War tax?

There's been much discussion recently of the idea of a "war tax" to pay for the costs of ongoing fighting in Afghanistan. Specifically, David Obey and others in the House of Representatives have introduced the Share the Sacrifice Act of 2010, under which income tax rate increases would be used, starting in 2011, to pay for the costs of the Afghanistan surge.

How should one evaluate this? I feel reasonably well qualified to chip in given my interest in both tax policy and budget deficits (as per this and this).

First point of interest concerns budget deficits. I believe we have a very grave long-term problem that, more likely than not, will lead to a catastrophic federal government default or quasi-default. The fact that we are headed this way is unambiguous in the projections, and has much less to do with the current recession (or the stimulus package) than the long-term path of projected outlays, for entitlements (especially healthcare) and otherwise relative to revenues. Key problems include the unsustainable growth of healthcare and the fact that American voters are simply unwilling to come anywhere close to paying for the government services they want.

The reason I expect a cataclysm is pure political economy, however. The Democratic and Republican parties of the 1980s probably would have been able to solve this, but things have changed (particularly on the Republican side). As always, California will get there first, in terms of totally unnecessary failure caused by political paralysis driven by lunatics playing chicken games, but I believe the U.S. will eventually follow. But again, this all depends on the course of national politics - how the parties behave, what legislative rules apply in Congress, and so forth.

From that perspective, any tax increase helps by narrowing the gap a bit, and the fact that it's targeted to Afghanistan war expenses is mere detail.

But the counter-argument, to my view decisive for now, is that this is the wrong time for implementing a move towards budgetary balance. Just as FDR taught us the hard way in 1937 that returning to budgetary balance needed to wait until the economy had fully recovered, so we would learn the same lesson now. Indeed, I agree with Krugman's column today about the need for a jobs bill.

But keep in mind the key word in the above paragraph - now (including 2011) is the wrong time for IMPLEMENTING, not for enacting, tax increases. I believe that tax increases moving us back towards fiscal balance are an inevitable part of what's needed, and that the sooner they are enacted the better. Only, the implementation needs to be a bit more delayed - not to the extent of making it clearly hypothetical and politically unrealistic, but sufficiently to permit recovery, and indeed to encourage moving economic activity up in time so that it will precede the effective date of pre-announced tax increases.

Some of the more interesting issues here, however, go to the specific targeting of the revenues in the proposed legislation. Earmarking of revenues is fundamentally a fiction unless revenues and outlays are indeed kept in lockstep. For example, Social Security earmarking arguably is fictional, to the extent that, if the Social Security Trust Fund were deemed to have run out, Congress would simply add general revenues to keep it going. It's all one big stomach, as the saying goes. But targeting or earmarking can make an important political economy difference.

If politics in Congress were less poisonously dysfunctional, and the war lobby in Washington less dedicated to endless military adventures abroad, the virtue of this proposal (at least, with more delayed implementation) would be its providing a fig leaf for moving tax policy in the needed direction, by suggesting that it's for the patriotic cause of supporting the troops. But that's not really what's going on here, as the proponents would be the first to say.

Rather, they are trying to create more of a sense that wars have costs, so that cost-benefit analysis will apply to decisions to engage in and prolong them.

The response from people such as Senator Even Bayh (who denounced it) is entirely nonsensical. They say: there's no room for cost-benefit analysis when it comes to national security. But this of course is false, especially with a relatively discretionary war like that in Afghanistan is right now. (To call it discretionary is not to oppose continuing it, though in fact I do - even if one supports it, no one in his right mind could compare it to, say, fighting Japan and Germany after Pearl Harbor.)

A better way to make their point is to say that, in cases where going to war is really important - I'd count here not only World War II but also the initial decision to go to Afghanistan and kick out / try to destroy Al Qaeda after 9/11 - it is guaranteed to win out in cost-benefit analysis.

There's an old Jack Benny joke, where he's asked by a robber; "Your money or your life?" Dead silence. "Well?" the robber asks after a long pause. -- "I'm thinking! I'm thinking!" [Note of personal privilege to readers - I'm too young to have heard this - I merely heard ABOUT it.] But the rest of us don't think that way.

So yes, war for vital national self-defense, like anything else, should be subject to cost-benefit analysis, only in that case it easily wins.

In theory, whenever expected future outlays increase, financing should immediately be implemented to pay for it over the infinite horizon, leaving aside the counter-cyclical problem that makes implementing (as opposed to announcing) an offsetting tax increase unwise today. But that, too, isn't really the main issue posed by the proposed legislation. It goes rather to political economy.

The proper question, in evaluating the proposal from this perspective, is the following: Is the political system prone to error in the form of going to war too readily, or not readily enough? In other words, will bringing forceful direct attention to the cost (which always should be considered in principle) do more to reduce errors of commission, in the form of fighting wars when it isn't worth it, or to induce errors of omission, in the form of undervaluing the benefits and thus mistakenly not going to war?

In the 1930s, perhaps one could have reasonably argued, as the German and Japanese threats kept rising and the majority in the U.S. didn't want to do much about it, that dedicated financing (say, for war preparations) would have led to worse decisions. But when you look at the post-World War II era in the U.S., I believe it's overwhelmingly clear that there's immense political bias in favor of war.

The causes are complex and beyond my subject matter expertise. They include (1) the rise of the military-industrial complex of which Eisenhower so presciently warned, (2) the fact that we haven't been soured on war and military adventure to the same extent as the Europeans (whose horrific experiences from 1914 through 1945 finally had an impact), and (3) the fact that it is so emotionally shocking for the U.S. to face genuine threats today after centuries when the oceans largely protected us. Hence the urge to lash out angrily even if that isn't the wisest course. Racial and cultural chauvinism also may play a role. And also, as Lord Acton would understand, the insidious, morally corrupting influence of being a global hyperpower.

A pervasive political bias in favor of going to war, and then prolonging unwise wars because no one wants to be responsible for admitting to misfires, suggests that dedicated financing would tend to improve decisions. This presumably is why people like Evan Bayh so vociferously oppose it. They don't want a fuller and more honest debate, because they realize they would not be guaranteed to win it.

UPDATE: Eric Posner opposes the war tax, and not just for the business cycle reasons I note. But it seems to me that he totally misses the political economy point, and has a half-baked argument to the effect that, if continuing the war in Afghanistan is a good idea, future generations should benefit, so why transfer wealth from us to them via a tax to pay for it. This is a bit blind to (a) the predominant trend of budget policy, which, for good or bad, is to transfer lifetime consumption from them to us, and (b) the need for a much less ad hoc approach. Even if one believed in generational "balance" (if that could be defined), shouldn't we look at the whole picture rather than just item by item?

FURTHER UPDATE: I would actually be prepared to endorse the war tax with the Megan McArdle proviso (one year delay in enactment, tax to remain in place for one year after the war's end).

Worst opening I've ever seen in a NY Review of Books article

From Diane Johnson, in an 11/5/09 review of the latest Margaret Atwood novel:

"Sarah Palin, the former governor of Alaska, announced on her Facebook page that she didn't want the lives of her elderly parents or her Down syndrome infant to be judged before Barack Obama's 'death panel.' It may be that Palin has been reading the works of Margaret Atwood, the distinguished Canadian writer ..."

Actually, I myself am rather inclined to think not.

Sad news

Earlier this week, former House of Representatives Legislative Counsel Ward Hussey died. Ward was the chief person responsible for actual drafting of the Internal Revenue Code from at least the early 1950s through the Tax Reform Act of 1986.

That sounds like a left-handed compliment at best (then again, I'm left-handed and it's a strong part of my identity). But in fact it is a straightforward compliment. Ward was not responsible for the often stupid policies that he was charged with executing. Nor was it his job to make the Code easy for casual readers to scan (an impossible task in any event, given the microscopically variegated rules that Congress continually demanded). Rather, his main job was to get it right so that it worked technically, including when it was being read by sophisticated tax lawyers who wanted to get it wrong, to their clients' advantage, if they were left the room to do so without acting in entire bad faith. Often this involved ensuring that huge Rube Goldberg machines did in fact have all their moving parts working in sync - where the parts might include prior Rube Goldberg machines, implemented in past years' legislation, that needed to continue operating alongside the new ones.

He also had to turn vague ideas into statutory language, where the proponents hadn't properly thought through what they were doing. A classic example from just before my time, which I believe was his work (unless John Buckley, working with him, did it), involved deciding that the building rehabilitation tax credit should be drafted to require, in its definition of rehab as distinct from new construction, that three of the preexisting outer walls remain in place. As a matter of basic policy, perhaps a tax credit based on keeping three of the outer walls intact doesn't make enormous sense. But that wasn't his call. He was presented with a vague statutory concept and had to make it feasible to implement, and he did.

Think of all the different social policies that are pursued through the Internal Revenue Code, or the fantastic complexity of a cops-and-robbers realization-based income tax with taxpayer move followed by government counter-move, then taxpayer counter-counter-move (like Spy vs. Spy in accounting lingo), and one can start to understand how challenging it was for one person to be in charge of House-side drafting of absolutely everything in the tax law. Against that background, and of course with the help of his own staff (e.g., John Buckley) plus the Joint Committee on Taxation and the House and Treasury staffs, he did a fantastic job.

On a more personal note, I well remember working with him on the Tax Reform Act of 1986. I was a Legislation Attorney at the Joint Committee, which I had joined just before work started on the 1986 Act, and was still perhaps a bit green behind the ears (the cliche I've chosen over "young cub.") I was warned before going to my first House drafting session: "You'd better know what you're talking about, and also try to be concise, or Ward will be all over you." It's not so much that he tested the young 'uns, as that they had to prove that they deserved his professional esteem. He knew all too well how sloppy and self-infatuated young staffers can potentially be. After the initial trial period, I felt that I had succeeded and indeed that he liked me, which was a relief.

You'd all be in there sitting around an enormous table. The JCT people, deferring as needed to the House majority staffers, would explain what something was supposed to do. He'd ask questions and listen for a while, then grab a piece of chalk and start working on a big green chalkboard, taking ideas but very much in the lead.

Somehow he reminded me of a benign Burgess Meredith (whose best-known roles to me at the time were as the Penguin in the Batman TV show and the fight manager in Rocky). I wish I could have seen him again, and I'm sorry that he is gone.

Quick, get them a law prof or economist before they embarrass themselves further

On the New York City subway today, I saw the following ad:

"Freelancers pay twice the Social Security tax that traditional workers do. And yet, we don't feel any more secure. Weird."

Followed by a plea to go the website of the Freelancers Union, which is "working to make freelance fair."

Somebody give these guys an F, as in "fuddled." The so-called double tax creates neutrality rather than bias as between freelancers and employees, given the employer share of the payroll tax. Indeed, it's even adjusted to take account of excluding the employer share from the payroll tax base.

If it makes the Freelancers Union feel any better, they can tell themselves that, when they pay that double Social Security tax, they are actually wearing their self-employed employer hats for half of it.

Gilbert and Sullivan's Lord Poobah would understand. "Let's go over there where the Lord Chief Justice [or one of his other multiple titles] can't hear us."

Foreign tax credits

I'm nearing completion of a short, somewhat preliminary, but I think also provocative and surprising yet correct, article entitled "The Case Against Foreign Tax Credits." Not ready to post it, but the time may come fairly soon.

Waiting for 2012

No, that isn't a presidential election reference. I'd predict that Obama is reelected (running against an actual or simulated loon) after tough midterms in 2010, but that's not what I have in mind here. By now the 2009 elections are so earlier-this-week anyway, whereas last night's baseball travesty remains fresh for another few hours.

The 2012 reference, rather, is to when I am hoping baseball's owners will lock out the players after expiration of the current labor contract.

OK, I am not actually hoping for a lockout, but there is no other realistic scenario for restoring the basic competitive balance that fairness and equity demand - no, strike that, let's say instead that consumer principles of enjoyable viewership require, among people with basic good taste.

The $210 million Yankees will presumably be adding Lackey and Holliday this offseason (unless they prefer Jason Bay). Perhaps a few others as well. How long before they add Cliff Lee? And I wouldn't be surprised if they get Utley in a couple of years. This is what they generally do with people who have hurt them in the postseason. They will also continually get their pick of the big money international free agents, such as from Cuba and Japan.

Maybe they'll even find a way to add LeBron. (Insert smiley face here.)

The other 29 teams get to squabble over whomever the Yankees decide they don't want. This isn't really a formula, at least to my taste or any that I find easy to understand, for interesting competition.

A lockout of, say, one full season plus half of the next would be well worth it, from my standpoint, if it meant that baseball competition subsequently would be more like that in football and basketball. (I'm hoping LeBron will come to the Knicks, but think it's great that (a) this is far from certain, and (b) the Knicks can only get him within the salary cap that applies to all.) If this hurts my team, the Mets - just imagine what baseball's dumbest organization could do with only a median budget - so be it.

Available for free - unused paper title

"Tagging" is a popular idea in tax policy scholarship these days. The idea goes back to a 1978 paper by 2001 Economics Nobelist George Akerlof, called "The Economics of 'Tagging' as Applied to the Optimal Income Tax, Welfare Programs, and Manpower Planning." The idea is finding observable attributes (tags) that correlate, e.g., with high income earning ability, and basing tax burdens on that. An example might be a height tax.

With that in mind, I've come up with a paper title that almost doesn't need that good a paper to justify itself. Offered to the world, as I don't plan to use it. Perhaps it would be a political economy piece about the perils of the approach?

"You're It, I Quit: The Truth About Tagging."

True to life?

Two novels I've read this month - Claire Messud's The Emperor's Children and David Lodge's Deaf Sentence - appear to be building towards unpleasant or even horrific climaxes for the lead characters, but then they kind of trail away instead. I half-wanted the worst to happen, though also finding the prospect painful. Traditional plot structuring would have suggested ending with explosions rather than damp firecrackers (though Messud's 9/11 ending is hardly comforting). I suppose they picked the quieter endings in order to avoid formulaic predictability (like when showing the gun in Act 2 means that someone's going to use it in Act 3). But there's nothing wrong with earning a dramatic payoff so long as you can keep it fresh and surprising.

All three of them

They're getting along better these days, though Seymour and Buddy still stage the occasional squeakfest or batting practice. We are still building the trust level with Seymour (look what 7 years have done for us with the once-shy Ursula). Constant love-bombing gradually breaks down their defenses. A la Ringo Starr, who once scribbled that his favorite type of person was "Enyone who likes me."



Buddy




Ursula






Seymour

Meanwhile, back at the ranch ...

I had almost forgotten that the bizarre witching hour for a one-year disappearance of the federal estate tax is almost at hand. Under current law, the tax will entirely disappear on January 1, 2010, and then return to life at its pre-2001 levels on January 1, 2011.

If economics researchers had political clout, they would definitely lobby for the retention of this bizarre anomaly, which could permit testing of Joel Slemrod's and Wojciech Kopczuk's noted and infamous finding (which won them the coveted Ig Nobel Prize in economics in 2001) that the timing of death is tax-responsive. (Slemrod and Kopczuk note that their data does not permit them to distinguish between the hypotheses of actual change and merely reported change in the timing of death.)

But speaking more seriously, this is a crazy and irresponsible thing to do. Imagine a very wealthy individual, without a surviving spouse, in an irreversible coma. The time is somewhere between Christmas and New Year's Eve, just over two months from now. Suppose this individual is ready to go and has even left a clear-cut living will, but that dying before the new year would cost the family $50 million of estate tax.

Luckily, I've never been faced with making decisions about a family member in these horrendous circumstances, but I have known a couple of gerontologists who get angry about excessive use of "heroic" measures, when they feel it's hopeless, disrespectful of the dying person's wishes, and being done simply because the family isn't ready to let go.

However one comes out on end-of-life care questions (and it is a true minefield), we surely don't want an estate tax thumb on the scales.

Now fast forward to the midnight hour of December 31, 2010. If Congress still hasn't done anything, living an hour longer could cost a given family $50 million of estate tax. And there are really discretionary choices people can make, well short of illegal euthanasia. E.g., provide antibiotics or not, keep the food tube going or not. Once again, this really is not a choice we want anyone to face with huge estate tax consequences in the background.

In a sane and rational political world - perhaps on the planet Zircon - Congress, if unable to address a permanent solution in the time left to it, would simply extend the 2009 estate tax rules for a year and then try to make a final decision in 2010. To be sure, continuing one-year extensions of the 2009 rules, needing to be lobbied for each time, would be a risk and itself a bad outcome. But certainly one worth taking in late 2009 if Congress is unable to address the issue seriously before the end of the year, as seems quite likely.

But will the Obama Administration try to push this? There may be political costs and benefits they need to evaluate, especially given the number of balls they already have up in the air. Would a one-year extender lead to a Senate filibuster? (My uninformed guess is yes.) Would they be able to break the filibuster? (My guess is no.) So perhaps we are going to get the mad research experiment after all.

My own take on where we ought to end up on the estate and/or inheritance tax is that there is enough empirical evidence that people under-plan for it to make it an optimal piece of the overall toolkit, even if one were to assume that the net revenue and distributional consequences of repealing it were zero due to the ability to make offsetting changes to other instruments, e.g., the income tax. But that is a separate question from whether or not to let this crazy one-year window pop open.

Ups and downs

Today I spoke on a panel at NYU Law School's Family Day, when students' parents, significant others, siblings, etc. come to the school for a series of events. Pretty big crowd for the panel - probably about 500 or so. My topic was the long-term fiscal problems we face, and what the Obama Administration is (or isn't) doing about it. I showed them such charts, explained healthcare's role as an important contributor but not the sole cause, expressed extreme skepticism about how it is going to play out, based however on my read of U.S. politics rather than anything about the current forecasts, and so forth. I thought it went well & that I was in good form; this is something speakers (or certainly I) naturally care about. Makes one feel good and indeed invigorated.

Then I came home to do a baking project I had in mind, making a couple of plum loaf breakfast breads using very ripe and flavorful but too-soft late-season Italian plums that I had purchased precisely with this in mind. You mix the batter (dry and wet ingredients separately and then together), and the last step is to add and mix in your defining liquid ingredient, in this case the plum puree.

Only, I took the wrong container out of the fridge and mixed in instead some very garlicky tomato sauce. Once I had done this, it was too late to do anything but either (a) throw the whole thing out (two whole loaves' worth) or alternatively (b) bake it anyway and see what happens.

I chose option (b) but was physically revolted by what came out of the oven an hour later. (Though others get the final word before we throw it out.) The problem isn't the tomato, I suppose one could substitute it for a more conventional dessert-style fruit though I certainly wouldn't try it without good reason to think it would work. But strong garlic plus sweet in the same food item is for some reason revolting, at any rate to me, and even if it does all mix in the stomach later on anyway.

Score one good experience for the day and one embarrassing if moderately amusing botch.

And another publication

I have a short note, "The Obama Administration's tax reform proposals concerning controlled foreign corporations," that just came out in the British Tax Review. The full cite is 4 BTR 331-339 (2009). As it may not be easy to access in the U.S. interested parties can contact me by e-mail for a reprint.

New article in the works

Having completed the first 4 (out of 7) chapters of my book-in-progress, "Fixing the U.S. International Tax Rules," I've now decided on a detour that may take me a couple of months. To give one of its relatively novel ideas more prominence, I'm going to write a stand-alone article entitled "The Case Against Foreign Tax Credits."

I've written a one-paragraph abstract, but feel like keeping it up my sleeve (or under my hat?) for now. But readers who know that I favor moving towards exemption for what we classify as "outbound" investment will correctly surmise that I am not in fact proposing a hefty (or any) tax increase for it via the elimination of foreign tax creditability.

From financial crisis to debt crisis?

Courtesy of Brad DeLong, Ken Rogoff has some sobering words about the next Halloween trick that the world economy may soon be facing.

I remember Ken Rogoff from the strangely compelling WNET-TV coverage of the Fischer-Spassky chess championship match in 1972, where he was the briefly immortal Shelby Lyman's # 1 in-house guest analyst (leaving aside the hot-line phone connection to Edmar Mednis and the gang at the Marshall Chess Club). But I digress, and few readers are likely to share my memories of that high point of public television. Anyway, Rogoff is now a leading (perhaps the leading) international finance expert, and here is what he has to say on a subject where our interests overlap:

"Everyone from the Queen of England to laid-off Detroit autoworkers wants to know why more experts did not see the financial crisis coming. It is an awkward question.

"How can policymakers be so certain that financial catastrophe won't soon recur when they seemed to have no idea that such a crisis would happen in the first place?

"The answer is not very reassuring. Essentially, there is still a risk that the financial crisis is simply hibernating as it slowly morphs into a government debt crisis.

"For better or for worse, the reason most investors are now much more confident than they were a few months ago is that governments around the world have cast a vast safety net under much of the financial system.

"At the same time, they have propped up economies by running massive deficits, while central banks have cut interest rates nearly to zero.

"But can blanket government largesse be the final answer? Government backstops work because taxpayers have deep pockets, but no pocket is bottomless.

"And when governments, particularly large ones, get into trouble, there is no backstop. With government debt levels around the world reaching heights usually seen only after wars, it is obvious that the current strategy is not sustainable.

"If the trajectory is unsustainable, how long can debt keep piling up? We don't know. Academic economists have developed useful tools to predict which economies are most vulnerable to a financial crisis.

"But, although we can identify vulnerabilities, getting the timing right is virtually impossible.

"Our models show that even an economy that is massively overleveraged can, in theory, plod along for years, even many decades, before crashing and burning.

"It all boils down to confidence and coordination of expectations, which depend, in turn, on the vagaries of human nature. Thus, we can tell which countries are most vulnerable, but specifying exactly where and when crises will erupt is next to impossible.

"A good analogy is the prediction of heart attacks. A person who is obese, with high blood pressure and high levels of cholesterol, is statistically far more likely to have a serious heart attack or stroke than a person who exhibits none of these vulnerabilities.

"Yet high-risk individuals can often go decades without having a problem. At the same time, individuals who appear to be ``low risk" are also vulnerable to heart attacks.

"Of course, careful monitoring yields potentially very useful information for preventing heart attacks. Ultimately, however, it is helpful only if the individual is treated, and perhaps undertakes a significant change in lifestyle.

"The same is true for financial systems. Good monitoring yields information that is helpful only if there is a response. Unfortunately, we live in a world where the political and regulatory system is often very weak and shortsighted.

"Indeed, no economy is immune to financial crises, no matter how much investors and leaders try to convince themselves otherwise, as Carmen Reinhart and I show in our new book, ironically entitled 'This Time is Different: Eight Centuries of Financial Folly.'

"Right now, the latest 'this time is different' folly is that, because governments are taking all the debt on their shoulders, the rest of us don't have to worry.

W"e are constantly reassured that governments will not default on their debts. In fact, governments all over the world default with startling regularity, either outright or through inflation.

"Even the U.S., for example, significantly inflated down its debt in the 1970s, and debased the gold value of the dollar from $20 per ounce to $34 in the 1930s.

"For now, the good news is that the crisis will be contained as long as government credit holds up. The bad news is that the rate at which government debt is piling up could easily lead to a second wave of financial crises within a few years.

"Most worrisome is America's huge dependence on foreign borrowing, particularly from China ― an imbalance that likely planted the seeds of the current crisis.

"Asians recognize that if they continue to accumulate paper debt, they risk the same fate that Europeans suffered three decades ago, when they piled up U.S. debt that was dramatically melted down through inflation.

"The question today is not why no one is warning about the next crisis. They are. The question is whether political leaders are listening.

"The unwinding of unsustainable government deficit levels is a key question that G20 leaders must ask themselves when they meet in Pittsburgh later this month. Otherwise, Queen Elizabeth II and Detroit autoworkers will be asking again, all too soon, why no one saw it coming."

Bruce Bartlett's new book

If Diogenes went to Washington, he could stop looking once he ran into Bruce Bartlett.

Bruce's new book shows that he is not just intellectually honest but persuasive, personally candid and - I hate to use this much-abused word but it's really the apt one here - genuinely patriotic, in that he prefers trying to save the U.S. from a fiscal calamity to winning partisan fights, endlessly reliving past political wars, getting in good with the big money think tanks or his old friends, etcetera.

Bruce can't help being a standing reproach to conservative intellectuals who have a conscience but figure they just can't afford to jump into that pool. But each one who does so warms it up a bit for the next. So far his endorsements have come mainly from the left, where it doesn't take so much courage. AEI - Cato - Heritage - is anyone there listening?

Good luck with that

Saudi Arabia wants monetary compensation from consumer countries if they cut their oil purchases in response to global warming.

Next up, crack dealers want compensation from former customers who get their lives in order.

This is actually a transition issue, akin to those I discuss in my book on the subject. Suffice it to say that the incentive effects (Saudi Arabia would have less need to respond to the risk of declining sales) are almost as appealing as the distributional effects.

And another SSRN posting

My article from last fall, "The Long-Term U.S. Fiscal Gap: Is the Main Problem Generational Inequity?," has now appeared in print at 77 George Washington University Law Review 1298-1357 (2009). It is part of a symposium volume in the GWU Law Review concerning generational equity. I suppose this is old news at this point, but interested readers can now download the final published version here.

Abstract for the piece is as follows:

Current U.S. budget policy is unsustainable because it violates the intertemporal budget constraint. While the resulting fiscal gap will eventually be eliminated whether we like it or not, the big issue in current budget debate is whether the ultimately unavoidable course corrections should start now or be left for later. This paper argues that concerns of generational equity, which often are relied on by those demanding a prompt course correction, do not convincingly settle the issue, given empirical uncertainties about future generations' circumstances. However, efficiency issues create powerful grounds for urging a course correction sooner rather than later, on three main grounds: to eliminate the risk of a catastrophic fiscal collapse, achieve the advantages of tax smoothing, and smooth adjustments to the consumption made possible by various government outlays. Political economy considerations suggest that the risk of a catastrophic fiscal collapse may be significant even though in principle it could easily be avoided.

SSRN posting

An old paper of mine on endowment taxation has been reposted at SSRN here, because it belatedly occurred to me that there was an error in how the tables appeared in it.

This is one of my old papers that I relatively like, although the literature it seems to have spawned sometimes seems to me to have a bit too much of an angels-on-a-head-of-a-pin quality. Here I try to stick to what I think is conceptually important.

The new cat

Our new cat Seymour still hides out a lot and tends to run away during the day. But in the middle of the night at some point he’ll jump on the bed, start purring and nuzzling, rolling on his back to be petted, etcetera. Then by morning he is gone (although he shows up again to be fed).

Probably just the adjustment period, but while it persists I’m reminded of a story that Alfred Hitchcock once told when he was a guest on a late night talk show (presumably Carson), some time in the mid-1970s.

The story concerns a young man who is lost in the desert, and convinced he is about to die of thirst and exposure, when he sees a lovely villa in the middle of nowhere. He is graciously welcomed there and given a place to stay while he recovers. His host is an older man who lives quite comfortably with no one else in sight except for an attractive daughter (and perhaps servants?). The daughter is very chilly towards our hero, and will scarcely talk to him. But every night there is a knock on his door. From the voice it appears to be the daughter. She comes in and spends most of the night with him, but insists that he not turn on the light. Then the next morning, when he goes to breakfast, she is as remote as ever, until the next night when it happens again.

When the young man has recovered and is ready to leave, he asks his host why they are living in such a remote place, with no one around. “It must be so lonely for you and your daughter,” he says.

“Daughter?” the old man replies. “I actually have two daughters here. They are twins. You haven’t seen the other one because she has leprosy.”

And on that note Hitchcock took his leave.

I’m pretty sure Seymour doesn’t have a leprous twin in our house, with the same long body, absurdly long tail, carpet-like gray fur, and white boots. But for now there’s a similar disconnect between his daytime and nighttime avatars.

UPDATE: Seymour is starting to relax and get friendlier during the daytime. But it's a good thing he isn't a Seymouria (early Permian reptile), or he would look like the one on the left rather than the right.

FURTHER SEYMOUR UPDATE: Seymour appears to have established a modus vivendi with Ursula, the sweet-tempered and moderately shy female. Buddy, our crazed male incumbent, has been having loud yowling contests with Seymour in which they swat at each other but haven't gotten into actual fighting. They're evenly matched and appear to be a couple of big sissies (and thank goodness for that) behind the macho posturing, each desperate not to appear vulnerable. A couple of peaceable nose sniffs recently indicate we may be headed in the right direction.

New career as a film star?

If you view the trailer that's available here all way to the end, you'll see the first time I've ever been listed in a film's credits as one of its "stars." But unlike several of my co-stars, I didn't make the cut for the trailer.

2010 NYU Tax Policy Colloquium

We're far enough into the fall semester that thinking about the spring semester (which perhaps ought to be called the winter semester) no longer seems so fanciful. So I thought I'd post the recently completed schedule for the Tax Policy Colloquium at NYU, which I will be co-leading with Mihir Desai. All sessions will meet on Thursdays from 4-5:50 pm in Vanderbilt 208, NYU Law School, and the schedule is as follows:

1. January 14 – Fred Goldberg, Skadden Arps.
2. January 21 – Kim Brooks, McGill Law School.
3. January 28 – Lily Batchelder, NYU Law School.
4. February 4 – Michael Devereux, Said Business School, Oxford University.
5. February 11 – David Walker, Boston University Law School/NYU Law School.
6. February 18 – Jeffrey Brown, University of Illinois Business School.
7. February 25 – Matthew Adler, Penn Law School.
8. March 4 – Rebecca Kysar, Brooklyn Law School.
9. March 11 – David Weisbach, University of Chicago Law School.
10. March 25 – Robert Peroni, University of Texas School of Law.
11. April 1 – Douglas Shackelford, Kenan-Flagler Business School, University of North Carolina.
12. April 8 – Joel Slemrod, University of Michigan Economics Department and Business School.
13. April 15 – Michael Schler, Cravath, Swayne, and Moore.
14. April 22 – James R. Hines, University of Michigan Business School and Law School, and Edward McCaffery, USC Law School.

World fame beckons

Apparently I'm very big in Israel, unless it's a separated-at-birth twin.

Glories of the past

OK, the Beatles box set is on back order, but at least I have my Pavement tickets, more than a year in advance of their 9/21/2010 reunion concert in NYC's Central Park. (UPDATE: Pitchfork reports that those tickets sold out in the first two minutes, so you can tell I was on the case.) Still skeptical about the Big Star box set (as I have their 3 classic 70s albums), but I've been finding some interesting Elliott Smith nuggets in out-of-the-way places.

Nothing to report right now from the 1980s or the 2000s, though I have to say Grizzly Bear didn't do much for me.

How NOT to be an "objectively" top-ranked tax law professor

Evidently, one way to lower your ranking is to write books, which in recent years I have found myself doing most of the time. Books can't get downloaded on SSRN. Thus, if you spend your time writing them, you do yourself no favors on the frequently published personal or institutional SSRN download rankings, such as this one that appeared today.

Not whining, just noting it.

I could easily write an article on how the incentive to get downloaded has bad effects on topic choice and the approach taken in scholarly articles. But would it get downloaded enough to be worth the effort?

Matt Yglesias on why the U.S. will probably default on its debt (implicitly if not formally)

In re. why the Chinese are getting nervous about their holdings of U.S. debt, he notes:

"It strikes me that any rational person looking at how the health care debate has unfolded is going to grow substantially more skeptical about the ability of the United States to pass major legislation in general. What’s more, if you contrast the health care situation with the relative ease with which it was possible to enact debt-financed tax cuts (in 2001 and 2003) and a debt-financed increase in Medicare spending (in 2003) you’re not going to get super-optimistic about the prospects of deficit reducing legislation passing in the future."

This overlaps with but is also partly distinct from (and a complement rather than an alternative to) Bruce Bartlett's explanation, noted by me here, of why the U.S. is likely to default.

Addressing uncontrolled federal debt growth

Per Andrew Sullivan, there's a recent AEI piece by John Steele Gordon addressing the uncontrolled growth of federal debt. Sullivan notes that it's (of course) too easy on the G.W. Bush Administration, to which I'd add that it also misconceives the core problem and offers dubious solutions. but at least it's a generally good faith effort, albeit from a perspective that conservative readers (actual ones, not Teabaggers who mind debt only during Democratic administrations) will find more compatible than liberal ones.

While I welcome Gordon's input here, I view it as having basic conceptual problems that have nothing to do with liberal vs. conservative.

First, he offers as his Proposal # 1 resurrection of a constitutionally permissible form of the line item veto. This is naive, and further analysis would be needed to ascertain whether it would raise or lower spending growth (as I explain here). People tend to think about the line item veto statically: Congress spends $X, then the president can only reduce spending by knocking some stuff out. But legislation is a dynamic process. The line item veto shifts power towards the president, and will be used to further his interests or policy agenda relative to that of the Congress. So the question is: How will this likely affect total spending? In general, Congress tends to like penny ante stuff more than the president does (goodies for particular districts or interest groups). But presidents like really big initiatives more. Thus, e.g., if the line item veto existed today it would offer Obama additional leverage to lobby members of Congress to support his health care legislation ("give me your vote or I'll knock out the appropriations for your district").

Gordon's second idea is to have an independent accounting board scoring new programs (a la the Fed, except that here it's just scoring, not substantive policy actions). Fine with me, but don't expect much, I would say. No reason for Congress or the president to care much what these folks say. Plus, to what degree would the nominal independence actually work out in practice? The incentive the parties have to preserve Fed independence (fear that, if they exercise direct control, they'll screw up AND take the blame for everything) really doesn't apply here. What sorts of people do you think George W. Bush would have appointed to this commission, not to single him out as the only sinner, if he thought it would matter substantively to policymaking in the slightest?

Gordon's third idea is to limit total spending by Congress so it could only grow with the population. Even assuming the underlying normative predicate, which is of course controversial in right versus left terms about the optimal and politically likely scale of government, it's a fatally naive implementation of the idea that government growth should be slowed. As I explain in my recent book on fiscal language and approaching fiscal default (link, once again, is here), the term "spending" is formalistic and not meaningful, e.g., consider tax expenditures or regulatory mandates. Dollars formally counted has "spent" has very little relationship to the true size of government, i.e., its effect on allocation and distribution relative to some agreed-upon (if problematic) "minimal government" baseline.

Bruce Bartlett on the risk of a U.S. government debt default

In his column today, he says - and I completely agree:

"[M]arkets have always assumed that the federal government would raise taxes as much as necessary to prevent a debt default. That's the primary reason why U.S. Treasury securities are assumed to have zero default risk.

"This was a reasonable assumption in the past, but I'm not sure if it is going forward because the Republican Party is now totally dominated by anti-tax fanatics utterly opposed to raising taxes for any reason. Although most Democrats would probably raise taxes if they could, they are terrified of being attacked by Republicans if they do. Barack Obama is so fearful of such attacks, he insists that taxes will never rise on any group except the rich, even if this means extending most of the Bush tax cuts.

"I don't think financial markets have yet priced into interest rates the possibility that Republicans would rather default on the debt than raise taxes. Although they may not control Congress or the White House any time soon, it is clear from the health care debate that they and their allies at Fox News and talk radio effectively dominate the policy agenda even on issues like health that are generally favorable to the Democrats.

"If Republicans gain seats next year, which is very likely at this point, they will have veto power over any tax increase. Should Democrats attempt to raise taxes, we will see a replay in Washington of the budget debacle that recently transpired in California, where the state was reduced to paying people with IOUs.

"In short, the fiscal situation going forward is even more precarious than it appears at first glance--and that's extremely bad. If I am right about Republican opposition to tax increases, default on the debt has to be considered as a real possibility."

Time to get a massive short position in U.S. government bonds. Or, since that's prohibitively costly, do what? Buy inflation-indexed bonds on the view that they'll eventually be paid? (Don't bet on it.) Buy gold?

A sucker, or just another hapless (if tail-end) boomer?

OK, I've ordered the Beatles box set (stereo - I'm not enough of an audiophile fanatic for the mono). I did so even though the albums are so far past over-familiar to me by now that I generally will only listen to bootlegs and outtakes. Worse still, I'm annoyed that they can't be like Pavement, say, and have greatly expanded reissues exploiting the vast wealth of unissued material out there. (E.g., the White Album could easily be doubled via Esher and other demos and outtakes; Get Back/Let It Be should be a 3 to 4-CD boxed set.)

But if the sound really is way better, as Pitchfork and others say ...

Tax reform recommendations (mine and others)

Tax Analysts has just posted "Towards Tax Reform: Recommendations for President Obama's Task Force," consisting of short essays by 32 invited kibitzers of all stripes (law profs, practitioners, economists, journalists, etc.). You can access the entire 130-page document here or my contribution here. My comments focus on corporate and international tax policy.

Game-changer?

Today we were on the verge of adopting this very placid and sweet-tempered 4-year old male cat named Seymour, when I noticed a mysterious lump on his belly. Could be nothing, but no adoption until the shelter has a vet check him out.

UPDATE: Looks like he's coming home with us in a few days after minor (?) surgery to fix an umbilical hernia.

FURTHER UPDATE: We've got him, after umbilical hernia surgery. Very calm yet affectionate.

Some interesting health reform ideas

With the Obama health reform plan evidently struggling, a host of different (political and substantive) approaches are being suggested. Two in today's NY Times alone.

Glenn Hubbard suggests reducing the exclusion for employer-provided healthcare and using the revenue to expand health insurance availability, e.g., via tax credits to the low-income uninsured for purchasing it.

Zero chance this is politically acceptable to either side, but a decent idea substantively, especially if the limit to the employer-provided exclusion targets coverage of routine care outlays.

BTW, Glenn also says Bush blew it in 2005 in his Social Security initiative by emphasizing private accounts rather than addressing financing (in particular at the expense of the upper-income) in exchange for expanding low-income saving. Once again, good policy thinking by my lights but no way this would have worked politically. The left would have said no, and for Karl Rove types in the Bush Administration, drunk as they were at the time on their hubris, the chief goal was to dismantle the belief that Social Security was a government program, as a tool for broader political point-scoring (i.e., they might have been happy with a substantively identical program to the current one in which the checks seniors got changed in only one respect: they purported to be from private companies rather than the government). Of course, it turns out this didn't matter because angry seniors at the healthcare forums appear to believe that neither Social Security nor Medicare are government programs. But that's another matter.

Meanwhile, Bill Bradley recalls that 1986 tax reform was a grand bargain founded on base-broadening for the Democrats in exchange for lower rates for the Republicans. Could we do it again in healthcare? He proposes universal coverage in exchange for tort reform.

Small aside, the empirical literature I'm aware of suggests that, while tort reform would help the problem of rising healthcare costs, it wouldn't do nearly enough. An opinionated senior doctor I was talking with the other day emphatically disagreed (based of course only on his anecdotal sense), arguing that defensive medicine is so prevalent that it would make a big difference.

Obama, in leaving tort reform out of the health reform package, either (a) wisely avoided picking one fight too many as the savings weren't big enough, or (b) cynically catered to the Democrats' trial lawyer lobby, on his own behalf or for Democratic support on the Hill. Take your pick, or say both if you like. I myself am sympathetic to a degree to tort reform, even though it's grossly wrong as a theoretical matter to have doctors not bear the costs of negligence so they will have the right incentives, because I have the sense that the liability process is so wildly askew that we aren't really advancing proper care sufficiently by having it. Being found liable may be more like losing the lottery than anything else, if the outcomes are random enough. But I am not expert in this area, and I'd certainly like people who leave in sponges, sever the wrong blood vessel, etc. to face liability.

Is Bradley right that this bargain could work? I'd like to think so but am skeptical both politically (would either side accept it?) and substantively (does tort reform, especially if tailored responsibly, come close to paying for the other piece?).

Maybe put all these things in the hopper together? But again, presumably it isn't happening.

One last thought, purely on the politics. Shouldn't Obama have called the public option "buying into Medicare," so long as its financing were explicitly separate? People couldn't possibly have gotten hysterical about that given Medicare's popularity. Dumb mistake not to have done it, which is not to say it would have been a good approach in substance.

Krugman comes around?

In reading Paul Krugman, it's important to resist Broderism, or centrism for its own sake. For example, his saying harsh things about the Republicans, or arguing that the stimulus package needs to be much bigger than the political consensus has it, sound "extreme" in the standard Washington framework, but ought to be evaluated straight on the merits, where they often prove more convincing than the "reasonable" competition.

But I certainly have had an enduring disagreement with him about the long-term fiscal sustainability problem, concerning which he, to my mind, has been overly dismissive. Only - might he finally be moving my way on this?

My recent book on the subject bears the tell-all title, "Taxes, Spending, and the U.S. Government's March Toward Bankruptcy." I discuss the parade of horribles towards which the U.S. is headed under current policy (a plausible playout could involve hyper-inflation, a bigger wave of bank failures than in 2008, etc.). I note healthcare's central role in the problem, but am a bit less willing than Krugman and others in his camp on this issue to say it's JUST healthcare (as there are other contributing elements as well).

Most importantly, I note that the fundamental problem is political, not economic. Under any reasonable economic and demographic path (leaving aside those that would imply disaster wholly apart from whether there's a fiscal collapse), it's in principle quite easy to fix things. If you put a couple of leading economic experts - say, one liberal and one conservative but both sane and reasonable - in a room for the weekend, they could come out on Monday morning with a plan that would work fine, albeit dishing out a bit of pain and disappointment, if implemented.

The problem is that the political system probably can't get there. Given the pain involved from raising taxes and slowing the growth of healthcare-related and other outlays, a fix would require bipartisanship, of the real kind we had every now and then in the 1980s, not the phony Broder style of compromising halfway between sanity and wherever the Republican leadership lines up (a moving target, since if you give them X they will demand 2X). So a minimum requirement for our having any chance whatsoever of avoiding the collapse is that the Republicans return to sanity. Even that might not be enough (the Democrats are hardly saints on this stuff either), but without it the chance of a soft landing is not much greater than zero.

Fast-forward to Krugman's column today. He says the deficit needs to be bigger for the next couple of years. OK, agreed unless there's a tradeoff down the road if, for reasons of political economy, this produces higher deficits in the future when stabilization policy wouldn't indicate having them.

Then he turns to the long-term problem. "So is there anything to worry about? Yes, but the dangers are political, not economic." OK, we certainly agree on that.

Then comes the bit that shocked and stunned me when I skimmed the paper quickly this morning before going to work. Only, I turn out to have read it out of context. After noting that eventually "the U.S. government will have big problems unless it .... rein[s] in the growth of Medicare and Medicaid spending," he says:

"That shouldn’t be hard in the context of overall health care reform. After all, America spends far more on health care than other advanced countries, without better results, so we should be able to make our system more cost-efficient."

Here, thinking this was his bottom-line conclusion, my contact lenses almost fell out. But then comes the payoff:

"But that won’t happen, of course, if even the most modest attempts to improve the system are successfully demagogued — by conservatives! — as efforts to 'pull the plug on grandma.'

"So don’t fret about this year’s deficit; we actually need to run up federal debt right now and need to keep doing it until the economy is on a solid path to recovery. And the extra debt should be manageable. If we face a potential problem, it’s not because the economy can’t handle the extra debt. Instead, it’s the politics, stupid."

My sentiments exactly.

It looks like the informed deficit debate has gone an important extra step, unfortunately into a dead end so far as what to do about it is concerned. To people like me concerned about the overall fiscal situation, Krugman kept saying: "It isn't a fiscal problem, it's a healthcare problem." To which my initial response was: Why call it only one, when it's both? (Albeit that without the healthcare problem it would be manageable, even if requiring non-trivial policy adjustments.)

But in Taxes, Spending, and the U.S. Government's March Toward Bankruptcy, I say: It isn't actually a healthcare problem; it's a political problem. (At least in terms of what makes it insoluble.)

While I'm confident that Krugman hasn't read my book, it looks like he's come around.

The next step, which I don't think he's taken yet, is to ask how all of one's policy proposals, even for the short term, might change if one rules out rational adjustments by the political system and asks instead how it likely will adjust (e.g., if deficits, once high, are hard to lower).

Paul Krugman on zombie Reaganism

Today Paul Krugman has an op-ed in the NYT asking why Reaganism, which he defines as "an ideology that says government intervention is always bad, and leaving the private sector to its own devices is always good," continues to dominate Washington policy debate even though events of the last few years have done so much to discredit it.

He has a point, but also is missing a point.

How, why, and when markets work or don't work is theoretically well understood, and we've learned in the last few years that market failure is more pervasive than the academic consensus held a decade ago. And he is right to label the financial crisis as Exhibit A, whether one primarily blames corporate governance failures within a rational behavior framework for individuals or thinks the framework's direct limitations were more crucial.

But he leaves out the other side of the horse race between market and government solutions that is crucial to evaluations of the proper size and scope of public sector decisionmaking. That is, while pervasive market failures call for government intervention, pervasive defects in political decisionmaking call into question how much benefit to expect in practice from government intervention.

Trained as a policy-oriented economist rather than a political scientist, Krugman has a view as to what sorts of government interventions could address market failures and lead to better outcomes. His approach to politics is to hope that making good arguments and supporting (while also exhorting) the relatively good guys against the really bad guys will lead to a close enough approximation of the policies he advocates for good to result overall. If you are arguing "We should do X" and your analysis is right (X if done correctly would have good effects), that may seem to be the end of it. But in the long run one also needs a political theory of how discretion will be exercised in practice.

Consider the hands-off non-regulation of new financial products that Krugman decries. Suppose we agree that the regulatory approach he advocates, if adopted and vigorously enforced 10 years ago, would have staved off the financial collapse. But now let's suppose that the approach was already in place but we had Greenspan, the Bush Administration, and for that matter the Eastern Democrats in Congress who were tight with the financial firms calling all the shots. There's a well-known theory of regulatory capture suggesting that the regulators end up serving their "constituents" rather than the diffuse public interest. Krugman's answer, a perfectly understandable one for someone playing his role, is simply: let's demand that they do the right thing, hold their feet to the fire, put in good people, etc. Keep on fighting and don't give up the ship.

But from a broader perspective one does have to think about market failure versus government failure. And one important intellectual force keeping the "zombie" of Reaganism alive is all too well-founded skepticism about the political process, enhanced pretty much every day one reads the papers. It's hard to come up with good theoretical grounds for expecting good things to happen, even if one can identify (and fight for) policies that would have good effects.

Case in point is the public option on health insurance. Krugman today notes the view expressed by Democrats such as Senators Conrad and Nelson that, if the option were available and people chose it over private insurance, this would be "a self-evidently bad thing, rather than ... what should happen if the government plan was, in fact, better than what private insurers offer."

Well, we know (as does Krugman) where Conrad and Nelson are coming from on this. But in fact the popularity of publicly provided health insurance would be normatively ambiguous until we understood more about how it was being run and why it was proving popular. One possibility is that the genuine cost savings proponents claim such a program could provide would be operating. A second possibility is that it would be heavily enough subsidized to offer a better price. Maybe that's fine too, but it raises a different set of issues. A third possibility, by the way, is that the insurance companies would make sure it was run in order to fail.

The problem with those on-line weather forecasts

Say I want to know if it will rain this afternoon between 2 and 5 pm, and the link says 30% for each of the three one-hour segments. Without knowing anything about the correlation, how am I supposed to plan?

There seems to be no way of telling where the chance of rain, for the entire period between 2 and 5 pm, falls between the polar answers of 30% and 65.7%.

Perhaps I'm over-thinking this (or failing to look at the forecast for the day as a whole).

Healthcare reform

The current debate's lack of coherent content has been quite startling, and indeed dismaying insofar as one naively hoped for better.

I generally support what the Obama Administration is trying to do (though sometimes what that is, isn't entirely clear). In 1993, I was unsympathetic to the Clinton plan, but since then my view of how well the U.S. healthcare market functions has darkened. More on that in a moment. Unfortunately, I don't think the Administration has conveyed any clear sense of what it is trying to do, or why.

Concerning the other side in the debate, perhaps the less said, the better. I really can't say anything temperate at this point.

What is the set of problems to which the Administration's healthcare reform proposals might, with luck, be an at least partial solution? Brad DeLong once put the point quite crisply (in his moderate rather than shrill persona). To liberal economists, the big problem is adverse selection. To conservative economists, the big problem is moral hazard. And I myself would say they're both right, plus there also are externalities.

On adverse selection: Anyone who is facing uncertain healthcare expenses ought to want insurance, smoothing out the actual cost towards the expected cost. Our healthcare market does not work well to solve this problem, and that's a big reason for the millions of uninsured. The tax subsidy for employer-provided insurance contributes to this, by making risk pooling much harder for the people left over after these generally healthier groups have been cherry-picked out of the pool (so to speak).

Adverse selection, making fairly priced insurance unavailable, is inherently a big problem in healthcare if the government doesn't somehow mandate pooling, given that people often will know more about their expected future health than insurance company doctors will be able to learn. But the system created by tax benefits certainly has made things worse.

Myopic or irrational failure to insure (until it is too late) when one should have also is a problem. Likewise, the prospect of free care in the ER if one has a crisis may create an individually rational reason for under-insurance, but involving a fiscal externality. When you count as well the adverse effect on risk-pooling of people's staying out of the insurance market (contributing to adverse selection), there's a good case for mandating health insurance coverage, just as Social Security effectively mandates retirement savings.

There is an argument on the other side - why give me (or make me buy) something that costs $X if I value it at less than $X - but while that's often a good argument I personally would reject it on balance here. Note, however, that this argument applies equally to making me buy something for $X and giving it to me for free (since in that case we could simply have given me the $X instead). And the question of whether I pay the $X or get it for free is simply an input to the overall issue of post-tax and transfer wealth distribution in the society (which is not to diminish its importance, but just to put it in the proper larger context).

And finally, mixed in with adverse selection (though conceptually distinct) is that we may favor redistribution from those facing low expected healthcare costs to those facing high expected costs, in particular to the extent that brute luck rather than choice underlies the difference. Thus, mandatory insurance for which everyone was charged the same amount might be defended as combining a solution to adverse selection with a deliberative redistributive policy. By the way, lest this sound a bit lefty, it is distributionally equivalent to what the George H.W. Bush Administration would have proposed it if Bush I had won the 1992 election, via risk-adjusted subsidies for the purchase of private health insurance.

OK, on to moral hazard. One key reason the U.S. healthcare system is so wildly expensive relative to the benefits provided (where the comparison is other economically advanced countries, where people get comparably good healthcare for much less) is that we have half of a free market system, in effect - which can be worse than no market system at all. Consumer demand drives the market, but it is largely the demand of subsidized consumers who are not actually paying at the margin for what they get. Suppose that in the market for groceries or cars we had consumer demand in the driver's seat (as we do), except that people didn't actually have to pay for what they purchased (or maybe they just had a small co-pay). Whole Foods and GM might like this, but it wouldn't be good socially. Yet in healthcare, that's effectively what we have, much of the time, for people on Medicare, Medicaid, or employer-provided health insurance that overpays at the margin (relative to the optimal insurance level) due to the distorting effect of the tax subsidy.

Perhaps the food or cars analogy overstates the problem in a couple of respects. Good food and cars are fun in themselves, getting healthcare isn't and hence I'd generally only do it out of the belief that my health will benefit. Plus, doctors to a large extent tell healthcare consumers what to do. But the latter is actually a big part of the problem - they don't bear the marginal costs either, and have some reasons of both ideology and self-interest (earn more fees or practice overly defensive medicine) for recommending treatments that aren't actually worth their cost to the patient.

So we have a terrible healthcare system that surely could be vastly improved. I take the Administration to be addressing the adverse selection problem by extending health insurance to the uninsured population. Also, it may want to address under-treatment of this population (which exists alongside over-treatment of others), which I think of as a distributional issue, because being sick and treatable, but unable to afford the treatment, should raise one's estimate of the marginal utility that a transfer via free provision of the needed service would provide.

The Administration would also perhaps like to address the moral hazard problem, which is a key input to the horrendous problems of long-term fiscal unsustainability that the U.S. currently faces. Many observers are skeptical, I would guess rightly, of the progress that the current proposal would make on this front. Unfortunately, addressing it really requires bipartisanship, since cutting benefits is politically unpopular. And the Republicans couldn't make any clearer their unwillingness to cooperate in any sort of good faith effort to address waste and put healthcare outlays on a sustainable path.

One of the many offensive and odious aspects of the Republicans' hateful lying about death panels and the like is that they are actually the ones who want to provide less treatment. For those among them who are sane and believe in civil society, this mainly reflects concern about moral hazard and/or a libertarian distributional view. The rest, apparently a large majority of their number, do not bear discussing.

Rare football commentary

The Brett Favre embarrassment tour continues.

Woodstock, 40 years later

Was I there at the time? Yes, if you're willing to count being a pre-teen in the back seat of my parents' car, caught in the very outskirts of the miles-and-miles-wide traffic jam as we drove to or fro a vacation site.

Woodstock's little secret (not that my knowledge of this comes from back then) is that most of the music wasn't very good. It was a year or two too late - too grandiose and self-infatuated by that point in the evolution of rock music. And though there still were some very good things to come in the immediate offing, the already badly needed rescue by punk rock / new wave remained seven years in the future.

Another day, another review

Alan Viard, in the latest National Tax Journal (Vol LXII, No. 2, June 2009), says the following about Institutional Foundations of Public Finance, the recently published conference volume (in honor of David Bradford) that I co-edited with Alan Auerbach:

"The book is exceptionally well suited to serve as a tribute to David Bradford. The authors and discussants address the questions Bradford studied, and they do so at the same broad and conceptual, but policy-relevant, level at which he addressed them .... This book should be of interest to economists studying any of the topics that it covers, particularly those interested in fundamental tax reform. It is a fitting tribute to David Bradford and should serve as an inspiration to those seeking to carry on his work."

I would add that it's not just suitable for economists, but also people with tax policy interests generally, including those with law or other generalist backgrounds. The participants were close to a 50-50 lawyers and economists mix. But admittedly it's much more of a specialists' book than, say, this one.

Topics covered include fiscal federalism, dividend taxation, fiscal language, income and consumption taxes, and questions of transition to a consumption tax.

"Keep the guvmint off my Medicare"

The widespread view among healthcare reform foes that Medicare is not a government program inclines me to ask: If Obama gets away with this, what is the government going to take over next? Social Security?!?!?

Go ahead, make my day

Perhaps I can be forgiven for quoting highlights from the brief review of my book, Decoding the Corporate Tax (available here or here), in the August 2009 issue of Choice Magazine.

"Shaviro (New York Univ. Law School), a distinguished tax scholar, does a masterful job of bringing the critiques together and explaining their logic in a concise, lucid manner. The arguments involve some arcane economics, corporate finance, and law, but he manages to bring a degree of order from the complexity .... This is the first place to go for anyone seeking to understand the corporate income tax maze."

The book gets a 4-star rating and is deemed "essential."

Most amusing quote in the review: "Shaviro tries hard, at the end, to convince himself that the U.S. political system can yield reforms." Ah, that would be the self-described "Hollywood ending," complete with the old saying that "if wishes were horses, beggars would ride," that I added upon being told by readers that the ending was a bit too bleak.

Quote of the day

From Captain Beefheart, in an excellent 1978 live album called "I'm Gonna Do What I Wanna Do" (that being his verbal response to audience requests for favorite songs):

"It's very hard to do poetry in this world of Denny's staying open all night."

But no harder, I suppose, than trying to revise the introduction to my new book while riding the NYC subway and listening to said live album.

Excitement on the home front last night. Ursula (our small brown tabby) was making loud crunching noises in our room while we were trying to get to sleep. It turned out she had a small mouse in her mouth. As it no longer had a head, it had stopped struggling, but she has always been conscientious about chewing her food.

I suppose Freddy from the Friday the 13th movies is a good analogy for cats as seen through the eyes of their prey. Demonically playful, bloodthirsty, and equipped with multiple retracting blades. Luckily I get to see a different side of Ursula, more characterized by her rolling on her back, eyes half-closed, kneading with her paws in the air, and purring.

Another day, another article

I've initiated posting on SSRN my new short (7,000 words) article, "The 2008-09 Financial Crisis: Implications for Income Tax Reform," and will post the link when it's up.

The paper is based on PowerPoint slides for a talk I gave in Milan (or actually from NYC via skype) earlier this year, as per the preceding blog entry. It may appear next year in a conference volume relating to that session.

UPDATE: The link is here. Abstract is as follows:

Tax rules encouraging excessive debt, complex financial transactions, poorly designed incentive compensation for corporate managers, and highly leveraged home ownership all may have contributed to the financial crisis, but do not appear to have been among the primary causes. Even without a strong causal link, however, the preexisting case for tax reform at all these margins arguably is strengthened by the 2008 financial crisis, which suggests that tax rules not only fell short of classic neutrality benchmarks but generally leaned in precisely the wrong direction.

Oops, more delays

If there's one thing I really want to accomplish over the rest of the summer - other than taking advantage of the NYC farmers markets' fresh fruit bonanza while it lasts - it's to make serious progress on my international tax book, which has taken very definite form inside my head but needs to be extracted and actualized.

But first I had to get straight the reading list and plan of action for the seminar on corporate and international tax policy that I am teaching this fall (starting a week before Labor Day). It's all very well to assign the students reading from this handy item, but I realized that wouldn't do the job all by itself. Luckily, my syllabus is now set, leaving me much more enthusiastic about the seminar than I was a mere 24 hours ago, when I still had various unsolved obstacles. Now the main concern I have left is whether I will draw genuinely interested students, rather than people who simply seek to fulfill a course requirement or keep their classes early in the week. (My holy grail is a filter to select positively for students who are genuinely interested, although admittedly, from the standpoint of the overall NYU faculty, this amounts to attempted cream-skimming.)

Now with that done, I've reluctantly persuaded myself that it makes a great deal of sense to write a short piece on taxes and the financial crisis, for a forthcoming volume associated with the conference, at Bocconi University in Milan, that I attended at the end of April (if only virtually, by skype, due to back spasms), and reported on here. The slides on which I will base the paper are still available here.

In other news, I should soon have 3 fresh publications out there on the at least virtual street. One is my paper for the George Washington Law Review on the long-term U.S. fiscal gap, a second is a piece for the British Tax Review on the Obama Administration's international tax reform proposals, and the third is a very short one for Tax Notes that's part of a series they should be publishing shortly on where the Volcker tax reform panel that ostensibly is hard at work should look for ideas. More on these when they come out.

And while I'm at it, I don't believe I've ever posted a link for my recently published article, Internationalization of Income Measures and the U.S. Book-Tax Relationship, which appears to be available here.

Oxford talks on U.S. international taxation

Powerpoint slides for the two talks that I gave a couple of weeks back in Oxford are now available on-line here.

The one from July 7, "Planning and Policy Issues Raised by the Structure of the U.S. International Tax Rules," is based on chapter 2 of my book-in-progress. (At least I like to think of it as my book-in-progress - I'm getting so backed up right now with other things I need to finish first that I'm starting to envy the Red Queen and Alice, for being able to stay in place by running fast.)

The one from July 10, "The Obama Administration's Tax Reform Proposals Concerning Controlled Foreign Corporations," echoes a forthcoming British Tax Review piece in which I expand on the views I first set forth here.

U.K. vs. U.S. international tax policy

My trip to Oxford earlier this month for a pair of conferences, one academic and the other mainly business and government, gave me a close-up look at how tax policymaking differs both substantively and procedurally in the two countries.

Substantively, the differences are pretty clear. The U.K. is in the process of greatly scaling back worldwide taxation of its resident corporations, whereas in the U.S. the Obama Administration has proposed heading in the opposite direction. This partly reflects differences in the countries' situations. The U.K. is obviously more deeply embedded in the "small open economy scenario" than we are, having a smaller internal market right next to the rest of Europe. Plus, corporate threats of expatriation in response to worldwide taxation play out very differently for a technical reason. In the U.S., where corporate residence depends on one's place of incorporation, companies that attempted "inversion transactions" a few years back (placing, say, a Caymans corporation at the top of the multinational chain and taking the U.S. firm out of the line of ownership of other foreign corporations) led to a huge 9/11-influenced political stink about "Benedict Arnold corporations" and the like.

In the U.K., by contrast, domestic residence follows from having U.K. headquarters. Thus, when companies threaten to leave, this apparently contributes to a very different reaction. Whereas the formalism of corporate inversion transactions helps feed the U.S. political anger about them, people in the U.K. evidently take to some extent the view that, if the headquarters truly leave, the expatriation transaction "should" work - the normative basis that people think of as underlying corporate residence has genuinely changed.

So by having a somewhat more economically substantive economic residence rule, the U.K. ends up inducing a greater sense in popular thinking that companies really can expatriate if they want to, leading to the threat of departure's having a different and stronger political valence. This in turn provides a big impetus for the drive to weaken worldwide residence-based corporate taxation in the U.K.

But all that concerns the substance of the policy, not the procedure. The latter is quite different as well. To begin with, as it's a parliamentary system, once the U.K. government announced what it wanted to do, everyone pretty much agreed that it was definitely going to happen, with only the details remaining open. Given the long-term political fragility of the Labor government, this presumably reflects some combination of the view that they can definitely serve out their time (without a no-confidence vote) and get this done before calling elections, and/or the view that the Conservatives would also be sure to adopt this policy given its pro-business direction.

Compare the fate of U.S. Administrations' tax policy proposals, which typically vary along a range from "maybe you'll get something loosely like this if you fight like hell and get lucky" to "dead on arrival."

Perhaps more surprising is the procedural differences in developing the details of the policy. In the U.S., the Administration will typically announce a full-blown (even if sketchy) proposal on which they have publicly consulted no-one. Obviously, there may be political dealings going on behind closed doors, and in the most extreme cases (such as the energy policy Cheney developed in 2001) they are pretty much explicitly written by current and past/future lobbyists on what's close to a pay-to-play basis. But given how contrary this is to the U.S. ideal of the government simply announcing its policy, in those cases the interest group input is as hidden as possible.

Then in Congress there's a lot of interest group input (obviously), and in recent years lobbyists have even been permitted to do the actual drafting (unthinkable in the 1980s and before). But even so the ideal is that the government policymakers decide, since public input is assumed (all too rightfully) to be sleazy giveaways to organized interests at the expense of the general public.

The biggest U.S. departure I can think of from this pertains to drafting regulations. The Treasury Department realizes it needs detailed input in order for regulations to be workable and to address the problems it aims at. So it solicits and receives notice & comment (as required by the Administrative Procedure Act), and makes serious use of input from affected taxpayers (and expert practitioners), even if it ultimately makes the calls itself subject to whatever White House control is being exercised (much greater in the GW Bush era than previously).

In the U.K., the Treasury announced the general details of its intended international tax policy change, but announced as well that it wanted extensive input from the business community in making workable rules that would avoid imposing excessive burdens. They more or less said they wanted to come up with something that the business community felt it could live with, although they didn't offer carte blanche to give people whatever they wanted. One big example of the input's impact: the UK government initially intended to retain their version of subpart F insofar as it taxes resident companies' foreign source passive income (such as portfolio dividends and interest), but has now pretty much agreed to give up on this point, subject only to doing what they feel is necessary to protect (a) overall revenues and (b) taxation of what is truly U.K.-source active business income.

It's easy to view this through a U.S. interest group lens, as merely a more overt and less secretive or shamefaced version of Cheney oil industry sleaze or lobbyists writing "rifleshot" tax giveaways for themselves. But, even leaving aside the distinct point that I tend to agree with this shift substantively, I get the sense that, while clearly the interest group story is a part of it (and the credible threat to expatriate is a further part of it), there also is some sense of consultation and consensus that really doesn't have an exact parallel in the U.S. setting.

The U.K.'s parliamentary system clearly plays a role in the U.S. versus U.K. procedural differences - but it doesn't necessarily explain this. After all, in the parliamentary model, it's vastly easier to shove an unpopular change down everyone's throat. I think the difference in scale may be crucial here. The U.S. is so big that wide-ranging consultation and consensus simply can't work the same way as in a smaller country like the U.K.

In Federalist # 10, Madison famously said that when you extend the sphere you create a better democratic process because there are too many interests for any one of them to be able to shove its agenda down everyone else's throat. The story here is very different and has an opposite normative spin (if I am right in viewing the U.K. example relatively benignly). Indeed, it's more of an anti-Federalist type story in which a "community" can run things with greater cooperation and consensus than a vast republic. Obviously, reflecting modern technology, the community-compatible size has greatly increased, and the underlying values being expressed are radically different.

Once again I find myself worrying that the U.S. has become unusually ungovernable by advanced-country standards.

Back in the U.S.A.

After a whirlwind week of sightseeing in London, we're back home and only slightly jet-lagged.

Although I'm a summerphile with a taste for heat (at least up to the mid-80s), London's weather was reasonably pleasant. There's seemingly a rule there that it has to spritz at least briefly every day, no matter how sunny it may look in the morning, but for the most part we had decent weather. The Underground is superior to the NYC subway in many ways - easier to use and with much more frequent trains (the tradeoff, clearly worth it for my money, is that it shuts down in the dead of night). The extremely long summer daylight hours (17+ hours at this time of year) are also exhilarating, although of course one pays dearly for this in the winter (I'm told the Sun pretty much disappears, between short hours and fog, from November through March).

There's lots of art in London that's either great or interesting - an example of the latter being my old favorite, the National Portrait Gallery, with its psychologically illuminating portraits of famous Britishers ranging from kings to poets. Though often averse to tack, I couldn't resist bringing home a Richard III towel, showing the famous painting in which he looks conscientious and careworn (the inspiration for Josephine Tey's delightful "The Daughter of Time"). But I passed up a Tate Gallery T-shirt I liked (saying "Your pizza is ready now") because the price was too high.

My most enjoyable read of the vacation was Tom Holland's "Rubicon: The Last Years of the Roman Republic," which turns the exploits of Marius, Sulla, Caesar, Crassus, et al into something at least on a par for excitement with "The Godfather." I gather it's historically sound if one forgives the rampant speculation about Romans' individual and collective beliefs and motives. Truly a compelling page-turner.

"Waiting for Godot" was predictably a bit too much to ask of our adolescents in tow (I declined to offer an advance preview of the plot, though it would have been easy to do in a sentence), but they greatly enjoyed "The 39 Steps" (enjoyable farce, though to my taste a bit too ready to rely on laughs that were easy but not enormously interesting).

A week in Oxford

I've just completed a week in Oxford (with family), attending a Summer Symposium and a Summer Conference held by the Centre for Business Taxation at the Said Business School at Oxford University. More shortly on the substance, including my own two talks (one on the main problems with the U.S. international tax rules, the other on the Obama Administration's international tax proposals). But anyway, most of the world is heading towards an exemption system for outbound investment by resident multinationals (a term of art, of course, as corporate residence isn't a meaningful concept). Today I compared the U.S., which is potentially headed in the other direction, to the boy in the high school parade of whom his proud mother says: "Will you look at that! Everyone is out of step except for my son, Johny!"

One amusing moment today came in a discussion of U.K. law. One issue is UK companies threatening to "expatriate" if the home company rules don't become more favorable. A second issue is ongoing litigation by HM Treasury on economic substance-type grounds.

On the latter, someone from the audience said something about how pretty soon some companies will be singing "the Clash song, 'I Fought the Law and the Law Won.'"

One of the speakers very promptly responded: "Or rather, 'Should I Stay or Should I Go?'"

OK, maybe you had to be there, but it was quite quick and funny in context.

I've also taken enough time off from the conference to go to Blenheim Palace and the slightly Disneyized but nonetheless interesting Warwick Castle. And the conference festivities included a humbling experience punting along the river (how Charles Dodgson could extemporize Alice in Wonderland while punting I'll never understand), and an amusing performance of Twelfth Night. Tomorrow, Stonehenge, and then a week in London.

On the road again

Last week (June 22-26) I was at an international tax conference in Berkeley. As it was devoted to looking at existing literature, I didn't hear much that was new to me while there.

Tomorrow I'm off again to another international tax conference, this one in Oxford at the Said Business School (July 6-10) and involving a number of new papers or talks. I'll be presenting twice, and hope to get the PowerPoint slides up on the NYU website, in which case I'll link them here. One concerns a chapter of my new international tax book in progress, while the other discusses U.S. trends in international tax policy with particular reference to the Obama Administration's international tax proposals.

After that, a week's vacation in London and then back to NYC as the summer bleeds away all too fast. Summer is by far my favorite time here, from a weather as well as a free time standpoint. I spend the winter cursing the cold and lack of fresh produce, and wishing the summer would get here already. Then I spend the summer half-enjoying it (at least when the rain lets up) and half-brooding about how fleeting it is.

Tax expenditure analysis at the Joint Committee on Taxation

While Ed Kleinbard was Chief of Staff at the Joint Committee on Taxation, he sought to modify and revive tax expenditure analysis, along grounds which I thought added to its usefulness and intellectual coherence. What is going to happen to JCT's tax expenditure analysis now that Ed has moved on to USC Law School?

From an interview with new JCT chief of staff Tom Barthold in the June 29 edition of Tax Notes:

TA: Your predecessor also focused a lot on the tax expenditure issue and, for example, looking at how to define expenditures. Will you continue that work, or are there areas that kind of fall into rethinking how the JCT looks at things?

Barthold: I don't currently have a special new thing that I want to do. The staff, as part of its Budget Act responsibilities, identifies and estimates tax expenditures annually. Of course we'll continue to do that. Ed Kleinbard wanted to emphasize it a little bit differently. The taxwriting committees frequently hold hearings where they say, "We want to look at the tax benefits that we've provided to topic X." When the committees look at that, that's a tax expenditure analysis. When our staff prepares background materials for committee hearings, it's often a discussion of how much does this cost, what are the distributional consequences, are there alternatives, what are the economic effects? That's really what a tax expenditure analysis is about.

I suspect that a redacted though still accurate version of this colloquy might read as follows:

TA: Your predecessor sought to revive and change tax expenditure analysis. Will you continue that work?

Barthold: No.

California's budget crisis and the upcoming federal budget crisis

California is teetering on the budgetary cliff these days, issuing IOUs in lieu of meeting its obligations because it can't adopt a plan to close the budget gap even though it is wealthy enough to do so without serious difficulty.

The IOUs remind me of the line in Duck Soup, where Groucho asks Ambassador Trentino for a personal loan until payday and offers a 30-day note. "If it isn't paid in 30 days, you can keep the note."

Living across the country from California, and thus not myself directly facing the main consequences as this plays out, the question that occurs to me is whether this is a harbinger of future U.S. budgetary problems. I am inclined to think that it is.

Obviously, the federal and California situations are easy to distinguish. The U.S. government presides over an even bigger economy, from which exit by tax base factors is costlier. The U.S. borrows in its own currency, and thus has a one-time option to default implicitly through inflation, although this is a bit of a nuclear option given the likely macroeconomic consequences. And the federal government doesn't have Proposition 13 or the other various fiscal hamstrings adopted in California via the statewide ballot process.

But the key point in common is that California's crisis is an entirely self-inflicted wound, reflecting the political system's inability to respond adequately, even when everyone knows (in broad outline) what it has to do, since it's consumed with ideological posturing and chicken games. That is already a problem on the federal level as well, and there is no particular reason to believe that it will ease.