Apocalypse soon?

It's distressing when we have a ticking time bomb in the form of the debt limit problem, and today:

(a) McConnell said no deal without massive Medicare cuts, which almost certainly is a response to Tuesday's election. The evident idea is that the Democrats must surrender the ability to flog the Republicans on the Ryan plan, or else he is unwilling to surrender his hostage (i.e., the U.S. and world economies).

(b) Ryan said that any increase in tax revenues is absolutely, unconditionally unacceptable because to him this is a matter of "economic doctrine."

Quick observation on Tuesday's election result

Did voters in upstate New York punish Republicans and the Paul Ryan budget for (a) honestly acknowledging that currently projected healthcare expenditure growth is unsustainable, or (b) proposing to throw poor people off the bus, to be joined by seniors once my age cohort reaches retirement age (but in the cynical hope that current seniors would shrug since they're exempted), in part to help make way for massive tax cuts for the top 1 percent of the income distribution?

If (b), I'd say they deserve the voter response they got. If (a), they are getting the same unfair punishment for acknowledging an aspect of reality that the Democrats faced in 2010.

My hunch is that, if one carefully queried the voters, one would find that it's at least two-thirds (a). But since I think the Republicans deserve what they got for (b) - especially given their 2010 election demagoguery, their threatening to block cost-saving under the current structure, and for that matter their enacting an unfunded Medicare prescription drug benefit in 2003 - my sympathy is extremely limited.

My new Tax Notes article on tax reform

Yesterday, Tax Notes published the article that I've mentioned here several times, "1986-Style Tax Reform: A Good Idea Whose Time Has Passed."

A link is available here.

The abstract goes something like this:

"The Tax Reform Act of 1986 combined base-broadening (such as the curtailment of tax expenditures) with tax rate reduction, in a manner that was designed to be revenue-neutral and distribution-neutral. It thereby established an influential model for tax reform that continues to be cited frequently today. This report argues, however, that while 1986-style tax reform was a good idea in its time, it is no longer appropriate in current circumstances, for three main reasons. First, if tax expenditures are properly viewed as spending through the tax code, then a revenue neutrality norm, in which the budgetary gain from their repeal ostensibly needs to be offset by rate cuts, is intellectually incoherent. Second, the long-term U.S. fiscal gap makes rate-cutting, in particular for individuals, potentially imprudent. Third, if one wants to address rising high-end income concentration in the U.S. since 1986, the option of raising, rather than reducing, the top marginal income tax rates may need to be squarely considered."

Scofflaw?

Though the rule is no cats on the dining room table, it's hard to get too upset with Seymour when he is such a handsome and placid fellow.

I'm back from Singapore, and have more or less readjusted to NYC time. In my absence, summer seems to have arrived in a schedule sense (students have graduated and the place has emptied out for the summer, though I have a LOT of things to do) though unfortunately not in a weather sense.

I'll be on sabbatical this fall, and teaching the Tax Policy Colloquium with Alan Auerbach next winter. During the balance of 2011, I have work-related trips scheduled to Oxford, Louisville, Los Angeles, Vienna, and Sao Paulo, plus no doubt a couple more that aren't currently coming to mind.

Final full day in Singapore

Tomorrow (Friday) is my final full day in Singapore. In addition to teaching my eighth and final marathon-length class over an 11-day span (ah, the narcissism and melancholy of spending too much time as a performer), I will be giving a late-morning hour-long talk to people at the NYU@NUS program generally. At the last minute (i.e., tonight), I have grown verging on enthusiastic, at least given my overall state of near-burnout and fatigue, about this talk.

When I was asked to give this talk, I had nothing more definite in mind than to reprise the main themes of my forthcoming Tax Notes paper, "1986-Style Tax Reform: A Good Idea Whose Time Has Passed." Forthcoming, I should add, this Monday, May 23. I will post a link on this blog as soon as I can; I'm pretty sure this can be done with Tax Notes articles once they're out.

The problems with the approaching talk were twofold (apart from simultaneous classroom preparation). First, although few people have seen my new paper as yet and I haven't widely discussed it, it's been on my mind over the last few months and I've discussed bits and pieces or ideas from it on numerous occasions (e.g., at my Senate Finance testimony earlier this month). Thus, to me it no longer feels quite as fresh as it might at this point. Second, it's U.S.-centric, hence not ideal for a talk in Singapore, especially to people who aren't any more tax-focused than they are U.S.-focused.

But I've been idly discussing Singapore-specific factors with various people during my brief stay here, and now feel qualified (at least for a fairly casual talk to a moderate-sized audience) to take things in a fresher and more locally pertinent direction. Hence, my lunch talk is now entitled (in my own mind; I didn't get to tell the organizers in time for any signage to reflect it), "Tax Reform: Singapore Versus the U.S."

As I've mainly written it out, I'll consider posting the talk's main contents here if, after the session is done, I still feel good about it. This, however, may have to wait until next week, as I am taking a 19 hour flight back home on Saturday morning.

Weekend in Singapore

When not preparing for my next class, going on various food, shopping, and cultural excursions (I've seen all the main Singapore tourist sites in past years), or going to the pool and the gym at my residence hotel, I've been reading James Ellroy's powerful and disturbing My Dark Places, which I picked up in the Borders here on Orchard Road. I may have to read more Ellroy, such as the well-regarded L.A. Quartet, though I wonder if it's possible that My Dark Places is his best.

Singapore ruminations

At the moment, by a strange quirk, it is both my birthday and my younger son's. His comes the day before mine, but as I am in Singapore, where the clock is 12 hours ahead of NYC time, and as it's still before 12 noon, we are currently having a joint birthday, only we won't get to communicate about it directly in simultaneous real time.

Perhaps it's not ideal to be spending one's birthday so far from home and loved ones, but I suppose there are compensations, ranging from my observation that lizards are Singapore's squirrels (they dash into the trees when you approach, then skitter around to keep the trunk between you and them), to a bizarre dream in which I was explaining to Willard Scott (!) that the early Neil Diamond song "Girl, You'll Be a Woman Soon," which was playing on his sound system at a garden party where he was offering people desserts, is better known from the cover version in Pulp Fiction (the only explanation I can offer for this dream is that I had been listening to early Neil Diamond recently and love that song, although it's rather off-kilter, un-PC by today's standards, and strange), to my plan to treat myself to a 5 pm viewing of "Source Code" at the nearby cinema (last showing before it disappears here), followed by a tasty and cheap if quick and informal dinner for one at a local food court (the chicken rice and Malaysian noodles are both excellent, but tonight I may look for something Indian).

Teaching a 3-plus hour daily class under current circumstances, in a small group that one really needs to engage directly (and they seem willing enough), while still adjusting to the time zone change and having had so little time since the end of the NYU semester, can feel a bit challenging even if (I hope) they don't see you sweat. It feels like being a stand-up comic who has dozens of familiar routines lodged somewhere in his cerebellum but hasn't gotten to rehearse them enough recently. Time management (too fast versus too slow), dealing with how I liked talking about a given issue 3 years ago as opposed to now, and balancing spontaneity against control, are among the challenges for which one might prefer to be in better-rested, better-rehearsed, more midseason form. But first days are always the most unsettling; in just a few minutes I'll be venturing forth for Day 2. And not long after that, while my birthday will continue for another 12 hours, my son's will be over.

UPDATE: Felt much better about the Day 2 class, plus I must have been a good boy, as I actually got an in-class birthday cake from the very kind people who run the program here.

Off to Singapore

Tomorrow I am flying to Singapore, where I will be teaching a class (U.S. Personal and Business Income Tax Law), in the NYU @ NUS program at the National University of Singapore, over the 2-week period from May 10 through May 20. 3-1/4 hours per day over 8 days - definitely a grueling journey for faculty and students alike. The readings will include greatest hits from the Tax I casebook of which I'm a co-author (with Klein, Bankman, and Stark), as well as selections from Decoding the U.S. Corporate Tax and my book in progress on U.S. international taxation. We'll also read materials on tax shelters (including some famous U.S. cases) and, if we have time on the last day, discuss fundamental tax reform from a U.S. perspective.

As on my prior two visits to teach at NYU @ NUS, I'm looking forward to meeting the students, as well as to sampling Singapore's great food (such as from street hawkers and at Zam Zam on Arab Street in Little India).

May 3 Senate Finance Committee hearing on tax fairness

Yesterday, I testified before the Finance Committee of the U.S. Senate on fairness or distribution issues in the federal income tax system. You can view a stream of the entire proceedings here, and you can read my full written testimony here or here (the latter corrects an erroneous number from the testimony I actually submitted). In addition, the shorter written remarks that I prepared for my 5-minute slot, and then delivered more or less verbatim (taking exactly 4:57!), are available here.

My remarks emphasized three main points:

(1) Rising high-end income concentration may influence how one thinks about high-end tax rates, in particular as part of a broader tax reform process. In the 1986 tax reform process, people thought about high-end distributional neutrality as purely a function of making before-and-after comparisons for two groups: those earning from $100,000 to $200,000, and those earning more than $200,000. A much more nuanced approach to the high end may be necessary today (e.g., the Fiscal Commission Report looked at the top 20%, 10%, 5%, 1%, and 0.1%).

(2) The big-ticket tax expenditure items (such as home mortgage interest deductions, the employer-provided health insurance exclusion, and charitable deductions), tend to provide benefits that rise relative to income until close to the top of the income distribution, when they start falling as a percentage of income. This makes it quite difficult to achieve distributional neutrality 1986-style at the very top unless one starts addressing items such as the 15% dividend rate, which (a) doesn’t hit wage earners at the very top and (b) arguably isn’t a tax expenditure given the double corporate taxation issue.

(3) If tax expenditures are equivalent to spending through the tax code (as asserted by both the Fiscal Commission and the Ryan Budget plan, and as best illustrated by David Bradford’s weapons supplier tax credit example), then repealing them is not in substance a “tax cut,” and hence doesn’t need to be accompanied by tax rate cuts even if one has some view about tax revenues and the size of government. The ONLY reason to cut individual income tax rates, especially in the face of the long-term fiscal gap, is if the equilibrium one prefers (and can get to) includes lower rates, a point on which I am quite skeptical. More on this in my May 23 Tax Notes piece, “1986-Style Tax Reform: A Good Idea Whose Time Has Passed.”

At the hearing, the Republicans had a coordinated theme decrying the fact that, according to a Joint Committee on Taxation estimate, in 2009 51% of all households paid zero in income taxes. 51 percent is ostensibly a “tipping point” (although in fact it reflected the temporary impact of the recession), and is said to be a concern because you have no “skin in the game” if you pay no income tax, and thus ostensibly will vote under the “fiscal illusion” that government spending is free.

I would question how much political influence we should attribute to Americans who are too poor to pay income tax. Political scientists such as Hacker and Pierson would presumably say, try zero as a good baseline estimate of their influence. If I were looking at a fiscal illusion that government spending is somehow “free,” I would start my analysis with deficit financing. Plus, as I commented at one point, it is a mistake to focus on just one year and just one tax.

One of the Republican Senators at the hearing dismissed the significance of payroll taxes in this regard by noting that they are associated with providing Social Security and Medicare benefits at retirement, rather than going into general revenues. But more specifically, he called payroll taxes merely an “insurance premium.”

If payroll taxes are insurance premiums rather than taxes, and Social Security / Medicare benefits are insurance payouts rather than government spending, I suppose we will need to restate our budgetary accounts a bit.

Another coordinated theme on the Republican side of the aisle was that it's simply wrong to have the income tax system do anything whatsoever to affect distribution. It should simply be about raising revenue to pay for government outlays, period. Anything else is immoral. I replied that, if this is the case, we should definitely have a uniform head tax, under which Bill Gates would pay the same amount of tax as a homeless person. And if this is wrong (and I noted that Margaret Thatcher, who had been lauded earlier in the hearing, ran into some problems with a head tax), and we indeed want to tax something such as income based on some such notion as ability to pay, then we are all really playing the same game, and there is nothing left to complain about at a philosophical level.

I think it came out sounding a bit less harsh than that, but hopefully the point was clear.

One of the Democratic Senators invited me to take some pretty open potshots at the degree of good faith in the tax part of the Ryan budget, but I declined to impugn motives, and simply said that I felt its rate cuts were unwise and that its base-broadening remained entirely unspecified. But I granted that it's a lot easier to criticize popular but bad policies if you have my job than if you are a member of Congress.

Last 2011 NYU Tax Policy Colloquium

Last Thursday, Cheryl Block presented her work in progress, “Tax Justice and the Equitable Distribution of Bailout Costs,” as our last paper of the semester.

The paper posits that public anger over the financial sector bailout, along with reasons for thinking that the anger might in various respects have been justified, suggests the possibility that ability to pay principles don’t provide the best guide to thinking about how the costs of the bailout would equitably be distributed. E.g., is the view that the financial sector ought to pay a distinctive view that we need to think seriously about?

Cheryl agrees that there may be important incentive reasons for making the people who caused (and may again cause) a bailout to be necessary pay for the expected costs of their behavior. Not only ex ante, before they act, but even ex post, if the lesson that is learned will impress itself upon future actors. But she wants to leave the efficiency analysis to one side, for purposes of considering the equity issues as well.

My main criticism of this is that there is a considerable overlap between giving people proper incentives and deciding whether they are blameworthy or not. Our intuitions (in the realm of “distributive desert”) about punishing the guilty, etcetera, have a lot of overlap with the idea of giving people proper incentives (and not minding what they decide if they had the right incentives to consider harm to others, etc.). So it is difficult to pursue this analysis independently of efficiency even if one concludes that one’s (or at least my) admitted emotions of distributive desert (a.k.a. retribution) should be preferred to, say, utility maximization where the two, despite their considerable overlap, prove to be in conflict.

Also, I would say that the financial sector as such can’t pay since it’s not a human being. When we say this we presumably have particular individuals in mind – e.g., in this case, the managers and other highly-paid employees in the financial sector, along with their pals in the rating agencies, captured regulatory agencies, etc.

Just because it’s been a very busy semester, I was relieved to have it come to an end, even though so much of it is very interesting and fulfilling. The students were great and their degree of interest and involvement was exhilarating. Things have hardly let up for me since, however – I testified today before the Senate Finance Committee on equity issues in the income tax (more on this shortly), and am off on Saturday to teach in Singapore for 2 weeks. Pretty fast turnaround there, admittedly adding a bit to the stress, although I am hopeful that the Singapore class will go well too.

Next year (January through April 2012), I’ll be teaching the colloquium on Tuesdays with Alan Auerbach. I’m very much looking forward to doing it with Alan. Thanks to Mihir Desai for collaborating with me in the enterprise over the last two years.

Panel discussion on corporate tax reform

This morning, I participated in a panel discussion on corporate tax reform sponsored by the New York State Society of Certified Public Accountants. The other participants were tax lawyer & accountant Laurence Keiser, Curtis Dubay of the Heritage Foundation, and Peter Merrill of PWC.

My turn at the spotlight was entitled "Corporate Tax Reform: If the Path is So Clear, What's the Problem?" A pdf copy of my slides is available here.

UPDATE: Apparently the event was live-blogged, yielding a summary of the discussion that you can see here.

FURTHER UPDATE: Here is a link to the webcast.

Senate Finance Committee testimony on May 3

On Tuesday next week, I will be testifying before the U.S. Senate Finance Committee on the subject: "Is the Distribution of Tax Burdens and Tax Benefits Equitable?"

I've submitted my written testimony, with which I am reasonably pleased, and I will post it here once the Committee has released it officially.

The other witnesses are (1) Scott Hodge of the Tax Foundation, (2) Aviva Aron-Dine, who has DC tax policy think tank experience and is getting an economics PhD at MIT, and (3) Alan Reynolds of the Cato Institute.

Unfortunately, this may conceivably shape up as a bit of a tag team event, with Aron-Dine and me on the Democrats' side and Hodge and Reynolds (neither of whom I have met) on the Republican side. But I hope not. There are things that we ought to be able to agree about, plus other things on which we ought to be able to agree on why & how we disagree.

If my several friends who do tax policy at AEI were among the Republican witnesses, I know that we would have this type of positive exchange. But how it turns out may depend on a combination of who people are and what sort of expectations they believe they face. (As an academic who doesn't want to be in Washington other than very occasionally, I am relatively exempt from such pressures.) And there are certainly some things in my testimony (albeit not everything) with which a principled conservative economist should be simpatico.

BTW, as this shows, I have published at Cato, in their Regulation Magazine.

Neil Young concert

This past Sunday night I attended my first rock concert since Pavement last September: Neil Young in Avery Fisher Hall. While I'm ambivalent about some of his work, he's certainly the best age 65, full-tilt, one-person rock band that I know, although (unsurprisingly) his older, recognizable numbers made more of an impression than his newer ones. My faves remain After the Gold Rush plus the best of his early work with Crazy Horse. (Going back further, he did some good things with Buffalo Springfield, but he didn't play anything quite that old.) Remarkable how he could play several of the guitar workout rock epics from the Crazy Horse era and not appear to either miss or need the rest of the band.

April 21 Tax Policy Colloquium (with Leandra Lederman)

Last Thursday, we discussed Leandra Lederman's work in progress, "Hold the Mayo: What Respect Should Courts Accord Tax Regulations and Rulings Issued During Litigation?" Unusually for us, this is mainly an administrative law paper, addressing two main subjects: (a) the recent Supreme Court decision (Mayo Foundation v. U.S.) holding that the so-called Chevron doctrine of very broad interpretive deference to the regulations issued by administrative agencies, does indeed apply to tax regulations (but not to less formal administrative statements, such as the issuance of IRS Revenue Rulings), and (b) the occasional IRS practice of issuing what are called "fighting regulations" or rulings, i.e., those issued during the course of a particular litigation and purporting to affect its outcome, not just future cases.

Constitutional and administrative law, along with statutory interpretation, have the odd feature of lacking a determinate framework for decision. By contrast, if one is assessing tax policy questions, say from a particular welfare economics framework, then in principle there is an agreed methodology for determining what the right answer is. But that said, I personally find Chevron deference to Treasury regulations both interpretively plausible and likely to have predominantly good effects. The latter impression, however, is based on a set of very general assumptions or beliefs about how the Treasury currently acts and about how courts or Congress (if not allowed to delegate as much) would do in its stead.

The "fighting regulations" problem can be put in focus by imagining that the IRS, whenever facing litigation, could have the Treasury issue a regulation applying just to that case, and purporting to solve it in the government's favor. If (a) the government had time to do "notice and comment" on the regulation, (b) the courts would stand for it, and (c) it was consistent with statutory restrictions on regulatory retroactivity, it would cause the IRS always to win all of its litigation so long as, under the Chevron standard, the regulation adopted a defensible interpretation of underlying statutes and was not "arbitrary or capricious."

But on the other hand, if litigation alerts the IRS to a problem it didn't previously know about (e.g., due to a particular taxpayer's clever and aggressive planning), and if it can address the problem prospectively through regulations that reasonably interpret the law to shut down the game, why should the first mover in effect be grandfathered, creating stronger incentives to look for these things. (In a separate legal context, this is a big piece of the case for a broad economic substance standard in combatting tax shelters.) While I as a judge would want to cast a very skeptical eye on this-case-only regulations (and I'm sure most actual judges would as well), the fact that the IRS or Treasury is willing to publish a broader and more authoritative statement than its attorneys' briefs to the court, having future applicability to other situations, is indeed meaningful, and should be taken as such. So even mere revenue rulings, even when issued in the middle of litigation, while not determinative, are also not equivalent to mere assertions in the government brief.

April 14 Tax Policy Colloquium (with Josh Blank)

Last Thursday at the colloquium, Josh Blank presented his paper, In Defense of Tax Privacy. The main argument the paper makes is that individuals' tax return data shouldn't be publicized (i.e., present law in this regard should continue), not because privacy is an important value but rather because compliance would be undermined if it were easier for people to figure out how feeble the IRS's auditing resources are, and how easy it in fact is to cheat and get away with it.

As things stand, the IRS does the best it can to make a brave show of being on top of the game - e.g., celebrity prosecutions, triumphant enforcement announcements on the days leading to April 15, etcetera. My own view is that this approach is more likely to work with the general public than with the more hardcore types who actually are inclined to play the audit lottery. The sheep and the gamers, to borrow but revise Alex Raskolnikov's terminology, are different groups calling for different strategies.

Also, I'd say that the privacy issues actually matter with respect to individuals - but not public corporations, as to which there should definitely be MUCH more published tax return information. Suppose, however, that one isn't worried about individual taxpayers' privacy for its own sake, but shares the paper's concern that permitting the press to find and publicize instances of notorious tax avoidance or evasion would end up undermining compliance, without aiding IRS enforcement given the agency's limited resources. Then arguably the proper response is to give private parties strong financial incentives to find (and perhaps even participate in litigating) tax underpayments by others.

The Standard & Poor's Treasury bond downgrade

While I see significant prospects of a U.S. fiscal disaster at some point, reflecting my pessimism that the U.S. political system can handle a predictable set of problems that everyone sees coming, I am unsurprised that the bond market, as the Business insider blog put it, gave Standard & Poor's a "gigantic middle finger" by pushing Treasury bond prices up (and yields down) upon hearing of the S & P downgrade.

There are lots of interesting theories regarding why the bond market would react at all. E.g., the S & P downgrade would force Washington to get serious. Or, it caused stock prices to drop (as indeed happened simultaneously) on the view that economic disruption would hurt earnings, and this caused a flight to, ahem, quality.

But the big mystery is that anyone would react at all. It's not as if S & P knows anything special about the bond market situation. And even when they do arguably know something, it's not as if their reputation is (or should be) stellar these days.

Presumably it's a Keynes beauty contest reaction of some kind - investors are reacting to how they think investors will expect investors to react.

Of course, there's one surefire way for the federal government to prevent any future downgrades: pay S & P to rate the bonds. Then wow the S & P analysts with models in which (a) default is ruled out because it has never happened and (b) inflation forecasts are based purely on post-1982 data, and it's AAA, all the way, until the very end.

Income tax burdens on the average family of four

Yesterday being Tax Day (the due date for on-time calendar year income tax returns), there were naturally various stories in the media about people's tax burdens and such. One that came up at least twice concerned that old chestnut of U.S. family structure, the good old "family of four."

As it happens, I was a member of such a family as a child, and I am again a member of such a family as a parent. But meanwhile I suppose a lot of things have changed.

In yesterday's NYT, Ross Douthat has an op-ed mentioning "families of four" that I didn't get to read until today (I've been really busy lately). I didn't have it in mind, therefore, when speaking yesterday to Natasha Lennart of Salon about the taxation of families of four, so it's lucky for me that her interest didn't lie in the Douthat column (although I suppose she would have told me if it did).

As per Lennart's Salon column that was posted yesterday evening, her interest lay in a report posted by the Tax Policy Center finding that, "for the second year in a row, a family of four earning the median income is paying less in federal income taxes than at any time since at least 1955."

I posited that this presumably reflected not only continuation of the Bush tax cuts, but more particularly the continuing economic slowdown. For example, suppose a lot of two-earner families are down to one earner. While obviously this is bad for them if they want or even need the two incomes, it would certainly tend to reduce their tax liability. If this is a major factor in the data, then presumably family-of-four tax liabilities will start rising again if employment levels ever get back to where they ought to be.

In fact, however, I gather that the Tax Policy Center data is based on a representative two-parents, two-kids, one-earner family of four. So it's lucky for me that I was only quoted saying things that actually are true:

"In 1955 'family of four' described a single-earner nuclear unit: a married man and woman with two children.

"'We're certainly more heterogeneous these days,' New York University's Wayne [Perry] Professor of Taxation, Daniel Shaviro, told Salon."

Lennart then notes that, while the Tax Policy Center data that she was citing assumes a traditional 1950s-style family, "in 2005, according to census data, 42 percent of families had two income earners, and around 34 percent of children lived in single-parent families. Of course, this does not change the fact that taxes are historically low. But the 'four person family' statistic does not pay attention to the fact that a dual-earner family is dually burdened with Social Security taxes and cannot claim the same spousal benefits. As Shaviro noted, 'Secondary earners are taxed fairly highly.'

"There is nothing misleading about analyzing the income tax burden of a married couple with two children with just one earning spouse. It is mistaken, however, to assume that is what's understood by the term 'family of four' in 2011."

Anyway, back to parts of the interview that luckily didn't appear in the column. Not having yet read the Douthat column, I suggested that, while household heterogeneity is an important issue in certain contexts - e.g., distributional effects of the fiscal system as between one-earner couples, two-earner couples, and singles, as well as the system's excessive discouragement of work by "secondary earners" in a couple - it wasn't necessarily crucial (in the sense that ignoring it would be misleading) when one is talking about historically low (since the 1950s) U.S. income tax burdens today, which presumably are a function of the rates plus the down economy.

Douthart raises the issue as follows:

"Today ... a family of four making the median income — $94,900 — pays 15 percent in federal taxes. By 2035, under the C.B.O. projection, payroll and income taxes would claim 25 percent of that family’s paycheck. The marginal tax rate on labor income would rise from 29 percent to 38 percent. Federal tax revenue, which has averaged 18 percent of G.D.P. since World War II, would hit 23 percent by the 2030s and climb even higher after that.

"Such unprecedented levels of taxation would throw up hurdles to entrepreneurship, family formation and upward mobility. (Or as the C.B.O. puts it, in its understated way, they would 'tend to discourage some economic activity,' and 'harm the economy through the impact on people’s decisions about how much to work and save.')"

He makes this point to challenge the Obama side of what many see as the "Obama versus Ryan" debate over our fiscal future, on the view that entitlement growth (in particular on healthcare) will definitely have to slow, whether not as much or in the same manner as the Ryan plan posits.

Douthat then got criticized (such as here) for using an overstated income number. Apparently the number he should have used, for taxable income purposes, is $75,700. He has acknowledged that he misread a chart that includes employment-based health insurance and the employer’s share of payroll taxes, neither of which is in taxable income. So we have a rare happy ending, in terms of on-line snark exchanges, as the above-linked critic accepts in an addendum that it was an honest mistake.

But Douthat's choice of a representative family could be questioned as potentially misleading (albeit still, I trust, honestly so) in a sense that I would have mentioned, in my Salon interview with Lennart, if only, ahem, I had gotten to read the Douthat column in the morning (re-queue whining about how busy I am lately). All else equal, Douthat would have had to cite lower numbers had he chosen a one-earner family or a single individual, given how joint returns amalgamate spousal incomes. The relative burden on two-earner families, from how we treat such households via joint returns with rate brackets being significantly less than double those on single returns, is important, but makes such a family not entirely representative. (So re-queue here the heterogeneity point.)

Another important aspect that Douthat may not have recognized was the following. The tax rate increase for two-earner families that he shows presumably reflects a key fact about income tax brackets under present law. They are indexed for inflation, but not for real GDP growth. Accordingly, there is a tendency over time for movement towards having everyone, not just high-earners, end up in the top bracket.

E.g., suppose that, with the gracious assistance of Wikipedia, we compare median incomes, in constant (i.e., inflation-adjusted) dollars for past eras as compared to today. Between 1950 and 2000, the U.S. median income for men grew 80 percent in real terms, while that for women almost tripled. (The latter, of course, also reflects women's greater entry into the workforce.)

For this reason, when economists try to project future tax revenues under a "current policy" approach rather than a "current law" approach, they will typically assume that, over time, tax rate brackets are roughly indexed for real GDP growth, as well as for inflation, thus causing the brackets to kick in at the same points in the contemporary income distribution in, say, the 2030s as today. After all, permitting the U.S. income tax to evolve into a system in which more and more people hit the top rate bracket would be a genuine policy change, albeit the natural consequence of simple legal inertia.

Obviously, a long-term U.S. fiscal gap and what I would call a reasonable (and indeed indispensable) willingness to address it on the tax side, as well as on the spending side, would naturally raise the question of whether we should continue current rate bracket policy by raising the tax rate brackets for real GDP growth as well as for inflation. But my default would certainly be to assume current policy in this regard.

While I'm sure it was not deliberate, I do think that Douthat's column ends up being potentially misleading in substance insofar as it treats real bracket creep as illuminating with regard to whether we should raise tax rates (at least for the top bracket) in keeping with Obama's but not Ryan's plan. The question of how high tax rates should be is analytically distinct from where we should set the break points between brackets. And the real bracket creep tendency of present law does not by itself carry any implication that the right solution is to lower the top rate a la the Ryan plan.

Above the fray

I like to be above the fray if possible. And, given my substantive views, I am willing to consider responsible proposals from both sides. For example, like many on the right, I'm skeptical about the political process, believe that markets can work well in a lot of areas (albeit less so for healthcare and the financial sector), and do not share the left's intense commitment to existing entitlement programs.

The problem I have is that Republican devolution over the last 15 to 20 years leaves me all too often sounding more shrill than I would like.

For example, I've been forced to agree that the Ryan plan is neither serious, professional, credible, brave, nor responsible, even though (a) I would like to be able to reach a more positive conclusion, (b) someone with his general views could have met those criteria, (c) I appreciate that he's better on tax expenditures than the Norquist Republicans, and (d) I think it is within the realm of debates we should be having to argue for a more market-driven healthcare approach with vouchers (although in recent years I've moved away from agreeing with that view).

I'm therefore happy to be able to link to an excellent post in today's New York Times by Alan Viard of the American Enterprise Institute.

In particular, I agree with Alan about the following:

"The Obama and Ryan plans have one striking similarity, as neither specifies which tax preferences will be curtailed or eliminated. Each plan will face hard choices when it comes time to spell out the details. Significant base broadening cannot be achieved by eliminating unpopular loopholes.

"Instead, it will be necessary to make major changes to at least some of the most widely used tax preferences, such as the exclusion of employer-provided health insurance and the deductions for state and local taxes, mortgage interest and charitable giving. If the political will is found to make such changes, the income tax can be redesigned to facilitate a more efficient allocation of resources across economic sectors. For example, while such a tax system might still promote homeownership, it would no longer provide lavish subsidies for expensive houses.

"The economic gains from income tax base broadening are limited, though, because this approach does little or nothing to mitigate the saving and investment disincentives arising from the taxation of business profits, interest, dividends and capital gains. Long-run economic growth could be better advanced by replacing the entire income tax system with a progressive consumption tax, but neither President Obama nor Representative Ryan has embraced that far-reaching reform."

Excerpt from the Obama Administration's budget plan

A White House fact sheet says the following about tax issues:

1) "The President’s framework would seek a balanced approach to bringing down our deficit, with three dollars of spending cuts and interest savings for every one dollar from tax reform that contributes to deficit reduction. This is consistent with the bipartisan Fiscal Commission’s approach."

COMMENT: I find it entirely obvious that tax increases need to be part of the pivot back to fiscal sustainability. It's amusing to see Republicans trying to denounce this as beyond the realm of permissible public debate.

2) "[W]e cannot afford to make our deficit problem worse by extending the Bush tax cuts for the wealthiest Americans."

COMMENT: This is a pretty small down payment on addressing the insanity of amending present law to enact hundreds of billions of dollars in tax cuts not currently on the books, not to mention on responding the staggering rise in high-end income inequality over the last 30 years. But you have to start somewhere. Everyone else's Bush tax cuts aren't really affordable either.

3) "[T]he President is calling for individual tax reform that closes loopholes and produces a system which is simpler, fairer and not rigged in favor of those who can afford lawyers and accountants to game it. The President supports the Fiscal Commission’s goal of reducing tax expenditures enough to both lower rates and lower the deficit."

COMMENT: As per my forthcoming Tax Notes article (coming out on May 23) concerning 1986-style tax reform, I would consider it foolish to lower tax rates in the current budgetary and distributional environment. And if tax expenditures are actually "spending through the tax code," then why should repealing them be deemed a "tax increase"? After all, cutting substantively identical direct spending programs would not be deemed a tax increase.

4) "If by 2014, budget projections do not show that the debt-to-GDP ratio has stabilized and is declining in the second half of the decade, the [debt] failsafe [that the plan proposes] will trigger an across the board spending reduction, including on spending through the tax code."

COMMENT: Okay, here it's accepted that tax expenditures are "really" spending. Why not elsewhere as well? Check out the discussion in my May 23 article of what tax expenditure analysis (in the public mind) has in common with viruses and zombies.

5) "[T]he President is continuing his effort to reform our outdated corporate tax code to enhance our economic competitiveness and encourage investment in the United States. By eliminating loopholes, reducing distortions and leveling the playing field in our corporate tax code, we can use the savings to lower the corporate tax rate for the first time in 25 years without adding to the deficit."

COMMENT: Don't expect anything to happen on this any time soon. I will address some of the reasons why in my portion of a breakfast panel discussion at a New York State Society of Certified Public Accountants event that will take place in midtown Manhattan, but also with a live webcast, on the morning of Wednesday, April 27. More details available soon, and at some point I will post my (already completed) PowerPoint slides for this talk.

Some great ideas for Eric Cantor

Cantor has been quoted as saying, not only that the Republicans should refuse to raise the debt ceiling unless they get massive policy capitulations from the Democrats, but that they should keep the hostage situation going for as long as possible - long past the date in May when the debt limit will formally be breached, and on towards (or past) July when the Treasury expects to run out of tricks that would stave off a literal act of default.

Great thinking on his part, but I have some even better ideas:

--Cantor should get his hands on some nuclear weapons and arrange to have them hidden in major U.S. cities. They should be irrevocably triggered to explode unless he and Obama turn a key together at the same time.

--Republicans on the House Intelligence Committee must have gotten some confidential information that would be of enormous interest to Al Qaeda. This information should be sent under seal to a neutral trustee in a country outside the U.S. realm of influence. The trustee's irrevocable instructions will be to turn over the information to Al Qaeda unless he gets a letter by a given date signed by both Cantor and Obama.

These plans are admittedly a bit more rigorous than merely destroying our country's creditworthiness. (Actually, depending on the exact info conveyed, the second might well be considerably less harmful than deliberate default.) But otherwise they are entirely consonant with what Cantor is advocating.

UPDATE: I think I start griping about politics and such when my time at work takes a turn away from the things that I want to do and more towards meeting obligations (even those I've taken on willingly). I've been carving away lately at a formidable backlog of talks, lectures, panels to arrange, etcetera, and summer writing seems as far away still as summer weather.