Wednesday, November 30, 2022

Final NYU Tax Policy Colloquium for 2022: Ariel Jurow Kleiman's Fiscal Impoverishment by Taxation

Yesterday (November 29) we had our last session of the year. Ariel Jurow Kleiman presented a forthcoming law review article, Impoverishment by Taxation, along with a related (but broader) book proposal.

While I don't discuss the sessions as such here because they're off the record, just as a quick word I have high aspirations for them that can be challenging to fulfill entirely in practice. Basically I want to combine a stimulating class that will deeply engage the students with a cutting-edge academic seminar that will enlighten and inform all of the participants (myself and the author included). I felt that this year went well, for reasons that had as much to do with the students, and with other participants in the public sessions, as with anything that I or even the authors brought to the table. 

The sessions have evolved over the years (and indeed decades), reflecting the thing's evolution as an institution but also I suppose my changing goals. I used to be a lot more combative, but the more senior you are the less appropriate this is. (Plus I have grown more agnostic about a lot of things.) I think of myself as trying now to be late-career Chris Paul rather than any-stage Russell Westbrook. This requires a deep, strong, effective, and multi-talented team if it is to succeed, but luckily that is what we've had.

Doing it solo the last couple of years is the other big change. While I've enjoyed and benefited from working with all of my co-teachers, doing it this way does leave more air in the room for others to breathe (if I may mangle the metaphor a bit), along with more time for reflection as a byproduct of our having a new paper every 2 weeks rather than weekly. It also allows students to take the class without making as big a sacrifice of other course needs.

Anyway, on to the paper. In addition to being itself interesting, it also helped round out the semester a bit. Generally the papers all concerned inequality. We had looked at high-end economic inequality, and at gender and racial inequality, so it was very appropriate to shift the focus this time to low-end economic inequality.

This week's paper discusses fiscal impoverishment (FI), which arises when people are made poor (or poorer) by paying federal and/or state taxes in excess of the antipoverty public benefits that they receive. FI arises, despite the US fiscal system's overall progressivity, for 3 main reasons:

1) Our fiscal system is not very generous.

2) It imposes a number of first-dollar taxes (i.e., without a zero bracket or its effective equivalent), such as payroll taxes and retail sales taxes.

3) Its coverage on the transfer side is spotty and gap-filled, for reasons that appear to combine the deliberate with the inadvertent. Hence, within a heterogeneous population of low-income individuals and households, some inevitably miss out, even on such benefits as there are.

Fiscal Impoverishment (FI) as a Measure

Proposed fiscal measures can serve one or both of two purposes: the purely analytical or descriptive, and the rhetorical purpose of helping to motivate policy change. This reflects the "scientist versus moralist" choice in one's scholarship that I discussed here with regard to Stanley Surrey and Boris Bittker.

Thus, consider tax expenditure analysis. Although the distinction it addresses actually lies between distributional and allocative objectives, rather than between "taxes" and "spending" as such, it partly aims (and serves) to provide what is simply a more accurate accounting of what (and in a sense "how much") the government is doing. But it also served, at least in Stanley Surrey's hands, as effectively a hit list of provisions that should be eliminated from the income tax code even if they were permitted to re-emerge somewhere else.

FI likewise combines science with enlightened advocacy. The science part is well-illustrated by the old joke about the statistician who says: "My head is in a block of ice and my feet are on fire. On average, I'm very comfortable."

It's a joke because we know that the statistician is wrong. The distribution of outside temperatures for various body parts matters, not just the average.

By analogy, suppose that the fiscal system's average effects, considered for all income levels together, are progressive, inequality-reducing, and poverty-reducing. Taking that as given, it's worse if we have the accountant's problem than if we don't. For example, suppose that people whose market income lies right at the poverty line gain on average 5% after considering both taxes and transfers. It would be better if each of them gained exactly 5% than if (a) half of them lost 50% of their market income, while (b) the other half of them gained 60%. Declining marginal utility alone would tend to support this normative conclusion, and there may be other grounds, too.

FI is not, however, aimed at simply measuring dispersion, even at the bottom of the income scale in particular. It adds two further premises, each subject to challenge from the standpoint of pure "science," albeit each defensible from the standpoint of enlightened advocacy. They are as follows:

        1) The poverty line is (or should be treated as) discontinuously important. Say that the fiscal system's net effect is to reduce your market income by $1. FI counts this as a violation if the loss pushes you below (or further below) the poverty line, but not if it pushes you from $1 above the poverty line right to it. However, while this claimed discontinuity is open to challenge from a "scientific" standpoint, it allows the FI measure to have a dramatic and salient takeaway that might help to motivate desirable policy changes.

        2) Market income is normatively meaningful as a baseline. FI addresses, not where one stands relative to the poverty line after considering taxes and transfers, but how that placement compares to where one stood considering only market income. This seemingly invites the usual Murphy-Nagel critique of market income as lacking normative relevance given (for example) markets' dependence on government's existence and role. Plus FI looks separately just at the fiscal system, and combines the effects of what one might consider separate sovereigns given our federal form of government. But these "scientific" objections do not prevent FI from offering useful and salient information about how fiscal instruments that we can conceptualize separately and change as we like are affecting things.

The paper's discussion of FI also raises a host of interesting measurement issues. It relies on the federal poverty line, based not on a conviction that it is canonically correct but rather as a placeholder that one could separately adjust or replace if one liked. I do think that the measure ought to be regionally adjusted for price-level differences, whether or not actual fiscal rules should be so adjusted, given that it does indeed cost more (say) in NYC than Biloxi to pay for food, rent, heating, etcetera. And there are also measurement issues relating, e.g., to Medicaid benefits and to the accrual during one's working years of expected Social Security retirement benefits. Without seeking to cover all that here, the paper offers cogent arguments for including, say, SNAP benefits that help one to afford the needed calories but not, say, the value to a given individual of national defense protection or a nice park across the street.

As an extension, the paper's arguments might also support measuring what I call regulatory impoverishment. Suppose, for example, that a minimum wage increase leads to an increase in low-wage workers' aggregate income, but that this comes (as it might not) at the price of net job loss. Or suppose that, while there is no net job loss, the increase causes some of the jobs to shift from people in low-income households to (say) high school and college students in high-income households. This is an example of information that would be highly relevant to a policy assessment, and that aggregated information misses.


        1) How could fiscal impoverishment be reduced? - The most obvious and straightforward approach would be to make the fiscal system more generous towards those at the bottom. However, stating it that way would miss the main takeaway of FI analysis, which pertains to how the fiscal system treats some low-income individuals and households much less favorably than others, leading to adverse effects on some in the face of heterogeneity. 

The main groups that the paper identifies as being disadvantaged on the transfer side today, and thus facing most of the FI, are as follows: the undocumented, childless households, the unemployed, and those whose use of extended kinship relationships (e.g., with cousins or neighbors supplying unpaid care) prevents them from qualifying under child-focused rules. For each of those groups, there are indeed arguments out there for disfavoring them. These arguments are worth noting, in terms of the underlying substantive debate that FI encourages, even though I happen to disagree with each of them.

The undocumented: Here we obviously face issues of immigration policy, which, even in the absence of white supremacist racism, would require analyzing how broadly (or not) we want to limit the fiscal system's generosity, along with access to US wage levels, to those who arrive or stay without being authorized.

Childless households - While I have thought for a long time that US fiscal rules (e.g., for the EITC) are often insufficiently generous to childless households, there are clearly reasons for providing additional benefits to households that have minor children, whose welfare is therefore at stake.

The unemployed - Here we get into such longstanding debates as those concerning TANF work requirements, the UBI vs. EITC approaches, and so forth. I tend not to favor conditioning benefits on having a job (it's like providing reverse insurance for the winners of the job search lottery), but there are arguments for doing so, pertaining e.g. to claims about both externalities and internalities.

Extended kinship relationships - It seems clearly anomalous, and perhaps "unintended," for various childcare benefits to be denied to people because their use of extended networks to provide childcare (in lieu of just the parents plus paid providers) causes them to fall outside the eligibility rules for particular benefits. But there is an underlying administrative issue of needing to direct benefits to the right people (i.e., those who would be most likely to use them on the kids' behalf). So there may be design challenges to think through here even if current law unnecessarily falls short.

    2) Relationship to support for universal basic income (UBI)

From the standpoint of avoiding FI that results from households' heterogeneity across various benefit design dimensions, the obvious answer would seem to be providing a generally available and unconditional UBI. So if FI troubles you that's a point in favor of UBI, and if you favor UBI that may help to make FI seem a salient and relevant measure.

But even if one supports UBI (which is my own inclination), I wouldn't be overly driven by FI as such in determining what the benefit level should be. That might instead be better driven by the standard policy tradeoffs regarding the distributional and incentive effects that it would have if it were set (and funded) at various alternative levels.

                                            *            *            *            *            *    

This wraps up my blogposts on the NYU Tax Policy Colloquium for fall 2022. But we'll be back, with blogposts from me after each public session, at the same time and place next year.

Wednesday, November 16, 2022

Tax Policy Colloquium for November 15: Goldburn Maynard's Biden's Gambit and Wage Enslavement papers

Yesterday at the colloquium, Goldburn Maynard presented two thematically linked papers: Biden's Gambit: Advancing Racial Equity While Relying on a Race-Neutral Tax Code, and Wage Enslavement: How the Tax System Holds Back Historically Disadvantaged Groups of Americans. (The latter was co-authored by David Gamage.) Here are some of my thoughts about the issues discussed therein:

1) Racial equity

Biden's Gambit (which discusses the American Rescue Plan Act) notes a distinction that has been drawn in the literature between "racial equity" (RE) and "racial equality." As it notes: "While racial equality has come to connote equal treatment and race blindness," RE is about fairness and anti-subordination, and is "firmly race-conscious."

I would describe this distinction as involving, not "equity" versus "equality" as such, but the choice between substantive and purely formal definitions of racial equality.

To illustrate the purely formal view of racial equality, consider Chief Justice Roberts' infamous statement (or at least it should be): "The way to stop discrimination on the basis of race is to stop discriminating on the basis of race."

This silly and disingenuous bromide suggests that there would be nothing to worry about if the elimination of affirmative action in college admissions led to elite institutions' being 100 percent white, even if this result was due to historical  and continuing private sector racism. It purports to perceive no difference between using race-conscious categories to dismantle and to enforce racial subordination.

While using racial categories raises important issues, I can't imagine a coherent normative view that was based on caring only about formal, not substantive, racial equality. Using race-conscious categories to advance substantive racial equality clearly raises a bunch of serious issues (e.g., pertaining to perceived fairness, political support, and potential misuse), but cannot reasonably be ruled out in principle.

2) "Wage enslavement"

The Wage Enslavement paper uses this term, a bit apologetically, because it was picked as a framing device by the organizers of the symposium in which it appears.

The term "wage slavery" has a bit of a mixed history, as it was used pre-Civil War by slavery proponents to argue that Northern workers were no better-off than enslaved persons in the South. But it has come to denote being trapped in a bad job (e.g., one that is not only low-paying but also unpleasant, exploitative, and physically dangerous) because one otherwise can't stay afloat.

Its metaphorical relevance to the paper arises from the concern that (a) people who don't accumulate significant savings must keep working to support themselves, and (b) the US tax system contributes to this lack of savings from one's work by imposing higher tax rates on labor income than on capital income. 

Among the standard tax policy issues raised by this view are (a) the incidence of taxes on capital income, e.g., do they affect wages over time, (b) the income tax's system's discouragement of saving even if capital income tax rates are nominally lower, and (c) whether one should view the accrual of Social Security retirement benefits as reducing the net marginal tax rate on the underlying wages.

I also would argue that a big part of the issue here is not so much the relative tax rates on "wages" and "capital income" as the fact that much of what is economically labor income may be mislabeled by the tax system as capital income. E.g., suppose I am a founder who creates a successful company, and that I "underpay" myself in salary terms because I am profiting from the stock appreciation (but I hold the shares until death). Then my labor income, in economic terms, faces only the 21% corporate rate, and not even that insofar as I can tax-plan effectively at the company level.

The paper mentions the well-known "Buy-Borrow-Die" (BBD) formulation by my good friend Ed McCaffery, but I have long thought that a better formulation would be "Earn-Borrow-Die." After all, the point isn't to buy stocks on margin - thus profiting only to the extent that they earn a rate of return exceeding the interest rate on the loan, and not even creating a tax arbitrage if the interest is caught by the investment interest limitation. This is not necessarily a well-advised plan. Rather, the idea is to do BBD with the proceeds of untaxed "sweat equity" - thus making it, in effect, EBD.

3) The racial wealth gap

As the paper notes, a Brookings analyst, Vanessa Williamson (who also kindly commented on my new book at an October 6 NYU event) estimates the "racial wealth gap" at $10.14 trillion. This is the estimated amount by which Black households' actual share of US national wealth ($2.54 trillion) falls short of what it would be ($12.68 trillion) if held proportionately to population.

There are several reasons, including at least the following, why the racial wealth gap matters:

--Even if it had no concerning empirical consequences as such, it would be of interest as a diagnostic. The gap "shouldn't" be so great (and it's much greater than the related racial income gap), unless other, underlying things are wrong.

--This is all the more true given that various conventional modes of explanation appear to fall short of accounting for it. For example, it persists at a high level even when one adjusts for income or education differences. It appears not to reflect different savings preferences. Some of it may reflect different types of asset holding (although that itself might call for further explanation), but there is also a large unexplained residual that those working in the field of stratification economics have sought to explain.

--Despite wealth's flaws as a measure, it offers more of a lifetime perspective than income, since it includes resources that are neither earned nor consumed in the current year, but that are relevant to one's level of material wellbeing. Put differently, savings matter a lot, as does the intergenerational transmission of material wealth.

--It contributes to substantive racial inequality and racial subordination, which reduce the wellbeing not only of its victims but actually of all Americans, who live our lives in its malign shadow. Consider the evidence (e.g., from Wilkinson & Pickett's The Spirit Level) that economic inequality reduces subjective wellbeing (and increases social gradient ills) for all groups. This is surely true as well for racial inequality. I suspect that even the millions of insecure Trumpian white supremacists who seek solace from subjugating non-whites would be better-off if our country's pervasive racial consciousness and anxiety could be shunted off centerstage by the achievement of secure racial equality.

--It's easy to think of the racial wealth gap in zero-sum terms. E.g., if national wealth were the same but there were no racial wealth gap, then Black households' having $10.14 trillion more in savings would arithmetically require other households' having $10.14 trillion less. But in a positive-sum world one group's having more than previously, because their opportunities have been increased, does not imply others having less.

4) Tax policy takeaways

As I discuss in this article, which recently appeared in this volume, the tax policy literature is still at an early stage of incorporating racial inequality concerns into an analysis that has traditionally been more focused on general economic inequality. But herewith a few quick points:

--Bad rules are even worse than we thought: Work by Dorothy Brown and others suggests that a number of income tax rules that already were widely viewed in the biz as defective, also tend to aggravate racial inequality (even when one adjusts their impact to income). Examples include the home mortgage interest deduction, income tax preferences for retirement saving that have been found to do little to increase retirement saving by those with the greatest need for it, and marriage bonuses for one-earner couples. The new information about these provisions' adverse racial impact is good to have, but it doesn't change bottom-line conclusions insofar as we already knew that these were bad rules.

--But what about what are otherwise good rules?: Things get more complicated if one views a rule as being good tax policy except for its having an adverse effect on substantive racial inequality. Then such questions arise as: How should one evaluate the tradeoffs? Should one now oppose this rule despite its otherwise beneficial net effects? Can one compensate / adjust for its adverse racial effects, thereby continuing to secure its other benefits?

An example might be switching to the income tax to a progressive consumption tax, if one otherwise favors this this switch (as I did at one time) but it were to turn out to increase the racial wealth gap relative to not making the change. A second example might be adopting a VAT without, rather than with, an exemption for "necessities," where the VAT would be used to fund good things. A third might be repealing (or declining to adopt) hypothetical income tax preferences that, while otherwise inefficient, were opposite to the home mortgage interest deduction in that they happened to benefit Black households relative to White ones at the same income level due to differences in asset choice, etc.

A natural way to think about this is in terms of the standard argument that one should think only about efficiency in designing the tax base, since once can separately adjust for progressivity. Thus, suppose again that one is choosing between an income tax and a progressive consumption tax, in light of one's believing that the latter is more efficient but (all else equal) less progressive. In principle, one can get the best of both worlds by adopting the progressive consumption tax but making it more progressive than the income tax to which it is being compared in its marginal rate structure, allowance for "basic income" cash grants, etcetera.

With respect to racial inequality, progressivity adjustments get you at least part of the way there, given the racial income gap. But one could view this as not doing enough, be it due to the larger racial wealth gap or the adverse racial effects that particular rules have even once one has adjusted for income. This in turn might call for (1) addressing wealth inequality more aggressively than one would otherwise consider optimal, given all the other tradeoffs, and also (2) considering the use of race-conscious rules (the tax equivalent of affirmative action) to make up the difference and/or move broadly in the equalizing direction.

Wednesday, October 26, 2022

Tax Policy Colloquium for October 25: Alex Raskolnikov's Should Only The Richest Pay More?

Yesterday at the colloquium, Alex Raskolnikov presented Should Only the Richest Pay More?, a paper which I believe has been receiving a bit of well-deserved attention on the conference etc. circuit.

While reading it, I thought of Voltaire's famous (although probably apocryphal) statement: "I detest what you say, but I will defend to the death your right to say it."

Here, by contrast, I was thinking: "I generally agree with what you say, but a part of me wishes that you wouldn't say it!"

The paper starts by suggesting that the upper income echelons in our society might reasonably be divided into 3 groups: the really rich (the top 0.1%), the pretty rich (the rest of the top 1%), and the affluent (the rest of the top 10%). As the paper shows, 

The "really rich" earn at least $2 million a year. Often they are top executives, superstar lawyers or doctors, or highly successful business owners and real estate or finance professionals.

The "pretty rich" earn between $500,000 and $2 million a year. Often they are successful doctors, lawyers, engineers, software developers, or mid-level executives, along with a few academics in select fields.

The affluent earn between $150,000 and $500,000 per year (although here as well as above one might want to consider the relevance of regional adjustments). While this group is highly heterogeneous, recent college or professional school graduates may enter it promptly upon becoming Big Law associates, practicing surgeons, or software engineers at top tech companies.

The paper makes three main arguments: 

(a) Much recent tax policy talk in the biz has overly distinguished between the top 0.1 percent and others in the top 10 percent. This has occurred at the level of both diagnosis (discussing whose economic blast-off from the lower echelons has adversely affected society as a whole) and tax policy prescription (whose taxes should be increased in a progressive tax reform that aims both to raise revenue and to mitigate rising high-end inequality).

(b) Progressive tax reform proposals, which often these days are limited to the top 0.1%, should at least consider raising taxes on the entire top 10%. Even if concerns about political feasibility weigh against the broader reach, it should at least be more on the table in academic discussions.

(c) The recent literature's deafening silence on such a broader reach (this is my phrase, but I think it expresses the paper's view) merits interrogation.

To illustrate the shift, consider progressive tax reform plans from 20-ish years ago, such as Michael Graetz's plan to replace the income tax on up to the first (say) $100,000 of income with a VAT, or Bruce Ackerman's and Anne Alstott's plan to use a wealth tax to fund cash grants that people would start receiving at age 18. Both had a broader reach at the top than recent plans to, say, impose wealth taxes, or else to tax accrued but unrealized capital gains, but with these proposals applying only at the very top of the income spectrum. The paper argues that, while it's one thing for Elizabeth Warren or the Biden Administration to aim proposed tax increases purely at the really rich and perhaps the pretty rich, it's another thing for academic commentators, who need not be limited in all their writing by political feasibility concerns, to avoid all consideration or even discussion of extending progressive tax increases to the affluent.

As the paper notes, one can see this shift happening in real time in, say, Piketty et al's work over the last 20 years. And in popular culture, one can see it in the 2011 Zuccotti Park Occupy Wall Street protests, which distinguished between the top 1 percent and everyone else. But to the contrary, the paper argues, the affluent resemble the top 0.1 percent in the extent to which they both (i) have gained economically in recent decades, relative to everyone else, and (ii) have contributed, through their rise, to the broader social ills that many (myself included) attribute to extreme high-end inequality.

Here I will offer 2 types of comments: critiquing the paper's main arguments, and seeking to explain the attitudinal changes that it notes.

1) Critiquing the paper's main arguments - I agree with the paper's conclusion that there is enough continuity, as we march down the economic scale from the really rich through the pretty rich to the affluent, to suggest that tax increases for all ought to be on the table from a progressive standpoint (which I share with those whom the paper critiques). But I think that in some cases the current draft overstates the similarities between these groups. In other words, I think the differences are greater than the paper allows, albeit not great enough to support the sharp distinctions between the groups that the paper criticizes. Just to pick a couple of main areas (there are more in the paper than I will seek to review here):

a) Political and cultural influence - The paper argues that the affluent may have as great (and democratically disproportionate) an influence on US political outcomes as the really rich, who have been widely blamed (including by me) for exerting plutocratic power.

I agree that the affluent are very powerful in certain narrow realms of particular interest to them. Consider the politics around §529 plans (and short-lived proposals to reduce their tax benefits), or around tax subsidies for retirement savings that do far more to benefit their retirement saving than that of people who really need help in this regard. Or concerning SALT deductions, even though (to date) the coastal affluent have not been able to reverse their losses from the 2017 act.

But I believe that the super-rich have far broader, more pervasive, and more agenda-setting influence. Consider the long-plotted, well-funded plan now recently crowned with success, to capture the Supreme Court and much of the federal judiciary for Federalist Society ideologues with a consciously anti-democratic agenda. Or consider the decades-long anti-tax and anti-regulatory campaigns that have been funded through right-wing think tanks as well as through campaign contributions. Or consider big-donor dark money, whose rise since the Supreme Court more fully unleashed it has been pervasive (even if deployable to a degree by Democrats as well as Republicans).

On the cultural front and with regard to public discourse, note how the likes of the Murdochs and Fox News, Zuckerberg and Facebook, and perhaps soon Musk and Twitter can shape things for all of us. It's true, as the paper notes, that these institutions are staffed by members of the affluent class. But does this really democratize them, even just from the 0.1 percent to the full 10 percent, given under whose direction the well-paid flunkies are laboring?

b) Keeping up with the Joneses - Bob Frank and others (including me) have discussed the importance of relative position to people's wellbeing and behavior. Thus, for example, when people in one's reference group start having fancier weddings or living in bigger houses, one may feel a need to match them just to avoid losing ground in either status competition or one's own feelings of personal satisfaction. The paper notes that one's reference group often prioritizes those who are equal to or just above oneself economically, as opposed to those all the way at the top.

While there is certainly some truth to this, there are prominent social science theories (such as those of Veblen as well as Bob Frank) suggesting that radiation down from the top has a pervasive influence on the entire process, even if it in effect functions one step as a time. This happens to fit my own intuitions about how these social processes operate, although I recognize that there are unresolved empirical questions here.

c) Comparative rate of progress - As the paper notes, in multiple studies of how wealth and income distribution have changed in recent decades, the relative gains of the top 10 percent appear to rival those of top 0.1 percent, while everyone below has relatively stagnated. (The pretty rich have also gained somewhat less in comparative terms than the really rich or the affluent.) The gains of the affluent reflect increased "skill bias" in the labor market, rewarding the well-educated with good college and professional degrees, while the gains of the really rich reflect rising globalization and economic concentration, resulting "tournaments" with a few big winners, the rise of rent-seeking, IP's growing role, etcetera. So, if one is concerned about relative change, both groups should be kept in mind.

But on the other hand relative change in position is not as such what matters the most. While it raises transition concerns, arguably today's statics (and what we expect in the near future) have greater normative weight than what things used to look like. For example, if today the positions of the affluent and/or the really rich have negative effects on the rest of society, how much does it matter whether these effects are new as opposed to having been around for decades?

There's lots more in the article that I won't touch on here. But, in general, I agree that, even if the paper might overstate a bit the extent to which the current positions of the really rich and the merely affluent present exactly the same issues, I agree that the issues posed are similar enough to support the paper's conclusion that progressive tax policy thinking should look more broadly, and that there is a strong case for raising taxes on the affluent as well as on the really rich. And yes, even if political feasibility concerns support the narrower scope, the broader reach should at least be on the table (more than it now is) in academic discourse.

2) Why the changes in attitude? - If the reach of academic discussions of progressive tax changes has narrowed in the last two decades, and I agree that it has, what might explain the shift? In the mode of explanation rather than justification, I think the key change is that things have gotten so much darker and more dystopian in our country since the era of the Graetz and Ackerman-Alstott proposals.

a) Political feasibility - It's not just that one's proposals may have little chance of being enacted unless they hold harmless the bottom 99 percent of the distribution. The bigger problem is that Republicans and the right have weaponized and debased tax policy talk, making responsible budget talk about needed long-term tax levels close to impossible.

There's a "Nixon goes to China" thing going on here. Only a responsible person on the right could safely bring broader-ranging tax increases back into public discourse. And unfortunately that appears to be a null set or oxymoron, in sharp contrast to 1980s US politics.

Plus, those on the right who would attack any broader-ranging tax increases are not merely undermining long-term revenue adequacy and distributive justice - many of the same people are also actually trying to overthrow American democracy. This creates an environment in which even independent-minded academics could reasonably think: If I don't align with the Democrats' (politically constrained) tax policy discourse, I might actually be aiding the cause of galloping American fascism.

I'm not saying here that this feeling is correct - that is, that one shouldn't conduct a broader progressive tax policy discourse due to the grotesquely and indeed transparently malignant evil that is triumphantly on the march in America today - but rather that it may influence (even if unduly) the questions one poses to oneself and the issues that one chooses to write about.

b) Who's to blame? - Twenty years ago, the main concern among progressive tax policy analysts was simply that personal welfare and economic opportunity were too unequally distributed. Hence, even if one was merely affluent, it was easy to see that others were worse-off and had fewer opportunities than oneself and one's children, and that one ought to support doing something about this.

Today, by contrast, there is a widespread sense (which I share) that things have gone darkly wrong in our society, and that this may have something to do with the rise of high-end inequality. So people are looking for scapegoats or villains.

The paper captures this current spirit, asking such questions as "Who ruined the American Dream?" and "Who sapped the American spirit?" These are not questions that the likes of Graetz or Ackerman-Alstott were asking in the more halcyon era of the late nineties and early aughts.

Once one is viewing high-end inequality in this way, I think it becomes psychologically more uncomfortable to include oneself among the targets of progressive tax policy than it was 20 years ago. It's one thing to agree that one is doing pretty well and others less so, and quite another to include oneself in the roster of those who one deems responsible for the awful current state of things.

Again, I offer this suggestion by way of explanation, not justification. It certainly makes me want to focus more on the top 0.1 percent than the top 10 percent, even if I ought to be focusing on both.

Friday, October 14, 2022

Cheat sheet / Admittedly a cheap shot

In my Law / Literature / Social Sciences class at NYU Law School, we read The Great Gatsby 2 weeks ago, and we'll be reading The House of Mirth for next week. For each week's reading, I attach a short "Advance Discussion" doc with lots of questions that the students can use to organize their thinking. (I.e., they don't have to answer any of the questions - it's just to stimulate thought and offer possible discussion topics, etc.)

Here is a question that I just added to my House of Mirth list,  reflecting the view that it's pedagogically good to link different weeks' discussions:

"In The Great Gatsby, Jay Gatsby is deliberately built up as a mysterious character. But is Lily Bart also mysterious, in the sense that we often do not know why she makes particular choices throughout the novel? Is she also a mystery to herself? How would you compare these two mysteries (if such they both are)?"

If I were to answer this question myself - and notwithstanding that I actually do like (albeit, not love) The Great Gatsby - the first difference I'd point to is that the "mystery" in The House of Mirth is actually interesting.

Thursday, October 13, 2022

Book panel at NYU Law School

Yesterday at NYU Law School, we had a book panel to discuss my recent publication, Bonfires of the American Dream in American Rhetoric, Literature, and Film.

Our Dean, Troy McKenzie, said in introducing the panel that he'll never look the same way again at the film It's a Wonderful Life (which I compare in the book to The Wolf of Wall Street). It's true that I view Wonderful Life as a pretty dark film, offering interesting contrasts (in light of Wolf) between American views of the rich and the poor in the 1930s and 1940s versus today. But I myself still get choked up when I watch it, even though (or perhaps because) I find its happy ending so unpersuasive.

Next my colleague Christopher Sprigman spoke, offering comments about the lack of US social solidarity that I diagnose and seek to explain in the book.

Then Vanessa Williamson of the Brookings Institution discussed the class and racial social divides that also feature prominently in the book, addressing both their historical roots and data suggesting that they are especially bad today.

After that, I offered some background about the book, and then we did Q & A. Here, among other things, I got to explain an earlier throwaway comment to the effect that Piketty got Balzac wrong in Capital in the 21st Century.

In the "things that make you go hmm" category, the event was attended by NYU law students, tax colleagues, members of the broader NYC tax community, visiting assistant professors at the law school (both tax and non-tax), other NYU visitors, and precisely zero (other than panelists) non-tax tenured or tenure track members of the NYU Law School faculty.

I believe that a video of the event with subtitles will be publicly available once it's been cleaned up for dead time, etcetera.

If I do say so myself, there were some testimonials at the panel to the effect that the book is fun to read. It's also mercifully short - the first book of mine about which this can accurately be said. But then again, one learns from experience (I hope).

If any of this sounds tempting, it is available for $18.99 here.

Wednesday, October 12, 2022

Tax Policy Colloquium for October 11: Bridget Crawford's Pink Tax and Other Tropes

Yesterday at the colloquium, Bridget Crawford presented Pink Tax and Other Tropes. It discusses the rhetorical practice of calling things "taxes," not just when / because they literally are, but in cases where the use is metaphorical or (even for a literal tax) the assigned name involves metonymy or synecdoche. The five examples the paper looks at in some depth are the so-called nanny tax, death tax, soda tax, Black tax, and pink tax (with especial interest in the last of these, as per the title).

I always enjoy conceptual papers of this kind. My main thoughts about the paper and the broader topic can be grouped into the following headings:

1) Use of the "tax" trope

Why do we call something the "this" tax or the "that" tax? Sometimes it is merely a descriptive shorthand for something that is literally / formally a tax provision. At other times, however (but also in some of the labels deployed to describe literal taxes), the label is a rhetorical tool, aimed at invoking a negative response to the provision or, for a figurative tax, the underlying phenomenon.

The paper notes the role of U.S. anti-tax ideology in motivating some of these labeling exercises. While one can almost never go wrong in ascribing great significance to this ideology, I think that the amount of work it is doing in the paper's case studies is variable. Sometimes the point seems to be, not that taxes are bad, but that the juxtaposition between "tax" and the descriptor is unjust or anomalous.

By point of comparison, consider the phrase "driving while Black." It's not anti-driving - rather, it asserts that Black people unfairly face special adverse consequences when driving (or doing other routine daily activities). Similarly, the phrase "Black tax" arguably is not so much drawing on anti-tax sentiment as asserting that in the US one's race can cause one, unfairly, to face various systematic burdens in one's life.

2) The paper's five main examples

Each of the paper's five main examples is interesting and merits attention.

    a) Nanny tax - This phrase debuted, at least in terms of national prominence, when Bill Clinton's two first choices for Attorney General, Zoe Baird and Kimba Wood, were forced to withdraw as a result of so-called "nannygate." Like millions of other Americans, they reportedly had not complied with the taxpaying and reporting obligations that one may incur when one hires people to provide services. Often these are provided in an informal household setting, and the service provider may be a chauffeur, housekeeper, babysitter, etcetera - not just a nanny.

The choice of the term "nanny tax" in the partisan political setting of a new president's Cabinet appointments reflected, I think, a bit of sexist hostility to professional women whose careers require them to use full-time childcare help, rather than just the odd babysitting hour here or there. Apparently male appointees who have violated this same rule in more recent years have avoided being forced out, because they didn't face the same sexist hostility. But it is also true that part of the "gotcha" that was successfully directed against Baird and Wood reflected the view that an Attorney General designate ought to have complied with all pertinent legal obligations.

In terms of the phrase's broader applicability, I don't think it reflects objection to the idea that hiring a nanny (or other domestic worker) should trigger tax liabilities. Rather, it is founded on the obligation's imposing compliance burdens on transactions in the informal household sector where people sometimes are not used to bearing them. The reporting thresholds have been raised since the time of the controversy, but arguably not enough, and noncompliance remains at high levels even among the otherwise generally compliant.

    b) Death tax - This term was deployed by the extremely well-organized and well-funded movement that sought to achieve repeal of the federal estate and gift tax. The movement succeeded in getting this tax repealed in full for one whole year, and otherwise in having the exemption thresholds raised significantly. The term "death tax" was helpful in this movement, at a minimum in enabling them to develop polling results which suggested massive public opposition to estate and gift taxes. (Differently worded polls, however, tended to show at least a modest level of public support for the very same taxes.)

The term "death tax" for the estate and gift tax is inaccurate and dishonest. Death is neither necessary nor sufficient for it to apply. It is a tax on transmitting wealth to others, incurred by only a tiny fraction of decedents' estates, and incurred inter vivos if one makes sufficiently large gifts.

One view of why the label proved so politically potent might be that it makes people (falsely) believe that everyone incurs the tax because everyone dies. But I don't think that was actually the main source of its potency (nor, do I think, was it anti-tax sentiment tout court). Rather, it was a bit like "driving while Black." Targets of the phraseology were being induced to react to the sentiment that death is simply a bad / burdensome / unfair time to impose tax liability. E.g., the death of a loved one is already a sad time, now this too?

    c) Soda tax - These are literal taxes, although synecdoche is involved if the provisions also apply to sugary drinks (or other products) beyond just soda. The term has also been used to describe regulatory provisions, such as those sought in NYC some years back by Mayor Bloomberg, that seek to reduce soda consumption by means other than imposing a fiscal levy.

I think of this as pretty much a straight-up term, rather than a rhetorical weapon, used by the provisions' supporters and foes alike as a handy shorthand descriptor. Soda taxes are rightly controversial, in that they have both virtues and vices (and to my mind it's largely an empirical question which prevails in a given setting). I personally am fine with their addressing both the externalities and the internalities associated with drinking sugary products. But even so there are such questions as that of the impact on people in lower-income households, who may benefit insofar as they switch to healthier diets but who face added burdens insofar as their diets don't improve but they are paying more tax (and/or adopt burdensome means of avoiding the tax).

    d) Black tax and e) pink tax - I discuss these more fully below. Here we are mainly in the realm of discussing figurative rather than literal taxes. The paper argues that such figurative uses of the tax trope are generally less effective than literal ones in generating a direct legislative response. I agree, but would emphasize that this is not the only use that figurative rhetoric may have.

3) What is rhetoric "for"?

The above tax tropes vary in the degree to which they are being used as rhetorical tools to support a particular viewpoint, as distinct from merely offering handy descriptors. How should one judge a particular use of the trope? One relevant question is whether it promotes accurate or inaccurate public understanding of the underlying "thing," be it a literal tax or merely a figurative one. Here "death tax," for example, badly fails the test, as (by design) it promotes misunderstanding.

A second relevant question, in the case of deliberate rhetorical use, is how effectively it promotes the underlying aim. Here "death tax" seems to have done well for those who shared the proponents' aim. Crawford's paper skeptically interrogates the efficacy of "Black tax" and "pink tax" in this regard. It emphasizes the lack of legislative successes that can be associated with these figurative uses of the tax trope. By way of contrast, the paper notes that the one literal tax within the pink tax rubric - what has become known as the tampon tax - has proven terminologically effective in getting these taxes legislatively scaled back. I'll say more about tampon taxes shortly. But for now let's focus on how one might assess figurative taxes' rhetorical effectiveness beyond just looking for legislative victories.

One who uses the term Black tax or pink tax is arguing that Blacks and women, respectively, face pervasive unfair burdens in US society (or elsewhere) that reflect the influence of racism and sexism. The argument is not just about current legislation, although it might inspire various proposals, but about how to view the state of social justice in our society. Hence the "payoff" from using these terms, if realized, may be indirect and more lagged.

And note again that tax tropes offer only one way of doing this. Consider again "driving while Black." Or the slogan "Black Lives Matter." The latter is a shorthand way of saying "While Black lives matter [which should be obvious], they have been treated as if they don't matter." Its being a shorthand for the longer version has permitted trolls to misunderstand it deliberately (e.g., the anti-Semitic clown Ye with his "White lives matter").

In thinking about the long-term political and cultural efficacy of such terms, I think it's useful to think of there being 3 groups in society, relative to one's underlying aims: supporters, persuadables, and opponents. A successful phrase is one that (a) stimulates, focuses, and motivates supporters, while also (b) reaching persuadables, and (c) not handing a useful rhetorical weapon to opponents. [Consider, for example, how racist politicians around the country have benefited from misapplying and weaponizing the term "critical race theory.")

In the context of the phrases Black tax and pink tax, the persuadables are people who can be outraged by racism or sexism - e.g., when they learn about police killings or Harvey Weinstein's actions - but who have a lower estimate of these problems' general pervasiveness and seriousness than those who are already "supporters." Gaining the persuadables' support is the key to achieving majority status for one's views, although in the US what the majority thinks (other than a Supreme Court majority) has had increasingly little impact on policy outcomes.

I wonder if the terms Black tax and pink tax are currently still a bridge too far for many of the persuadables whom the terms' proponents want to reach. But sentiments can't change over time, as evidenced, e.g., by the rise over the last twenty years of support for marriage equality (another well-chosen descriptor).

4) The Black tax

This term is used to describe the pervasive disadvantages that Black Americans by reason of both current and historic racism. Per one of the paper's sources, it refers to the cost of implicit bias on African-Americans that manifests in housing, business, finance, the automotive industry, online commerce and employment by way of segregation, employment discrimination, and race-based differentials in marketplace fees and pricing. It can also include the risks and disadvantages that are captured by such phrases as "driving [etcetera] while Black."

As this is already a fairly long post, I will note here that many of its manifestations are potentially relevant to tax policy design. When people discuss reparations for slavery and continued racism, the analysis is at least partly backwards-looking. Basing proposed fiscal policies on racism's continued impact is both forward-looking and potentially consistent with broader principles that are widely accepted in public economics and welfare economics more generally.

5) The pink tax

This term is used to describe such phenomena as the gender wage gap, gender-based pricing differentials, gender-based personal safety costs, and the "second shift." Its use as a term is controversial even among supporters of the underlying anti-sexist cause, e.g., due to differing views regarding whether it promotes / relies upon undesirable gender stereotypes.

Again for reasons of brevity here, rather than discussing each of these manifestations in particular, I will merely note that they are potentially highly relevant to tax (and broader fiscal) policy design, whether this were to involve expressly gender-based provisions or, say, deductions/exclusions for particular items.

The paper also discusses the one literal (rather than just figurative) tax within the pink tax rubric, which is the so-called tampon tax on female menstrual products. As background, US retail sales taxes (RSTs) often exempt "necessities" while taxing other consumer products ("luxuries"). Often products for men, such as Viagra, are exempted whereas tampons are taxed. However, there has been a widely successful movement, in a number of states, to move tampons to the exempt category. The allies in this movement have included (a) people who are more broadly engaged in combating sexism, (b) high school students and the like whose limited budgets are strained by the need to pay the tax on top of the pretax price itself (and by the products' not being otherwise made available to them), and (c) more generally anti-tax Republicans.

As it happens, under the Internal Revenue Code the cost of buying tampons qualifies for reimbursement in a health saving account (HSA). But it might not be deductible (I am not sure) as a section 213 medical expense. The latter would only matter for people whose medical expenses (as defined by the Code provision) exceed the statutory floor and who are itemizing.

On tampon taxes more generally, I would make the following two arguments:

a) Agreed that they are misclassified by RSTs that treat them as luxuries but exempt "necessities."

b) Well-designed consumption taxes would not exempt necessities, however, so long as other adequate provision was made for the taxes' fiscal impact on lower-income households.

c) In a properly comprehensive consumption tax, the cost of buying a tampon (in common with consumer purchases generally) would be included, not exempted.

d) Despite (c) above, the fact that some people but not others need to purchase tampons is relevant to what one might call ability to pay. Suppose that A and B are relevantly identical (e.g., they earn the same amounts with the same level of labor supply), but that A but not B needs to purchase tampons due to a biological difference between them. All else equal, B has greater ability to pay, and A should have greater marginal utility of a dollar. Moreover, needing tampons is an unchosen condition, hence one not triggering moral hazard (leaving aside the choice between costlier and cheaper tampons), and subject to adverse selection if private insurers offer it in circumstances where take-up depends on one's knowledge of how the ex ante uncertainty regarding one's need for them has been resolved.

This might support one or more of the following: (i) gender-based provisions in one's fiscal system, (ii) the use of at least partial deductions or exemptions for tampon purchases, and/or (iii) free or subsidized tampon provision by a national healthcare or health insurance system.

Newly published book on tax policy

 I have a chapter in a newly published (Edward Elgar) book called A Research Agenda for Tax Law.

My chapter is called Tax Law, Inequality, and Redistribution: Recent and Possible Future Developments.

If my list of participating authors is correct & up to date, then the other chapters are by Leopoldo Parada, Judith Freedman, Leandra Lederman, Ruth Mason, Allison Christians, Steven Dean, Svetislav Kostic, Karoline Spies, Rita Szudoczky, Yariv Brauner, and Miranda Stewart.

Wednesday, September 28, 2022

Tax Policy Colloquium for September 27: Taub, No Income Taxation Without Basic Accommodations

Yesterday, our presenter was Jennifer Taub, whose above-titled piece is an early draft relating to a broader book project. The latter will not mainly be about tax, but aims to influence broader public debate. 

The tax piece of the project (yesterday's focus) offered what one might call an opening bid regarding how Democrats and progressives should approach federal income tax reform. It expresses linked concerns about rhetoric and substance.

On the rhetorical side, it responds to a decades-long disparity in the approaches of the two major parties. Republicans repeatedly offer large tax cuts to their friends, without regard to the long-term budgetary implications. Democrats, by contrast, worry at least intermittently about blowing up the deficit. Hence, they often will settle for saying there should be no tax increases for people below the top (e.g., those earning $400,000 or more). Taub wants to reclaim tax cut rhetoric from the Republicans, while applying it to the general public rather than to the usual targets of Republican largesse.

While Democrats have recently emphasized "taxing the rich" - which polling data suggests has gotten some positive feedback - this doesn't offer any clear direct benefit to the general public. While the revenues might conceivably be used to help fund, say, better healthcare or education, there is no clear link to which Democrats could point.

Not directly mentioned in the paper, but I think important in the background, is a concern (which I share) that the US faces a broader crisis of rising fascism, and that the fascists are aided by a widespread feeling that neither the Democrats nor conventional politics more broadly can offer anything significant to improve people's lives. "You can't have nice things." Making a visible positive difference in people's lives could help a great deal in defeating fascism.

Turning from rhetoric to substance, the paper expresses especial interest in bettering the lives of the bottom 50% or so among us. They would benefit both from having more cash to live on, and from the easing of such needless vexations as those around income tax filing (which can both be costly and yield anxiety), and over-withholding that is only refunded much later without interest.

A key term in the paper is "basic accommodations." This refers to the amount one needs to pay for such items as rent, "electricity, heat, cable ... internet .... [f]ood, transportation, insurance premiums, co-pays, [and] laundry." It thus is related to the concept of basic necessities, but is a bit more expansive, including also items that aren't life-or-death but that have become parts of Americans' basic expectations regarding what everyone should have as regular parts of contemporary life.

The paper suggests that one should not face income tax liability until one's income is great enough to fund providing these basic accommodations. And it argues that one cannot meaningfully participate in politics until these have been met.

To this end, it proposes what it calls the People's Tax Shelter (PTS). In particular, this involves creating exemption amounts of $50,000 (single), $70,000 (head of household), and $100,000 (joint return). Withholding would likewise be changed, perhaps by exempting the first $25/hour of one's wages from withholding. In addition, marginal tax rates for labor income (up to a ceiling) would not exceed those for investment income (i.e., dividends and capital gains). The paper also contemplates, as linked changes, (a) capital income tax reform (such as the Wyden proposal to tax currently, or charge interest on the benefit of deferral, for high-end taxpayers' unrealized appreciation, and (b) the enactment of a VAT.

Here are some quick thoughts on my part regarding the proposal in its current form:

1) I share the paper's concern both about the affordability of basic accommodations for millions of Americans, and about the steep decline of democratic (yes, small-d) accountability and efficacy. People feel - rightly! - that they have zero influence on public policy and that those who determine (or at least can block) policy outcomes have little concern with their welfare. But I don't think that the daily struggle to meet basic accommodations is at the core of today's pervasive political dysfunction. In that regard, we have a whole lot of other problems (e.g., the roles played by money and by the promulgation of falsehoods). Thus, I might not link the two problems in the same way that the paper does.

2) I am uneasy with calling the proposal the People's Tax Shelter. To me (although views may differ), this tends to legitimize abusive tax shelters by analogizing them to a basic structural feature such as exemption amounts.

3) While I would certainly support enactment of a VAT (assuming that the revenues are used in such a way as to improve overall federal tax and spending policy by my lights), it's not a great rhetorical fit with PTS.

4) The proposed large rise in exemption amounts (plus VAT) brings to mind Michael Graetz's tax reform plan, the main purposes of which he well captured in his book title "100 Million Unnecessary Returns." Here, however, while there is some overlap, the focus is more on after-tax cash benefit to the people who would be removed from the federal income tax rolls. And if one is thinking about aiding these people financially, whether so they can meet "basic accommodations" or to offset a VAT's distributional effects, one faces some classic design questions. Say we are considering a $100,000 exemption amount for joint returns. The tax saving from this depends on the marginal rate at which the last $100,000 (or less) of one's income would otherwise have been taxed. E.g., if it would have been taxed at 40%, the taxpayers save $40K of tax. If 15%, only $15K. If one's taxable income was under $100,000, some of the tax benefit is lost (assuming nonrefundability and that one can't carry it over to other taxable years. 

This line of thinking naturally leads one to consider such alternatives as refundable credits. And that in turn leads one to think about universal basic income (UBI). Plus, once one has gotten to there, then, given the existing UBI debate, one may also want to think about whether one favors or opposes work requirements. And if one favors them, should jobs (and what kind) be provided (and on what terms), who is excepted from such requirements, should related aspects such as childcare and transportation be addressed too, etcetera. All this goes well beyond the contours of federal income tax reform as it often is conceptualized, but a focus on the welfare of the bottom 50% (many of whom don't pay a great deal of income tax in a given year, if any) makes it part of the relevant inquiry.

5) I wonder about the workability of relying on hourly wages to implement the reduced withholding that would pair up with increased exemption amounts. We don't always know what someone's hourly wage is (e.g., what is mine?), plus there is a risk of mismatch when the exemption amount and the withholding rule operate on different tracks (annual vs. hourly income). Better to key the two more closely together, although this would require addressing scenarios such as multiple employers?

Thursday, September 15, 2022

Tax policy colloquium: Gale and Thorpe, Rethinking the Corporate Income Tax: The Role of Rent Sharing, part 2

 My prior post set the stage for responding to the Gale-Thorpe paper's finding that, under plausible empirical surmises, firms' sharing of their excess returns with particular employees may do little if anything, to reduce one's estimate of the progressivity of corporate income taxation. Here I turn to some of the main issues that the paper's analysis raises.

1) Are highly profitable US companies' excess returns rents, or merely quasi-rents, and does it matter?

In economic theory, rents derived from ownership or control over a limited asset or resource, attained without any expenditure or effort by the resource-holder, and that exceed any opportunity cost of reaping them, can efficiently be taxed. Moreover, the incidence of the tax can't be shifted by the resource-holder to anyone else.

But there are two main problems with calling excess returns rents in practice. First, given the role of luck, observed ex post high returns don't prove the existence of a high ex ante expected return. One would not, for example, try to measure the return on investment (ROI) from New York State lottery tickets by looking just at the winners' ROI.

This leads to the quasi-rents issue that the paper indeed notes. For example, even if successful patents earn a lot, what about all the failed efforts to create valuable ones? Might taxing the resulting excess returns create efficiency and incidence issues after all?

Second, I'd argue, as did my old friend David Bradford, that excess returns are definitionally returns to labor in a certain sense. This need not mean strenuous effort, but at least the exercise of choice.

Suppose I find $10,000 lying on the sidewalk. Not being an economist (as per the old joke), I believe that it is really there, and hence I pick it up. Clearly, I have been lucky. But in addition, I walked by the spot, looked down, and stooped to clutch in my excited (?) fingers. In that sense, I think it's useful to say that this was a return to my labor (as well as to luck).

This does not mean that I "deserve" the $10,000 as the fruit of my effort, earned by the sweat of my brow, etcetera. As I'll discuss further below, there's a huge ideological component, at least in US ideology,* to saying that, because something is labor income, it therefore is personally deserved. 

*Well, not just US ideology, if you think, say, of Locke's Second Treatise.

The labor / choice component of deriving excess returns, like the ex ante vs. ex post issue in measuring excess returns, raises the possibility - excluded by definition under the concept of pure economic rents - that companies' excess returns actually can't be taxed completely efficiently and without the possibility of incidence-shifting.

But this seemingly big theoretical point may actually make less of a practical difference in evaluating how to tax companies' ex post excess returns than one might initially have thought. Here are several distinct points that may all lie in the direction of saying (to overstate it a hair): So what?

a) The margins that are being taxed here - e.g., pertaining to seeking to hit an ex post home run via risky investment with a high upside, along with supplying labor to the same end, may not be very elastic. Hence, the behavioral responses that result in inefficiency and incidence-shifting may be fairly modest.

b) A given country that is pondering how to tax excess returns has an externality reason for doing so. The deterrence of future highly profitable investment may have spillover effects that are global, not just local, whereas one gets the revenue. Now, perhaps one should in general be cautious about urging countries to exploit positive spillovers in this way. But, given highly profitable companies' immense global economic and political power, I suspect that the end result may not be too bad. Indeed, they may have sufficient clout for one to suspect that on balance they will be undertaxed, not overtaxed.

c) The downside of reduced risky productive effort may take a while to manifest, causing it to be borne more by future than present generations. Suppose that one thinks that  our generational policy is not in fact unduly tilted towards us relative to them (as, for example, Neil Buchanan argues here). This might then significantly mitigate one's weighing of the future harm relative to the current benefit.

2) How should we define progressivity?

Here I raise a question, not about the results of applying a given metric (e.g., how fast do tax burdens need to rise with "income" - or whatever - in order for it to count as "progressive," but rather how we should define the metric itself.

a) ECI vs. other metrics - Expanded cash income, or ECI, is the metric used by the Brookings models that underlie the analysis in the Gale-Thorpe paper. As I noted in the prior post, ECI is an imperfect standard for economic income. But economic income is itself a rightly controversial metric. Indeed, it lies oddly and perhaps uneasily in the middle, between the metrics suggested by a snapshot approach on the one side of the spectrum, and a lifetime (or even multigenerational) approach at the other side.

From a snapshot perspective, the right standard (or at least one closer to being right) is wealth. This might perhaps be expanded to include expected future earnings - at least for high-wage people who can borrow against the expectations, like working, and anticipate earning a lot more than their support needs. If one favored wealth as one's perspective, economic income arguably would undervalue the benefits enjoyed by wealth-holders, by reason of including only the current period's return to the wealth.

From a lifetime perspective, the proper metric is lifetime income + transfers received (such as through bequests). This is the classic consumption tax baseline, reflecting the view that normal returns to saving merely represent how one has chosen between present and future consumption. This perspective is used for example, in generational accounting studies as well as recent work on intra-generational accounting. From this standpoint, economic income is mistaken in including the normal return, and also confuses lifecycle effects with permanent effects. (E.g., if I have saved adequately for retirement, then in the year when I retire my income declines, due to the loss of the current year labor income component, but in fact I am no less well-off than previously).

b) Labor vs. capital - There has been a lot of talk in recent years about the tax system's unduly favoring capital relative to labor. But one might also characterize the same set of concerns, in very different language, as involving high-earners (whether from self-earned lifetime income or those from bequests) relative to low-earners.

Because of our imprisonment by misleading rhetoric, it makes a great deal of sense for people on the left, who favor a more progressive system, to say that we are unduly favoring capital relative to labor. And it makes equal sense for people on the right, who favor a less progressive system, to say it's all labor, with capital (properly defined in terms of the risk-free return that it can earn) being just a thing rather than basis for applying the vertical metric.

Once again, in American (but not just American) ideology there's all this stuff honoring labor income as deserved, earned by the sweat of one's brow, etcetera. It's a version of the "myth of ownership" that Murphy and Nagel attacked in the book bearing that name.

But high-wage needn't mean that you deserve it. You are still lucky, may be rewarded for doing bad things, may be reaping the advantages of privilege, etcetera.

To me, high-wage is a descriptive term that is entirely neutral in terms of its relationship to desert. But given how people view it, I would anticipate continued debates about whether it's actually about labor versus capital. (And I also don't want to wholly discount here the relevance of "capital" as such - a term that I may be writing about after my somewhat arduous current semester is done.) But one should firmly in one's mind distinguish between the rhetorical issues and the substantive ones.

3) Other topics

At this point in the annual cycle I am keeping too many balls in the air to devote time and space here to the many other interesting issues raised by the Gale-Thorpe paper. But here is a list of some of them:

--Rent-sharing is a very interesting topic, with multiple implications for how to think about taxation, labor markets, efficiency, etcetera.

--How should the shareholder-level tax figure in one's analysis of corporate income taxation and xcess returns?

--To what extent does the existing US federal income tax fall on excess returns as compared to normal returns? How should these two components be defined and measured?  How different would tax incidence be, say, under a VAT or DBCFT?

--Since rent-sharing incurs in part through self-dealing by corporate managers, what are the links between the issues raised here or in the paper, and issues of corporate governance?

Tax policy colloquium: Gale and Thorpe, Rethinking the Corporate Income Tax: The Role of Rent Sharing, Part 1

 This past Tuesday, we had our first public session of the year for Year 28 (!) of the NYU Tax Policy Colloquium. Our guest was Bill Gale of the Brookings Institution, discussing his co-authored (with Samuel Thorpe) paper Rethinking the Corporate Income Tax: The Role of Rent-Sharing.

 A couple of preliminary side notes: Public sessions will be available through Zoom while they are live.  We had some technical issues with this at the session, which I am hoping will be cleared up in the future. There are also some issues regarding remote participation in live vs. hybrid classes that I am trying to get my hands around.

Second, we had a post-session dinner with 9 attendees (students plus colleagues at NYU and elsewhere), for the first time in 3 years. What a relief to be lurching towards post-pandemic normality, even if (given Covid's continued threat) we are not entirely there yet.

Okay, onto the paper itself. It raised a bunch of interesting issues, and I will offer a brief run-through here regarding the main ones and my thoughts about them.

1) Background - What the US corporate rate should be is a big political issue these days. The 2017 act lowered it from 35% to 21%. But it likely would have been raised somewhat, either this year or last, by the Democratic majority in Congress if not for Manchin's and Sinema's opposition. If the Democrats keep the House and add at least 2 Senate seats in the 2022 elections, it is plausible that the corporate rate will indeed be raised next year. So there is a real-time public policy debate going on here.

There is also a rich and ongoing economic literature regarding  the incidence of the corporate tax. I see this paper as fitting into what I would call "Stage 5" of this debate.

Stage 1: As in the classic Harberger 1962 paper, the view that saving and investment are inelastic in a closed economy supports the conclusion that the incidence of the corporate tax falls on all investors, suggesting that it is progressive.

Stage 2: A shift to the view that the US has a small open economy in which investment capital can easily exit leads to the view that the incidence of the corporate tax falls on local resource owners (including those who would supply labor), suggesting that it is not so progressive.

Stage 3: The view that corporate profits consist largely of excess returns that are reasonably viewed as rents supports viewing the corporate tax as borne by shareholders, suggesting that the corporate tax is progressive (as well as fairly efficient).

Stage 4: The view that rents are to a significant degree shared with workers, whose wages rise with the profits that result from earning rents, arguably suggests that the tax might not be so progressive after all, at least if one thinks about progressivity in standard "capital versus labor" terms.

Stage 5: Here is where the paper comes in. Relying on empirical evidence that excess returns are mainly shared with high-income labor, and basing vertical distributional rankings on ECI (expanded cash income), the paper concludes that the corporate tax is actually fairly progressive after all, and indeed comparably so to where the incidence / progressivity literature was at Stage 3.

The core results are provided in Table 2 at page 36 of the paper. Choosing the values that the literature arguably suggests are most plausible (regarding both the % of rents that are shared, and who gets them as between higher-wage and lower-wage workers), the corporate tax is arguably slightly more progressive than prior Brookings models (with rents but not rent-sharing) had shown, albeit slightly less progressive as to the top 1%.

This supports taking a favorable view of increasing the corporate tax rate, at least within the range that Democrats appear to be contemplating, and indeed all the more so if one views the excess returns as rents that can efficiently be taxed. (More on that below.) Even the slight estimated decline in progressivity as to the top 1% arguably calls merely for using different instruments to reach that cadre, if one's normative views support doing so.

Before moving on to other issues, I'll just mention one concern about the data. Even if one agrees that economic income is the right vertical rankings metric, ECI inevitably falls short of it, in particular by reason of its excluding unrealized appreciation. This could conceivably become a significant concern, upon a fuller evaluation than one can give it in a law school colloquium session.

E.g., consider that owner-employees' ECI depends on their W-2 wages, plus various other things but not unrealized appreciation generally. This could be an especial concern when the likes of a Jeff Bezos or an Elon Musk or a Larry Ellison really doesn't care how much he pays himself, since to a degree (despite less than 100% ownership) it is like the left pocket sending funds to the right pocket.

I am not entirely sure how stock option grants fit into ECI. My guess is that they might enter into it when they become includable for tax purposes. But stock option tax planning often results in their being  taken into income at far less than what one might think is actually true value as discernible to insiders at the time.

To be sure, an owner-employee who underpays herself given her benefit from stock appreciation in effect causes the Brookings model to classify the underpaid earnings in entity-level capital income, which it apportions mainly to high-income individuals given its empirical assumptions. But at this point it occurs to me - and the relevance of this point requires further reflection than I have had  time to give it - that rents are shared very unequally among shareholders.

This is the familiar "early bird" point. Suppose we agree that Amazon and Apple are earning huge excess returns that we might or might not call rents. Should you and I immediately start buying lots of Amazon and Apple stock? Not necessarily, because the expected future returns are built into the stock price. It's the early movers, the people who had shares before these firms' outsized success became general public knowledge, who captured huge excess returns relative to what they paid for the stock. (Leaving aside for now the important "sweat equity" point that they may have invested labor for which they were fully compensated at the value that became manifest ex post - I will get to this in a bit.

Is the "early movers" point an important one that might lead corporate tax incidence models, even without rent-sharing, to underestimate the incidence of the corporate tax. Suppose that the early bird windfalls go especially to people who turn out (because of those returns) to be higher in the distribution than shareholders generally. I'll just note this question for now and move on, albeit in my next post rather than this one.

Wednesday, August 31, 2022

Possible writing project

Right now I'm deep under water, what with the start of a new semester in which I'm teaching both my Tax Policy Colloquium (covering a bunch of new papers every year) and my first-ever Law and Literature seminar (with a novel or shorter work each week). Plus I have several works in progress that I need to get back to once I can, which will not be right away.

But as I think about down the road, I have a project in mind that I am wondering about - would it be of interest? - Is it publishable? - Would it attract interest in the field? - etcetera. It would be a book, but unlike all of my previous books a collection of essays, mostly but not all previously unpublished, that are linked thematically only at a broad level.

As background, some years ago I wrote a piece about Henry Simons, available here. And this past summer I wrote a piece about Stanley Surrey, available here. The latter hasn't appeared in print yet, but I've promised it to a volume of pieces about Surrey in the aftermath of the belated publication of his memoirs.

It occurred to me: What if I had a book of such pieces, about prominent 20th century American tax academics? Each piece would take whatever angle I thought was interesting with respect to that individual, as opposed to attempting biography or comprehensive review. For example, if I wrote about E.R.A. Seligman, the question that would interest me starting out is why on earth did he write that crazy American Economic Review piece / amicus brief in Eisner v. Macomber that led to the absurd result in that case? (This is not suggested muckraking - he was evidently a high-minded guy, but somehow he got onto this train, and I don't know if there's anything in his archives, if they exist, that would shed light on his intellectual process.)

Others I might write about include a couple of people I knew well - Walter Blum and David Bradford. Very possibly, William Andrews, whom I also knew decently well. Plus definitely Boris Bittker, and I'd think about whom else. But definitely not anyone in the Warren-Graetz generation or younger.

Obviously this would not be anything remotely approaching a book with mass market appeal. But maybe enough appeal within the biz to be worth doing? Would a university press consider publishing such a thing? I just don't know - offline feedback welcome!

Monday, August 29, 2022

The Rolling Stones' early to mid-1960s singles

 When I go to the health club, I need to listen to music to get through the drudgery, and for it to work I really need to be familiar with what I'm listening to.

The last few times, I've been playing my way through the Rolling Stones' collection of singles through about 1972, called the London Years or something like that. Have often had the Beatles in mind while listening, since they were operating in parallel at this time. Some quick thoughts:

1) When the Stones play standard blues stuff, they're very good, but not I think brilliant or revelatory.

2) On the other hand, Jagger and Richard were utterly brilliant pop singles songwriters. E.g., although Satanic Majesties was a bust album (albeit, with a couple of good songs), they wrote some of the era's definitive psychedelic singles.

3) While their production and finish could sometimes be more slapdash and less thought-through than the Beatles', that was more of an issue on the albums' second-tier cuts. Their singles are imaginatively and cleverly produced, with orchestra etc. added for color effectively.

4) One greatly appealing feature of the early Jagger is his vulnerability. This got lost when he became a preening superhero.

5) Brian Jones was a great rhythm player and especially welcome, as the 60s went on, for his mania about finding interesting and odd instruments to play instead of just guitar.

6) Bill Wyman was a simpler bass player than McCartney. Much less melodic range and counter-melody. But very in-the-pocket and effective, often just what the music seemed to need.

7) Obviously Charlie Watts was a great drummer. He and Ringo seem to have done similar, very interesting things in the high psychedelic period. (E.g., Rain vs. Ruby Tuesday or Dandelion.)

8) Stopping here because I haven't quite reached 1968 yet, a year in which they dramatically changed and started pushing towards the high point of Exile on Main Street.

Wednesday, August 17, 2022

Ten thoughts about the new book minimum tax

 Now that the Inflation Reduction Act has been signed into law, I thought I'd add some quick comments about it - or specifically about the book minimum tax. which reaches the "adjusted financial statement income" (AFSI) of "applicable corporations." In general, an applicable corporation has had annual AFSI averaging $1 billion over the last three years. (But this is a bit of a one-way ratchet - once on, something extra is needed to get one off the list of companies subject to the tax.)

AFSI is the net income or loss reported on the company's "applicable financial statement," but with certain adjustments. Perhaps the biggest adjustment is that accelerated depreciation deductions, to the extent in excess of those already taken into account in the book measure, are subtracted from AFSI and thus do not lead to minimum tax liability.

For a U.S. company, this is in effect a worldwide tax at a 15 percent rate, with foreign tax credits being allowed. So the marginal reimbursement rate (MRR) for foreign taxes paid generally is 100% until one reaches the limit. There are also rules for foreign-parented multinational groups that have either US subsidiaries or foreign subsidiaries with a US trade or business. In general, affiliated groups are taxed as if they were a single company. However, as got a lot of attention in the press, Senators Sinema and Thune succeeded in removing from the final version a provision that would have aggregated the income from unrelated portfolio companies under common ownership of an investment fund or partnership. This may help, e.g., with their avoiding the $1 billion AFSI test.

With that as background, here are ten quick comments:

1) From an empirical standpoint, it will be very interesting to see how this works out. Who ends up paying how much under it? We are going to learn a lot from what happens in the next few years - not just the payment of minimum tax, but also effects on how much US and foreign tax one pays because the provision affects the payoff to minimizing them.

2) For big companies that are guaranteed to meet the $1 billion AFSI test, the most obvious tax planning idea is manipulating AFSI. That, in turn, would most obviously involve manipulating reported book income.

Accounting professionals almost unanimously HATE the incentives that this creates. But it is worth noting that the managers in publicly held companies often appear to be interested in overstating financial statement income relative to "true" or economic income. This pushes the other way, so it doesn't automatically need to result in overall distortion being worse. More complicated, certainly.

Studies of the book income preference that was in the corporate AMT for the years 1987-89 showed a lot of increased manipulation, leading (the authors concluded) to a less informative measure for financial markets. But note that the provision at issue there was pre-announced as being for 3 years only. An ostensibly "permanent" measure may play out differently.

3) A second way of reducing one's minimum tax liability is to make more investments that can be expensed for tax and thus also for AFSI. But if these are real investments then there are certainly issues of expected pretax profitability that will be important to the resulting behavior.

4) Paying more foreign taxes, or at least not incurring costs to avoid them, is another tax planning response. A 100% MRR for foreign taxes does not on its face make one want to pay more of them, and note that the minimum tax also in effect has a 100% MRR for US corporate income taxes otherwise paid. But there are still various margins here that tax planners will explore. Beyond being less willing to incur real costs in avoiding foreign taxes, one may also have extra reason to try to incur taxes in lieu of other expenses that would merely be deductible from AFSI.

5) The tax presumably discourages mergers that would lead the parties to collectively meet the $1 billion AFSI test (where they would individually fall short). But it encourages mergers between companies that would be subject to the minimum tax and those that are paying more than 15% globally. In effect, the latter's "excess" global tax payments go to offset the former's minimum tax liability instead of being "wasted."

6) There is an AMT credit, so that if one (say) has a 10% global rate in Year 1 and a 20% global rate in  Year 2, one gets to offset the Year 1 minimum tax liability against one's Year 2 US regular corporate tax liability. But I gather that a Year 2 minimum tax credit couldn't be used against Year 1 liability. Plus, one doesn't get a US minimum tax credit against foreign tax liabilities that proved to be high in the "wrong" year.

7) Companies subject to the tax will have an incentive to do careful planning under the provision. E.g., they may want to ensure that their global rate on AFSI, as computed under the rule, stays at about 15% annually rather than fluctuating up and down (although the AMT credit does address this issue to a degree).

8) I have written elsewhere about my view that, all else equal, minimum taxes are generally not a great approach. But there is a "compared to what" issue in the provision's defense (just as there is with respect to its use of book income) given that other, arguably superior, provisions were not going to be passed.

9) While the new book minimum tax is not identical to Pillar 2 of the OECD/G-20 global tax  reform framework, Reuven Avi-Yonah and Bret Wells have recently argued that it moves significantly in the direction of increasing US compliance therewith.

10) One thing we learned from the 1986 Act's corporate AMT is that these provisions may tend to die the death of a thousand cuts over time. Lobbyists seeking to narrow the corporate AMT base often find that this is sufficiently lacking in salience to be easy pickings legislatively. Hence the 1986 corporate AMT moved far in the direction of undoing itself even before it was officially repealed. I would certainly be unsurprised if this happened again. Indeed, it has arguably already started with the depreciation change, which might conceivably prove to be a harbinger of future legislative efforts taking out additional items.

Sunday, July 03, 2022

Updated Surrey piece

 It turns out that the Stanley Surrey piece I posted on SSRN was not actually my most current draft. I somehow posted one that lacked the brief Conclusion  that goes at the end. The truly current version (which I believe is the same as that which I posted, except for its having the Conclusion) is available here.

Friday, June 24, 2022

Fall 2022 NYU Tax Policy Colloquium speaker schedule

 Here is our schedule of public colloquium sessions with speakers for fall 2022. Assuming that COVID restrictions continue to decline, all sessions will be fully live, and will be followed by dinner nearby with the speaker and a group of about 8 people total (including interested students). All sessions will meet from 4:25 to 6:25 pm, in the NYU Law School main building, Vanderbilt Hall, room 202.

1) Tuesday, September 13: William Gale, Brookings Institution.

2) Tuesday, September 27: Jennifer Taub, Western New England University Law School.

3) Tuesday, October 11: Bridget Crawford, Pace Law School.

4) Tuesday, October 25: Alex Raskolnikov, Columbia Law School.

5) Tuesday, November 15: Goldburn Maynard, Indiana University, Kelley School of Business.

6) Tuesday, November 29: Ariel Jurow Kleiman, Loyola Law School, Los Angeles.

A few quick additional notes: (a) I am hoping that we will be able to offer "hybrid" attendance by people who are interested in the sessions but can't make it to our NYU site. But don't know yet how the law school will be operating in this respect.

(b) In general, these public sessions meet every other week, Each is preceded by a class-only session discussing the same paper just with the students (albeit possibly with the author's participation, in person or remotely). However, the November 15 session comes three weeks after its precursor, because Tuesday, November 8, is Election Day. Also, our first week of class is Tuesday, August 30, but this will be a general introductory session for the students, not focused on a particular paper.

(c) Back in the days when we had 14 public sessions instead of 6 -  because the semester was a week longer, and I had a co-convenor with whom to share the work - I took a certain pleasure in the concept: "And now for something completely different." In other words, each week's paper might have absolutely nothing in common with that from the week before. I both found this personally refreshing and felt that it helped to show the students just how intellectually diverse and far-ranging a field tax policy is or can be. The downside was that it could be a bit overwhelming for people.

(d) This fall, by contrast, with just 6 papers, I feel the optimal approach is a bit different. There will be greater topical continuity, and something of a general theme. Most of the papers will address issues around inequality, in one way or another - although I have told the authors that this should not entirely get in the way of their writing and presenting whatever is of greatest current interest to them (and would work for us). Still, this focus will largely hold. That said, there will be a wide diversity of approaches among our speakers, who differ greatly in their interests and methodologies. Also, inequality itself is a very broad topic, as the papers will collectively help to make clear.

Wednesday, June 22, 2022

Newly posted article on Stanley Surrey

 I have just posted on SSRN a  completed draft of an article that I wrote earlier this year on Stanley Surrey. You can download it here.

The abstract goes something like this:

Nearly forty years after his untimely death, Stanley Surrey, the renowned Harvard law professor (and Treasury official), remains perhaps the most important and influential tax law scholar in American history. The recent publication of his highly illuminating memoirs offers a convenient occasion for reassessing his work.
In offering such a reassessment, this essay takes its title from William F. Buckley’s 1974 observation that, while Surrey claimed to analyze tax policy issues with “scientific detachment,” in fact he was a tax “moralist,” whose policy recommendations were “based on a highly articulated set of personal value principles.” Largely agreeing with Buckley as a descriptive matter, the essay considers what Surrey’s work both gained and lost intellectually by hewing so strongly to a set of career-long, deeply held beliefs. Along the way, the essay contrasts Surrey’s moral and intellectual certainty with the skepticism and resistance to grand system-building of Boris Bittker of Yale Law School, Surrey’s only mid-century rival for intellectual leadership of the tax legal academy.

UPDATE: I somehow failed to upload a draft of the paper the first time around. Here it is, definitely with the paper available for download.