Sunday, August 29, 2010

Personal milestone?

Some time between 1978 and 1981, I bought a box of staples in the Yale Co-op for $1.25 (or so it says on the box). Today, my wife took the last staples from the box to refill her stapler. I guess it's finally time for another box.

Friday, August 27, 2010

Volcker Commission Report

Today the President's Economic Recovery Advisory Board, chaired by Paul Volcker, released a 126-page report on tax reform options, designed to achieve tax simplification, improved compliance, and corporate tax reform without raising taxes for families that earn less than $250,000 per year.

The Board had no mandate, however, to make recommendations, a la the famous 1984 Treasury "Blue Book" report that led to 1986 tax reform, or the somewhat less successful 2005 Tax Reform Panel under the G.W. Bush Administration.

Given this lack of a mandate, it's no surprise that the report is largely a laundry list of possibilities, stating in fairly general terms the advantages and disadvantages of particular options. E.g., lowering the corporate tax rate would reduce the cost of capital for U.S. companies, but also would lose revenue. Duh.

That comment is perhaps a bit unfair, as in many respects it's a useful compilation - for example, of opportunities to eliminate needless complexity from multiple parallel tax incentives, such as for saving or education, or of the main ways one could change corporate taxation or international taxation, and the main arguments for and against going in each direction.

Still, I imagine that many of the board members and staff people who signed up for this project wish they could have had the opportunity to do more, which they didn't.

I'm not optimistic about major tax reform (good or bad) any time or soon, and although I'd value it if done right I'm not convinced it's the best place to invest one's efforts. I see tax reform as happening (if at all, and I don't think it will) in the context of addressing the fiscal gap by raising taxes and reducing the projected growth rate of spending, via the sort of bipartisan deal that happened several times in the 1980s but does not appear even remotely feasible today.

Thursday, August 26, 2010

Depressing reading?

Susan Morse's newly posted short piece, How Australia Got a VAT, makes depressing reading if you keep the U.S. in the back of your mind while going through it. She offers a nice description of how Australia ended up adding a VAT in 2000, absent any of the usual causal elements (severe fiscal crisis, World Bank or IMF pressure, etc.).

What makes the story so positively bizarre, from a very jaded U.S. perspective, is how well the Australian political process worked compared to ours. Rationality, attempts to make good policy, willingness to work together to bridge differences based on not entirely irreconcilable preferences, etcetera. It would almost remind me of Sunday school if I had ever attended one.

You start with a conservative Prime Minister (John Howard) who actually believes a VAT is good tax policy due to its relative efficiency. He apparently decides to promote enactment at least in part for this reason. Opponents raise concerns about its regressivity (they apparently didn't have in mind the transition effect, since at enactment a VAT may function as a one-time wealth tax.) So what happens? They compromise, and put the VAT in a package that has significant progressivity offsets. Concerns of Australia's states are also addressed. Moreover, academics are consulted and play a role in designing and evaluating the package, which I hope readers will forgive me for thinking is a good thing. (Much less likely to happen in the U.S., where we might testify at a Congressional hearing but generally do not get to play inside the process to the same degree as in many other Western countries.)

OK, this isn't a Hollywood fairy tale. For example, Howard initially got elected in part by denying that he had any interest in enacting a VAT, then promptly reversed course (although he did then end up seeking and narrowly getting voter approval). And some of the details seem clearly wrong and driven by optics and poor understanding of the issues - e.g., one important mechanism for addressing progressivity was excluding food from the VAT, whereas what Morse calls a "Michael Graetz-like plan" with higher transfer payments would likely have been far preferable. (Food exclusions are inefficient, poorly targeted as they apply to Whole Foods-type consumers way up the income scale, and create administrative complexity if the boundaries of the exclusion are unclear or in the presence of mixed food plus non-food goods or inputs.)

Still, in the words of Sinclair Lewis, "it can't happen here." (Though Lewis had a bad "it" in mind, the rise of fascism, and was saying that it actually could happen here - whereas I mean that a good thing actually can't.)

Wednesday, August 25, 2010

And another article

I've just finished a first draft of my new article, "The Rising Tax-Electivity of U.S. Corporate Residence," though I probably won't post it on SSRN until after I deliver it at NYU on September 21 as the Tillinghast Lecture. Some good stuff in it, including (a) what we know about such electivity today, (b) state of the play on the distributional (pertaining to individuals) as well as efficiency issues raised by residence-based entity-level worldwide taxation, and (c) a proposed $200 billion (!) transition tax if the U.S. shifts from its current sort-of-worldwide system to a territorial one. (This number, at this point, is back-of-the-envelope at best, but I think it's reasonably in the ballpark.)

Once I've put this article to bed for the time being, I'll return to my (suspended since late 2009) book in progress, Fixing the U.S. International Tax Rules.

Tuesday, August 24, 2010

Tom Tomorrow on the supposed "ground zero mosque"

From his latest cartoon, available here:

"A visitor to that hallowed ground might wander several blocks north past the neighborhood strip clubs, off track betting parlor, and fast food joints - and stumble across an Islamic cultural center!

"I'm offended just thinking about it!"

But not to worry, sleazy pols are coming to the rescue.

Palin: "This blasphemecration of sacrosanctified ground is abhorrentible! I refudiate it unequivocately!"

Gingrich: "It's shockingly insensitive! Don't these New Yorkers understand what ground zero means to real Americans?"

Another day, another paper posted on SSRN

Kim Clausing and I have just posted on SSRN our recently completed paper draft, "A Burden-Neutral Shift from Foreign Tax Creditability to Deductibility?"

You can download it here. The abstract is as follows:

Observers of international tax rules have long conflated two distinct effects of the foreign tax credit on multinational firms: the effect on the incentive to invest abroad and the effect on foreign tax sensitivity. With national welfare as the policy objective, we discuss how a burden neutral shift from foreign tax credits to deductibility could be designed to improve distortions associated with insensitivity to foreign taxation without raising aggregate burdens on outward foreign investment. We also provide new evidence suggesting that the tax sensitivity of outward foreign direct investment is indeed reduced for OECD countries using foreign tax credits, in comparison with other OECD countries. Finally, we discuss policy considerations surrounding a possible burden-neutral shift from foreign tax creditability to deductibility.

Monday, August 23, 2010

Keeping one's composure

I've been struggling with a blog post that keeps coming out a bit too strong. The gist of it is that, for reasons such as those discussed here, people like Gingrich and Palin are guilty, not only of odious bigotry against the members of a faith with one billion members worldwide, but of deliberately hurting the United States and, in particular, placing New Yorkers (such as me and my loved ones) at greater risk of becoming victims of terrorism. For crass political advantage and/or the love of hatred for its own sake, they are willing both to do evil and to aid it. I would not forgive them for this if I had a million years.

Saturday, August 21, 2010

Bad little bunny

Our furniture's bete noire is a bete brune (Buddy).

This innocent-looking little fellow has also scratched up a couple of pairs of shoes lately, and goes after food on the counter like the Allies storming the Normandy beaches.

After some of his worse outrages, I tell him he's a bad-to-the-bonehead. But it's hard not to laugh.

Thursday, August 19, 2010

Betting on your own grades: incentive effects vs. distributional effects

As noted by the Tax Prof blog, the Wall Street Journal has an article today discussing a new on-line service that would permit students to bet regarding their own grades. Supposedly, this would provide incentives for bettors to work harder, as in the case where you wager $50 on getting at least an A-, and thus engage in extra studying to make sure you get there. Critics note that students could also bet against their getting good grades.

I'm not sure I'd want to run this business (even if it were otherwise my sort of thing). The "house" faces problems both of moral hazard (given how one might adjust one's efforts for the direction of one's bet) and adverse selection (given the possibility of inside info, more specific than one's overall GPA, regarding how well one is likely to do in a given class). Or to put it differently, given how the house would have to price the bets in light of moral hazard and adverse selection, the odds are bound to be lousy for students who are not betting on something that they surreptitiously know is actually close to a sure thing. And perhaps the house will end up having to include a very wide bid-ask spread, given that students can game it either way.

In any event, to say that betting in favor of your getting good grades would improve your incentive to do well, we have to posit that it is otherwise under-powered. This might have to do with loved ones who are affected by how you do, but let's instead call it an externality from the standpoint of your future self, whose interests you may fail to consider adequately if other activities are more fun than studying or you just get too bored. (And let's forget about the opposite externality, which is that other students may end up doing better if you do worse.)

Note, however, that, from the standpoint of portfolio theory, betting in favor of your getting a good grade is the very last thing you should do. You already face risk given the genuine unpredictability of how you will do (and any economic or even just psychic stakes in how you fare). Why double down and make your risk-bearing even greater? A savvy investment advisor would tell you to hedge the risk, by betting against yourself as a form of insurance. Indeed, the tax system already does this to a degree, since if you end up earning more (whether from good grades or otherwise) you will pay more tax.

Hence, we face the familiar tradeoff between incentive effects and distributional effects. Do I smell a future Tax Policy exam question here?

And if this gets going, how long before we see the first allegation of a student letting his or her professor in on the grade action?

NYU Tax Policy Colloquium, spring 2011 schedule

I'll be co-teaching the colloquium with Mihir Desai again. Here is our schedule for next winter, a.k.a. the spring semester.

1. January 20 – Joseph Bankman, Stanford Law School
2. January 27 – Yair Listoken, Yale Law School
3. February 3 – David Miller, Cadwalader, Wickersham & Taft LLP
4. February 10 – Michael Keen, International Monetary Fund
5. February 17 – Kenneth Scheve, Yale University Political Science Department
6. February 24 – Allison Christians, Wisconsin Law School
7. March 3 – Adam Rosenzweig, Washington University Law School
8. March 10 – Eric Zolt, UCLA Law School
9. March 24 – Kirk Stark, UCLA Law School.
10. March 31 – Len Burman, Maxwell School of Syracuse University
11. April 7 – Jennifer Blouin, Wharton School, University of Pennsylvania
12. April 14 – Joshua Blank, NYU Law School
13. April 21 – Leandra Lederman, Indiana University Law School
14. April 28 – Cheryl Block, Washington University Law School

All sessions meet on Thursdays, from 4:00 to 5:50 pm, in Vanderbilt 208, NYU Law School.

Tuesday, August 17, 2010

Getting It sales (first quarter, post-release)

Fewer second quarter sales of Getting It than I had expected, not quite 300 for March through June. I am hoping for 2,000 or so, and feel that it deserves more (including a film), but that remains a long way off.

Wednesday, August 11, 2010

Death of Dan Rostenkowski

Chicago news outlets are apparently reporting that former House Ways and Means Chair Rostenkowski has died. I was on the Joint Committee of Taxation staff for the 1986 Tax Reform Act, during Rosty's tenure. Whatever else one says about him at any other point in his career, at that time I observed him to be a true statesman and leader. (And I speak as one who is extremely hard to please, when it comes to political figures.)

Monday, August 09, 2010

Down with the home mortgage interest deduction

The 2008 financial crisis made it clear that the home mortgage interest deduction is even worse, and perhaps I should say much worse, than experts had previously thought. The long-obvious (to tax policy types) points against it were that it inefficiently encourages both home consumption relative to other consumption, and home ownership relative to home rental (unless the tax breaks for the latter are commensurately big, as they may have been, say, in the mid-1980s).

But what hadn't been fully appreciated until 2008 was just how devastating the deduction's encouragement of highly leveraged home ownership can be. The deduction probably played an important background role in encouraging the blizzard of crazy U.S. mortgage loans that helped to sink the U.S. and world economy. (Although, to be fair, it's true that problems also arose in countries without a similarly designed tax break for housing, and that many subprime borrowers probably couldn't reasonably expect to get much value from the deduction.)

Now we see its poison playing out in another dimension. An article in today's Wall Street Journal notes that employers are often having a hard time hiring even though unemployment is so staggeringly high. While the problem has multiple causes, one of them is that "getting people to move for work has been especially difficult this time. Often, that is a function of the mortgage and credit problems many potential employees face. In a recent study, Fernando Ferreira and Joseph Gyourko of the University of Pennsylvania, together with Joseph Tracy of the Federal Reserve Bank of New York, found that people who owe more on their mortgages than their homes are worth are about a third less mobile."

Reducing people's mobility, in the event of a downturn that makes it extra-important, through a tax incentive for highly leveraged home ownership, harms us all, not just the prospective worker and employer who would have mutually enjoyed surplus from their job deal if moving were less costly. It has social, political, and revenue costs that are becoming all too familiar.

For one of the less obvious angles, think of Greece's difficulties in getting out from under its budget problems because, given the euro, it can't devalue its currency. Economists note that adjustment would be easier if labor were more mobile between different countries in the EU. But with language and cultural barriers, Greece is relatively stuck, and the adjustment much slower and more painful.

The U.S. obviously has much more of a common culture and language than the EU, which should help us, but when we encourage people to tie themselves down a bit of this may be lost.

Friday, August 06, 2010

Krugman's Paul Ryan takedown

Highlights include "charlatan ... The Ryan plan is a fraud that makes no useful contribution to the debate over America’s fiscal future."

The short version that is clearly correct: It is utterly impossible to propose an even remotely credible plan for restoring long-term fiscal sustainability that involves massive tax cuts, as Ryan's plan does. All the more so if one leaves the spending cuts (as Ryan does) unspecified.

There really is no ground for debate about this - the plan is a fraud for these very simple and clear reasons.

But I would be less sweeping than Krugman in dismissing the entire thing, for one reason that Krugman finesses a bit at the end of the column.

The Ryan plan actually does have one stated idea that potentially would have a significantly positive effect on the long-term fiscal picture. This is to turn Medicare into a voucher plan starting in 2020, and to control the program's currently projected fiscal growth path by capping the vouchers.

Krugman is right that this is politically unlikely to be permitted (other than perhaps in the brink-of-default scenario). But it's less fictional than the unspecified spending cuts, in that voucherizing is a step towards making slower Medicare growth at least administratively more feasible.

The point that I regard as finessing by Krugman is the following: he disagrees with capped voucherization as a policy matter, noting that it would mean that seniors with lesser independent means would be denied future healthcare that, under current policy scenarios, they would get. (By the way, given the march of technology, the denial would mean that seniors were getting worse care, relative to what was contemporaneously technologically available, than seniors today - they might still be getting better care in absolute terms due to medical advances.)

But to disagree with it as a policy matter, when it might actually address long-term sustainability, is different from his critique of the rest of the Ryan plan, which is not just that he disagrees with it (although he does) but that it is a fraud. We should also keep in mind the point that currently projected healthcare growth is bound to slow one way or another, as it's unsustainable. So comparing Ryan's plan to current policy in this regard is not entirely fair, since if growth isn't slowed his way it will have to be done some other way.

Bottom-line message to the media: plans to address fiscal sustainability that include large tax cuts are frauds. They should be mocked or ignored, not treated as Serious & Courageous Bigthink. But we do need to debate how healthcare spending growth will be made to slow. National healthcare (which Krugman favors) offers one possible path. Vouchers in lieu of all the big pillars under current policy - not just Medicare, but also Medicaid and uncapped exclusions for employer-provided health insurance - are another. That's a debate we should have (which is not to say we can, given the utter debasement of political discourse over the last few years). But at least Ryan puts a little bit of it on the table, albeit only 10 years down the road.

Thursday, August 05, 2010

What am I currently working on?

Despite all my frivolous posts in recent days on such burning issues as adolescent Triceratops, the supposed U.N. plot against Colorado, and possibly bombastic indie rockers, I actually am reasonably hard at work writing on international tax issues.

My foreign tax credit paper is pretty much final for two publications (long version in the Journal of Legal Analysis, short version in the National Tax Journal), and I am also working with an economist co-author on a follow-up piece with empirical content. More on this in due course.

My main project these days is a piece entitled "The Rising Tax-Electivity of U.S. Corporate Residence," projected to be my Tillinghast Lecture at NYU Law School next month (on Tuesday, September 21) and then an article in the Tax Law Review. I will talk some about what we can tell about the trend described (or rather asserted) in the title, and somewhat more about how it should affect our thinking about international tax issues. I'm reasonably pleased with it so far, as I was with the foreign tax credit paper (and this is not a constant I experience equally with all of my papers), based on a feeling in both cases that the item ought to be (whether or not it actually proves to be) intellectually influential.

Science shocker

First they took away Brontosaurus, renaming it Apatosaurus, and no one said anything.

Then they came and took away Pluto, and again no one tried to stop them.

Now they are taking away Triceratops ...

Though just for the record, I am actually fine with the latter two developments. What's a "planet" is arbitrary (it's a language issue), and yes, Pluto seems more like Ceres and the farther-out Kuiper Belt objects than like the Elite Eight.

And if Triceratops is merely an adolescent Torosaurus, that's fine, good to know.

As for renaming Brontosaurus, this was a bad language decision - why be so rigid about the first-in-time naming rules when it's just about some 19th century guy who's long past caring? Do something dumb like that, and the next thing you know, you'll find yourself renaming Haig-Simons income as Haig-Simons-Schanz, and then also having to add Smith, Malthus, Sax, Garelli, and Seligman to the list of honorees.

Wednesday, August 04, 2010

Dastardly U.N. plot to take over Colorado

Fear not, however. The Republican gubernatorial candidate who is actually leading in the primary polling is all over it like a cheap suit.

Monday, August 02, 2010

Musical note

I tried to like Arcade Fire's first album but found it too bombastic. Am I missing something?

Grim reminder

David Stockman reminds us that Republicans, or at least important elements in their leadership, used to be sane and responsible, rather than reckless know-nothings.