps Obama will make some good choices, though even then he'll have to sell them. But rational policymaking needs to have deeper roots than a particular president or it simply won't happen regularly enough.

2-9/10 cheers for flu shots

I got one last fall. Late last week, I suddenly felt what seemed to be a cold coming on. Then it turned into a couple of days of wipeout, with low fever but well short of the three-alarm job I remember from 9 years ago. Given the relative mildness, I was wondering if it was actually a bad cold rather than the flu, since one really expects a bit more from the latter (pounding headaches, dizziness, loss of appetite, weeks of exhaustion, etcetera). Not that I'm complaining or anything. Still, the typology felt more flulike.

Today I read that (a) the Northeast has been having a flu resurgence in the last couple of weeks, and (b) the shot often gives a 70% reduction in severity, rather than making you immune. So now I feel confirmed that I had the flu after all, and that the shot, while short of perfection, may have saved me from a couple of really brutal weeks.

Make sure you get those shots next year, kids.

Bad weather ahead

From the abstract of the new Auerbach-Gale article, The Economic Crisis and the Fiscal Crisis: 2009 and Beyond:

"In 2009, the federal deficit will be larger as a share of the economy than at any time since World War II. The current deficit is due in part to economic weakness and the stimulus, and in part to policy choices made in the past. What is more troubling is that, under what we view as optimistic assumptions, the deficit is projected to average at least $1 trillion per year for the 10 years after 2009, even if the economy returns to full employment and the stimulus package is allowed to expire in two years.

"The longer-run picture is even bleaker. We estimate a fiscal gap – the immediate and permanent increase in taxes or reduction in spending that would keep the long-term debt/GDP ratio at its current level –about 7-9 percent of GDP, or between $1 trillion and $1.3 trillion per year in current dollars.

"Recent trends in credit default swap markets show a clearly discernable uptick in the perceived likelihood of default on 5-year U.S. senior Treasury debt, a notion that was virtually unthinkable in the past. While it is difficult to know exactly how to interpret these results, it is clear that – although fiscal policy problems are usually described as medium- and long-term issues – the future may be upon us much sooner than previously expected."

As Margo Channing (Bette Davis) put it in All About Eve: "Fasten your seatbelts. It's going to be a bumpy [ride]."

A step towards more honest budgetary accounting

The Obama Administration deserves generous plaudits and hosannas for this.

Friday, February 13, 2009

Tax policy colloquium on Dorothy Brown's "Shades of the American Dream"

Yesterday we had a lively session, terminated by the clock when it was still going strong, on Dorothy Brown's "Shades of the American Dream."

The paper argues that the income tax rules for homeowners (exclude imputed rent, allow mortgage interest and real property deductions, disallow losses on sale but also exclude most gains) unfairly disadvantage African-Americans, who take less advantage of the rules than whites. They own comparatively fewer and less valuable homes, on average have lower marginal rates for the deductions, less frequently itemize deductions, and have disallowed losses a higher proportion of the time.

Home ownership differences remain even if one adjusts for income, though this appears to be mostly because, as between average African-American and white families with the same income for a given year, the latter is likely to have greater wealth.

There is a strong pre-2008 financial collapse flavor to the article (a problem for many of us if our articles are overtaken by events while in gestation), since it treats home ownership as a good thing that ought to be encouraged. I imagine that many of the lower-income people, both white and African-American, who bought homes in the last 10 years despite being pressed financially are now sorry that they did so.

Among the main issues that I raised was tax capitalization of the tax subsidy. If homes are more expensive by the full expected value of the tax benefits, then (a) all the whites who are getting these benefits actually aren't benefiting after-tax at all, (b) adding new tax benefits that non-affluent African-Americans could claim after buying a home might simply boost the price they would have to pay, potentially making them worse off if they faced liquidity problems (e.g., the need to pay 10 or 20% of the purchase price in cash).

I noted that marginal tax rate differences (along with itemizing versus non-itemizing) could lead to clientele effects that might change the analysis. For example, if I don't itemize or am in a low tax bracket and am bidding for a home against someone who gets more marginal value for the deductions, then all else equal that person will be willing to pay a higher price than I would. Given that homes are non-fungible assets being sold in what are often thin markets, this could lead to a reduction in the consumer surplus enjoyed by lower-bracket prospective home purchasers. E.g., one loses out on a home that otherwise one could have purchased at a favorable price, or alternatively one gets the home but has to pay a bit more. I thought Dorothy should consider and emphasize this issue a bit more, but I noted that housing markets may be sufficiently segmented by income to reduce its importance. E.g., even if people in the 15% tax bracket are buying homes, they probably aren't, much of the time, bidding on the same homes in the same neighborhoods as people in the 35% bracket.

In a similar vein, Alan Auerbach discussed how expected lack of home appreciation (e.g., buying housing stock in Rochester or Detroit when the city is well-known to be in long-term economic decline) may lower the purchase price, and permit one to receive a higher annual imputed rental value relative to the price than would have been available if appreciation were expected.

I was hoping Dorothy would engage more with these arguments than she did. They strike me as not implausible and also as pretty fundamental to the validity of the claims being made.

We also discussed a bit at the session what the financial meltdown tells us about the tax rules for home ownership. I think we've learned quite a lot. For decades, tax policy types thought we knew how bad the home ownership rules are. We recognized that they encourage enormous inefficiency in the form of substituting home consumption for other consumption simply because it's tax-favored by the exclusion of imputed rent plus the allowance of deductions for items (home mortgage interest and real property taxes) that are tax-arbitraged against it.

But we didn't know the half of it. We didn't fully realize how, when you throw in exclusion of nearly all sale gains plus a strong inducement to adopt maximum leverage, the tax system contributed to the real estate bubble and financial collapse of 2008. The wreckage is strewn everywhere, from the macro-economy to financial institutions to all the individuals who bought over-priced homes they can't afford and now have to deal with the back-end mess.

It's pretty clear to me how the tax rules ought to change, but unfortunately there is zero chance of this happening. Congress wants to shower new benefits (such as the first-time homebuyer credit) on homes that will keep prices too high and prevent rational adjustment. Obviously I don't want to exert strong downward pressure on homes right now, but that's the direction in which we ought to go with sufficiently deferred effective dates to permit adjustment for existing mortgage default problems.

The first big point is that, while there may be a modest rationale for encouraging home ownership relative to rental, there is absolutely no rationale for encouraging bigger or more expensive homes. The rationale for doing anything at all relates to positive externalities, e.g., caring more about the neighborhood and about upkeep that affects neighbors, although there also are arguments the other way (e.g., reduced mobility may increase adjustment costs partly borne by others when jobs migrate). The current tax rules fail to focus on just ownership because the benefits keep rising with home value until one reaches the $1.1 million ceiling on the debt principal that gives rise to deductible interest.

Step 1 would be to greatly lower the $1.1 ceiling. Step 2, convert it to a refundable fixed-percentage credit so that marginal rate differences between prospective buyers are eliminated. (Refundability aside, this is an old proposal - it was in the 1984 Bradley-Gephardt tax reform bill, and I believe it was also in the 2005 Tax Reform Commission's recommendations.) Step 3, sever the link to leverage, by making it a fixed dollar amount for each home (or for a percentage of purchase price up to a low ceiling) without regard to home mortgage interest paid.

But this leaves one other huge problem that the financial collapse reminds us is really important. A home is both a consumer asset and an investment asset. In theory, while a decline in home value from its being used ought to be non-deductible if we don't tax imputed rent (just as you don't to deduct the purchase price of a car for personal use that you eventually sell for scrap), investment gains and losses ought in principle to be fully taxed.

Thus, suppose you buy a home in 2006 for $200,000. Ignoring for simplicity its economic depreciation due to being used, suppose you end up selling it either for $300,000 in 2007 or for $100,000 in 2009. These $100,000 swings from the original purchase price are economic returns to investment that ought to be included, in the 2007 case, and deducted in the 2009 case.

It's common wisdom among tax policy types that, in some settings, having the income tax reach risk by including gains and deducting losses is potentially irrelevant. Thus, suppose I want to place a $100,000 bet with some counter-party on whether oil prices will rise or fall this year. It might make no difference whether the system took account of this bet or not. Thus, suppose we really want to bet $100,000, but that the gain is taxable and the loss deductible at 50%. Our response to exposing the risky outcome to the tax system might be that we simply double the nominal bet, from $100,000 to $200,000, so that after-tax we end up having the bet we really wanted.

Whatever one makes of this line of argument in other settings, it's largely inapplicable to home ownership. Here the problem is that lower and middle-income homeowners have a grossly under-diversified investment portfolio given how large a share they have sunk into home equity and the fundamental difficulties of hedging or diversifying that stake. So the insurance that the tax system could provide by including gains and deducting losses, rather than being irrelevant because people can achieve optimal hedging and diversification by themselves, actually responds to a market failure or missing market (or mistake in investment strategy by millions of people).

For a long time, this seemed less important because the real estate market was rising anyway. But now we have forcefully been reminded that there is downside as well as upside risk to home prices.

Allowing losses on home sales to be deducted while gains are not taxed strikes me as a huge mistake that could encourage new real estate bubbles in the future (or at a minimum continuing over-investment in home ownership). But taxing gains and allowing losses to be deducted upon the sale of a primary residence has a lot to be said for it. Given the lock-in problem for gains (and inducement to realization for losses), one could argue for doing it, on both sides, at capital gains rather than ordinary income rates, although this would reduce the insurance provided. One also might exempt it from the capital loss limitation (and also from having other capital losses allowed against it if a gain), given that it doesn't entirely fit the rationale for the capital loss limitation, which is that, without it, people would sell all the losers while holding all the winners in their asset portfolios. Finally, although this reintroduces some undesirable non-neutrality, one could consider permitting gain rollover when the sale price is promptly reinvested in a new home - the approach that the income tax law took before 1997, when it was changed to simply exempt up to $500,000 of gain. This in turn would increase the desirability of preventing the tax-free step-up in asset basis at death.

As a final detail, Richard Epstein, in his early days as a tax scholar rather than broad-ranging libertarian, wrote a Stanford Law Review article proposing to tax home gains and allow home losses with one adjustment, to capture the personal use element. This was to have home basis decline each year by the amount of tax depreciation typically allowed for real estate, only without the depreciation actually being deducted (given the tax arbitrage against excluded rental income). This annually declining basis would then be used to compute the fully allowable gain or loss on home sale.

There you have it: what I consider a pretty sound set of proposals for taxation of home ownership. I'd enact it today but with a deferred effective date or phase-in given the huge problems we now face with bad mortgages. The fact that it has so little chance of ever being seriously considered tells us something, I think, about the state of our political system and the broader likelihood that it is able to adopt sound policies that would bode well for our economic future.

Tuesday, February 10, 2009

My latest book is now available

My latest book, Decoding the Corporate Tax, is now available here on the Urban Institute Press website.

Not to lay it on too thick, but the cover blurbs are as follows. From David Weisbach:

"Decoding the U.S. Corporate Tax is a concise and clearly written review of the corporate tax structure and its economic and distributional consequences. The book covers perennial issues (such as corporate integration) as well as issues raised by the recent increases in capital mobility, the interaction of the corporate tax and corporate governance, and more. Reform of the corporate tax will be central to any significant long-term reform of our tax system. Shaviro provides a roadmap."

Joel Slemrod says:

"Right out of the blocks, Decoding the U.S. Corporate Tax by Daniel Shaviro is the indispensable guide to this most complex and politically divisive tax. It addresses the key issues with sophisticated economic and legal reasoning and a keen knowledge of how the world really works, yet makes its points clearly—and often amusingly—with a minimum of jargon. Start here to understand where corporate tax policy should head in a world marked by increasing globalization and financial innovation, and where it probably will end up instead.”

Harvey Rosen says:

“Daniel Shaviro has produced a clearly written, insightful, and comprehensive discussion of the economic and legal issues surrounding corporate taxation. It is sure to become a highly valued resource for both students and researchers.”

And Kevin Hassett says:

"Daniel Shaviro is a giant in the tax community because his analysis is always novel and always convincing. He understands that to develop a smarter and more efficient code, we must fully understand the code we have and why it emerged. Yes, the tax code is a horrific and comical mess, but a mess that has often been made for practical reasons. Decoding the U.S. Corporate Tax is a priceless addition to the literature and just cause for optimism—the hard work of fixing the tax code just got a lot easier.”

One reason I wrote this book was so I could assign it to students in Tax Policy and Corporate Tax classes, as otherwise there was nothing available that concisely and clearly explains the important economic models in the area, including why they're all over the map and why (though none of their alternative assumptions fully hold) they matter. Another reason was to argue that corporate integration, though all very well in principle, probably isn't the best place to focus corporate tax reform efforts these days, for reasons that readers of the full text (and particularly the last couple of chapters) can evaluate for themselves.

You can see the introduction here and the table of contents here.

My two favorite cartoons concerning the stimulus battle

One is by David Horsey, and the other is by Ed Stein.

Monday, February 09, 2009

Tax policy colloquium on Amy Finkelstein's “EZ-Tax: Tax Salience and Tax Rates”

Last Thursday, we discussed Amy Finkelstein's very interesting above-named article, which shows that adoption of EZ-Pass appears to lead to higher tolls, as well as to reduced consumer elasticity of response to the tolls, because not paying cash at the tollbooth reduces one's awareness of the charge. Oddly, EZ-Pass users appeared to over-estimate rather than under-estimate the toll they were paying, which might seem to make the empirical response backwards, except that it's consistent with the notion that people under-measure CHANGES in the toll. Also, more from our colloquy than from the paper itself, it seems that people simply were not thinking much about the toll because they didn't have to pay it in cash - one had to prod them to get an estimate of its likely level (raising a question of whether they were really thinking in terms of the cost estimates they eventually furnished).

Tentative conclusions: hard to doubt that EZ-Pass is good for us on balance as consumers, especially since its use as voluntary. Is it good for us as voters? (A key motivation of the paper was to test the Milton Friedman idea, a la withholding, that making tax payments less salient or noticeable leads to a bigger government.) Here the problem is that political choice has so many flaws (aggregation problems, externalities, collective action) that anyone trying to say whether one more defect, in the form of reduced understanding of one specific element, makes things better or worse faces severe second-best problems. Easy to be concerned about it if one has Milton Friedman-James Buchanan type priors, in which government systematically is too big and does too much. But public choice defects apply to supplying valuable public goods in addition to everything else, so unless one has the Friedman-Buchanan prior (or, rather, settled faith) it's hard to know where EZ-Pass-type reduced salience sends us relative to the optimum.

Sunday, February 08, 2009


After complaining about ineffective stimulus or non-stimulus proposals in the House bill, the Senate has not only eliminated some of the most unambiguously effective stuff, such as $40 billion to head off state and local government spending cuts (by definition "shovel-ready") - it has also put in a $70 billion alternative minimum tax (AMT) patch for 2009.

As anyone even minimally expert on these issues already knows, that is about as ineffective a stimulus provision as one could possibly have. The money goes mainly to upper-income individuals, who are unlikely to change their consumer spending much in consequence of it.

No doubt the House will accept it, however, in exchange for genuinely stimulative spending provisions.

The only principled defense one could offer of it is that it makes the true stimulus bill smaller, arguably reducing the deficit relative to having a full-size stimulus bill plus the AMT fix to boot (since no doubt it would have been adopted anyway). I happen to think that a smaller stimulus bill is wrong on the merits despite the long-term fiscal problem. But couldn't they try to make the case directly if that's what they believe?

Wednesday, February 04, 2009

Sad news

This made me quite sad. I didn't know him personally, and never bought one of his fabled peelers, but he was a riotous and delightful presence at the Union Square Greenmarket, which I haunt so incessantly during the summer and fall months (mainly for fresh fruit) that I'm worried they'll start charging me rent.

Tuesday, February 03, 2009

AALS call for papers on property & tax law intersections

Nancy Staudt of Northwestern Law School, an old friend who happens to have been the second-ever presenter at the NYU Tax Policy Colloquium (way back in January 1996), asked me to post the following item:


The Property and Taxation Sections of the AALS are seeking to co-sponsor a half day session at the annual AALS meeting next year (January, 2010) in New Orleans. If you are working on the intersection of these two areas of law and would like to present a paper--we would love to hear from you by February 28, 2009. Specifically, please send us a working title, a brief description of your paper, and a draft if one is available.

The papers will be published in Northwestern Law School's Journal of Law and Social Policy; therefore, we will only consider unpublished pieces for possible inclusion in the AALS panels.

If you are interested, please contact Professor Carol Brown, University of North Carolina Law School ( and Professor Nancy Staudt, Northwestern University Law School ( Please be sure to include both of us on your e-mail submissions.

[END OF POSTED ITEM] One obvious example of what they might have in mind involves takings law, which (as the literature shows) implicitly raises tax policy as well as property issues because it concerns who pays for government programs under particular circumstances (with myriad incentive, distributional, and political economy effects that should be familiar to writers in both areas.)

Monday, February 02, 2009

New York Times on-line forum on Geithner's and Daschle's tax problems

I was invited today to participate in an on-line New York Times forum concerning Geithner's and Daschle's tax problems. As you can see if you go there, the participant responses had a range that would do the movie Rashomon proud, ranging from "No Moral Turpitude" to "Fundamentally Corrupt."

I myself rated what they did as pretty bad - highly self-serving "mistakes" though short of fraud - and suggested that they voluntarily pay the Treasury what in effect would be self-imposed penalties.

Glamorous 5:30 am slot

I just did a 3 or 4-minute live radio slot on KCBS out of San Francisco, concerning the alternative minimum tax (AMT) patch in the Senate stimulus bill. Time of the appearance was a humane 8:30 am here in the East Coast, but as it was 5:30 am in the broadcast area I doubt there were all that many millions of listeners.

The topic was a $70 billion, one-year indexing patch to the AMT that news articles say the House is likely to accept.

I noted that the growth of the AMT is a big problem that everyone in theory wants to deal with (although no one wants to pay for it), that whatever its merits it really isn't stimulus, and that the continual one-year patches Congress uses to "fix" the AMT are like someone buying an expensive car on financing and pretending that all he has to worry about is this month's payment.