Economist Channel

On repeal and replace, a healthcare oped on "The Hill", here.  

Republicans replacing Obamacare, beware. It has a certain logic. Much of it patches up unintended consequences of previous regulations. If we just roll back and patch once again, we will end up right back where we started.

It’s wiser to start with a vision of the destination. In an ideal America, health insurance is individual, portable, and guaranteed renewable — it includes the right to continue coverage, with no increase in cost. It even includes the right to transfer to a comparable plan at any other insurer. Insurance companies pay each other for these transfers, and then compete for sick as well as healthy patients. The right to continue coverage is separate from the coverage itself. You can get the right to buy gold coverage with a silver plan.

Most Americans sign up as they graduate from high school, get a drivers’ license, register to vote, or start a first job. Young healthy people might choose bare-bones catastrophic coverage, but the right to step up to a more generous plan later. Nobody’s premiums subsidize others, so such insurance is cheap.


People keep their individual plans as they go to school, get and change jobs or move around.  Employers may contribute to these individual plans. If employers offer group coverage, people keep the right to individual plans later.

Health insurance then follows people  from job to job, state to state, in and out of marriage, just like car, home and life insurance, and 401(k) savings.

But health insurance is not a payment plan for small expenses, as home insurance does not “pay for” lightbulbs. Insurance protects your wallet against large, unexpected expenses. People pay for most regular care the same way they pay for cars, homes, and TVs — though likewise helped to do so with health savings and health credit accounts to smooth large expenses over time. Doctors don’t spend half their time filling out forms, and there are no longer two and a half claims processors for every doctor.

Big cost control comes from the only reliable source — rigorous supply competition. The minute someone tries to charge too much, new doctors, clinics, hospitals, and models of care spring up competing for the customer’s dollar. “Access” to health care comes like anything else, from your checkbook and intensely competitive businesses jockeying for it.

What about those who can’t afford even this much?  Nobody dies in the street. There is also a robust system of government and charity care for the poor, indigent, those who have fallen between the cracks, and victims of rare expensive diseases. For most, this simply means a voucher or tax credit to buy private insurance.

But — a central principle — the government no longer massively screws up the health insurance and health care arrangements of the majority of Americans, who can afford houses, cars, and smartphones, and therefore health care, in order to help the unfortunate. We help people forthrightly, with taxes and on-budget spending.

Why do we not have this world? Because it was regulated out of existence, and now is simply illegal.

The original sin of American health insurance is the tax deduction for employer-provided group plans — but not, to this day, for employer contributions to portable individual insurance.  “Insurance” then became a payment plan, to maximize the tax deduction, and then horrendously inefficient as people were no longer spending their own money.

Worse, nobody who hopes to get a job with benefits then buys long-term individual insurance. This provision alone pretty much created the preexisting conditions problem.

Patch, patch. To address preexisting conditions, the government mandated that insurers must sell insurance to everyone at the same price. Insurance companies will then try to avoid sick people, so coverage must be highly regulated.  Healthy people won’t buy it, so it must be nearly impossible for people to just pay out of pocket. Obamacare added the individual mandate.

Cross-subsidies are a second original sin. Our government doesn’t like taxing and spending on budget where we can see it. So it forces others to pay: It forces employers to provide health insurance. It forces hospitals to provide free care. It low-balls Medicare and Medicaid reimbursement.

The big problem: These patches and cross-subsidies cannot stand competition. Yet without supply competition, costs increase, the number of people needing subsidized care rises, and around we go.

The Republican plans now circulating make progress. Rep. Tom Price’s plan ties protection from preexisting conditions to continuous coverage. His and Speaker Paul Ryan’s “Better Way” plan move toward premium support for private insurance, and greater portability.

So far, though, the announced plans do not really overturn the original sins. But those plans were crafted in a different political landscape. We can now  go big, and really fix the government-induced health care mess in a durable way.

I visited my dermatologist last month. I spent 20 minutes with a resident, and 5 minutes with the dermatologist. The bill was $1335. An “insurance adjustment”  knocked off  $779. Insurance paid $438. I paid $118.  The game goes on. We start with a fake sticker price to negotiate with the uninsured and to declare uncompensated care. But you cannot just walk in and pay as you can for anything else. Even $438 includes a huge cross-subsidy.

We’ll know we’ve fixed health care when we don’t get bills like this.

Mr. Cochrane is a Senior Fellow of the Hoover Institution at Stanford University and an Adjunct Scholar of the Cato Institute.

In a remarkable and clear oped "A Conservative Answer to Climate Change" James Baker and George Shultz lay out the case for a carbon tax in place of the complex, cronyist and ineffective regulatory approach to controlling carbon emissions.

A plea to commenters. Don't fall in to the trap of arguing whether climate change is real or whether carbon (and methane) contribute to it. That's 5% of the debate. The real debate is how much economic damage does climate change actually do. Science might tell us that the temperature will warm 2 degrees in a century, with a band of uncertainty. But the band of uncertainty of the economic, social and political consequences of 2 degrees is much bigger. Moreover, the band of relative uncertainty is bigger still. Does "science," as the IPCC claims, really tell us that climate change is the greatest danger facing us -- above nuclear war, pandemic, state failure, and so on?

And most of all, given that our governments are going to do something about climate change, how can we do something much more efficient, and (plea to environmentalists) much more effective? That's the question worth debating.

Both sides have fallen in to the trap of arguing about climate change itself, as if it follows inexorably that our governments must respond to "yes" with the current system of controls and interventions. The range of economic and environmental effects from the "how" question are much, much larger than the range of the effects of the "is climate change real" question.
So, Baker and Shultz lay out in gorgeous clarity the kind of compromise we all hope our governments can still occasionally achieve: Given that we're going to do something, trade a carbon tax for the removal of intrusive regulation. You get more economy and less carbon.

The oped refers to a report from the Climate Leadership Council, which is here and worth reading. The Niskanen Center has also been championing the case, and reaching out to environmental groups.

There is a natural bargain, if our political system can get around its current habit of take-no-prisoners maximalism.


Environmental groups that really care about carbon are starting to realize that the current system produces symbolism at great cost but will never produce the kind of carbon reductions they think are necessary. High speed trains and electric coal-powered cars may make you feel good, but they don't make a dent in carbon. They are also realizing that climate is swallowing up the world's attention for other pressing environmental problems. Endangered species need habitat, now, not 2 degrees cooler in a century. People are dying of dirty water and particulate pollution now. Yes, they'd prefer carbon tax and controls, since they don't trust the tax incentive alone. But given the choice, I've met serious environmentalists who would take the deal.

Alas, the sad fate of the Washington (state)  carbon tax is not encouraging. Maximalism won. Some large environmental organizations are going to have to realize, in the current era, this is their best deal. Perhaps staring in the face that waiting for a progressive uprising that takes back house, senate, presidency, state legislators, governors, and turns back to tide of global nationalist populism, allowing regulations of the scale that actually would cut back carbon --without using nuclear power -- will induce a little deal-making will. It also feels good to be part of the "resistance," but the climate keeps warming while you feel good.

Those on the other side, horrified at the waste, cronyism, and economic damage of our current controls would prefer nothing, and hence keep arguing about the science. But a straightforward carbon tax would be immensely less distorting than what they will get otherwise. This one will not go away. Removing energy regulation, even with Rick Perry in charge of DOE, will be a miserable mess against an entrenched and very politically effective opposition. If you can get them to accept the deal, it will go much more easily than trying to shove no carbon regulation down their throats.

Of course, the major problem in any deal is trust. The environmental side may not trust that carbon taxes will be high enough to abandon command and control. And the market side certainly does not trust that controls will be removed, or not reimposed -- especially given the large amount of money that green subsidy-seekers can get from them.

Minor quibbles: The oped and council report refer to steadily increasing carbon taxes. Ideally, in my view, a big advantage of the carbon tax is that it is easily adjustable -- much more adjustable than direct controls. Implement a carbon tax at say $40 a ton. Keep fighting about the science, and the level of the carbon tax. There is uncertainty about the science, face it. Once in place it's easier to raise if we learn carbon is a bigger problem than thought, and vice versa.

Also, I think it will be much easier to agree on the principle of a carbon tax if each side knows it can keep fighting about the rate than if they have to agree on the principal of carbon tax + deregulation and the rate, and the schedule of future rates. (Generally, I think things would go much better to debate the structure of the tax code separately from the rates.)

Not mentioned, of course, is that it is vital for a tax like this that the law forbid any of the special credits and deductions that people will instantly start asking for. "Family farmers can't pay the carbon tax on their diesel fuel....; low income americans need a break so they can drive to work...." The incentive to make every single tax redistributive is strong.

Second, what to do with the money? Greg Mankiw has, on other occasions, argued that the carbon tax revenue should offset other, more distorting taxes. It is a double-whammy -- most taxes, in order to raise revenue, reduce some desirable economic activity. A carbon tax, to raise revenue, reduces an undesirable economic activity. As a matter of economics, Greg is exactly right.

The Oped and council propose instead that the tax is rebated to Americans, so the tax is revenue-neutral. That is, I think, politically attractive. A $2,000 check to each taxpayer is a nice way to build a political consensus for keeping the carbon tax, much as using the tariff to fund civil war pensions kept a strong pro-tariff constituency in the late 1800s. In a previous post, I suggested carbon rights instead: Each American owns the rights to emit X tons of carbon, which he or she sells on an electronic marketplace. Or throws away, if they want to do their bit. That too gives people a stake in keeping the system going.

But we should be clear when as economists we are treading into political waters. Giving up on a optimal tax in order to produce political support for a project is the kind of tradeoff that we're not as good at as we are at figuring out optimal taxes in the first place, and figuring out compromises between current political groupings is really not our strong point. Perhaps it would be better to outline the possibilities -- rebate if you think it's politically necessary, use to eliminate other distorting taxes if you can -- and let politicians figure that one out.

Quibbles over.

I must add that Shultz is an inspiration. I hope that at 96 I can write opeds half this good. Heck, I wish I could do it now!

Update: A Conservative Case for Climate Action by Martin Feldstein, Ted Halstead, and N. Gregory Mankiw in the New York Times, describing the same plan, also excellent.

Larry Summers has an excellent FT column, "Revoking trade deals will not help American middle classes." (If you can't access FT, these usually show up eventually on Larry's blog)

The key point: whatever you think of the impact of trade and globalization, trade deals are not responsible for stagnating "middle class" wages.

...the idea that past trade agreements have damaged the American middle class and that the prospective Trans-Pacific Partnership would do further damage is now widely accepted in both major US political parties. 

... the idea that the US trade agreements of the past generation have impoverished to any significant extent is absurd. 

There is a debate to be had about the impact of globalisation on middle class wages and inequality. Increased imports have displaced jobs...

My judgment is that these effects are considerably smaller than the impacts of technological progress... 

But an assessment of the impact of trade on wages is very different than an assessment of trade agreements. It is inconceivable that multilateral trade agreements, such as the North American Free Trade Agreement, have had a meaningful impact on US wages and jobs for the simple reason that the US market was almost completely open 40 years ago before entering into any of the controversial agreements. 

...The irrelevance of trade agreements to import competition becomes obvious when one listens to the main arguments against trade agreements. They rarely, if ever, take the form of saying we are inappropriately taking down US trade barriers. 

Rather the naysayers argue that different demands should be made on other countries during negotiations - on issues including intellectual property, labour standards, dispute resolution or exchange rate manipulation....

In other words, the US was open already in the postwar period. Trade deals ask other countries to take down trade barriers in specific markets, and also to make internal changes, for the US to remain open.

The reason for the rise in US imports is not reduced trade barriers. Rather it is that emerging markets are indeed emerging. They are growing in their economic potential because of successful economic reforms and greater global integration. 

These developments would have occurred with or without US trade pacts, though the agreements have usually been an impetus to reform. Indeed, since the US does very little to reduce trade barriers in our agreements, the impetus to reform is most of what foreign policymakers value in them along with political connection to the US. 

Trade deals are very useful for many countries, including the U.S. When politicians get demands for subsidies, protection, stifling regulation, or lack of needed regulation, they can point to the trade agreement. That's a good argument for multilateral agreements as well -- look at the broad range of countries that has agreed to behave, not just look at our special deal with one country.

The truth too often denied by both sides in this debate is that incremental agreements like TPP have been largely irrelevant to the fate of middle class workers. The real strategic choice Americans face is whether the objective of their policies is to see the economies of the rest of the world grow and prosper. Or, does the US want to keep the rest of the world from threatening it by slowing global growth and walling off products and people?
Framed this way the solution appears obvious. A strategy of returning to the protectionism of the past and seeking to thwart the growth of other nations is untenable and would likely lead to a downward spiral in the global economy. The right approach is to maintain openness while finding ways to help workers at home who are displaced by technical progress, trade or other challenges.

If it works, protection only enriches some Americans at the expense of foreigners and other Americans.  It is a negative-sum game. If you do not think America's role in the world is to try to send a billion Chinese and Indians back to grinding poverty, to benefit a bit selected American workers and businesses, then you ought not to be a fan.

Larry focuses on the TPP, but the trade agenda is now much larger -- a substantial increase in US trade restrictions, including a return to tariffs, industry - by - industry quantative restrictions, even in violation of trade agreements, and so on.

Larry mentions protectionism in the past, but don't get all nostalgic. That was in the far past, last seen in the universally reviled Smoot-Hawley tariff of the Great Depression. Nobody looks back to that nostalgically as part of "Great" America.

Do read the whole essay.

Dodd-Frank reform seems to be back on the front burner, according to the latest Presidential executive order. At last.

But let us hope it can be done right. Simply pulling down regulations in ways demanded by big banks will lead, I am afraid, to lower capital standards, more debt implicitly guaranteed by the government, and just enough regulation to keep the big end of the banking industry protected from competition and disruptive innovation.

As with much reform, there is a rather detailed and clearheaded effort coming out of Congress, which gets much less attention than it should relative to the Administration's preliminary thoughts. Watch Rep Jeb Heainsarling's Choice Act for Dodd Frank reform. (Speaker Paul Ryan's "Better Way" plan is the one to watch on everything else. Though corporate taxes are getting a lot of news, the personal tax plan is more important.)

The core of the Choice act offers a clever carrot: Much less regulation in return for much more capital.

A reader asked me a while ago how I would deal with the extraordinary complexity of the Dodd-Frank act. I answered that fixing it was easy  -- a trained parrot could do it. Just teach the parrot to say "More capital. More Capital. More capital."  

Which is all to introduce a little essay I wrote that was serendipitously published last week in the Chicago Booth Review, "A way to fight bank runs—and regulatory complexity" It's a much edited version of an earlier blog post, and offers some suggestions on how even the Choice act might be improved. I'd copy it here, but the Booth Review team did such a nice job of formatting it that I'll hope to get you to click the link instead.

(I've been doing this for a while with the Chicago Booth Review, and they now have a page with all my essays.)


***

The Wall Street Journal covers the issue well, in A Trump-Cohn Financial Rewrite,

Gary Cohn, who runs Mr. Trump’s National Economic Council, told the Journal that Dodd-Frank’s costs and complexity have restrained bank lending. 

True, but dangerous. I hear lots from the banker community that capital requirements restrain lending, which is not true. If the "costs" are costs of capital, we're in trouble.

The better way to prevent a panic is to have simple but firm rules along with high capital standards that make banks better able to endure losses in a downturn. That’s the philosophy behind House Financial Services Chairman Jeb Hensarling’s proposed financial reform, and it’s the direction the Trump Administration should take even without legislation.

But will it? The President signed his directives Friday after meeting with bank executives, and he didn’t help himself politically by praising the “great returns” BlackRock has earned. The point is to help the larger economy, not bank profits.

Especially not bank profits juiced by lots of leverage, which the government will bail out next time around, because "everybody knows" it was a huge mistake to let Lehman go under.

As a Goldman Sachs alum, Mr. Cohn has a particular burden not merely to relax regulations that are the bane of big banks while doing little to relieve the burden on their smaller competitors and tech start-ups. J.P. Morgan’s Jamie Dimon and Goldman Sachs’s Lloyd Blankfein have argued against a wholesale repeal of Dodd-Frank, which has given these large incumbents a competitive advantage.

As I warned above.

There is a huge difference between knowing how to run a bank -- Goldman Sachs, say -- and knowing how to run a banking system, or an economy.  Banks hate competition. Economies love it. We have seen this failure many times before when successful bankers or businesspeople move to government.  I hope Mr. Cohn can quickly put on a different set of goggles.

Although Mr. Cohn said the U.S. has the highest bank capital standards in the world, they aren’t as high as they should be. The trade he could offer Wall Street is less burdensome regulation in return for higher capital standards. The banks would then be freer to lend money while taxpayers have more protection against the next bailout. This would have the added political benefit of blunting the inevitable Democratic attacks that Messrs. Cohn and Trump are trying to help Wall Street.

And that is precisely the clever deal offered by the Choice plan.

***

The Executive Order itself is interesting. (I'm trying to follow through on looking up primary sources, as I became aware in reading about corporate taxes just how much commentary spins on thin air.)

The key part is this

By the power vested in me as President by the Constitution and the laws of the United States of America, it is hereby ordered as follows: 

Section 1. Policy. It shall be the policy of my Administration to regulate the United States financial system in a manner consistent with the following principles of regulation, which shall be known as the Core Principles: 

(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth; 

(b) prevent taxpayer-funded bailouts; 

(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry; 

(d) enable American companies to be competitive with foreign firms in domestic and foreign markets; 

(e) advance American interests in international financial regulatory negotiations and meetings; 

(g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.  

I notice some key omissions. It does not say that the regulatory structure should be primarily aimed at eliminating financial crises or runs. It lists textbook "moral hazard and information asymmetry" so that's not just to avoid wonkish language.

That would have been helpful. Financial regulation combines (as usual) three goals: 1) stop runs and crises, which are fueled by short-term runnable debt, 2) consumer and investor "protection," an effort of debatable value though more important in an industry rendered less competitive by regulation, 3) transfer money and give cheap credit to political constituencies. Saying the primary goal is 1 would allow a big deregulation effort on 2 and 3.

"Moral hazard and information asymmetry" sound like textbook excuses for regulation. In fact most of the moral hazard and information asymmetry in financial markets are government failures, not market failures. Moral hazard results since the government guarantees bank debts, so banks have an incentive to take too much risk. Information asymmetry is forced by regulation such as rules that they can't use lots of available information in making loans. T

hese words apply to analyses of insurance markets, when customers may know more than insurers, and therefore markets break down. I'm scratching my head to think of widespread "moral hazard" and "information asymmetry" in unregulated bank operations. Are we really worried that people know more about their finances than banks can possibly know, given the ability to mine all your records with impunity (free market information asymmetry) so that nobody can get a loan because only the secret deadbeats apply? Just when did this start being the prime worry about unregulated financial markets? Just what are we talking about here?

Or is this a throwaway line that somebody lifted from an economics textbook so that it wouldn't sound like the Administration denies all regulation is bad? That impulse is good, but a better choice of words might have been wise in an executive order that will be cited for all kinds of both good and mischief.

It says "vibrant" but not "competitive" or "innovative," in the sense of new companies being able to offer new and better products to consumers. Foreign companies are great sources of innovation and competition! US cars are a lot better because of the pressure from Japanese imports, and French smartphones are a lot better because Apple is allowed to sell there. What's good for the goose is good for the gander. Competition in (d) and (e) sounds like pure mercantilism, and an inducement to lower, say, capital standards, and raise implicit guarantees, for existing big banks  to "compete," i.e. extract rents.

It also reads as if nobody had thought about fixing Dodd-Frank before. How about

"(f) Review existing analysis of the Dodd Frank Act, reform proposals, and legislation pending before Congress?" 

But all of this minor whining within the gray area. The refreshing part of the source document is that it is pretty vague, and if someone of my tastes -- or Rep. Hesarling's-- were implementing it, what we want to do could fit in well.  The dangerous part is that another reading is equally possible.

This page provides links to popular overviews of behavioural economics

http://economicspsychologypolicy.blogspot.com.au/p/blog-page_6932.html

The FCA Occasional papers that we have spoken about here a lot are available below. The first one introducing behavioural economics has lots of relevant information.

http://www.fca.org.uk/your-fca/list?ttypes=Occasional+Papers&

A very lengthy set of links that I have been maintaining on public policy is available below

http://economicspsychologypolicy.blogspot.co.uk/2012/04/behavioural-policy-readings.html

The behavioural change wheel by Susan Michie is a terrific resource for a wideranging account of behavioural change.

http://www.ncbi.nlm.nih.gov/pubmed/21513547

A report written by IGEES on potential for behavioural economics in Ireland is below

http://igees.gov.ie/wp-content/uploads/2013/10/Behavioural-Economics-1.pdf

http://igees.gov.ie/wp-content/uploads/2016/10/Applying-Behavioural-Economics-in-Irish-Policy-October-2016.pdf
Some further links below, grouped by topics that we have discussed here:

On the house and administration plans to reform the corporate tax, and my struggles to figure it out.

Larry Kotlikoff, "With Some Tweaks, The Democrats Can Love The House Tax Plan."

..the corporate tax reform, which is the most significant part of the House plan and represents a major and long overdue shift toward consumption taxation.  ...  there are two ways to tax consumption, C. You can either tax it directly (e.g., via a retail sales tax or a personal consumption tax) or indirectly by taxing everything available for consumption, namely output plus imports, less investment plus exports.

Greg Mankiw, "A Three-Point Tax Reform"

Consider the following tax reform:
1. Impose a retail sales tax on consumer goods and services, both domestic and imported.
2. Use some of the proceeds from the tax to repeal the corporate income tax.
3. Use the rest of the proceeds from the tax to significantly cut the payroll tax.
...
As I understand it, this plan is, in effect, what the Republicans in Congress are proposing.

William G. Gale, "Understanding the Republicans’ corporate tax reform"

The DBCFT is essentially a value-added tax (VAT), but with a deduction for wages.  ...The deduction for wages makes the DBCFT progressive, relative to a VAT. It only taxes consumption financed out of holdings of capital, whereas a VAT burdens all consumption. 

..A final concern is that the corporate reform proposals described above, ... would reduce federal tax revenue..Rough estimates suggest that setting the DBCFT rate at around 30 percent for all businesses would eliminate the revenue shortfall. 

The revenue point, I think, makes it clear though just how far from a VAT or consumption tax this is.  From the Tax Policy Center, Federal government revenues are  $3 trillion—about 17.5 percent of GDP. Thus, a pure VAT of 17.5% with no Federal personal income tax, estate tax, excise tax, corporate tax, or anything else is revenue neutral.  Current corporate taxes are 10 percent of government revenue and 1.5 percent of GDP over the past five years -- tiny. So if this tax needs to have a 30 percent rate just to generate 1.5% of GDP, its base must be tiny.

If we tax corporate sales, but allow corporations to deduct wages, the cost of inputs, investments (i.e., they buy forklifts for the factory, and can deduct the cost of the forklift), interest payments, and dividend payments then... there is nothing left! So, I infer that the tax base is only on interest and dividend payments.

(At least the house proposal promises to end the differing treatment of dividends and debt payments. This is excellent! The subsidy to debt is distorting our financial system towards too much debt, and we all just saw what too much debt leads to.)

The border adjustment appears clever. It makes it look to trade warriors that we've passed a big tariff, though it amounts to the rule that everyone pays sales tax in their own place of residence. Sort of. See also

Martin Feldstein, "The Shape of US Tax Reform;" Feldstein also in Wall Street Journal, "The House GOP’s Good Tax Trade-Off"

Since a border tax adjustment wouldn’t change U.S. national saving or investment, it cannot change the size of the trade deficit. ... the exchange rate of the dollar must adjust... 

I wish I knew better what we are all talking about. A historian's son, I gravitate to primary sources. The only one linked to in any of the above is Paul Ryan's Better Way tax plan. That plan has a great statement of principles and lots of great ideas for the tax code. But it is dated last June. It's a document of principles made for the campaign, back when everyone thought Mrs. Clinton would be president. I presume an actual house tax plan may look a lot different.  I looked hard at Whitehouse.gov and could find no mention of taxes. The Trump campaign plan only mentions cutting the corporate rate to 15%.

What are we talking about really? Or is this all a kerfuffle interpreting the latest tweets? Are we just making this up?

Bottom line, I am beginning to understand that whatever it is these commenters are talking about has the potential to be a big improvement on the current system. However, it suffers from much of the structural defect of current Federal taxation. It's obscure. Yes, as Kotlikoff explains, you can either tax consumption directly or sneak it in by taxing its ingredients. But it would be a whole lot better for our political system -- both enacting a better tax system, keeping it from becoming overgrown with barnacles, and making continued progress towards a consumption-based tax -- if it were what it appears, not a tax that looks like one thing (corporate tax with a tariff barrier) but sneakily is something else (consumption tax with VAT treaty).  Economists emphasize the difference between who pays a tax and who bears the burden of taxation (see my last post), but politically it is much better, when you can, to have who pays actually be who bears.

Two views along this line:

Tyler Cowen:

I say anything complicated they will just screw up, and the lack of transparency in the plan means eventually it will lead to a tax hike and furthermore a good deal of favoritism and rent-seeking along the way.  Best hope is simply that they cut the corporate tax rate and don’t do much else on that front.

Holman Jenkins, "Incompetence Is the Norm" (an excellent piece on other matters)

In the short weeks since Mr. Trump was elected, the vision of clean, straight tax reform has gone out the window. Instead of merely lowering or, ideally, ending the corporate rate, we may get a 20% border-adjustment tax to go along with a 20% corporate income tax. That is, two taxes instead of one, which Congress can immediately start peppering with exemptions, exclusions and deductions.

So does one support or not an improvement with so many asterisks? Fortunately, we are not at the stage of support or not. The big pot in Washington is still stewing with ingredients.

On the one hand, there is a lot that I and my fellow bloggers don't know. Just what were the political constraints that went in to the better way tax plan? Paul Ryan, acting alone, would surely eliminate the corporate tax, income tax, estate tax, and so on, and enact a simple consumption tax or VAT in its place. So, what produced the house plan? Is the same constellation of forces still in place? What better could actually be achieved? I don't know, and it's a mistake to criticize the process and personalities too heavily if one does not know. That, alas, is the job of historians.

On the other hand, this is the one chance in my lifetimes to really reform the tax system. If we're ever going to dramatically simplify, eliminate the corporate tax, really move to a broad-based consumption tax instead of an income tax, separate revenue raising from subsidies and transfers, and so on, if not now, when? Republicans, who have been talking about these things through their years in the wilderness, now have majorities in house, senate, and have the presidency.  They let this chance slip with Bush II. Will it return?

So as I read it these are still ideas floating around, and the chance for all of us to ask for more dramatic, simple, and transparent tax policy is still there.

Distribution.  Larry Summers doesn't like the proposal,

the corporate cash flow tax is supported by some experts in both political parties. However, it has four major — probably fatal — flaws. 

Three out of the four are about income distribution. Given the utter confusion all around on how this tax would work, who would bear the tax (again, see my last post - who is hurt by a tax has little to do with who bears the tax), the interaction of corporate and personal taxes (like my questions about interest and dividend taxation above), and that we are also thinking about how prices, wages, interest rates, and stock prices change in the general equilibrium, it seems to me a little presumptuous to have any clear idea about the distributional consequences of this tax.

Economists are supposed to first to understand incentives, then understand efficiency, then understand who actually bears the burden of taxes, and then move on to distribution. Distribution also collects hundreds of different polices, from the progressivity of personal taxation, the welter of deductions, the effects of social programs, and effects on prices, like how cheap things are at Walmart. Starting with a distributional analysis of every individual policy seems like a big mistake even if one wants to craft redistribution, which one must always do understanding the disincentives that redistribution engenders.

Or, as Kotlikoff summarizes a more extensive analysis,

Summers needs to get a grip. 

In my last post, I skated over many of the details one must think about in moving to a consumption tax. There are many book length tax plans that work out such systems:

Kotlikoff's preferred tax plan, summarized in "You're hired!,  quoting the Forbes article,

a) eliminates the corporate income tax, the personal income tax, and the estate and gift tax, b) introduces a value added tax (VAT), a progressive personal consumption tax on top consumers that exempts consumption financed by labor income, an inheritance tax that kicks in after the receipt of $5 million, and a Co2 emissions tax of $80 per ton, c) eliminates the ceiling on the FICA payroll tax, and d) provides a $2,000 annual payment to each U.S. citizen.

As you can tell, it's not a pure ideal, but merges ideal taxation with some of Kotlikoff's ideas on what subsidies and tax-based redistribution are desirable or politically necessary.

My Hoover colleagues Bob Hall and Alvin Rabushka also have an excellent detailed Flat Tax plan that fills in the details of another way to achieve a progressive consumption tax. Recommended.

Update. 

Alan J. Auerbach, Michael P. Devereux, Helen Simpson, Taxing Corporate Income, NBER working paper.

Alan J. Auerbach Michael P. Devereux, Cash-Flow Taxes in an International Setting.

Alan Auerbach,  Michael P. Devereux Destination-Based Cash Flow Taxation

I should have found these long ago, serious academic papers describing the border-adjusted cashflow tax. I have only read the abstracts, but they seem predicated on taxing corporate "rents," an interesting and perhaps somewhat fragile restriction that I doubt will make it in to policy. (In the usual use of the term it means that competitive businesses would face no tax.)

Jason Furman, Douglas Holtz-Eakin, Gary Clyde Hufbauer, Adam S. Posen, Caroline Freund, Joseph E. Gagnon, Sherman Robinson and Chad P. Bown, Border Tax Adjustment and Corporate Tax Reforms (panel)

Brad Setser, Dark Matter. Soon To Be Revealed? On the border adjustment, and the fact that the US seems to be running a successful hedge fund, borrowing cheap abroad and investing with great returns. Much of that involves tax strategies which will be upended. Also the post where I found the above and HT Marginal Revolution, the best economics blog by far.