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Archive for April, 2012

A recurring theme of recent happiness research is that when it comes to seeking pleasure, people should “buy experiences rather than things.” People are happier when they skip the shiny baubles (or new high heels) and do something memorable.

Over at the Atlantic, Garett Jones gives one economic explanation for this finding: memories are a durable good.

[M]emory, wholly intangible, is quite durable.

People often shrink from driving to a distant, promising restaurant, flying to a new country, trying a new sport–it’s a hassle, and the experience won’t last that long. That’s the wrong way to look at it. When you go bungee jumping, you’re not buying a brief experience: You’re buying a memory, one that might last even longer than a good pair of blue jeans.

Psych research seems to bear this out: People love looking forward to vacations, they don’t like the vacation that much while they’re on it, and then they love the memories. Most of the joy–the utility in econospeak–happens when you’re not having the experience. …

[P]eople treat memories somewhat like durables, but most of us could do a better job of it. Yes, it’ll be a hassle to find that riad in Marrakech when your GPS fails you, but complaining about it with your sibling years later will be a ton of fun. Get on with it.

A corollary: if memory really is a durable, then you should buy a lot of it when you’re young. That’ll give you more years to enjoy your purchase.

So it’s worth a bit of suffering to create some good memories, since the future lasts a lot longer than the present.

That’s good advice. But I can’t help thinking that people who are unhappy on vacation are doing it wrong. Then again, maybe my recollection is blurred by selective memory?

In any case, the little feline above is a great example of Garett’s thesis. Since I was a child, I had always wanted to see an ocelot in the wild. And last summer, Esther and I found one in Brazil. Our entire encounter lasted about 15 seconds and produced a couple of mediocre photos. But until my brain gives out, I will always cherish seeing the little critter.

P.S. About 20 years ago, I recall someone attributing the “memory is a durable good” idea to Milton Friedman. If anyone’s got a cite to that, please post in the comments.

P.P.S. Will Wilkinson also comments on Garett’s thesis.

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My Twitter feed is, quite rightly, full of links to this remarkable episode of Golden Balls, the British game show that puts contestants in a classic game theory dilemma of “splitting or stealing” the grand prize:

If you have time for more, here’s another famous episode, with a very different display of strategy and tactics:

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Here’s another fun infographic by CBO’s Jonathan Schwabish and Courtney Griffith. This one surveys all the mandatory spending programs (aka entitlements) in the federal budget and how they have changed over the past two decades:

P.S. In case you missed it, here’s Jon and Courtney’s overview of the entire federal budget. They also have nice graphics on discretionary spending and federal revenues.

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Talking Tax Reform on the PBS Newshour

Here’s an interview that Alice Rivlin and I recently did with Jeffrey Brown on the PBS Newshour. Spoiler: Both Alice and I think the tax code needs to be fixed. 

P.S. Most TV interviews involve starting into a camera and listening to a voice in your ear. So this was a fun change with Alice, Jeff, and me together.

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The Federal Budget in One Picture

The Congressional Budget Office has assembled a great collection of infographics on the budget situation. Here’s an overview of the entire budget:

 Image

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After another grueling tax season, my colleague Howard Gleckman is understandably frustrated with America’s complex tax code. And with instructions like this, who can blame him?:

Your ATNOL for a loss year is the excess of the deductions allowed for figuring the AMTI (excluding the ATNOLD) over the income included in the AMTI. Figure this excess with the modifications in section 172(d), taking into account your AMT adjustments and preferences (that is, the section 172(d) modifications must be separately figured for the ATNOL).

So who is to blame? Feckless politicians? High-priced lobbyists? Social engineers?

Well, yes, yes, and yes. But Howard looks deeper and asks why Americans don’t rise up against the scourge of needless complexity. Why are we so complacent?

His answer: TurboTax. By buffering us from complexity, tax preparation software allows that complexity to persist:

[T]echnology both inoculates us from much of the complexity of tax filing and reduces compliance costs. But, more importantly, it immunizes the politicians from the consequences of their decisions that lead to this madness.

Taking this to its logical extreme, Howard calls (tongue-in-cheek) for a one year moratorium on tax preparation software and, for good measure, paid preparers too.

I’m not ready to go that far. But I would like to point out that the dynamic Howard points out is everywhere around us. Give people cellphones that make it easier to call for help, and they will get into more trouble in the wilderness. Offer people low-fat cookies, and they will eat more. Put people in more fuel-efficient cars, and they will drive more. Give people software to do their taxes, and they will accept greater complexity. It’s practically a law of nature.

P.S. Over at Republic Report, Matt Stoller levels a more serious charge at Intuit, the producer of TurboTax. Quoting from its SEC filings and lobbying data from Open Secrets, he argues that the company has been lobbying against efforts to make it easier for citizens to file without the help of software.

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The tax code is chock full of credits, deductions, deferrals, exclusions, exemptions, and preferential rates. Taken together, such tax preferences will total almost $1.3 trillion this year.

That’s a lot of money. But it doesn’t necessarily mean that $1.3 trillion is there for the picking in any upcoming deficit reduction or tax reform.  In fact, even if Congress miraculously repealed all of these tax preferences, it would likely generate much less than $1.3 trillion in new resources. 

Where did I come up with that number? For a short piece in Tax Notes, I simply added together all the specific tax expenditures identified by the Department of Treasury; these were reported in the Analytical Perspectives volume of the president’s recent budget.

Treasury doesn’t report this total for a good, technical reason: some provisions interact with one another to make their combined effect either larger or smaller than the sum of their individual effects. As a result, simple addition won’t give an exact answer. That’s an important issue. In the absence of a fully integrated figure, however, I think it’s useful to ballpark the overall magnitude using basic addition.

In your travels, you may find other estimates that do the same thing but come up with a figure of “only” $1.1 trillion. Why is mine higher? Because it includes some important information that Treasury reveals only in footnotes. Treasury’s main table estimates how tax expenditures reduce individual and corporate income tax receipts; those effects total $1.1 trillion. But they also have other effects. Refundable credits like the earned income tax credit increase outlays, for example, and some preferences, like those for employer-provided health insurance and alcohol fuels, lower payroll and excise taxes. I include those impacts in my $1.3 trillion figure.

Budget hawks and tax reformers have done a great job of highlighting tax expenditures in recent years. I fear, however, that we have lifted expectations too high. Just because the tax code includes $1.3 trillion in tax preferences doesn’t mean it will be easy to reduce the budget deficit or pay for lower tax rates by rolling them back. Politics is one reason. It’s easy to be against tax preferences when they are described as loopholes and special interest provisions. It’s another thing entirely when people realize that these include the mortgage interest deduction, the charitable deduction, and 401(k)s.

Basic fiscal math is another challenge. Tax expenditure estimates do not translate directly into potential revenues. Indeed, there are several reasons to believe that the potential revenue gains from rolling back tax preferences are less than the headline estimates. One reason is that the estimates are static—they measure the taxes people save today but do not account for the various ways that people might react if a preference were reduced or eliminated; those reactions may reduce potential revenues. Second, most reforms would phase out such preferences rather than eliminate them immediately. That too reduces potential revenues, at least over the next decade or so.

Finally, the value of tax preferences depends on other aspects of the tax code, most notably tax rates. If a tax reform would lower marginal tax rates, the value of deductions, exclusions, and exemptions would fall as well. Suppose you are in the 35 percent tax bracket. Today, each dollar you give to charity results in 35 cents of tax savings—a 35-cent tax expenditure. If the top rate were reduced to 28 percent, as some propose, your savings from charitable donations would be only 28 cents. The 20 percent reduction in tax rates would thus slice the value of your tax expenditure by 20 percent. That means that the revenue gain from eliminating the deduction—or any other similar tax expenditures—would also shrink by 20 percent, thus making it harder for tax expenditure reform to fill in the revenue gap left by reducing tax rates.

My message is thus a mixed one. Tax expenditures are very large—$1.3 trillion this year alone if you add up all the individual provisions – and deserve close scrutiny. But we need to temper our aspirations of just how much revenue we can generate by rolling them back. It isn’t as though there’s an easy $1.3 trillion sitting around. In coming months, the Tax Policy Center will explore how to translate tax expenditure figures into more reasonable estimates of the potential revenues that tax reformers and budget hawks can bargain over.

P.S. For an interesting analysis of how individual tax preferences interact with each other, see this piece by TPC’s Dan Baneman and Eric Toder.

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