Category: Law
The new GOP tax bill
As I’m on the road, I’ve only read summaries. Kevin Drum has an excellent post on how the distributional implications harm the blue states, follow-up here. Scott Sumner says better than expected. Kevin writes:
The Republican tax bill eliminates deductions for a bunch of odd things: tuition debt, mortgage interest, alimony, medical expenses, state and local taxes, gambling losses, tax prep expenses, moving expenses, and a few others.
Bravo! I’m actually impressed, noting that many of these deductions are limited rather than eliminated as I understand matters. Furthermore, in various embedded ways the plan discourages the itemizing of deductions, which in turn limits the value of remaining deductions for many taxpayers, but in a politically subtle way. The bill even nips at the endowment income for well-off universities, though I don’t favor that change, as it may harm innovation.
The plan as a whole is a reckless expansion of the deficit, but if that is going to happen anyway this is one of the better ways to do it. In fact, we should tax companies less and homes/land more. Why? First, for behavioral reasons homeowners are insufficiently diversified; the tax code should not encourage that. Second, this bill will (modestly) lower land, home, and rental values in the fancy cities on the coasts, a net gain at least for non-itemizers perhaps (caveat: I don’t know everything that is in the bill). Third, big, fancy homes on big plots of land are not that “green,” and furthermore residence size seems to bring a lot of hedonic adaptation. Fourth, there are more likely increasing returns across companies than across expensive homes. Fifth, American equities seem to bring a long-run return of 5-7% and real estate zero percent. More of the former please! Companies > homes.
I believe that with further examination I could find many ugly and stupid aspects of this bill, and many politically craven decisions. And again, I don’t favor increasing the debt. But holding the size of the debt constant, let’s face it — this is a step in the right direction.
Regulatory progress in Arlington, Virginia?
Arlington County is considering whether to relax regulations that allow homeowners to legally rent to long-term tenants on a portion of their property, after only 20 homeowners out of 28,000 eligible successfully obtained licenses over the past eight years.
At a time when people increasingly are sharing cars, bicycles and workspaces, and are renting out rooms by the night on Airbnb, the idea of providing a legal way for residents to safely lease their garage or basement room to a young adult — or anyone else — seemed like a no-brainer.
But the detailed regulations, written in part to mollify wary neighbors, apparently stopped the practice from taking off, county officials said.
That is from Patricia Sullivan at the Washington Post. As a frontier for further deregulation, this does not seem to be a hopeless cause:
California’s legislature passed bills in 2016 that made it easier for local communities to create ADUs, prompting cities throughout the state to adopt ordinances that are designed to be more user-friendly.
Even California.
Don’t blame Facebook for our own failings
That is the theme of my latest column for Bloomberg, here is one excerpt:
Critics may argue that Facebook isn’t so much like a phone company because it uses complex algorithms to decide what to place before our eyes. That’s true, but would the critics be much happier if ads and posts on Facebook simply appeared in linear, chronological order? And on the question of algorithms, consider an analogy with a traditional publisher: Plenty of mainstream companies have published and promoted the works of Marx, Stalin, Hitler and Mao. The “algorithm” behind these decisions was whether these works would find an audience and bring in profit. The ideologies behind those works, of course, led to revolutions and the massacres of many millions, plus the infiltration of Western governments by communist sympathizers and delusional beliefs for several generations of Western intellectuals. Few of us are happy about those outcomes, yet for the most part we don’t blame printing presses, publishers’ quest for profit or their “algorithms.” We instead focus on the bad ideas themselves, and how we might persuade individuals otherwise.
You could think of Facebook as akin to a delivery truck, noting that such trucks often carry guns, abused medications, junk food and bad books, among other evils. If Russian conspirators order you flowers for Valentine’s Day, perhaps in appreciation of your pro-Putin tweets, the delivery truck will bring those too.
Here is good analysis by Jacob Sullum. Here you can view some of the offending ads, weak tea says I. Vyacheslav Mikhailovich Molotov would have been ashamed.
Overall, one reason Facebook is such a scapegoat is because so many individuals don’t want to admit that Trump simply won the election. To the extent you can pin his victory on some kind of conspiracy or wrongdoing, that gives you something to rail against, something to blame, and also a way to feel better about parts of your country.
My Conversation with Brink Lindsey and Steve Teles
This is an out-of-synch bonus episode, rushed out because I think their new, just-out book — The Captured Economy: How the Powerful Slow Down Growth, Enrich Themselves, and Increase Inequality — is so important. You will find the podcast here, lots of rapid fire back and forth.
Everyone wanted me to interview them together, but I said no, I would instead interview them separately and ask about 2/3 the same questions to see how their answers might hang together, or not. That is how co-authors should be treated! I also asked each what the other has for breakfast, and by the end each had confessed to several crimes, to avoid a longer sentence of course.
Here is the smallest of bits:
COWEN: Are higher levels of executive compensation part of the problem?
TELES: There you probably would get a different answer between me and Lindsey.
COWEN: That’s why I asked
Recommended, again here is the podcast (no transcript, we wanted to get this out right away).
My dialogue with Matt Levine on the future of finance
Here is the back and forth, it is more Matt than I, but plenty of both of us. Here is one excerpt:
Matt: …I think the possible surprise here lies in the connection between finance and identity. People are sort of inchoately aware of it now; we use the term “identity theft” to mean “someone using your name and Social Security number to get a credit card.” But most people don’t really think of their credit report as being central to their identity. Really ambitious proponents of blockchain technology, though, envision a world in which a lot of identity information — your citizenship and marital status and college degrees and employment and certifications and whatnot, maybe your fingerprints and retinas and DNA, as well as of course your credit information — are encoded on a blockchain and used in every aspect of your life. (India has a governmental system a little bit like this, and China is building one, though the blockchain vision usually involves decentralized non-governmental systems.)
I think that the idea that financial intermediaries should be the keepers of identity is pretty uncomfortable, but then, the idea that Facebook would be the keeper of identity seems like it would be uncomfortable, and in fact Facebook has quickly taken over a lot of the work of verifying identity, at least online. One thing that we might see in the next 20 years is a fight between financial institutions and social networks and decentralized blockchain builders over who gets to be the keeper and verifier of everyone’s identity.
Recommended.
Prostitution Reduces Rape
A new paper in the American Economic Journal: Economic Policy by Bisschop, Kastoryano, and van der Klaauw looks at the opening and closing of prostitution zones (tippelzones) in 25 Dutch cities.
Our empirical results show that opening a tippelzone reduces sexual abuse and
rape. These results are mainly driven by a 30–40 percent reduction in the first two
years after opening the tippelzone.
For tippelzones with a licensing system, we
additionally find long-term decreases in sexual assaults and a 25 percent decrease
in drug-related crime, which persists in the medium to long run.
Cunningham and Shah studied decriminalization of indoor prostitution in Rhode Island and found very similar results.
We exploit the fact that a Rhode Island District Court
judge unexpectedly decriminalized indoor prostitution in 2003 to provide the first causal estimates
of the impact of decriminalization on the composition of the sex market, rape offenses, and sexually
transmitted infection outcomes. Not surprisingly, we find that decriminalization increased the size
of the indoor market. However, we also find that decriminalization caused both forcible rape offenses
and gonorrhea incidence to decline for the overall population. Our synthetic control model finds 824
fewer reported rape offenses (31 percent decrease) and 1,035 fewer cases of female gonorrhea (39
percent decrease) from 2004 to 2009.
In addition a working paper by Riccardo Ciacci and María Micaela Sviatschi studies prostitution in New York and also finds that prostitution significantly reduces sex crimes such as rape:
We use a unique data set to study the effect of indoor prostitution establishments on sex
crimes. We built a daily panel from January 1, 2004 to June 30, 2012 with the exact location of
police stops for sex crimes and the day of opening and location of indoor prostitution establishments.
We find that indoor prostitution decreases sex crime with no effect on other types
of crime. We argue that the reduction is mostly driven by potential sex offenders that become
customers of indoor prostitution establishments. We also rule out other mechanisms such as
an increase in the number of police officers and a reduction of potential victims in areas where
these businesses opened. In addition, results are robust to different data sources and measures
of sex crimes apart from police stops.
It’s become common to think that rape is about power and not about sex. No doubt. But some of it is about sex. Quoting Ciacci and Sviatschi again:
We find evidence consistent with the fact that potential perpetrators substitute
towards indoor prostitution establishments instead of engaging in sex crimes….This mechanism is in line with a survey of men who had purchased sex from women in London.
About 54% of these men stated that if prostitution did not exist then they would be more
likely to rape women who were not prostitutes. This belief was clearly held by one man who even
stated: “Sometimes you might rape someone: you can go to a prostitute instead” (Farley et al.,
2009).
In short, a wide variety of evidence from different authors, times and places, and experiments shows clearly and credibly that prostitution reduces rape. This finding is of great importance in considering how prostitution should be rationally regulated.
Montesquieu’s *Persian Letters*
There is a new edition out, edited and translated by Stuart Warner and Stéphane Douard. This eighteenth century bestseller could hardly be more relevant today. Is it possible to lead a philosophic life? How do political leadership and wisdom intersect? How do Christianity and Islam differ politically? How does politics reflect gender relations in a society? Is there a case for optimism in modernity? I still am not sure we have improved on Montesquieu’s investigations, although I cannot claim he gives us final answers. This is a volume of polyphony, with travel as a source of learning and liberation as a major theme throughout.
Harems play a role too, here are the final paragraphs from Roxane to her sultan master Usbek:
You were astonished not to find in me the ecstasies of love. If you had known me well, you would have found in me all the violence of hatred.
But you have had for a long time the advantage of believing that a heart such as mine was submissive to you. We were both happy you believed me deceived, and I was deceiving you.
This language, without doubt, appears new to you. Could it be possible that after having overwhelmed you with grief, I could still force you to admire my courage? But it is done: poison consumes me; my strength abandons me; the pen falls from my hand; I feel even my hatred weaken; I am dying.
The introduction and notes are outstanding, and also of interest for those of you who are piqued by Straussianism. You will note that the book was first published anonymously.
“Jokes in a serious work are acceptable on the condition that they hide a profound sense beneath a trivial form. It is in this way that Montesquieu, in his novel, Persian Letters, has written one of the most philosophical books of the eighteenth century.” – Alexis de Tocqueville [link]
I am pleased, by the way, to have once had the chance to spend two days with co-editor Stuart Warner discussing Persian Letters and nothing but (thank you again Liberty Fund!). I cannot think of any person more qualified to have undertaken this endeavor.
You can order the volume here.
More John Cochrane on the corporate tax burden
Here is a long and very interesting post with many distinct points. Here is one of them:
So the entire corporate tax is pre-paid, or borne, by the stockholders who are unfortunate enough to be around when the corporate tax is announced. Anyone who buys shares after the corporate tax is imposed gets the shares at a lower price, so his or her return is entirely unaffected by the corporate tax.
People who buy shares after the corporate tax is imposed bear no burden of the tax. The corporate tax does not affect the rate of return received by current owners at all, because they got to buy at low prices.So much for corporate taxes soaking the rich. This is an important fact, missing in all the distributional analysis I have seen.
Here is another:
Pietro Peretto reminds me there is an active literature on optimal taxation in endogenous-growth economies, including his Corporate taxes, growth and welfare in a Schumpeterian economy , Schumpeterian Growth with Productive Public Spending and Distortionary Taxation, The Growth and Welfare Effects of Deficit-Financed Dividend Tax Cuts and Implications of Tax Policy for Innovation and Aggregate Productivity Growth. Nir Javinovich and Sergio Rebelo have a nice recent “Nonlinear effects of taxation on growth,” in the JPE, Nancy Stokey and Sergio have “Growth effects of flat-rate taxes” also in the JPE, and I have inside information that Chad Jones is working on it too. So, there is no lack of academic literature on the question just which kinds of taxes reduce growth, which of course leads to huge distortions.
Worth a full read.
How effective is media censorship in China?
Here is a new and very important paper by Yuyu Chen and David Y. Yang (and note how they named the link):
Media censorship is a hallmark of authoritarian regimes. We conduct a field experiment in China to examine whether providing access to an uncensored Internet leads citizens to acquire politically sensitive information, and whether they are affected by the information. We track subjects’ media consumption, beliefs regarding the media, economic beliefs, political attitudes, and behaviors over 18 months. We find 4 main results: (i) free access alone does not induce subjects to acquire politically sensitive information; (ii) temporary encouragement leads to a persistent increase in acquisition, indicating that demand is not permanently low; (iii) acquisition brings broad, substantial, and persistent changes to knowledge, beliefs, attitudes, and intended behaviors; and (iv) social transmission of information is statistically significant but small in magnitude. We calibrate a simple model to show that, due to the low demand for, and moderate social transmission of, uncensored information, China’s censorship apparatus may remain robust for a large number of citizens receiving unencouraged access to an uncensored Internet.
Those results are fully consistent with my own anecdotal observations.
How foxes guard
If Whitehouse had chosen to pursue a complaint against the senator, she would have discovered a process unlike other parts of the federal government or much of the private sector. Her complaint likely would have been thrown out because interns have limited harassment protections under the unique employment law that Congress applies to itself.
Congress makes its own rules about the handling of sexual complaints against members and staff, passing laws exempting it from practices that apply to other employers.
The result is a culture in which some lawmakers suspect harassment is rampant. Yet victims are unlikely to come forward, according to attorneys who represent them.
Under a law in place since 1995, accusers may file lawsuits only if they first agree to go through months of counseling and mediation. A special congressional office is charged with trying to resolve the cases out of court.
When settlements do occur, members do not pay them from their own office funds, a requirement in other federal agencies. Instead, the confidential payments come out of a special U.S. Treasury fund.
That is from Michelle Ye Hee Lee and Elise Viebeck at The Washington Post.
“your thoughts on replacing income and consumption taxes by a wealth tax?”
That is another reader request. I would emphasize the following points:
1. A property tax already is a wealth tax. This form of taxation works fine, although as much as possible value taxes on land should be replaced by taxes on the unimproved value of land, for the reasons suggested by Henry George. California in particular should tax land more and income less. Read Noah Smith on this.
2. The actual impact of capital gains taxes is complicated, but in practice they often act as wealth taxes, especially if they are not indexed for inflation. The next time the Democrats hold all branches of government, they are likely to try to raise these tax rates to an excessive level.
3. The French try to tax wealth per se, and that is a big reason why so many French people have ended up in London. People hate this, feeling they’ve already “given at the office.” A higher and more progressive income or consumption tax, if needed, usually is better than a wealth tax. The wealth tax hurts savings and investment to a disproportionate degree, plus it makes all property rights insecure. You never know when your earnings are safe from further taxation.
4. Taxing wealth is another way of running a higher implicit government deficit, and this is dangerous.
So #1 aside, overall I am not crazy about wealth taxes. Compare them to sovereign wealth funds. You may or may not like SWFs, but at least the government is then trying to augment wealth rather than take away from it.
It seems they will ban foreigners from buying homes in New Zealand
Foreigners are set to be banned from buying houses in New Zealand as part of a phase of new policies outlined by Prime Minister-elect Jacinda Ardern.
The 37-year-old, who was elected as part of a coalition government on 23 September, said the new plan was designed to stop rising house prices and will apply to non-residents.
‘We have agreed on banning the purchase of existing homes by foreign buyers,” said Ms Ardern, according to AFP.
Here is the full story. Will the Kiwis be returning to their mercantilism of the 1970s? She also wants to renegotiate TPP. And here is the immigration update.
How simple can tax reform get? (from the comments)
The corporate income tax could be reduced to zero if all corporations were treated as pass-thru’s. However, for a variety of technical and practical reasons (too lengthy to discuss here), that is not feasible. Under the current regime, many businesses have the option to be treated as pass-thru’s (e.g., LLC’s and partnerships) and thus taxed only once at the individual rate, but for most publicly traded and very large entities, entities with foreign shareholders, etc., that is not possible or practical. One could also consider an imputation system such as used by the UK, but that is also messy.
The ideal system should treat all income at the same rate, regardless of the form of business. Currently, corporate income (including distributions) is subject to a higher rate than income from non-corporate entities. The federal marginal rate is currently 48 percent (35% + (.20 x .65) = 48%) compared with a marginal rate of 39.6% on ordinary income. These rates should be equalized and, preferably, the rate of corporate tax and the rate on distributions should also be roughly equal in order not to discourage corporate re-investment over distributions or vice versa and therefore avoid undue distortion regarding decisions on the allocation of capital. Thus, at the current marginal rate of 39.6%, the current proposal of a corporate rate of 25% would roughly achieve this with the current dividend marginal rate of 20% (25% + (.20 x .75) = 40%). Progressivity can be achieved (as it currently is) through progressive rates on the dividends/capital gains.
As someone who spent an entire professional career in the business, I find it amusing and naive that economists who lack any detailed knowledge of the Code or practical experience with its administration think it’s easy to radically “simplify the tax code”, make it “fair” to everyone, eliminate all tax avoidance, all at the same time! The three are simply not feasible simultaneously. As a wise man once said, “the life of the law has not been logic, but experience”.
The experience has also been that we need more than one type of tax in order to prevent the inevitable tax planning around one or the other. The system is complicated, but it is a result of a considerable amount of trial and error and political compromises. It can be made better, yes, but Trump’s promises are more credible than those who promise a one page tax code.
That is from Vivian Darkbloom. And from another Vivian comment:
1. “…so just tax that person”. Please explain how, absent a corporate income tax, the US is going to effectively tax foreign investors, if they invest via a US or foreign corporation. This is a major practical problem of eliminating the corporate income tax completely. It would be very difficult to get one’s ounce of tax flesh out of non-US investors and put them on equal footing with US investors (the same issue arises with a system relying solely on consumption tax). It would be very impractical to abrogate the 68 or so bilateral tax treaties the US is party to today or the treaties of friendship and commerce.
On the mark.
Should we move to self-assessed property taxation?
Eric Posner and Glen Weyl recommend a version of this idea in their recent paper “Property is Only Another Name for Monopoly.”
The core proposal is you announce how much each piece of your property is worth, and you are then taxed as a percentage of that value (say 2.5%). At the same time, you have to sell your property for that same value, if someone bids for it, thereby lowering or eliminating the incentive to under-report true values. If you think this through, you can see it minimizes holdout problems.
I think of the proposal as trying to force “willingness to be paid” people to live at “willingness to pay” valuations. Microfoundations as to why WTBP and WTP so diverge would be useful!
In the meantime, my main worry concerns complementarity. Say I own eighty pieces of property, and together they constitute a life plan. The value of any one piece of property depends on the others. For instance, if I lived in a more distant house, the car would be of higher value. The ping pong table would be worth less in Minnesota, and having a good slow cooker enhances the refrigerator. Don’t get me started on the CDs, but of course they boost the value of the stereo system and for that matter all the books. I’ll leave aside purely “replaceable” commodities that can be replenished at will, and with no loss of value, through a click on Amazon (Posner and Weyl in any case think those replaceables should be taxed at much lower rates).
So how do I announce the value of any single piece of that property, knowing I might have to end up selling its complements?
In essence, I have to calculate how much the rest of the economy values each piece of my property, for me to know how much any single piece is worth. That recreates a version of the socialist calculation problem, not for the planner, but for every single taxpayer. And you can’t rely on the status quo ex ante as a readily available default, because that status quo can be purchased away from you.
The authors do consider related issues on pp.76-78 and 89-90. For instance, they allow individuals to announce valuations for entire bundles when complementarity is strong. You choose the bundle: “My house and all its items for three million tokens.”
But your human capital and your personal plans are non-marketable, non-transferable assets that can’t be put in this bundle. So the incentive is to assemble highly idiosyncratic assets that no one else can quite fit together, and so no one else will wish to buy from you, and then you can announce a low valuation.
If that strategy works, the tax system doesn’t yield enough revenue and furthermore you’ve had to distort your consumption patterns. If that strategy doesn’t work, someone might buy your life’s belongings/plans from you anyway, leaving you without your beloved customized snowmobile, your assiduously assembled music collection, and what about all those shoes you thought fit only you?
Ex ante, individuals are forced to assume huge, non-diversifiable risk, namely that someone will snatch away their whole “commodity life” from them. So many of us, even if we could bear the asset loss, just don’t have the time to rebuild that formerly perfect mesh of plans and possessions, the one that took decades to create (think about risk-aversion in terms of time). Furthermore, what if a wealthy villain or personal enemy wished to threaten to denude you in this manner? Or what if you simply make a big mistake reporting the value of your bundle? Isn’t this much much harder than just doing your income taxes?
To protect against these risks, ex ante, people will value their wealth bundles at quite high levels, and the result will be that wealth taxation will be too high. Since I don’t favor most forms of wealth taxation in the first place, why push for a method that also will tax people on the risk of losing most of their carefully assembled personal wealth and plans? Is “planning plus complementarity” really something we wish to tax so hard?
Don’t forget the “planning plus complementarity” process as a whole tends to elevate the value of assets, not reduce them. Posner and Weyl boast that their scheme lowers the value of assets (p.88: “Under our system, the prices of assets would be only a quarter to a half of their current level.”). Lower asset values may boost turnover, but is it not prima facie evidence that the value of aggregate wealth has gone down? (I am not convinced by the way, that once lower rates of income taxation are taken into account, that asset prices would in fact be lower in their system.) Why is that good?
So I wish to announce a high valuation for keeping the current system in lieu of this reform. My personal plans depend on it.
Addendum: I consider several of Glen’s ideas too much along the lines of what Hayek labeled “rationalist constructivism.” Here is my earlier post on quadratic voting.
Second addendum: You might instead prefer this method for only a limited set of issues, such as eminent domain. But then you have to end up taxing wealth values, if only for credibility and future reporting incentives, even when efficiency may dictate simply transferring the resources with compensation. There just aren’t that many situations where a wealth tax is what you optimally should be seeking to do. And keep in mind, so often the real preference revelation problem is not for the homeowners, but whether the government really needs your asset or wealth! Or maybe they are just taking it because they can.
Should there be a tax on corporate income at all. For and against.
That is a reader request. I used to think the ideal tax rate on corporations should be zero, but that is no longer my view. For one thing, too many individuals would find ways to self-incorporate, thereby avoiding personal income taxes on labor income. Note that a small corporation controlled by you can return real income to you in a variety of non-taxable or less-taxed ways.
Furthermore, tax-exempt institutions such as non-profits and pension fund would end up owning too many corporations, to the detriment of (non-tax) efficiency. While pension funds eventually must pay out that income in the form of pensions, those often go to high-wealth, low income elderly individuals, and thus would never end up taxed at such a high rate.
I now think that for the United States the tax rate on corporate income should be in the range of 18-25 percent, depending of course on what other decisions we make with our budget and tax systems. It also would work to simply target the OECD average of the corporate rate.
A further question is whether the case for a zero corporate rate would be stronger if we shifted from income to consumption taxation. That depends how easy it might be to partially evade the consumption tax, say by spending money abroad. In general, to the extent evasion is possible that favors lower marginal tax rates but levied on a greater number of distinct points in the system, including in this case on the corporate veil.
I thank Megan McArdle for a useful conversation related to these points.