A Taxing Blog

Friday, September 12, 2003
Sin Taxes  
On the topic of sin taxes (e.g. the espresso tax or cigarette taxes), David Theroux of the Independent Institute (a think tank) points me to their book: Taxing Choice: The Predatory Politics of Fiscal Discrimination, edited by William F. Shughart II.

From the description, I think I can agree that targeted tax adjustments are often misguided policy. My sense, however, is that the book focuses on the libertarian argument that experts in Washington are wrong to think that they know what's best. I often oppose target tax adjustments on the slightly different basis that lawmakers underestimate the power of tax planning and thus cannot foresee all of the negative and unintended consequences of such taxes.

I've noticed that Libertarians are often anti-tax but not always clear on why, exactly, this is so. I suspect that Taxing Choice will give me the answer, so I'll add it to my list.

One more thought while I'm at it. If we do away with targeted tax adjustments --- cigarette taxes, gasoline taxes, real estate transfer taxes, and so on, there would be a revenue shortfall, and overall rates will have to rise, particularly at the state level. Would Libertarians vote to increase overall tax rates as a tradeoff? Or do Libertarians really believe that the efficiency gains will outweigh the losses? If so, is there empirical evidence to back up this claim?

Thursday, September 11, 2003
Really Rational Exuberance  
Tax Law Review just accepted my "job talk" article, The Rational Exuberance of Structuring Venture Capital Startups, for publication early next year. TLR is a peer-edited journal, so I am especially pleased about this. Whoo-hoo!


Corporation Law and Economics  
My colleague Steve Bainbridge has a new blog: Corporation Law and Economics. Steve is best known (I think) for supporting the race-to-the-top thesis in the corporate law debate. Steve's spin, as I recall, is that corporate law benefits from having 50 regulators instead of one (federal) regulator -- if one state gets out of hand and excessively regulates, managers will learn to incorporate elsewhere.

Don't mistake this for a managerialist bent, though. Steve thinks that directors of the board, not managers, lie at the heart of the corporate enterprise.

I'm not sold on his regulatory competition model of corporate law -- having corporate law at the state level but securities, tax, banking law etc at the federal level never made much sense to me. I say federalize the whole thing. But we're having lunch tomorrow, so maybe he'll persuade me.

Wednesday, September 10, 2003
Distributive Justice Game  
This site will tell you what theory of distributive justice you adhere to. I'm a pluralist, apparently. I think this puts me slightly to the right of most academics (mostly Rawlsians, these days, I suspect) but still a bit to the left of most non-academics.

I'm increasingly interested in theories of distributive justice, as it's hard to argue tax policy questions without having an underlying theory of distributive justice to refer to. The old guard of the academic tax community tends to be pretty strict egalitarian, which obviously stresses equality over efficiency. When faced with the question of equality vs. efficiency, I now know why my answer is usually "it depends." It's not becuase I'm a wishy-washy lawyer-type, it's because I'm a pluralist. Whether redistribution is just depends on the specific good -- political power, environmental resources, economic wealth -- that we are talking about and the context in which a transfer might be made.

Ex-Treasurer of Enron Is Sentenced to 5 Years in Prison  
The first of many, I hope. The article notes that Glisan has agreed to give back $1 million in fraud profits but not to seek a refund of the $412,000 that he paid in taxes on those profits. Wrong tax result, but good for justice.

Is this the usual practice for when fraudulent profits are discharged in connection with a criminal plea? What if the defendant is found guilty after trial (instead of a plea)? I'm not bothered by the result -- you can think of the lack of a refund as a criminal fine -- but I'm not sure under what theory the discharged profits are still considered income.

Good news for Mississippi  
The headline says it all: Alabama Voters Crush Tax Plan Sought by Governor. Consider Alabama a lock to come in 50th in state rankings for education and public safety spending.

Tuesday, September 09, 2003
Cig Taxes in Africa  
Kip Viscusi has posted a paper arguing against Cigarette Taxation in Africa. Viscusi is best known for arguing that cigarettes are good for you.

Actually, not quite that. His argument, if I remember correctly, is that teenagers actually do understand the risks of smoking. (Therefore, all this effort that we put into advertising the risk of smoking has been effective to a point, but isn't likely to yield further gains in reducing smoking.)

If anything, teens overestimate the likelihood of developing cancer or other smoking-related illnesses. So the teenager understands that smoking is likely to cause cancer by, say, age 60. So why smoke? The problem is that teenagers have an extremely high "discount rate" -- meaning that they value their happiness today much, much more than their happiness tomorrow. Living to age 60 is such an abstract concept that the negative consequences of smoking today are pretty much disregarded.

Monday, September 08, 2003
Poker and Taxes  
There really is a tax policy relevance here, but you'll have to keep reading for a bit.

First, an amusing anecdote from my weekend.

I played in my first no limit hold em poker tournament at the Commerce Casino on Saturday. I was doing moderately well in the first couple of hours, winning a few hands but also losing a couple of good-sized hands. At a tournament, as people get knocked out, they move people around to consolidate the tables. About two hours in, who should walk over to my table but Amir Vahedi, whom I recognized from ESPN, where he recently finished 6th in the World Series of Poker. (CardPlayer has him ranked number one at No-Limit.) So all of a sudden, in my very first tourney, I'm up against one of the world's best.

It seemed like gravity was tilting the table his way, and he slowly but surely built a bigger and bigger stack. My highlight of the night came when, sitting in the big blind holding Q-J offsuit and a 50 chip ante, Amir raised it to 200, I re-raised all-in (about 600 chips), and Amir dropped. (I was hoping he would ask me "Did you have it?" so I could respond, "Sorry, Amir, I don't remember.") (Cf. the Matt Damon -- Johnny Chan conversation in Rounders.)

I was still on a short stack, and it was only a matter or time before I got knocked out. As a newbie, I'm what they call Dead Money, a "tourist" with virtually no chance of winning. And sure enough, a short while later I was all in on an A-4 suited and Amir called me with Q-9. I was ahead, remarked the fellow to Amir's right. Sure, Amir responded, but "I'm luckier." Sure enough, Amir flopped a Queen, two blanks on the turn and the river, and that was that.

I love the democracy of poker. Can you imagine entering a local tennis tournament and getting a chance to face Andre Agassi? Or a entering a golf tournament and teeing off with Tiger Woods? All it took for me to play with the world's best was a $100 buy-in.

And now on to what poker can teach us about tax policy.

In a regular "ring" game (unlike a tournament), the casino takes a certain amount of money, called the "rake", from each pot. The rake functions like a tax, raising revenue for the casinos. What's interesting is that at most games the house does not ask each player to ante up, say, $0.50 a hand and take each person's money off the table. If there are 10 players, this would produce a $5 rake. Rather, they wait until people in the hand have bet into the pot and take the $5 out of the pot. So in effect you only pay the tax (rake) when you win a hand. So your $60 pot is reduced to $55; the house still gets the same $5 as if they had taken fifty cents from each player.

So why does the casino do it this way? I suspect that behavioral economics and cognitive bias has something to do with it. If each player has to pony up fifty cents every hand, they would notice the rake more. By only having winners pay the rake, the pain is more than offset by the thrill of winning the pot. Thus the casino raises the same amount of revenue but inflicts less psychic pain on the players.

Similarly, if we want to raise more revenue but minimize political opposition, we should tax the winners. Someone who makes a huge killing in the stock market is less likely to complain than if we collect a smaller amount from everyone who invests. Similarly, hidden taxes (the VAT and sales taxes generally come to mind) probably face less opposition than income taxes in part because they cause less psychic pain.

Note, however, that this does not necessarily make good policy. Hidden taxes are not necessairly more efficient --- just easier to slip past the electorate. I suspect people would play less poker if they realized how big the rake was --- I'm astonished at how many people don't even know how much the rake is.

The next time you read about a new tax --- say, the espresso tax in Seattle, or a penny-per-share tax on stock market transactions -- ask yourself if this tax really makes economic sense or if, like a casino, we are relying on cognitive biases to separate fools from their hard-earned money.

As for me, I will try to learn to fold A-4 suited in early position.


Alabama Tax Reform  
The prospects of tax reform in Alabama are not good. Republicans are actively attacking the Republican governor's plan (which is going to a referendum, I think) and the Dems are luke warm, and apparently no one is getting the message that a horribly regressive tax system is not good for anyone.
On a lighter note, David Bernstein at The Volokh Conspiracy notes the horror of Alabama cheerleaders not having enough state funding to allow them to travel to away games.


Lawsky on Mental Disability in the Tax Code  
Practitioner Sarah Lawsky has posted a Tax Notes paper, Redefining Mental Disability in the Treasury Regulations, on SSRN. Here's the abstract:

The regulations accompanying section 72 of the Internal Revenue Code, relating to penalties for early withdrawals from qualified retirement plans, contain an outdated definition of mental disability under which almost no one with a mental illness today could be found to be disabled. This definition is incorporated by reference in many sections throughout the code and regulations. This article looks at the definition of disability in section 72(m)(7) and its corresponding regulations and shows how the current law was applied in the recent case of Keeley v. Commissioner. The article then shows that current understandings of mental disability, as well as the history of the statute and its regulations, mandate revision of the regulations. The article concludes that the current language of the regulations allows courts some leeway in determining whether an individual is disabled, however, and that courts therefore need not feel constrained by the outmoded sections of the regulations.


One of the supposed advantages of Chevron/Mead deference to administrative agencies is that agencies are supposed to respond more quickly than Congress or judges to changes in science, technology, medicine and so on. Here it sounds like the Treasury and the Service might be more concerned with screening out fraudulent cases than with updating the law to reflect our current understanding of mental disability.

William Henry Newman  
I'm an uncle! My nephew, William Henry Newman, was born a couple of hours ago in New York -- 7 lbs, 1 oz, and everyone is doing well. Yay!



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