Probably?

I've been wanting to write an article entitled "Oatmeal Raisin: The Cookie Nobody Loves." Unfortunately, although this title captures, I am convinced, a deep truth, I could not find a way to link it to tax law. So instead of describing why, if you leave out lots of plates of different kinds of cookies and come back a little while later there are always more oatmeal raisin cookies left than any other kind, but if you come back an hour later, all the cookies, including the oatmeal raisin cookies, are gone (nobody loves 'em, but they do like 'em), this post will describe the piece I wrote instead: Probably? Understanding Tax Law's Uncertainty.

As I described in an earlier post, flipping a coin is risky, because while we do not know whether it will come up heads, we do know the probability that it will come up heads (50%). The presidential election is uncertain, because we do not know whether John McCain will be elected president, and we do not know the probability that he will be elected president. A.J. Sutter pointed out in a comment to that post that the distinction between risk and uncertainty (that is, between known probabilities and unknown probabilities) ties into the debate about the correct interpretation of probability statements. As it happens, that debate is precisely Probably?'s topic.

We might say that the probability that an event will occur is the number of times that event will occur over the long run out of the number of times that it could occur. So when we say that a coin has a 50% chance of coming up heads, we mean that if we flip the coin a lot of times--a million, say--about half of those flips will come up heads. And the more times we flip, the closer the percentage of heads will get to 50%. This is a frequentist interpretation of a probability statement.

But this interpretation doesn't work if the event we're talking about is not risky, but is, rather, uncertain. As others have noted, tax law is uncertain--that is, that we do not, and cannot, know the probability that a court will uphold a particular tax position. Tax advisors make these sorts of probability statements all the time, because a taxpayer faces lower penalties if he can get a tax advisor to give an opinion that there is a certain level of probability that the taxpayer's position will eventually be upheld by a court. But if we don't and can't know this probability, what does it mean to say that there is a, say, 90% chance that a particular tax position will be upheld?

It means, I think, that the speaker believes that there is a 90% chance the tax position will be upheld. Or, put another way, the speaker would pay 90 cents to play a game in which he would get a dollar if the position were upheld and get nothing if it were struck down. This is what's known as a "subjectivist" interpretation of a probability statement.

So, who cares? Well, everyone should care, of course!

The IRS and tax advisors should care, because a subjectivist interpretation of tax probabilities could provide additional support for stringent and much-criticized laws that regulate the substance of tax advisors’ written opinions. If we think of tax probabilities of expressions of belief, we can see that these strict rules may actually help tax advisors arrive at less biased estimates of the chance that a tax position would be upheld by a court.

Lawmakers should care, because incorporating tax law's uncertainty into economic models suggests that lawmakers should, perhaps counterintuitively, be cautious of reducing tax law’s uncertainty. Empirical work suggests that some taxpayers do not like uncertainty. So the uncertainty associated with whether certain questionable transactions are permitted (aside from any penalties imposed if transactions do turn out to be forbidden) might itself reduce the number of taxpayers who engage in those transactions.

And legal scholars who are working with economic models should care too, because these models can change if we acknowledge that neither taxpayers nor lawmakers have access to a "true" probability that a tax position will be struck down. For example, instead of just looking at the taxpayer's estimation that his position will be struck down by a court, a subjectivist interpretation requires us to look at the relationship between the taxpayer's estimation and the lawmaker's estimation. (This last point--that legal scholars, as opposed to economists or statisticians or philosophers, should care about the subjectivist/frequentist distinction--is particularly interesting to me, but it is, I think, the subject for a different post.)

Posted by Sarah Lawsky at 08:08 AM | Comments (6) | TrackBack

Question of the Day

If you could tattoo only one section of the Internal Revenue Code on your body, which section would it be?

Comments are open!

Posted by Sarah Lawsky at 09:39 AM | Comments (10) | TrackBack

How Much is that Simulacrum in the Window?

When America's wealthiest families start beating the drum for estate tax repeal, remember this heartwarming story of canine cathexis from Leona Helmsley:

[Helmsley's] instructions, specified in a two-page “mission statement,” are that the entire trust, valued at $5 billion to $8 billion and amounting to virtually all her estate, be used for the care and welfare of dogs, according to two people who have seen the document and who described it on condition of anonymity.

This news reminds me of part of John Chung's fascinating article Money as Simulacrum, which comments on the unreal differentials of power created by contemporary inequality:

In 2007, the average amount of compensation for the top 25 highest paid hedge fund managers was $892 million. The compensation for the highest paid manager was $3.7 billion. . . . Earlier this decade, the price of some paintings broke the $100 million mark. Single family homes also have broken the $100 million mark this decade. To the ordinary person, such amounts are beyond comprehension. Such numbers are the product of a different world, a different reality that bears no resemblance to the reality of most people.

Perhaps the numbers seem unreal, even unimaginable in an increasingly innumerate society. But the power they manifest is all too real, all too able to shift scarce resources from increasingly hungry persons in the developing world to spoiled pets in ours.

Posted by Frank Pasquale at 02:53 PM | Comments (14) | TrackBack

More On Endowments

Late last week Crooked Timber had a lively discussion about university endowments, prompted by my recent post here and Larry Solum’s response to it. Those who are interested in the topic should take a look at the discussion, as it partially mirrors the debate that is taking place more generally. I’ve been following Crooked Timber with interest, and here’s several points that have struck me:

* I’ll start with the observation I found most interesting: that some elite institutions have a mission that is as much (or even more) about research than about education. I agree that I need to emphasize this distinction more than I have to date. My proposal that an endowment per full-time student of $300,000 or more trigger less favorable tax treatment could penalize institutions whose primary output is research rather than education. Recall, however, that the most frequently proposed trigger is an absolute endowment value of $1 billion or more. Elite research universities tend to have endowments of this magnitude, so my proposal is not tougher on these institutions than the oft-suggested alternative. In fact, my proposed trigger would exempt some research-oriented universities that would otherwise be subject to new tax rules, such as Cornell and Columbia. The institutions most "negatively" affected by the $300,000 trigger are liberal arts colleges with endowments less than $1 billion and small student populations.

More important, however, is that a research-oriented mission actually strengthens calls for increased endowment spending. The sort of research taking place at America’s premier universities is designed to eventually lead to much social good: the easing of the global food crunch, the elimination of certain diseases, and so on, as well as the creation of knowledge more generally. Few science departments, for instance, are likely to argue that a dollar is better spent in the stock market than in their labs. The ability of researchers and scholars to make productive use of endowment funds seems almost endless, as do the potential gains from their work. This strikes me as a strong argument for elite research universities spending more of their endowments than they currently do.

* Any talk of a $300,000 trigger, however, presupposes that at least some universities and colleges should spend more. On this point, some of the comments over at Crooked Timber tipped up what can be characterized as a disagreement about who bears the burden of proof: Congress or universities with mega-endowments. That is, if Congress is considering changing the way it taxes these institutions, do universities bear the burden of convincing us about the wisdom of their endowment spending policies, or does Congress have to convince us that the social good produced by these policies is inadequate given the tax code’s treatment of these institutions and their donors? Because current tax policy so favors universities and colleges (they are exempt from the corporate tax and are not subject to some of the rules that govern other non-profits such as foundations), I tend to think that universities bear the responsibility for demonstrating the wisdom of their spending policies and the relative good created by them.

Regardless of who carries the burden, however, mega-endowments are starting to come under fire for a couple of reasons. One is the cost of tuition, which has skyrocketed. This concern is only partially about tuition at mega-endowment universities and colleges; some of these institutions have been aggressive about controlling tuition and reducing or eliminating it for lower and middle class students. The larger concern, however, is that mega-endowments enable expenditures that are only loosely associated with education or research, such as the construction of student amenities. These sorts of expenditures affect the priorities of less-prosperous institutions, which engage in this sort of spending at the cost of initiatives more directly related to education, including those that reduce tuition. Above all, however, is a belief raised by groups like the Harvard Alumni for Social Action mentioned in my initial post: institutions with mega-endowments could broaden their missions in ways that would require more spending and also produce additional social good.

* As Solum’s post alluded, universities defend large endowments by citing the need for a stable and predictable funding source (“saving for a rainy day”) and by invoking concerns about intergenerational equity. I am sympathetic to the threat of rain, which is why my proposed $300,000 trigger is most likely to affect schools who have 5 years or more worth of reserves, not including the value of their real estate and physical plant. This is also why I would likely oppose Congressional spending requirements aimed at all universities, regardless of endowment size.

Intergenerational equity is the notion that a university needs to spend less so that the endowment can support the same activities in the future as it does in the present. The work challenging the logic of intergenerational equity is not mine; it was done by Henry Hansmann almost 20 years ago. Solum has said that he finds the arguments against intergenerational equity unpersuasive (or at least my recounting of them); I disagree. But don’t take either of our words for it. Instead, check out Hansmann’s work for yourself. The best place to do so is here , although shorter versions have appeared in The Chronicle for Higher Education.

As I studied endowments, I was surprised by how little academic work exists on the subject. I’ve had several people suggest to me that this is because academics fear reprisal from their own institutions. While this may be true in isolated incidences, it doesn’t sound right to me, especially given the politically-charged issues that academics routinely tackle. But I do think that academics need to think seriously about mega-endowments; that’s one of the reasons I urge you to look at Hansmann’s work.

None of what I have written above or in my previous post discusses how institutions might be made or encouraged to increase spending. More on that later.

Posted by Sarah Waldeck at 12:33 PM | Comments (8) | TrackBack

Super-Sized University Endowments: Is Your Alma Mater Richer (or Poorer) Than You Think?

The New York Times recently published an opinion piece by a Harvard alum who was refusing to make a donation to her alma mater, which in 2007 reported an endowment of more than $34 billion. Yesterday the Times reported on a group called Harvard Alumni for Social Action, whose goal is to convince Harvard to use its endowment in untraditional ways, such as for the support of colleges in Africa. As the Harvard alum opined, “Many colleges may genuinely still need alumni contributions to stay solvent, but Harvard isn’t one of them — nor are Yale, Princeton or several other super-rich universities.”

Endowments provide plenty of fodder for discussion and this month I plan to do at least a couple of posts about them. Today I want to start with the preliminary question of how to determine whether a university or college is “super-rich.” This is a critical inquiry, because everyone agrees that if Congress adopts measures designed to spur endowment spending, most of these measures should apply only to the wealthiest institutions. In my estimation, this means those institutions with an endowment per full-time student of $300,000 or more. In 2006, about 30 universities and colleges fit this description.

Policymakers have three choices for evaluating endowments: absolute size, the endowment-to-expense ratio, and the amount of endowment per full-time student. The first measure—absolute size—is what has dominated in Congressional discussions and media accounts. Critics of university spending policies typically rail against institutions with endowments of $1 billion or more. One billion undoubtedly has appeal in part because it sounds so large and is therefore useful in helping to shock the public conscience. But the absolute size of an endowment is a crude measure of its strength. After all, the primary value of an endowment stems from its ability to subsidize university operations. Because the magnitude of activity is smaller at a liberal arts college, it needs fewer resources than a large research university. In relative terms, $1 billion buys more at a small institution than at a large one.

The endowment-to-expense ratio, in contrast, acknowledges that the strength of an endowment depends on the extent to which it can pay for institutional activities. Some economic research has categorized any ratio in excess of 2:1 as excessive; other commentators have argued that an endowment is too large once it reaches 5:1. In a piece that is forthcoming in the Fordham Law Review, I use data from 2006 to calculate approximate endowment-to-expense ratios for the private universities with the 60 highest absolute endowment amounts. The analysis shows that an institution’s place in the endowment hierarchy changes when we consider its actual expenditures. For example, in 2006, Harvard had the largest absolute endowment, at $28.9 billion; Grinnell was in twenty-fifth place with $1.47 billion. But when those same institutions are ranked by endowment-to-expense ratios, Grinnell leaps to first place (with a ratio of 15:1), while Harvard falls to number nine (with a ratio of 9.6:1). Even more important, in 2006 some colleges (for example, Bowdoin and Hamilton) had endowments that were significantly less than $1 billion ($673 million and $587 million, respectively), but endowment-to-expense ratios that exceeded 5:1. On the flip side, some institutions (for example, the University of Pennsylvania and Cornell) had endowments well over $1 billion ($5.3 billon and $4.3 billion, respectively), but endowment-to-expense ratios below 2:1. If absolute endowment value determined whether an institution was subject to new tax rules, some extraordinarily prosperous schools would remain untouched, while some significantly poorer ones would be affected.

So far all of this suggests that policymakers should rely on endowment-to-expense ratios to determine which institutions are super-rich. But several disadvantages make the ratio an impractical choice for regulatory purposes. For instance, an institution adjusts its operating budget in response to changes in its endowment. As such, the ratio can change significantly from year to year, making it a moving target. In addition, universities presumably will prefer to remain immune to any Congressional action and will thus be eager to lower their ratios. This could be accomplished by spending more—exactly the behavior Congress is seeking to encourage. But one can also imagine a series of, dare I say it, U.S. News-ranking-like maneuvers designed to manipulate the ratio.

This leaves policymakers with the measure of endowment per full-time student, which relies on the number of full-time students as a rough proxy for institutional expenses. This number is more difficult to manipulate and less likely to vary significantly from year to year. As one might expect, a university’s endowment per full-time student roughly correlates with its endowment-to-expense ratio. My analysis suggests that an endowment of $300,000 or more correlates with an endowment-to-expense ratio of 5:1 or higher. Therefore an endowment per full-time student of at least $300,000 suggests that a university could spend more without jeopardizing its long-term prospects. These are the universities with endowments that warrant Congressional attention and that are well-served by groups like the Harvard Alumni for Social Action, which encourage a sharing of the wealth.

Posted by Sarah Waldeck at 06:00 AM | Comments (4) | TrackBack

Italians Know What Their Neighbors Make: Why Don't You?

Sure, it was a leak, possibly politically motivated. But for 24 hours, every Italian's tax information was publicly available on the web.

The finance ministry described the move as a bid to improve transparency.

Deputy Economic Minister Vincenzo Visco said he could not understand what all the fuss was about.

"I can't understand what the problem is," he is quoted as telling Italy's Corriere della Sera newspaper.

"This already exists all around the world, you just have to watch any American soap to see that. We had the system ready by January but we delayed publication to avoid arguments during the election campaign."

I can't imagine what Visco means by American soap opera's treatment of tax law, but I myself would be perfectly happy in a world where folks' tax filings were transparent. (In part, of course, the cost to me isn't terribly low, as I'm sure that the public institution I work for will eventually be compelled to disclose salary data. Similarly, government officials, whose salaries are knowable, have small incentives to care about privacy). But even so, wouldn't the privacy losses we'd all feel be balanced by the pro-social consequences of transparency? For example, I'd bet that you'd see a rise in competitive charitable giving, and more pressure on unequal pay for equal work.

Posted by Dave Hoffman at 05:54 PM | Comments (8) | TrackBack

The To-Be-Blogged Pile

As the semester draws to a close, I'll be adding a couple features to my blogging here. First, there's always a big pile of stuff each week I'd like to blog on, but don't get around to. So I'll just post links to the articles, ala Tyler Cowen. Second, I'll be trying to do a series on art & politics this season. Having lamented the press repeatedly, I think I owe it to readers to comment on people who are thinking more creatively about the political scene. . . including Kenneth Tin-Kin Hung, Timothy Donnelly, MIA, and Paul Chan. Without further adieu:

1. Have a tough time memorizing things? Check out this software program by Piotr Wozniak (which I'm definitely consulting if I try to re-learn Spanish).

2. Patrick S. O'Donnell both comments incisively on the food crisis and rounds up posts from around the blawgosphere. O'Donnell and Paul Horwitz have an interesting discussion on sustainability here. My own take would begin by comparing an article on the new living standards of very poor persons, and one on a "Club Med for Dogs."

3. China's new weapon: Low executive pay. Over to you, Todd Henderson.

4. Yale U. Press leads the way in opening access to books on internet topics. [Full disclosure: they do advertise here.]

Have a great weekend.

Posted by Frank Pasquale at 04:32 PM | Comments (0) | TrackBack

Fantasy Authors, Tax Policy & Veil Piercing

Pat Rothfuss, author of the best-selling fantasy novel "The Name of the Wind," and an interviewee in my "Law and Hard Fantasy" series, has a post up on his blog ruminating about tax policy and incorporation.

Up until this year, I've always gotten money back because I've lived well below the poverty line. This year, I got to give them money. It was, as they say, more fun than getting kicked in the throat. Mostly.

Don't get me wrong, I'm not against taxes. Everyone loves to bitch about them, but taxes pay for schools, and roads, and snowplows, and sewage treatment plants. My friends have a son who is autistic, and the government helps them by bringing in well-trained people.

These things are important. If that's all my taxes went toward, I would pay them gladly. I would sing a song while writing out the check.

However, we all know that's not the case.

So, under the advice of several wise people, I've decided to start a corporation. This is supposed to prevent the government from taking quite as big a bite out of my ass for next year's taxes.

It doesn't seem right, honestly. The corporation is just me: I own it. And this corporation (let's call it Me-corp) will be employing me. That, apparently, is different from being actually self-employed. Sorry? What? How does that work?

I guess what it comes down to is that the government is really, really dumb. Dumb enough so that if I put on sock on one of my hands and use it as a puppet, it will be convinced that the puppet is actually paying the taxes, not me.

But I'm not above exploiting a loophole in the system. So all that remains is to figure out what to call this corporation. I having trouble picking a name. Names are important things, you know. They tell you a great deal about a... a corporation.

I'm not an expert in tax law, so I'll leave discussion of the income-sheltering aspects of this structure to the experts, but I know something about corporate veil piercing. And I'll just say that calling a corporation a "puppet" would seem to make it less likely that a court would consider it a bona fide entity for the purpose of shielding a shareholder's personal assets in any suit against Me.corp.

Posted by Dave Hoffman at 10:02 AM | Comments (2) | TrackBack

Who Wants to Think They're Millionaires?

Lots of Americans, apparently:

A Time Magazine poll in 2000 found that 19 percent of those surveyed believed themselves to be among the richest 1 percent of Americans. Another 20 percent said they expected to one day be among the richest 1 percent.

But as Citizens for Tax Justice estimates, "This year, the best-off one percent will have an estimated average income of $1.5 million each. Just to get into this elite group requires an income greater than $466,000." And the middle class of, say, ABC debate moderator Charlie Gibson is also pretty expansive--it includes people with adjusted gross income over $250,000, though CTJ notes that only about 2% of taxpayers fit that category.

As the "millionaire's amendment" in our tattered campaign finance laws comes under attack, misperceptions about wealth feed into Supreme Court arguments as well:

Consider Tuesday’s oral arguments over the so-called Millionaires’ Amendment, the federal law that lifts some political fundraising limits for candidates facing wealthy self-funded opponents, defined as those who pour at least $350,000 of their own cash into their campaign.

Justice Antonin Scalia suggested that practically anybody had that cash available for political activism, if he or she really wanted to tap some family assets. “Are we talking wealthy people here? What’s the average price of a home in the United States? I think it’s a good deal above $350,000, isn’t it?” he said.

Actually, it’s nowhere near that. According to provisional figures from the National Association of Realtors, the average single family home price last month was $246,000. And falling.

As I noted two years ago, even the assumption that everyone has $200 to spare for a political campaign is pretty objectionable. And it is downright nonsensical to deny that donating $200 "hurts" a poor family far more than one with disposable income to spare (just think of the parable of the widow's mite). The legitimacy of our current "dollar primary" politics probably rests in large part on the erroneous perception of 38% of the population that they are (or someday will be) in the top 1% of earners.

UPDATE: Given my title, I should note that about 3% of the US population are millionaires (i.e., have assets over and above principal residence that are worth over a million dollars). Nevertheless, given that the median net worth of the top 10% in the U.S. was $833,600 in 2001, and that of the bottom ten percent was below $7,900, Americans live in very different economic worlds.

UPDATE 2: I forgot to add in one good part of the CTJ report, which helps explain the source of misperceptions like Scalia's:

We have heard anecdotally that people who work for members of Congress (from both parties) in Washington tend to overestimate the percentage of Americans with incomes over $200,000 a year. We also have seen people in the media, like Charlie Gibson, express their belief that families at this income level are “middle-class.” Why?

Part of the reason surely is that the people who influence the political discourse — people working in the media or in politics — tend to live in or around cities where incomes and the cost of living are higher than elsewhere in America. These cities include New York, Washington, D.C., Los Angeles, Boston and San Francisco. In these cities and their suburbs, owning a house and two cars and raising two children who go to good schools — what many people consider the American Dream — is thought by some to require a six-figure salary.

There could be other reasons as well. Perhaps the people who work in politics and media are disproportionately highly educated people who come from wealthier families, which could result in expectations of higher incomes and higher standards of living than are enjoyed by the true “middle-class.”

Posted by Frank Pasquale at 08:38 PM | Comments (2) | TrackBack

Those wacky tax guys...

Who says that tax lawyers don't have a sense of humor? I recently pulled the following disclaimer off the bottom of an email sent by an in-house attorney at a capital management firm:

Disclaimers: This information was added automatically by Mozilla. It is not intended to be a signature. I am not your lawyer. You are not my client. If you think that there is useful tax advice in this e-mail, you are delusional. If the IRS wants to impose a penalty on you, waving this e-mail at them will make them laugh at you, and it won't get you off the hook. If someone shows you this e-mail, and says it proves that some bright idea of his will save you a boatload of taxes, he is lying -- run the other way as fast as you can.

Those wacky tax guys...

Posted by Nate Oman at 01:34 PM | Comments (1) | TrackBack

Free Lunch Discussed at Reason

The concept of a "left libertarian" has been something of an oxymoron of late, best left to obscure philosophical proposals and Kossite appeals to Cato. But David Cay Johnston's recent conversation at Reason Magazine makes the case in some interesting ways:

[Johnston's new book] Free Lunch is full of sharp, heavily reported takedowns on eminent domain, expensive special favors for sports teams, legislative deals that put taxpayers on the hook for a private train company’s crimes and errors, giveaways from small towns to attract big-box stores, and how heavily government-managed markets in areas such as power and health care can enrich some at everyone’s expense.

I've found Reason the most principled libertarian outfit around, so I'm not surprised that they've interviewed Johnston. I just started his book, and I'll be posting a review here later this month. It's been fascinating so far.

Posted by Frank Pasquale at 10:26 AM | Comments (0) | TrackBack

I'm Sorry... Sincerely, The IRS

Today, the New York Times reports, the National Taxpayer Advocate delivered her annual report to Congress. First established in 1998, the Taxpayer Advocate Service describes itself as "an independent organization within the IRS that assists taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should." Judging by the generous use of exclamation points on its home page, moreover, the Service would appear to be quite excited about this mission.

Among other things, I was struck by certain aspects of the IRS' present-day operations that the annual report critiques. I hadn't realized, for example, that the IRS makes widespread - if ineffectual - use of private debt collectors, or that it charges (sometimes substantial) fees to respond to taxpayer inquiries.

Two reform proposals in the annual report, however, particularly caught my eye:

First, there is the Advocate's proposal to adopt a new taxpayer bill of rights - an odd-seeming concept, to begin with. (Isn't the Administrative Procedure Act the "bill of rights" of the modern administrative state?) This bill of rights, moreover, would include a list of taxpayer "responsibilites," including requirements that they (in the Times' words) "conduct themselves honestly and [] cooperate with auditors and tax collectors." But what exactly is the "honest conduct" the Advocate has in mind? Avoiding fraudulent statements to the IRS? Surely, we've already got that covered. What's other honest conduct might be expected? Some general promise of good and clean living?

Even more eye-catching were the report's proposed "Apology Payments," to be doled out by the Advocate's office - in amounts ranging from $100 to $1,000, and up to a collective cap of $1 million - to taxpayers who suffer "excessive expense or undue burden" because of IRS error or delay. Leaving aside the procedural complexities of such a scheme, are there analogous arrangements to be found in other areas of law? (The Times reports that the U.K. and Australia already have such a scheme in their tax code.) Do we do it anywhere else?

Posted by Robert Ahdieh at 08:05 PM | Comments (0) | TrackBack

The Heroism of Susan Pace Hamill

It is now sadly all too common to see public intellectuals pointedly ignoring--or even cheering on--growing inequality. Bloodless statistical accounts tend to miss the consequences that flow for poor families when taxes on the wealthiest are cut and social programs are gutted accordingly.

Professor Susan Pace Hamill has done an extraordinary job in turning public attention to this problem. According to the NYT's David Cay Johnston, "her latest effort is a book, As Certain as Death (Carolina Academic Press, 2007), that seeks to document how the 50 states, in contravention of her view of biblical injunctions, do more to burden the poor and relieve the rich than vice versa." Some statistics are really striking:

The poorest fifth of Alabama families, with incomes under $13,000, pay state and local taxes that take almost 11 cents out of each dollar. The richest 1 percent, who make $229,000 or more, pay less than 4 cents out of each dollar they earn, according to Citizens for Tax Justice, an advocacy group whose numbers are generally considered trustworthy even by many of its opponents.

As a cursory Google search shows, Professor Pace Hamill has honed her message with extraordinary clarity and skill in a variety of forums--law review articles, books, interviews, and even sermons. Prof. Pace Hamill's engaged scholarship and contributions as a public intellectual provide a great model for those who seek to develop religiously inspired legal theory.

Hat Tip: TaxProfBlog; Mirror of Justice.

Posted by Frank Pasquale at 01:04 PM | Comments (2) | TrackBack

The Place of Charity

By the way, I don't want to sound (from my last post) as if I am against all charity. I'm very concerned about the plight of those in LDC's, and I've argued that charitable giving should be something of a moral requirement for many of us in the developed world. As this extraordinary program from Krista Tippett's Speaking of Faith shows, charitable giving can help us find a true "moral balance" of sharing, saving, and spending.

Sometimes it is hard to know exactly where one's contribution will do the most good. Over the past three years I have found many good causes through Global Giving, a group now sponsoring a Giving Challenge. Here are some causes I found compelling enough to give to:

--Safe Water and Latrines for Bangladeshi Slum
--Clean Water for DEPDC's Underprivileged Children
--Help Feed 200 Neglected Elderly in Guatemala

I'm also happy to report that GG's president, Mari Kuraishi, recently gave a talk at a conference devoted to figuring out the best ways of assessing the reputation and value of various online entities--including charities. As efforts like these improve, questions about the accountability of charities will become less nagging.

Posted by Frank Pasquale at 10:47 AM | Comments (0) | TrackBack

Understanding Resistance to Redistribution

Over at Balkinization, Professor Brian Tamanaha worries that the "fabled American Dream, the supposed glue that holds our society together across its many fault lines, is a delusion for many." He points to "new research [that] suggests the United States' much-ballyhooed upward mobility is a myth, and one that's slipping further from reality with each new generation." (Even The Economist has recognized the problem!) Tamanaha wonders why the issue has so little visibility in national political debates, and gives several good reasons. I'd like to focus on one of them: the sense that increasing inequality "feels irresistible, the product of structural factors beyond our control."

First, though this sense may be widespread, it is highly contestable empirically, and doesn't really "ring true" at an intuitive level. Let's not even talk about the justice or appropriateness of an executive making hundreds of times more than line workers--what about people who almost got to the top spot? As Eduardo Porter reports, "widening disparities in business, which show up in a variety of other ways, reflect a dynamic that is taking hold across the economy: the growing concentration of wealth and income among a select group at the pinnacle of success, leaving many others with similar talents and experience well behind."

A form of "legitimation theodicy" has become important for some at the top, who reach for sports metaphors:

[Some] very wealthy men in the new Gilded Age talk of themselves as having a flair for business not unlike Derek Jeter’s “unique talent” for baseball, as Leo J. Hindery Jr. put it. “I think there are people, including myself at certain times in my career,” Mr. Hindery said, “who because of their uniqueness warrant whatever the market will bear.”

The flip side of this is a well-cultivated sense among the "losers" in the new economic order that their fates are their own fault. This is one reason why the SCHIP battle is so hard-fought right now: it is very important for those pursuing an inequality-enhancing agenda to insist that some people do not deserve health insurance. . . . and that that sin is so egregious as to be visited even upon their children.

I do not expect redistributional issues to get much play in the upcoming presidential election, for a number of reasons. The media is largely run by those who benefit from the current order. Moreover, no candidate has much reason to offend the what Professor Spencer Overton has aptly called the "donor class." As he noted in 2004,

Less than one percent of the U.S. population makes financial contributions over $200 to federal candidates, and these contributions represent the vast majority of funds that candidates receive from individuals. Of those who contribute over $200, approximately 85 percent have household incomes of $100,000 or more, 70 percent are male, and 96 percent are white. This donor class effectively determines which candidates possess the resources to run viable campaigns.

Thomas and Mary Edsall’s work has detailed the ways in which federal officials’ reliance on large donors has slowly narrowed the range of acceptable political discourse. To the extent politicians are reliant on the support of those enriched by market forces, they are reluctant to interfere too much with the distribution of social power such forces generate.

So what is to be done? First, those concerned about equality of opportunity have to become more skilled at relating the objective harms arising out of inequality. Robert Frank has become a master at this, and I'm going to try to draw out the implications of his work in an upcoming review of his book Falling Behind: How Inequality Harms the Middle Class.

Second, consider the following comment from Greg Mankiw on health care debates:

What health reform would you favor if the reform were required to be distribution-neutral? That is, you can change the rules of the health system but you cannot change the distribution of economic resources between rich and poor.

The bottom line of health care reform has to be an insistence that its financing rely not merely on redistribution from the healthy to the sick, but also from the rich to the rest. A just society is committed to the universal destination of human goods--especially those essential to the preservation of human life. Perhaps we will eventually reach a point at which taxation of those at the top to provide for the care of those at the bottom truly threatens the well-being of our economy. But when "the increase in incomes of the top 1 percent of Americans from 2003 to 2005 exceed[s] the total income of the poorest 20 percent of Americans," we're a long way from that point on the Laffer Curve.

Posted by Frank Pasquale at 11:29 PM | Comments (2) | TrackBack

Questioning the Prosperity Gospel

Recently Republican Senator Charles Grassley has begun to investigate "six televangelists who are part of an evangelical subculture known loosely as Prosperity gospel." For example,

Grassley wanted to know how Kenneth Copeland--who as a church leader pays no taxes but is expected to plow revenue back into the public welfare--got a private plane and whether flights to Hawaii and Fiji qualified as business trips. Grassley sought credit card receipts and the numbers of the church's offshore bank accounts.

The conflict raises some interesting theological questions--for example, what if the religious group sincerely believes that its leaders deserve extraordinary opulence? What if their high spending is not a diversion of resources, but instead is the very point of the religion? As I'm mentioned before regarding The Secret, wealth worship may be working its way into the DNA of American culture. Consider this conflict between Grassley and the Prosperity gospel crowd:

Prosperity adherents believe the right thoughts and speech, along with giving to the church, will prompt divine repayment in this life, with a return as high as $100 on each dollar handed up. On a small scale, Prosperity's positive thinking has sometimes energized the march of the poor into the middle class, but many Christians find it theologically and ethically perverse. Prosperity dominates American religious TV, and millions of adherents send millions of dollars to preachers they have never met. For Grassley, this might be fine if the ministers put all the money back into their mission work. But his now famous question about Meyer's $23,000 commode suggests he questions the destination of her estimated $124 million annual take.

I think the answer has to be that the Prosperity Gospel crowd is itself distorting and ignoring Christian doctrine--even if such an indictment sets up the state as a more authoritative interpreter of the Bible in this case than those it would prosecute.

One need only a passing acquaintance with the Bible to understand that egalitarianism and concern for the poor are two of its central themes. The story of the "widow's mite" says volumes, and as Proverbs 16:8 puts it, "Better is a little with righteousness, than great revenues without right." Matthew 19:23-24 also comments on how difficult it is for the rich to enter the Kingdom of God.

I think there is one final lesson in this controversy for those who would criticize others for holding "strange" or "exotic" religious beliefs. As inequality skyrockets, the "Prosperity Gospel" may be the most natural and obvious creed one could opt for in today's America. But perhaps we should religious ethics in part to the extent to which they are in tension with the prevailing norms of our commercial society. As much of the collection Preach Liberty suggests, religion can provide moral balance in the present age.

Photo Credit: Micreon.

Posted by Frank Pasquale at 09:03 AM | Comments (5) | TrackBack

How the Economics of the Well-Off Can't Help the Uninsured

Two of the most perceptive health policy analysts, Drs. Steffie Woolhandler and David U. Himmelstein, provide a good "reality check" for those who think a Massachusetts-style health plan can fully handle the problem of the uninsured. (Though it took me a long time to figure out their title, "I am not a Health Reform," was a play on Nixon's "I am not a Crook.")

Woolhandler and Himmelstein observe that the past twenty years of failed state-based health care reform (and mandates) do not bode well for the plans now being discussed among presidential candidates:

In 1971, President Nixon sought to forestall single-payer national health insurance by proposing an alternative. He wanted to combine a mandate, which would require that employers cover their workers, with a Medicaid-like program for poor families, which all Americans would be able to join by paying sliding-scale premiums based on their income.

Nixon’s plan, though never passed, refuses to stay dead. Now Hillary Clinton, John Edwards and Barack Obama all propose Nixon-like reforms. Their plans resemble measures that were passed and then failed in several states over the past two decades.

W&H are particularly disappointed by the recent Massachusetts plan; "even under threat of fines, only 7 percent of the 244,000 uninsured people in the state who are required to buy unsubsidized coverage had signed up by Dec. 1. Few can afford the sky-high premiums." W&H should also acknowledge that in some cases the uninsured themselves are responsible; according to one recent study, "twenty-five percent are eligible for public coverage."

W&H suggest that mandates will not work, but do not have the space to fully explore why. I think they are right to emphasize lack of affordability in plans, but a recent book suggests some deeper issues. Charles Karelis's The Persistence of Poverty: Why the Economics of the Well-Off Can't Help the Poor argues that we cannot expect impoverished individuals to react to economic incentives the same way that middle- and upper-class people do.

Karelis asks a provocative question: "what if the choices that truly benefit typical human beings when they're poor are working little and not saving?" He asks us to consider the following scenarios:

In the first, a poor worker with no car or bus fare must walk six miles to work. And let's say this long walk results in six blisters, and six unwashed dishes in the sink at home, and workplace mistakes that bring six reprimands from the boss. Suppose too that getting a bus ride for part of the way would reduce the worker's troubles proportionately, so that each mile she didn't have to walk would mean one fewer blister, unwashed dish, and reprimand. What will the poor worker give up to get a one-mile ride, given that she still has five miles to walk? Probably not much. After all, the sixth blister, unwashed dish, and reprimand tends to be drowned out, like a shout in a riot, by the other five anyway.

But now imagine she has just been given a five-mile bus ride, free. She has only one mile left to walk. What will she give up to get a one-mile ride now? Probably much more than in the first scenario because the difference between the discomfort of one blister, unwashed dish, and reprimand and the discomfort of none is far greater than the difference in discomfort between six and five. If the effect of getting a one-mile bus ride in the first scenario is like that of quieting a shout in a riot, in this scenario the effect of the one-mile bus ride is like that of quieting a shout in an otherwise quiet street.

Karelis offers a number of other examples in a phenomenology of the poor that challenges conventional economic wisdom. If we think of health insurance payments as a form of (probabilistic) saving, we can better understand how many of the uninsured rationally choose to persist in vulnerability. Life is already pretty bad presently; why deny certain small pleasures (or necessities) now to improve an uncertain future?

Of course, we all grow up with Horatio Alger tales, and there are many inspiring microlending success stories out there. But capitalism's chutes and ladders have a dark side, too. Perhaps it's time policymakers stopped trying to scare the poor into certain patterns of behavior--fill out this form, pay this deductible, etc., or you don't get health insurance!--and instead take this particular "blister" of insecurity off the table.

Karelis is a philosopher, and though some may challenge his introspective methods, I can say that coming from a family that often had little money, they often made a lot of sense to me. The more policymakers can meld the insights of a Karelis with empirical works like Sudhir Venkatesh's Off the Books: The Underground Economy of the Poor, the better a chance we have at addressing the persistent disadvantages and insecurity generated by the great risk shift. Here are some closing thoughts from Karelis:

[W]e should reopen the welfare debate that preoccupied liberal and conservative poverty reformers during the 90s. Having agreed that giving poor people resources undermines their motivation for self-help, the liberal and conservative camps fell to wrangling over whether generosity or maintaining incentives ought to be the top priority. (The liberals lost.) But the choice between generosity and maintaining incentives is a false one if generosity actually enhances the motivation for work and investment — by increasing the relief that poor people stand to get from the next dollar. It's time to take another look at no-strings welfare for the truly poor. . . .

Posted by Frank Pasquale at 10:01 PM | Comments (3) | TrackBack

Tax and Its Relationship to Slavery

On Monday Professor Robin Einhorn of U.C. Berkeley gave a talk at my school about her recent book, American Taxation, American Slavery. Professor Einhorn's book challenges some of the stories about the American aversion to taxation. As her essay "Tax Evasion and the Legacy of American Slavery" argues, the distrust of taxation has "more to do with protections for entrenched wealth than with promises of opportunity, and more to do with the demands of privileged elites than with the strivings of the common man." The topic is provocative. The political history Prof. Einhorn sets forth shows how the institution of slavery influenced the Articles of Confederation, later state constitutions, and tax policies. Tax reveals the problem because of the fear that slavery could be taxed out of existence. If controversy tempts you to an area, this book may be for you as it has generated some debates within the legal history world. On a final note the topic reminds me of Jack Chin and Randy Wagner's paper, The Tyranny of the Minority: Jim Crow and the Counter-Majoritarian Difficulty which is also a fascinating read.

Posted by Deven Desai at 02:57 AM | Comments (1) | TrackBack

Should All Lawyers Join Peer-to-Patent?

Paul Caron has been covering patents on tax strategies for some time, and an article by Steve Seidenberg in the ABA Journal has recently described the growing worries they're creating among practitioners:

Since issuing its first patent for a tax strategy in 2003, the Patent and Trademark Office has issued at least 52 patents covering specific tax strategies. Another 84 published applications for tax strategy patents are pending. . . .In the ABA Section of Taxation, “members are shocked and dismayed at the very idea that legal advice can be patented,” says Drapkin [who heads the section’s Tax Strategy Patenting Task Force].

Apparently it's not just tax lawyers who should be worried about a chain reaction of IP claims here. Drapkin says that “I’ve had conversations with lawyers who told me about corporate law patents that have been applied for,” and Wachtell lawyer Andrew A. Schwartz says “There could be hundreds, even thousands, of legal [strategy] patent applications that the PTO is waiting to rule on.” The chair-elect of the ABA section on IP law isn't worried, but even she might be dismayed by rumors that someone is filing a "patent application for a new way of preparing patent applications."

I'd personally like to see something like an extension of Veeck's principles in both copyright and patent. In that case, the 5th Circuit ruled that a model building code entered the public domain once it was adopted as law. Good legal arguments are effectively an interpretation of law, an effort to get the judge or jury to see the law in a certain way. To the extent they are adopted, they should be considered so inextricably intertwined with the development of law itself that they are by nature public property. For that reason I'd even be hesitant to grant copyright protection to the expression of legal arguments, and I'm doubly suspicious of a patent on the ideas at their core.

On the other hand, given the increasing scope of patent protection, I don't foresee arguments like mine going very far in the current PTO or Federal Circuit. . . and the Supreme Court ultimately declined to limit the scope of patents in a recent situation where it appeared they might.

So what is to be done? Beth Noveck's Peer to Patent Project offers an exciting and innovative approach to the problem. . .

As her website relates,

With the support of grants from the Omidyar Network, IBM, Microsoft, HP, GE, Oracle and Red Hat, Professor Noveck is developing the Community Patent Review project, the legal, policy and software framework to open patent examination for public participation. The project was named by the United States Patent and Trademark Office as one of its Strategic Initiatives 2007-2012. This is the first social software project to directly impact federal decision making.

You can check out the process here. I'm predicting people like Drapkin, who are worried about the prospect of patent law swallowing tax practices, will try to submit for review patent applications like "Springing Interests Flowing from Benefits That Run with the Land (patent pending 11/176,724).” By submitting prior art, participants can at least make it clear to a patent examiner that a given patent application is not as novel or nonobvious as its submitter wants to make it seem.

It remains to be seen whether the collective action problem here can be overcome. However, perhaps firms with large enought tax and T&E practices will find it worthwhile to get involved. As Sabrina Safrin notes, improvident grants of property rights can spur a destructive arms race of propertization:

[T]he expansion of intellectual and other property rights have an internally generative dynamic. . . . The creation of property rights for some engenders the demand for related property rights by others. These demands and resulting recognition of property rights may have little to do with the value of the resource in question or efficiency concerns. [Given these dynamics, we can anticipate] the development of unexpected, extensive and ultimately undesirable property regimes.

Noveck's Peer to Patent is a brilliant idea for avoiding such wasteful enclosures of ideas and methods that should be "free as air to common use."

Posted by Frank Pasquale at 09:58 AM | Comments (1) | TrackBack

How Much Should a Dog Consume?

In his provocative book How Much Should a Person Consume, Ramachandra Guha asks "can the world as a whole achieve American levels of car ownership? Can there be a world with four billion cars?"

I don't have any easy answers there, but I do think there are some limits on what a person should consume. And the case of Leona Helmsley's will suggests some for dogs, as well. Consider her $12 miillion bequest to a puffball named Trouble:

Trouble . . . has expensive tastes. According to the Post, Ms. Helmsley would order her hotel chefs to drop what they were doing to prepare special meals for Trouble when she was hungry. Still, $12 million is a lot of money for an eight-year old dog — even if her kibble is made from kobe. If Trouble invests her money in a diversified portfolio, she’ll earn at least $600,000 a year — without dipping into her principal!

Is $600,000 per year too much to spend on a dog? Or is this another happy story of growing incomes for dog butlers, "five-star kennels, doggy sitters and paw manicurists?" Given that hundreds of millions of people who live on less than a dollar a day, perhaps over $1600 per day of pet care is troubling, however much it expands the GDP.

Posted by Frank Pasquale at 01:10 PM | Comments (0) | TrackBack

Flying the Stratified Skies

Travel has always served to remind us of the divisions our "classless society" tries so hard to downplay. Sam Walton may have driven an old truck, but you'd be hard-pressed to find most top executives or trust-funders flying in less-than-first-class digs. As the song in Chitty-Chitty Bang-Bang put it,

O the posh posh traveling life, the traveling life for me

Pardon the dust of the upper crust - fetch us a cup of tea

Port out, starboard home, posh with a capital P. . .

Admittedly, for those of us crushed into coach, there was always a happy flipside to the narrative: the profligates up front were paying so much more for their seats, effectively subsidizing the rest of us.

But that subsidy effect has been on the wane in recent years. And now wealthy fliers have found a new way to effectively assure that the rest of us are subsidizing them:

Corporate jets pay a fraction of the taxes and fees that commercial airliners do. The F.A.A. estimates that private planes, which include both corporate jets and weekend fliers, account for 16 percent of the air traffic control system’s overhead but contribute only 3 percent of the fees earmarked to run the system.

***

The Air Transport Association has . . . created a Web-based ad campaign featuring a fictional traveler, Edna, complaining about the fee disparity while the computer screen displays waves of corporate jets filling the skies before and after sporting events like the Kentucky Derby and the Masters golf tournament.

It's enough to wilt the mint in your julep. As the campy YouTube ad sloganeers, travelers like "wearing big wigs, not subsidizing them!" Edna (pictured above) wonders "Why should the rest of us pay ten times more using the same services?"

Fortunately, the FAA has heard her pain, and is planning on "sharply increasing the fuel tax for private jets and also hitting corporate fliers with extra charges to land at any of the country’s 30 most congested airports."

Posted by Frank Pasquale at 09:45 AM | Comments (1) | TrackBack

The Last Shall Be First

The WSJ has a terrific article on "stretch" givers--people who make "donations seemingly out of proportion to the givers' resources . . . . [which] require donors to make sacrifices or at least live more modestly than their income would allow." Recent legal changes have helped this "movement," as "[t]he Pension Protection Act of 2006 allows people 70½ years of age and older to make tax-free donations of up to $100,000 directly from Individual Retirement Accounts." What's particularly surprising about the article is that the big givers often end up doing better than stingier peers:

Arthur C. Brooks argues in his book "Who Really Cares," which identifies the forces behind American charity, that people who give in a way that pinches are happier and, surprisingly, end up wealthier. According to Mr. Brooks's analysis, a dollar donated to charity led to $3.75 in extra income for the donor in 2000. "They often create great discomfort among their families, but when people give there is substantial personal transformation," says Mr. Brooks, an economist and professor of public administration at Syracuse University's Maxwell School. "They tend to work harder," leading to greater prosperity, and in the long run, he says, "this leads to more success, both financial and nonfinancial."

I had worried that the "super givers" would Darwinianly be out-competed by greedier peers intent on keeping every penny "in the family." But as one interviewee says in the article, she doesn't "believe in inherited wealth" in part because she's "seen it ruin so many nice families." If that logic takes hold, perhaps we can expect to see "more aging Baby Boomers are choosing charity to add meaning to their lives -- and to get a buzz that lasts longer than the kick that comes from splurging on a designer watch or expensive car." Such a movement could well be self-reinforcing, as often the only reason people (believe they) need such luxuries is because of the competitive spending of peers. Perhaps diamond taxes can help keep the giving going.

Photo Credit: Flickr/Scottwills.

Posted by Frank Pasquale at 03:45 PM | Comments (1) | TrackBack

Vanity Taxes vs. Worthless Competitions

New Jersey adopted a "vanity tax" in 2004, levied on “any medical procedure performed on [an] individual which is directed at improving [his/her] appearance and which does not meaningfully promote the proper function of the body or prevent or treat illness or disease.” In a critique of the tax, Michael Duel argues that it is sexist and such surgery is frequently nondiscretionary:

Women can either feel inferior, enjoy a lower quality of life, and be rejected by mainstream society, or else suffer the pain and toil of cosmetic surgery to achieve the exact same ideals society uses to reject them.

Cosmetic surgeons have also railed against the tax, unctuously declaiming that it "discriminates against women" because they buy about 86% of the procedures.

NOW President Kim Gandy has a nice response to that canard:

In general, I'm opposed to most things that impact women disproportionately, but disproportionate use isn't a good measure if a tax is unfair or not. I can't imagine someone arguing against having a luxury tax on yachts because more of them are bought by men.

State Senator Karen Keiser is uppping the redistributive ante in Washington state, with a plan to earmark vanity tax revenue for health insurance for poor children. As one tax policy analyst claims, "In this anti-tax climate, these user-based, selective tax proposals are more palatable than broader ones."

Duel also attacks the vanity tax as a matter of tax policy, but I have a feeling he misses its point. . .

On the basis of Deborah Sullivan's 2000 study, he claims

Higher levels of attractiveness correlate to increased life satisfaction, less stress, perceived competency, and a positive balance of everyday life. Therefore, "the more attractive a person is, the more competent and in control of their lives they feel, affirming the attractiveness stereotype." . . . [G]ood-looking workers generally earn 5% to 10% more in income and hold more prestigious positions.

Duel thus argues that vanity taxes discourage the appearance-challenged from laying claim to these very real human goods. He claims that improved appearance both a) gives individuals a “competitive edge” in various contexts and b) makes them subjectively more satisfied with their lives. I believe neither of these goals outweigh the advantages of a tax, and the vanity tax may even promote the latter.

In the competitive context, Duel assumes that, if more people become more attractive, all will share in the advantages once enjoyed only by the appearance-favored. He appears to misunderstand the basic concept of “advantage.” It is concerned with the distribution of extant goods, not the production of more goods. Assume, for instance, that three associates at a law firm are bald (A, B, and C), and one has a full head of hair (D). Only one can make partner, and all have equal performance records and client contacts. D eventually gets the job on the basis of his presumed higher level of attractiveness to clients.

Now assume that C gets surgical hair implants, to “level the playing field” between him and D. It is far from likely that the firm will suddenly decide to make two partnerships available rather than one. The same logic applies to less dramatic allocations of earning power or professional advance. The role of enhanced appearance has been modeled by economist Robert Frank, who sees it as a classic example of a positional good--one whose value, far from being inherent, directly derives from its comparison with others. The appearance game is zero-sum; some move up only by pushing others down by comparison.<