Bad stimulus legislation

If it were feasible to enact and enforce a constitutional ban on fiscal stimulus legislation, I would support it. The problem isn't with the theory of fiscal stimulus, but the practice. For extremely good reasons, it became generally accepted orthodoxy by the late 1980s that efforts to do it would almost always be bad.

Then Clinton won the 1992 election on "it's the economy, stupid," with stimulus legislation as part of his campaign arsenal. Never mind whether Congress enacted the thing in 1993 (it didn't), but a resounding lesson had been learned by politicians across the political spectrum, not least (but not limited to) George W. Bush.

Stimulus legislation is almost always bad because (a) it comes too late, and (b) it becomes a political excuse to throw dollars around to targeted voters, without regard to the actual merits of the policy. In 2001, we got the first supposed stimulus legislation that was actually timely, but this was because Bush had already decided to do it back in 1999 (to fight off Steve Forbes), and calling it stimulus was merely a change in rationale. Even so, the 2001 tax cuts had virtually nothing to do with what actual stimulus legislation would look like. Rather than giving money to poor people who are more inclined to spend it and/or inducing businesses to increase their activity today, its rationale went purely to long-term structural reform of the system (on which grounds there would have been a case for it but for its fiscal unsustainability, although this is a bit like saying there would be a case for taking arsenic to kill stomach tumors except for the side effects).

Anyway, back to the main point. Politicians are now foaming at the mouth to do these things, both as a way of pandering to voters by mailing them checks and to avoid being blamed or looking like they don't care. The fact that Bush and the Democrats agreed to make a deal on this shows how hungry they are to do something, given how they usually interact.

So what they're doing, the investment incentives aside, is mailing people a bunch of checks several months from now, when it will be too late if there actually is a recession. Why not wait a few months until October, for perfect pre-election timing? Although the Democrats got a small concession or two from Bush on the distribution of the tax cut, it will still be going to people who in general are probably unlikely to spend much more at the margin by reason of getting these little one-time checks.

Does anyone want to offer a guess on whether they will rescind the check-writing program if it turns out by June that we don't have a recession after all?

And what is this foolishness about how it should be styled a tax rebate and hence linked to taxes actually paid? That has zero connection with the stimulus theory, which is that you disburse the money based on marginal propensity to spend it. Plus this is supposedly a one-time, unexpected, ex post adjustment that people weren't supposed to anticipate or see as likely to recur. We don't retroactively encourage more economic activity in 2007 by mailing back a check in June 2008 that is a bit higher if you paid more tax back then. And if we do, because people anticipate that this will happen again, then we are imposing higher marginal rates via the phase-out as 2007 taxable income rises.

What about the fact that, because the government takes in cash and pays out a mix of cash and goods or services, just about everyone in the society pays a positive lifetime net tax? Would it really be a tax rebate if we gave more money to someone who paid zero in 2007 but styled it either an ex post rebate of taxes paid ten years ago or an ex ante rebate of taxes to be paid ten years from now? Why not? Money is fungible.

A truly pathetic performance out of Washington, and not in the least bit surprisingly so.

Fiscal stimulus, Rudy-style

Since Rudy asserts that tax cuts always raise revenue, does that mean counter-cyclical fiscal policy, in his world, requires RAISING taxes so as to cut revenues and pump more money into the economy?

Just asking.

Inheritance tax pushback

Yesterday we had our first NYU Tax Policy Colloquium of the semester. This is year 13 for me, shockingly enough, meaning I've been doing it for more than a quarter of my life (certainly a strange thought).

My co-convenor for the first 7 weeks is Kevin Hassett of the American Enterprise Institute. This brings a strong conservative voice of the intellectually honest genre to the table, not a bad thing at a major American law school or indeed for me. I've spent time at AEI in the past and have often considered myself more center than left (because I like redistribution but think markets are important and find political processes & centralized decision-making suspect). Then along came Bush, causing me to foam at the mouth and feel much more left. So a counter-balance is as good for me as I think it is for everyone else in the class or at the sessions.

We discussed Lily Batchelder's work on inheritance taxation, which I've blogged about in the past. But this is the first time I've seen it discussed by someone who is strongly opposed to the bottom line, which is that an optimal tax policy set of tools would include this instrument. I've suggested in past blog entries that points in favor of Lily's approach include the following:

--Including gifts and bequests received, and interacting their tax consequences with consideration of the recipient's other resources, uses more distributionally relevant information than any other alternative on the table (i.e., don't tax bequests, use an estate tax, or tax accessions without regard to the recipient's other resources). This is only an argument for having bequests affect bottom line tax liability, not for having a positive as opposed to a negative tax rate on them.

--Evidence about accidental bequests and lack of donor planning suggests that this is an area where the tax draws less of a real planning response than one might expect under standard economic models. (By real response I mean adjusting one's work and saving in response to the tax, as distinct from hiring an estate lawyer to arrange various rigmaroles.)

Kevin pushed back effectively against this view, which is not to say I always entirely agreed with him. Two of the main points raised were as follows:

1) A soundbite-style misreading of Lily's work might interpret it as follows: most bequest dollars are accidental (i.e., incompletely annuitized taxpayer died before spending everything), such bequests can efficiently be taxed at 100%, hence a very high tax rate is fine. Kevin notes that this line of reasoning would be defective. Even with incomplete annuitization and consequent accidental bequests, in a rational planning model a prospective decedent who also had some altruistic bequest motives would leave more if the residue would go to kids than if it went to the government. This is true, but I concluded the differences on this issue are semantic. Relatively inelastic accidental bequests would affect the analysis in the direction that Lily suggests.

2) Given that gratuitous transfers unfold over time, rather than simply being lateral (e.g., if I don't eat the apple this period, I make a gift of it to someone who also eats it this period), taxing bequests involves taxing returns to capital, leading to the "exploding tax rate" problem with wealth and capital income taxation over long periods generally. Perhaps I am too much of a conceptual purist in wanting to say that the lateral and inter-temporal issues are theoretically distinguishable - in practice taxing the former means taxing the latter. But there are questions of how well very long-term rational planning models capture actual human behavior. E.g., even if a low-rate annual income tax adds up over 30 years to an 80% tax wedge between consuming today and in the future, how responsive are people to this?

Redefining tax expenditures

Joint Committee on Taxation chief Ed Kleinbard was recently quoted to the effect that he wants to reshape and revitalize tax expenditure analysis.

This is potentially a very good thing. As per a recent article of mine (in the Tax Law Review) and book chapter (in my book Taxes, Spending, and the U.S. Government's March Towards Bankruptcy), TE analysis was undermined from the start by its being intertwined with (a) support for Stanley Surrey's particular tax policy agenda (progressivity and comprehensive income taxation), and (b) a sideshow concerning whether one could define a normative income tax baseline that everyone could accept.

In illustration, I recall years ago discussing with Bruce Bartlett, at an American Enterprise Institute event, an article he was writing on TE analysis. He was somewhat hostile to the concept because he saw it as a tool of the Surrey agenda, and I pointed out that in many ways he should really like what it does, since stealth spending programs packaged as tax cuts but that increase government intervention in the economy should not be what he likes best. I believe he agreed.

The real point behind TE analysis is analytical and independent of the Surrey agenda. People define taxes and spending based on form, but attribute substance to the formal distinction. Thus, an identical program can appear to make government "smaller" if it's done through the tax system or "bigger" if it's done via direct appropriations.

The underlying conceptual problem is that the taxes-spending distinction even if reformulated is vacuous. So TE analysis uses and reformats a distinction that in the best of all possible worlds would instead be discarded. But a more satisfying distinction lies between distributional and allocative policies - the former aim at who ends up with what, the latter at level and allocation of investment, etc. In the context of a distributionally rationalized income tax, TE analysis can help avoid confusion between what one might call "synthetic spending" that is formally packaged as if distributional - e.g., a "tax cut" - but that is economically equivalent to a direct outlay (and equally needs to be financed). The real contribution that TE analysis can make is to address this confusion and defang it a bit.

I'm hoping that the Joint Committee will adopt changes that move in this direction, making TE analysis both more useful and less controversial.

A Nobel Prize in Economics for Mitt Romney?

Contrary to previously prevailing economic theory, it turns out that Detroit's auto industry can be restored to its 1950s status so long as we (1) replace Washington-style pessimism with optimism, (2) have a President who "fights for every job" (I hope Mitt still gets enough sleep - and who exactly does he fight?), and (3) eliminate fuel efficiency standards.

Who knew? This truly is a new paradigm, or else perhaps a very old one.

New achievements in phoniness

Even by his own exalted standards, Romney is outdoing himself with all this talk about personally, as President, rebuilding the traditional auto industry, "fighting for every job" in Michigan, and so forth.

Guilty pleasure

I recently downloaded Tommy James and the Shondells' Crimson and Clover - the album version, of course.

Not that I'm proud of myself for this ...

No good economist should support a stimulus bill

Let's think in terms of the actual bill we would get, not the hypothetical bill one might design.  It will be late, a Christmas tree loaded with lobbyists' garbage, larded by both parties since otherwise it wouldn't become law, and full of bad new stuff that will just stay on as the business cycle changes.

Latest Rudy follies

Our boy has apparently decided that the way to get back in the Republican race is to offer the biggest, most pandering tax cut of all. An unnamed fiscal policy expert has been quoted in blogs elsewhere as saying that Rudy's tax cut package is "huge," about 4 percent of GDP, or more than twice the size of the Reagan or Bush tax cuts.

Since the present value of all future US GDP under current projections is probably a bit over $800 trillion, this implies that the Rudy tax cuts would add more than $30 trillion to the fiscal gap. This is about 50 percent bigger than Medicare prescription drugs and 3 times bigger than the Social Security shortfall.

Who's crazier?

Bush says he expects a Mideast peace treaty by the end of his term. Isiah Thomas says the Knicks are headed towards an NBA championship soon, and that all members of his 9-25 team are untouchable.

The Bush Administration pays for the Iraq war!

Jason Furman just sent me the following article from the Congressional Quarterly:

CQ TODAY - BUDGET

Jan. 9, 2008 - 1:31 p.m.

Sparing Trees, Saving Money: The Fiscal 2009 'E-Budget'

By David Clarke, CQ Staff

There will be no delivery truck pulling up to the White House next month to unload freshly printed copies of President Bush's fiscal 2009 budget proposal, which is likely to total more than 2,000 pages.

The White House estimates it would need to order more than 3,000 copies of the books this year in order to provide copies to its own staff, lawmakers and the news media as it has done in the past.

Instead, it will send those eager readers to an Office of Management and Budget Web site (www.budget.gov) on Feb. 4, the day Bush will submit his new budget to Congress.

The move is an effort to save money and spare some trees, budget director Jim Nussle said Wednesday. "This step will save nearly 20 tons of paper, or roughly 480 trees," Nussle said in a statement. "In terms of fiscal savings, we estimate the E-Budget will save nearly a million dollars over the next five years."

For those who just can't live without the paper version, the four-volume set can still be ordered from the Government Printing Office. But Nussle urged all potential readers to embrace the E-Budget.

The budget has been online for several years, but this year OMB is hoping to publicize its availability more effectively. "Having an E-Budget also aligns well with the president's E-Gov initiative, which focuses on utilizing technology to make the Federal Government more efficient and to improve transparency in order to better serve citizens, businesses and agencies alike," Nussle said in his statement.

[END OF ARTICLE]

As Jason clearly recognized in sending this to me, it offers an ideal set-up for numerous and diverse punchlines. He offers one, asking whether the $200,000 annual saving "make[s] up for Bush's other fiscal and environmental policies."

For mine, I note that a New York Times article nearly a year ago (available at http://www.nytimes.com/2007/01/17/business/17leonhardt.html ) suggests that the Iraq war had cost about $1.2 trillion to date. Call it $240 billion a year. No one seems to have realized that the Administration entirely paid for this - even before the e-budget initiative - simply by NOT printing an extra 3.6 million copies per year of its annual budget. (I assume for simplicity a fixed per unit cost.)

When is the press going to give Bush full credit for this? Liberal bias liberal bias liberal bias.

Freedom is slavery

The Iowa contests have me watching CNN for a couple of nights, which I don't often do (unbearable fatuousness and vapidity, and that's not even counting the politicians).  But in watching discussion of the Republican race, I was struck (though I've noticed this for a while) about how "fiscal conservative" now means someone who favors huge budget deficits.  More specifically, a "fiscal conservative" favors huge and unending tax cuts while having no obligation whatsoever to address the outlay side other than through very vague and general rhetoric.   Thus requiring huge and ever-growing deficits as a matter of simple arithmetic.

Interesting way to use the English language.

2008 NYU Tax Policy Colloquium

The spring semester Tax Policy Colloquium that I have been co-running at NYU since 1996 starts up again on Thursday, January 17, with a 4-6 pm session at Furman Hall, room 120, at NYU Law School. My co-conveners will be Kevin Hassett of the American Enterprise Institute for the first seven weeks, and Mihir Desai of the Harvard Business School for the last seven weeks. The schedule of speakers is as follows:

1. January 17 – Lily Batchelder, NYU Law School, “The Superiority of an Inheritance Tax Over an Estate Tax or No Wealth Transfer Tax.”

2. January 24 – Daniel Halperin, Harvard Law School, “Deferred Compensation Revisited.”

3. January 31 – Kevin Hassett, American Enterprise Institute, “Taxes and Wages.”

4. February 7 – Chris Sanchirico, Penn Law School, “The Tax Advantage to Paying Private Equity Funds Managers With Profit Shares: What Is It? Why Is It Bad?”

5. February 14 – Sarah Lawsky, George Washington University Law School, paper to be determined.

6. February 21 – Brian Galle, Florida State University Law School, “Fairness and Federalism in Taxation.”

7. February 28 – Jason Furman, Brookings Institution, “Dynamic Distributional Scoring.”

8. March 6 – Mihir Desai, Harvard Business School, paper to be determined.

9. March 13 – Ruth Mason University of Connecticut Law School, “The Federal Interest in Structurally Coherent State Taxes.”

10. March 27 – Andrea Louis Campbell, MIT, paper to be determined.

11. April 3 – Jonathan Barry Forman, University of Oklahoma Law School, “Making Social Security Work.”

12. April 10 – Alan Auerbach, Berkeley Economics Department, “Long-Term Objectives for Government Debt.”

13. April 17 – David Gamage, Boalt Law School, "On Capital Income Taxation: Refuting the Cases for Consumption Taxation and for Reduced Capital Gains Tax Rates."

14. April 24 – Daniel Shaviro, NYU Law School, “The Optimal Relationship Between Taxable Income and Financial Accounting Income.” (Unless I substitute a chapter or two from my Urban Institute Press book in progress, "The U.S. Corporate Tax: What Is It, and Where Is It Headed?")

Latest reading

After finishing the William Randolph Hearst biography that I noted in an earlier post, I sprinted through two novels, slacker-ironist Benjamin Kunkel's Indecision and dour Ian MacEwan's On Chesil Beach. The latter, though painful, is really good, and makes the former feel in retrospect a bit like amateur hour (though that's too harsh about a largely enjoyable read).

Next week I will begin a semester's hard labor on my school's appointments committee. This may doom my reading for a while, given the tree-slaying tomes by potential hirees or invitees that I will need to spend my weekends slogging through.

Good news from Iowa

At least, that's how I see it. On the Democratic side, I just hope Obama (if elected) doesn't actually believe that he can work "together" with Republican revanchists. But perhaps this is to a degree just astute packaging. And I am hoping he will be elected.

On the Republican side, to backtrack for a moment to 2000, one lesson some people take from the campaign that year is that you shouldn't focus on personality in the shallow, superficial way that the press did in preferring Bush to Gore. But another, very different-sounding lesson (not necessarily inconsistent, however) is that the individual's campaign, including what it tells you about his or her personality, is actually highly pertinent.

Thus, Krugman keeps noting that Bush's campaign platform in 2000 showed how reckless and dishonest he is. I'd add that Bush's odious personal qualities were already on full display, although I along with others didn't fully grasp this. An example is his sadism, which came out in the debate with Gore when he gloated about giving people the death penalty. And of course the ignorance, smirking, arrogance, sense of entitlement, etcetera.

All this is prelude to asking about Romney: Just how bad is he, and how disastrous would it be if he were elected? (As now seems a lot less likely.) The prior might have been that his record suggests adequate competence and intelligence, and the fact that he's pandering so shamelessly is just a matter of rationally chosen political tactics. But I have come to think that it bespeaks more grievous defects that we hopefully will never get to learn about the hard way. Encouraging about the process if he and Rudy fail because the truth about them emerged through it.

One hard thing for me about the last seven years is that I believe in nuance and shades of gray. I don't like utterly despising people and finding them completely without any decency or redeeming qualities. But sometimes that is what you get. Next question, just how bad is McCain. He has done some bad things, such as the torture sell-out to Bush, but often appears to have good as well as bad qualities. And if the Rovean grip on the party is weakened, he might have an easier time expressing them. Then again, if he believes in endless war and a 100 years occupation of Iraq, along with endless tax cuts, the good may not matter enough.

Huckabee is actually a likable person in some ways. I have old friends whom I would tremble to see as president, and whom I wouldn't even recommend as, say, a spouse or parent, but who are enjoyable in the right context due to their having some nice qualities. Whatever one thinks of Christianism in politics or his hostility towards gays, rejection of evolution, etcetera, I have enjoyed his deft skewering of the Republican leadership's arrogant elitism. Plus I am hoping he's on a trajectory to destroy the coalition that has brought us where we are today - and in the best case scenario to lose like Goldwater or McGovern, but with the subsequent tail of George's loss, not Barry's.

Retail sales tax versus value-added tax

Bruce Bartlett argues against the Fair Tax here: http://taxprof.typepad.com/taxprof_blog/files/bartlett_fair_tax.pdf

I generally don't bother discussing the Fair Tax, as it appears to be a dead horse both intellectually and politically. Even assuming one wants a flat rate consumption tax with no zero bracket, why use the retail sales tax model instead of a value-added tax (VAT)? The latter can lead to the same overall result but with better enforcement capabilities since the revenue authorities can cross-check rebates against taxes remitted on inter-business transactions, and since it can be embarrassing for a business to claim rebates on purchases without admitting to any sales on items that are no longer observable in inventory.

That said, I have learned more recently from people in VAT nations that the tradeoff is not quite as clearcut as I had thought. E.g., Europe has had fun lately with "carousel fraud," in which one side to an inter-business transaction claims a rebate, while the other side disappears before paying tax on the offsetting receipt. Also, U of Sydney law prof Graeme Cooper won, to my mind, the 2007 tax article title-of-the-year contest with his SSRN-posted piece, "The Discrete Charm of the VAT," available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1027512, in which he argues that the administrative tradeoffs are closer than various of us had been inclined to believe.

Shadow forgets the rules again; Buddy gets into the holiday spirit

Shades of O.J.?

Nice to see that Clemens is doing his own investigation of the steroid reports.

The movie versus the book

I recently saw Citizen Kane again, for the first time in quite a few years, to show it to my kids (one of them anyway).  When I then came across a William Randolph Hearst biography on a Christmas shopping foray to a Barnes & Noble, my interest was piqued.  The book is "The Chief," by David Nasaw, and I strongly recommend it if this sort of thing appeals to you.

I must say, the actual story is considerably more interesting and complex than the one in the screenplay, leaving aside those amazing deep focus shots and the jump cuts.  E.g., at 40 he married, not the President's niece, but a 21-year old chorus girl he had been seeing for five years.  And, as is somewhat better known, the "Susan Alexander" figure actually was the accomplished and independently successful Hollywood comic actress Marion Davies.

I've gotten to 1904, when Hearst, having conquered the newspaper markets in SF & NYC, was seeking the Democratic nomination for President.  Though running as a radical (decades before supporting Joe McCarthy), he differed from Charles Foster Kane in focusing on "trusts" (corporations accused of wielding monopoly power) and union issues, rather than on the likes of Boss Jim Gettys.

An amusing quote I want to share, from an anti-Hearst editorial alarmed by his candidacy:

"It is not a question of policies, but of character.  An agitator we can endure; an honest radical we can respect; a fanatic we can tolerate; but a low voluptuary trying to sting his jaded senses to a fresh thrill by turning from private to public corruption is a new horror in American politics."

Other than in the writing style, why do I almost feel this is about another NY-based Presidential candidate, 104 years later?

On Romney's claim that he saw his father march with Martin Luther King

The Romster has been taking quite a bit of abuse on this one, especially given the added revelation that in 1978 he told the Boston Globe: "My father and I marched with Martin Luther King Jr. through the streets of Detroit."

He has been defending himself by saying that "saw" means "was aware of," not literally "saw," a defense that I gather he will not try to extend to the 1978 claim.

All the same, I am reminded of that bit - is it from Monty Python? I can't quite remember - that goes something like this:

"Is it for the likes of you that I lost my leg in the War?"

"But James, you have both your legs."

"I was speaking metaphorically, you fool!"

Double standards

It's kind of interesting how the very same Senate Republicans who were threatening to invoke the "nuclear option" and destroy filibustering if the Democrats used it even a tiny bit, have now set the all-time 200-year record for filibusters in a single two-year Congressional term, in just eleven months.

This brings to mind the game they were going to play in California, trying to make it apportion electoral votes by Congressional district while Republican-majority states such as Texas would remain winner-take-all.

Or the fact that, in 2000, they were all set to launch a huge PR campaign if Bush lost the electoral vote but won the popular vote, demanding that the people's will be honored by giving him the 270. Then of course when it went the other way (leaving aside that Bush actually lost both), not a peep was heard of this.

The press plays along with this as well.

Quotations of the year

These are arguably the ten most memorable quotations of the year (U.S. only). I didn't find them myself - seven are from Fred R. Shapiro, editor of the Yale Book of Quotations, as reported on-line in today's New York Times, and three are from an article by James Parker, posted on 12/18 at http://thephoenix.com. But well worth passing on:

--1. ''Don't tase me, bro.'' Andrew Meyer, a senior at the University of Florida.

--2. ''I personally believe that U.S. Americans are unable to do so because some people out there in our nation don't have maps and I believe that our education like such as in South Africa and Iraq and everywhere like such as and I believe that they should our education over here in the U.S. should help the U.S. or should help South Africa and should help Iraq and the Asian countries so we will be able to build up our future for us.'' Lauren Upton, South Carolina contestant in the Miss Teen America contest, when asked why one-fifth of Americans cannot find the U.S on a map.

--3. “You must have meant something more intelligent.” Christopher Hitchens, responding to an audience member in Madison, Wisconsin during his book tour for God Is Not Great.

--4. “My view is, we ought to double Guantanamo.” Mitt Romney.

--5. ''I don't recall.'' Alberto Gonzalez (repeatedly).

--6. ''There's only three things he (Rudolph Giuliani) mentions in a sentence: a noun and a verb and 9/11.'' Joseph Biden.

--7. ''I'm not going to get into a name-calling match with somebody who has a 9 percent approval rating.'' Harry Reid, referring to Dick Cheney.

--8. ''(I have) a wide stance when going to the bathroom.'' Larry Craig.

--9. “I’m here with the members of the NRA – would you like to say hello?” Rudolph Guiliani, purporting to answer his wife’s call on his cellphone during a speech.

--10. ''I think as far as the adverse impact on the nation around the world, this administration has been the worst in history.'' Jimmy Carter.

Evidence from the crime scene

I'd like to see Shadow and Buddy offer an innocent explanation of this little number. They know perfectly well that counter-top visits, and our food, are off-limits. Not that they care particularly, as one can see, but it is something they know.

A bit too convenient

OK, a baseball aside admittedly reflecting my anti-Yankee bias.

First Andy Pettitte is named in the Mitchell report for using human growth hormone. Then he promptly apologizes for using it just twice. So sorry about those two days, he says, "if what I did was an error in judgment." (Interesting use of "if.") Then Mitchell says yup, that's what we heard, he did it twice. Today Mariano Rivera praises him for being so forthright.

Admittedly, Pettitte still has a leaner build than you see on some of the big time abusers. But this seems awfully pat and convenient. He trained with Roger Clemens for years. And he did seem to add a couple of miles to his fastball after having elbow problems in his early 30s. He's reportedly been named by Jason Grimsley.

If he's admitting to two days right off the bat, I'm bidding - oh, maybe 150 times over four or five years. Just a guess.

You know what they say - the opening bid is never the final offer. But that goes for us both.

Worth every penny?

The U.S. Treasury has just issued the 2007 Financial Report of the U.S. Government, available here.

Money quote, from page 32 of the document:

"[The report's measure of the long-term U.S. fiscal gap] totaled approximately $53 trillion as of September 30, 2007 ... an increase of more than $32 trillion from about $20 trillion as of September 30, 2000. This translates into a burden of about $175,000 per American or approximately $455,000 per American household."

Of the entire U.S. historical total, more than 60 percent arose under Bush. A bit of it comes from simple accrual of interest on the preexisting fiscal gap, plus changed assumptions may have had some impact. But the bulk of it comes from massive tax cuts, spending increases, and the Medicare prescription drug abomination.

These figures arguably are grossly under-stated relative to Bush's actual policy, because they ignore the revenue cost of making his tax cuts permanent (as he urges, admittedly it seems ineffectually) and fixing the alternative minimum tax. I couldn't quickly find a contemporaneous estimate for those changes, but the ten-year (2008-2017) estimate for extending the tax cuts and fixing the AMT is $3.5 trillion according to a report by the Center for Budget and Policy Priorities, available here. This report also states that extending the Bush tax cuts would double the expected size of the national debt relative to the economy in 2050.

Just to make the Bush share of the overall fiscal gap more tangible, even without these changes in the current baseline that he is urging, developments on his watch, which overwhelmingly are the fruit of his policy moves, have run up the tab by about $106,000 per American or $275,000 per household.

That is quite a tab for a not very enjoyable bash.

Don't play for money, folks - he's a ringer

On a lighter note, here is a new photo of my cat, Buddy, which has just been posted, but fairly far down the page, at stuffonmycat.com

Mitt Romney and my novel, Getting It

My unpublished comic novel, Getting It, features a convoluted set of battles between the "hero," a character who is a complete phony and hypocrite, and his rival, who is even worse by reason of being a true believer in the values of their workplace, and no phony or hypocrite at all.

One "lesson" of the story in my mind, not that it tries to teach lessons any more than my models Wodehouse and Waugh did, is that there are worse things out there than mere hypocrisy - even total, arrant hypocrisy mixed with grandiose dishonesty and over-wrought self-involvement. I am trying to remind myself of this in order to feel a bit less angry at the scoundrel Mitt Romney.

Beyond trying to read atheists and agnostics out of membership in U.S. society, he is also trying to prompt an angry counter-attack by them so he can pose as the champion of the Bible-thumping sectarians. Of course, he doesn't give a damn about any of this. I suppose he'd be even more dangerous if he actually believed any of this stuff. But then again, how far is he willing to go in this direction for political convenience? Doberman, the scoundrel hero of my novel, is just trying to make partner - he will always be scrabbling and desperate, for all his bravado. Romney aims for the ability to do a lot more harm, and evidently is entirely willing to do it. Maybe my novel's "lesson" shouldn't be over-generalized.

Michael Graetz's tax reform plan

Today I was at a session at Columbia Law School where Michael Graetz presented his tax reform plan, from a forthcoming book. Among his main ideas is to enact a VAT and use some of the revenues to give the income tax a $100,000 exemption amount, thereby eliminating income tax filing for people earning less than that. Such individuals would exit not only the income tax, but generally the filing of annual federal tax returns that base liability on household circumstances. This has implications for differential rates and adjustments for dependents, to the extent that other mechanisms aren't able to pick up the slack.

I've commented adversely on the proposal before at this site, but am prepared to change my tune a bit now. I certainly would welcome the adoption of Graetz's tax reform plan, as well as of any of the main academically posited alternatives, compared to keeping the status quo. I remain a bit concerned that it doesn't do as much as it could for equity as between different households below $100,000. He rightly points out that, politically, discretion to adjust for household circumstances in this range is not always used for the best. And he has tried to address the problem in some ways.

Other proposals, such as the Bradford X-tax, have advantages over the Graetz plan, e.g., in rationalizing business taxation. He rightly points out that they are not likely to be politically feasible. Not clear that his plan is either, but if he manages to get somewhere with it, then more power to him. I'd certainly be a supporter relative to the politically likely alternatives.

The fact that his plan, like the others, seems to me unlikely to be politically feasible, highlights a key dilemma, which is: What do you propose if nothing good seems possible? Actually, I think our political choice problems are even worse than this. Not only is nothing good possible; nothing possible is possible. That is, an unsustainable policy (by definition) can't be sustained, but nothing sustainable can be enacted any time soon.

At least he is trying to find a way to square the circle, and it's not his fault that this is likely to be a hopeless task. I personally think the best political maneuver to grease the skids for adding a VAT to the current mix (which at some point is likely to be unavoidable, even if not one's first choice) is to purport to earmark all of the revenues towards addressing funding shortfalls in social insurance programs. Hopefully as part of lowering the programs' growth rates to be more sustainable. But this is obviously a long way off anyway.

Pending that, I'd be glad if I were wrong and the plan proved to have some political traction. Clearly my preferred alternatives don't.

More bug-swatting (Mitt Romney edition)

Shorter Mitt Romney, from his speech today: Being a Mormon is okay, but being an atheist isn't.

Ugly intolerance fits poorly, to my mind, in a speech requesting tolerance.

Since this raises my ire, let's have some fun with Romney's tax plan, which I had previously not commented on because it seemed just too easy.

According to Romney's website, he has five main tax proposals:

1) "Make the Bush tax cuts permanent." Wow, what an original idea, Mitt! This would cost trillions of dollars and massively augment the long-term U.S. fiscal gap. No serious financing for it, of course.

2)"Lower tax rates for all Americans." I'm glad to see he isn't pandering or anything. Same comment. But these are fake tax cuts, not real ones, as indeed are any tax cuts that are unsustainable. I call it tax-shifting to the future, not tax reduction.

3. "Abolish the death tax." That Orwellian name again - it's an estate tax, not a death tax, since just dying doesn't trigger it. I have come off the fence in recent years to favor some degree of estate or inheritance taxation, largely based on economic research about people's relatively low responsiveness to taxation at the bequest margin. But again, what makes it recklessly irresponsible is the overall U.S. fiscal situation and lack of any meaningful offset.

4. "Savings incentive plan." He proposes to make interest, dividends, and capital gains tax-free for middle class families (which I believe he defines as people with up to $200,000 of income). Another unsustainable tax cut, of course. I do happen to favor progressive consumption taxation as a replacement for the income tax, so arguably this goes in a good direction from that vantage point, the lack of financing aside. But - if people can borrow deductibly (such as through their homes) while investing tax-free, all you are doing is handing them free money for zero net saving. This probably reduces national saving due to the income effect (write them a check for doing no net saving and they have more $$ to spend on consumption).

5. "Our corporate tax rate must be competitive with the rest of the world." Okay, some serious economists agree about this. But again, there is a difference between genuinely cutting tax rates, which requires a fully financed or otherwise sustainable change, and simply shifting them to the future.

I've got it - maybe Mitt is planning an Atheists Tax. After all, he said in his speech that there is no freedom without religion. With a high enough Atheists Tax, this could literally be true, and the fiscal gap addressed to boot.

Iran news

I consider the NIE news the best that I have heard for a very long time. Good news not only about what's happening in Iran, but about the chances of stopping the lunatic Bush Administration rush to war. I had been periodically very worried about this. Now I guess Bush and Cheney are down to the Doonesbury option (from last week's strips), or variants such as freshening up a version of the 1939 Polish "attack" on German border posts.

Quote of the day

This is from Rob Jovanovic, Perfect Sound Forever: The Story of Pavement.

"While not ones to get up to the usual hotel-trashing antics of other bands, Pavement nevertheless received robust coverage of their backstage activities ...

"'We can definitely brag about our Scrabble,' said Malkmus. 'I think we can pretty much take down any other rock band at that.'"

Rare moments in parenting

"Dad, what's the music you're playing?"

"Oh, it's a group called the Feelies."

"Really? It sounds pretty good."

Definitely atypical, despite a few past success stories such as Squeeze and Heatmiser.

Fred Thompson's bad idea

It's hardly worth mentioning Fred Thompson's recent tax proposals, although lauded in the Wall Street Journal the other day, given that the dang doggone ol' boy (as this Washington-Hollywood smoothie likes to style himself) is going nowhere fast. He makes my 16-year-old cat Shadow, who sleeps almost all the time, seem like a whirling dynamo by contrast. But I'll briefly discuss ol' Fred's tax plans anyway, as they raise broader points of interest.

What with proposing to end the AMT, extend the Bush tax cuts, and on and on, Fred appears to envision reducing Federal revenues by as much as 5 to 10 trillion dollars for 2008-2017 alone. (This is a wild guess, but the Bush tax cuts alone come in at $2.3 trillion according to the Congressional Budget Office.) This verges on the criminally insane given the overall U.S. fiscal picture and the political unlikelihood of commensurate outlay reductions.

The bad idea I want to emphasize here, however, is his proposal to add a simple flat tax system with fewer deductions to the Code, but not to replace the current system - he would instead make it elective: you get to use whichever system you prefer.

Tax Policy Rule # 12 (I don't have a list, it's just that this one isn't important enough to be Rule # 1): Taxpayer elections are almost always a bad idea. They add complexity while losing revenue, since taxpayers have an incentive to look at all the options and then pick the one under which they pay the least. Plus, the pattern of tax liability you get is bound to be incorrect, given its being a mix-and-match between different systems. No matter which system you prefer, the result is "wrong" for people who pick the other system.

The Wall Street Journal, in its Nov. 28 editorial lauding the plan, was characteristically ignorant and naive. They put it as follows: "Anyone who prefers the current tax code can stick with it. The rest of us can have a better choice."

Does the Journal really think that taxpayer elections will be based on personal affinity as opposed to which system enables one to pay less tax? That is not a very plausible or sophisticated view of taxpayer behavior.

Yes, as the Journal notes, providing the election may ease the politics of adopting a flat tax, which may seem good if that is the tax system you prefer. But it eases enactment by not really enacting the flat tax, given that the other system remains out there, influencing behavior and running up tax planning costs. Making something easier to adopt by not really adopting it is not a very brilliant strategy.

Okay, just for completeness, are taxpayer elections always bad? No. To over-simplify, suppose there were 2 kinds of elections: those that induced the taxpayer to choose whichever option reduced tax liability, and those that induced the taxpayer to choose whichever option lowered her tax planning and compliance costs. The latter type of election would be good, the former bad. In practice, of course, the two effects will generally be mixed together, so it's a question of how much you get of each. But the election Thompson proposes certainly seems likely to be the bad kind, as taxpayers would have strong reason to track, e.g., their home mortgage interest deductions and such (not all that administratively costly a thing to do) in deciding which option they want to use.

Inadvertent hilarity

In an op-ed in today's LA Times, Zev Chafets says that Bush is the "big winner" from today's Middle East shindig in Annapolis, notwithstanding that nothing is likely to happen there. Could be so, I suppose, as a statement about the U.S. opinion poll effects (though even this seems to me unlikely).

But then the LSD kicks in, and the spittle starts spraying from Chafets' mouth.

He asserts that, just because various countries and institutions came to the thing, "[i]t turns out that Bush, far from wrecking America's prestige and influence, has compounded it."

Then the true comedy payoff:

"In the past, there were foreign leaders who might have attempted to spoil the party. President Jacques Chirac of France, Chancellor Gerhard Schroeder of Germany, Canadian Prime Minister Jean Chretien and U.N. Secretary-General Kofi Annan were all publicly rude to Bush at one time or another, and perhaps they would have dissed him again this time. But guess what? None of them is invited. They are all gone from office -- a fact not lost on their successors, who are almost embarrassingly anxious to be friendly with the Bush administration."

Never mind Australia, or for that matter the fate of Tony Blair. The really important thing to keep in mind is that Bush can go over the heads of foreign leaders and appeal to the voters out there ANY TIME HE LIKES. Those foreign voters are nuts about him, and protective like a mother hen. Likewise, Bush's pull with the UN General Assembly rank and file is just INCREDIBLE. So none of these people would DARE stand up to him unless they had a political death wish.

Is Chafets living on the planet Zircon or something? Is he deranged enough to believe what he writes, or too crass to care?

My ideal

Someone once said the following about David Ricardo, the great classical economist, who developed all kinds of remarkable insights without any formal economic tools. (An example is what we now call Ricardian equivalence with respect to budget policy, an idea he both expressed and saw the problems with, in a couple of throwaway paragraphs, nearly two centuries before anyone else wrote about it.)

Anyway, this individual compared Ricardo to the guy you see at the end of a tough mountain climb, when you've gotten there with tons of special gear and burkah helpers, who you find out has ascended before you with nothing but a T-shirt, shorts, and sneakers.

That's my ideal in academic work, though I certainly make no pretense of comparability.

David Halberstam's The Coldest Winter

This widely noted book about the Korean War has been a very interesting read. The start is painful and hard to get through - a flash forward to the stage of the war where American soldiers, near the Chinese border, were being overwhelmed by Chinese forces for whom the sleeping MacArthur had totally failed to prepare despite more than ample warnings.

A lot that happened in the Korean War era is painfully recognizable today. Policy being driven by ignorance about the other side. People who knew something being ignored, as the "China hands" had been driven from influence for the sin of correctly predicting the outcome of the Chinese Civil War. People who knew better lying about what had happened in China to score political points against the Truman Administration. The overwhelming inclination in U.S. politics to be over-hawkish at all costs, without regard to rational pursuit of national self-interest. The arrogant disregard of local realities out there. Absurd worship of military figures, permitting them to exercise malign influence. Deliberate exploitation of patriotism themes by right-wingers determined to pursue nefarious ends, or in some cases well-meant but unrealistic ones. Knowledgeable civil servants being defamed and ignored. Insistence on reading every single situation in world politics as Munich revisited, with "appeasement" of a mythically monolithic adversary to be avoided at all costs, and with "appeasement" defined to include any exercise of sanity and common sense.

Interesting side-point: MacArthur's daring Inchon landing succeeded for a reason that no one fully understood at the time. It was guaranteed to fail if the North Koreans were at all prepared for it, highly likely to succeed (as it did) if it caught them completely by surprise. What we didn't know, before the archives opened abroad, was how close it came to failing. The Chinese knew from their intelligence sources in Japan that the U.S. was planning a landing somewhere. Being a lot savvier and more experienced than Kim Il Sung, they correctly guessed Inchon because they had studied MacArthur and knew his style. So they told Kim, a couple of weeks before the landing, to prepare for it. He wouldn't have had to do much - just put minimal resources there without greatly diverting from anywhere else. But luckily enough he arrogantly ignored them. So MacArthur's gamble worked because of Kim, but certainly was not bound to work given that the Chinese had figured it out. Being a racist, MacArthur had counted on "Asians" lacking the wit to foresee what he was up to.

Back to the main themes and how familiar they feel from the perspective of 2007. We really are reliving 1946 to 1954 in a lot of ways, albeit without responsible adults running the Executive Branch or the Republican Party. Let's hope we are lucky enough to emerge again. But I am not very confident that we will.

If Bush isn't stupid ...

... then why is he so laughably easy for sophisticated foreign leaders, such as Putin and Musharraf, to dupe?

Great new album

Glenn Mercer (previously of the Feelies), Wheels in Motion. So far as I can tell, the biggest difference between this album and his work with the Feelies is that this one is actually in print.

You could call it George Harrison on guitar with a Velvet Underground drone.

Cat pandering

Posts on international tax appeal only to a select audience. But I fail to see how anyone could resist my three cats.

This one is Shadow, aka The Big Fella.








This one is Ursula, aka The Lovely One.








And this one is Buddy, aka The Wascally Wabbit.

U.S. international taxation

Today at NYU Law School we held the session on international taxation mentioned in my blog entry from yesterday, with Jim Hines presenting his new paper, “Reconsidering the Taxation of Foreign Income,” followed by comments from Alan Auerbach, Mitchell Kane, and Stephen Shay, followed by general discussion. The following is a partial report and some very preliminary thoughts. (I am likely to publish about this topic at some point down the road.) But let me just mention up front that the event seemed (to my biased eyes at least) to be a big success - 70 attendees, lively discussion that could have kept right on going if people didn't have to leave, and most importantly it may have advanced people's thinking about the issues, as it certainly did mine.

Jim argues that U.S. (and other countries’) tax policy with respect to outbound investment should be guided by capital ownership neutrality (CON) rather than capital export neutrality (CEN), with the claimed implication in practice that the U.S. should exempt active business income earned abroad by U.S. corporations. Under CEN, the prescription would instead be to move towards full U.S. taxation of all worldwide income of resident corporations (and individuals), albeit subject to allowing foreign tax credits.

CON focuses on not distorting ownership patterns, as would happen if a German firm rather than a U.S. firm owned a given investment in China, despite the U.S. firm’s expecting a higher pre-tax return from the investment, because the German company earns more after-tax by reason of Germany’s imposing less tax than the U.S. does on top of whatever China levies. CON advances worldwide efficiency by increasing pre-tax profitability, taxes being ignored for this purpose as they are a cost to the taxpayer but a transfer from the social perspective (since the taxing government gets the money and does something with it). CON is understood to matter a lot in a world where the theory of the firm, as pioneered by Ronald Coase, suggests that ownership arrangements are economically very important. (You have a firm instead of arm’s length market arrangements between partners in the productive process where this increases efficiency.)

CEN focuses on not distorting where investments are made. If Ireland has a lower tax rate than the U.S., investment will tend to shift from the U.S. towards Ireland, leading to the selection of some Irish investments that are more appealing after-tax than their U.S. alternatives despite having lower expected pre-tax returns. Same point about pre-tax profitability being the proper guide since taxes are a transfer not a social cost.

So why should we think the CON margin is more worth pursuing than the CEN margin? Not because it is inherently more important, which Jim doesn’t claim (noting only that CON is indeed important), but on the ground that the U.S. can benefit from unilaterally pursuing CON but not CEN. This is a part of the analysis that needs to be developed more.

Proponents of CEN usually define unilateral pursuit of national self-interest by invoking national neutrality (NN), under which the home country would fully tax outbound investment by its companies without foreign tax credits – permitting only deductibility for foreign taxes paid. The foreign tax credits then emerge either out of benevolence or (more plausibly) reciprocity between nations. As I argued in my recent Tax Law Review piece on international taxation, moving towards CEN by increasing the U.S. tax burden on multinationals is often defensible in terms of national self-interest because it also moves towards NN.

Jim rejects this nationalistic ground for moving towards CEN and NN via what I am inclined to call the “musical chairs” or “row of shops” hypothesis. NN is motivated by the concern that, if we tax outbound investment by U.S. companies less than their domestic investment, we lose revenue because their investments relocate from the US to abroad. But suppose the amount that will be invested in the U.S. is fixed so far as the U.S. tax regime for U.S. firms is concerned. If the U.S. tax rules induce a U.S. firm to invest abroad, someone else will make the investment here. Or the U.S. firm will raise more capital in worldwide capital markets and make both investments, not just one or the other. He invokes recent empirical research in support of this view, suggesting that home and foreign investment by U.S. multinationals seem to be complements rather than substitutes.

I call this the musical chairs theory because it’s as if the music is playing, and the companies are marching around all the chairs (i.e., investment choices), and everyone ends up getting a seat somewhere. If we induce the U.S. firm not to take the seat here, someone else will take it instead. This is of course the benign (or should I say progressive schools) version of musical chairs, where you have just enough for everyone rather than being one short.

The row of stores metaphor for this story is inspired by Bleecker Street, which I sometimes pass on my way from home to school, in which every storefront is bound to be rented by someone – it’s just a question of who ends up where. Bad theory so far as Bleecker Street is concerned, by the way – there are lots of boarded-up storefronts still seeking tenants, some of which have been there for years. (A puzzle: why are the rents apparently so high if so many stay vacant for so long?)

Again, Jim doesn’t deny that low taxes attract investment. The claim here is that, if the U.S. tries to move towards CEN, rather than everyone doing it, all it does is create clientele effects, whereby other nations’ firms replace U.S. firms as the makers of particular foreign investments. So no motivation for the U.S. to address CEN alone, and indeed we get a piece of the worldwide CON welfare loss if U.S. firms (still these days predominantly owned by U.S. individuals) make a bit less money due to the inefficient reallocations. Unclear how much we gain from following CON, however, even granting that in this model we have nothing to gain from unilaterally following CEN.

Jim rejects distributional or fairness-based reasons for taxing the worldwide income of U.S. firms by analogy to tax-exempt bonds. Say the interest rate on taxable bonds is 10%, the marginal tax rate (MTR) is 30%, and tax-free municipal bonds pay 7%. Then there is no distribution problem by reason of the preference (assuming the pre-tax interest rate is fixed), because muni bond holders pay a 30% implicit tax that is the same as everyone else’s explicit tax. All earn 7% after-tax. By analogy, investment in low-tax Ireland pays an implicit tax in the form of a lower pre-tax return (by reason of the CEN-violating shift of investment into Ireland), so there’s no reason for distributional concern about its being (to exaggerate relative to actual Ireland) tax-exempt.

The big problem with the muni bond argument is that it only works with a single MTR for all investors. So, if in actuality we taxed corporate income on outbound investment at the individual level, so we could apply Bill Gates’ MTR to his investments and a lower rate to yours and mine, exemption for foreign source income would involve sacrificing this potential to apply the desired MTR to each investor. But since we generally tax outbound corporate equity investment purely at the flat corporate rate, we aren’t getting that rate differentiation anyway under the current system or even one revised to accord more with CEN.

There is lots more one could say (and that I perhaps will say) about the paper and the topic – including details of excellent comments by Auerbach, Kane, and Shay – but given the length of this post I will omit them at least for now. But one last point concerns passive income, earned through portfolio investment. Jim agrees that the U.S. should tax all worldwide income of U.S. residents. This is potentially a big concession, making one wonder about the broader principle. It has a rationale, relating to the point that passive income doesn’t have a meaningful location in the same sense as active business investment (e.g., there is no limit to the funds that could be described to the tax authorities as deposited in Caymans banks). So the musical chairs hypothesis does not apply. But still, it might have big implications for the overall analysis – especially considering the murkiness of the active-passive distinction (which Jim conceptualizes as, “does ownership or control matter here?” – a matter of degree, of course) – and considering as well the murkiness of the source concept.

Source is not an economically well-defined idea. Consider, for example, the synergies obtained by operating as a multinational rather than through arm’s length dealings between firms in different nations. Where exactly does the synergy income arise? And this is not just an implementation question – it undermines the underlying idea on which source-based taxation ostensibly rests.

International tax session at NYU Law School

On Wednesday, November 14 (tomorrow as I write this), from 12 to 2 pm, we will be having a really interesting session at NYU Law School on international tax issues. Jim Hines of the University of Michigan Business School and Law School will be presenting a new and as yet unpublished (perhaps even unposted?) paper entitled "Reconsidering the Taxation of Foreign Income." Commentators will be Alan Auerbach, Mitchell Kane, and Stephen Shay. If I do say so myself despite having arranged the event, this is a really strong group of people with diverse backgrounds and viewpoints.

I am expecting a very lively and enjoyable session. Jim argues for significantly changing the policies and policy benchmarks that have prevailed for several decades in U.S. international tax policy. The panelists' level of agreement may well top out at 50 percent while in some cases being significantly lower. But all agree about seeking light not heat.

Interested individuals who will be in the area and who were not previously aware of the event (or at least have not previously responded) should let me know, and I can offer fuller information about it.

Budget hypocrites threaten to strike again

Courtesy of Paul Caron's TaxProf blog, I note that the White House is threatening to veto the one-year AMT patch being considered by Congress. Specifically:

"The Administration does not believe the appropriate way to protect 21 million additional taxpayers from 2007 AMT liability is to impose a tax increase on other taxpayers. Accordingly, if H.R. 3996 were presented to the President in its current form, the President’s senior advisors would recommend he veto the bill."

How exactly does the White House rationalize counting AMT revenues towards its multi-year deficit forecasts, under this view? They're counting net revenues that they insist must be lost, not replaced.

UPDATE: Stan Collender, in his "Budget Battles" analysis of the AMT squall, puts it a bit more crisply:

"On one hand, the White House says that paying for a one-year "patch" on the AMT is unnecessary, so an offsetting tax increase isn't needed. As he has done with everything else Congress is considering that he doesn't like, the president is threatening to veto any AMT fix that is revenue neutral.

"On the other hand, congressional Republicans have been insisting that the Democrats maintain their pledge to live up to pay-as-you-go budget rules by offsetting the AMT fix so that it has no impact on the budget.

"The Republican positions clearly are not defensible.... [given] the glaring, inherent conflict between saying that the AMT fix doesn't have to be paid for and demanding that PAYGO, which applies to taxes, be maintained."

Collender notes as well how utterly (and I would add characteristically) incompetent the Congressional Democrats have been in letting the Republicans paint them into this corner, and in failing to explain why the AMT fix isn't a tax cut but the offsets are somehow tax increases.

Could those guys win a poker hand if they had four aces and the other side had face-up junk? I am starting to think not.

Newly published or forthcoming

My article "Why Worldwide Welfare as a Normative Standard in Tax Policy?", 60 Tax L. Rev. 155-178 (2007), has now been published. Hard-copy reprints are available to anyone who still wants so old-fashioned a thing.

Another forthcoming article of mine, "Beyond the Pro-Consumption Tax Consensus," should be appearing very shortly in issue 4 of Volume 60 of the Stanford Law Review.

Finally, within the next few weeks my article "Disclosure and Civil Penalty Rules in the U.S. Legal Response to Corporate Tax Shelters" should be appearing in Wolfgang Schon (ed.), Tax and Corporate Governance, to be published by Springer Science. This volume contains the papers from a conference that was held in Munich in December 2006, and other authors whose papers should be in the volume include, e.g., Reuven Avi-Yonah, Steve Bank, and Mihir Desai.

Radiohead redux

They're not a natural band for me to espouse. I'm a bit suspicious of the popularity, although the Beatles model says that in the ideal world the best band is also the most popular. But then there's the U2-ish, prog-rock sound and the keening mournfulness of Yorke's lead vocals, neither to my typical taste.

Still, in varying degrees I like most of their albums, previously OK Computer best of all, and to date I would call In Rainbows the best album of 2007.

UPDATE: I've also come to like the new Fiery Furnaces album, after initial skepticism. Eval of Jens Lekman, highly touted by pitchforkmedia.com and others, remains open.

Buffoon in chief

A stopped clock is right twice a day, but not Cheney - he is wrong 100% of the time, defying the law of averages. Latest bit is that he has apparently demanded 100% loyalty by the Bush Administration to Musharraf, in lieu of any thought of steering an independent course.

State of the play academically on wealth transfer taxation

Yesterday I went to a session at Columbia Law School where my colleague, Lily Batchelder, was presenting her paper, "How Should an Ideal Consumption Tax or Income Tax Treat Wealth Transfers?" Lily is doing excellent and important work in this area, ranging from her actual policy proposal as part of the Hamilton Project to the more theoretical inquiries she is pursuing now. But even apart from any one individual's distinctive view of the area, I think it's important to say something about the current state of the play, which Lily helps make her clear both through her own contributions and through the prior empirical literature she cites.

Ten years ago, I would have said the jury is out in the academic and tax policy literature, so far as the merits of wealth transfer taxation are concerned. E.g., there is no particular reason one should favor wealth transfer taxation just because it's progressive, given that in principle equal progressivity could be obtained with or without it, through adjustments to other tax instruments.

From a 2007 perspective, however, I think the case for wealth transfer taxation has pretty much been made. A key point that Lily's work makes clear is that inheritance taxation - where the tax depends on the circumstances of the recipient - is theoretically superior on informational grounds both to estate taxation - where it depends on the size of the bequest - and to no tax at all on wealth transfers. The inheritance tax option uses more distributionally relevant information than do the other mechanisms. E.g., my wellbeing clearly depends on the wealth transfers I receive, plus other stuff I have or can earn, so the tax system is depriving itself of distributionally relevant information if it ignores the wealth transfers or fails to interact them with what else I have.

Now for a refinement, potentially reversing the seeming import of what I just said. The clear superiority, on informational grounds, of inheritance taxation over the alternatives does not tell us that the inheritance tax rate should be positive. This depends on a whole raft of relevant inputs, including (as Lily's work makes clear) the case for subsidizing gratuitous transfers due to the "altruistic externality" that Louis Kaplow may have been the first to emphasize. So to say we should have an inheritance tax isn't to say we should burden inheritance relative to not having a wealth transfer tax - just that in theory it ought to be taken into account somehow, which straight exemption fails to do.

But here is what I would argue is the clincher in terms of a positive inheritance tax rate (again, recognizing that there are complicated multiple inputs). Recent empirical research concerning bequest motives and practices, including, e.g., work by Wojciech Kopszuk of Columbia University, suggests that "accidental bequests" (those reflecting imperfect lifecycle saving and annuitization rather than bequest motives) are a sufficiently large piece of the whole to suggest that the distortionary effects of taxing wealth transfers, e.g., the discouragement of work and saving by future decedents (which we all are), are likely to be substantially lower than they would be if bequest motives were doing more of the work. So there are likely to be substantial efficiency advantages to this device for taxing work and saving, relative to the use of standard annual income or consumption taxation.

All this is not just high theory, of course. The estate tax is actually scheduled to disappear in 2010 and then re-appear in its pre-2001 form in 2011. This is a crazy and implausible sequence of rule changes, leaving aside the fascinating "throw momma from the train" research opportunities that it would offer empirically minded economists. So something is bound to be done. It thus is well worth knowing how strong the academic case for some type of wealth transfer taxation, especially an inheritance tax, now appears to be.

I myself would combine inheritance taxation in some form with a progressive consumption tax in lieu of the current income tax, but this is a topic for another day (actually for a past not a future day as I have written about income and consumption taxation quite a lot in recent years).

What did Rudy actually do on 9/11?

Since I was there at the time, I remember. The answer is: one thing, and one thing only. He was a heckuva good TV talk show host over the period of several days right afterwards.

I don't want to minimize this too much. It actually mattered to a degree. A key virtue is that he was actually calm. With all the grief and shock in the air, he helped New Yorkers to feel better.

But that was it. So far as actual emergency management is concerned, the less said the better. Think of the lost command post that he put on top of the WTC, possibly as a love nest. Or the dead firemen who would have survived if they could have communicated by radio with the police. Or the lack of health precautions for people at the site, who are still getting sick due to his negligence. Or the fact that he spent more hours at Yankee games between 9/11 and the end of that year than at the site (not that he was really needed there).

Good talk show host for a few days. Period. Via a completely different persona than his mad dog spewings on the campaign trail these days. And again, this was genuinely valuable and I still appreciate it. But it is a slim reed for a Presidential campaign.

Invidious comparison

I felt slightly bad about rooting for the higher-budget, bigger-bully Red Sox, an involuntary reflex reflecting all the years of counting on them (faute de mieux) to stop the Yankees. I also wanted the thing to end already, so I wouldn't have to keep on staying up late.

If you think the World Series outcome was inevitable, even after 8 innings of Game 4, think back to game 4 of the 2004 ALCS. It's difficult to draw any distinction between the Yankees' degree of dominance (and seeming inevitability) through that point in 2004, and that for the Red Sox this time around. E.g., the Yankees in 2004 had outscored the Red Sox by 36-19 through the 8th inning of game 4, versus 29-10 for the Sox this time around.

Only, Rivera blew it and Papelbon didn't.

New tax bill introduced by Congressman Rangel

House Ways & Means Chair Rangel has introduced a major tax bill, the "Tax Reduction and Reform Act of 2007." Zero chance of enactment - probably zero chance of passage, but even if passed it would be vetoed by Bush - but it matters for two reasons. First, revenue-raisers in it might be used to pay for extending AMT relief. Second, all of its provisions automatically land on the shelf full of items that might be considered in the future, e.g., in 2009 under a Democratic President. (Which is not to say that Hillary or any of the others would actually take much from this bill - it would simply add to the background list of options.)

Clear discussion of the bill would be helpful but is unlikely to emerge in the political process. I gather no Democrats wanted to co-sponsor. Republicans will presumably yammer centrally furnished talking points about how it's a huge tax increase (a lie - it's a mix of tax increases and cuts), reflecting once again that they behave more like a Bolshevik-style cabal than like the type of political party one really would expect to find in a country with several centuries' worth of democratic traditions. But I am hopeful that thoughtful conservative commentators will take it seriously - there actually are parts of it that they ought to like, although they might quite reasonably dislike it on balance.

Anyway, here is a quick summary of several main features with my thoughts about them.

1) Lower-income tax reductions - The bill would cut taxes for lower-income Americans via about $86 billion (over 10 years) worth of increases to the standard deduction, earned income tax credit, and refundable child credit. This is a straight distribution issue. I'm sympathetic, but readers can evaluate it for themselves (the counter-argument is that it gives infra-marginal rate cuts that need financing via distortionary taxes).

2) AMT shuffle - interesting methodology here to try to pay for AMT repeal. Complete AMT repeal, costing $795B over 10 years, is financed by a "limitation of benefits of individual AMT repeal" provision (raising $831B). This is simply a rate increase of 4% initially, then 4.6%, on groups at income levels with a lot of AMT exposure. Amusing that the top rate gets back to exactly its pre-2001 level of 39.6%. Substantively, the idea is to raise top rates in lieu of having the AMT. Semantically, the idea is to call this a mere limitation of the benefits of AMT repeal. As a political or semantic matter, I don't think it will work. Substantive merits are mixed - getting rid of the AMT may be good but in part this amounts to higher marginal rates instead of indirectly denying state and local tax deductions. Further marginal rate increase here, although as a "bubble rate" not at the very top, from restoring the phaseout of personal exemptions. I would argue that personal exemptions are appropriate at all income levels, so the best rationale for this is an optimal income tax thing about not putting the highest rates at the very top.

3) Business, including international - Top corporate rate is cut from 35% to 30.5%. (Republicans will of course ignore this.) 90% of the revenue loss from this is offset by the revenue gain from (a) repealing the idiotic special lower tax rate for domestic production activities, (b) denying deductions related to foreign source income that is not currently taxable, until such income is actually repatriated & thus becomes taxable here, and (c) barring the use of LIFO accounting for inventories. This is a good package that almost any good-faith independent observer ought to like, with the possible exception of (b). I tend to think (b) probably is good policy - preventing what is effectively better-than-exempt treatment for foreign source income - but I feel a need to hear more about this issue from people who know more about the intimate institutional details.

One interesting effect, if you put it all together, is that marginal tax rates for individuals become much higher than for corporations if all this is enacted - 39.6%, plus more in the personal exemption phase-out range, versus 30.5%. I gather that the 15% dividend rate would be allowed to expire. Never mind, in an era when double taxation of corporate income is ever easier to avoid through sophisticated planning, this seems likely to make the corporate tax a net benefit rather than a net burden. All those economists doing incidence studies of the burden of the corporate tax (a subject I've been studying and writing about for my latest academic project) are going to have to turn around and write new papers about the incidence of the benefit from the corporate tax.

4) Other - about a gazillion one-year extenders. Not the fault of the Rangel bill, but I find it pretty unedifying to have all this stuff on regular extenders needing annual lobbying infusions to get them renewed for another year. This is a case where Congress and the lobbyists may be colluding to screw the lobbyists' clients. But again I don't lay this on Rangel or the bill - the extenders simply bring this preexisting situation to mind.

Among other features, the bill would take on carried interests, put "economic substance" in the Internal Revenue Code (which at least would stop Scalia & Thomas from saying, in any event prospectively, that there is no such doctrine), and address various little planning tricks that the staffers on Capital Hill have evidently learned about.

On the whole, I would definitely take this package over present law. Not going to happen, of course. Even apart from the lack of votes, and the Republican noise machine lying about it, it's inherently pretty hard to enact a break-even package with hundreds of billions of dollars worth of tax cuts and tax increases both, because the losers tend to screech more than the winners. Certainly a good try, in most respects, to throw out the AMT in a fiscally responsible manner and to improve the corporate tax rules through the classic combination of rate cuts and base-broadening.

Interesting National Bureau of Economic Research study of the Iraq "surge"

According to Michael Greenstone of the MIT Economics Department, in his new NBER working paper, "Is the 'Surge' Working? Some New Facts" (NBER Working Paper 13458, 10/07), while various on-the-ground Iraqi indicators are mixed, perhaps the most salient fact is that Iraq's bonds have declined by 40% since the surge started. He concludes:

"This decline signals a 40% increase in the market's expectation that Iraq will default. This finding suggests that, to date, the Surge is failing to pave the way toward a stable Iraq and may in fact be undermining it."

Bond prices reflect, of course, people betting real money for real payoffs down the road, either good or bad. This market, unlike that for Washington punditry, is one in which it actually pays off to be right, rather than wrong.

Current reading

I've just finished Ken Kalfus' A Disorder Peculiar to the Country, a black comedy about a divorce from hell, set in NYC on 9/11 and the ensuing months. For the first two-thirds I liked it, though sometimes I had to make myself pick it up, what with the themes being what they are. Often very dark and painfully funny. But it turned too episodic and scattershot, didn't build quite as I would have expected, and at the end took a sharp turn into a sarcastic historical fantasy ending that is the sort of thing I ought to like, but that I didn't feel built on or went with what had come before. So the potential effect, for me, was lost.

Next, Alexander Waugh's Fathers and Sons.

Just asking

If Bush sought legislation permitting him to throw the entire Democratic Congressional leadership in jail, would they support it? I rather think they would.

Strange alliance

Although obviously I am no fan of the Christian right, I must say I am encouraged by recent talk (to the extent one believes it) that they will take major steps to block Giuliani's candidacy. I don't know anyone in New York who doesn't regard the prospect of his becoming President with a mixture of astonishment and trepidation. This includes people (such as me) who believe he was in many respects a successful mayor.

As a Presidential candidate, Giuliani stands for two things: war and dictatorship. In a mayor, such inclinations don't matter so much. As President, they would go well beyond making him the living embodiment of the Peter Principle. Anyone who can block him, on any grounds, is doing a good thing whether or not for the right reasons.

What's so funny?

If you want your Halloween chills a couple of weeks early, check out the video of Bush smiling and giggling as he raises the idea of World War III with Iran.

If you know you've decided to attack, I suppose it's funny, at least to a certain type of mentality.

There's no magic bullet reason for doing this - a similar rat's nest of reasons, I would think, to those for attacking Iraq. Finding it fun and exciting is certainly one of the reasons.

For another, consider how the media will play it, and how the Democrats will react, if the Iranians take any violent counter-measures, be they in the U.S., in Iraq, or elsewhere. The Administration can only win from ratcheting up the tensions, having "America under attack," etcetera.

War with Iran?

From today's NY Times coverage of Bush's press conference:

“If Iran had a nuclear weapon, it’d be a dangerous threat to world peace,” Mr. Bush said. “So I told people that if you’re interested in avoiding World War III, it seems like you ought to be interested in preventing them from having the knowledge necessary to make a nuclear weapon.”

If I am interpreting this correctly, Bush is suggesting that Iran should be attacked unless there are other means of "preventing them from having the knowledge necessary to make a nuclear weapon.”

This mere "knowledge" standard appears to be much lower than the standard supposedly applied to Iraq, where the Administration claimed that Saddam actually had WMD including an active nuclear program. It does not, for example, appear to require any sort of access to bomb-making materials.

I personally put the odds of an attack at greater than 50 percent. The only arguments I have heard against the likelihood of its happening are that (a) it would be insane, and (b) people (whether the public, the military, or Secretary Gates) wouldn't stand for it. I can't see that (a) matters to this crew, or that the public will stop it, or that the military can stop it given the principle of civilian control plus generals' craven careerism. I fear that means we're down to Secretary Gates.

Presidential line item veto

The Republican Presidential candidates are having a little spat about the line item veto, which Rudy as Mayor successfully sued to have struck down on constitutional separation of powers grounds. Attacked for this at the last debate, he took the extremely bizarre position - for a Republican Presidential candidate - that it actually matters whether something is constitutional or not.

By the way, I read about all this in newspapers and blogs. If there is one rule I live by, it is never to watch either Republican or Democratic Presidential candidate debates. Doctor's advice, or at least it would be if I asked him after properly laying out the facts.

Anyway, today McCain renewed the attack, although I think it started from Romney, saying that no true fiscal conservative could oppose the line item veto. And this is not necessarily a purely hypothetical debate, since conceivably clever structuring could create something rather like the line item veto that would withstand constitutional scrutiny. (Even leaving aside whether the "unitary executive" types on today's Court would vote differently.)

But one small problem here. As I point out in my recent book, Taxes, Spending, and the U.S. Government's March Toward Bankruptcy, it is theoretically ambiguous whether a line item veto will increase or decrease government spending, budget deficits, or the fiscal gap - whichever one chooses as the operative measure. It all depends on how the president uses it.

There are decent political economy arguments for the view that presidents will typically have a lower preference than members of Congress for lots of small handouts to this interest group or that. (Although Bush never minded earmarks or other pork until the first Wednesday of November 2006.) But presidents also tend to like really big-ticket projects - monuments to their "great leadership," perhaps - much more than do the members of Congress. This is pretty much a constant across presidents.

Give a president the line item veto, and while there is reason to think that anyone except for Bush from 2001-2006 will occasionally use it to lop off egregious handouts here and there, there is also reason to think that they will see it as a bargaining chip, the threat of which can help them win extra votes for the really big items they are struggling to press through.

So I think it is plausible that the line item veto would exacerbate rather than ease problems of fiscal discipline.

There may be some empirical evidence from the state level supporting the more conventional view. But there is a big difference between presidents and governors regarding the incentive to swing for the fences with really big "historic" programs.

Extremely lucky travel day

Today I flew roundtrip NYC - Boston to present my new paper on tax and accounting at Boston College Law School, where I saw various old friends in the biz (Diane Ring, Jim Repetti, David Walker, Marjorie Kornhauser). Given the storm sweeping up the East Coast, I was astonishingly lucky in how it played out for me - I could easily have spent hours in the airport but actually saved time due to the travel delays. On a normal travel day I would have returned on the 3:30 shuttle, but because the 2:30 was delayed I managed to board it and leave Boston at 3. Back in NYC the Marine Air Terminal (where the Delta shuttle lands) was an absolute horror show, jammed with people and with one of the longest airport cab lines I've ever seen. But I caught a ride back with a limo driver who had lost his scheduled pick-up due to the wall-to-wall canceled flights from DC and Chicago, and who also proved a wizard at the sort of shortcuts through backed-up traffic that I resent when I am one of the other drivers. Plus I heard his very interesting life story, or at least the dramatic highlights.

Either I'm living right or the gods are making up for the pulled hamstring I suffered while playing tennis last week. Or else perhaps neither. (And do I owe the gods for those gnats in Cleveland game 2?)

One thing I like about my paper, in the course of presenting it, is that the proposal I offer (a 50% adjustment of companies' taxable income towards their financial accounting income, with a few miscellaneous bells and whistles) has some interesting pluses and minuses that - rightly, I think, from an expositional standpoint - I don't fully explore in my paper, as they would make it too long and ponderous. Maybe others will choose to write about the proposal if it gets off the ground sufficiently. I am also increasingly persuaded that it makes basic sense, at least enough to get off the ground as a serious contender even if in the end one might choose not to adopt it. (Although I myself would adopt it.)

How much did I pay for the new Radiohead album?

$ 5 U.S.

UPDATE: Pretty good album, by the way. Would certainly have been worth full price.

Today's Krugman column

He argues today that the Republicans have always been as they are now under Bush. I disagree. His analysis is a bit like saying that someone who has gone stark raving mad with a 105 fever was always just like this because back in the day he had an infected toenail. Yes, Barry Goldwater did some bad things, and the Reagan Administration did Iran-Contra. But they also worked in a bipartisan and responsible way with the Democrats on tax and budget policy in 1982, 1983, 1984, 1985-86, and 1988. They effectively admitted that the "riverboat gamble" had failed within 6 months of trying it. And, despite the Beirut fiasco, which of course is far from the worst blunder our country has ever perpetrated, they certainly did nothing like Iraq, Blackwater, the sinister plans for Iran, etc., etc.

No one is a saint in politics, not the Republicans at any time and certainly not the Democrats at any time. But our institutions can't survive for much longer with the Republicans that we have now, and it's worth remembering that they were never like this, more than just a little bit perhaps, before 1994.

It's only chamber pop, but I like it

The New Pornographers' Challengers, mildly criticized in early reviews for being too sedate, is actually quite enjoyable. It sounds a bit at times like Belle & Sebastian playing early-70s Bowie.

Encouraging news

I just saw a link somewhere to a new NBER study finding that people have U-shaped happiness across their lifetimes, sinking to a low point at age 49 for men and 45 for women before steadily rising again.

I suppose this is good news for me - apparently I have bottomed out and am headed back up again. Separate analysis, perhaps, for my wife ...

The word from Washington

I've just returned from a brief trip to Washington, where I attended a conference on taxes, technology, and privacy, and offered comments on a paper by Kyle Logue and Joel Slemrod on endowment taxation, the use by the tax system of genetic "tags" that correlate with expected income, etc.

While there, I happened to chat with several people who have worked for a long time in different agencies of the executive branch of the government (not just tax-related), and who report on what a historically unprecedented horror it is for career professionals in the government to have to deal with the current Bush Administration (earlier Republican Administrations were generally fine). Essentially, it's like being in the Soviet Union with a party commissar harassing everyone, except that while he can (and does) make your life miserable and prevent all honest governance he at least can't have you arrested.

Once the national nightmare has ended, someone should really go around collecting accounts from people in different departments. While unlikely to be a best-seller, it would be genuinely eye-opening reading with a lot of startling stories about dishonesty and dirty work.

Horrifying collapse of the Mets

By reminding myself of the (to me, hilarious and delightful) 2004 playoff collapse of the Yankees, I can at least avoid paranoid thoughts about the structure of the universe. Then again, who knows what horrors lurk in the 2007 baseball post-season.

If one could take a pill and eliminate one's rooting interest for a given team, I would certainly do so with respect to the Mets. But not mainly because of the horrifying choke they have perpetrated. From the standpoint of the principles that lead me to despise the Yankees, the Mets, not to mention the Red Sox, are merely lesser versions of the same thing. Okay, significantly lesser versions given the Yanks' nearly 2-1 spending advantage over the Mets, even though the Mets are the # 3 spenders in baseball.

No such pill exists, however. (And I would decline on ethical or aesthetic grounds to take the companion pill making me a Yankees fan.) The sad thing for me is that this Met fandom just goes so deep, immune to rational questioning and far beyond any positive rooting interest that I have in any other team in any sport. It all goes back to 1964, when at age 7 I became the only Mets fan on my block (in the Bronx, no less). Apparently, rooting interests that were laid down in sediments that deep simply go far beyond any laid down more recently in their emotional depth and ineradicability.