Volcker Commission Report

Today the President's Economic Recovery Advisory Board, chaired by Paul Volcker, released a 126-page report on tax reform options, designed to achieve tax simplification, improved compliance, and corporate tax reform without raising taxes for families that earn less than $250,000 per year.

The Board had no mandate, however, to make recommendations, a la the famous 1984 Treasury "Blue Book" report that led to 1986 tax reform, or the somewhat less successful 2005 Tax Reform Panel under the G.W. Bush Administration.

Given this lack of a mandate, it's no surprise that the report is largely a laundry list of possibilities, stating in fairly general terms the advantages and disadvantages of particular options. E.g., lowering the corporate tax rate would reduce the cost of capital for U.S. companies, but also would lose revenue. Duh.

That comment is perhaps a bit unfair, as in many respects it's a useful compilation - for example, of opportunities to eliminate needless complexity from multiple parallel tax incentives, such as for saving or education, or of the main ways one could change corporate taxation or international taxation, and the main arguments for and against going in each direction.

Still, I imagine that many of the board members and staff people who signed up for this project wish they could have had the opportunity to do more, which they didn't.

I'm not optimistic about major tax reform (good or bad) any time or soon, and although I'd value it if done right I'm not convinced it's the best place to invest one's efforts. I see tax reform as happening (if at all, and I don't think it will) in the context of addressing the fiscal gap by raising taxes and reducing the projected growth rate of spending, via the sort of bipartisan deal that happened several times in the 1980s but does not appear even remotely feasible today.

Depressing reading?

Susan Morse's newly posted short piece, How Australia Got a VAT, makes depressing reading if you keep the U.S. in the back of your mind while going through it. She offers a nice description of how Australia ended up adding a VAT in 2000, absent any of the usual causal elements (severe fiscal crisis, World Bank or IMF pressure, etc.).

What makes the story so positively bizarre, from a very jaded U.S. perspective, is how well the Australian political process worked compared to ours. Rationality, attempts to make good policy, willingness to work together to bridge differences based on not entirely irreconcilable preferences, etcetera. It would almost remind me of Sunday school if I had ever attended one.

You start with a conservative Prime Minister (John Howard) who actually believes a VAT is good tax policy due to its relative efficiency. He apparently decides to promote enactment at least in part for this reason. Opponents raise concerns about its regressivity (they apparently didn't have in mind the transition effect, since at enactment a VAT may function as a one-time wealth tax.) So what happens? They compromise, and put the VAT in a package that has significant progressivity offsets. Concerns of Australia's states are also addressed. Moreover, academics are consulted and play a role in designing and evaluating the package, which I hope readers will forgive me for thinking is a good thing. (Much less likely to happen in the U.S., where we might testify at a Congressional hearing but generally do not get to play inside the process to the same degree as in many other Western countries.)

OK, this isn't a Hollywood fairy tale. For example, Howard initially got elected in part by denying that he had any interest in enacting a VAT, then promptly reversed course (although he did then end up seeking and narrowly getting voter approval). And some of the details seem clearly wrong and driven by optics and poor understanding of the issues - e.g., one important mechanism for addressing progressivity was excluding food from the VAT, whereas what Morse calls a "Michael Graetz-like plan" with higher transfer payments would likely have been far preferable. (Food exclusions are inefficient, poorly targeted as they apply to Whole Foods-type consumers way up the income scale, and create administrative complexity if the boundaries of the exclusion are unclear or in the presence of mixed food plus non-food goods or inputs.)

Still, in the words of Sinclair Lewis, "it can't happen here." (Though Lewis had a bad "it" in mind, the rise of fascism, and was saying that it actually could happen here - whereas I mean that a good thing actually can't.)

And another article

I've just finished a first draft of my new article, "The Rising Tax-Electivity of U.S. Corporate Residence," though I probably won't post it on SSRN until after I deliver it at NYU on September 21 as the Tillinghast Lecture. Some good stuff in it, including (a) what we know about such electivity today, (b) state of the play on the distributional (pertaining to individuals) as well as efficiency issues raised by residence-based entity-level worldwide taxation, and (c) a proposed $200 billion (!) transition tax if the U.S. shifts from its current sort-of-worldwide system to a territorial one. (This number, at this point, is back-of-the-envelope at best, but I think it's reasonably in the ballpark.)

Once I've put this article to bed for the time being, I'll return to my (suspended since late 2009) book in progress, Fixing the U.S. International Tax Rules.

Tom Tomorrow on the supposed "ground zero mosque"

From his latest cartoon, available here:

"A visitor to that hallowed ground might wander several blocks north past the neighborhood strip clubs, off track betting parlor, and fast food joints - and stumble across an Islamic cultural center!

"I'm offended just thinking about it!"

But not to worry, sleazy pols are coming to the rescue.

Palin: "This blasphemecration of sacrosanctified ground is abhorrentible! I refudiate it unequivocately!"

Gingrich: "It's shockingly insensitive! Don't these New Yorkers understand what ground zero means to real Americans?"

Another day, another paper posted on SSRN

Kim Clausing and I have just posted on SSRN our recently completed paper draft, "A Burden-Neutral Shift from Foreign Tax Creditability to Deductibility?"

You can download it here. The abstract is as follows:

Observers of international tax rules have long conflated two distinct effects of the foreign tax credit on multinational firms: the effect on the incentive to invest abroad and the effect on foreign tax sensitivity. With national welfare as the policy objective, we discuss how a burden neutral shift from foreign tax credits to deductibility could be designed to improve distortions associated with insensitivity to foreign taxation without raising aggregate burdens on outward foreign investment. We also provide new evidence suggesting that the tax sensitivity of outward foreign direct investment is indeed reduced for OECD countries using foreign tax credits, in comparison with other OECD countries. Finally, we discuss policy considerations surrounding a possible burden-neutral shift from foreign tax creditability to deductibility.

Keeping one's composure

I've been struggling with a blog post that keeps coming out a bit too strong. The gist of it is that, for reasons such as those discussed here, people like Gingrich and Palin are guilty, not only of odious bigotry against the members of a faith with one billion members worldwide, but of deliberately hurting the United States and, in particular, placing New Yorkers (such as me and my loved ones) at greater risk of becoming victims of terrorism. For crass political advantage and/or the love of hatred for its own sake, they are willing both to do evil and to aid it. I would not forgive them for this if I had a million years.

Bad little bunny

Our furniture's bete noire is a bete brune (Buddy).

This innocent-looking little fellow has also scratched up a couple of pairs of shoes lately, and goes after food on the counter like the Allies storming the Normandy beaches.

After some of his worse outrages, I tell him he's a bad-to-the-bonehead. But it's hard not to laugh.

Betting on your own grades: incentive effects vs. distributional effects

As noted by the Tax Prof blog, the Wall Street Journal has an article today discussing a new on-line service that would permit students to bet regarding their own grades. Supposedly, this would provide incentives for bettors to work harder, as in the case where you wager $50 on getting at least an A-, and thus engage in extra studying to make sure you get there. Critics note that students could also bet against their getting good grades.

I'm not sure I'd want to run this business (even if it were otherwise my sort of thing). The "house" faces problems both of moral hazard (given how one might adjust one's efforts for the direction of one's bet) and adverse selection (given the possibility of inside info, more specific than one's overall GPA, regarding how well one is likely to do in a given class). Or to put it differently, given how the house would have to price the bets in light of moral hazard and adverse selection, the odds are bound to be lousy for students who are not betting on something that they surreptitiously know is actually close to a sure thing. And perhaps the house will end up having to include a very wide bid-ask spread, given that students can game it either way.

In any event, to say that betting in favor of your getting good grades would improve your incentive to do well, we have to posit that it is otherwise under-powered. This might have to do with loved ones who are affected by how you do, but let's instead call it an externality from the standpoint of your future self, whose interests you may fail to consider adequately if other activities are more fun than studying or you just get too bored. (And let's forget about the opposite externality, which is that other students may end up doing better if you do worse.)

Note, however, that, from the standpoint of portfolio theory, betting in favor of your getting a good grade is the very last thing you should do. You already face risk given the genuine unpredictability of how you will do (and any economic or even just psychic stakes in how you fare). Why double down and make your risk-bearing even greater? A savvy investment advisor would tell you to hedge the risk, by betting against yourself as a form of insurance. Indeed, the tax system already does this to a degree, since if you end up earning more (whether from good grades or otherwise) you will pay more tax.

Hence, we face the familiar tradeoff between incentive effects and distributional effects. Do I smell a future Tax Policy exam question here?

And if this gets going, how long before we see the first allegation of a student letting his or her professor in on the grade action?

NYU Tax Policy Colloquium, spring 2011 schedule

I'll be co-teaching the colloquium with Mihir Desai again. Here is our schedule for next winter, a.k.a. the spring semester.

1. January 20 – Joseph Bankman, Stanford Law School
2. January 27 – Yair Listoken, Yale Law School
3. February 3 – David Miller, Cadwalader, Wickersham & Taft LLP
4. February 10 – Michael Keen, International Monetary Fund
5. February 17 – Kenneth Scheve, Yale University Political Science Department
6. February 24 – Allison Christians, Wisconsin Law School
7. March 3 – Adam Rosenzweig, Washington University Law School
8. March 10 – Eric Zolt, UCLA Law School
9. March 24 – Kirk Stark, UCLA Law School.
10. March 31 – Len Burman, Maxwell School of Syracuse University
11. April 7 – Jennifer Blouin, Wharton School, University of Pennsylvania
12. April 14 – Joshua Blank, NYU Law School
13. April 21 – Leandra Lederman, Indiana University Law School
14. April 28 – Cheryl Block, Washington University Law School

All sessions meet on Thursdays, from 4:00 to 5:50 pm, in Vanderbilt 208, NYU Law School.

Getting It sales (first quarter, post-release)

Fewer second quarter sales of Getting It than I had expected, not quite 300 for March through June. I am hoping for 2,000 or so, and feel that it deserves more (including a film), but that remains a long way off.

Death of Dan Rostenkowski

Chicago news outlets are apparently reporting that former House Ways and Means Chair Rostenkowski has died. I was on the Joint Committee of Taxation staff for the 1986 Tax Reform Act, during Rosty's tenure. Whatever else one says about him at any other point in his career, at that time I observed him to be a true statesman and leader. (And I speak as one who is extremely hard to please, when it comes to political figures.)

Down with the home mortgage interest deduction

The 2008 financial crisis made it clear that the home mortgage interest deduction is even worse, and perhaps I should say much worse, than experts had previously thought. The long-obvious (to tax policy types) points against it were that it inefficiently encourages both home consumption relative to other consumption, and home ownership relative to home rental (unless the tax breaks for the latter are commensurately big, as they may have been, say, in the mid-1980s).

But what hadn't been fully appreciated until 2008 was just how devastating the deduction's encouragement of highly leveraged home ownership can be. The deduction probably played an important background role in encouraging the blizzard of crazy U.S. mortgage loans that helped to sink the U.S. and world economy. (Although, to be fair, it's true that problems also arose in countries without a similarly designed tax break for housing, and that many subprime borrowers probably couldn't reasonably expect to get much value from the deduction.)

Now we see its poison playing out in another dimension. An article in today's Wall Street Journal notes that employers are often having a hard time hiring even though unemployment is so staggeringly high. While the problem has multiple causes, one of them is that "getting people to move for work has been especially difficult this time. Often, that is a function of the mortgage and credit problems many potential employees face. In a recent study, Fernando Ferreira and Joseph Gyourko of the University of Pennsylvania, together with Joseph Tracy of the Federal Reserve Bank of New York, found that people who owe more on their mortgages than their homes are worth are about a third less mobile."

Reducing people's mobility, in the event of a downturn that makes it extra-important, through a tax incentive for highly leveraged home ownership, harms us all, not just the prospective worker and employer who would have mutually enjoyed surplus from their job deal if moving were less costly. It has social, political, and revenue costs that are becoming all too familiar.

For one of the less obvious angles, think of Greece's difficulties in getting out from under its budget problems because, given the euro, it can't devalue its currency. Economists note that adjustment would be easier if labor were more mobile between different countries in the EU. But with language and cultural barriers, Greece is relatively stuck, and the adjustment much slower and more painful.

The U.S. obviously has much more of a common culture and language than the EU, which should help us, but when we encourage people to tie themselves down a bit of this may be lost.

Krugman's Paul Ryan takedown

Highlights include "charlatan ... The Ryan plan is a fraud that makes no useful contribution to the debate over America’s fiscal future."

The short version that is clearly correct: It is utterly impossible to propose an even remotely credible plan for restoring long-term fiscal sustainability that involves massive tax cuts, as Ryan's plan does. All the more so if one leaves the spending cuts (as Ryan does) unspecified.

There really is no ground for debate about this - the plan is a fraud for these very simple and clear reasons.

But I would be less sweeping than Krugman in dismissing the entire thing, for one reason that Krugman finesses a bit at the end of the column.

The Ryan plan actually does have one stated idea that potentially would have a significantly positive effect on the long-term fiscal picture. This is to turn Medicare into a voucher plan starting in 2020, and to control the program's currently projected fiscal growth path by capping the vouchers.

Krugman is right that this is politically unlikely to be permitted (other than perhaps in the brink-of-default scenario). But it's less fictional than the unspecified spending cuts, in that voucherizing is a step towards making slower Medicare growth at least administratively more feasible.

The point that I regard as finessing by Krugman is the following: he disagrees with capped voucherization as a policy matter, noting that it would mean that seniors with lesser independent means would be denied future healthcare that, under current policy scenarios, they would get. (By the way, given the march of technology, the denial would mean that seniors were getting worse care, relative to what was contemporaneously technologically available, than seniors today - they might still be getting better care in absolute terms due to medical advances.)

But to disagree with it as a policy matter, when it might actually address long-term sustainability, is different from his critique of the rest of the Ryan plan, which is not just that he disagrees with it (although he does) but that it is a fraud. We should also keep in mind the point that currently projected healthcare growth is bound to slow one way or another, as it's unsustainable. So comparing Ryan's plan to current policy in this regard is not entirely fair, since if growth isn't slowed his way it will have to be done some other way.

Bottom-line message to the media: plans to address fiscal sustainability that include large tax cuts are frauds. They should be mocked or ignored, not treated as Serious & Courageous Bigthink. But we do need to debate how healthcare spending growth will be made to slow. National healthcare (which Krugman favors) offers one possible path. Vouchers in lieu of all the big pillars under current policy - not just Medicare, but also Medicaid and uncapped exclusions for employer-provided health insurance - are another. That's a debate we should have (which is not to say we can, given the utter debasement of political discourse over the last few years). But at least Ryan puts a little bit of it on the table, albeit only 10 years down the road.

What am I currently working on?

Despite all my frivolous posts in recent days on such burning issues as adolescent Triceratops, the supposed U.N. plot against Colorado, and possibly bombastic indie rockers, I actually am reasonably hard at work writing on international tax issues.

My foreign tax credit paper is pretty much final for two publications (long version in the Journal of Legal Analysis, short version in the National Tax Journal), and I am also working with an economist co-author on a follow-up piece with empirical content. More on this in due course.

My main project these days is a piece entitled "The Rising Tax-Electivity of U.S. Corporate Residence," projected to be my Tillinghast Lecture at NYU Law School next month (on Tuesday, September 21) and then an article in the Tax Law Review. I will talk some about what we can tell about the trend described (or rather asserted) in the title, and somewhat more about how it should affect our thinking about international tax issues. I'm reasonably pleased with it so far, as I was with the foreign tax credit paper (and this is not a constant I experience equally with all of my papers), based on a feeling in both cases that the item ought to be (whether or not it actually proves to be) intellectually influential.

Science shocker

First they took away Brontosaurus, renaming it Apatosaurus, and no one said anything.

Then they came and took away Pluto, and again no one tried to stop them.

Now they are taking away Triceratops ...

Though just for the record, I am actually fine with the latter two developments. What's a "planet" is arbitrary (it's a language issue), and yes, Pluto seems more like Ceres and the farther-out Kuiper Belt objects than like the Elite Eight.

And if Triceratops is merely an adolescent Torosaurus, that's fine, good to know.

As for renaming Brontosaurus, this was a bad language decision - why be so rigid about the first-in-time naming rules when it's just about some 19th century guy who's long past caring? Do something dumb like that, and the next thing you know, you'll find yourself renaming Haig-Simons income as Haig-Simons-Schanz, and then also having to add Smith, Malthus, Sax, Garelli, and Seligman to the list of honorees.

Dastardly U.N. plot to take over Colorado

Fear not, however. The Republican gubernatorial candidate who is actually leading in the primary polling is all over it like a cheap suit.

Musical note

I tried to like Arcade Fire's first album but found it too bombastic. Am I missing something?

Grim reminder

David Stockman reminds us that Republicans, or at least important elements in their leadership, used to be sane and responsible, rather than reckless know-nothings.

Greatest fictional lawyers - vote for Bill Doberman!!

The latest issue of the ABA Journal has, as its cover story, "The 25 Greatest Fictional Lawyers (Who Are Not Atticus Finch)." These are not necessarily the fictional lawyers described as being the most able, but rather the best characters who are lawyers. E.g., unclear if Ally McBeal would be on the list otherwise.

You can vote here, and I'd personally be inclined to vote for Vincent "Vinny" Gambini, from the delightful film My Cousin Vinny.

There's also a second list here of "Other Notable Characters That Did Not Fit into Our Top 25." Here we find such personal faves as Tom Hagen from The Godfather and Jackie Chiles from Seinfeld, and there's some indication that fun fictional characters end up here if they are simply too odious and dishonest. For example, Ned Racine of Body Heat is here with the comment that "he's lazy and corrupt — and we like that in a fictional character, but maybe not in a lawyer."

Especially given that last comment, I must put in a word for my own Getting It lead character, Bill Doberman. He definitely belongs on this list, if I do say so myself. OK, if there are ethical standards of any sort, then the "Other Notables" rather than the main list.

I mean, c'mon - Claire Huxtable from the Cosby Show? And on the main list, Arnie Becker from LA Law? Truly a pale shadow of Doberman though some overlap of personality types.

The only excuse the jury that selected the notables can offer for not adding Doberman - but admittedly it's airtight unless we apply a strict liability standard - is that they presumably haven't read Getting It or heard of him.

Unjust $10 Billion Tax Credit for BP??

Far be it from me to say anything nice about BP after the horrendous mess they created in the Gulf of Mexico. Accidents happen, but everything I've read suggests that the company had a reckless culture that made a mockery of prudent and safe practice. They appear even to have been unusual among oil companies (e.g., Exxon is said to have learned from the Valdez spill). And given the immense costs being imposed on others, one is inclined to compare BP's executives with the fools and malefactors at major financial institutions who brought about the current global recession.

But having said that ... I was struck by a story in the Washington Post (h/t to Paul Caron's Tax Prof Blog) airing complaints about the supposedly scandalous fact that BP, by deducting its $32 billion in losses from the spill, is going to save (at a 35 percent corporate rate) almost $10 billion in taxes, which the article notes is half of the amount President Obama got them to pledge to a relief fund (the supposed "extortion" in the eyes of pro-business but anti-market lunatics who apparently believe that tort-feasors should be able to impose harm without paying). Anyway, back to my main point.

Worse still, supposedly, is the fact that this might be a $10 billion "credit" for taxes that BP has already paid. That is, it will show a huge loss for the year or years when it lays out the $32 billion, and use this to get a refund of tax liabilities in prior years when it had positive taxable income.

My recent co-author Doug Shackelford is quoted near the end of the story, shedding some needed light on the subject. First he notes that only the arbitrariness of annual accounting gives rise to the apparently shocking credit for taxes already paid. If BP paid income taxes on multiple years of taxable income at the same time - as surely would be the sensible rule if not for problems of administrative convenience, steady cash flow to the government, etcetera - the same thing would happen without the specter of a horrifying "credit" and "refund." Or, if they'd made $32 billion in January through November and then lost the same amount from the oil spill in December, no one would be surprised by their reporting zero income for the year.

Second, Shackelford notes that "[t]he cost associated with the cleanup and the damage and all that -- that's just another cost of doing business from the tax perspective ... It's viewed no different from paying salaries or other costs they might incur."

This is correct. If BP really loses the $32 billion, of course the normal rule is (and should be) that it gets a deduction, including with carryovers to other taxable years if necessary. So the issue, at least on its face, is a red herring.

A separate issue is whether BP should be fined. Indeed, perhaps fined a lot - say $10 billion on top of the $32 billion of direct compensation for harm. I don't have a particular opinion on this, as I would need to know more about the adequacy of what they're paying, the incentive and deterrence issues, problems of adequately sanctioning reckless behavior, and so forth.

Suppose that BP should be fined $10 billion. Then disallowing the tax deductions happens to get it just right, but not because that happened also to be the value of the deductions.

The expiring tax cuts

Political attention is beginning to focus on the expiring Bush-era tax cuts, so perhaps I should weigh in. The Obama Administration, presumably for reasons of political cowardice (or to put it more kindly, prudence), purports to favor generally extending them except for the top bracket. The Republicans, of course, want to extend all of the tax cuts forever, though probably that's just for starters. They also want vastly increased tax cuts with no financing and no meaningful cuts on the outlay side (at least none they are willing to acknowledge, beyond the occasional Congressman Ryan - who falls way short despite going way beyond what the rest of them would actually do).

Let's analyze this in two parts. First, suppose there were no ongoing recession with shockingly high unemployment that is projected to continue almost as far as the eye can see (exacting enormous social costs that may last far longer than the high unemployment itself). Then, what about the recession and need for stimulus rather than contraction.

Absent the recession, the thought of extending any of the tax cuts would be ludicrous. We are faced with an enormous and growing fiscal gap. There is no indication that the political system can deal rationally with it. The idea of massively cutting taxes relative to the current law baseline verges, against this background, on being criminally negligent.

But is eliminating the tax cuts and generally restoring pre-2001 law really the best way forward? Was the tax law at that point in some kind of Periclean golden age, an acme of perfection? Of course not. So there is plenty to discuss, in terms of revenue-neutral (or better still revenue-raising) tax reform relative to that baseline. Or rather, there would be plenty to discuss if there was anything to discuss, which there isn't for political reasons.

Extend the income tax cuts and enact a VAT instead? Enact a 1986-style base-broadening exercise but with general savings incentives (i.e., consumption tax-type treatment without creating inter-asset distortions)? Enact a carbon tax for revenue as well as global warming reasons? General base-broadening in lieu of the rapidly growing AMT? All these things and more could be on the table, but of course they aren't.

Okay, but what about the recession? Extending the tax cuts is, to a marginal degree, stimulative relative to not doing so. But it is poorly designed as stimulus. If there were any political point to even thinking about it, I might consider a short but finite (and credibly expiring) extension of the tax cuts, plus tax increases (such as a VAT) with postponed effective dates to stimulate sooner activity, plus the much better designed conventional fiscal stimulus that people in the Krugman-DeLong camp are advocating, plus credible long-term retrenchment in entitlements growth, plus a carbon tax. And then on to fundamental tax reform within the revenue parameters. Etcetera.

But in a country with a failing political system there's not a whole lot of point that I can see to nailing down one's preferred details.

If only I liked gardening, like Candide ...

More on the same theme of approaching U.S. default

More on the same theme as Bruce Bartlett from Martin Wolf.

I have been arguing this for several years - in particular, in my recent book Taxes, Spending, and the U.S. Government's March Toward Bankruptcy. The U.S. government is going to default in some way (including implicit or quasi-default of some kind), with a high degree of certainty - not because the economic or demographic trends are so dire, but because our political system is irretrievably broken. And this in turn reflects not just its flawed design but the strange sociological story of the conservative movement, which, for some reason I don't understand, at some point in the last 20 years, decisively rejected any sense of national loyalty (as well as commitment to rationality) in favor of intense group loyalty.

Bruce Bartlett interview in the Economist

This makes enormous sense and is well worth reading.

Crazy stuff

Tennessee Republican Congressman (and gubernatorial candidate in the state's Republican primary) Zack Wamp lauds Texas governor Rick Perry as a "patriot" for urging secession if healthcare reform isn't repealed by 2012. Certainly an interesting and innovative use of the word.

Meanwhile, there's increasing evidence that, if the Republicans gain control of Congress later this year, they plan to pursue impeachment of President Obama.

Fasten your seatbelts, as Bette Davis' character memorably remarked in All About Eve. If control of Congress changes, it's going to be a wild and crazy next 2 years.

Political mystery, a.k.a. naive question

I am trying to figure out why the likes of Senators Ben Nelson and Kent Conrad combine (a) opposing the extension of unemployment benefits on the ground that this adds to the deficit with (b) supporting extension of the Bush tax cuts by reason of the weak economy. These arguments can't really be made together in good faith.

Another reader comment on Getting It

"Lovely writing, fun, and suspenseful, with nice wry observations about humanity as embedded in a law firm."

Martin Feldstein endorses tax expenditure analysis ...

... as well as generally cutting tax expenditures. Today's WSJ op-ed is available as such to subscribers only, but you can find the full text of it on Feldstein's webpage here.

Unfortunately, as a general matter only principled or genuine conservatives, rather than the right-wingers who play the role on TV and dominate the Republican Party, accept the central point of TE analysis that a targeted special-purpose tax cut is substantively equivalent to the hated "government spending."

Book report

Last night I arrived back in NYC, after 2+ weeks in Munich, including a 4-day excursion to the lovely town of Malcesine by Lake Garda in Italy. Though it was very enjoyable I'm also glad to be back, and wish I could leave NYC for longer periods in the winter rather than the summer.

One fun thing about vacations is the chance to do a lot more leisure reading, though I try to maintain this year-round. So herewith my book report from the trip:

1) Michael Lewis, The Big Short - Lewis is always entertaining, and though the bestseller style of telling different individuals' stories might itself seem slight, he consistently gets his finger on important broader themes, here no less than in Liar's Poker and Moneyball. Shocking and distressing to read about the astounding idiocy that cratered the world economy starting in 2007, and it really makes one wonder how/if a market economy can function (which is not to say the alternatives will help).

2) Paul Hodge, Higher Than Everest: An Adventurer's Guide to the Solar System - This little-known item was a delightful vacation read. Written as an adventure travel guide for later in the 21st Century, it whimsically posits that some modest technological advances have made it possible for the reader to visit all of the most fun and exciting spots in the Solar System (mountains on Venus, the ocean beneath Europa's crust, the methane lakes on Titan, "snowboarding" through Saturn's rings, etc.). Beneath this conceit it combines detailed description of what we know about various planets and moons with plausible speculation about how any of these visits might actually be accomplished. Only disappointment is that it was written before some of the most recent developments, e.g., the Huygens probe's Titan landing and Pluto's demotion to planetoid. Time for a revised edition?

3)Valerie Martin, The Confessions of Edward Day - Martin is a very good contemporary fiction writer, best known for Property (narrated by a slaveholder's wife in 1828 Louisiana). This one is set in 1970s New York among aspiring actors. Well-written, some good underlying ideas, but I found the resolution a bit disappointing.

4) Neil MacFarquhar, The Media Relations Department of Hezbollah Wishes You a Happy Birthday - former NYT reporter in the Middle East gives a more inside view than one normally gets of the Arab societies that get so caricatured and demonized out here. But then again, reading about Saudi Arabia was authentically horrifying.

5) Sara Gruen, Water for Elephants - very readable fiction set mainly in a 1931 traveling circus amid the Great Depression. Good reading material for the beach and plane, but a bit of a stunt and could have had more depth. I found myself making invidious comparisons to Getting It, on the view that mine has more motivation and depth of viewpoint (though a farce not a realized world), but that's just me being a bit self-conscious or self-centered.

6) Christopher Isherwood, A Single Man - One day in a man's life, brings to mind Ian McEwan (who may perhaps have learned from it), impressive and affecting, easily the best thing I read on the trip from a pure literary standpoint.

7) Martha Schwab, Ludwig II - brief review of the life of a silly 19th century Bavarian king who, as Bertie Wooster might say, made rather an ass of himself building palaces and worshipping / ordering around Richard Wagner while Bismarck, almost next-door in Prussia, was engaged in considerably more serious work. Ended up being deposed on grounds of insanity and then apparently drowning himself the next day. Of interest because we had visited the Neufschwanstein Castle that he built outside Munich, real-life model for the well-known visual of the Disney castle. The site itself was Disneyland plus short-distance hiking and minus the rides.

Paul McDaniel

I'm greatly saddened to learn of the death of Paul McDaniel. He was a great and pathbreaking scholar - exceptionally fair-minded and intellectually honest even when advocating a particular approach. Paul also was a lovely, kind, and yet spirited man (and good friend when he was at NYU), and an important institutional leader during his time here.

Another reader comment on Getting It

Another airplane reader of Getting It (I frankly think it's ideal for this purpose) concludes:

"Really, it's a great book, I happened to be alternating it with Philip Roth and I think you have a lot more to say than he does . . . although perhaps not the advance sales."

This reader also detects a moralist (in the author) beneath the surface cynicism. Who'd a thunk it?

All too human (from the Munich Zoo)

A word on status issues in the biz

It's always anthropologically or sociologically interesting to attend mixed economist-lawyer gatherings, as I have been doing in Munich and also do with great regularity in the U.S. The overall status relationship between the groups is clear: economists in the aggregate have higher status, although in particular pairwise groupings the lawyer may be higher-status. (Of course, a shared assessment requires that both individuals know who the other is.)

Before saying more, I should interject here that I personally am anti-hierarchical and detest status rankings. Deference makes me very uncomfortable whether I am the giver or the receiver. This is partly personality and partly absorbed ideology (I grew up mostly in the 1960s, which effectively ended in 1972 at the earliest and 1974 at the latest). But if you are a member of the human species, then unless you have Asperger's Syndrome or some such condition, I think you cannot avoid being keenly conscious of status issues in any social milieu that you find yourself in. It's there, whether or not you choose to act as if it matters.

Against this background, economists vary from those having zero interest in talking to lawyers, to those having a negative presumption that is very hard to overcome (even if you know a lot of the secret handshakes), to those who make individualized judgments and are very willing to think that lawyers can have interesting ideas, knowledge, and insights. (I'm equating here intellectual interest in talking to a person with status judgment about her, but in academics these categories exhibit strong overlap.)

So far as all this is concerned, the main difference between Europe and the U.S. is that most of Europe has had significantly less lawyer-economist mixing than the U.S. (One further byproduct for me, of course, is that economists in Europe are less likely than those in the U.S. to know anything about my work, or should I pompously say about "who I am.") But Munich, where I am now, is much more U.S.-like in this regard, as settings such as the Max Planck Institute have allowed much lawyer-economist mixing to occur.

Munich's U-Bahn and the related tax evasion literature

Munich has a clean, modern, far-ranging, very easy-to-use subway system, the U-Bahn, which I gather dates back to the 1972 Olympics. Even without speaking or reading much German, it makes it a breeze to go anywhere in the city or environs that you like. One great feature, also found in D.C., but in NYC almost nowhere, is its electronic signs telling how long till the next train arrives. I am noted among intimates for extreme impatience, at times, when waiting for a train. But it's really about the uncertainty, not the waiting time as such. If the sign says I need to wait 10 minutes, I'm fine with that. For some reason, not knowing when/if it will come is the part I can find difficult. Must be some suppressed early-childhood memory behind this; then again maybe not. (This isn't the script of an early-1950s Hitchcock movie, after all - or at least I hope not.)

The most interesting thing to me about the Munich U-Bahn is the ticketing design. You are legally required to have a valid farecard in order to use the system. And there are signs threatening the mandatory imposition of a 40-Euro fine if you are found without a valid farecard. But to enter the U-Bahn, you don't actually use the farecard in any way - you simply walk in, and should have it in your pocket in case you are asked. But I have yet to see any enforcement, and I suspect that the threat is statistically quite low.

People therefore have the option, at what would appear to be a very low risk, to ride and use the system without paying. Applying the risky investment framework that one finds, for example, in the tax evasion literature, it seems that one's expected fare (at least, counting monetary costs only) must be a lot lower if one cheats than if one buys the required farecard.

Allowing people this cheating option, without making them engage in forced entry (such as by vaulting a turnstile) would be unthinkable in many systems. Surely in New York or Washington one could never do it, and I would suspect that the same holds for London and Paris (which don't allow you just to walk in, unless I am misremembering Paris). Something tells me it wouldn't work in Italy, either, or in most other countries. But Belgium's commuter trains were similar, as I found in May, and the only time I was challenged was when (while jet-lagged) I mistakenly boarded a first-class car.

Evidently, people mostly comply, or else I assume they would have had to build entry barriers. For that matter, Muncheners also largely cross at the corner and wait for green lights (contrary to my practice as a New Yorker), although in a few spots without lights there evidently is an accepted convention of cross-as-you-can.

Returning to the U-Bahn fare system, the other thing I find interesting is that it requires (at least for a short-term person like me) considerable thinking about what is the best option. You can purchase a single ride, or all rides for the day for one person, or all rides for either one day or three days for up to five persons traveling together. I believe there's also a separate option that permits you to ride with a dog. And I gather that there are lots of more long-term options, extending for as long as a year.

With the vagaries of our travel schedule as a family here, I find myself needing to think it through each time, so I can figure out what is likely to be most cost-effective. (Yes, I am complying despite my international tax policy interest in multiple-play prisoner's dilemmas where cooperation fails to emerge.}

So they assume little or no cheating, but have a structure designed to reward good planning by law-abiders.

Live from Munich

Since last Friday, I've been in Munich, splitting my time between touristic activities and work. I'm visiting at the Max Planck Institute - not on the view that physics, no less than novel-writing, should be added to my portfolio, but because of the excellent tax group here, headed by Wolfgang Schon. So far this week, I've given talks on my foreign tax credit paper as well as the S-S-S- financial institutions paper (a revised version of which should be up on SSRN shortly), and have also attended the Richard Musgrave Lecture, given this year at a nearby public economics institute, CES-ifo, by Michael Keen of the International Monetary Fund.

Mick's very interesting paper is similar in spirit to S-S-S (reflecting some dialogue back and forth), but has a formal economic model designed to elucidate the question of whether Pigovian taxes, as opposed to capital adequacy regulations, should be used to address financial institution failure that threatens the broader economy. Broadly speaking, he concludes that taxes should be used to fund government rescue of failing firms, while regulation should be used to prevent failure that the government will permit (a la Lehman Brothers). One problem outside the model is that the government also has to decide on its rescue vs. permit to fail strategy, a hard problem in itself and made worse by time consistency problems. E.g., one wishes one could credibly tell the firms they'll be allowed to fail, but then rescue them ex post where the stakes are high enough. But good luck on the credibility aspect.

Munich is a charming city. It's been warm but not by the standards of what I gather has been a hideous U.S. East Coast heat wave. (About which I would have considered myself estopped from complaining, as I prefer to concentrate my fire on hating the winters.) I've even been able to find nice fruit, particularly in the Viktuellenmarket. This is something that I care about, perhaps more than I should, as farm market fresh fruit is one of the things I love about NYC in the summer. I've certainly had more beer, sausages, and pork products generally than would be typical while in NYC, and I've also observed the intense but benign German soccer mania that came crashing down last night with their defeat by Spain in the World Cup. I even went so far as to find that game enjoyable though I am not generally a soccer fan. It's tactically the same sport as ice hockey though with key parameters that are set very differently (e.g., how fast people and the ball/puck can move, size of the arena, out of bounds vs. boards on the side). So it's all about ball control, advancing into the other team's territory, and centering it in front of the goal, all factors that I can recognize. (For that matter, basketball is pretty close to being in this general sense the same game as well.)

Touristically, we're living in a small private house, doing things that actual Muncheners do, such as shopping and commuting, and have seen various tourist sites, including (on a much somberer note than the rest) a trip to Dachau.

Next week, pure-vacation trip to Lake Garda, then back to Munich & then to New York.

Lyttle-Lytton Contest

Many readers may have heard of the Bulwer-Lytton contest, in which people compete to write the worst opening passage of a hypothetical novel, and a new winner plus a group of runner-ups (a.k.a. dishonorable mentions) are picked each year.

Today, while twiddling my thumbs as I await the evening flight to Munich, I learned of the Lyttle-Lytton contest, an offshoot distinguished by a 33-word maximum length.

Herewith the entry I sent in today:

"Two heads are better than one," tweeted Glorbiss as he dusted off his smoking gamma blaster. Too bad he now had only one left; but then again the now-headless Zamarian now had none.

Notice the many bad elements here. Tweeting while dusting off a smoking gun, er, make that gamma blaster for the badly dated sci fi cliche. Second sentence is a bit obscure about one what (head? blaster?), uses the word "now" thrice in close succession, and clarifies that a now-headless Zamarian now has no head (if that's the referent). Also, exactly 33 words.

This is a hard contest to win, but I'm hoping I'm in play for a dishonorable mention.

Horrifying conflict

In September 2009, I purchased tickets to see one of my favorite bands of all time, Pavement, perform a reunion concert in Central Park on September 21, 2010. As Pitchfork or some other music blog remarked at the time, the degree of advance planning that this required seemed likely to be a challenge for Pavement's core audience of 1990s-style hipsters. But not being in that demographic myself, I figured: No sweat.

The tickets were a hot item, and I had to act fast to get them. But Pavement then went on to announce a number of additional reunion concerts, including a number prior to that date elsewhere, and also several more that week in Central Park.

Sometime in the interim, I agreed to give the NYU Tillinghast Lecture on International Taxation this fall. I was only offered one date: Tuesday, September 21. But somehow I had persuaded myself that the Pavement tickets were for a Monday, suggesting to my evidently easily addled brain that they must be for September 20. I guess this means I should steer clear in the future of making jokes or sardonic remarks about hipsters. (At least in relation to their planning abilities.)

I've now finally become aware of the conflict. So what to do? I am reminded of the old Jack Benny joke:

Armed robber: "Your money or your life!?"

Dead silence.

Armed robber: "Well!?!?!"

Jack Benny: "I'm thinking! I'm thinking!"

Unlike Jack, however, I recognize that I don't really have a choice. At this point, I've credibly committed to one of the two options, and I don't (alas) mean the Pavement concert.

Luckily, the market for Pavement tickets may now realistically be thick enough that I can, so to speak, have my cake and eat it too (although I've never understood why anyone would want cake, other than to eat it). Surely I can both sell my 9/21 Pavement tickets, such as on Stub Hub or Craigslist, and buy tickets for later the same week on one of those venues. Or, better still, cut out the middlemen by arranging a swap. (Please contact me off-line if you're interested in either or both sides of this.)

Yet another Amazon customer review of Getting It

From the Amazon UK website, under the heading "Just couldn't put it down" (with five stars):

"Getting it is an excellent and highly entertaining book. It's a must-read for law students, lawyers and not only. The characters are so alive that you begin to empathise with them and live through their agonies. The book is also hilarious at places - the conversation between Gidget and Doberman on their first date is simply amazing. I highly recommend it to all but especially those who cherish a bit of intellectual challenge. Well done to Dan Shaviro!"

In the interest of full disclosure, I should note that I know the reviewer (as well as one of the two earlier reviewers), but I did not solicit the review.

Travel snafu

I was scheduled to leave NYC tonight on a 10 pm flight to London, from whence I would have proceeded to Oxford on Tuesday morning to appear at a conference at the Said Business School. I was scheduled to present my foreign tax credits paper on Wednesday and then to comment on an international tax paper by Richard Vann a couple of days after that. Then on to Munich where I will be giving a couple of talks and attending conferences at the Max Planck Institute in Munich (on tax policy, not physics).

Knowing how bad the Holland Tunnel can be, I got to Newark Airport way early - at 7:40 pm for a 10:10 pm flight. Only problem: the flight had been rescheduled to leave at 8 pm. So much for that idea - you can't sprint through airports any more these days, especially for international, like in that old O.J. Simpson (!) commercial that I seem to recall from, well, obviously it couldn't been from later than the early 1990s.

No chance of getting to England tonight, and the outlook for getting there tomorrow was fairly bleak what with summer travel volume. I was offered the opportunity to arrive by 7 am and sit around hoping to get seated on stand-by for one flight after another, but without enormous hopes of success. With my main talk scheduled for Oxford on Wednesday, and mediocre prospects of getting there in time, I decided to pull the plug and cancel the London/Oxford wing of the trip, instead going straight to Munich on Thursday (where fortuitously, after talking to the flight people for 3 different airlines, I was able to get a seat on the flight that my family is already taking there).

I'm sorry to miss the Oxford conference and numerous friends who will be there, as well as to have let down the conference schedulers & made them scramble at the last minute to rearrange the sessions. I happen to greatly like both Oxford & London, and perhaps will get to try again, more successfully, next year.

Empty nest of a sort

Our cats have been relocated for their care during our upcoming trip, to what I believe they regard as a splendid wild game preserve in northern New Jersey. Chipmunk population there has gone through the roof, but all our heroes can do is look - which they do quite avidly, as well as chasing the little critters along the wrong side of the windows. At least they get to claw and partially eat the occasional cave cricket that took a very wrong turn from the outside world into the hall or kitchen. Myself, I would give any place holding them a very wide berth if I weighed under 5 pounds.

Even with 4 humans around, our home seems bereft without them. Their favorite sleeping spots are empty. We don't have them following us up and down the stairs. (More the latter as it's towards their food, but Buddy is like Kramer from Seinfeld - he'll follow you anywhere.) They are so interested, alert, aware, and in their species-appropriate way intelligent and observant that it feels wrong not to have them continually underfoot. Not to mention our missing for now the pleasure of having been accepted as surrogate mothers.

Marty Ginsburg

I was very saddened by the news of Marty's death, though I had known he was ill. Truly a wonderful and lovely man (gentle, ironic, appreciative of life), as well as a preeminent and brilliant legal scholar from a different era.

Competitive imbalance

Most people have little interest in a sporting event where one team is vastly better than the other - the $200 million Yankees versus the $40 million Royals, for example, or a lion versus an unarmed slave in the Roman Colosseum back in the day.

But games often have two distinct subgames - e.g., offense versus defense, or (in tennis) server versus returner. If the two subgames are wildly one-sided but each contestant has the huge advantage in one of them, the overall contest will be close. But it's still potentially boring, in that you know how each matchup within the game is going to end up almost all the time.

To my mind, this flaw is shared by Wimbledon men's tennis (where Isner just beat Mahut in the fifth set, 70 to 68) and the World Cup, where the offense generally seems to have almost no chance of scoring. On grass courts, returners often are hopelessly outmatched in the men's game. And amusingly crazy though the result was in Isner-Mahut, I'd say it's far better to have a close match where there's, say, a 25% chance of a service break each time around. Last year's Federer-Roddick final, though entertaining, helps make the point - the servers were simply too dominant. (And this is an old problem - Edberg once lost the Wimbledon final in 4 sets with only one break of serve - by him - in the entire match.)

In the World Cup, the fact that you can go away for an hour (if you're watching it to begin with) and be almost certain nothing will happen is, to my mind, a serious defect that prevents me from getting at all interested. You see a team trying to move towards the enemy goal, but know that, if you watch it on offense for a minute, its chance of scoring is probably less than 1 percent. So why bother to watch? If the rules were changed somehow so that an average score was, say, 4 to 3 (like hockey), I think it would be a vastly more entertaining game.

Then again, perhaps such jejune impatience is only to be expected of an American.

UPDATE: Uh-oh. From the Wimbledon website: "Isner's reward is a second round meeting with Dutchman Thiemo De Bakker, himself the winner of a marathon first match when he beat Colombia's Santiago Giraldo 16-14 in the deciding set. Perhaps they should be made to play best of three sets."

FURTHER UPDATE: De Bakker beats Isner in straight sets, 0, 3, and 2. I guess Isner left it all on the court on Wednesday.

Financial institutions paper

My article on taxing financial institutions post-2008, coauthored with Doug Shackelford and Joel Slemrod (hence, known to some readers as "S-S-S") appears to be getting a lot of play. Already my all-time # 3 download, for example, and recently linked here by Ezra Klein at his widely read WaPo blog (where it's item # 4).

Another Amazon customer review of Getting It

Herewith my second customer review at Amazon:

"I highly enjoyed this debut work by Professor Shaviro. 'Getting It' is a very fast, fun read about three senior associates in a last-ditch battle for partnership. Unlike many other very good (The Firm, In the Shadow of the Law) legal novels set in law firms, "Getting It" is a more satirical portrayal of big firm life, and it is the better for it. Although Shaviro appears to have worked in private practice (at a smaller firm) for just a few years, he precisely captures some of the 'moments' of firm life in a way that left me laughing out loud.

"Overall, 'Getting It' was significantly better than I expected. Really, an excellent read. As a tax lawyer, I only wish he had written it about tax associates! But I suppose litigation is more relatable and has more mass appeal. Perhaps the next time around..."

Now, if only I could persuade some other of you holdouts (I know you're out there) that it will be "significantly better" than you expect...

One more week in NYC

Hot weather notwithstanding, I love (one could almost say live for) NYC summers. So long as the AC is working and bug problems (mosquitoes, etc.) aren't too bad, sign me up for this full-time. But unfortunately school schedules (my kids' as well as my own) mean that we can't as easily get out of town for extended vacations during the rest of the year, when I sometimes really wish we could get (and stay) away.

Since summer it has to be, as usual this summer it'll be combined work and play across the ocean. Next week I head to Oxford for a conference where I'll present my foreign tax credit paper (and possibly the S-S-S financial institutions paper if scheduling issues can be solved). Thence to Munich for 2 weeks, the first at the Max Planck Institute (where inter alia I'll present the same 2 papers) and the second touring the region with Munich as home base, which given its location in central Europe is a pretty open-ended proposition. Dachau (which I saw some years ago), Mad King Ludwig's castle, probably Salzburg, etcetera.

David Zaring review of Getting It at the Conglomerate Blog

David Zaring at the Conglomerate Blog (which tax types will recall also used to feature Vic Fleischer) has just posted a brief review of Getting It. David finds it "concise, witty, and sometimes racy. I just sped through it, and commend it to you all."

As a serial reviewer of legal fiction, David compares Getting It to Kermit Roosevelt's In the Shadow of the Law, which I haven't read but realize I should. The two apparently take similarly dim views of life in a big law firm, though (as David notes) Kermit wrote in the thriller genre whereas I employ "black humor."

A word on the "concise" point. Getting It is indeed short - if you want to be technical about it, 61,000 words or so. Elephantine fiction is all the vogue these days. Back in the day, another aspiring author told me I'd have a better shot of finding a mainstream commercial publisher if I expanded it to 100,000 words or so. I declined; padding it struck me as insane, and I think the pace is a real strong point.

If you're taking your summer vacation any time soon, keep in mind that the Amazon shipping weight is only 6.4 ounces. But I get the sense from readers that you may want to set aside a stretch of time when you don't have to worry about other obligations while in the middle of it.

Injustice

League semifinals. Down 1 point. 2 seconds to play. My son is driving to the hoop, is deliberately fouled. Should be 2 shots for the win - but the ref incorrectly calls it on the ground, not shooting, so they have to inbound. Proof that the ref was wrong is right here. You can see he's going up for the shot - just as everyone saw it live except for the one person whose view mattered.

Free market economics, Joe Barton-style

If you think about it, tort liability is a shakedown, not to mention extortion, redistribution, and big government at work. So I guess companies shouldn't ever be liable for damages.

Basketball note

It's a funny thing how, if you tend to root for underdogs as I do, that means your teams usually lose. Perhaps I should have considered this more fully up front, meaning at age 7 or so.

I rooted against the Celtics in the 1980s and actually did pretty well (the Lakers took 5 titles and the 76ers 1 to the Celtics' 3). But now I root against the Lakers, who have taken the Celtics' marquee spot in the sport, and this is not going so well. (OK, I admit I rooted for Michael Jordan, but I was a Chicagoan for most of that time, and found myself admiring his bid to rise above the human frailties that beset us all.)

Though the Lakers were the better team, the Celtics could have won (ex post I'd say Game 7 was a 40 percent shot). For the slightly weaker team to win, it needs a number of things to go its way. Several did for the Celtics, but they needed just a bit more, such as Ray Allen hitting more than one out of every twenty 3's, or perhaps Nate Robinson connecting on that twisting layup and going on a binge. It might also have helped if the referees, throughout the series, hadn't classified guarding Kobe as per se a foul (or if they hadn't repeatedly called more fouls on the Celtics for no apparent reason), but perhaps that's the sour grapes talking.

Too much, yet too little, deficit aversion

I have to agree with Ezra Klein that the current Washington mania for refusing to address unemployment via stimulative fiscal policy is giving us the worst of both worlds. On the one hand, ignorance and an essentially aesthetic aversion to doing things that are known to work mean that we will have higher unemployment than necessary for years to come. This disastrously affects people's long-term earnings prospects and guarantees continued poisoning of the political environment. Of course, the people who oppose fiscal stimulus will be the main political winners from the anger that ongoing unemployment creates. Talk of having the wrong incentives. Yet I see absolutely no evidence - not the slightest - that the dominant political aversion to short-term stimulus implies any willingness whatsoever to address the long-term fiscal problems we face. If anything, the aesthetic mood includes an increased eagerness, documented by Bruce Bartlett, to force a U.S. default as an almost criminally negligent act of political posturing.

Possible choice to play Doberman in the (purely hypothetical) film?

A friend suggests Ed Helms, who plays Andy in The Office. Maybe so if Helms has the range - Doberman is far more formidable and energetic than Andy, as well as adding some of Jim's surface and Dwight's substance.

Who needs a dog when you've got Ursula

She can be so affectionate that I feel it isn't presumptuous to say: "I love you too."

What else is purchased by Amazon buyers of Getting It?

Someone actually asked me this burning question recently, so I decided to give the Amazon page a look, and found the following:

BOOKS
Daniel Shaviro, Decoding the Corporate Tax - good thinking.
Michael Lewis, The Big Short: Inside the Doomsday Machine - good match, as the world of Getting It certainly has affinities with that of rogue capitalism early 21st century style.
Carment Reinhart, This Time is Different: 8 Centuries of Financial Folly - ditto for the prior 8 centuries.
James Hirsch, Willie Mays: The Life and Legend - nice to see a fellow baseball fan, though I'm not convinced Mays is interesting to read about.
Michael Sandel, Justice: What is the Right Thing to Do? - good match in a different sense, as Getting It could be subtitled "Injustice: What Is the Wrong Thing to Do?"
Julee Rosso, Silver Palate Cookbook: 25th Anniversary Edition - must be a kindred spirit; I have and use the original one.
Christopher Buckley, Supreme Courtship - Though Getting It is darker, I suppose there are stylistic affinities here. I wish I could get in touch with Buckley and persuade him to take a look at Getting It, as I'm convinced he'd like it. Same for James Wolcott. But I don't have connections to either of them - any offline suggestions would be much appreciated.
Roberto Bolano, 2666: A Novel - I've heard of this and it sounds very interesting.
Stephen Carter, Jericho’s Fall - with all due respect to Steve, I think we have different literary aesthetics.
Richard Posner, The Failure of Capitalism - I've meant to read this but am already too familiar with the subject matter and thesis (with which I generally agree) to have it as a high current priority.
Antonin Scalia, Making Your Case - I hear Bill Doberman will be working with Nino on the second edition.
Joseph Glennon, Civil Procedure: Examples and Explanations - two great beach reads are better than one?

OTHER
Cuisinart coffee grinder
Canon digital camera
The Wire: Complete Series (DVD)

Ars brevis, vita longa

Well, I've had my day of glory - Getting It rose briefly as high as # 622 in the Amazon book ratings (higher than I ever imagined) on the strength of Kashmir Hill's Above the Law review (takeaway phrase: "an 'American Psycho' take on Biglaw") - but is now slowly declining again.

Today was a very long travel day, as I flew round trip between NYC and Toronto to deliver the talk I noted in my previous entry. Hope it went over well; I certainly tried to say a lot in limited time. But better over-ambitious than predictable or boring, I'd like to think.

One thing of value I learned, for the next time I travel to Toronto, concerns the huge advantages of flying via Porter Airlines to the small airport on Toronto Island in the center of town (Billy Bishop Toronto Center Airport). You dash through this tiny airport to a ferry that leaves every 15 minutes and delivers you 5 minutes after that into the heart of town, near the giant needle and all that stuff. Vastly better than dealing with the size and commute from Pearson Airport well out of town.

Main topic for the day, before my pre-dinner talk, was the Canadian tax treatment of stock options (similar in some respects to ours, but complicated by the fact that their corporate rate is much lower than their individual rate, so deferring the inclusion and deduction alike doesn't balance out to equaling the treatment of cash compensation). Speakers on this topic noted the benefit of tax neutrality, but if corporate governance isn't working right (as in the Bebchuk story of options being misused) one needs to consider regulatory responses. Only, once one is considering command & control regulations, if one has just co-written a paper (as I have) on trying to use a Pigouvian tax approach in a new area for it (bank regulation), one is naturally inclined to wonder if that approach has any prospects here. As in the bank subject in the S-S-S- paper, the problem is defining and measuring the harm so you know how to price it. But if you don't know that, it's hard to get the regulatory approach right either (which is not to say one should do nothing if markets are screwing up - just that one will have an ugly problem no matter what).

Talk at Canadian Tax Policy Research Symposium

Off to Toronto tomorrow, just for a few hours with no overnight, to give a dinner talk at a Tax Policy Research Symposium in Toronto, featuring many of the leading tax academics north of the border. Alas, no dinner for me, as I'll have to fly home immediately afterward to attend a son's middle school graduation on Friday.

It certainly poses extra challenges to be a before-dinner rather than after-dinner speaker, as this is bound to affect the audience's mood as I speak. ("Isn't he done yet? I'm hungry.")

The slides I'm planning to use for my talk, entitled "Three False Statements Concerning International Tax Policy," are available here.

Another review of Getting It

The very popular and enjoyably snarky legal blog Above the Law has just posted a review of Getting It and interview of the author (moi), by Kashmir Hill. She says, among other things:

"If you’re the type who is convinced that the people you work with in Biglaw are evil, conniving, and ready to stab you in the back with a really sharp highlighter, you will love Getting It ... In a post titled “james joyce meets the paper chase,” an Amazon reviewer says: “If Joyce or Kafka had worked at Arnold and Porter, this would be their book.

"I’ve read a lot of lawyer fiction, but never something quite like this. The satirical novel is .... an 'American Psycho' take on Biglaw — funny and fast-paced, a great summer quick read. I devoured it on a plane to Chicago....

"People have told Shaviro it could easily be made into a movie. He could see a young James Spader playing Lowell Stellworth and a young Matthew Broderick playing protagonist/antagonist Bill Doberman. He lives on the same block as Broderick and Sarah Jessica Parker and has considered dropping off a copy of the book.

“Neighbors do favors for each other,” said Shaviro. “I’d give him a book. He’d give me tickets to a Broadway show.”

UPDATE: Above the Law certainly has some pull. My Amazon rating has gone from 650,000 this morning to (so far) # 824.

Invigorated by a change in projects

Although I like my foreign tax credits paper and think of it as making a significant contribution, the last stages of massaging the final version pre-edit (worse still, two final versions pending two edits) is never much fun. So I am relieved to have put it behind me for now.

David Bradford once observed that, if you ever polish an article to the point of formal perfection, you've badly misallocated the last few hours of your time, which would have yielded a far greater marginal product had you said "close enough" and started on something new.

In my case, something new means an article I had started work on about 4 months ago but then had to shelve until now after just a couple of days. (In the words of a former University of Chicago colleague, it was cooling its heels on the back burner.) Luckily, my subconscious appears to have been at work in the interim, giving me a clearer and cleaner sense of the project, which should save some effort by permitting the first draft to come closer to the final one.

Evidence that I am now thinking more clearly: The prior working title was quite turgid: "A Voluntary Worldwide Tax? Corporate Residence and the Transition Problem In U.S. International Taxation." As revised: "The Rising Tax-Electivity of U.S. Corporate Residence."

Christian Science Monitor article on the "S-S-S" bank tax analysis

I've previously noted here my article draft (co-authored with Doug Shackelford and Joel Slemrod) concerning bank taxation in the aftermath of the 2008 financial crisis. SSRN link is here.

The Christian Science Monitor has just posted a blog entry, discussing the article and inviting readers to make comments, here.

Final version of the article will be published in the December 2010 issue of the National Tax Journal (along with the short version of my foreign tax credits piece).

UPDATE: My error: though the link is correct, the CSM is actually just picking up on a Tax Vox blog post by Howard Gleckman at the Brookings-Urban Tax Policy Center.

Revised "album" version of my foreign tax credit article

I've also now posted here a revised and improved "long" version of my foreign tax credit article, the one that will be appearing in the Journal of Legal Analysis.

Quasi-new paper now available on SSRN

I've previously posted word here of my SSRN paper, "The Case Against Foreign Tax Credits," a revised (and I think significantly improved / clarified) version of which should be available through SSRN shortly.

But I have also now posted a much shorter version, less than half the length, with the title "Rethinking Foreign Tax Creditability." I find the shorter version more fun to read, but the longer one does address more issues, and each (I hope) is properly adapted for the setting in which I expect it to be published in the next few months.

"Rethinking" will be in the National Tax Journal's December issue, containing papers from the National Tax Association's 2010 Spring Symposium, and is directed as much (if not more) to economists, accountants, policymakers, etc. as to lawyers. "The Case Against" will be in a faculty-edited law review, the newly established Journal of Legal Analysis, I believe early next year. It attempts more comprehensive issue coverage of a sort that I felt was appropriate and indeed desirable in that setting.

Anyway, here is the SSRN link for "Rethinking Foreign Tax Creditability." The abstract is as follows:

"International tax policy experts often mistakenly conflate two distinct margins: (1) the overall tax burden on outbound investment, and (2) the marginal reimbursement rate (MRR) for foreign taxes paid, which is 100 percent under a foreign tax credit system, but equals the marginal tax rate for foreign source income under an explicit or implicit deductibility system (such as exemption). From a unilateral national welfare standpoint, whatever the right answer at margin (1), deductibility is clearly optimal, and creditability dangerously over-generous, at margin (2)."

Redundancy warning: these are indeed effectively the same paper, and they have much text in common (albeit with distinct introductory and concluding sections). But the version I've linked to here is under 6,000 words, and potentially worth it, even if you've read the first draft of the long version, if you are sufficiently interested in the topic and found that first draft less pellucid than I had hoped it would be.

Yes, another word on Getting It

While I await a review on a popular legal blog that should be up next week, here's what Nancy Matsumoto (my West View interviewer and reviewer) has to say on her blog:

"NYU tax law professor Daniel Shaviro's new novel Getting It is the perfect summer read, in case you are looking for one. This mordant satire, set in a 1980s-era Washington D.C. law firm, follows the adventures of three associates (one of them particularly venal), vying for partnership. The book is a hilarious dissection of American corporate law firm culture and one that rang true for me."

International tax policy: domestic expenses that produce foreign income

The latest issue of the National Tax Journal contains a brief "Comment and Reply" section on Jim Hines' 2008 article, "Foreign Income and Domestic Deductions." The comment is by Johannes Becker of the Planck Institute in Munich and Clemens Fuest of the Said Business School at Oxford (coincidentally, two places I am going this summer), and Hines offers a very brief reply.

The exchange is important for people interested in the topic. However, as it's written mainly for economists (with equations playing a prominent role), it may not get the broad attention and readership among other interested individuals that it deserves.

Hines starts from the premise that adopting exemption for the foreign source income of domestic firms is optimal. The question presented is what should then be done with respect to the domestically incurred expenses of producing foreign source income. E.g., suppose a U.S. firm borrows in the U.S., incurring interest expense, in order to invest abroad. Or suppose a portion of its domestic headquarters operations are devoted to producing foreign source income that the U.S., having hypothetically adopted exemption, is not going to tax.

There has been widespread agreement that, at least in principle, one would want to disallow domestically incurred expenses that produce untaxed foreign source income. In effect, since the expenses are an input to determining foreign source income, which one has decided to exempt/ignore, they should be ignored as well. But Hines' article argues that "the only policy consistent with efficiency ... is to permit full domestic deductibility of expenses incurred in the home country." With all due respect to Jim, I think it's fair to say that this has met with widespread skepticism.

I had noticed that Jim's argument seemed too lawyer-like in a bad way (if I may say so as a lawyer). That is, the claim is largely one of logical consistency with exemption, in effect treating the decision to adopt exemption as if it were a precedent.

Becker and Fuest make this a lot clearer. They start by quoting the following statement from Hines: "Exempting foreign income from taxation implies that the government values equally one dollar of after-tax domestic income earned by home-country firms and one dollar of after-foreign tax foreign income, since home-country firms make this tradeoff at the margin."

Let's try a simple numerical example to make this more salient. If the U.S. adopts exemption and has a 35% domestic rate, a U.S. firm will be indifferent between earning $100 in the U.S. ($65 after paying U.S. tax) and earning $65 abroad after paying foreign taxes. Since exemption gives the firm this tradeoff, Hines asserts that this tradeoff is indeed the socially optimal one from a U.S. national standpoint, and is the one that the government, if benevolent, employs in its social welfare function. As Becker and Fuest note, this necessarily means that, in the benevolent government's social welfare function, domestic taxes paid are worth zero (!!!!!!!!!!!!!).

A more plausible social welfare function would hold that a dollar of domestic taxes paid is worth $1, since the government could simply give it to someone.

One way of describing the underlying error (made clear by Becker and Fuest) is that it confuses first-best with second-best optimality. Suppose an exemption system is best for reasons that relate to the government's lack of market power with respect to taxing foreign source income on a corporate residence basis. (The argument is ultimately similar to that against imposing tariffs if the government lacks the market power to make foreigners bear the incidence of the tax.) Even though this might make exemption, like not having a tariff, the best choice, it doesn't imply that domestic taxpayers have optimal incentives in all respects given, for example, that other domestic taxes which are second-best need to be imposed.

Analogously, suppose that imposing a wage tax is best, all things considered, as in a typical optimal tax model where efficiency and distributional objectives are being traded off (and where, as there's just one period, there is no difference between an income tax, consumption tax, or wage tax). The fact that a wage tax is optimal, all things considered, does NOT mean that tax revenues have a social value of zero and that people making work versus leisure decisions (where the return to work, but not the value of leisure, is taxed) have exactly the set of incentives that the government considers optimal.

Becker and Fuest, using a model with a more plausible social welfare function in which domestic tax revenues have value, find that deductions yielding foreign source income should not be allowed. And if expenses producing domestic versus foreign source income cannot be distinguished, partial deductibility of some kind (such as from using an apportionment formula) is optimal. Finally, they find that full deductibility "subsidizes the ownership of foreign affiliates and therefore leads to inefficiently high levels of such ownership."

Hines' reply appears largely to demur. Rather than defending his earlier line of analysis, he argues that foreign investment yields positive externalities domestically. Hence, it should be subsidized, rather than exempt. He does not address, however, what the optimal Pigouvian subsidy for positive-externality-yielding foreign investment should look like. I would be surprised if it took the form of subsidizing such investment that happens to use domestically incurred expenses.

The glass is 1% empty, not 99% full

Why am I already bemoaning that the summer is just too short? I don't find myself, on December 2, thinking that the winter will be over soon.

Lately it's occurred to me that I could learn from Buddy. As you can see from the picture here, he generally just accepts things as they come (in this case, an upcoming ride in the car). While a bit of a maniac and perpetually food-obsessed like Wile E. Coyote to the nth power, this little fellow is always hopeful, never lets anything get him down, and seems to think at all times that something great is about to happen to him.

Like Paul's uncle in A Hard Day's Night, he's very clean but also a mixer. The family mythology lauds him as the silliest of our cats. But perhaps he ought primarily to be admired, rather than (albeit gently and lovingly) mocked.

Traveling in Belgium

One striking thing about my just-completed trip to Belgium was that I never once needed to take a taxi. I arrived at Brussels International Airport at 8 am this past Thursday, and all I had to do to get to Leuven (about 20 miles away) was go down a couple of levels in the airport and take a train. They're available every 20 minutes or so and only take 15 minutes to get to Leuven. From there, with Google's help, I was able to walk to my hotel.

A few days later I traveled 70 miles, from Leuven to Bruges, and once again the train was all I needed. Then to return to the Brussels Airport, arriving 2 hours early for a 9:45 am flight on Sunday, train travel made it far easier than the equivalent in most other travel destinations that I've known.

True, the U.S. is a lot bigger than Belgium, and New York is not especially small. But imagine if there were high-quality, fast, and direct rail links that made it easy to get from, say, Penn Station to one or more of the 3 major NYC-area airports.

Both Leuven and Bruges are very pleasant cities with the classic medieval / Renaissance era churches, town halls, etcetera. The best art museums are in Brussels, where I didn't get a chance to go, but Bruges has one in particular (the Groeningemuseum) that I rather liked - highlights of local artists from the 1400s through almost the present. The Flemish portion of Belgium (where I was throughout) also has good beer, as well as tasty white asparagus prepared in the Flemish style with vinegar (and plenty of fish and beef), plus the inevitable (not that there's anything wrong with that) chocolate shops at all touristed locations. I didn't get to try the surprisingly prevalent Asian food in Leuven.

Easy to get by speaking English there, though if you speak in French (which would require greater fluency than the bare rudiments I still have) you might run into feelings associated with the country's big cultural divide, which lies between Flemish and French speakers. Though leave it to the U.S. (with its red and blue states) to have (worse?) regional tensions despite a common language.

In Bruges, the central touristic high points are built more or less at the scale of parallel sites in London, except that the rest of the town is, well, a bit smaller. Tough break for Bruges when the Zwin Channel, which gave it sea access and made it a trade center, silted up in the early 1500s. Perhaps there is a global warming scenario in which the Zwin is restored without burying all of Belgium and Holland underwater?

More on my Leuven trip

As previously noted, last Friday (May 28) I spent the day at the 12th (?) Annual Congress of the European Association of Tax Law Professors (EATLP). I suppose one might compare this organization to the AALS Tax Section in the U.S., except (a) it's not part of a broader umbrella organization such as the AALS, and (b) it plays a different role given distinctions between the U.S. and European academic environments.

Tax and other legal scholarship in Europe are headed in the same direction, I'd say, as U.S. legal scholarship. (Insert sarcastic comment here if you must, but I believe this is generally a good direction.) In other words, the movement is towards being more academic, inter-disciplinary, etcetera. But the U.S. has perhaps gone further to date along the same road, e.g., with regard to having incorporated economics and other related disciplines into legal thinking. Though, that said, when called upon by my panel's title to address what "law and economics" is, I mentioned the line from Moliere about the guy who is startled to learn that all his life he has been speaking in prose. The underlying idea in law and economics is to assess laws in terms of their real world empirical effects (whether studied directly or analyzed through theoretical models that are believed to relate to the real world). And in all the panels prior to mine, people had been doing exactly this, at least in many instances (i.e., arguing for or against a proposition based on what they believed about real world effects).

The U.S. is a huge country, filled with law schools, and I would think has lots more tax law professors than all of Europe put together. Plus, we have lots of different institutions in place where we tax law profs meet each other, discuss ideas, etc. This is one reason why the AALS Tax Section isn't pretty much obligatory for anyone who wants to stay in touch with everyone else in the field, and indeed tends to be attended disproportionately by people who may not be as connected with some of the institutions (such as the host of tax policy colloquia) that enable us to meet and discuss each other's work. In Europe, having a smaller tax prof population and fewer developed institutions for the group to stay in touch, I gather that EATLP plays a large role in creating the needed larger sense of community.

The attendance at EATLP 2010 was probably in about the 150 to 200 range. Nearly all Europeans but there were also a few people from Japan, plus 4 Americans, including the 2 invited speakers (Charlotte Crane and me). The main activity for last Friday was 4 sessions on "Retroactivity in Tax Law." Each session had a single proposition to be debated, with two main speakers, one in favor and one opposed. People presumably tended to believe in the arguments they were making, but they were expressly charged with acting as advocates, rather than fully expressing all the nuances of their own personal views.

The speakers would get their say and then respond to each other, then the audience would chip in, and at the end the speakers would get another turn. There also were before-and-after audience votes in favor of vs. against the proposition that was being debated. In the "before" vote, you could check off "Don't yet have an opinion," but at the end you had to go Yes or No. At the end the votes were graphically shown on-screen, permitting audience discernment of winners and losers regarding both (a) the propositions themselves and (b) the speakers' ability to change things in their own favor.

The first proposition held that European Court of Justice decisions should "more often" lack retroactive application. This, of course, is contrary to how judicial decisions usually work (since, ostensibly, they "find" rather than "create" law). The argument for it was that the ECJ's tax decisions are so arbitrary, ungrounded, and unpredictable that retroactive application made no sense (e.g., no one could try to anticipate the decisions). Surely a bit overstated, and the implication might be to get rid of, otherwise greatly limit, or otherwise greatly improve, the ECJ, rather than simply denying retroactive effect to its decisions, so the proposition lost.

The second proposition held that it's OK for legislation to apply from the date of announcement (such as a government press release), even if it's not enacted for some months afterwards. To an American, this proposition is entirely uncontroversial. E.g., if the Obama Administration announced in January a proposed new law greatly slowing down tax depreciation, one would be unsurprised if it applied (assuming enactment within a few months) to all property placed in service after the announcement date. Otherwise, you get the rush to market to beat the enactment date (or delay in acquiring new depreciable property if the proposed change speeds up depreciation). And even those who are more anti-retroactivity than I am would say there's no reliance problem with applying the new law before it is formally enacted given the announcement. To European tax law professors, however, the proposition appeared to be more considerably controversial than it is to most of us in the U.S., reflecting, I think, a more formalist legal approach that is expressed in disparaging references to "legislating by press release." If I recall correctly, the proposition prevailed, but in the U.S. it wouldn't even have been thought debatable.

The third proposition concerned the use of retroactive tax legislation to confirm a particular interpretation of existing law (or else to support administrative practice). E.g., a country's parliament might pass a new law on June 1, 2010 to the effect that a given law (passed in 1950) has always meant X rather than Y, and this indeed would ostensibly nail down that, even back in 1950, it did indeed mean X not Y. My American perspective was to find this a bit surprising (since one legislature can't necessarily be deemed to have the same intent as an earlier one), but I felt that I was missing the context - there was obviously some set of cases that people had in mind.

Finally, the fourth panel, entitled "Retroactivity in Law and Economics" featured me in defense of the proposition (with Charlotte Crane opposed) that "When disadvantageous changes in tax rules are introduced, taxpayers should not receive transition relief." I interpreted this as being about tax preferences, and as holding that there shouldn't be an asymmetric approach holding that taxpayers win wen tax preferences are expanded but aren't permitted to lose when they're made smaller. And I interpreted my role as making an amalgam of the so-called new view, interpreted as Graetz then Kaplow then me (among others), and reviewing its motivations, main points, etc.

Here are the PPT slides for my talk. For reasons of time, I didn't get to cover the issues of income to consumption tax change, repealing worldwide taxation of domestic companies, etc.

As I expected given the more traditional legal framework accepted by most attendees, my side of the debate lost big-time in both the before and after votes. But I picked up at least half of the undecideds. I therefore decided that I would view myself as having won, but that Charlotte could also, equally reasonably, claim that she also won. No rule against two winners, after all, and the outcome was otherwise ambiguous (though not about the proposition itself, which as expected lost).