A first step to progressive consumption taxes

What's an easy way to get going on progressive income taxes? Simply remove all limits on contributions to and withdrawals from IRAs. (I thank my Hoover colleague Michael Bernstam for this clever idea, and the Hoover coffee room for bumping us into each other.)

Background: Once people see that a consumption tax, in place of income tax, corporate tax, estate tax, etc. is much simpler and more economically efficient, the natural question is "what about progressivity?" The answer is that there are lots of ways to make a consumption tax progressive.


My favorite (today) is a flat consumption tax, with the same rate on everything, collected as a VAT.

Then, realize that progressive taxation is the same thing as flat taxation plus redistribution. If I pay 40% tax and you pay 20% tax, that's the same thing as both of us paying 40% tax and you receiving a check from the government. So, I think, separate taxation (raising revenue for the government at minimum cost), subsidy, and redistribution. Make redistribution coherent, integrate it with other programs, and implement it by sending people checks, on budget.

Most countries try to make it progressive by charging different rates for things that rich people buy vs. poor people. But that is a mistake as it distorts the economy. Even rich people can buy more tacos and less yachts, and maybe a poor person wanted to buy a yacht and start a rental business.

An alternative implementation is to turn the current income tax system into a progressive consumption tax. If you can fully deduct savings from income, the "income" tax becomes a consumption tax. Alternatively, pay taxes on all "earned" income, but no tax on  dividends, interest, or capital gains. That works out to the same thing -- no tax distortion on whether you consume the day you get the income, or later after returns compound.

That approach leads to all sorts of definitional problems, which is why I haven't been a huge fan. (Though I'm not strongly opinionated, recognizing that people who advocate it know a lot more about the tax code than I do.)

So, along comes Michael. Why not just remove all limits on IRAs? Contribute as many pre-tax dollars as you want. Interest, dividends, and capital gains accumulate tax free. No minimum distributions, estate taxes, etc. But when you take money out of the IRA, to consume it (otherwise you'd leave it in!) you pay income tax.

Yes, it's imperfect. It doesn't solve the Trump issue that what is "income" is an elastic concept in the hands of lawyers and lobbyists. But it's a quick and easy step that gets us a long way there.

Our tax code sort of recognizes that taxing rates of return is a bad idea. We tax "unearned" income -- but then there is a huge list of complex exemptions. 401(k), 526(b), IRA, Roth IRA, health savings accounts, college savings accounts, step up of capital gains at death, like-kind exchanges, and on and on, each with complex rules to follow. Just removing all limits on IRAs would be a big step towards a consumption tax, and then we wouldn't need all these other ones either.

Objections? I'm not great on tax law, so it will be fun to hear comments.

Bracing for Hurricane Matthew or any natural disaster

As I write this blog for you all today, I am sitting in a hotel in Jacksonville, Fla., because I am working with an amazing periodontal office with their systems, health history updates and overall practice efficiency. Last night, I spoke to their study club members on some practical measures when it comes to protecting their patient records. It is ironic that, as I write this, we are on the verge of Hurricane Matthew hitting the east coast of Florida … so this post becomes so much more important.

It is up to the practice to make sure that their patients’ Protected Health Information (PHI) is kept confidential, the integrity of the record is sound and your patients’ records are accessible. So as I watch the Weather Channel from my hotel room tonight, I wanted to put together some tips you can follow to help you protect your patient’s information.

Notice what I said “some tips you can follow to help you protect your patient’s information.” It is not the job of your software, your hardware or your office design to ensure the protection of your patient’s data. It is up to you to put systems in place.

Since Florida is on the verge of a Category 4 hurricane, I want to point out a few things that could potentially affect the confidentiality, integrity and accessibility of your patient’s protected health information.

• Power outages are going to be a huge issue with this upcoming storm. If you are going to close the office and want to have access to some of your patients’ information for returning calls, phoning in medications or following up with your patients after some surgeries, I would recommend you using Dentrix Mobile. When you use Dentrix Mobile, you have the opportunity to remote in using a mobile device and having access to some of your patients’ critical information.
• Make sure an authorized team member has access to the backup of all the patient data in case of flooding or destruction of the practice. The backup of the data might be on an external hard drive or in an online secure backup system. Dentrix has the option of using eBackup to store your patients’ information securely and safely. This would give your practice a good option to access patient data in case of an emergency.
• Make sure you have your Business Associate Agreements in place with your outside contractors. What if you are working with a consultant, accountant, attorney or computer company who has access to your patients’ information and they are the ones who are affected by the storm which jeopardizes the confidentiality of your patients’ information?

You can never do too much to prepare for a disaster and you have an obligation to protect your patients’ health information. It is not something you want to take lightly. Seeing this storm and looking back on storms in the past makes me realize we should be prepared for anything.

Trump Taxes

As I see it, important points about the Trump tax affair are not yet reflected in media coverage. 1) This affair reflects the intrinsic difficulties of an income tax. A consumption tax can be more progressive -- Mr. Trump would have likely have paid a lot more. 2) Raising personal income tax rates and especially capital gains and estate tax rates will do little to raise tax payments from the likes of Mr. Trump. No taxable income = no tax at any rate. It will likely have the opposite effect, making more lawyer, accountant, and lobbyist time worthwhile.

The main issue, really, is not what taxes Mr. Trump did or did not pay after the big loss. The big issue is what taxes he did or did not pay beforehand.


If we're going to tax income, the principle of net operating loss carry-forward (this sort of taxese by itself tells you a lot about what's wrong with the system) makes a lot of sense. Suppose you run a business that makes $1,000,000 in even years, and loses $900,000 in odd years. On average, you make $50,000 per year. But if you pay a 40% Federal income tax rate (plus state, local, etc.) in the good years, then you pay $200,000 per year on average in taxes, a 400% tax rate.

So, if Mr. Trump really had earned $1,000,000,000 of income, paid taxes on that income, then lost $900,000,000 as reported, allowing him to deduct future income against that $900,000,000 until he pays taxes only on the net $100,000,000 makes abundant sense. (I'm struggling to keep track of the zeros here.)

Now you see the big issue. The real question is, did Mr. Trump actually make income, pay taxes, and then suffer that $900,000,000 loss? Or, did other people suffer the loss, and Mr. Trump got to use the losses to protect his future income? Or, are the losses basically fictitious?  The reporting (New York Times ) suggests the latter

...net operating loss, or N.O.L., allows a dizzying array of deductions, business expenses, real estate depreciation, losses from the sale of business assets and even operating losses to flow from the balance sheets of those partnerships, limited liability companies and S corporations onto the personal tax returns of men like Mr. Trump.

The  follow up offered more detail on where fictitious or other people's losses come from:

... he might have been able to record write-downs of assets under a doctrine known as “abandonment,” an aggressive accounting tactic used when an investor walks away from a worthless or nearly worthless asset and writes off the entire capital investment in the property. ["The" does not mean "his?"] 

... Mr. Trump personally guaranteed $832 million of debt related to his casinos and other assets. Under tax code provisions available to real estate developers, he could take the full amount as a deduction even if he didn’t invest a dime of his own money. [my emphasis] 

Ordinarily, that deduction would be recaptured when the debt was forgiven or the underlying assets sold. If the debt were forgiven, Mr. Trump would have to report that as income. But there are various exceptions. If Mr. Trump was insolvent at the time — if his debts exceeded his assets — he might have avoided having to report the forgiveness of debt as income...

There are other provisions, too, that might have allowed Mr. Trump to deduct the loans but never have to report them as income. 

Real estate developers are also uniquely able to realize losses as soon as they occur, but defer gains, often indefinitely, through such tactics as like-kind exchanges. “It’s heads Trump wins, and tails the government loses,” Mr. Knoll said.

As a simple version, lunch conversation had the following anecdote: If you rent out property here, you can depreciate the cost of the house. But the cost of the house in the bay area is 99% value of land which doesn't depreciate. So you can cut your taxable income by this fictitious depreciation. I don't know if it's true, but it is a similar story.

Now, for lessons.

Income and corporate taxes.  Compare this outcome to a consumption tax. Suppose that no matter what his income, Mr. Trump had to pay, say, 25% VAT on

...Mr. Trump’s opulent lifestyle over the years. At the nadir of his personal financial crisis in the early 1990s, his lenders put him on an annual “budget” of $450,000 in personal expenses — more than enough to sustain his lifestyle of lavish homes, private jets, country clubs and golf courses 

Assuming that he did not, in fact, pay 40% taxes on the $900,000,000 before he "lost" it, he would have ended up paying a lot more in consumption taxes. A consumption tax can be more progressive than an income tax. The attempt to tax income is at the root of all this mess.

It's not just Trump. The great news of this story is that it shines a light on the affairs of America's "dynastic families" (aristocracy), and the puzzle of why they all seem to be so heavily invested in real estate. From the Times again,

...America’s dynastic families, which, like the Trumps, hold their wealth inside byzantine networks of partnerships, limited liability companies and S corporations.  

...According to Mr. Mitnick, Mr. Trump’s use of net operating losses was no different from that of his other wealthy clients.

“If it wasn’t clear before, it is now: The tax code is tilted toward the rich in its statutory framework, its exceptions, and in how it is enforced and administered,” said Steven M. Rosenthal, a real estate tax specialist and senior fellow at the Urban-Brookings Tax Policy Center. 

It goes on. A real estate lawyer once explained to me how she set up trusts for one of these "dynastic families." On Junior's first birthday he gets complex shares in a limited partnership worth just under the gift tax limit. 50 years later, what do you know by capital gains it's worth $50 million, so the property passes outside of estate taxes.

What fixes it? Neither candidate's tax plan does anything that I see to eliminate these shenanigans among the super-rich who can afford to hire armies of lawyers. (Correct me if I am wrong, please. I have not read them in great detail as I know they will be shredded on Nov. 7). Mrs. Clinton's plans to raise personal income tax rates doesn't raise more taxes from people who have sheltered all their income. Raising capital gains and estate tax rates just raises the incentive to pursue shelters. (See for example Zuckerberg's GRAT)

The right response to this affair is outrage at the astonishing crony complexity of the tax code, not really Mr. Trump's apparently perfectly legal behavior.  I can't see a way to get around this than to abandon the attempt to tax income, and just tax consumption instead.

As for Mr. Trump, I actually have a kind thing to say: This affair makes it clear that politics is indeed a recent avocation.  You can tell which economists want government jobs and which don't by how they pay their nannies. Nobody planning to run for office would have done this!

Update: Debt Parking by John Hempton (HT Marginal Revolution). Short version: Borrow lots of money. Lose it, take tax loss. Sell worthless debt to offshore entity. Get creditors to forgive debt. Normally, debt forgiveness counts as income and eats back your tax losses. But since that "income" is not cash, it's easy to hide it. The big question will be whether Mr. Trump did this, or whether he later paid taxes on the forgiven debt or not.

Hampton speculates he did not pay that tax:

There is a vehicle out there (say an offshore trust or other undisclosed related party effectively controlled by Donald Trump) - which owns over $900 million in debt and is not bothering to collect it. 

I do not have the time or energy to find that vehicle. But it is there. Now that this blog has gone public journalists are going to look for it. 

There is a Pulitzer prize for whoever finds it. Just give me a nod at the acceptance ceremony

Update 2: Josh Barro writes about a more plausible explanation from Lee Sheppard -- the "Gitlitz loophole." Until 2002, someone in Mr. Trump's position could, in fact, set up a company, borrow a ton of money, lose it, have the debt forgiven in the company's bankruptcy, but use the lost borrowed money against future personal taxes. Apparently, it was an error in writing the tax code, which Congress fixed when it came to light.

I stick to my interpretation that the episode reveals more about insane complexity of the tax code, a necessary result of trying to tax income, than much of anything else.

Will you finish the year at goal?

Okay teams, we are down to the last three months of the calendar year. Now is Are we going to meet our YTD goals?” You still have time to prepare and make some adjustments in your schedule if you are coming up short for the year. Just a couple of weeks ago, I talked about reaching out to patients with unscheduled treatment and how to make sure you have an accurate list of patients with whom to follow up. Now is the time to give your patients a gentle nudge and get them in before they lose out on those precious dental benefits.

the time to ask yourself, “

But there is more to goal-setting than just production goals. You have new patient goals and collections to strive for if you want a healthy practice. You might be asking, “Okay, what can we do over the next three months to maximize the time we have left in the year?” Let’s talk about some things you can do to set your practice up for an end of the year success.

• Make sure you have time set aside for those new patients who are going to procrastinate and want to schedule in November and December. If you have read my blog for a while, you know that I love Perfect Day Scheduling and it is ideal for blocking out time for new patients. If you have a goal of 20 new patients per month, then using Perfect Day Scheduling will ensure that your new patients calling in will have some options when they call you. It kills me when I am working with practices that say, “We can’t get a new patient in for two months.” This is unacceptable if you want to grow your practice. For more information on how to use Perfect Day Scheduling, refer back to these articles . . .
• What if Every Day Could be a Perfect Day
• The New Patient Experience
• Monitoring your production goals on a daily basis can give you and your team the statistics needed to make adjustments throughout the month and hopefully end the month on a positive note. You can enter your monthly goals into the software and use the Daily Huddle Report to manage your production goals on a daily basis. Also, when you enter your monthly goals into the software, you can use the monthly calendar as a quick visual to see where you are in respect to your goal. This is a great tool for your morning huddle. For more information on how to enter goals into Dentrix, refer back to these articles . . .
• Let’s Do Some Goal Setting
• Your Daily Motivation
• Tracking your collections and forecasting where you will end up for the year is also an extremely important piece for the last three months of the year. Monitoring your collections and accounts receivable can be watched from the Daily Huddle, Practice Advisor and the Practice Analysis. You can have amazing production … but if you are not collecting it, then none of it matters. If your collections are short for YTD so far, then let’s look for ways to step it up and find out where the outstanding money is. For more information on managing your accounts receivable, refer back to these past articles . . .
• Your Own Practice Management Consultant at your Fingertips
•  Your Daily Motivation

You can do this! Give your team the tools and reports they need to look ahead toward the end of 2016. 

EconTalk

I did an EconTalk Podcast with Russ Roberts. The general subject is economic growth, the reasons it seems to be slipping away from us and policies (or non-policies) that might help.

As in other recent projects (growth essay, testimony) I'm trying to synthesize, and also to find policies and ways to talk about them that avoid the stale left-right debate, where people just shout base-pleasing spin ever louder. "You're a tax and spend socialist" "You just want tax cuts for your rich buddies" is getting about as far as "You always leave your socks on the floor" "Well, you spend the whole day on the phone to your mother."

We did this as an interview before a live audience, at a Chicago Booth alumni event held at Hoover, so it's a bit lighter than the usual EconTalk. This kind of thought helps the synthesis process a lot for me.  Russ' pointed questions make me think, as did the audience in follow up Q&A (not recorded). Plus, it was fun.

I always leave any interview full of regrets about things I could have said better or differently. The top of the regret pile here was leaving a short joke in response to Russ' question about what the government should spend more on. Russ was kindly teeing up the section of the growth essay "there is good spending" and perhaps "spend more to spend less" ideas in several other recent writings. It would have been a good idea to go there and spend a lot more time on the question.


From the growth essay, I think the government could profitably spend a lot more money on the justice system. That so many of our fellow citizens rot in jail awaiting trials, that the vast majority never receive a trial anyway but a hasty plea-bargain, that their legal representation is so thin, is a disgrace -- and causing huge problems. If a wrongly accused young man spends two years in jail before charges are dropped, the consequences for him and his family are awful. Business relies on a speedy and efficient justice system to adjudicate commercial disputes, and that seems to be falling apart too, partly for lack of resources.  The cost here is peanuts compared to, say, peanut subsidies.

Our public infrastructure doesn't just consist of steel and asphalt. The public software needs investment as well, or more.

Public health is one of the most essential public goods. Of all the civilization-ending scenarios you can think of, nuclear war and a pandemics top my list. Many past pandemics followed a surge in globalization -- the plague of the 1350s, that wiped out half or more of the population; the smallpox that wiped out native America in the 1500s, the 1918 flu. (Larry Summers has a good article on this point.) We are ripe for antibiotics to stop working and new diseases to spread catastrophically, if not among humans among the plants and animals on which we depend. Don't count on the UN and the WHO.

The government can profitably fund basic research. "Yes, 95% of funded research is silly. Yes, the government allocates money inefficiently. Yes, research should also attract private donations. But the 5% that is not silly is often vital, and can produce big breakthroughs." (Basic research is not the same thing as subsidies for commercializing research.)

Yes, Martha, I should have said, there are public goods here and there.

Of course, more spending on things like these does not imply more spending overall. They're all remarkably cheap, and could easily be funded by spending a little less on some of the colossal waste. (Example: We spend $6 billion on the FBI and $13 billion on border control.) Of course, one must also spend wisely and use the results wisely. And one could add a lot to the list. But repeating a fun joke about spending is not the right answer.

Furman on zoning

On this day (Clinton vs. Trump debate) of likely partisan political bloviation, I am delighted to highlight a very nice editorial by Jason Furman, President Obama's CEA chair, on the effects of housing restrictions. A longer speech here. The editorial is in the San Francisco Chronicle, ground zero for housing restriction induced astronomical prices. Furman:

 When certain government policies — like minimum lot sizes, off-street parking requirements, height limits, prohibitions on multifamily housing, or unnecessarily lengthy permitting processes — restrict the supply of housing, fewer units are available and the price rises. On the other hand, more efficient policies can promote availability and affordability of housing, regional economic development, transportation options and socioeconomic diversity...

...barriers to housing development can allow a small number of individuals to enjoy the benefits of living in a community while excluding many others, limiting diversity and economic mobility. 

This upward pressure on house prices may also undermine the market forces that typically determine patterns of housing construction, leading to mismatches between household needs and available housing. 

What's even more praiseworthy is what Furman does not say: "Affordable" housing constructed by taxpayers, or by forcing developers to provide it; rent controls; housing subsidies; bans on the construction of market-rate housing (yes, SF does that); bans on new businesses (yes, Palo Alto does that), and the rest of the standard bay-area responses to our housing problems.  The first few may allow a few lucky low-income people to stay where they are, as long as they remain low-income, but does not allow new people to come chase opportunities. Subsidies that raise demand without raising supply just raise prices more. As in child care or medicine.



When President Obama's CEA chair writes an oped, most of which could easily have come from Hoover or CATO, it's a hopeful day, no matter what happens tonight.

Moreover, Furman recognizes that a thousand-point federal program imposed on states and local governments by regulation is not the answer:

While most land use policies are appropriately made at the state and local level, the federal government can also play a role in encouraging smart land use regulations

We have found the enemy, as Pogo said, and it is us.

The real political economy is tough, of course. Current residents vote for restrictions, and not just out of misunderstanding.  Current residents (people like me), who buy expensive houses in this beautiful area, vote to keep things just as they are. Restrictions mean they can't sell houses for $10 million to a developer who wants to put up a 100 story office building and turn it in to Manhattan. But restrictions mean they can sell for $2 million and retire comfortably to Mendocino.  Or stay  right where they are, paying property taxes based on the 1965 value of their house (another big impediment to housing mobility and affordability) and making sure the neighbors don't sell and ruin their view. Renters vote for rent control, affordable housing mandates, and so on that applies to current residents but not to newcomers.  This behavior has a  negative externality on low-income ("low" means out of top 0.5%in SF!)  people who want to move here. But a Trumpian mini-wall of regulation keeps them out. The most local government is not always the best. The most liberal government often acts with effects that are surprisingly conservative.

Negative rates and inflation

Have negative interest rates boosted inflation? Here is a nice graph (source macro-man blog, HT FT alphaville)

Source: Macro-man blog

Not really. Explanations? Choose the chicken or the egg:

1) But for negative rates, inflation would have been even lower

2) We're living in a Fisher effect world. Lower rates lower inflation. (Which is arguably a good, if unintended, thing)