U.S. Politics: Wile E. Coyote edition

[Fez]

Hah! It's interesting. I come at it from exactly the opposite direction. I do NOT want tax policy used for social engineering. I personally think that a lot of the really obnoxious complexity, unfairness, and loopholes in the Code come from (sometimes) well-meaning but (ultimately) misguided attempts to achieve a social outcome. I would like the Code to be as behavior-neutral as possible (recognizing that tax policy ultimately will somewhat influence behavior) and not give any special breaks to whatever industry has the best representatives on K Street (effing Corn; g-d oil; "small" business BS).

I completely agree with you, though, that we don't need any special rate incentive to get the "rich" to invest. I agree that they will do it anyhow, provided that rates on gain aren't "confiscatory" (which I mean in a different way than Norquist does, for the record).

So much this. Tax policy should be about raising revenue, period. There are plenty of noble (and not-so-noble) goals that the government is currently trying to achieve through tax incentives, but its not the right way to go about it. I've been arguing for years that the correct way to push those policy goals would instead be through the use of subsidies that would need to be reauthorized each year.

[TerraPrime]

So much this. Tax policy should be about raising revenue, period. There are plenty of noble (and not-so-noble) goals that the government is currently trying to achieve through tax incentives, but its not the right way to go about it. I've been arguing for years that the correct way to push those policy goals would instead be through the use of subsidies that would need to be reauthorized each year.

What's the effective difference between subsidies with sunset clauses and tax policies with sunset clauses?

[Mlle. Zabzie]

Or you go in to PE.

1. Gold, I believe, is taxed as a collectible, so you don't get the lowest CG rate.

2. PE, ah yes. Let's talk about PE for a moment. The biggest "gimme" for PE right now is the fact that the "carried interest" (the "20" of the "2 and 20") earned by the GP (and then ultimately the individual partners of the GP) of the fund is taxed at capital gains rates rather than ordinary income rates (note, if there's no CG preference, this benefit goes away). In one sense, this looks like comp. Investors give the fund money, and in return, the fund professionals get a 20% cut (sometimes there's a catchup back to $1 of profits, sometimes not) after the investors get their money back plus an investment hurdle (often an 8% IRR). The economics in some sense look a lot like an option over corporate stock (which likely would, in fact be taxed as OI with respect to the spread). However, interests in partnerships are taxed differently. I'll spare you the gory details, but suffice it to say that very, very, generally, because the GP isn't entitled to anything on a liquidation basis day 1, and is also treated as a partner in the fund, the analogue of the corporate rules don't apply. The capital gain is the amount passed through by the PE fund (generally CG, but sometime it's OI, in which case the fund professional recognizes OI). The same logic, btw, applies to the following situation: entrepreneur has a great idea; gets an investor; deal is that entrepreneur runs the business and gets a 40% share of profits; investor puts up all the capital and gets 60% of the business.

3. Terra - I totally respect where you are coming from. I am, in fact, more libertarian than you are.

[Fez]

What's the effective difference between subsidies with sunset clauses and tax policies with sunset clauses?

Well firstly tax policies almost never have sunset clauses, particularly deductions and credits, and which are essentially what we're talking about here. They get into the tax code and never come out. In fact they often aren't even debated in the first place, they just get inserted in committee. Even though the effective expenditure is the same, subsidies are seen as "spending" so there is much greater debate, and each time they need to be reauthorized there is at least the potential for debate and alteration. This also means that a lot of things that are currently tax credits/deductions would never make it as a subsidy.

Secondly, its much easier to game the tax code than it is to game a government agency. I'm sure that for mass-use things, like the home mortgage interest deduction, it wouldn't make much difference if it was a subsidy; just a little bit of paperwork and the appropriate agency would rubber stamp the subsidy. But for the more niche, very valuable deductions, particularly the ones that businesses take advantage of, the subsidy-applying process would be much more active than the tax process. Right now its very easy for accountants and tax lawyers to obey the letter but not the spirit of the tax code and there's not much that can be done about it. But if it were a subsidy instead, and the agency in charge had discretionary awarding power, they could do a lot more to insist that the spirit of the subsidy is being followed.

Thirdly, once you start distorting the tax code its very easy for people to attack the legitimacy of the tax system, which in turn leads to attacking the legitimacy of the entire government structure it supports. Better to keep the system clean, simple, and easy to understand; and put the social engineering on the spending side instead of the revenue side.

ETA: Fourth, tax expenditures disguise the true size and influence of government. Better to put it all the spending side and let people truly understand just how large the government is and what an impact it has on people.

[Mlle. Zabzie]

I'm hoping that someone call tell me that this op-ed by a former SEC chair and a PWC person is unnecessarily alarmist and contains factual errors.

Not I. I think it's likely correct.

ETA, 5.5x leverage, athough aggressive, isn't unheard of in the corporate context.

[Guest Raidne]

Bale - I would agree with that. I am 100% in favor of subsidies, directly funded programs, etc.

On what Terra said, I am also fine with monkeying with sales tax since it's very difficult to make that anything other than what it's intended to be, but that's an issue outside of the scope of federal taxation.

[ljkeane]

It may well be factually correct. However articles that 'reveal' that the net present value of a budget deficit extrapolated to infinity is a large number irritate me. It's fairly alarmist.

[Mlle. Zabzie]

On what Terra said, I am also fine with monkeying with sales tax since it's very difficult to make that anything other than what it's intended to be, but that's an issue outside of the scope of federal taxation.

At least for now. . . see Trisky's post above. VAT here we come.

[Shryke]

I'm hoping that someone call tell me that this op-ed by a former SEC chair and a PWC person is unnecessarily alarmist and contains factual errors.

In what way are they calculating these liabilities? They aren't very clear at all.

My suspicion is the usual tactic of looking at multiple years of liabilities compared to only a single year of income.

The fact that it's a WSJ op-ed makes it suspect right from the start.

[Mlle. Zabzie]

In what way are they calculating these liabilities? They aren't very clear at all.

My suspicion is the usual tactic of looking at multiple years of liabilities compared to only a single year of income.

The fact that it's a WSJ op-ed makes it suspect right from the start.

They say that they are using NPV numbers (presumably actuarily adjusted) taken from the programs' own reports. The question is what discount rates and other assumptions are used to calculate the NPVs; however, so long as it is an NPV, the NPV of the liability should be its value today.

[lokisnow]

Income tax rates, since 2003, have been as follows (all rates listed are single/separate rates - double for joint filers):

$0-8K: 10%

$8-34K: 15%

$34-82K: 25%

$82-172K: 28%

$172-373K: 33%

$373K+: 35%

But, if the tax cuts, expire, starting in 2013 they will be:

$0-8K: 15%

$8-34K: 28%

$34-82K: 31%

$82-172K: 36%

$172+: 39.6%

Setting aside the complicated CG stuff, I'd love to see us go over the fiscal cliff and then come up with something like this:

$0-8K: 11%

$8-34K: 17%

$34-82K: 25%

$82-172K: 31%

$172-373K: 36%

$373K+: 39.6%

That's a tax raise on all brackets except 34-82K It preserves most of the tax breaks and is only a 1-2% increase on the lower end--that is regressive, and bites, but it will capture more money, plus it would establish a new baseline that will better fund the government long term, and it's not severe enough to trigger a recession, I imagine. It would mean everyone shares a bit of pain, rather than putting all the pain on a new 250,000+bracket.

[Shryke]

They say that they are using NPV numbers (presumably actuarily adjusted) taken from the programs' own reports. The question is what discount rates and other assumptions are used to calculate the NPVs; however, so long as it is an NPV, the NPV of the liability should be its value today.

Which is calculated as the amount owed to all people alive today over the next 75 years. (at least for medicare. I believe it's similar for SS)

It's an alarmist framing of the issue.

[TrackerNeil]

Anybody got a link to this article? I can't imagine how this case could be made and am interested in reading it.

Although I agree with Krauthammer's conclusions I don't know his reasons. I'd probably disagree with them anyway - he's a Republican tool - but here are mine.

In exchange for the BCA, Obama got short-term stimulus in the form of a payroll tax cut and an extension of unemployment benefits, funds far more stimulative than, say business tax cuts. He also broke the Senate logjam (as you'll recall, the GOP threatened to shut down the chamber for the rest of the session) and got the repeal of DADT, the START treaty, and as I recall some food safety bills and other nice things. At the time, even Lindsey Graham agreed that the Democrats had won the day. If it was bad news for Graham, it was probably good news for Obama.

[Oblique]

I saw this comment by Robert Fast under the Cox and Archer Op-Ed

QUOTES

"The actual liabilities of the federal government—including Social Security, Medicare, and federal employees' future retirement benefits—already exceed $86.8 trillion, or 550% of GDP."

What nonsense! They use a 75 year horizon on liabilities, and worry that it's 550% of one year's GDP. What's the expected total GDP for the next 75 years?

What about the Defense Department? Do we have a guaranteed funding source for the Pentagon's next 75 years? Of course not. Half the people in this country don't know where their next meal is coming from. To these over-priced accountants, life itself is nothing but an unfunded liability.

Somehow Cox and Archer have produced a balance sheet for the country with liabilities but no assets. Sorry, it doesn't work that way. With productivity gains at even half their historical levels, the GDP will rise very many times faster than liabilities.

Start over guys, and this time do it right.

"...the over $8 trillion per year in the growth of U.S. liabilities."

There is no need to collect money in the first year to cover the liabilities of the seventy-fifth year. As a percentage of the total GDP over the time horizon, the cost of these programs is decreasing.

The Postal Service is facing a crisis this year because idiots in Congress decided they should pre-pay seventy-five years of retirement benefits. Let's not make the same mistake with Social Security and Medicare.

END QUOTES

Do his quotes accurately refute any of what they stated? They seem to make a little sense....

[Mlle. Zabzie]

Which is calculated as the amount owed to all people alive today over the next 75 years. (at least for medicare. I believe it's similar for SS)

It's an alarmist framing of the issue.

Why?

ETA - assuming they are using the correct discount rate, the NPV of the liability should reflect the amount that we would need to fund today to cover the liability. I don't deny that the choice of discount rate is key, but why is this so alarmist?

[Fez]

Why?

ETA - assuming they are using the correct discount rate, the NPV of the liability should reflect the amount that we would need to fund today to cover the liability. I don't deny that the choice of discount rate is key, but why is this so alarmist?

But they aren't using any discount rate as near as I can tell. They are just comparing 75 years of liability to 1 year of GDP, which is meaningless.

[Sci-2]

The Most Conservative States Have the Pregnant-est Teenagers

We already knew that the Bible belt was also home to a lot of unideal, sinful pre- and extra-marital belt loosening. But now, according to the most recent data available from the Centers for Disease Control, the birth rate for girls between 15 and 19 is highest in states where the most publicly popular approach to extramarital sex is to affix one's hands firmly over one's ears and shout Bible verses until whoever is talking about the sex gets annoyed and walks away.

[White Walker Texas Ranger]

So Intrade is apparently against the public interest. Looks like the Commodities Futures Trading Commission doesn't have any bigger fish to fry.

Why?

ETA - assuming they are using the correct discount rate, the NPV of the liability should reflect the amount that we would need to fund today to cover the liability. I don't deny that the choice of discount rate is key, but why is this so alarmist?

Because they're bringing up the the NPV of 75 years of of costs without comparing to the NPV of 75 years of revenues.

[Mlle. Zabzie]

But they aren't using any discount rate as near as I can tell. They are just comparing 75 years of liability to 1 year of GDP, which is meaningless.

Thanks. Reading more closely, I think the article is somewhat misleading, but not wholly meaningless.

I took the following quote to mean there was a NPV calculation:

"As of the most recent Trustees' report in April, the net present value of the unfunded liability of Medicare was $42.8 trillion. The comparable balance sheet liability for Social Security is $20.5 trillion."

Though, as I read more closely, that adds up to only $63.3 trillion (itself 4x GDP, so you know, a lot) and they seem to suggest that $86.8 is the number that is attributable to the program. If you sum the $63.3 trillion, plus the existing debt, plus the deficit, plus this year's expenses, you get pretty close to that $86.8 number. If that is what they meant, then the op-ed is misleading by about $16 trillion. If it's not what they meant, then they are misleading by a factor of 1.5.

It is interesting to note that if $86.8 and $63.3 are the correct numbers then you can really see the baby-boomer effect.

[Mlle. Zabzie]

Because they're bringing up the the NPV of 75 years of of costs without comparing to the NPV of 75 years of revenues.

That's not the issue. NPV is necessarily the amount that would be needed to fund a stream of future payments based on an assumed discount rate. The issue is that, though they do reference the NPV in the article, their 5.5x comparison takes the undiscounted NFV against the actual value of today's GDP. As I said above the apples to apples comparison is the $63.3 mm NPV published by the entities, not the $86 m number.