Tax policy colloquium on EC tax policy

Yesterday in the Tax Policy Colloquium, in our 9th of 14th sessions and the last before our one-week spring break (which I will blissfully spend in warmer climes), Ruth Mason presented her paper, "Made in America for European Taxation: The Internal Consistency Test." A lively session, in part because our usual crowd was supplemented by a number of high-spirited EC tax folk who were in town for a conference on EC tax policy that is taking place at NYU today, and indeed at this very moment.

Ruth proposes a Kantian-sounding (but not actually Kantian) diagnostic for tax discrimination, which the European Court of Justice (ECJ) has a mission to strike down while permitting mere "disparity." She would have the ECJ ask whether cross-border activity or those engaging in it would be disadvantaged if the tax law of the jurisdiction that is being challenged were universalized, i.e., adopted to the last comma by all other jurisdictions. It's a proposed diagnostic rather than a proposed standard, because one could analogize it to the skin test for tuberculosis - the question is whether one actually has tuberculosis, not whether one's skin swells where they inject you, but if it doesn't swell then you're home free whereas if it does you face further tests.

The key problem here is that, while we have an objective standard for tuberculosis (once all the facts are known, one unmistakably either has it or doesn't), the same cannot as easily be said for tax discrimination. What is it? Mihir Desai, my co-convenor for the last seven weeks of the colloquium, and I felt that one really needs to define it, at least conceptually, in order to have any sense of what one is trying to do, but lawyers who have spent less time with economists than I have often scoff at this and say no worries, we can proceed anyway. Definition, we don't need no stinkin' definition.

Mihir proposed an idea that Michael Graetz and Al Warren have also written about, to the effect that discrimination might be found if one violates either capital import neutrality (equal treatment of one's outbound investments with those in the source jurisdiction) or capital export neutrality (equal treatment of home and outbound investment). The punchline Michael and Al derive from this, and which Mihir suggested as well, is that tax discrimination, if defined this way, is a hopelessly incoherent concept. All taxes, home and abroad, would need to be harmonized if one wanted to fully satisfy both CIN and CEN, and this is not among the options on the table. The Europeans in the room loudly hooted at this interpretation of what they and the ECJ have in mind by tax discrimination - as I gather they also did in the past, on multiple occasions, when Graetz and Warren proposed this view.

Luckily for me (since I have to make some comments later today at the EC Tax Policy conference here), I felt that the session eventually helped me to understand what they appear to have in mind when they discuss tax discrimination. Very roughly speaking, and falling short of an operational definition, I'd say the idea is (a) negative cross-border tax synergies, or higher total taxes from being in two jurisdictions than one would have had from the sum of being separately in each, that (b) are not considered justifiable all things considered (e.g., considering how bad the impact is, how deliberate it seems to be, how easily the government could have avoided it without being forced to change rules that it might like for "innocent" reasons, etc.).

Not very crisp, and I don't have the time pre-vacation to try to spell it out more, but for me at least this helps conceptually. Seen this way, the idea isn't incoherent, although it is a bit mushy, underspecified, and vague. And not necessarily a bad idea to have courts doing this in an ECJ-type or US national setting.

Musical update

Stephen Malkmus' new album sounds at times a bit like the Allman Brothers. All those long hippie guitar rave-ups, albeit on songs that have characteristic Malkmus chord sequences and start-stop dynamics. I'm quite enjoying it, although the analogy isn't entirely praise. The best song, "Out of Reaches," could have been a Pavement ballad. (Now that's higher praise.)

Ray Davies' new album is really good. Probably his best album of new material since Arthur (with the Kinks) back in 1969, although this is not as high praise as it may sound as there are few intervening contenders. The Kinks, after having extraordinary self-direction and integrity in the mid-1960s, when they paid a price for not trying to fit in, spent the next couple of decades being as crassly and reductively commercial as one could possibly be. Plus Ray got too boringly bitter. The current album has a few overly preachy political moments, but overall it's a bit as if Lennon had lived, mellowed, and rediscovered a voice that could work for him.

The new Dengue Fever album is very enjoyable and lively. Not sure if I will want more of their work, but the fusion definitely works.

Intellectual progress at the NYU Tax Policy Colloquium

Yesterday at the colloquium, Mihir Desai, who will be co-leading things with me for the rest of the semester, presented his empirical paper "Foreign Direct Investment and Domestic Economic Activity," which concludes from firm-level data that outbound investment by US multinationals (MNEs) is a complement to, rather than a substitute for, their domestic investment. Hence, contrary to the "runaway plants" scenario that arguably underlies much of US international tax policy, the paper suggests that MNE investment in low-tax environments abroad does not cost the US domestic jobs or tax revenues.

One question I raised at the PM session is whether outbound investment is necessarily distinctive in this regard, if what we have in the main is a story about economies of scale and rising vertical / horizontal integration in an era when the general worldwide business environment may be transforming itself. E.g., suppose we did the same type of study regarding whether investment in California by a nationwide firm is a substitute or a complement for investing elsewhere in the US, and got the same result.

But the main topic was the U.S. international tax policy implications, about which I am reluctant to say too much because it would make this post too long and anyway I'm planning to write about it this summer. But one thing that became clear is that exempting outbound investment by US firms does not necessarily emerge as the logical consequence of the paper's findings, and that when Desai, Jim Hines, and others describe exemption or national ownership neutrality (NON) as an efficiency benchmark, they don't mean a tax policy benchmark. To give a sense of the difference, a lump sum tax such as a uniform head tax is in some settings an efficiency benchmark, but not a reasonable proposed policy. In that setting, the complicating issue is concerns of distribution as well as efficiency. In the international setting, the complicating issue is that one is choosing between inefficient tax instruments and attempting to minimize overall inefficiency.

I call this post "Intellectual progress at the NYU Tax Policy Colloquium" not because of that point in particular, but because it was one of those sessions - meeting our ideal, which one can't always do - at which the group dynamics and interplay resulted in advancing the thinking of lots of participants about these issues. It was a collective exercise and perhaps will show up in the future writings of several of us.

My letter to the editor of Tax Notes

This Monday my letter to the editor of Tax Notes regarding Al Warren's critique of the BEIT business tax reform proposal (mentioned in an earlier post) came out. The cite is 118 Tax Notes 1048-1050 (March 3, 2008), and a relevant extract goes as follows:

[A]t least one of [Warren's] key conclusions, dismissing the BEIT plan as having no apparent rationale, is overly harsh in an important way. I therefore wish to augment the debate by explaining why, in my view, the BEIT remains an important corporate tax reform proposal that merits further attention notwithstanding any defects in its current form that he may have demonstrated.

I should note, however, that in two respects my analysis here is orthogonal, rather than directly responsive, to Warren’s. First, he understandably focuses on the exact details of Kleinbard’s most recent description of the BEIT. I wish to focus at a more general level on the central BEIT concept of eliminating the debt-equity distinction by having an annual cost of capital allowance that is both deducted at the corporate level and included at the investor level...

Second, one reason I consider the BEIT potentially appealing relates to a possible direction of U.S. tax law change that neither Kleinbard nor Warren considers because it has not happened yet, and indeed may never happen. Purely as a matter of prediction, and without regard to the policy merits (though they might be positive), I believe there is a strong chance that worldwide competitive pressures will lead the United States to adopt a corporate tax rate that is significantly below the top individual rate .... [This] would give new importance to the way in which the BEIT relates entity level and investor level tax collection.

Only one previously proposed corporate integration plan resembles the BEIT in its approach to the income tax distinction between debt and equity: the comprehensive business income tax (CBIT) that the U.S. Treasury Department proposed in 1992. In effect, the CBIT would revise the tax treatment of debt to be more like that of equity, by denying deductions for interest at the business level and making the receipt of both interest and dividends generally tax-free to investors. The BEIT reverses this, making the tax treatment of equity more like that of debt, by providing cost of capital deductions at the company level along with inclusions at the investor level.

This reconciliation between the tax treatment of debt and equity, accomplished by both the CBIT and the BEIT, could be enormously important. Modern financial innovation has made the tax distinction between the two types of instrument ever more porous and manipulable. Insofar as investors can slap whichever label they prefer on whatever sort of investment position they wish to have, the debt-equity distinction amounts to an election to use either the corporation’s tax rate (via the use of equity) or one’s own (via the use of debt), whichever is lower. It is hard to think of a good rationale for such an election, and allowing it might be all the more significant if the corporate rate were reduced significantly below the top individual rate.

Why reverse the CBIT approach and tax the normal return at the investor rather than the corporate level? This has been my main concern about the BEIT, as the change might not make enough difference to be worth the trouble if the corporate rate and the top individual rate are the same. However, if I am right in my surmise that the corporate rate may soon be lowered significantly below the top individual rate, then at some point it really will matter. What is more, one could argue that the BEIT approach is better in this scenario, if the reason for the lower corporate rate is entity-level capital mobility that does not apply in the same way to high-income individuals who are U.S. residents.

Warren, in my view, misconstrues the best argument for the BEIT’s revision of the CBIT approach when he states that “the rationale for applying graduated rates to some, but not all, components of capital income is not apparent.” So long as administrative considerations, relating to income measurement, are assumed to prevent full flow-through taxation of corporate shareholders, continuing to tax extra-normal returns at the company rate is a design constraint, rather than a deliberate feature. This does not, however, automatically settle the question of how normal returns (which can be measured with reasonable accuracy by observing interest rates) ought to be taxed if rate differences between the company and investor levels, or differences in the amounts being included and deducted, make the choice potentially important...

Published at last

My Stanford Law Review article, "Beyond the Pro-Consumption Tax Consensus," has finally been published, along with a response from Joe Bankman and David Weisbach, who I suppose I accused in my piece of intellectually overselling a bit.

The Tax Prof blog has more of the details at http://taxprof.typepad.com/taxprof_blog/2008/03/bankman-shaviro.html

In this exchange, the problem is that we are talking past each other a bit. I am more interested in the pure analytics, they in what is likely to be one's practical bottom-line conclusion. I don't think they really disagree with me about the analytics, only they seem to me a little less interested in looking there as a pure intellectual exercise. And I don't disagree with them about the likely bottom line conclusion in favor of a consumption tax.

Was I just nitpicking? I don't think so. It's important to have a really clean grasp of the analytics before proceeding with real world conclusions, which one should do as well but with all due intellectual reticence given the gap between simplified economic models and real world implementations.

Overheard in my Pilates class

... from a middle-aged woman:

"Obama is STUPID. He should have waited his turn. All my friends are voting for McCain if he wins. His wife is a problem."

Talk of being true to your demographic ...

Adventures in rock concerts

If anyone who will be in the vicinity of NYU Law School by mid-afternoon on Tuesday, 3/4, wants two tickets that I am holding to a potentially very interesting concert but will be unable to use, please let me know. The concert is by Dengue Fever, an LA group with a Cambodian chanteuse that mixes indie /psychedelic rock with 1960s Cambodian pop music. Doors open at 8 pm at the Mercury Lounge on East Houston Street, NYC. It turned out we couldn't go, so I am buying the group's latest album instead.

Other recent album purchases: new releases by Ray Davies (still a great songwriter and vocalist) and Stephen Malkmus (won't know until it's released tomorrow), plus the reissue of Nick Lowe's Jesus of Cool.

Tax policy colloquium session on my tax & accounting paper

Last Thursday at the NYU Tax Policy Colloquium, we discussed my paper from last fall, "The Optimal Relationship Between Taxable Income and Financial Accounting Income: Analysis and a Proposal." Kevin Hassett did his last co-leading gig of the semester unless required to pinch-hit later on. I'm very grateful to Kevin for the great job he did throughout the semester as a very stimulating colleague and discussant. Plus it's been great to talk regularly to someone who disagrees with many in my circle on at least a few contemporary political issues. Same-mindedness and orthodoxy are the enemies of creative thought.

Kevin began the day unenthusiastic about my admittedly tentative proposal, under which publicly traded companies' taxable income would be adjusted part-way (say, 50 percent) towards an adjusted measure of the financial accounting income of the same affiliated group of companies. But in the course of the colloquy he acknowledged to moving in the direction of greater sympathy for my approach, in particular because it tries to address the downside to a full-fledged "one book" approach, which I locate primarily in legislative politics.

Some of the flavor of the discussion at the colloquium session is captured in a new subsection I added near the end of the paper, addressing particular critiques that I have heard often.

"1. Why not simply increase penalties and regulatory oversight? Doing so might be a good idea whether or not the taxable income adjustment was adopted. Moreover, insofar as it reduced the magnitude of the problems posed by tax sheltering and earnings management, it would indeed tend to weaken the case for adopting the adjustment, given the various tradeoffs presented. Nonetheless, even with optimal auditing and penalties, the adjustment would have benefits. For example, it would reduce the managerial incentive to waste resources engaging in transactions that are legally permissible, and thus that would survive heightened scrutiny, and yet that serve no good social purpose beyond advancing the managers’ income manipulation goals. Examples include creating hybrid financial instruments that are debt for tax but not accounting purposes, and engaging in tax shelter transactions that have just enough economic substance to withstand IRS review.

"2. Why not instead directly improve the systems’ income definitions? This as well would be independently desirable, and might reduce the social gain from adopting the adjustment. Nonetheless, it would still leave room for the adjustment to improve matters. Any plausible rules for defining taxable and accounting income are likely to leave room for the exercise of interpretive discretion, which managers would be expected to use in a self-interested fashion to reduce the former measure and increase the latter one. This problem can only be addressed via the relationship between the measures.

"Consider again the case of the tax shelter transaction that has just enough economic substance to withstand IRS review. Such cases may exist even with optimally designed economic substance rules, given the tradeoffs that underlie choosing the proper level of stringency. Accordingly, the taxable income adjustment, which would reduce the tax benefit from engaging in such a transaction, is not simply or even primarily a substitute for directly seeking improvement in the income definitions used by either system.

"3. How can going halfway towards a one-book system be a good idea, if going all the way is not? The experience of countries such as Germany that have moved away from one-book systems may support the inference (with which I agree) that adopting a one-book system in the United States would be a mistake. Why move halfway towards something not worth doing in full?

"The core reason, in my view, for avoiding a predominantly one-book system (even with specified exceptions, such as for foreign subsidiaries) is that it would put the U.S. Congress more directly in the business of defining financial accounting income. My proposal is designed to minimize this danger, and concentrate the incentive effects on corporate managers rather than on politicians whom it would not succeed in reining in. Insofar as the proposal would nonetheless result in increased legislative meddling in the definition of financial accounting income, the case for adopting it would be weakened."

I have now sent the paper to a bunch of leading student-edited law reviews and am hoping for the best.

Academic wars in corporate tax reform

In this week's Tax Notes, Al Warren of the Harvard Law School has an article critiquing Ed Kleinbard's "business enterprise income tax" (BEIT) proposal for corporate (and broader business) tax reform. I would be very surprised if Ed doesn't have a reply in next week's Tax Notes, and I am also planning to submit a short letter to the editor responding to Al's article.

It would be fair to say that Al is not a huge fan of the BEIT, which he assesses as unworkable and unmotivated in the sense of lacking a good rationale for its key design choices. I feel that his critique is too harsh, referring here to the content not the tone of his piece. In other words, even if he is right that the BEIT in its exact currently proposed form doesn't work, I see considerably more value and reasonable motivation (in the sense of real problems addressed) than Al does. So rather than casting the BEIT and its author into the innermost circle of hell, which is one takeaway readers could conceivably derive from Al's critique, I think it ought to remain an important player in how we think about business tax reform alternatives. My letter to the editor will say a bit more about this, in addition to being purely on the substance rather than musing about the background as I am doing here.

While one should never be mealy-mouthed in one's critiques to the point of failing to inform readers properly of the merits as one sees them, I feel there was room for a more sympathetic inquiry than Al delivered - in the sense of asking what problems the proposal might be trying to solve, what we might learn that is of value from particular pieces even if we don't like it as a whole, and what underlying constraints (e.g., bad tax rules that we know we will be forced to live with in any event) might help explain any of the features. Adopting a more sympathetic tone in this sense, without being mealy-mouthed, leads to a better tax reform debate both directly, because one's critique may be improved by it, and indirectly, by encouraging more inclusive discussions.

Have I ever fallen short of this? Well, I don't claim to be a saint or to lack occasional impulsiveness and strong reactions. In general, I'd rather be rude "up" than "down" in the hierarchy, which means I need to be ever nicer as the years go on. If, or perhaps I should say when, I fall short I am certainly willing to have it pointed out to me.

Tax policy colloquium session on horizontal equity

Yesterday at the colloquium, Brian Galle of FSU Law School presented his paper, "Tax Fairness," arguing that rumors in the recent tax policy literature of the death of horizontal equity (HE) as a tax policy norm are greatly exaggerated. I was not persuaded, but unfortunately there was a bit of a ships passing in the night quality to the session.

There's a bit of a generational aspect to this, I suppose, just as with Sarah Lawsky last week, in that my peer group is the one that purported to throw out HE with the trash.

Brian mainly argues for HE on grounds concerning procedural norms that may improve decisions in an imperfect political setting, rather than as something that (like welfare-based norms) matters for its own sake. So I would compare the argument he is making to support for, say, a takings compensation rule like that in the U.S. Constitution, or the constraint barring nominally retroactive changes (e.g., raising the income tax rate with retroactive application to the last 20 years) that I discussed in my transitions book, When Rules Change. But I couldn't entirely get a handle on exactly how the argument goes.

In terms of HE for its own sake, I made a point that I think a lot of people in the tax policy literature have missed (though Kaplow, Auerbach, and Hassett get it) concerning the potential irrelevance of whether one subscribes to HE or not, and the resulting purely semantic character of many HE debates. Consider David Bradford's argument that a consumption tax is fairer than an income tax because it doesn't overtax savers relative to immediate consumers when the two have the same budget lines but different inter-temporal consumption preferences. David posed this as an HE argument, and many responses said: So what, if we don't like HE.

But David's argument was relevant, whether one agrees with it or not, even wholly without HE. To accomplish vertical equity (VE) or suitable progressive redistribution, you need to rank people on a vertical scale from best-off to worst-off, so that you know how much everyone should pay or get. ("Vertical" and "better or worse off" may be misnomers insofar as the scale depends on factors, such as the number of children in the household, that affect the marginal utility of a dollar, and thus distributive desert in a utilitarian framework, without regard to whether they systematically affect how well-off one is deemed to be.) HE concerns equal treatment of two people at the same point on the scale but, as Kaplow has repeatedly argued, you need to do this for purposes of VE whether you separately care about HE or not. So even if you don't care about HE, Bradford's argument, that a consumption tax measure gets the vertical scale right while an income tax gets it wrong, remains completely pertinent.

Why does subscribing or not to HE matter at all in this framework? Borrowing from the idea behind an Auerbach-Hassett paper from some years back, I put it this way. Suppose a person who is otherwise a utilitarian, but hasn't decided yet whether or not to differentially weight utility gains or losses under the influence of HE, is considering two wealth transfers, each bad in itself but leading to an efficiency gain that increases other people's utility. The first would violate HE (but also VE, as Kaplow notes) by transferring a certain number of dollars from A to B, who previously were equally well off, leading to a utility loss from the redistribution (because as A gets poorer her marginal utility of a dollar increases) in the amount of X utiles. The second would only violate VE, by transferring dollars from C to D, where C was already poorer, also leading to a utility loss from the redistribution of X utiles. If you nonetheless weight the first utility loss more than the second utility loss in your social welfare function, thereby departing from strict utilitarianism, by reason of the fact that A and B started out as equal, then you are relying on horizontal equity, albeit consistently with welfarism.

Suppose the utility consequences of the efficiency gains that accompanied the wealth transfers from A to B and from C to D were equal to each other (and greater than X). A welfarist who believed in HE, but not a strict utilitarian, might oppose the former transfer and support only the latter one, solely by reason of using HE in her social welfare function. (I ignore here the question of how the HE proponent might need to think about the utility gains from the efficiency enhancement.) So we have a theoretical case - albeit a painfully abstract and bloodless one - in which subscribing or not to HE actually does matter.

When Kevin presented the Auerbach-Hassett paper at the colloquium many years ago, I responded by quoting the Jeff Goldblum character in Jurassic Park, who says: "You did it because you could! You never bothered to ask whether you should!" In other words, I complained that while it worked logically, and showed that HE can be reconciled with a welfare framework (contrary to what Kaplow had argued), it remained unmotivated, at least for me.

But given how abstract and third-hand the example where HE matters turns out to be, perhaps the real lesson is that it doesn't matter so much. When people make HE arguments that are not just status quo bias or simplistic takes either on transition issues or on how market prices respond to tax preferences, they often are arguing about the correct vertical scale, an issue that anyone interested in the fiscal system's effect on distribution must take seriously.

Vignettes from a short trip

Last evening through tonight I was in Washington to discuss international tax issues on a panel run by the apparently prestigious Tax Council Policy Institute, a rather generic name for a group run out of KPMG that has conferences with lots of CFOs and such in attendance. (I am hoping they will merge with the Tax Foundation to form the Tax Council Policy Institute Foundation.)

One amusing moment: I was watching the Wisconsin primary news in the hotel last night, on an unknown channel that for 30 seconds or so I thought was actually a serious news station. Then it struck me that their vote analysts were explaining about how Obama gets votes from "extreme left wing" college students. Ah, that must be Fox News, I realized.

Today at the session, a co-panelist took umbrage to my describing theories such as capital export neutrality, capital import neutrality, and capital ownership neutrality in trying to orient U.S. international tax policy. Those are just theories, he said, and what matters are things in the real world.

If they're good theories, I replied, they tell us something about the real world, and if not then we simply need better theories.

A bit later he started talking about how the important thing is that firms such as his face a level playing field when competing against foreign firms.

The riposte was a bit obvious, but sometimes you have to be obvious. That is a theory, I pointed out.

Tax policy colloquium session on probability of tax positions' correctness

Yesterday at the NYU Tax Policy Colloquium, Sarah Lawsky presented her paper, "Probably? Understanding Tax Law's Uncertainty."

One thing I'll say for Sarah, she definitely came in with some flair. A key feature of the paper that she came to NYU to present is its criticizing moi (of all people), in this case for a hypothetical in a paper of mine discussing tax penalties, in which I suggest that a taxpayer taking ten positions, each 90 percent likely to correct, might on average have one incorrect position. As she rightly notes, the example treats as a frequentist or objective probability something that in practice we probably need to construe in subjective probability terms, concerning degrees of belief by the person who judges it as 90 percent.

I didn't see, when writing my paper, or when reading her paper, or in the discussion yesterday, how (correctly) recasting the probability I invoked in my hypothetical as subjective rather than frequentist does anything to change significantly my analysis or conclusions. I would say the modification makes my conclusions (supporting no-fault penalties) even stronger, given how taxpayers can exploit (and how the government can use) uncertainty about uncertainty. But this was an early draft of her paper and I am hoping she will develop a really interesting analysis of how thinking in subjectivist terms matters to compliance and penalty issues.

The most deflating thing about it all was having one's nose rubbed in the brute fact of the passage of time. Time was that I and others in my age cohort (law professors such as Bankman, Griffith, Kaplow, Fried, Strnad, McCaffery, and Weisbach) were the young pups criticizing the work of the prior generation, and sometimes meeting a rough reception. Now we're the establishment (as Sarah crisply, and I would say irrefutably, informed me) and thus can expect similar treatment from younger persons of spirit. I believe we'll be a lot nicer about it, however. But then again let's not revisit the dead past, or revive disputes that by this point have been so fully resolved that they tend to show up, if at all, purely as schtick.

Bright side of the Clemens hearings

As a Mets fan, I am all the more inclined to believe that Clemens is lying and that he is only getting what he deserves. But I also feel sorry for him and (emotionally speaking) not at all vengeful.

But the true bright side of today's Congressional hearings relates to a comment I made at the colloquium last week. Chris Sanchirico said he found it disproportionate for the Congress to have devoted so much attention to the private equity issue when (especially if it is just a matter of tax rate "arbitrage," as he believes) there are so many bigger issues to consider. But I pointed out that Congress could certainly do worse things with its time than hold multiple hearings on an arguably secondary issue that it wasn't going to do anything about anyway. After all, just think of the stimulus package.

From that perspective, it's nice to see them spinning their wheels on the central policy issue of our day, whether Roger Clemens took HGH, rather than engaging in yet more affirmative mischief.

Change in NYU Tax Policy Colloquium schedule

For those who are interested in the NYU Tax Policy Colloquium but don't regularly travel to its website (at http://www.law.nyu.edu/colloquia/taxpolicy/schedule08.html), I've had to trade dates with Jason Furman. So I will be presenting my paper, "The Optimal Relationship Between Taxable Income and Financial Accounting Income," on February 28, while his, "Dynamic Distributional Scoring," will now be on April 24.

Longest exercise session ever

This morning I went to the health club to do my regular elliptical machine routine (36 minutes, with cool-down).  In addition to the TVs for each machine, they have huge ones dominating the room that people can look at while exercising.

The one dominating my line of sight was set to Fox, although at first I didn't realize this.  Then two minutes into my session, they started broadcasting the hagiographic Chris Wallace interview with Bush that I had seen mentioned, probably on-line.

No sound for me, but for the rest of my time I couldn't look up without seeing indecently huge, reverential close-ups of that vacant, fatuous face.  Blush makeup had been layered on him with a trowel, and it was gleaming everywhere.  He kept furrowing his brow to simulate Deep Thought, or laughing at things he was saying that I seriously doubt were funny.

I've never had a workout that felt so long.  People snipe about "Bush hatred," but when you think of all he has done to our country and the world, one would have to be a lot more forgiving than I am not to find the sight distasteful.

Scarcely any commercials, though when at last they came they've never been more welcome.  I could actually look up.

One thing about Bush is that he only says two or three things a year.  Privately as well as publicly, I gather, he keeps saying them again and again and again.  He's been saying repeatedly for several years now that you can't judge a president until long after he's dead.  I gather from what I've read about this interview that he was trotting out that one again.  This was also, I gather, a prime session for the incessant self-comparisons to Lincoln that he reportedly harps on privately as well as in public.

Not that his intimates deserve much sympathy, but it can't be all that enjoyable for anyone to keep hearing this stuff.

At half past the hour came the commercial break.  I was hoping they were done with him, but no such luck.  Apparently they needed a full hour for him to say everything enough times.  Meanwhile Fox was flashing on the screen the tough criticisms they were asking him to comment on, one by John Bolton and another by Peggy Noonan.  Talk about your full range of viewpoints.

When he came back on after the half-hour break I was in my cool-down phase.  So I took one of my towels and draped it over the left side of my face, blocking the view.  Now at last I could look up and see nothing worse than frayed white fabric.

Tax policy colloquium session on private equity

Yesterday at week 4 of the NYU Tax Policy Colloquium, Chris Sanchirico presented his paper, "The Tax Advantage to Paying Private Equity Funds Managers With Profit Shares: What Is It? Why Is It Bad?"

These afternoon meetings follow a morning session with just the students, and then lunch with the speaker to hash things out. One nice thing about the morning session, I felt it was the first time this semester that it became entirely clear that the morning class had established a good vibe or dynamic and come to life as an institution with a history. Just as the New York Giants need to start from ground zero all over again next year, one funny thing about teaching is that each new class you teach is an organic entity unto itself - you collectively start without any established chemistry even if the teacher and a number of the students know each other. This takes time, which can be an adjustment if you know that in the past you've had a good vibe, as I think has usually been true in the colloquium. Anyway, at the risk of being too optimistic or out of touch, I did feel that we've now gotten there to a degree this year.

As for the PM discussion of the paper, though Kevin Hassett was the discussion leader I made some points about the private equity issue that I won't repeat here as they've appeared in past blog entries. The central focus of the discussion was on two related aspects of Chris's analysis. First, though reasoning by analogy is generally a bad idea in the tax policy realm - one needs to think about substitutes for a given activity that you are deciding how to tax, but that is different - it has arguably been so central to the private equity debate that the paper takes it on. In particular, David Weisbach arguably influenced the politics of the debate (assuming that it wasn't just an interest group story) by raising the ever-popular analogy to sweat equity. Chris rejects the analogy, although the degree of its applicability turns out to rely on semantic aspects of how one defines everything. This of course is one of the problems with reasoning by analogy, leaving aside the problem of its normative emptiness.

More substantively, Chris argues for the relative importance of tax rate differences between the players in the private equity world (e.g., tax-exempt limited partners paying incentive-based compensation to a taxable general partner), as compared to the problems of timing and conversion of ordinary income into capital gain. The main reason for downplaying the latter, which I consider the heart of the issue, is that in practice people are getting the conversion anyway, independently of these arrangements, even if they shouldn't. There was what I would call a spirited debate concerning the importance and implications of the point Chris emphasized about tax rate-driven joint planning.

At times it was a bit more like the McLaughlin Group than a typical academic seminar. The big plus to this, from my standpoint, though I might have preferred more light and less heat, is that it reflected the PM sessions' having established an institutional life of their own. When something has a life of its own, the organizers can't control it entirely any more, which, in this case at least, really is good on balance. Better for the thing to have a life of its own than to find oneself droning to an empty room, which certainly has not been my experience this semester.

More on the stimulus package - or, does Larry Summers need an economics lesson?

According to Brad DeLong on his blog:

"On the phone just now, Larry Summers just moved me appreciably toward enthusiastic support of the stimulus package by arguing, roughly:

• The big arguments against the stimulus package are two:
  • It will become a destructive lobbyist Christmas tree
  • It will increase the deficit and yet fail to stimulate the economy
• We appear to have dodged the bullet on the first argument
• The second argument is incoherent because:
  • The U.S. government is not going to go bankrupt
  • Hence the reason to fear increasing the deficit is the fear that increasing the deficit will reduce national saving
  • But if the stimulus package fails to boost spending, it will be because people save their tax rebate checks, in which case the stimulus will have no effect on national saving. Hence you can believe: *Either that the stimulus package will be ineffective as a stimulus but will not reduce national saving--in which case it is a zero.
    • Or that it will be effective as a stimulus--in which case it will be both good for employment and probably good for national saving as well, because few things are worse for national saving than a recession.
    • But the argument that the stimulus package is bad because it will be ineffective at boosting demand and will reduce national savings is not coherent."

Back to Shaviro. Three reasons why I disagree with Summers:

1) The two types of savings effects that he identifies are not symmetric because their time frames are different. If I deposit a $500 check in the bank rather than spending it immediately, feeling $500 wealthier but not immediately buying more things, I may still increase my spending gradually. Suppose the time frame over which the largesse affects me is 5-10 years. The result is next to no economic stimulus, but within a few years $500 less national saving.

2) Writing people checks increases economic distortion because it is in effect a lump sum spending levy that will end up being financed with distortionary taxes. True, the handouts relate to past income tax liability, which depends on past work and savings decisions. But they are handed out after the fact and ostensibly won't be repeated except in unpredictable special circumstances. And while in theory one could finance them with extra lump sum taxes, as a matter of political economy that is unlikely to happen. So we are increasing the likely economic distortion imposed by the fiscal system if we do it without getting effective stimulus.

3) Summers is too glib about the U.S. government not going bankrupt. We are headed towards a huge fiscal policy sustainability problem which can be very disruptive. Default is only the far end of the curve but by no means the only bad part, nor does it differ by more than degree from various politically realistic kinds of implicit default (which in fact could come pretty close to it in their adverse impact on the economy as a whole or various detrimentally relying individuals). Barring effective stimulus, this package makes the problem $145 billion worse. Every little bit hurts.

So there you have it. Law prof or not, I am willing to call out Larry Summers on a matter of basic macroeconomics as well as microeconomic tax policy.

Early election returns

Not that it will make any difference, but my sense this morning was that Greenwich Village is voting for Obama.

I've watched these ten times in a row, but I'm not done yet

Both the David Tyree catch and the Plaxico Burress TD are available on youtube.  Both stand up to repeated viewing, at least for me.  The former speaks for itself; for the latter the great thing was seeing it unfold - Burress breaking open, the ball in the air, and (in total contrast to the Tyree play) you could tell what was about to happen.  That was a great moment, although the Tyree play literally makes me laugh out loud.

No re-viewing for the Tom Petty half-time show, for which I pressed the mute button.  Generic is as generic does.

Budget deficit projections for 2009-2018

Sometimes I think I should publish my novel on-line, since I don't have a non-virtual publisher.  It's funny and a good read.

Bush's new budget is also being published only on-line.  It's equally fictional, though a lot less funny and not so good a read.

Or maybe it is funny after all.  Consider this.  The budget projects a net SURPLUS of $274 billion for the years 2009-2018.  This is the fruit of absurdly low projections for spending growth, rapidly transitioning to spending zero on the Iraq and Afghanistan wars even though we're supposed to stay there forever, retaining the AMT even though it's supposed to be repealed, et cetera, et cetera.

The Committee for a Responsible Budget released a statement today recomputing the baseline with more realistic assumptions.  They come up with a net DEFICIT for 2009-2018 in the amount of $5.972 trillion.

To modify the old line from Senator Dirksen so it fits today's times: A trillion here and a trillion there, and pretty soon you're talking real money.

Tax policy colloquium session on incidence of the corporate tax

Last Thursday, my co-convenor Kevin Hassett presented his paper, "Taxes and Wages," an empirical study suggesting (based on international time series data) that corporate tax rate increases lower manufacturing wages, while corporate tax rate cuts raise wages.  The implication is that labor, not capital, bears the incidence of the corporate tax.  The theoretical explanation is worldwide capital mobility.

The main problem in accepting the paper's findings is that the effects seem to be too big and too fast.  But this does not mean they are wrong.   The general story they tell, which is consistent with lots of recent empirical papers about the incidence of the corporate tax, makes sense theoretically, as it posits that tax incidence gets shifted from mobile factors (capital) to relatively immobile factors (labor).  This is essentially Tax Incidence 101.

I noted that the famous Harberger (1962) analysis of the corporate tax shows that, depending on the dynamics of the corporate versus non-corporate sectors (in particular, how they compare in substituting between labor and capital as productive inputs), it is actually theoretically possible for the obvious, Tax Incidence 101 outcome NOT to hold.  E.g., in Harberger 1962, capital wouldn't have borne the burden of the corporate tax, even though he assumed the capital supply to be fixed, had the attributes of the corporate and non-corporate sectors been reversed.  In the present international setting with worldwide capital mobility, this implies that the opposite result - capital bearing the tax despite its greater supply elasticity - could happen.  But to get this result would in effect be like drawing an inside straight in poker - everything would have to work out just so, as seems unlikely in the abstract, especially if the line between the sectors is not sharply etched after all.

What to do with the corporate tax if labor bears it is less clear.  One can't just repeal it, as in the context of an income tax it is a vital back-up to imposing the tax on individuals.  Repeal the corporate tax while still taxing individuals on their income, and people will do tax planning games so their earnings disappear and pop up again, tax-free in the putatively corporate sector.  Switching to consumption taxation might eliminate this problem and even permit continued progressivity (so long as individuals remain relatively immobile) but that doesn't seem likely to happen.

Small bit of good news on the pop music front

According to pitchforkmedia.com, Dennis Wilson's long-unavailable Pacific Ocean Blue is going to be re-released in a couple of months in an expanded version. This is reputedly a weirdly off-kilter lost gem by the Beach Boys' other gifted songwriter, unavailable for years unless one was willing to pay more than $100.

The other "lost"album in this sense that I have impatiently been awaiting, leaving aside bootlegs such as Neil Young's Chrome Dreams, is Tom Verlaine's Dreamtime, which I have but only as an old 33.

Interesting empirical paper

A new National Bureau of Economic Research Working Paper, "Does Movie Violence Increase Violent Crime?", by Gordon Dahl and Stefano DellaVigna, reaches the interesting conclusion (based on mid-1990s U.S. data) that, at least in the short run, the dominant empirical effect of violent movies goes the other way. That is, more people watching violent movies in the theaters correlates with (and appears to cause) reduced violence.

Their data breaks down violent incidents by hours, with 6 pm to 12 am being the presumed viewing times and 12 am to 6 am the aftermath. For the first of these two periods, violence apparently declines due to incapacitation, i.e., the potentially violent are sitting in theaters watching violent movies instead of wandering the streets. From 12 am to 6 am the effect is even stronger, apparently reflecting substitution. Attendees have chosen going to the movie in lieu of drinking more and getting into violent situations.

Bottom line, "our estimates suggest that in the short run violent movies deter almost 1,000 assaults on an average weekend. While our design does not allow us to estimate long-run effects, we find no evidence of medium-run effects up to three weeks after initial exposure."

I have no dog in this fight, merely finding the result interesting and initially counter-intuitive. Next step, of course, is for someone to propose a Pigovian subsidy for movie violence so we will have the optimal level rather than too few given the positive externality. (Meant as a joke.)

Or, to reverse the big pay-off line in The Rocky Horror Picture Show, "don't be it, dream it."

Bush's State of the Union

I didn't watch it - it was just too tempting to have elective root canal surgery instead. Or at least I would have rated that about on a par with watching the speech.

That said, but having read about the speech, just a couple of fairly obvious comments. First, while I certainly dislike earmarks, the hypocrisy here is truly hilarious in its blatancy, when you consider his approach to them during the six years when the Republicans controlled Congress. It's not like he's trying hard to pretend it is anything but a partisan game to him.

Second, for all the childish bluster about vetoing any tax increase that crosses his desk, what exactly does he think he is doing, other than raising future taxes, whenever he procures new unfunded spending?

Too big, too fast, too strong

So what if they're only sixth graders. My younger son's school basketball team won its opener, 17-4, in 24 fast-paced minutes.

UPDATE: A tough four-point loss in Game 2 of the season. Apparently a bit too much Marburying by some of the players.

Tax policy colloquium session on deferred compensation

Yesterday the NYU Tax Policy Colloquium featured a paper by Dan Halperin of Harvard Law School and Ethan Yale of Georgetown Law School concerning deferred compensation and recently enacted Internal Revenue Code section 409A.

For a bit of background flavor, this provision responded to one of Enron's more outrageous scams. Various Enron senior executives had special deferred comp deals that did not have to be disclosed in their financial statements under rules applying at the time or treated as currently taxable. The ground for non-taxability was that individuals using cash accounting don't have to report income currently if it hasn't been paid by the employer and remains unfunded and subject to credit risk.

Leaving aside for the moment the reason for having such doctrines in the cash accounting rules, the Enron deals' compliance with them was a sham. In particular, the moment Enron entered potential financial crisis the amounts were promptly paid (presumably a borderline fraudulent conveyance at the expense of creditors), plus offshore entities may have been used to make sure creditors couldn't actually get at the money.

As one might guess from Enron's association with these deals, the deferred compensation problem actually goes more to corporate governance (concealing and understating executive compensation) than to tax planning. Halperin and Yale show that there is very little tax advantage to deferred compensation if the applicable marginal tax rates are the same for (a) the employer as compared to the employee, and (b) one possible year of inclusion and deduction as compared to another year.

The authors argue that the big tax planning issue is taxpayers using deferred compensation deals to lower the tax rate on the investment return during the period before the compensation is paid. They propose a possible special tax to address this. I argued that the bigger issue might be effective electivity with respect to statutory changes in the tax rate, i.e., using the arrangements to put taxation of the compensation in the most tax-favorable year. The instability of U.S. tax policy and the use of phase-ins, phase-outs, and sunsets arguably increases the importance of this angle. From this perspective, requiring credit risk by strengthening the cash accounting doctrines that Enron flouted can be seen as burdening effective electivity, albeit in an arbitrary and imperfect way, by causing exercise of the when-to-realize election to bear a positive price. This is the same as the rationale for deterring tax sheltering via economic substance rules.

All agreed that current Code section 409A is a mess and that simply barring deferred compensation (i.e., allowing the arrangements to be made, but treating them as giving rise to current tax liability) might be best but is presumed to be politically unavailable.

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.'"