Monday, December 05, 2016

NYU Law School website link on high-end inequality

NYU Law School now has a link on ongoing work by members of the faculty, including me, on evaluating the issues around high-end inequality.  The link includes video of an interview I did, and there's also a link to the current draft of the opening chapter on my book in progress on literature and high-end inequality.

The book's tentative title used to be "Enviers, Rentiers, Arrivistes, and the Point-One Percent: What Literature Can Tell Us About High-End Inequality."  With an eye to being less wholly uncommercial, the link reveals that I had changed the working title to "The March to Toxic Meritocracy: Literature and the Changing Nature of High-End Inequality."  I have since tentatively changed it again to "Great Books and the Rise of Toxic Meritocracy."  But it's definitely not just about "great books" (a concept that in any event makes me uncomfortable).  Rationale for the title is to increase commercial appeal.

Saturday, December 03, 2016

Asymmetry

At the risk of belaboring the obvious, suppose that Trump had won the popular vote by 2.5 million, but that Clinton had won the Electoral College via narrow wins in several battleground states.  This alone would have produced a huge, coordinated national movement, from Republican elites plus mass rallies, demanding that the Electoral College accept the popular verdict.  (Such a campaign was actually planned by Rove in 2000, in the event that Bush won the popular vote but lost the electoral vote.)

Then suppose the Clinton campaign had opposed recounts in the close states.  At this point, the rhetorical (and possibly actual) violence would have been astounding.

This asymmetry is a puzzling but regular feature of U.S. politics.  It's not just about Trump.  Imagine the parties in office being reversed when (a) 9/11 happened (especially if the president had brushed off intelligence briefings about the threat), (b) the 2008 financial crisis arose, (c) the economy recovered 2012-2016 (Romney claimed that a smaller recovery would prove his policies were correct), or (d) Benghazi happened (note that not just 9/11 but the 1983 Beirut barracks bombing were far bigger deals, each with highly plausible theories of executive fecklessness in the run-up).

Tuesday, November 29, 2016

High-end inequality colloquium at NYU, week 6: Morse & Bertrand, Trickle-Down Consumption

This past Monday, Adair Morse of Berkeley presented her paper (coauthored with Marianne Bertrand of U Chicago), Trickle-Down Consumption.

The paper is a nice, compressed job of empirical research, published recently but of particular interest to us given its relationship to my co-convenor Robert Frank's interest in expenditure cascades, whereby rises in market consumption at the top triggers attempts to keep up via increased consumption just below, then again just below that, and then continuing until it has radiated far down the distributional chain.

The two main explanations for the Frank story are (1) positional externalities, whereby my having a bigger house requires you to get a bigger one, too, just to restore our relative positions to what they were before, and (2) context, whereby my bigger house simply triggers you (without necessarily having competitive motives) to need a larger house in order to feel that yours is big enough.  These two views are closely related and can be hard to tell apart, although (2) is framed in such a way as to sidestep criticisms to the effect that one should not give social weight to "envy" (a criticism that I consider wide of the mark in any event).

In the Bertrand-Frank study, state-level data suggests that, when the consumption of the top 20% in the income distribution in a state increases, those in the bottom 80% start consuming more even if their current and expected future income are flat.  Hence, their savings rates fall and they experience increased rates of bankruptcy and financial distress.

With respect to types of consumption, the effect is not greater for what seem to be positional or status goods than for other types of consumer outlays.  This might tend to rebut viewing the issue as status competition via positional goods, although how it affects the context view is less clear.

Based on meticulously testing various alternative explanations, the authors suggest that the methodology might involve a rise in well-off consumers in a neighborhood triggering an increase in appealing high-end goods and services that the others then start consuming without due regard for their budget constraints.  (But they manage to rule out mere price level changes for the same goods.)

To me, this seems to invite (as a plausible explanation) what I call the chocolate chip cookie or temptation problem.  When there are more nice things around, I tend to buy them, just as I might gobble chocolate chip cookies left on the seminar table. [I actually don't do that these days, but never mind that.]  So I'm inclined to view it as an internalities problem, in which consumers who are tempted by what might actually be nice things (from which they do indeed derive utility) get themselves into worse spots overall.

It's not as obvious why a preference for positional goods or the influence of context on consumer choice would necessarily involve irrationality.  But Bob Frank, in terms that he once nicely explained in an NYT column, invoked the work of James Duesenberry, a Harvard economist whose model for how people make consumption choices dominated the economics field & textbooks, because it nicely explained actual observed behavior, until Milton Friedman's permanent income hypothesis wholly supplanted it.  To paraphrase the old joke, Duesenberry's account worked in practice but not in theory, whereas Friedman's worked in theory but not in practice, so the economics profession unanimously voted for Friedman.

Friedman views people as rationally and farsightedly allocating consumption opportunities across their lifespans in order to equalize its marginal utility in all periods, as judged when one decides, and hence one's total lifetime utility.  (If bequests are added to the picture, a common move is to model the multigenerational household as if it were a single infinite-lived individual.)  But he can't readily or convincingly explain, e.g., why rich people generally save higher percentages of their incomes than poor people.  A smoothing rationale alone, for example, might tend to apply equally to each.

Friedman also had trouble explaining the fact that, as societies grow richer, their savings rates generally don't increase.  But, to quote Frank's NYT column:

"Mr. Duesenberry's explanation of the discrepancy is that poverty is relative. The poor save at lower rates, he argued, because the higher spending of others kindles aspirations they find difficult to meet. This difficulty persists no matter how much national income grows, and hence the failure of national savings rates to rise over time.

"To explain the short-run rigidity of consumption, Mr. Duesenberry argued that families look not only to the living standards of others, but also to their own past experience. The high standard enjoyed by a formerly prosperous family thus constitutes a frame of reference that makes cutbacks difficult, which helps explain why consumption levels change little during recessions.

"Despite Mr. Duesenberry's apparent success, many economists felt uncomfortable with his relative-income hypothesis, which to them seemed more like sociology or psychology than economics. The profession was therefore immediately receptive to alternative theories that sidestepped those disciplines."

Whence the shift by universal acclaim to Friedman's model, even though it was psychologically less realistic and also a worse fit with the key data points noted above.

This phenomenon has much in common with what I say about public economics and optimal income tax theory in my recent U Miami Law Review article on the "mapmaker's dilemma."  I too call there for more sociology, and less exclusive reliance on rational choice-based economic models.

In any event, once one adds the Duesenberry view to the positional and context models, they can join the temptation / chocolate chip cookies model in positing that a rise in high-end consumption may trigger planning failures that we might describe as involving internalities from people in lower income tiers.  This might be viewed either as further ground for deeming high-end inequality injurious to those below, or else simply as providing support for the use of policy instruments that focus on increasing private saving where it appears to be suboptimal, and/or on addressing the misuse of consumer credit.

Saturday, November 26, 2016

Music for car trips

Being now newly technologically equipped to play Spotify via my phone through a car stereo, my musical options on long trips are now broader, or at least more flexible and less in need of advance planning, than they used to be.

Thanksgiving-related and other driving the last few days offered an occasion to play through Fiona Apple's 3 classic albums (I'm not counting her first one, Tidal, as at that point she hadn't really found her voice yet).  Then there was time for one more, by Mark Mulcahy, the former frontman of Miracle Legion who recently reemerged after an 8-year hiatus that apparently was triggered by a family tragedy.

The Mulcahy album is really good - witty, clever, literate, tuneful, sharp, catchy, etcetera.  But playing it right after a Fiona Apple-fest doesn't show it off to best advantage, because it's a bit like taking a scenic trolley right after a rollercoaster ride that was loaded with free falls and loop-the-loops.  Against that background, even very good songs can sound too contained by their conventions and form, whereas Fiona Apple's songs, even though she's a classicist who does all the standard things (verse, chorus, build to the climax, etc.) sound like they are trying to fight free of any such constraints.

Monday, November 21, 2016

High-end inequality colloquium at NYU: My "mapmakers dilemma" paper

Today at NYU Law School, at session 5 (out of 7) at our Colloquium on High-End Inequality, I presented my paper, The Mapmaker's Dilemma in Evaluating High-End inequality.  The version we discussed at the session is available here.  As noted in prior posts, an alternative version, longer by about 20 pages since I discuss at length the Diamond-Saez optimal income tax work that proposes a 70 percent top marginal income tax rate, was just published by the University of Miami Law Review, and is available here.

I don't usually discuss my own work at my colloquia these days, because I learn more from discussing other people's work, but I thought it made more sense to do this here.  Since I and my co-convenor comment on other people's papers, I thought it was only fair play to have an outside commentator comment on this one, and my colleague Liam Murphy ably filled the role, discussing broader philosophical issues that I touch on in the piece but don't really try to resolve.

It's a bit of an odd piece, I feel, although I do mainly like it these days.  The thing is, rather than trying to resolve or take a firm stance on most of the issues it raises, the aim is simply to show that we need a broader discussion of the issues around high-end inequality than standard economic analysis (and the optimal income tax or OIT literature in its most common form) really are prepared to handle.  But the aim in a way is simply to open the door for complementing not only OIT with other hard social science, but also hard social science with the soft social sciences, such as sociological and psychological inputs on how high-end inequality affects people's sense of wellbeing (and how that concept of wellbeing should be conceptualized to begin with).  These inputs presumptively include my focus on literature, without there being any claim on my part that that is one of the most important pieces of the puzzle from a narrowly answers-related framework.

So the piece starts a lot of hares without trying to run them to ground (so to speak).  And also, as I noted in an earlier post, I am no longer planning to use it in my inequality and literature book, except for a couple of the best bits (relating to the Gini coefficient and to the "mapmaker's dilemma" itself) that I have imported into the literature book's chapter 1.  So while it used to be chapter 2, now it's just a freestanding law review article.  What a comedown, eh?

Saturday, November 19, 2016

Sitting by the dock of the bay

OK, I’m actually not exactly sitting by the dock of the bay, but I am fairly close to the Golden Gate Bridge.

Yesterday I gave a talk at the University of San Francisco Law School concerning U.S. international tax policy, generally in light of my 2014 book on the subject, Fixing U.S. International Taxation.  My aim in the talk, as often, was to work on several levels at once, the idea being to combine comprehensibility to students who are new to the field with having something interesting to say for the experts who were also in the room.  Today I’m staying in San Francisco for an extra day – it’s odd how rarely I’ve been in SF, although a frequent traveler to the Bay Area (I used to have extensive family in Berkeley) – and hoping it doesn’t rain. 

I’ve been thinking for some time that I should write a second edition of Fixing.  I had two reasons, but maybe now there are four.  Reason 1 is that I have an altered and perhaps clearer sense of how to make many of the book’s main points.  (Also, some of my main targets in it, such as the CEN / CIN / CON welfare norms, appear to me to have receded to the point that focusing on them is now less necessary.)

Reason 2 is that a lot has happened internationally since I wrote the book.  I finished the manuscript at a point when OECD-BEPS was just starting.

Reason 3 is that I’m teaching U.S. international tax law for the second straight year, whereas I hadn’t taught it for several years before writing the book.  Without getting too deep into the weeds in a general policy book, there’s a lot of interesting detail that I could use in discussing the various tradeoffs and ambiguities that dot the field.

Reason 4 is that it’s possible U.S. international tax law will change significantly on the ground next year.

But first I have a long way to go on my book on literature and high-end inequality.  Major progress in the last two days, I think, towards nailing down my chapter on E.M. Forster’s Howards End.   But on the other hand it’s trickier than it usually is for my books to figure out exactly what the market is and how best to reach it.  I do think there’s something potentially there.  But judging quality in a project of this sort is so much more subjective than in the things I am more used to.

A big step forward, I think was deciding to eliminate from the book 90+% of the material that appeared in my University of Miami Law Review article from last week, The Mapmaker’s Dilemma in Assessing High-End Inequality.

I like the piece OK, and will be discussing a shortened version of it (minus the in-depth discussion of the optimal income tax literature, Diamond-Saez, etc.) this coming Monday at my high-end inequality colloquium.  But probably too little readership overlap between the details of that sort of academic trawl and my literature chapters.

I've resumed my boycott of U.S. political news, simply because in light of the great risks our country faces I find it too upsetting these days.

Tuesday, November 15, 2016

High-end inequality colloquium, week 4: Alan Viard

Yesterday at the Colloquium on High-End Inequality, Alan Viard from the American Enterprise Institute discussed portions of his recent book (with Robert Carroll), Progressive Consumption Taxation: The X-TaxRevisited.

Here are summaries of my thoughts regarding the first two topics that I aimed to discuss.  As it happened, we never got to Topic 2 (which shows that we had plenty to talk about).

1.         For / against the progressive consumption tax
My two colleagues in leading the colloquium discussion both support shifting from the existing income tax to a progressive consumption tax – but for very different reasons! I had been thinking that their reasons for supporting it were wholly inconsistent – but upon reflection (and discussion) have concluded that they are instead merely entirely distinct, and potentially complementary.

Alan Viard: He starts from assuming that we need a general revenue system founded on ability to pay, and that this might be either an income tax or a consumption tax. Both burden work, but income taxation also burdens future consumption relative to current consumption. It thereby inefficiently deters saving.  Plus, in practice enormous complexity (and undermining of objectives) results from the full playout of the realization requirement.

In evaluating a consumption tax, Viard emphasizes that, in principal, deferral of the tax (via saving instead of immediately consuming) does not reduce the expected liability in present value, so long as tax rates are constant.

To illustrate, say we have a flat 30% (tax-exclusive) consumption tax that will remain in place indefinitely.  Adam and Barbara each consume $100K this year, so each pays $30K of current-year consumption tax,   But Adam also has $100M of savings (Barbara has none).

A current-year-focused income tax advocate might ask: How can it be fair to charge both of them the same tax, when Barbara’s ability to pay is so much greater?  But a consumption tax advocate might respond: Adam would have paid an additional $30M of tax if he had consumed all his savings this year.  But by not doing so, he merely deferred it at the market interest rate, whatever that might be.  Thus, the present value of the tax on this wealth is $30M whether he saves it for a year, a century, or a millennium. So the consumption tax does require him to pay more, as it should based on ability-to-pay – one simply needs a longer time frame to make the appropriate comparison.  All we need to assume, to reach this conclusion, is a constant tax rate and realization at some point – or that indefinite deferral is effectively no better than realization at some point.

An income tax is likely to be more progressive than a consumption tax if they have the same rate structure, because higher-income individuals generally save a higher percentage of their resources than poorer individuals.  But we can replace the lost progressivity from changing the tax base from income tax to consumption by making the new tax rates nominally higher and more progressive.

Again, all this is what I take to be the Viard view (although I agree with most of it); now on to the Robert Frank view.

Robert Frank: He questions the need for an ability-to-pay tax until we’ve exhausted all taxes on negative externalities.  For example, we might meet at least a portion of our revenue needs by properly taxing pollution, carbon, congestion, etc.

But the taxes on negative externalities that Frank favors include a luxury tax for the high-end.  The aim here is to address expenditure cascades, addressed in this paper, which we discussed at the High-End Inequality Colloquium on October 28.

In effect, he wants a high-end luxury tax, on the same grounds as pollution or congestion taxes.  But since it’s a hopeless task to try to figure out all the items that ought to be on the luxury tax list, he proposes instead to start levying the tax at very high annual consumption levels.

This might even be an add-on to the current income tax, although it also could come out of a personal expenditure tax (PET) – i.e., an individual-level progressive consumption tax.  The very high rates just at the top would presumably require thinking about multi-year inclusion of consumer durables such as a home, and one might also debate whether averaging should be allowed.

Could a general consumption tax at lower rate brackets be justified on externality grounds, rather than just under ability to pay principles?  For Frank, the answer is potentially yes, but this would require a separate critique of keeping-up-with-the-Joneses style lateral positional wars via consumption.

Frank also posits that the luxury tax wouldn’t greatly reduce high-end labor supply, and does not posit adverse effects from unequal wealth-holding.  His target is unequal current consumption, based on the analysis of expenditure cascades from the top on down.

My comments & concerns:
1) Bob Frank posits negative externalities from high-end inequality solely via the consumption pathway.  But what if there are also negative externalities from high-end wealth-holding?  Suppose that Wilkinson-Pickett adverse effects on health and on social gradient ills were found to be increased by wealth inequality alone, even controlling for current consumption levels.

2) As a matter of political economy, will progressive consumption tax rates (whether under the Bradford X-tax or the PET) be high enough? The political process sometimes over-focuses on marginal rates, without regard to the tax base or actual effective rates.

3) Is savings, reached by the income tax but not the consumption tax, a tag of ability?  If so, then under standard optimal income tax theory, including it in the tax base can improve the available tradeoff between distributional gain and efficiency loss.  

4) On more of a technical point, is the personal expenditure tax (PET) more administratively friendly to highish rates than the  X-tax?

2.         Inheritance
The conventional wisdom holds that, if you favor consumption taxation, then logically it’s at least against the grain to favor estate and gift and/or inheritance taxation.  But I disagree.

The above logic is inescapable if one thinks of multi-generational family dynasties as if they were extremely long-lived individuals.  But they aren’t – parent and child, bequestor and bequestee, are not in fact the same person.

Henry Simons famously argued for double-taxing gifts and bequests.  No deduction to the donor, full inclusion for the done (leaving aside administrative arguments re. small items, and perhaps set of internal transactions within a household). 

This was an argument about consumption, not income.  And whether or not one buys his result, the logic of saying it triggered consumption by both was clearly correct.  If I make a gift, including an altruistically minded bequest, then clearly I get utility from it, no less than if I had instead spent my $$ on vacation travel or a restaurant.  (Accidental bequests are different, but there it’s efficient to tax them if we posit that they were precautionary saving, but the owner had no bequest motive and ended up not needing them precautionarily.)

So as a matter of judging individual welfare in ability-to-pay terms, if I give a $1M gift to my kids, this is $1M worth of consumption by me and by them.  Double-taxing it would merely match the fact that there was double consumption.

Why wouldn’t we want to adopt the Simons solution?  Not because it is logically wrong in defining ability to pay – but rather because we don’t like the policy outcome.  As the literature discusses, there is an “altruistic externality” here.  I valued my enjoyment of the kids’ consumption at $1M, but I didn’t value their enjoyment at a separate $1M.  By contrast, if I bought a standard consumption item for $1M the total welfare gained would be just $1M.

This suggests tax-favoring gifts and bequests for policy reasons, relative to the Simons baseline.  Taxing them “just once” is a salient, prominent, intuitive, and relatively simple way of getting to this result, but it doesn’t inherently get the incentive exactly right.

Now suppose we are worried about unequal wealth-holding when there is extreme high-end inequality.  One might consider addressing this through a wealth tax, but one is in the ballpark if one does this periodically, such as by targeting gifts and bequests. So now, where there’s impact on high-end inequality, we might want to move towards taxing gifts and bequests less favorably than under the “tax it once” baseline.

True, in that scenario it’s really just a mechanism for a periodic wealth tax, with the tax on gifts needing to accompany that on bequests so it can’t be avoided via transfers to younger or healthier individuals.  Basing it on gifts and bequests as such would merely be opportunistic.  But now suppose that one’s high-end inequality concerns are triggered by dynastic wealth transmission, unequal opportunities in life, etc.  Then the gratuitous transfer, not the wealth-holding, might indeed be worthy of direct focus.

My point here is not to sketch out the policy upshot, but just to suggest that (a) there is really no logical tension between favoring enactment of a progressive consumption tax to replace the income tax, and wanting to tax gifts and bequests, plus (b) if one is uneasy about the prospects for a progressive consumption tax to be progressive enough, a tax on gifts and bequests may help to address that problem.

Ground worth thinking about in some hypothetical future, e.g., if the incoming Administration moves things in one direction distributionally, but subsequent Administrations want to move in a different direction.

New article published, discussing high-end inequality

My article, The Mapmaker’s Dilemma in Evaluating High-End Inequality, has just been published by the University of Miami Law Review. The official cite is 71 University of Miami Law Review 83-159 (2016), and it’s available here.
  
The abstract goes as follows:

“The last thirty years have witnessed rising income and wealth concentration among the top 0.1% of the population, leading to intense political debate regarding how, if at all, policymakers should respond. Often, this debate emphasizes the tools of public economics, and in particular optimal income taxation. However, while these tools can help us in evaluating the issues raised by high-end inequality, their extreme reductionism—which, in other settings, often offers significant analytic payoffs—here proves to have serious drawbacks. This Article addresses what we do and don’t learn from the optimal income tax literature regarding high-end inequality, and what other inputs might be needed to help one evaluate the relevant issues.

The piece was adapted from what used to be chapter 2 of my book-in-progress, Enviers, Rentiers, Arrivistes, and the Point-One Percent: What Literature Can Tell Us About High-End Inequality, In effect, it serves to explain why one might want to look at contemporary literature in this regard, rather than confining oneself to tools from public economics and other “hard” social sciences.  But as it happens, I have decided not to include almost any of the material from this chapter in the book.  Instead, material from maybe 3 to 5 pages of it has been adapted to fit into the book’s chapter 1, and the book then goes straight to the fun stuff, starting with Jane Austen’s Pride and Prejudice in what is now chapter 2.  Ensuing chapters that I have written to this point address Stendhal’s Le Rouge et le Noir, Balzac’s Pere Goriot, Dickens’s A Christmas Carol, Trollope’s The Way We Live Now, and (albeit only about half-done) Forster’s Howards End.  The chapter after that will cross the Great Pond and look at Horatio Alger (to be followed by Dreiser’s The Financier and/or The Titan and then Wharton’s House of Mirth).