Intellectual progress at the NYU Tax Policy Colloquium

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

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

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

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

My letter to the editor of Tax Notes

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

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

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

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

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

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

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

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

Published at last

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

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

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

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

Overheard in my Pilates class

... from a middle-aged woman:

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

Talk of being true to your demographic ...

Adventures in rock concerts

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

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

Tax policy colloquium session on my tax & accounting paper

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

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

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

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

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

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

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

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

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

Academic wars in corporate tax reform

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

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

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

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

Tax policy colloquium session on horizontal equity

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

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

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

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

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

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

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

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

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

Vignettes from a short trip

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

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

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

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

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

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

Tax policy colloquium session on probability of tax positions' correctness

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

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

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

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

Bright side of the Clemens hearings

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

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

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

Change in NYU Tax Policy Colloquium schedule

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

Longest exercise session ever

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

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

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

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

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

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

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

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

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

Tax policy colloquium session on private equity

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

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

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

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

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

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

According to Brad DeLong on his blog:

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

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

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

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

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

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

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

Early election returns

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

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

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

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

Budget deficit projections for 2009-2018

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

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

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

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

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

Tax policy colloquium session on incidence of the corporate tax

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

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

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

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

Small bit of good news on the pop music front

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

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