July 10, 2003
I'm Being Trapped Here!

Former LTCM partner Myron Scholes's claim not be an expert on taxes does not enhance his credibility in the LTCM tax evasion trial: Partner Questioned on Tax Shelter Profits: ...the Internal Revenue Service disallowed a tax shelter that the economist, Myron S. Scholes, acquired for Long-Term Capital Management.... The government is seeking $40 million in taxes and $16 million in penalties and interest.... Under questioning by his own lawyer... Scholes... explained that he knew the tax shelter must have had real economic substance.... Given that the shelter could provide $375 million in tax benefits but cost the fund about $4 million, Dr. Scholes said, he worked hard to make it viable.... [A]fter he answered a question showing that the shelter could not have turned a profit, and with no question pending, Dr. Scholes revealed what was on his mind. "I'm being trapped here," he blurted out.... Mr. Hurley, a career Justice Department litigator, [had] opened an aggressive line of questioning aimed at impeaching Dr. Scholes's testimony the day before, in which he minimized his expertise about taxes. "I said I was not an expert with regard to taxes," Dr. Scholes said. Mr. Hurley held up a copy of "Taxes and...

Posted by DeLong at 08:04 AM

February 26, 2003
Synchronicity on the Consumption Tax

Synchronicity: Today Vaguely Right writes: According to Bruce Bartlett:  a) "Liberals are opposing [the move from income taxation to consumption taxation] because it would benefit the rich too much." Yesterday, I had the following conversation: Him: "All this talk of the consumption tax seems to be just another way to justify not taxing the rich. Aren't there already enough ways to not tax the rich in this world?" Me: "Yes, a consumption tax is another ideological justification for not taxing the rich. But this reason for not taxing the rich does have desirable long-run efficiency properties......

Posted by DeLong at 01:05 PM

August 27, 2002
Skepticism Toward the Skeptical Environmentalist

I cannot be the only economist who was disappointed by Bjorn Lomborg's column in the New York Times on Monday, August 26. Lomborg makes a number of good points: it is definitely the case that we are pumping enough CO2 and other greenhouse gases into the atmosphere to warm the earth; that many of our environmental problems are the diseases of poverty, early industrialization, and the absence of democracy; that the Kyoto Protocol would be hideously expensive; that it would delay the warming trend for a decade at most; that projected temperature rises up to 2100 are bearable; and that it would almost surely be better to spend the resources that would be sucked up by the Kyoto Protocol on third-world public health and infrastructure instead. But as I read I kept waiting for another shoe to drop, and it did not. It seemed to me that Bjorn Lomborg's argument was radically and dangerously incomplete. It seemed to me that there were three more critical points that Bjorn Lomborg desperately needed to make, but did not. And because he did not it seemed to me that the net effect of his piece was not to reveal wisdom, but to darkeneth...

Posted by DeLong at 01:23 PM

July 08, 2002
Emmanuel Saez Has Evidence That Supply-Side Effects Are Not Large

One of the nicest things to happen to us here in Berkeley's Economics Department this year was our successfully persuading Emmanuel Saez that he wants to move from Harvard to Berkeley. Here Emmanuel looks at the number of people found at the "kinks" in the tax code. If supply-side effects are large, then lots of people who would otherwise work more (and be in the higher bracket) will decide to quit when their forecasted income reaches the point at which the marginal tax rate jumps up. So Emmanuel looks for kinks, and finds less evidence of them than I would have thought (save for those reporting lots of self-employment income, but that's another taxp policy story). It's simple. It's ingenious. It's well-executed. It's convincing. All in all, very nice to see. Emmanuel Saez (2002), " "Do Taxpayers Bunch at Kink Points?"" (Cambridge: Harvard University xerox). Abstract: This paper uses individual tax returns micro data from 1960 to 1997 to analyze whether taxpayers bunch at the kink points of the U.S. income tax schedule generated by jumps in marginal tax rates. Clear evidence of bunching is found only at the threshold of the first tax bracket where tax liability starts. Evidence...

Posted by DeLong at 09:18 AM

July 02, 2002
The Current Fiscal Outlook

From the Brookings Institution, Auerbach, Gale, and Orszag provide a brief cheat sheet on what has happened to the federal budget outlook since George W. Bush took office. They also lay out options for restoring fiscal discipline--but such options are only relevant if one cares about making economic growth faster by raising national savings through sound government policies. But it appears that the Republican Party, at least, has stopped listening to its deficit hawks, and now cares about other things. The Budget Outlook: Options for Restoring Fiscal Discipline | The Ten-Year Budget Outlook: Between January 2001 and January 2002, the ten-year unified surplus projected by the Congressional Budget Office (CBO) fell from $5.6 trillion to $1.6 trillion (see table 1) for the 2002-2011 period. The decline is concentrated almost completely in the non-Social Security part of the budget, which fell from a projected surplus of $3.1 trillion in January 2001 to a projected deficit of $0.7 trillion by January 2002. About 40 percent of the shift is due to last year's tax cut (the Economic Growth and Tax Relief Reconciliation Act of 2001, or EGTRRA), another 40 percent arises from economic and technical changes in the forecast, and the remaining...

Posted by DeLong at 09:52 AM

Alan Auerbach Says the Bush Tax Cut Looks Like a Loser for Economic Growth

Alan Auerbach feeds the 2001 Bush tax cut to his and Larry Kotlikoff's (1987) behavioral model, and finds out that--once again--the drain on national savings produced by the revenue losses from the tax cut more than offset any likely savings increases from the incentives provided. This is interesting because--in my humble opinion at least--the Auerbach-Kotlikoff model leans on the side of finding large behavioral responses where they are unlikely to exist in the real world. In the Auerbach-Kotlikoff model, the people who receive last year's tax cut by and large do not perceive it as an increase in their lifetime wealth--they expect to pay the tax cut back with interest a decade or so down the road when the government raises taxes to balance its budget. Hence people decide to work more now when taxes are low, work less a decade from now, and save their extra income. Thus Auerbach and Kotlikoff's model has a much bigger savings response than does a--in my opinion more realistic--model that sees tax cut recipients as believing the tax cut raises their lifetime wealth, and so decide to boost their consumption now. Yet even this bigger savings response is not enough to disrupt the...

Posted by DeLong at 06:42 AM

June 28, 2002
Gene Sperling on the Estate Tax

A fine piece of intellectual judo by Gene Sperling. "Yes," he says, "I understand that for you the estate tax is a problem. But given the limited amount of resources the government has, should fixing your estate tax problem be a higher priority than [fill in the blank]?" I hope Gene retains his energy and his involvement in American politics for a long time to come... Bloomberg.com : Gene Sperling : There is a telling story that sometimes circulates in Democratic Party policy circles. A congressional staffer tells his boss, the congressman, that while costing tens of billions of dollars repeal of the estate tax will benefit only a few thousand families. The congressman replies: "Maybe so, but I think I met every one of them at my last fundraiser." It is a story that resonates with many of us. Often, when I am giving a speech even to Democratic Party donors one or two people will raise their hands to challenge my opposition to estate tax repeal. The message is usually that I don't get it. The argument is that the estate tax doesn't just bite the billionaires. It affects business people, lawyers, doctors and entrepreneurs like "us"... I...

Posted by DeLong at 03:56 PM

June 20, 2002
My Naivete Shown Up Once Again: Strategic Bequests and the Benefits of Keeping Firm Hold on Your Money as Long as Your Heart Beats

Back when I was in graduate school Doug Bernheim, Andrei Shleifer, and Larry Summers wrote an article about the "manipulative bequest motive" for inheritances--how bequests are neither the result of people holding extra wealth in case they should live longer, nor because of their altruistic desire to better the circumstances of their descendants, but because if you are old the prospect of a bequest is one of the few tools you have to encourage your descendants to pay any attention to you. At the time I thought that this was formal economics gone mad--that this was a sterile theoretical point of no practical importance. But here is yet another piece of evidence that I was hopelessly naive | Andrew Tobias - Money and Other Subjects | SAY IT ISN'T TRUE--Bob Kirkland: "Less Antman was quoted today as advising distributing assets to one's family prior to death. I had two great aunts of substantial means (neither left me anything). One had generously divided most of her assets among her nieces and nephews at least ten years prior to death, so the government wouldn't get it. Fortunately, she did reserve just enough to live modestly and support nursing home care. The other...

Posted by DeLong at 10:19 AM

June 19, 2002
Closing Corporate Tax Loopholes with All Deliberate Speed: Why Require Treasury Tax Policy to Wear Boots of Lead?

Andrew Tobias--who is, I think, our best observer of the financial scene--finds a New York Times story on how the Bush administration and the Republican House leadership think that tax loopholes should not be closed too rapidly: Andrew Tobias - Money and Other Subjects THE LEONA HELMSLEY PHILOSOPHY OF CORPORATE TAXATION | Headline in yesterday's New York Times: G.O.P. Is Moving to Slow Action on Tax Loophole. The story begins: "Republican leaders in Congress are using procedural tactics like walking out of committee hearings to keep Congress from voting on measures to close the so-called Bermuda loophole in the federal tax code, measures that would almost certainly pass overwhelmingly if given the chance. The loophole allows big companies to pretend legally that they are based offshore (Bermuda has been the country of choice) and then filter profits through a third country (most often Barbados), avoiding American income taxes." To the Republicans -- always sensitive to the plight of the rich -- this is just good old fashioned Yankee ingenuity. "The Bush administration," the Times reports, "while saying in a Treasury Department report last month that the Bermuda deals should not be allowed, has called for further study, which may take...

Posted by DeLong at 10:49 AM

June 11, 2002
Issue Briefing: Estate Tax Repeal

Estate Tax Repeal: Talking Points DeLong Says: The Republican-led House of Representatives and President Bush think it is unfair that there is an Estate Tax. It would, they think, be fairer to have no estate tax at all--and thus, relative to our current system, give an average present of $3.5 million each to the heirs of the 2,400 people who die each year leaving estates of more than $5 million (current numbers). Earlier generations of Republicans would be astonished at this. It was Abraham Lincoln who said that the great thing about new America as opposed to old Europe was that in America wealth, power, and influence were not inherited: by and large Americans did not work for landlords or bosses but worked for themselves, and "the man who labored for another last year, this year labors for himself, and next year will hire others to labor for them." It was Andrew Carnegie, a principal funder of the 1900-era Republican Party, put it more bluntly: "he who dies rich dies in disgrace." Accumulated entrepreneurial wealth was a public trust to be used for public betterment--hence the Carnegie libraries, endowments, buildings, and universities scattered over America. Accumulated entrepreneurial wealth was...

Posted by DeLong at 09:01 PM

The Repeal of the Estate Tax

Last week the Republican-led House of Representatives voted to repeal the estate tax. If it gets past the Senate, George W. Bush will sign permanent estate-tax repeal: he believes that it is unfair that those who leave estates--even those who leave estates of more than $5,000,000--would have to pay two-fifths of the excess to the federal government in estate taxes. It would be fairer to have no estate tax at all--and thus, relative to our current system, give an average present of $3.5 million each to the heirs of the 2,400 people who die each year leaving estates of more than $5 million. So why is it a high priority of both the Republican Congressional leadership and the Republican President? Why is it a high priority to give another tax break to the rich? Why is it a high priority to remove an obstacle that keeps the rich and powerful of one generation from ensuring that their grandchildren have--unearned--relative riches and power as well? Earlier generations of Republicans would be astonished. It was Abraham Lincoln, after all, who said that the great thing about new America as opposed to old Europe was that in America wealth, power, and influence...

Posted by DeLong at 03:13 PM

December 13, 1999
How Not To Not-Tax the Internet

Internet Taxes Governor James Gilmore and his Advisory Commission on Electronic Commerce are coming to town later this week. The way that Gilmore has been conducting the debate about internet taxation annoys me. He hides what seem to me to be the crucial issues. His proposals seem to me to be crafted for public-relations gain. He seems not to encourage but rather to discourage serious thought about what should be done on hard issues......

Posted by DeLong at 04:11 PM