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NYU Tax Policy Colloquia - Kenneth Scheve, Allison Christians

Last week (Feb. 17) our colloquium guest was Yale political scientist Kenneth Scheve, with his paper Envy and Altruism in Hard Times. The paper reports U.S. survey evidence (the next draft will also have French survey evidence that for the moment remains "in the field") showing that respondents' views about hypothetical policy changes, such as protectionism for a particular industry, a tax on bankers, or raising income tax rates to reduce the deficit, depends on the income ascribed in the question to the group that would be hit by the tax. Thus, it confirms that people not only care about the own-consumption consequences of policy changes, but also are swayed by "envy" (desire to lower the incomes of those above them) and "altruism" (desire to raise the incomes of those below them).

In keeping with the paper's title, the survey was done during "hard times" (2009), but since there's no control from, say, 2006, we don't learn anything about preferences during such times as compared to those that are seemingly non-hard.

My reactions to the paper included questioning the use of "envy" upwards as part of the explanatory framework. The term sounds as if ripped from the op-ed pages of the Wall Street Journal, though in fact Scheve takes it from a specific model in the prior poli sci literature. The evidence in the paper does nothing to support "envy" as the explanation as compared to, say, a behind-the-veil utilitarian ethos in which it's altruism up as well as down, based on the view that all people's welfare counts equally and that people generally have similar utility functions characterized by declining marginal utility.

Yesterday our speaker was Allison Christians of Wisconsin Law School (home of the current U.S. political ground zero). Her paper, Hard Law, Soft Law, and No Law: The World of International Tax Dispute Resolution, provides what one might argue is too balanced an account of the issues posed by the extreme paucity of publicly available information regarding how treaty disputes (e.g., concerning transfer pricing) involving two countries and a multinational that is active in both end up being resolved. What I mean by "too balanced" is the following. It's certainly desirable, and indeed highly preferable, to give a fair and full account of the issues presented by various tradeoffs (e.g., how public to make the terms of a dispute resolution when all the parties are averse to publication and they have some defensible as well as socially dubious grounds for preferring confidentiality). And the paper does express Christians' view that there is way too much confidentiality, permitting huge swathes of public policymaking to be done in secret, with no one but the insiders knowing what's happening). It also hints at her skepticism, which I believe she has discussed more fully elsewhere, regarding the OECD's role in developing non-binding legal norms (i.e., "soft law"). But insofar as she appears to want to make these very points very strongly, arguably the paper could push them harder (and make her point of view clearer) without either degenerating into a rant or being "unfair and unbalanced."

I am persuaded that the secrecy issue is a significant one. My main disagreement goes to the paper's characterization of the main issues likely to be raised by what is effectively extensive secret and nonprecedential lawmaking (or at least case resolution). It emphasizes concerns that OECD-type countries are being greedy and grabby of tax base at the expense of non-OECD countries, whom they want to keep in the dark regarding the extent to which all this is going on. It seems to me, however, that the non-OECD countries are doing just fine so far as transfer pricing, the use of debt, etc., are concerned to place taxable income in locations where it is lower-taxed. Thus, I would surmise that the main issue raised by the secrecy of treaty-related administrative decisions in the U.S. and other countries goes to internal politics and agency costs - what are these guys deciding on whose behalf, why, are cozy insider relationships distorting outcomes, etcetera.

Full post as published by Start Making Sense on February 25, 2011 (boomark / email).