Wednesday, March 27, 2019

Tax policy colloquium, week 9: Jeffrey Hoopes on tax planning by private C corporations

Yesterday at the Tax Policy Colloquium, after a one-week hiatus for our spring break, Jeffrey Hoopes of the UNC Kenan-Flager Business School presented his paper “Is Tax Planning Best Done in Private?” The paper can’t as yet be posted publicly, but here is the abstract:

“We investigate the conventional wisdom that privately-held firms engage in more tax planning than do publicly-held firms. Private firms are believed to face lower nontax costs of tax planning relative to public firms, allowing them to engage in more tax planning. However, empirical evidence of U.S. private firm tax planning is limited, primarily because of difficulty in obtaining private firm data. We make use of detailed administrative data from the Internal Revenue Service, which covers virtually all U.S. public and private firms. Using a variety of tax planning measures, and contrary to conventional wisdom, we find no evidence that private firms engage in more tax planning relative to similar-sized public firms in the same industry. Moreover, some evidence suggests that private firms actually engage in less tax planning. These findings persist across different measures of tax planning and are not explained by firm characteristics commonly used to explain tax behavior. These results have important implications for researchers as well as for policymakers and managers.”

Here is some background about the setting for this: Conventional wisdom in the biz (drawing both on field knowledge and empirical research into the tax and accounting behavior of publicly held companies) holds that, at such companies, agency costs at the managerial level, and/or surprising lacunae in capital markets’ grasp and use of information, cause managers to care more about reported profits than true after-tax profitability. Hence, they may do less to reduce taxes than they ought to do, from the perspective of a buy-and-hold shareholder, because they are so focused on the financial accounting measure that they will be reporting in their 10-Ks. (Shareholders have every reason to want higher true profits, but higher reported profits in a given year do nothing for them unless it boosts the stock price when they happen to be selling.)

Anyway, an obvious inference would be that private firms, since they’re not filing 10-Ks or similarly engaged in trying to impress credulous investors, are going to do more tax planning than the public firms. And agency costs in this regard may recede if you have high-percentage owner-managers who are playing with their own money. It has therefore been presumed that “private firms” should be expected to do more extensive and (given low penalties) aggressive tax planning than public firms.

When we think of “private firms” in the U.S. setting, we may mainly think about passthroughs, such as partnerships and S corporations. But these are NOT the focus of the Hoopes paper; hence, we learn nothing about them directly (although it’s open for further thought whether, and to what degree, the findings might affect our assumptions or understandings about them). Instead, the paper uses previously un-studied IRS tax data to look at private C corporations, which have chosen to be subject to the corporate tax (and then potentially the shareholder-level tax upon selling shares or receiving corporate distributions) even though they are not publicly traded.

To quote Butch and Sundance, but with an opposite implication (one is asking “Are they stupid?” rather than “How can they be so smart?"): Who are these guys? In the aftermath of the 2017 tax act, private C corporations may be drawn by the 21 percent corporate rate, which is much lower than the top rate of 37 percent for individuals. There has been debate in the biz regarding how great a deal this actually is, given the potential second level of tax (plus the chance that the corporate rate might be raised in the future), but at least it’s a big up-front discount that might attract some savvy operators. Pre-2017, however, when the rate difference was only 35 percent corporate versus 39.6 top rate for individuals, the conventional wisdom was that you just shouldn’t be a C corporation unless your aim of being publicly traded effectively forced it on you.

The literature offered some interesting answers to why there might be private C corporations. E.g., one might be planning to go public soon, and in that regard want to be able to offer key employees incentive stock options, or appeal to venture capitalists who were familiar and comfortable with the C corporation form. One might really like access to standard corporate law (if one was actually incorporating, not just checking the box for C corporation tax status despite using some other sort of legal entity). Or, as recent work by Emily Satterthwaite suggests is possible, one might simply be relatively uninformed and ill-advised regarding one's tax planning choices.

OK, back to the Hoopes paper. It uses tax data to compare public with private C corporations when they otherwise look extremely similar – same size, industry, etcetera. More specifically, it uses a matched pair design, under which each public firm is matched to a private firm that is in the same industry and similar in size. As to these matched pairs, it finds no evidence (using multiple specifications) that the private firms domore tax planning than the public firms. This is potentially contrary to what one might have expected, under the standard view as described above.

How might we explain this result? Perhaps pre-2017 C corporations are an odd group, partly including those who are simply bad at tax planning (or otherwise atypical of private firms generally). Surely the post-2017 group will be quite different, given that it will now attract more players who are interested in the up-front tax rate difference. Perhaps these pre-2017 private corporations had their own agency costs with respect to their tax decision-makers, or did not have as good access to the best tax planning advice. Perhaps agency costs at public C’s can lead to “too much” tax planning from the shareholders’ standpoint, as well as “too little.” For example, complex structures that are rationalized on tax planning grounds may also serve managerial objectives of diverting funds from the shareholders’ pockets to the managers. Or managers may have an unduly short time horizon if they anticipate exiting the firm (or, at least, exercising the options) before any dubious tax planning that they have done catches up with the firm.

But whatever the explanation, and whether or not one considers it illuminating as to private firms generally, and/or likely to persist in the significantly altered post-2017 business tax planning environment, it’s an interesting result that merits attention.

Tuesday, March 19, 2019

Death of Alan Krueger

I was very sad to hear about Alan Krueger's untimely and tragic death.

I didn't know him personally, but was only two degrees of separation away by multitudinous pathways (if we define knowing someone directly as one degree of separation).

On a professional note, I was intrigued and influenced by Krueger's minimum wage work with David Card, which I first read - fittingly enough - when I was on the verge of leaving the University of Chicago for NYU in the mid-1990s. To economists, part of the interest lay in the use of well-chosen natural experiments to raise questions, the answers to which had unduly been taken for granted (and left unchallenged by reason of publication bias in favor of positive findings). But for me, the main interest lay in its potential theoretical and policy implications.

I found the Card-Krueger work illuminating with respect, not just to minimum wages' potential employment and broader wage effects in particular, but also the more general need to go beyond "Econ 101-ism" and think hard about how particular markets' - especially labor markets' - odd features can lead to non-neoclassical results. (This even before the full rise of behavioral economics, which plays an important, albeit only partial, role in explaining how Card-Krueger outcomes could come to be.)

Throwing in as well my interest in the interrelationships between various formally distinct, but substantively overlapping, types of rules (e.g., minimum wage versus cartelization versus mandate versus EITC versus negative income tax), I wrote here about all of the above, including the Card-Krueger work. I probably still agree with most, though perhaps not all, of what I wrote there more than 20 years ago.

Krueger continued to do important work after his minimum wage research, in addition to being a great public servant in two Administrations.

Wednesday, March 13, 2019

Tax policy colloquium, week 8: Tatiana Homonoff on SNAP (fka Food Stamps)

Yesterday at the colloquium, Tatiana Homonoff of NYU's Wagner School presented Program Recertification Costs: Evidence from SNAP. As background, when people qualify for benefits under the Supplemental Nutritional Assistance Program (SNAP, formerly known as Food Stamps), they must periodically document their continued eligibility, under a recertification process that includes submitting income documentation and having an interview with a case officer.

This interview can be by phone, and apparently aims more at providing counseling and aid towards completing the process, than at raising obstacles. But I would be unsurprised if SNAP participants who need to recertify, and who still meet the qualifications, were to view it with anxiety.

SNAP has a great deal of "churn." That is, people fail to recertify in time, get thrown off the program, and then succeed in being reinstated. The paper mentions estimates suggesting that this actually costs the SNAP program money, in that the administrative costs of recertification exceed the fiscal savings from the missed benefits. This of course is a lose-lose scenario, since even the fiscal saving comes at the expense of people who needlessly miss benefits that would have helped them. For example, one may have children going hungry due to the missed benefits, at the same time that the program is losing money on net.

The paper studies how randomly assigned interview dates in San Francisco's SNAP program affected rates of successful recertification. San Francisco staggers the interview dates that it assigns people, so that its case workers will have a smoother workload. But if your interview is late in the month and you don't act promptly to reschedule (such as in advance), you may run out of time and get thrown off the program - albeit just temporarily in what turn out to be the "churn" cases.

The effects of being randomly assigned an interview date late in the month turn out to be startlingly large. "We estimate that a one-day delay in the assigned interview date decreases the chance of succesfully recertifying by one-third of a percentage point. In other words, a case that has an initial interview on the 28th day of the month [the last date to which interviews are randomly assigned] is 9.0 percentage points less likely to recertify than a case that has an initial interview scheduled on the first of the month - a 19 perent decrease in recertification success."

The paper finds, moreover, that needier households that would get large benefits are affected on average more than those closer to exceeding SNAP's income thresholds and that would thus get smaller benefits. So the hazard that is effectively  being imposed here, via randomly assigned dates later in the month, worsens rather than improves SNAP's "targeting efficiency," as this typically is defined by SNAP researchers to distinguish between worse-off and better-off households, among those that are sufficiently poor to qualify for the benefits.

Benefit loss here looks less like a function of rational choice (e.g., expending less effort to preserve your benefits if they're smaller) than of reverse screening. That is, needier households are apparently less able to overcome the obstacles created by having less time to reschedule if needed, get everything done, etc.

The most obvious policy takeaway is that interviews should be scheduled earlier in the month when recertification needs to be completed, and/or extra time given to complete the documentation requirements post-interview. One step broader is the question of why recertification is required to be so frequent when, at least in this paper's data set, there appears to be such a high probability of continuing to qualify for the benefits. (And the reverse-screening aspect of recertification makes this even worse.) But broader still is the sociological / fiscal language question of how SNAP's character as a transfer or benefit program appears to influence its structure in telling, and perhaps counterproductive, ways.

A number of my tax colleagues at various law schools have written papers about integrating the tax and transfer systems. One shouldn't necessarily have any particular prior about the extent to which this is likely to be desirable as an administrative matter. But the clearer and perhaps more interesting point for me, which I have written about herehere, and here, is that "taxes" such as the income tax and "transfers" such as SNAP are part of the very same thing. We should think about them in an integrated fashion, but often we don't, and this is partly a function of the optics that result from staring intently at stand-alone transfer programs without a grasp of the broader context. It leads to program maldesign, and bad effects on poor people, even when they are not the deliberate targets of lawmakers' malice. In particular, it encourages

Should we so focus on SNAP's stand-alone "program integrity" that Type 1 errors (mistaken allowance of benefits) get treated as far more regrettable than Type 2 errors (mistaken disallowance)? I don't inherently see why, even though it is a "transfer" rather than a "tax." The direction of cash flow, between the government and a given household, under one program for one period, as considered in isolation from all the rest of the system, is of zero normative interest. Suppose, for example, that Bill Gates mistakenly got $100 in SNAP benefits. Leaving aside the difficulty of imagining Bill at the checkout counter with a SNAP card, this has no more significance than the case in which he ought to have been required to pay $100 more in income taxes.

Transfer programs are often in-kind rather than being paid in cash, although SNAP is one of the more cash-like in that people's total food expenditures typically exceed their SNAP benefits (hence the word "supplemental" in SNAP). Thus, while for behavioral reasons it might increase food outlays relative to giving out straight cash, the difference is probably not that great.

Transfer programs - and SNAP in particular - are also typically more tied to current period available resources, rather than to long-term or even lifetime, material wellbeing levels. Hence, the case for replacing an income tax with a progressive consumption tax would be difficult to apply sensibly here. ("Sorry, we're going to let you starve because you have great expectations for the future, and/or spent too much last year.")

But the broader conceptual interchangeability suggests that we should view under- and over-payment of SNAP benefits, relative to the case where eligibility criteria were correctly applied,more symmetrically than I gather we do. This would likely suggest making recertification less frequent and more easily accomplished. Even people on the high end of SNAP eligibility are presumably below the median economic level in our society. And where hazards are reverse-screening out the neediest, that is worse still. Even the concept of "program size" can involve unduly separating in our minds one intertwined piece of our overall fiscal system from all the rest.

Monday, March 11, 2019

Book event on Kim Clausing's Open

Today we had a book event at NYU Law School on Kim Clausing's new book, Open: The Progressive Case for Free Trade, Immigration, and Global Capital. I offered brief comments after Kim's opening presentation, and Timothy Noah, as moderator, added questions and comments.

Here is a quick version of much of what I said at the event, expanded from my notes:

This is a great book that performs a valuable public service in bringing important and widely misunderstood ideas, of great current political and policy relevance, accessibly to the attention of a broader audience. In one sense, however, it's a commenter's nightmare! The problem I have in that regard is that I agree with too much of it, whereas commentators are more fun to hear when they offer criticism. But.luckily, I know the standard fallbacks that academic commenters have used, when faced with this problem, for decades, if not longer.

"Why did you write THIS book, instead of a different one?" - I get this all the time, as do plenty of other people when they present their work at a given forum. Usually the person who makes such a comment has a perfectly good hypothetical book in mind. But this doesn't weigh against the value and importance of the book that the author actually did write. Nonetheless, faute de mieux I will not completely refrain from using it below.

"If X is such a great idea, why isn't it already happening?" - This was a favorite at the University of Chicago, where I spent 8 quite happy years before coming to NYU Law School in 1995. It is an application of the old joke in which the economist says: "That can't be a $20 bill on the floor right by my feet, even if it looks like one. Because if it really were a $20 bill, someone would have picked it up already."

The sense in which I am reminded of it here is that Open proposes a political Grand Bargain, involving a decent swathe of the political spectrum and buy-in from many in the top 0.1% and the business, with features that would include the following: far more extensive free trade (and immigration) but with help offered to those displaced by the transitions, a decent safety net, better infrastructure, better education and healthcare, more support for basic scientific research, sound macroeconomic policy, proper financial regulation, and policies addressing climate change,

Surely this set of policies could attract enough consensus support that there would be no need to write a book advocating them. Indeed, I would "predict" (a favorite phrase among academics, when they aren't actually predicting the future) that surely we must have these policies already.

No, wait a second, strike that.

If one had to find a "weakness" in the book, but only by being unfair, it doesn't show how, as a matter of politics, we can get to a reasonable policy space, But that not only would be a version of the "different book" complaint, but would involve deeming it a "weakness" not to have found something that isn't there. When you have a political system that's rife with bad people, bad power imbalances, and bad incentives, you get collective $20 bills (so to speak) just staying, and indeed accumulating, on the floor.

That said, here are three quick sets of comments on particular topics in the book:

High-end inequality - I've long been a proponent of breaking down "inequality" talk into at least two distinct realms: high-end inequality or problems of plutocracy, and low-end inequality or problems of at least relative deprivation. (One could add more categories if one liked, e.g., addressing patterns in the middle.) Aiming to raise those at the bottom is commanded by beneficence, while wanting to lower those at the top requires a different sort of motivation, which I'd put in terms of the negative externalities resulting from extreme concentration at the top. For now, I'll note just that, while the difficulty of enacting a clearly desirable Grand Bargain has many causes, to my mind one of them is the extreme concentration of both political and economic power at the top in current U.S. society. Plutocratic outliers want it all, they're mainly not interested in Grand Bargains, and the darkening ripple effects throughout the society of extreme high-end wealth concentration make reasonable policy outcomes less accessible still.

Low-end inequality - In addition to arguing that trade and immigration are on balance good for all - not just for those at the top - and that trying to unwind them would only make things worse still, the book offers wide-ranging suggestions for helping those who have been at least relatively left behind. At the risk of entering the "different book" realm, I just want to suggest that yet further expansion of policy debate might be of interest. For example, the book mentions using at least modest negative income taxation to address the distributional impact at the bottom that stand-alone carbon taxes and VATs would likely have. And it urges expanding the earned income tax credit (EITC), thus helping, as the saying goes, to "make work pay." Whatever one's ultimate policy conclusions, I'd propose adding still more items to the discussion list. A huge issue is the relationship between work and distributional aid at the bottom. E.g., discussion of demogrants or Universal Basic Income on the one hand, and federal job guarantees on the other.

Tax policy - Recent talk about increasing tax progressivity at the top has focused on at least 3 alternative approaches: (1) significantly raising the top marginal tax rate (as per AOC and Diamond-Saez, (2) enacting a wealth tax (as per Elizabeth Warren), and (3) raising the capital gains rate and estate taxation (e.g., Bill Gates).

The book is mainly in the third of these camps, based partly, but not wholly, on the idea of a widely politically palatable Grand Bargain. I myself am somewhat agnostic in this fight, and/or believe there could be some of each, with the details being vital to the merits, but I'm not convinced that a Grand Bargain is in the offing anyway, so I suppose a fella might as well dream in multiple channels. But my point for now is just to keep the set of alternatives more open (no pun intended).

I'd also note a possible downside to the book's view that capital gains rates should generally be the same as ordinary income rates. Capital gains realization tends to be far more elastic than labor supply, reflecting that it's often easier to just keep holding an appreciated asset than to change how much one earns and works in a given period. So, at least absent further structural changes to the tax system, one oughtn't too swiftly to rule out ordinary income rates that are higher than capital gains rates.

Wednesday, March 06, 2019

NYU Tax Policy Colloquium, week 7: Richard Reinhold's Does the Parsonage Exemption Violate the Establishment Clause?

Yesterday at the Tax Policy Colloquium, Richard Reinhold presented Does the Parsonage Exemption in Internal Revenue Code Section 107 Violate the Establishment Clause of the 1st Amendment?

Here is a bit of background. Section 107 of the Internal Revenue Code provides: “In a case of a minister of the gospel, gross income does not include (1) the rental value of a home furnished to him as part of his compensation, or (2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent a home or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.”

This is potentially suspect under the Establishment Clause of the First Amendment, which provides that “Congress shall make no law respecting an establishment of religion.” Indeed, it would unambiguously violate the Establishment Clause, as that clause has come to be understood, if the rental exclusion were limited to Christian “ministers of the gospel,” as distinct from, say, rabbis and imams. But it has been interpreted as applying to the equivalent of “ministers of the gospel” for religions generally – a concept that may involve considerable ambiguity! (E.g., does “religion” have to involve belief in a God or gods, should the IRS be on the lookout suspected sham religions, how broad is “minister” and how does it track across religious affiliations.)

In Gaylor v. Mnuchin, 278 F. Supp.3rd 1081 (D. Wi. 2017), the section 107(2) exclusion for cash rental allowances was held to violate the Establishment Clause. The case is on appeal to the Seventh Circuit, oral argument took place last October, and a decision is expected imminently. The main legal issue in dispute, other than section 107(2)’s constitutionality, is whether the plaintiff has standing. In an earlier case, the same judge had found standing but the Seventh Circuit had reversed. Here, the plaintiffs sought to create standing (without which, there is no justiciable case for the court to hear) by filing for a tax refund under section 107(2) despite being employed by the Freedom From Religion Foundation, Inc., rather than by a religious institution in the conventional sense. Thus, the options available to the Seventh Circuit include reversing and dismissing the case on standing grounds. If that happens and is upheld more generally (e.g., by the Supreme Court upon appeal), then section 107(2) (in common, it appears, with section 107(1)) might prove, as a practical matter, to be wholly immune to constitutional challenge through litigation even if it does in fact violate the Establishment Clause.

Reinhold’s article argues that section 107 IS constitutional and ought to be upheld by the  courts even if there is standing (as to which he is skeptical).  The paper raises 3 topics that I’ll (in varying detail) address here: constitutionality, standing, and how we should think about the role of the courts and of constitutional litigation.

1. Is section 107 constitutional? – Suppose Gaylor v. Mnuchin ends up in the Supreme Court, and is definitively addressed on the merits (i.e., the court finds requisite standing). Then we might end up with a decisive precedent, to the effect that section 107 (or at least section 107(2), the cash allowances aspect) either is or isn’t constitutional.

If one were handicapping the outcome of this still-hypothetical case, it would of course be of enormous predictive moment that the Scalia seat ended up going to Neal Gorsuch, rather than to Merrick Garland. I’d personally place a large bet (if this were the type of thing I did) on the Court’s 5 conservatives finding section 107 constitutional, if they reached the issue. But it also wouldn’t surprise me if, upon reading such an opinion, I personally found it unpersuasive and ascribed it to political and policy preferences (as distinct from the legal grounds offered for the Court’s conclusions) that differ from mine.

If that happened, I might find myself concluding that the Supreme Court had (in my view) gotten it “wrong,” and that section 107 “is” unconstitutional. But what does that mean exactly, once we’ve untethered the notion of constitutionality from blind adherence to precedents? The more general problem I am adverting to here is the difficulty of setting forth definite criteria for determining constitutionality. The inquiry is not well-specified, nor can a dispute between A and B on any such question be resolved, other than if they sufficiently accept common premises and one of them has made errors in reasoning from those premises.

Con law, in my view, tends to be a lot murkier and less well-specified in this sense than, say, disputes over tax policy between people who accept generally welfarist frameworks and are open to empirical evidence that those frameworks make normatively relevant.

But with all that said, I am strongly inclined to view section 107 as unconstitutional under the Establishment Clause. I view it as favoring religion, and funding it at the expense of the non-religious, without sufficient justification. (For much more detail than I will offer here, see this article by Adam Chodorow )

One can think of the Establishment Clause as limiting permissible subsidies to religious institutions and actors, and the Free Exercise Clause as limiting the permissible imposition of special burdens on them. This suggests looking for neutrality in some sense, notwithstanding baseline issues in defining it.

Consider sections 170 and 501(c)(3) of the Internal Revenue Code, which provide tax benefits to charities, including religious organizations. I would question their constitutionality, on Establishment Clause grounds, if they were ONLY for religious organizations. I would also question their constitutionality, on Free Exercise grounds, if they offered tax benefits to all charities EXCEPT religious organizations. I don’t think we need to ask ourselves any sort of neutrality question (requiring that one specify the baseline) with respect to having versus not having special treatment for charities in general.

Now let’s look at section 107 from this standpoint. It is JUST for “ministers of the gospel,” as generalized to be nonsectarian within religions. This strikes me as exactly the sort of thing that the Establishment Clause is supposed to inhibit.

As Reinhold’s article notes, one counter-argument is that we actually have a broader category of exempt housing, akin to the broader section 501(c)(3) that I noted above with respect to exempting churches from federal income tax and allowing charitable contribution deductions to those who donate to them. But it’s really just dribs and drabs, apart from the big entry here, which is section 119, excluding the value of housing provided by an employer to an employee, if (a) it is provided for the convenience of the employer, (b) the employee is required to accept it as a condition of employment, and (c) it is on the employer’s business premises (although this can be satisfied where the employee’s off-site house is sufficiently used in the business, e.g., as a site for business meetings).

Although I question section 119 – it over-responds to valuation problems that arise when the home serves business as well as consumption purposes, hence I believe that a value greater than zero ought to be includable – I’m perfectly fine with “ministers of the gospel” (in the broader sense) seeking to qualify under it. Indeed, there would be Free Exercise problems with not allowing them to do so. But section 107 is far broader, especially (although not solely) given section 107(2)’s exclusion for cash allowances. The difference is great enough that section 107 has been scored (I believe, in official tax expenditure budgets) as costing nearly $1 billion a year.

Boris Bittker, a rightly towering figure but one who liked to argue absurd things sometimes, apparently claimed that section 107 should be viewed as merely an evidentiary rule establishing a presumption – albeit, an irrebuttable one even when demonstrably false – that one qualifies under section 119. Or perhaps the argument is better put as: section 107(1) might be reasonable as an evidentiary presumption re. section 119, then once we’ve gone that far why not vastly broaden it (on the claim that this increases neutral effects between religions) by adding section 107(2).

This line of argument strikes me as rather a triumph of bootstrapping. But the rationale for the initial evidentiary presumption is that testing “ministers of the gospel” for qualification under section 119, potentially subject to audit, would raise undue “entanglement” concerns under the Establishment Clause. But to my mind, these concerns are small not only absolutely, but also relative to the entanglement concerns raised by needing to define “ministers” who can claim the benefit of section 107.

So I regard the Establishment Clause case against section 107 as extremely powerful, although (as Reinhold’s article helps to show) not everyone agrees about this.

2. Standing – The standing issues in Gaylor are clearly significant, and I won’t address them here. But I agree that standing is not just some sort of arcane technical requirement (although it is that, too). Rather, it serves substantial purposes in limiting courts to resolving the sorts of disputes that they are best equipped to handle. It would presumably be a big mistake to offer “taxpayer standing” whenever a taxpayer happened to dislike a particular appropriation or tax preference, and thus wanted to raise all conceivable challenges.

Still, if section 107 is unconstitutional, yet no one has standing to challenge it (or at least section 107(1), even if the taxpayer in Gaylor succeeds in establishing standing to challenge section 107(2)), then we have a potential problem of under-enforced constitutional norms. This is especially troubling if one believes that a key reason for having constitutional limitations, such as those in the First Amendment, is to allow the courts to address violative behavior by the executive and legislative branches, in circumstances where our supposedly (whether or not actually) majoritarian politics may fall short of offering adequate protection.

3. Role of the courts and of constitutional litigation – While the paper mainly makes specific legal arguments, it’s also about what one might call sound social practice: Is constitutional litigation really a good way to handle the sort of issue that section 107 raises? Does it overly politicize the courts, and/or overly judicialize politics? Rather than providing a way to reach consensus in a diverse and pluralistic society, does it instead end up intensifying social discord?

These are serious questions, and hard to answer confidently. With respect to institutional choice, I am not confident that Congress and the executive branch can be trusted to adhere sufficiently to Establishment Clause norms, without judicial oversight. But then again, my confidence in the Supreme Court as a good faith arbiter has been higher at times in the past than it is now.

In terms of consensus versus discord, I admittedly identify with the plaintiffs in Gaylor. As one whose own descent and set of personal beliefs about what one might call cosmological questions places him outside of the U.S. majority, I would like to be able to invoke the protection of the courts when Establishment-type issues arise. I remember, as a child in public school, being offended by the public assemblies in which I was expected to recite the “under God” language from the Pledge of Allegiance. To this day, I am affronted when ignorant Supreme Court justices falsely (although, I presume, sincerely) assert that a crรจche, or even crosses in a public graveyard, are not religious symbols and are not rightly perceived by minorities / outsiders as such.

But even granting that I (and “we”) are rightly affronted, do we help ourselves by bringing these cases?  Are we better off just swallowing the ill feeling than creating larger controversies that may inspire pushback? Maybe yes, maybe no.

Tuesday, March 05, 2019

Financial transactions taxes et al

Now that there is renewed talk of legislation that would tax financial transactions, I thought I'd mention my article on these issues from a few years back: "The Financial Transactions Tax Versus (?) the Financial Activities Tax."

Here's the abstract:

In both Europe and the United States, there has been much recent debate regarding whether, in response to the 2008 financial crisis, one should enact a financial transactions tax (FTT) or a financial activities tax (FAT) – commonly viewed as mutually exclusive alternatives. This article evaluates these two alternative instruments, focusing on recent proposals by the European Commission and the International Monetary Fund. It concludes that the case for enacting an FAT is considerably stronger than that for an FTT, mainly because the FAT focuses on a broad “net” measure, rather than a narrow “gross” measure, of financial sector activity.

The article further concludes that a rationale for the FTT not emphasized by the European Commission – its addressing wasteful over-investment in the activity of seeking trading gains at the expense of other traders – could conceivably support its enactment, though it is uncertain that the social benefits would exceed the costs. The issues raised by this alternative rationale are independent of whether or not an FAT has been enacted. Finally, the desirability of enacting an FTT may be affected by broader political economy constraints on revenue-raising and on the pursuit of greater tax progressivity by alternative (including clearly superior) means.

Monday, March 04, 2019

Upcoming NYU event on Kim Clausing's "Open"

Next Monday, March 11, at NYU Law School, 12:45 to 2 pm in Vanderbilt 214, Kimberly Clausing will present her new book Open: The Progressive Case for Free Trade, Immigration, and Global Capital. I will offer comments, and Timothy Noah will moderate the discussion.

It's open to the public, and info about attending is available here. Info about the book is available here, and you can buy it from Amazon here. I may post comments about the book on this blog, after the session.

Here is a basic description:

Globalization has a bad name. Critics on the left have long attacked it for exploiting the poor and undermining labor. Today, the Right challenges globalization for tilting the field against advanced economies. Kimberly Clausing faces down the critics from both sides, demonstrating in this vivid and compelling account that open economies are a force for good, not least in helping the most vulnerable.

A leading authority on corporate taxation and an advocate of a more equal economy, Clausing agrees that Americans, especially those with middle and lower incomes, face stark economic challenges. But these problems do not require us to retreat from the global economy. On the contrary, she shows, an open economy overwhelmingly helps. International trade makes countries richer, raises living standards, benefits consumers, and brings nations together. Global capital mobility helps both borrowers and lenders. International business improves efficiency and fosters innovation. And immigration remains one of America’s greatest strengths, as newcomers play an essential role in economic growth, innovation, and entrepreneurship. Closing the door to the benefits of an open economy would cause untold damage.

Instead, Clausing outlines a progressive agenda to manage globalization more effectively, presenting strategies to equip workers for a modern economy, improve tax policy, and establish a better partnership between labor and the business community

Accessible, rigorous, and passionate, Open is the book we need to help us navigate the debates currently convulsing national and international economics and politics.

Friday, March 01, 2019

The Great Gatsby and the Great Gatsby curve

Paul Krugman's column today mentions the  "Great Gatsby curve," which shows a negative historical correlation between inequality and upward mobility. Economist Miles Corak, who played the lead role in discovering it, and also wrote a useful Journal of Economic Perspectives piece discussing and explaining it, starts that article by mentioning the so-called "American dream," of which F. Scott Fitzgerald's The Great Gatsby has been called, by generations of literary critics, an important critique.

The name "Great Gatsby curve" was cleverly chosen but is paradoxical, perhaps deliberately so. In the novel, Gatsby exemplifies upward mobility, as he rises with remarkable swiftness, and it seems almost effortlessly, from humble circumstances to the possession of a vast fortune. But on the other hand, the book seems to show the impregnability of self-confident, hereditarily super-rich American aristocrats like Tom and Daisy Buchanan at the top. It doesn't take much of a high school English teacher to conclude that the book somehow portrays the emptiness or elusiveness of the "American dream" of upward mobility, or perhaps more specifically of using upward mobility to reinvent and change oneself. So does The Great Gatsby suggest that one can rise, or that one can't rise quite enough, or that the quest to rise is for the hollow, and/or leaves one feeling hollow?

And however one interprets or responds to The Great Gatsby as a text, does it offer broader takeaways for thinking about high-end inequality in its, or our, time and place? My recently completed book manuscript, Dangerous Grandiosity: Literary Perspectives On High-End Inequality Through the First Gilded Age, ends in the run-up to World War I, hence does not include The Great Gatsby, but it is premised on the idea that one can enrich one's understanding by such literary means. But I have found myself struggling, when I try to think about how I might use The Great Gatsby in this way. I did not comparably struggle (beyond simply the perspiration of intensive thought and effort that sometimes passed through dark caves) when I was writing, in Dangerous Grandiosity, about classic nineteenth to early twentieth century works by Austen, Stendhal, Balzac, Dickens, Trollope, Forster, Twain, Wharton, and Dreiser. This struggle relates to my ambivalence and uneasiness regarding The Great Gatsby as both literary work and sociological resource.

I've always liked The Great Gatsby - but I don't love it! The darkness and unhappiness appeal to me aesthetically, but I never fully bought into either Gatsby's magical appeal or the Gatsby-Daisy romance. (Using Nick Carraway as the narrator seems deliberately to distance us from the latter, but to aim at selling us on the former.) Indeed, as an adolescent reader I was possibly more emotionally invested in the diffident romance between Nick and Jordan Baker than in the novel's main tragedy, perhaps in part because it's so deliberately un-filled out.

I also of course admire the writing, and the way things are left bare so you can imagine them for yourself. But the poetry about boats against the current, and the symbolic bread crumbs strewn about that so delight high school English teachers,* aren't entirely to my taste.

But why am I relatively uneasy about how best to use The Great Gatsby sociologically, in relation to thinking about high-end inequality? This brings us back into the vicinity of the Great Gatsby curve.

If ever a character in fiction found it incredibly easy to become super-rich without breaking a sweat, it is Jay Gatsby. He does it in just a few years, apparently through bootlegging, bond fraud, and other such schemes in cahoots with gangster Meyer Wolfsheim. But he appears to be utterly unmarked by all this, leaving aside his embarrassment when Tom Buchanan throws it in his face. Gatsby came out, of course, before the gangster theme, now associated with classic movie roles played by the likes of Cagney, Bogart, and Edward G. Robinson, had flowered in American culture. (I gather that a little-remembered late 1940s movie version of Gatsby brings in all those gangster tropes, but they're not in the book, beyond a bit of derision about Wolfsheim's low-class Jewish ethnic schtick.)

One is left thinking - or, at least, I am - what's the problem? Why can't Gatsby just get over his adolescent obsessions with a rich young woman he met while he was "Mr. Nobody from Nowhere"? We even see in Gatsby the emergence of alternative social elites to the horsey WASP set of the Buchanans - for example, the show biz glitterati who enliven Gatsby's parties. The Buchanans only have a monopoly over their particular sector.  

Hemingway famously mocked Fitzgerald for having a moony fascination with the super-rich, rather than seeing that they were just "dull" and "repetitious" - as indeed the racist ranter Tom Buchanan clearly is. If fortunes like Gatsby's can be made so readily, and given the 1920s rise of increasingly modern-looking mass popular culture, we're already nearing a transition point that the book doesn't seem to anticipate. True, the hereditary WASP establishment would continue to hold many of the ramparts at the top of American society (such as in government and the Ivy League) for decades to come, but the Buchanan view that inherited wealth is the only worthy kind has already faced repeated challenges in American culture, from the perhaps more culturally dominant myth of the "self-made man," and it won't be all that long before even the vilest and most pathetic scions of inherited wealth (no need to name odious names here) will be feverishly insisting that they were self-made.

The Great Gatsby was somewhat of a commercial and even critical bust when it first came out, and truly begun its triumphant rise only twenty-odd years later. By then, the Great Easing was well underway and the super-rich had lost the commanding heights that they had reached during the Gilded Age and perhaps were still aggressively holding, even if in defiance of emerging new economic trends, during the early-1920s "return to normalcy." So perhaps one should think of Gatsby as being more about American Dream aspirations, than about the super-rich or class relationships as such.

Yet I'm still left thinking: if Gatsbyesque wealth could be achieved so swiftly, easily, and without leaving a mark - such that the Great Gatsby curve did not apply - then, even if a few parvenus found their newly won heights disorienting,  how much would there really be to worry about, so far as our ongoing Second Gilded Age is concerned?

I personally seem to find more interest and insight, with regard to issues of high-end inequality that might peculiarly resonate today, in P.G. Wodehouse's classic 1930s Wooster novels, which I hope to write about soon.
*Lest I sound too harsh on high school English teachers here, I should note that perhaps my favorite teacher ever, and certainly the funniest one I ever had (despite even Marvin Chirelstein), was Mr. Cammarata of the Bronx High School of Science, who in my eleventh grade English class brought The Importance of Being Earnest forever into my life.