ataxingmatter

Greg Mankiw: utilitarian analysis/optimal taxation

Greg Mankiw and Matthew Weinzierl have a paper on the "Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution" (July 2007).  As noted in their introduction, the paper may be just a "quirky contribution aimed to clarify the literature on optimal income taxation" or a "challenge to that literature."  It raises questions about Vickrey and Mirrlees' Noble-prize-winning public finance work on optimal taxation.

The authors note that under Edgeworth's initial insight, the ultimate objective of a utilitarian social planner with full information would be full egalitarianism--equalization of marginal utility even in after tax incomes.  He who could produce more would be taxed more, he who produced less would be subsidized.  Vickrey (1945) and Mirrlees (1971) developed the notion of optimal income taxation:  productivity cannot be observed, whereas income can, though the use of income to achieve redistribution requires somewhat less strong redistribution else it might blunt any incentives to be productive.

Akerlof (1978) and others added the observation that various items may correlate with productivity, or with the ability to identify the people who society thinks it should be supporting through redistribution--health expenditures, mortgage loan payments, number of children.  These "tags" can be used to target the redistribution within the system, even though it is not completely redistributive.

Mankiw and Weinzierl note that under this optimal tax theory, any variable closely correlated with income may provide a useful "tag."  Height is strongly correlated with income:  a person who is 72" tall earns about $5525 more annually than a person who is 65" tall; 1" more in height for an adult white male correlates with a 1.8% increase in earnings.  Various explanations have been provided.  Persico, Postlewaite & Silverman (2005) suggest that adolescent height is related to the development of self-esteem, which is rewarded in the labor market, whereas Case and Paxsopn suggest that height correlates with cognitive ability, which is rewarded.  Whatever the relationship, the correlation of height and income is strong.

Yet our instincts tend to shy away from taxing taller people at higher rates than shorter people.  It seems to poorly match our fairness intuitions, yet it follows inexorably, according to the authors, from the dominant approach to optimal income taxation.  So perhaps the dominant approach to optimal income taxation is lacking as an appropriate theory of taxation.  The authors suggest three problems: (i) political constraints (picking this demographic factor could lead to taxation based on gender, color, attractiveness), but we consider marital status, parenthood, and income already; (ii) costs of stigmatization might mean that a subsidy to short people could stigmatize them (but we have many subsidies in the system that do not seem to stigmatize); and (iii) the basic notion of utilitarianism may simply be the wrong philosophical framework for thiking about taxation, as compared to an individual rights-based approach (libertarianism) or a horizontal-equity based approach.  In spite of economic analyses that disparage horizontal equity, it still seems to stand as a "worthy goal" (Auerbach 1999) of the tax system.

This was an interesting, brief, and thought-provoking article worth the read.  I'll plan to report on more articles each Thursday as a new segment of this blog.

Christina Harper: Climate Change and Tax Policy

Christina Harper, in the business and finance practice at the firm of Morgan Lewis, has published an article assessing the most prominent options that the US might use to deal with greenhouse gas emissions as a factor in global climate change, Climate Change and Tax Policy, 30 B.C. Int'l & Comp. L. Rev. 411 (2007).  The article provides an overview of the current consensus on the human factor in global climate change, and points out the different national responses, from the countries that have supported the Kyoto Protocol to the US, which is both a major polluter and a significant holdout on taking international action to reduce carbon dioxide, with its air conditioning for hot desert summers, heat for Midwest winters, and love of the automobile/lack of public transportation.  She goes on to describe the primary options for regulation of greenhouse gas emissions--command-and-control regulation, economic incentives such as tradable permit schemes, and green taxes (for example, a carbon tax which is an excise tax on the carbon content of fuel).

One of the interesting items in the paper is the summary of a Danish business professor's analysis of the attitudes towards each of these major modes of intervention of private industry, state governments, regulated industries and environmental groups.  Gert Svendsen at the Aarhus School of business in Denmark concludes that:

• private industry prefers permit markets for the flexibility and the possibility of grandfathering current industries, making it harder for future competitors to enter the market
• state governments prefer green taxes because they maximize revenues that can be used to create self-sustaining environmental protections
• regulated industries (public utilities) generally prefer green taxes or command and control regulation as a quid pro quo for maintaining existing monopolies, and
• environmental groups will cooperate with industry out of self-interest (This last claim raises Harper's hackles (justifiably so), as she notes that it seems both cynical and unsubstantiated by recent research).

Harper makes the case that green taxes (either direct taxes on emissions or indirect taxes on inputs or final products) work because they both 1) punish bad behaviors (like sin taxes on cigarettes) and create a financial incentive designed to change behavior towards more desirable results and 2) channel good behavior and influence the choice of resources.  In the US, she notes, many analysts believe that the tax on chlorofluorocarbons was the most important of the 1989 legislation, even though the Clean Air Act also put a cap on their production with a phase-out by 2000.  Some Eurpoeans have suggested that high environmental taxes could both raise significant revenues to fund important environmental projects and boost employment by shifting the burden of taxation away from labor and towards the taxed industries, but she notes that "most policymakers" believe the employment boost is unrealistic, because any tax will have economically distortive effects.

There's a good bit of descriptive material in the paper, that will provide a resource for anyone thiking about the proper role of excise taxes in general, and carbon or environmental taxes in particular, in a national tax system.   However, there's not much analysis.  Part V, labeled "Deciding between green taxation and emissions trading", attempts to make the case, but seems to be merely an extension of the prior section.   It looks at whether permit trading or taxes are "politically achievable".  It repeats the primary arguments made by various constituencies (governments are concerned about competitiveness; private industry says green taxes may cause economic damage; industries will simply be more likely to comply with permit trading schemes than indulge in evasive noncompliance).  And it makes a fairness argument for taxes over permits, that give the industries that tried hardest to reduce emissions before the advent of permit trading the "short end of the stick" when grandfathering is based on a percentage of historical emissions.

David Pozen's Tax Expenditures as Foreign Aid

David Pozen has published an interesting article on tax and foreign policy, Tax Expenditures as Foreign Aid, 116 Yale L.J. 869 (2007), available on SSRN at http://ssrn.com/abstract=951236.  As he notes, the OECD generally ranks the US well below most other developed countries in the amount of foreign development assistance provided to other countries and our record is viewed as problematic by those hoping to see more progress on global poverty.  (Pozen references Jeffrey Sachs, whose "The End of Poverty" suggests that global poverty could be ended with appropriate commitment from major economies such as the US.) 

Pozen says we haven't been counting US foreign aid appropriately, because we don't include the subsidization of private aid efforts accomplished through tax expenditures.  Since Stanley Surrey first put forward a tax expenditure budget to help us understand better the way the deductions, exclusions, credits and preferential rates provide subsidies for everything from homeowners (or maybe home builders and banks) (the mortgage interest deduction and the property tax deduction) to professionals who discuss business over meals (or restaurants) (the business meal deduction). Pozen suggests that overseas spending of charitable organizations represents, in part, privatized US foreign aid, because of the tax expenditures in support of charities. Charities are often exempt from taxes at all levels of government--property taxes, sales and franchise taxes, income taxes, and gifts to charities may be deductible for federal and state and gift and estate tax purposes.  Accordingly, "the government acts as an indirect fiscal sponsor of the beneficiary organizations, in all that they do...[and] it is hard to see why, analytically, the tax expenditure portion of these funds--the portion effectively paid for by the government--should not count as official aid."  Id. at 871.

Pozen reports that international charity has grown significantly over the last few decades.  While they make up only about 2% of the nonprofit sector, many international and foreign affairs charities were founded since 1970 (62% of them since 1985).  And many domestic charities have expanded their international focus.  Id. at 872.  Determining how much the US spends on foreign aid through these tax expenditures is not easy, however, because of the range of tax expenditures supporting their work, the lack of a direct correlation between tax expenditures and charitable contributions, and the fact that some cross-border work clearly doesn't constitute foreign aid (support for missionaries whose goal is to convert Muslims to Christianity would not count, for example).  Making a stab at rough figures, Pozen concludes that "the cocktail-napkin math suggests that annual tax expenditures on foreign aid, as delivered through private nonprofits, are currently running somewhere in the range of $1 to $2.5 billion, of which as much as $1.5 billion might reasonably be deemed ODA [official development assistance]."  Id. at 875.

Is this a good thing?  Pozen suggests that at least the US should get credit for this indirect ODA--by classifying tax expenditures on foreign aid as foreign aid and maintaining appropriate data on these expenditures.  Id. at 876.  He admits that starts us down a slippery slope (the tendency of government to claim it has done more than it actually has will push those classifying the data to see ODA and not religious zealotry or whatever else in a particular charities' work), and that once these expenditures are official, it will be easy to claim we are spending too much on foreign aid (the privatized foreign aid will make the real foreign aid seem just that much less necessary).   But he still wants the US to get "full credit" for its foreign development expenditures.Id. at 876-77.

Beyond those issues, tax expenditures have been criticized as problematic because of administrative concerns, "visibility concerns" (costs of particular programs hidden away in the complexity of the tax code); equity concerns, predictability concerns, and efficiency concerns.  Foreign aid decisions made by charities are, he acknowledges, even more likely to reflect "very different objectives" than those espoused by the government, raising issues of democratic legitimacy.

Pozen nonetheless finds virtues in the very decentralized patchwork that tax expenditures for foreign aid represent. 

"These expenditures help develop both the U.S. nonprofit sector and global civil society.  They diversify aid spending and increase the total amount of aid. ...They serve an educative function by connecting more americans, via the beneficiary nonprofits, to issues and events around the world.  They empower certain minority views in foreign policymaking and invigorate the 'market' in development strategies.  They cordon off one segment of the aid budget from the vicissitudes of constituent politics and thereby help correct for possible governmental failures....  [G]iven America's comparatively paltry levels of ODA and the well-known limitations ... on individuals' capacity to show moral regard for distant strangers, I submit that tax expenditures serve a valuable function in institutionalizing and expanding our commitment to foreign charity."

I've always worried about the charitable contribution deduction and tax exemption for charitable organizations from the perspective of oligarchic capture.  Those who have the most to give (and especially those who can benefit from in-kind contributions that generate fair market value rather than basis deductions) are, as always, the very rich.  And there is generally a quid pro quo connected to the gift--names in brass letters over the lecture hall or theatre, ability to rub elbows with the sophisticated group of similar donors to the museum, and similar percs.  it may be that this is somewhat less of a worry in the context of foreign charities, but I suspect that it is ultimately not.  Pozen's piece, though, gives us a new perspective about foreign aid and something worth pondering.

Tax Patents: Pressure to Restrict Them Increases

As tax practitioners, academics and government lawyers consider the matter more carefully, it is becoming clear that some response is necessary to the Patent and Trademark Office's (PTO's) new policy of granting tax strategy patents following the State Street Bank case.  See Patents on Tax-related ideas Stir Worry: Groups Fret Plans Could Be Viewed As Backed by IRS, Wall St. Journal, Mar. 14, 2007, at D3.

Legislation was introduced by Senators Levin, Obama and Coleman to prohibit tax strategy patents.  See 34 Daily Tax Report G-2 (Feb. 21, 2007) and Title III, Section 303 of S.681 on thomas.gov.  The bill would prevent any patented strategy that was "designed to minimize, avoid, defer or otherwise affect the liability for" taxes.  Commentators have noted that it should include a carveout for some kinds of tax software.

Treasury has announced that it is seriously considering requiring taxpayers to disclose their use of patented tax strategies under the reportable transaction regime. See 47 BNA Daily Tax Report G-12 (Mar. 12, 2007).  The preamble to proposed modifications published in November asked for comments on the idea, but the proposed rules did not include any items relating to tax patents.

The American Institute of Certified Public Accountants has stated that it opposes any requirement that taxpayers disclose use of patented tax strategies, suggesting instead that the patent holder be obligated to inform the IRS when it receives a patent.  See AICPA Comments on Proposed Regulations on Reportable Transactions under Sections 6011, 6111, 6112, in 44 BNA Tax Core (Mar. 7, 2007). In contrast, the ABA Task Force on Tax Strategy Patents (of which I am a member) has urged that transactions using tax patents be reported.  See ABA Task Force comments; 35 Daily Tax Report G-5 (Feb. 22, 2007) (reporting on the ABA Tax Section comments).  (Readers should know that the Intellectual Property Section of the ABA is the only section that is authorized to recommend changes to Congress in respect of the patent laws.)

The AICPA has also, to its credit, urged Congress either to eliminate tax planning patents or eliminate liability for tax planning patent infringement for both taxpayers and tax advisers.  See AICPA Urges Congress to Address Tax Strategy Patents (Feb. 27, 2007).

If Congress does not act to prevent the patenting of tax strategies, it is essential that the IRS be informed of tax strategy patents at the time they are submitted to the PTO.  Given the time lag between submission and grant, the patent process would otherwise provide a mechanism for achieving confidentiality without clearly satisfying the confidentiality trigger for disclosure under the current reportable transaction regulations.  It is furthermore necessary that the IRS be informed that a taxpayer has used a patented tax strategy.  Adequate disclosure would seem to require mention of use of a patented strategy, else a taxpayer who used a patented strategy and without acknowledging such use would be in the position of providing mere clues rather than full disclosure about the transaction. Cf Guardian Industries.

Wal-Mart: low prices, low wages, and very low taxes

My scholarship has focused, one way or another, on compliance issues--corporations that manipulate their income to avoid tax liability, practitioners who promote aggressive shelters and those who "customize" tax-motivated transactions for their clients.  I am concerned that big corporations, and the tax practitioners that assist them in structuring their transactions, have so thoroughly adopted the "tax minimization norm" that they have lost sight of their responsibilities to comply with the tax law--including, I would say, with the spirit of the tax law.

So I found very interesting the new information about Wal-Mart, reporting on Tax Prof yesterday, here, and its profitable state tax dodge--deducting rent that Wal-Mart pays to "captive REITs" (i.e., controlled  real  estate investment trusts) that are 99% owned by Wal-Mart.   Add this to the other ways that Wal-Mart evades reasonable social responsibility for the giant corporate power that it wields.

By the way, doesn't this suggest that something needs to be done by Congress about the REIT world?  REITs were supposedly invented to permit broad-based ownership in real estate assets by ordinary people who don't have the wherewithal to buy multimilliondollar real estate holdings.  The idea of a REIT was pooling--lots of little owners could pool their money and do what wealthy individuals do in reaping real estate rewards.  But the real estate world has found it much easier to let the little guys own a tiny percent of the business, and then hold the rest right where all the real estate has always been held--in the hands of those with lots of money.  Wouldn't it be interesting if Congress would abolish these "captive REITS" by requiring all REITS to have fully distributed ownership, with no single shareholder owning more than 1% (using broad constructive ownership rules to attribute ownership)? 

International tax and Structural Coherence

Reuven S. Avi-Yonah's recent article, Tax Competition, Tax Arbitrage, and the International Tax Regime, is an interesting explanation of his theory of a coherent international tax regime.   Just as I have argued that the Code provisions and the various administrative and judicial authorities interpreting them cohere in a system of rules that are required to be interpreted (and followed) with a view to their structural coherence based on fundamental principles (including, e.g., conservation of basis,  the anti-manipulation value that underlies disallowance of artificial losses, etc.), Avi-Yonah argues that the treaties and domestic tax laws of the major nations involved in global commerce create a coherent international tax regime founded on important underlying norms that amounts to customary international law and is binding even in the absence of treaties.  Those two norms are the "single tax principle" (income should be tax once but not more than once) and the benefits principle" (active business income should be taxed primarily at source, and passive investment income should be taxed primarily at residence).  He notes that the tax competition and tax arbitrage of recent years that violate those norms provide evidence that the norms exist, because of the concerted efforts by the OECD, WTO, EU and various tax administrations (including, sporadically, in the US) to combat those challenges.

The reaction to his assertion of an international regime has been much the same as the reaction to assertions of structural coherence in our domestic tax system--strong skepticism, fed by the apparent variety of rules and mechanisms by which different items are taxed in our domestic system or different categories of income are treated as part of the base in various systems around the world. 

The tax laws of countries vary and the treaties for international taxation vary as well.  Yet the pattern of convernge is pronounced, especially in the area of international taxation where differing domestic regimes must interact and where the network of 2000 treaties based on the UN and OECD models have led to considerable similarity.  Now that "every developed country ...tends to tax currently passive income earned by its residents overseas (thorugh controlled foreign corporations and foreign investment funds... and to exempt or defer active business income, ...the distinction between countries that assert worldwide taxing jurisdiction and those that only tax territorially has lost much of its force."  Id. at 5.  Similar rules exist for non-discrimination, arm's length transfer pricing, and foreign tax credits versusd deductions.  As a result, "the freedom of most countries to adopt international tax rules is severely constrained, even before entering into any tax treaties, by the need to adapt to generally accepted principles of international taxation.  Even if divergent rules have been adopted, the process of integration into the world economy forces change."  at 7.  Avi-Yonah asserts that this international tax regime "rises to the level of customary international law."

Perhaps the most interesting portion of the article is Avi-Yonah's discussion of the normative basis for the two international norms (single tax principle and benefits principle). Underlying the single tax principle is the accepted international norm of both personal and corporate income taxes.  As a result, to maintain equity--especially on domestic labor income--it is important to avoid both double taxation and zero taxation of cross-border income.  Double taxation would lead to too-high tax rates and stifle international investment, while zero-taxation would create opportunities for avoiding domestic taxation by investing abroad and eroding the national tax base (and harming less mobile wage earners).  "In a world in which international trade and investment are important, but taxes (unlike tariffs) cannot be reduced to zero, the Single Tax Principle is the best option."  at 20

Similarly, Avi-Yonah founds the active-source/passive-residence "benefits" principle on the notion that individuals primarily earn investment income and corporations primarily earn busienss income.  Residence-based taxation makes the most sense for individuals--it is easy to define, residence overlaps political allegiance, and distributive principles can be most easily addressed by country of residence.  Source-based taxation makes the most sense for corporations--residence is meaningless or formalistic, multinationals have no allegiance to a particular society, and multinationals exert significant political influence in various jurisdictions so taxing "foreign" multinationals is appropriate.  And source-based taxation is consistent with the benefits theory of tax justification.  It also would be hard to prevent source taxation of businesses.

The paper deals with three threats to the international regime--zero taxation of passive income due to tax haven activity; tax competition for active investment; and tax arbitrage.  Regarding the first, Avi-Yonah notes that the US enactment of the portfolio interest exemption led to a trend not to tax passive income (interest, rents, royalties, capital gains and even dividends) at source.  That, combined with the existence of tax havens made it hard for residence countries to tax passive income as well, leading to zero taxation in violation of the Single Tax Principle.  Recent steps to encourage better information reporting may be making a difference, but Avi-Yonah proposes instead a coordinated withholding tax that is refundable upon a showing that the income has been declared in the residence country. 

As to tax competition, Avi-Yonah is more optimistic than Julie Roin, Robert Peroni and Craig Boise at the January meeting of the AALS. (There, the concern was whether an income tax could survive globalization, but the problems caused by tax havens and tax arbitrage were a looming part of the problem.) The OECD countries have been reducing the threshold for finding a permanent establishment, making it hard for multinationals to avoid being subject to tax.  And the OECD is putting pressure on members and non-members to abolish tax havents and abandon tax sparing rules that foster double-non-taxation.  Avi-Yonah suggests that the "trend will continue until effective residence-based taxation by OECD members stops developing countries from engaging in harmful tax competition."

Finally, as for tax arbitrage, Avi-Yonah considers anti-conduit developments since 1984--when the US terminated its treaty with the Netherlands-Antilles because it did not tax on a residence basis--to show a consensus that rejects it.  Other US developments--the dual consolidated loss rule, the reverse hybrid rule in section 894(c), and recent regulations on tax arbitrage transactions involving foreign tax credits--show a growing desire to stifle arbitrage as inappropriate.

Taxes as a rationale for multinational enterprise location decisions

Multinational enterprises (MNEs) based in the United States have been lobbying vigorously over the past few years to convince Congress to change our international tax regime.  They'd like zero taxation on their foreign source income--a "territorial" system rather than a "worldwide" income taxation system.  The tax panel at the AALS meeting considered whether a income tax system can survive at all with the globalization pressures and the claims that a corporate income tax puts US MNEs at an economic disadvantage in comparison to their global competitors.

Of course, one response to claims from MNEs that the US tax system should be loosened up to help them be globally competitive is to ask--for what purpose?  MNEs treat aid for their competitiveness as an unquestioned good.  Yet that is clearly not the way Congress should address the issue.  If we relax tax on a US MNE and thereby permit it to open a manufacturing plant in a country where it pays inferior wages to workers, pollutes the world's air and water at a rate higher than that permitted in the US, all to manufacture products that it charges its US affiliate dearly to import into this country, we have done little of benefit to the US or, in fact, to anyone other than the owners (sometimes US based and sometimes not) of the US MNE.  Aiding MNEs in their game of pulling tax rates across the world down to the bottom so that their owners (and top executives) can reap even higher profits and control even more of the world's wealth is not an inherent good.  In that situation, US workers lose out because their jobs are outsourced, aided by tax provisions undertaken to aid MNEs' economic competitiveness.

Even if there are some situations in which the US should be deeply concerned about the global competitiveness of its home-based MNEs, the next question is whether the precipitous race to the bottom in corporate tax rates is necessary to lure corporations into a particular country (or keep them where they are already located).  There has been considerable commentary of late that assumes that taxation is a major factor in MNE location decisions.  So it is interesting to see some new empirical research based on OECD data about the relative importance of taxation and other policies (openness to foreign firms, labor rules, etc.).  A new OCED Economics Department working paper by Hajkova, Nicoletti, Vartia and Yoo, Taxation, Business Environment, and FDI Location in OECD Countries,  examines just these areas, to determine how important is the impact of tax regimes on multinational corporations' location decisions.

They conclude that taxation matters, of course, but perhaps not as much as everyone has assumed. 

The results indicate that omission of other policies that shape the business environment of host countries may lead to serious upward bias in tax elasticity estimates. Moving from a simple model specification including only tax policies to a wider one covering also other factors and policies affecting rates of return on FDI significantly lowers the estimated tax elasticities. As a result, the elasticity estimates are on the low side of the range covered by recent surveys of the empirical literature. Moreover, the impact of tax regimes on bilateral FDI appears to be quantitatively limited. On the whole, taxation would seem to be a relatively minor factor affecting the location choices of MNE as compared to policies affecting the ease of entry for foreign firms, their labour costs and the functioning of product markets in the host country. These results appear to be robust to changes in model specification and estimation methods as well as to accounting for the possibility of FDI diversion from third countries. (emphasis added)

Big Oil, Big Subsidies: Citizens For Tax Justice Says End Them Now

CTJ has just released a report on Big Oil, The 110th Congress Should End Tax Subsidies for Big Oil (Dec 21, 2006).  It notes that the American public and the incoming Congress seem to have finally wakened to the fact that Big Oil is making runaway profits and is in no need of a supportive subsidy from the tax system.  There's even talk of instituting a windfall profits tax or carbon tax, for both revenue and environmental reasons.  But CTJ thinks Congress should first focus on just getting rid of the many loopholes that let Big Oil pay much less than its fair share of taxes to the federal government, many of them added or increased in the ridiculous Energy Act of 2005.   Put simply:

If the public debate revolves around whether or not Big Oil needs to be subsidized through the tax code at a time when oil prices are at an all-time high, it will be much more difficult for the energy companies to win the debate. As a practical policy matter, it makes sense for Congress to get energy companies to simply pay the taxes they would owe without special loopholes, before considering adding a new tax on their excess profits.

For the Joint Committee on Taxation's spreadsheet on the revenue costs of the various loopholes for Big Oil in the 2005 Act, see this link.  For various other JCT documents on the energy bill, see here.

Here's the list of the biggest tax expenditures benefitting Big Oil.

1. an immediate deduction for "intangible" drilling costs (wages, materials for wells, etc.) that are normally expensed over the life of property in other industries

2. an immediate deduction for "percentage depletion" for oil and gas properties that amounts to a flat percentage of gross revenues off the top, whereas other industries have to expense such costs over the properties useful life (and the Big Oil Giveaway (energy) Bill of 2005 actually increased the benefit to Big Oil of this provision!)

3. an almost immediate two-year amortization of costs for searching for oil--even when it is discovered

4. an immediate deduction of 50% of the costs of certain equipment for refining--created as an "incentive" to Big Oil in the Big Oil Giveaway (energy) Bill  of 2005 when costs per barrel were already over $50!

5. an immediate deduction for "domestic manufacturing" --a loophole extended to Big Oil by a 2004 "legislative slight-of-hand", when Congress was required to repeal a provision that aided manufacturers in violation of international trade law and enacted an even bigger giveaway that was extended to industries like Big Oil that weren't even eligible for the repealed provision

6.  even faster accelerated depreciation for natural gas distribution lines--also added by the Big Oil Giveaway (energy)  Bill of 2005, when the existing accelerated depreciation system already provided front-loaded depreciation much faster than economic depreciation

7. credits (dollar for dollar reduction of taxes) for foreign taxes that Big Oil probably doesn't actually pay

As the CTJ article notes, "the next Congress has many options to close unnecessary and wasteful energy-related tax loopholes. "  Let's hope that it starts out with at least this list of wasteful items so Big Oil can pay its fair share of taxes. 

And for my Christmas wish:  Perhaps Congress can finally figure out a way to get those tax funds to places that they are really needed, like the victims of Hurricane Katrina in New Orleans.

Cheney's Tax Returns

Messrs. Bush and Cheney have released portions of their 2005 federal income tax returns.  The White House website includes an announcement for each, but does not make the tax returns themselves readily accessible.  See announcement of release of Bush return and announcement of release of Cheney return.   The excerpted returns themselves are available at TaxHistory.org and on the TaxProf website.  See Bush's Return and Cheney's Return.

There has been a veritable deluge of commentary about them.   The New York Times and Associated Press carry general stories reporting particular items of interest from the returns.   The TaxProf website links to a number of commentaries that themselves are interesting. 

They include, for example, Americans for Tax Reform's rather patronizing praise of Bush for setting aside $3700 in a tax free health savings account for his routine medical expenses.  That is a luxury that many of the 40 million Americans who have no health insurance can hardly afford, not to mention the fact that the purported premise of health savings accounts--that "consumer-directed health care" will cut medical costs--is barely short of laughable.  If we were medical experts and we only had non-emergency medical needs and we all lived in towns with ample medical services, we might be able to do some comparison shopping for health care that might impact the costs to some extent.  But in the normal use of medical services, we need to be able to develop a relationship with a provider and trust in expedited treatment when necessary.  Consumer choice enters into the establishment of a provider relationship, but not pricing of particular services.  HSAs are therefore primarily just another tax-advantaged savings vehicle for those with money to spare. We should look to Europe and Canada to see how to provide universal health care at a cost far lower than our current system's costs.

The TaxProf links as well to commentary on the Daily Kos that attacks Cheney for taking advantage of the tax break that Congress passed as part of the KETRA tax bill for Katrina aid.  Ordinarily, a person cannot take charitable contribution deductions in excess of 50% of adjusted gross income.  KETRA removed that limitation for contributions made in the last quarter of 2005 after the August 27 date of Hurricane Katrina, as an incentive for charitable contributions.  Of course, only the very rich, who can afford to donate more than half of their income, could take advantage of such a provision.  So this was a provision targeted as a benefit for the wealthy from the beginning.  And since contributions to any charitable organization were eligible for the benefit, there was no assurance that Katrina victims would benefit at all.  In fact, one could hypothesize that wealthy donors would most likely support the kinds of charities that wealthy donors often support--ones that provide status and prestige to donors who are toasted and hosted in symphony halls and art museums and celebrity receptions to grease the palm for more.  The Cheneys, who still have enormous wealth in the form of Halliburton stock options, took advantage of Congress's gift to multimillionaires by donating $6.8 million and taking a related itemized deduction against about 75% of their income. See Cheneys Donate Millions In Charity: Scholarship Fund, Heart Center Benefit. 

So the KETRA charitable contribution provision likely aided rich people much more than it aided Katrina victims, but it isn't really cricket to call Cheney contributions and deductions "shady" , as the Daily Kos commentary does, and imply that Cheney engaged in chicanery.  He simply arranged the contributions for the maximum benefit under the law as passed.  In this case, it was Congress that engaged in questionable practices by claiming credit for helping Katrina victims and glossing over the way the charitable contribution deduction would benefit the wealthy.

As is frequently the case, one of the most even-handed commentaries can be found at Citizens for Tax Justice, which provides a factual analysis of the impace of the 2001-2005 tax cuts on both the Bush and Cheney tax returns.  CTJ concludes that Bush's taxes were cut by $26,204 in 2005 due to the tax cuts, while Cheney's were cut $1,093,937.  Bush benefited from lower rates and the treatment of dividends as preferential capital gains.  Cheney benefited from both of those features as well as the KETRA charitable contribution provision, described by CTJ as "ostensibly designed to encourage charitable donations to the victims of Hurricane Katrina."  Id.  CTJ does note the fact that none of Cheney's donations went to Katrina victims.  Instead, they support the hospital that cares for his heart condition, his alma mater, and a program in DC to help students go to private schools instead of public schools.

"Tax Policy for Sustainable Mobility"

Arizona Professor Mona Hymel, writing with Beth Wolfsong, has a paper called Americans and their "Wheels": A Tax Policy for Sustainable Mobility, accessible on SSRN via this link.  Economists understand the use of tax incentives and subsidies to affect behavior that harms the environment or to encourage the development of fossil fuels and alternative energy sources. Environmentalists and social scientists are well aware of the societal and environmental impact of the automobile.  Yet the authors note a regretable paradox.

One incredible, amazing technology--the car--gobbles tax-subsidezed energy as it takes us to our distant homes or jobs or malls exhaling noxious gases along the way.  And yet, while more evidence stacks up pointing to the car as a key contributor to environmental decline the present tax structure in the United States drives our ever-increasing dependence on the car. ... This articles draws on economic and social research to advocate for the development of tax policies that address the destructive environmental realities of continued and increasing fossil fuel usage.  New policies, however, must take into account who Americans are, both socially and cutlurally, and how they expect to live and travel."  Id. at 1.

The article catalogues the historical incentives provided to the energy industry, noting that tax incentives for fossil fuels date to 1913, while energy-conserving tax provisions first appeared in 1978.  Unfortunately, Congress has not developed a suitable strategy for moving away from fossil fuels--they still account for the vast majority of tax subsidies for energy.  In fact, Congress has increased subsidies for fossil fuel as recently as the 2004 tax bill, which permitted producers and owners of royalties from marginal wells to take a oil depletion deduction in excess of their net income, and created a new tax credit for producing oil and gas from marginal wells.  The tax code also allows investors to expense most of the costs of acquisitions of reserves.

As a result, Hymel and Birdsong report a tax rate differential favoring oil and gas producers: their marginal rates range from 8-9 percent for independents and 7-24 percent for integrated companies, compared to marginal rates in other industries of around 31-32 percent.  They note that "[t]he various tax incentives available for conservation and renewable technologies are just a drop in the bucket when compared with the U.S.'s enormous investment in fossil fuels and its [sic] infrastructure."  Id. at 20.  The differential amounted to about $33 billion in tax subsidies for alternative energy and $106 billion in tax subsidies for fossil fuels.  Id. at 22.

Even more discouraging, the article points out that "the 'environmentally-friendly' tax subsidies that purport to encourage alternatives further encourage dependence on the car and fossil fuels."  Id. at 21.  This is because the mixed fuels incentives actually encourage fossil fuel use, even though it may result in a more efficient combustion mixture.  It does not result in less fuel use or less reliance on cars.

The authors' recommendations?  Phase-out fossil fuel subsidies.   Phase in conservation subsidies.  Presumably the authors think the latter should include elimination of the parking fringe benefit, which they mention as hogging the majority (85 percent) of the tax subsidy provided for transportation fringes, with only 15 percent going for commuter highway transportation and transit passes.  Develop alternative fuels.  Presumably the authors are calling for more tax credits for renewable energy technologies, although they do not clearly say so.  Develop a more sustainable society.  The authors illustrate their concept of a "new society" with Portland Oregon, which has developed an urban plan to limit growth, force higher-density projects, and reduce automobile dependency.  Are they suggesting that the federal income tax code should provide tax incentives to support such planned urban growth?  Maybe what they are suggesting is that by eliminating the fossil fuel subsidies and encouraging the development of renewable energy, these societal and cultural changes will simply be easier to achieve.  Those who develop tax policy should consider what kind of society is likely to develop from the kinds of subsidies and incentives provided.