Another new publication

Yet another article that I wrote for a conference a couple of years ago is now on the verge of coming out. In "Simplifying Assumptions: How Might the Politics of Consumption Tax Reform Affect (Impair) the End Product?" I try to examine the political economy scenarios that would be necessary for a consumption tax to be enacted replacing the current income tax. I was asked by the conference organizers to assume that such a thing would actually happen, notwithstanding my skepticism on this point. I reach fairly pessimistic conclusions about whether the instrument that actually passed Congress would be something to feel terribly good about.

I certainly can't complain about how long it took the conference volume to come out, given that another roughly contemporaneous conference volume that Alan Auerbach and I are co-editing is taking even longer. (This is a book to be entitled "Institutional Foundations of Public Finance," collecting some generally excellent papers from a conference held at NYU in May 2006 in honor of the late David F. Bradford. Coming out at some point this year from the Harvard University Press.)

The volume in which my "Simplifying Assumptions" paper is coming out is Fundamental Tax Reform: Issues, Choices, and Implications," edited by John W. Diamond and George R. Zodrow. It is available (for advance ordering) for $36 here or $45 here. (Which to buy? - sounds like a tough choice.)

The real tax policy significance of Paris Hilton

Having seen her on one of the big TV screens in the health club when I was working out this morning, I'm reminded of how I think her symbolic significance to tax policy debates is sometimes (to my taste at least) misstated.

Proponents of estate or inheritance taxation sometimes see her as the poster child for their position in the debate. The idea being that she is the canonical undeserving heir who is wealthy simply because, from the financial standpoint (whether or not more generally) she had good luck in the choice-of-parents lottery. Hence, the implicit argument goes, we should want to tax away her undeserved good fortune, whether just to finance lower taxes on those who are more productive and deserving, or also on the Andrew Carnegie surmise that receiving a huge inheritance is actually a curse not a benefit.

Not exactly to defend her, but whenever I hear this usage it occurs to me that she has actually generated huge earnings in recent years. So, from a conventional economic standpoint that relies on market measures of earnings, she actually is a large-scale producer rather than a member of the "idle rich."

But this in turn points out another symbolic use. Within a standard optimal income tax framework, even ignoring the inherited dollars that she got to spend, her earnings make her a canonical example of someone with high "ability." So the real reminder that we get from her example is what "ability" really means in this framework - that it is about something external, relating to one's potential interactions with the environment in which one finds oneself, rather than something purely internal such as (genetically or otherwise derived) intelligence, taste, acting and singing ability, or charm.

So we might call an income, consumption, or earnings tax a "Paris Hilton tax" and mean the same thing (but with a bit more topspin) as if we called it a "Bill Gates tax."

Another musical note

Some time ago I purchased CD 1 of the 3-CD "69 Love Songs" by the Magnetic Fields (aka NYC songwriter Stephin Merritt plus associated musicians). It didn't quite take, but earlier this year I purchased their/his latest, "Distortion," which is a stylistic homage to the Jesus and Mary Chain that I preferred to the original. A fave on this new record is the hilarious "California Girls," which has a slightly different viewpoint than the Beach Boys song of that name. (Fitting into the concept here because J & MC were in some ways a Beach Boys homage with static and electronic distortion layered on top.) Sample lyrics: "Looking down your perfect noses at me and my kind / Did you really think that we won't mind? ... You will hear me say, as the pavement whirls / I hate California girls." [Sung by a woman so that it conveys jealousy rather than misogyny.]

Anyway, this led me to try 69 Love Songs, Part 1 again, and this time I liked it enough to spring for the last 2 volumes and 46 tracks, which I am now eagerly awaiting.

Robert Christgau aptly remarked of 69 Love Songs that to complain that it doesn't sound sincere is like complaining about a great jazz musician that he plays too many notes. That's what Merritt is selling. The album is a review / pastiche / homage / satire / compendium / commentary concerning love songs (as opposed to love) in all sorts of genres, with what are often astonishingly clever and witty lyrics - Noel Coward-level at times although with a different sensibility.

Really stupid tax policy ideas

McCain's proposal to suspend the gas tax for the summer (but who knows if it would ever really come back?) deserves some sort of prize. That one is going to be hard to top.

Senate Finance Committee testimony

Today (April 15, natch) was the day. Here is the link to my full written testimony. The three main points I covered were base-broadening, rationalizing business taxation, and filing and compliance simplification for lower and middle class taxpayers.

In some other parallel universe, I will tell my enthralled grandkids "Yep, I was the lead-off witness at the first Senate Finance Committee hearing that led to the great Tax Reform Act of 2009." Not as likely, alas, in the one we actually inhabit. While I would settle for the universe where it happens except for the realistic detail that the grandkids don't care, I don't think we are in that one either.

Turnout by the Senate Finance Committee members exceeded the insiders' over-under, totaling 7 at the peak. Someone had forecast only 5 because the farm bill was in conference, or something like that. Senator Baucus, the Chair of the Committee, showed up for a bit despite the farm bill because he wanted to make the point that tax reform is a big priority for him. Others who asked questions included Bingamon, Wyden, Kerry, and Bunning. Occasionally a question would take the form of "Isn't it true that my bill, which I already know you like, would be a good idea?" At one point I leaned over and whispered to Michael Graetz: "Objection, leading the witness." But other questions had more of an information-evoking flavor, I suppose.

The panel had a lot of consensus, except that Jason Furman questioned studies Graetz and I mentioned suggesting that these days the incidence of the corporate tax may fall on labor due to international capital mobility. And Jason spoke up for traditional capital export neutrality, which Graetz noted is in question these days after I had ducked the question a bit by noting the proposal (by economists Rosanne Altshuler and Harry Grubert) to enact a "burden-neutral" repeal of deferral, thus keeping overall U.S. tax burdens on outbound investment about the same but without all the wasteful tax planning associated with playing deferral or subpart F games.

I'll confess that I thought for a second of Robert DeNiro in "Analyze This!" saying to a petrified Billy Crystal that "I'm going to be seeing a lot of you!" when a couple of our hosts made the same suggestion to us in connection with the possibility that Congress in 2009 will be seriously pursuing fundamental tax reform. But there really doesn't seem to be much buzz about the topic even though the stars arguably are aligning in various ways (rising AMT liability, expiring tax cuts, etc.).

One thing I could imagine them taking up, however, is simplification for lower and middle class taxpayers, meaning greatly eased filing. This has some aspects of win-win, although inevitably some people's taxes would go up if the substantive law changed in a revenue-neutral fashion. It is bound to have foes however done, but has the potential (for once) for politicians to score points because they actually deserve to. I am reminded of the fact that renewing driver's licenses used to be an excruciating experience and then was made simple. Not all that unrealistic an analogy for most wage-earners' tax returns, albeit not entirely lacking in tough choices.

James Banks and Peter Diamond weigh in on the income vs. consumption tax debate

Economists James Banks of University College, London, and the renowned Peter Diamond of MIT have posted a new paper, called "The Base for Direct Taxation."

The abstract says in part:

"The essay presents the Atkinson-Stiglitz and Chamley-Judd results that capital income should not be taxed, but concludes that the required conditions are too restrictive and not robust enough for policy purposes. Hence there should be some role for including capital income as a part of the tax base. The essay discusses some empirical underpinnings for two key elements in the conclusion - differences in savings propensities and the shape of earnings (and uncertainty about earnings) over the lifetime. The conclusion that capital income should be taxed does not lead to the conclusion that the tax base should be total income, the sum of labour income and capital income."

I couldn't resist forwarding a copy to my good friends Joe Bankman and David Weisbach, since the paper appears to line up more on my side than theirs in our recent exchange in the Stanford Law Review. But that is not to prejudge what effect, if any, a careful reading would have on one's assessment of the overall merits (and in truth my position and theirs are pretty close - we both would favor a progressive consumption tax, holding constant the political implementation variables).

Tax filing

I'm done, but I didn't make it under the wire by very much. I use Turbo Tax, as doing it by hand would be intolerable (think of the AMT alone, or for that matter leaving one item out of adjusted gross income and then, once one finds it, having to do umpteen calculations all over again).

Kind of an unpleasant process, haunted by fear that I am forgetting something, and subject to the usual feelings of being glad to get a refund or sad to still owe $$ even though in principle only the total paid really matters (leaving aside the time value of money on the one hand and penalties for under-paying on the other).

Turbo Tax appears to have screwed up this year by not automatically dealing with New York State estimated tax for next year. Had to do that myself. I am not well inclined towards them in any event, given their odious behavior in the Ready Return fight in California (where they raised bogus arguments to help kill a program that would have given Californians for free, at a state government cost of pennies, a set of services that Intuit would rather sell for $50).

Official witness list for my Senate Finance testimony next week

The panel, meeting on Tuesday, April 15, at 10 a.m. in room 215 of the Dirksen Senate Office Building, has the title "Tax: Fundamentals in Advance of Reform." The witness list (order as given in the listing I saw), is as follows:

Daniel N. Shaviro, Wayne Perry Professor of Taxation, New York University School of Law, New York, NY

Michael Graetz, Justus S. Hotchkiss Professor of Law, Yale Law School, New Haven, CT

Jason Furman, Director, The Hamilton Project, Brookings Institution, Washington, DC

Robert Carroll, Vice President for Economic Policy, The Tax Foundation, Washington, DC

Tax policy colloquium on "Long-Term Objectives for Government Debt"

At yesterday's NYU Tax Policy Colloquium, my past and future co-convenor Alan Auerbach presented "Long-Term Objectives for Government Debt," a paper he wrote for a conference in Sweden (arranged by a new government entity there, the Swedish Fiscal Policy Council).

Whew, this is going to be a tough one, I thought, when I saw the first page, which starts: "Finanspolitiska radet are en myndighet som har till uppgift att gora ... " etc. Okay, just kidding there. That actually is the first bit after the title page, but it comes from the soon-to-be-published book's credits, and it's the only part that's written in Swedish rather than English.

Alan identifies the three main issues associated with budget deficits and public debt as generational equity, economic efficiency or performance, and fiscal sustainability, which he identifies with a possibility of a fiscal disaster such as default or hyper-inflation. (The fourth big issue is its political economy effects, mainly reflecting political incentives to (a) defer and/or under-specify financing for government outlays and (b) pre-commit future governments' budgets because they may not share one's currently ascendant priorities. I quibbled a bit about Alan's list, notwithstanding that I have used exactly the same list in some of my writing. (Consistency being the hobgoblin of petty minds, after all.)

On generational equity, Mihir Desai argued, and I tend these days to agree, that, while the issue is important and while better information about government policy is surely welcome, it is hard to say how the policy we are actually following compares to the optimal policy. We know so little about future generations' circumstances relative to our own, and about the actual marginal costs and benefits of shifting consumption opportunities one way or the other. Sustainability, not generational equity, is actually the big enchilada so far as telling us that U.S. fiscal policy is on a dangerously bad path is concerned.

On economic efficiency or performance, I did the quibbling. As I define this category, there isn't a lot of efficiency at issue in the standard microeconomic sense. There are stabilization / counter-cyclical fiscal policy issues, though unfortunately deficits provide a poor measure given that the composition of tax and spending changes is so important (e.g., transfers to people with high versus low propensity to consume, rewarding existing investment versus new investment). And there are issues of effects on national saving, although again here composition is important and the main complaint, if fiscal policy reduces national saving, is a positive externalities story about saving.

Alan also puts in category 2 issues of tax smoothing, or having more constant tax rates over time rather than having to raise them suddenly because one has finally woken up to the sustainability problem if taxes aren't adequate over the long run given spending levels. At the risk of being a nitpicker, however, I put this in category 3, sustainability issues.

Alan views the sustainability issues discontinuously, in terms of the very real risk of a big meltdown or credit event along the lines of a run in the bank. I agree that this is the really big and growing risk or concern about our unsustainable fiscal policy - explicit or implicit default, hyper-inflation, collapse of the banking system, and so forth. As I say in Taxes, Spending, and the U.S. Government's March Toward Bankruptcy, this actually might happen, and indeed it verges on certainty of happening IF the U.S. political system can't function adequately. (It usually has in the past, but the last seven years make one a bit less optimistic.) But I would include in this category, because they are merely lesser versions of the same problem and have the same cause, lesser versions of the harm caused by deferring any serious response to sustainability problems. Examples include:

(a) foregone tax smoothing, leading to unduly high and distortionary taxes or tax rates in the future because we didn't raise them more moderately sooner,

(b) foregone consumption smoothing, such as from steep Medicare cuts in the future that cut more into essentials because more moderate cuts, hitting less vital and valuable services, weren't imposed sooner, and

(c) tough times for future elderly people whose benefits are cut late in the game, when they can no longer react by saving more, leading to their own accentuated failures of lifetime consumption smoothing.

Anodyne though it may sound, this can actually involve really bad stuff that was completely avoidable. And again, we basically agree about all of this - more of a semantic debate regarding how to conceptualize it.

We also struggled with tough questions of fiscal measurement that lack good answers and probably always will. The fiscal gap - say $80 trillion or about 10 percent of the present value of all expected future GDP (these numbers are made-up, but probably within the realm of a reasonable estimate) - sounds alarming, but strictly speaking is just a statement about statements; that is, a measure of the degree to which a reasonable projection of the current policy path actually is impossible and will not happen. Mere words don't automatically hurt, however. Thus, in thinking about the problems (such as fiscal meltdown risk) implied by the fiscal gap, we need to think about softer variables such as degrees of pre-commitment or lost flexibility.

For example: Joe Stiglitz projects an Iraq war cost of $2 or 3 trillion. Medicare prescription drugs has an infinite horizon revenue cost of more than $20 trillion. But these two numbers aren't entirely comparable, because the Iraq costs are largely water under the bridge - little we can do about them now - whereas we could actually back off spending all that money on future Medicare prescription drugs. This is a point about irreversibility, not about present value or risk / variance. Alan's article introduces a couple of concepts such as "implicit liabilities" and "deferred tax assets" that attempt to advance thinking about these issues - which I agree they do, although this post is already too long for full further discussion to make sense here - but in dealing with soft variables through the medium of a fiscal measure we will never be entirely satisfied. And, how we think about something such as the Medicare prescription drugs dollars (assuming one agrees about the remaining flexibility) does in part depend on whether one is thinking more about fiscal meltdown issues or broader smoothing / optimization issues.

Ray Davies concert

Last night, after a very full day devoted to intensive labor on my Senate Finance testimony for next week plus sundry internal NYU matters, I returned home feeling a bit beaten down ("It's hard work," as Bush would say) but with an evening event on my schedule - a Ray Davies concert at the Beacon Theater.

How au courant to be going to such a concert, some of my NYU colleagues said. Not that I was trying to be. Better just to rest after a day of long hard slogging, if that were the goal. But another colleague, who actually is somewhat au courant, used instead the word "old-fogeyish" to describe going to such a thing. (Had he seen the audience in the orchestra section of the theater he would have felt entirely vindicated.) But my true reason for going was that I hoped the concert would be interesting and fun. It was - and I felt really revived afterwards.

The biggest surprise, though I suppose it shouldn't have been, was what a showman, as well as a hungry sponge for audience acclaim and approval, Davies proved to be. Also seemingly a genuinely nice man, although that isn't the standard formula for a rock 'n' roll lead singer (and on-stage appearances can surely be deceiving). There's so much depression, scorn, and paranoia in some parts of his songwriting canon that I was expecting something a bit different. (Maybe I was succumbing as well to the romantic myth of the lonely, suffering artist.) Obviously lots of other parts of his canon express something very different than this (e.g., Days and Waterloo Sunset). But one could see how integral to his overall set of drives were his fifteen plus years (from the early 70s on) of playing dreadful arena rock so as to "give the people what they want" (as one of his album titles put it).

So there he was, actively seeking sing-alongs on all the old Kinks hits, coming back on stage when the show seemed to be over because he wanted to do just one more number, then doing another one after that, thanking the crowd, mourning the Kinks, throwing repeated verbal bouquets to the guitar playing of his estranged brother Dave, praising his current band and asking if we liked them too, etcetera.

More needy than smarmy, however. And he's still a great singer as well as one of the premier rock songwriters, with his trademark plaintive but indelible minor-key hooks that only the Beatles could really do as well. (That plus the articulate lyrics, ability to capture moods, and the memorable power-chord runs that others such as the Who stole from him.) No other songwriter from that era has come close to his recent writing except for Dylan, who still sets his own standard but really just on Modern Times.

Almost all Kinks in the first set (although two from his first solo release), then after the intermission five or so cuts from the new album starting out acoustic then returning to the full band, and finally a mix of old classics with more new stuff. Almost all of his Kinks material was from the band's first 3 or so years. Nothing from Village Green unless you count Days (which is from the same era and is on the extended reissue but not the original album). Only 3 songs from the 70s and 80s, which (Lola excepted) was a mercy. And the new material really did stand up to the old although perhaps not quite as rousing.

NYU hiring

We've now gone public on the fact that Mitchell Kane is joining the NYU law faculty. Mitch is a rising star in the international tax field and has things to say about, among other topics, recent convulsions in international tax policy thinking about the worldwide and national welfare considerations that underlie optimal (whether or not actual) rule design. I'm very glad to have him here.

NYU Tax Policy Colloquium on "Making Social Security Work"

Last Thursday at the colloquium, Jonathan Barry Forman of U Oklahoma Law School presented (or, given our format, responded concerning) "Making Social Security Work," a chapter from his recent Urban Institute Press book, "Making America Work."

The chapter describes the Social Security fiscal crisis - which some people call large, others small, even when they agree about its actual size (a bit like arguing about whether a spill on the floor is big or small - what the heck, either way at some point we'll have to wipe it up). It offers this as motivation for fixing the system to have a level-one demogrant for seniors plus a level-two individual account, in lieu of the current benefit structure.

As Mihir Desai noted in the discussion, one could fix the Social Security fiscal gap without fundamentally changing the structure. (A bit later retirement, a bit higher payroll tax rate or ceiling, a bit slower benefit growth relative to wage levels, etc.) Or, one could change the fundamental structure, if one likes a different one better, even in the absence of any long-term fiscal problem.

More quibbling: In terms of the book's idea of rewarding, or at least not overly penalizing, work, penalizing it is basically what the fiscal system does in light of its basic distributional aim of treating Bill Gates as better-off as the readers of this blog, and them in turn as generally better off than homeless individuals. A consumption tax burdens work, as does an income tax or any other plausible base. Sure, there are some silly Social Security features that needlessly discourage work, such as the treatment of earnings by people age 62 to 66 if they have selected early retirement, or arguably the lack of a clearer tax-benefit link in the system (so that the marginal burden it imposes on work arguably seems higher than it actually is). Fundamentally, however, discouraging work up to a point is the name of the game. Why select it as a key consideration here?

Somehow, the conversation ended up devolving into the good old income tax versus consumption tax chestnut that has occupied us so often in past years' sessions (though for this year, it was a first). Forman argued that using general revenues (and thus the income tax) is more efficient than payroll tax financing because it covers a larger percentage of GDP. But, insofar as that reflects the difference between an income and a consumption tax base, one must keep in mind the tax policy and economics literature's recent finding that an income tax is likely to be less efficient because its burdening savings on top of work does not mean that it burdens work any less. Just because GDP happens to be an income measure doesn't mean we should think about efficiency in terms of the percentage of GDP covered. It's true that the income tax also reaches wages in the economist's sense that are not legally wages for payroll tax purposes. But then again it is also true that the existing income tax base has more preferences built into it than the payroll tax base (they share the preferences for fringe benefits and such, but the income tax has lots more such as home mortgage interest et al). So anyway, why should we think that income tax financing would be better? (Rate structure is a separate point.)

Anyway, just speaking for myself, I didn't think I came out of the day knowing all that much more than I had going in. But it was a lively and interesting session.

Forthcoming testimony

I've been invited to testify before the Senate Finance Committee on April 15, from 10 am to noon, regarding tax reform basics.  More details to follow, but the panel seeks to lay the groundwork for thinking about fundamental reform of the income tax variety that in theory might start taking shape next year.  I'm not convinced anything will, but certainly there are enough ticking time bombs out there, such as the expiring tax cuts, rise of the AMT, and exploding deficits (if, unlike the Bush Administration, we are sufficiently unsporting actually to count everything).

Others on the panel will include Michael Graetz and, most likely, an economist thought to represent more conservative views (though conceivably the three of us will agree a whole lot more than the audience expects).  This will be a hectic day - by 6 pm the same night I need to be back in NYC discussing tax policy on a panel that includes both a Heritage Foundation flat-taxer and someone apparently associated with Bill Gates, Sr.'s bid to save the estate tax.  Plenty of disagreement to go around there, I suppose.

Also by April 15, I'm pretty sure there's something else I'm supposed to have completed and filed.  If only I could remember what it is.

Yes, it's April Fool's Day, and no, I wasn't born yesterday

Earlier today I got the following e-mail:

"Dear Professor Shaviro:

"We represent a very small but very wealthy nation that has asked us to approach you. This nation is about to launch a revolutionary effort to adopt some of the values of countries that have been developed economic powers throughout recent history. In particular, this nation’s ruling family is interested in a modern and explicitly progressive system of taxation.

"The ruling family is acquainted, in some cases directly, with your thinking. We (my organization is resolutely obscure, but we did great deal of research to identify you) and they have identified three candidates in total to approach: you and one other from the United States, and one from Norway.

"While the intellectual challenge of designing a system of taxation from scratch would be of the highest order, the compensation alone would be enticing. For your time in consultation amounting to let us say some 500 hours, perhaps concentrated in the summer, something in the very high six figures seems appropriate, with the possibility of a continuing relationship.

"To date, revenue from this nation's resources has made progressive taxation unnecessary, and that state of affairs continues. The family’s motivation is not to find more funding, but rather to embark on a approach that embodies concepts of economic justice that we believe you understand and can apply.

"If this opportunity interests you in any way, we would appreciate the chance to meet with you in person. You should be advised that the ruling family, while moving toward Western values in many ways, appreciates what they consider a dignified appearance: coat and tie (or burnoose), highly polished shoes or boots, carefully combed hair, and so on.

"We look forward to hearing from you."

[Followed by organization name, Wall Street address, and 800 number.]

Okay, let's get this straight. On April Fool's Day, someone simply cold-e-mails me to offer close to a million dollars for doing what all academics ostensibly dream of - getting to play philosopher king. I guess I'd better get my burnoose cleaned and pressed.

What I actually did, just out of curiosity, was (a) google the supposed organization and draw a blank, and (b) have my secretary call the 800 number, which turned out to be a porno line.

At least they didn't ask me for $10,000 or my private security codes. But I guess that million-dollar payday for getting to play philosopher king will just have to wait.

New publication

An article of mine from late 2006, "Disclosure and Civil Penalty Rules in the U.S. Legal Response to Corporate Tax Shelters," has finally been published, in Wolfgang Schon (ed.), Tax and Corporate Governance.

On second thought, if you press the link you'll see that Amazon lists it as coming out later this month.

As it is a bit pricey, anyone interested just in my chapter should e-mail me off-line.

Ready for the 80s?

I'm starting to think I'm not, or at least not ready enough to purchase the new B-52s and R.E.M. albums.

NYU Tax Policy Colloquium on "How Americans Think About Taxes"

Last Thursday at the colloquium, MIT political scientist Andrea Louis Campbell presented a couple of draft chapters from her forthcoming (but still in progress) Princeton University Press book, "How Americans Think About Taxes."  Once again, as when we had a paper by Carnegie-Mellon political scientist Christina Fong last year, a session with a political scientist outside our usual circles here at the colloquium proved to be a big success, intellectually broadening for all concerned, and fun.

The piece of the book that we saw has two distinct things going on: attempting to explain the determinants of Americans' changing attitudes towards taxes without regard to how this affects political outcomes, and exploring why tax progressivity has recently (at least in the last 7 years) declined.

For the former, Campbell, while still weighing aspects of her approach, at present uses "perceived cost-benefit theory," an adaptation of rational choice theory that takes into account how taxes' form and structure can dramatically shape perceptions wholly independently of substance.  I was basically okay with this, although her use of the perceived benefit side can be (and was) questioned.  Others argued that ideology plays a bigger role than she gave it credit for.

As the paper acknowledges, rational choice has a tough road to hoe in public policy even if one believes it governs behavior in, say, financial markets, given the voting paradox.  If it isn't rational, in a narrowly economic sense, for me even to inform myself (much less vote) in a mass society where I can't significantly affect the outcome, then we may be using the wrong theory.  What makes self-interest almost work a little better here is that people have some inclination to believe that things that are good for themselves are also good policy.  I attribute this to the Pleistocene incentive to be self-interested yet genuinely convinced of the broader merits when arguing "policy" (e.g., where should we go tomorrow) with the other hunter-gatherers.  But there is no evolutionary impetus to deploy one's most advanced cognitive tools and efforts to solve complicated problems that one has no power to decide anyway.

Insofar as rational choice (almost) works in spite of itself with respect to simple choices that would unmistakably be better rather than worse for oneself, it may seem paradoxical that the median voter has let the system become so much less progressive in the last few years.  No policy judgment about optimal progressivity is needed for one to posit that most voters would rather have rich people pay a bit more tax if this meant that they themselves could pay a bit less.  But this basis for considering reduced progressivity paradoxical would only apply in a zero-sum framework, where all current voters are paying a fixed amount of tax and the question is who will pay more and who less.  When you can simply run up the tab at the expense of future generations, as the Bush Administration has done, then current voters both (a) have no reason to bother figuring it out any more (especially if agenda control means they aren't comparing it to alternative changes that lose the same revenue) and (b) could rationally say fine, I don't care about future generations.

So perhaps there is no paradox after all, even leaving aside the role of ideology, normative issues, complicated tax incidence questions, and changed worldwide economic conditions ithat arguably reduce the optimal level of progressivity from where it was 40 years ago.

My version of Amy Winehouse

They say I got to go to rehab, I say "No, no, no"

First it's my knee and then it's my hamstring, ow, ow, oh

My elbow's still inflamed, can't play no tennis game

And still I have to go to rehab, I just go, go, go.

I'd much rather get to play

Than spend thirty minutes every day

Cause there's nothing, there's nothing getting better

It seems like I'll never be okay

But they say I got to go to rehab, I just go, go, go

I used to play lots of squash

But then that got the kibosh

They say I have to go to rehab, I just go, go, go

I ain't got the time, and if I gave up I'd be fine

But if I want to play again it's rehab, so I say, ow, ow, oh.

And all I do is go to rehab, saying "No, no, no."

Doing their homework

I recently was invited to participate in a DC tax policy forum discussing the Clinton and Obama tax plans. I couldn't go, but I gather that the Clinton people had thought I might be a good person to discuss Obama's tax plan. This in turn is interesting, because many months ago (well before even the Iowa caucuses) I had a blog post that was critical of Obama's then-newly announced proposals. So I suppose the suggestion may in this sense be no coincidence.

As it happens, I haven't posted on any other candidate's tax plans other than ol' Fred Thompson (you know, the actor) along with some snark concerning this now-forgotten guy who used to be a big shot, I think named Rudy Guiliano or Guilianus or something like that (it's hard to remember these days).

I've been thus scattershot about the candidates' tax plans because I find it hard to really take an interest in these things until I have reason to believe that the candidate is actually going to (a) win and (b) propose his or her plan. Plus, I sometimes have an aversion to overly low-hanging fruit, which is what criticizing a candidate's tax plan can amount to given all the political constraints on proposing sensible tax policies. So in a way it was a compliment, albeit less to Obama himself than to his economic advisor Austan Goolsbee, that I considered the plan worth criticizing.

Anyway, someone's campaign must be reading these things given the apparent genesis of the invitation. Good to know I'm not all alone out here.

Work, publication, and reading update

One work-related item that I did have to take care of in Mexico was the exploding offer (mentioned in an earlier post) for my article on taxable and accounting income. The offer was from the Georgetown Law Journal, and after very minimal efforts to stir up a couple of expedited reviews I decided to accept. A perfectly good placement, and no reason I could see, especially while on vacation, to play silly games aimed at raising the prestige factor slightly.

OK, I'll fess up to the one other bit of work I did, which was to plan (at a basic conceptual level) my remarks at the NYU Tax Policy Colloquium this Thursday, where we will discuss "How Americans Think About Taxes: Public Opinion and the American Fiscal State," a forthcoming (Princeton University Press) book excerpt by Andrea Louise Campbell of MIT's Political Science Department. I like the excerpt, which discusses why tax politics has moved recently in a less progressive direction despite the arguable financial self-interest to the contrary of non-rich American voters. Campbell uses, among other inputs, detailed polling data over several decades and a sophisticated theory of perceived cost-benefit from tax rules. Naturally, given my work and interests, this is a topic on which I have plenty of my own ideas. I anticipate a fruitful discussion.

I also found the time to read 4 books. (Reading fast is a bloody nightmare when it comes to packing for a vacation trip - you end up with plenty of bulk and still have to worry about running out.) First was "Zhou En-Lai: The Last Perfect Revolutionary." This perhaps unlikely bit of beach reading is a book written by a Chinese exile and U.S. emigre who for years had access to top secret Chinese Communist Party files from the 1960s and 1970s. After a slow start it became fascinating and even genuinely moving, showing how Zhou worked with the utterly mad and monstrous Mao, trying above all to survive and also to moderate him but also enabling him. The book reaches the conclusion that Zhou tried to be a decent person but failed because of the demands the system placed on him plus his own human failings such as the need to subordinate himself and comply. Extra points for satisfying the curiosity of one who grew up reading the crazy news from China in the Cultural Revolution era without having any information (which no one in the West had) about what was really going on behind the scenes. E.g., what was the deal with Mao's "closest comrade in arms," Lin Biao? Now I know, and it's a much more interesting story than I had expected.

Second book was "Smile When You're Lying: Confessions of a Rogue Travel Writer" by Chuck Thompson, an at times uproarious collection of travel experiences packaged as an expose of all the fakery and hype in the travel industry. Good not so clean fun.

Third was "Mayflower," by Nathaniel Philbrick, a history of the Plymouth Bay and related settlements from founding through the horrific Indian wars of the 1670s. Guess who were clearly the bad guys. A good read but not in my view great.
Finally, Joshua Ferris, "Then We Came to the End," the only novel I have yet read that is written in the first person plural (a shifting "we" that is one of the strong points). It's set in a yuppie (and otherwise)-filled ad agency and shifts gradually from satire to a bid for something, in the author's view, more. Agreed, the pure satiric take would have risked being very over-familiar after all the TV and other such treatments of same. And anger at the workplace or the bosses (shared by many of the workers in the novel, but not by the author) would have been tedious as well. I did like it, and found it absorbing, but in the end it was perhaps a bit too book-groupish rather than memorable. Reading Ian McEwan (such as "On Chesil Beach"), when one can stand to, can make a lot of other mainstream contemporary fiction look a bit thin.

Back from vacation

We returned yesterday from a week in the Iberostar Tucan in Playa del Carmen, Mexico (near Cancun but much quieter). A pleasant week on a family resort that mixed the idyllic with, I suppose, the tired (such as some of the all-you-can-eat buffets). At my age, the real good news is avoiding injury (from sunburn, being smashed by waves, testing my elbow tendonitis, etc.) and not gaining weight despite the all-you-can-eat system. As Oscar Wilde said, "I can resist anything except temptation," but luckily the desserts and fried foods don't even tempt me any more. The enormous quantities of fresh papaya that I consumed apparently were okay.

One of the Iberostar's best features is the wildlife living on the property - howler monkeys that I got to see daily after stumbling on their PM hangout site in the canopy, big iguanas, peculiar rodents that might be capybaras, and some beautiful though exceptionally pompous peacocks that were strutting around the pathways and in one case decided to challenge me. (I held my ground, figuring that I weigh more.) Best activity was letting waves wash me onto a surfbreaking structure resembling rock but actually a canvas filled with sand. Very slippery in spots where algae had grown onto it.

In the picture here I'm in the background, having ridden a wave onto the structure but not having yet been washed off. (This apparently was the day I decided not to stand up any more before the waves got me - there's only so much pounding you can take at age 50 plus.)









Second picture is one of the local beastie residents whose favorite AM sunning site we discovered. You can see that he or she is sitting on top of another iguana's tail.














Today (Sunday), things are not quite so idyllic. I'm in my office reading literally hundreds of pages for work (appointments committee, etc.) that I decided not to trouble myself with while in Mexico. Or rather, I am finding a way not to read them at the moment.

Ouch

Well I'm glad on balance, but I got a law review exploding offer (96 hours) for my tax and accounting piece, less than 12 hours before I'm scheduled to leave for the airport.  Managing this from a beach resort while trying to unwind is going to be interesting.

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.