Is Buffett Rule a First Step Towards Tax Reform?

When the president first announced his Buffett Rule--that millionaires should pay at least 30 percent of their income in tax--in the State of the Union address in January, I had a strong sense of déjà vu.  It is another alternative minimum tax, and its provenance is very similar.  Congress created a minimum tax back in 1969 when people were up in arms about 155 high-income people who hadn't paid tax a few years earlier.  The logical response would have been to close the loopholes that let rich people avoid tax, but that would have been politically costly, so instead we got the thing that evolved into the AMT--one reason  millions of upper middle-class Americans hate tax day.

The new AMT, called the Fair Share Tax, is anathema to tax reform (and I opined on that in today's New York Times). It will be one more complication for people who are affected.  For example, if you're on the cusp of paying FST, you won't know whether your capital gains will be taxes at 15 or 30 percent. And it will generate enormous marriage penalties.

And it's unnecessary.  If Congress is not willing to fix the underlying defects in the tax code, they don't need a new AMT. One is really enough.  If capital gains and dividends were fully taxed under the AMT, as they used to be before the Tax Reform Act of 1986, the Buffett Rule would be satisfied without a new levy.  Moreover, I suspect that would raise enough more revenue that Congress could use  the savings to finally index the thresholds for the AMT so that it doesn't have to be patched every year.

Some people, however, see the Fair Share Tax as a good start on tax reform.  The Times also has a nice article about two economic rock stars, Emanuel Saez and Thomas Picketty, who have been extremely effective at putting together data and analysis on rising economic inequality. The article is titled, "For Two Economists, the Buffett Rule Is Just a Start," so the question is whether the Buffett Rule is a first step towards tax reform and a fairer, more progressive tax system, or a dead end.

The president has said that the Buffett Rule is not a specific proposal, but a principle for tax reform. The actual specific proposal, the Fair Share Tax, which the president supports, includes language saying that tax reform is the goal (thanks David desJardins for reminding me of this):

It is the sense of the Senate that--
(1) Congress should enact tax reform that repeals unfair and unnecessary tax loopholes and expenditures, simplifies the system for millions of taxpayers and businesses (including by eliminating the alternative minimum tax for middle-class Americans), and makes sure that the wealthiest taxpayers pay a fair share; and
(2) this Act is an interim step that can be done quickly and serve as a floor on taxes for the highest-income taxpayers, cut the deficit by billions of dollars a year, and help encourage more fundamental reform of the tax system.

The question is whether the Fair Share Tax is a complement to tax reform, or a substitute.  The president has been talking about individual income tax reform for several years. The president commissioned Paul Volcker to put together a tax reform plan, which issued a report that went nowhere. The president said that his Bowles-Simpson commission, which would have simplified taxes (although not made them markedly more progressive), had a lot of good ideas, but none of those ideas actually made it into his budget. President Bush actually did commission a credible tax reform plan, but once completed, he acted like it was never his idea.

If the president and Congressional leaders really want tax reform, they should propose tax reform and throw their weight behind it.  I understand this might not be a winning strategy in an election year, but we could lay the groundwork by putting together a serious proposal. President Reagan commissioned his Treasury to quietly put together a tax reform plan behind closed doors during the 1984 election year and then he pushed it to passage in 1986.

I don't, however, think it's in Democrats' long-term interest to further undermine an already dysfunctional tax system. The Fair Share Tax might be good politics, but it's bad policy.

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Tax Day! NY Times has several interesting articles

There’s a terrific article about Emanuel Saez and Thomas Picketty, whose statistics on inequality I have cited in the class (and elsewhere). For Two Economists, the Buffett Rule Is Just a Start

There’s a nice article on what the EITC means to families in or near poverty. Antipoverty Tax Program Offers Relief, Though Often Temporary.

And my op ed about how the Buffett Rule is not a start but a dead end is here: The Buffett Rule: Right Goal, Wrong Tool

Happy Tax Day.

Is Tax Day Killing us?

A new study in the April 11 edition of the Journal of the American Medical Association reports that road fatalities are significantly higher on the tax filing deadline than the same day a week earlier or later.  The study is based on a national database on fatalities spanning three decades, 1980-2009.  Fatalities on tax day are compared with fatalities on the same day in the prior and subsequent weeks.  Overall, fatalities increased by 6 percent on the filing deadline and the difference was statistically significant at the 95 percent confidence level.

The study does not measure what might have caused the increased risk.  One possibility is that stress levels rise as the deadline approaches.  Another is that the stress of filing drives people to drink.  A third is that cheating on tax returns brings on the wrath of the almighty (which, if true, should be publicized by the IRS as this would likely improve compliance).

The authors mention that they expected that the increased use of electronic filing would reduce tax day fatalities, since filers could submit their returns without leaving the house, but there is no apparent trend in recent years (and, indeed, the fatality ratio is higher in the past two decades than in the 1980s).

The usual caution applies: correlation does not necessarily imply causality.  But the sample is very large (19,541 deaths) so the result is unlikely to be a statistical fluke.  Does something else happen around mid-April that would be expected to be correlated with more traffic deaths?  Or is the stress of filing really killing us?

In light of these results, it would be  interesting to compare the tax returns of those involved in traffic fatalities with those who survive tax day.  Are the victims more likely to have filed a tax return at the deadline.  If they filed at the last minute, are the decedents more likely to  have a balance due,  especially complicated returns, or questionable income or deduction items than filers who survive?

In the meantime, if you go out on Monday (Tax Day), be careful.

Source:  Donald A. Redelmeier and Christopher J. Yarnell, 2012, ”Road Crash Fatalities on US Income Tax Days,” Journal of the American Medical Association, 307(14):1486-1488.

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VAT is not a Money Machine

Marty Sullivan, writing in today's Tax Notes (subscription required):

The European experience is often used as an argument against considering a VAT in the United States. It would be a "fast track to a European welfare state," according to Daniel J. Mitchell of the Cato Institute ("Will Republicans Hand the Left a VAT Victory?" The Wall Street Journal, Jan. 4, 2012). Even if that were true in Europe, why would it be true in the United States?

Surely, antitax conservatives can beat back tax increases in legislation that includes a VAT just as well as with legislation that does not. And surely, if a VAT is enacted, antitax conservatives will not fold up their tents and let tax-and-spend liberals run amok. And even if antitax groups somehow disappeared, the VAT would not disappear from public view, as voters would be reminded of it every time they went to the checkout counter.

There is another reason to believe conservatives' fears are not justified: the Canadian experience with VATs. In Canada, the tax was first adopted by a conservative government in 1991 as a replacement for an inefficient 13.5 percent tax imposed on sales by manufacturers. The new tax (officially known as a general sales tax) was highly visible, highly unpopular, and subject to a great deal of ongoing political debate. The rate was reduced to 6 percent in July 2006 and to 5 percent in January 2008. Since the adoption of the GST, overall taxation in Canada has declined from 36 percent of GDP in 1990 to 33 percent of GDP in 2007. (For prior analysis, see "VAT Lessons From Canada," Tax Notes, May 3, 2010, p. 493, Doc 2010-9497 , or 2010 TNT 84-3 .)

Conservatives frequently say they would consider a new broad-based consumption tax if it were used to completely replace the current income tax system. Accordingly, many support a federal retail sales tax (the FairTax) and a VAT split into two parts (the flat tax) only if the income tax is jettisoned. Although there are huge concerns in many quarters about the lack of progressivity in those approaches, there is little doubt the economic benefits would be positive -- and perhaps very large. Given the political impossibility of such radical reform, conservatives with a practical bent for getting things done should consider the adoption of a VAT as a partial replacement for the income tax. That is what professor Michael Graetz proposed (Tax Notes, Dec. 22, 2008, p. 1439, Doc 2008-25405 , 2008 TNT 247-41 ). The same economics that make flat and fair taxes attractive also apply to his plan -- just on a smaller scale. Sometimes half a loaf is better than nothing.

The VAT in the Bipartisan Policy Center's debt reduction plan would make possible cuts in top ordinary income tax rates to 27 percent. And I (and others) have proposed a VAT earmarked to pay for health care.  That would simultaneously guarantee a funding source for the fastest growing source of government spending and serve as a brake on that spending since, for the first time, taxpayers would see a connection between their government-funded healthcare and the taxes they pay.

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Santorum Likes my April Fool's Scenario (Mostly)

So, it turns out that Rick Santorum gave a speech suggesting the same scenario that I did in my April Fool's joke.  Senator Santorum says he should be the candidate now, rather than waiting until 2016, because it will save time.

Here's an excerpt from the speech in Mars, PA, given after the primary election results had come in showing Romney with decisive victories in Wisconsin, Maryland, and DC:

[Ronald Reagan] lost almost every early primary. He only won one until May. One primary till May. Everybody told him to get out of the race. This was back in 1976. They said, get out of the race, we need a moderate. In 1976, Ronald Reagan didn't get out of the race. He was able to stand tall in May, win the state of Texas, which we have every intention of doing.

(APPLAUSE)

He took that race the entire way to the convention and he fell short. And in the fall Republicans fell short because we nominated another moderate who couldn't galvanize our party and bring those votes to our side to get the kind of change that we needed in America. And then four years later, they fought him again. We need another moderate. We have to defeat this Democratic incumbent [Jimmy Carter]. And this time the Republican establishment lost. Let's not make the mistake of 1976 again. Let's bypass that error and move straight to 1980.

So Santorum's analysis is exactly the same as mine, except the part where he gets his butt kicked because he is a right-wing nut.

Here is Jon Stewart's take on the speech.  It starts around 1:50.

The Daily Show with Jon Stewart
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Obama is a Lightweight in the Intimidation Game

Republican leaders are outraged that the president is trying to "intimidate" the Supreme Court into supporting his health reform law. It is an election year so hyperbole and feigned outrage are to be expected, but if the GOP wants to find politicians engaging in intimidation, they should look in the mirror.

First, let't look at what the president said, as reported by Fox News:

"I'm confident that the Supreme Court will not take what would be an unprecedented, extraordinary step of overturning a law that was passed by a strong majority of a democratically elected Congress," Obama said. "And I'd just remind conservative commentators that for years what we've heard is the biggest problem on the bench was judicial activism or a lack of judicial restraint, that an unelected group of people would somehow overturn a duly constituted and passed law. Well, this is a good example. And I'm pretty confident that this court will recognize that and not take that step."

But exactly how does the president intimidate the Supreme Court? The president can't do anything to the Supreme Court if it displeases him. Supreme Court Justices have lifetime tenure. Do the critics worry that Justice Kennedy or Roberts would change their votes because they didn't want to disagree with the president? Whether or not the president opined on the subject, could the Justices have any doubt about what the president's views are? The president's solicitor general did have three days to make the president's case directly to the Supreme Court, rather than to reporters in the Rose Garden.

But the talk of intimidation did remind me of a much more egregious case back in September, when the Republican leadership sent a letter warning Fed Chairman Ben Bernanke and the Fed governors not to engage in any more quantitative easing.

It is our understanding that the Board Members of the Federal Reserve will meet later this week to consider additional monetary stimulus proposals. We write to express our reservations about any such measures. Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people.

Ezra Klein of the Washington Post summarized the message as "Nice central bank you got here. Shame if something should happen to it." This is real intimidation. Congress can legislate limits on the Fed's autonomy and hold up confirmation of appointees to the Board of Governors. Fed governors do not have lifetime tenure. They must routinely testify before Congressional committees. The Republican leaders' warning had real teeth.

And there's also one more meaningful difference between the two episodes. Messrs. McConnell, Boehner, Kyl, and Cantor are professional pols with no training in economics or monetary policy. They have no business lecturing Ben Bernanke, a distinguished scholar with a fabulous reputation in the profession, on economics.  Barack Obama taught constitutional law at University of Chicago, one of the best law schools in the country.


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Jeremy Lin is not Retiring (more short-lived April Fool's humor at Forbes)

I'm not the only Forbes blogger to make up a headline that was treated as news at Google.  Allen St. John had this hilarious April Fool's Day post announcing that Knicks' sensation Jeremy Lin would retire to attend Harvard Divinity School.

Breaking News: Injured Jeremy Lin Announces Retirement To Pursue Harvard Graduate Degree 

The story of NBA phenom Jeremy Lin took a startling turn early this morning when the NBA star announced his retirement from professional basketball in the wake of a knee injury that may be more serious than previously thought. “I’ve just had it with professional basketball,” said the Knicks point guard in a hastily prepared announcement at the Knicks training facility in Purchase, N.Y.   “Everyone thinks being an NBA player is  glamorous, but it’s not. Practice. Ice your knee. Game. Ice your knee. Practice again. More ice. Pack for a road trip. Some days I feel like I’m just pushing a boulder uphill.”

Why is Lin quitting the NBA? Evidently to pursue his Ph.D. at Harvard’s Divinity School.”We’re really excited to welcome Jeremy back to campus,” said Dean Arthur T.S. Jackson, who was Lin’s thesis advisor when he was an undergraduate.  ”He was always a very smart and engaged student in all his philosophy courses. He displayed a real Kant-do attitude.”

Indeed, Lin may have telegraphed his intentions after last week’s win over Charlotte Hornets, when he dropped an obscure reference to the Greek stoic Epictetus in his post-game comments. “A man should so live that his happiness shall depend as little as possible on external things,” Lin told reporters at Madison Square Garden, as he iced his sore left knee. “And since I cracked the starting lineup I haven’t had five minutes to sit down with The Confessions of St. Augustine.”

I'd like to give you the link to the whole post, but Forbes pulled down the post (which coincidentally went online at almost the same time as my fake story about Romney's withdrawal from the GOP race).  However, you can find it by searching Google for jeremy lin retirement forbes, clicking on the first hit that pops up, and opening the cached version.  If you click the actual link, you'll get an error message.

Here's a screen shot of the Google News page showing the "scoop," from a story about the joke on latinosports.com.

Oh, and for the humor-impaired, Lin is not retiring. If he were,  Forbes would not break the news, or be the only non-robot source covering it.  Chill.

Press Coverage of my April Fool's Joke

For a little while yesterday, my April Fool's joke on Forbes was the top news item on Google News. As social media expert (and my cousin) Josh Bernoff explains here, the Google algorithm has no way of distinguishing news from humor or satire. When I wrote the piece, I was targeting the human demographic so I guess it's no surprise that the robot didn't get the joke.

Gawker picked it up (screenshot at left is theirs) and saw it as a setback for Forbes's journalistic integrity. By that time, Forbes had taken it down. The Washington Post reported on the kerfuffle on their Style blog.

My takeaway from this episode is that there really should be a way to distinguish commentary from news. In newspapers, commentary is clearly labeled as commentary or opinion and typically presented in a separate part of the newspaper. I know the last two interior pages of section 1 of the New York Times are editorials and opinion and no thought at all is required to figure out that David Brooks is not a journalist.

Reputable news sites like Forbes should agree to insert an HTML code that identifies items by type. It could be just news or commentary, or there could be finer distinctions such as sports, people, etc., like the sections of a newspaper. There could even be a category for humor or satire.

Then even a robot would be able to get the joke.

[The post in question is here.]

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Romney Drops out of Race, Endorses Santorum

I posted this on my blog on Forbes.com on April Fool's Day and they pulled it down. 

In a surprise move, Mitt Romney announced today that he is ending his presidential campaign and throwing his support behind Rick Santorum. The move shocked observers, including Senator Santorum, as Governor Romney seemed poised for a decisive victory in Wisconsin.

The governor, however, said he concluded that he has “no chance” to win the general election in December and that a Santorum candidacy in 2012 would be in the “best interest of the party.” He explained, “It will save time. As many observers have pointed out, my defeat in 2012 will be interpreted by the party faithful as evidence that our problem is that we’ve become too pragmatic and moderate. In 2016, we’ll ‘correct’ that and nominate some right-wing nut and get demolished in the general election. It’ll be like Goldwater in 1964. I don’t want to wait until 2020 to get my party back. I’m all about efficiency. Let’s get our butts kicked now and move on.”

When asked if he was worried that a Santorum thrashing in 2012 would also cause GOP losses in Congress, Romney said, “sure, but many of the losers will be those Tea Party nuts. If they go back home, Congress may actually be able to get some work done for the American people.”

The governor also said that he “wasn’t really troubled” at the prospect that a Democratic Congress and President Obama would guarantee the survival of the president’s health reform. “Look, I invented Obamacare and I’m proud of it. If I’d been the candidate in 2008, that would have been my signature issue, and I’d have won. 98 percent of people in Massachusetts have health insurance. It’s ridiculous that my party thinks it’s just fine for 50 million Americans to lack health insurance, access to preventive care, and all that. We can spend the next four years thinking about how to improve on health reform, rather than sabotage it.”

Senator Santorum said that he was “gratified, I think,” at the governor’s endorsement.

Newt Gingich pointed out that he is still in the race and expects to prevail at the GOP convention in August.

April 1, 2012