Tag: Taxes

The Supremes Reject Notion that Spending Can Occur Through the Tax Code

As regular readers may recall, I believe that many tax preferences — but not all — resemble spending programs run through the tax code. The tax exemption for municipal debt, for example, essentially taxes investors (who get lower interest rates than they could from other taxable investments) and gives the money to state and local governments (who pay lower interest rates than they otherwise would). It’s effectively taxing and spending, except the money never reaches Washington.*

As my colleague Bob Williams notes over at TaxVox, that perspective took a legal hit the other day when the Supreme Court ruled that state tax breaks are fundamentally different from spending programs, at least for purposes of legal standing:

In 1968, the Court ruled that citizens may sue to stop the government from spending that violates the Constitution, in the specific case supporting religious activity (Flast v. Cohen). Citizens had standing to sue, the Court concluded, because the challenged spending directly affected taxpayers who fund government programs.

The current case, Arizona Christian School Tuition Organization v. Winn et al., involves not direct government spending on an unconstitutional activity but rather a tax credit that serves the same purpose as a spending program. Arizona allows taxpayers to claim a non-refundable credit of $500 a year ($1,000 for couples) for donations to qualified school tuition organizations (STOs), which then use the funds to support tuition payments to private schools. The original suit claimed that STOs violated the First Amendment’s prohibition of government activities promoting the “establishment of religion” because tuition payments could go to parochial schools.

In a 5-4 decision, the Court ruled that the challenged tax credit was not government spending and therefore the claimants lacked the standing to sue allowed in Flast. Unlike spending, the majority argued, tax expenditures do not necessarily affect the tax bills of others; that is, the government won’t necessarily raise taxes to cover the revenue cost of a tax credit. In fact, the opinion claimed, “the purpose of many governmental … tax benefits is ‘to spur economic activity, which in turn increases government revenues.’” And further, private school tuition assistance might induce some students to switch from public to private schools, thus reducing government costs. Since tax expenditures thus don’t necessarily harm taxpayers, they have no right to sue.

As Bob notes, several of those arguments seem rather weak, particularly since spending programs can also “spur economic activity” or induce students to change schools.

You can find Justice Kennedy’s decision (joined by Roberts, Scalia, Thomas, and Alito), Justice Scalia’s concurrence (joined by Thomas), and Justice Kagan’s dissent (joined by Ginsburg, Breyer, and Sotomayor) here.

* High-income taxpayers also get some benefit from the exemption. I haven’t looked at the specifics recently, but for some testimony I gave back in 2006, my CBO colleagues estimated that the breakdown was about 20% benefit to high-income taxpayers, 80% benefit to states and localities.

President Obama’s Tax Proposals

President Obama’s budget proposal has been overshadowed by the earthquake and tsunami in Japan, a new military action in Libya, and continuing battles over the 2011 budget, not to mention tiger blood and March Madness.

But one of these days, Washington will turn its attention back to a core piece of business – budgeting for 2012 and beyond. To help with that process, my colleagues at the Tax Policy Center recently released an analysis of the tax proposals in the President’s budget.

The report discusses the president’s numerous proposals and puts them into larger budget context.

As I’ve noted before, one unfortunate feature of our tax system is that it is riddled with uncertainty. There are now major temporary cuts in the taxes on individual incomes, corporate income, payrolls, and estates. As a result, it can sometimes be confusing to talk about potential policy changes. Should changes be measured relative to tax law as now written? Relative to the tax law in place in 2011? Or something in between?

The first table in the TPC report measures the ten-year budget impact of the president’s proposals against three benchmarks. Relative to current law, the president is proposing a $2.4 trillion tax cut over the next decade. That’s because he would extend most of the tax cuts that expire at the end of 2012, including the 2001 and 2003 tax cuts for “middle-income” taxpayers, the AMT patch, and the estate tax at 2009 levels. Those extensions total $3.1 trillion, which he would partly offset by $700 billion in revenue increases.

Relative to current policy — which we define as 2011 tax law excluding the payroll tax holiday and temporary investment incentives — the president’s proposal turns out to be a $2.0 trillion tax increase. That’s because he would not extend certain provisions of 2011 tax law, most notably the lower rates on “upper-income” taxpayers and the lower estate tax.

Confusingly, the president uses neither of these benchmarks to measure his proposals. Instead, he assumes that the upper-income tax cuts expire, while the middle-income ones get extended. Under that assumption, the president’s tax proposal amounts to a $700 billion tax increase.

So there you have it. Depending on how you look at it, President Obama is proposing to cut taxes by $2.4 trillion over the next decade, raise them by $700 billion, or raise them by $2.0 trillion. It all depends on your benchmark.

Time Management and the Budget Debate

What features tiger blood, March madness, federal deficits, and Stephen Covey’s time-management advice? My latest column at CNN Money:

America faces trillions of dollars in deficits in coming years. But Congress has been reduced to funding the government three weeks at a time so it can fight over mere billions.

Why is Congress spending so much time and effort on so little money? Are those billions bigger than they appear because cuts today will carry forward into further cuts tomorrow? Is today’s skirmishing part of a larger political strategy to rein in our deficits?

Maybe.

But I think good old-fashioned human psychology is a bigger factor. Congress faces the same time-management challenge that plagues me and, I suspect, you. The urgent crowds out the important.

Productivity guru Stephen Covey popularized the “important versus urgent” distinction, showing how we should spend our time versus how we do.

People spend too much time on “waste” and “distraction,” immersed in unimportant issues. Waste and distraction can be fun, of course, and are welcome in small doses. Charlie Sheen’s rantings about his “tiger blood” are entertaining. And no one should berate President Obama for filling out his NCAA bracket. But let’s hope he didn’t spend too much time on it.

Today Congress faces a different problem. It seems stuck in the realm of “crisis and necessity,” to use Covey’s terms. Unless lawmakers pass yet another spending bill, many agencies will run out of money on April 8. Unless Congress increases the debt limit, America will be unable to pay some of its bills.

Urgent and important, these issues demand congressional attention. As Samuel Johnson might have said, nothing focuses the mind like the prospect of a government shutdown and subsequent hanging by the voters.

And therein lies the problem. America faces much larger fiscal challenges — a broken tax code and an unsustainable build-up of debt. But these exceptionally important challenges aren’t urgent. Neither has a deadline. And so they languish, prompting commission reports and congressional hearings but little action.

Budget watchers often lament that we won’t fix our budget until struck by an actual fiscal crisis — skyrocketing interest rates or a failed Treasury auction. Indeed, some experts sometimes seem to be wishing for such a crisis so that long-run budget issues finally become urgent.

Let’s hope it doesn’t come to that. Rather than wait for (or cheer on) an actual crisis, we have a better option: leadership. The art of leadership is getting people to pay heed to what’s important, even when it isn’t urgent. President Obama, for example, enacted his health reform legislation one year ago because he pushed for it, not because it was politically urgent.

We need the same leadership on budget issues and tax reform. Our elected leaders must make time to address our long-run challenges, even as they address the urgent problems of the day. The Senate’s bipartisan “Gang of Six” has taken an important first step, working together to turn the recommendations of the president’s fiscal commission into draft legislation.

But more leadership is needed. That’s why 64 senators — 32 Democrats and 32 Republicans — wrote to Obama last week urging him to take the lead in deficit-reduction discussions in which everything would be on the table: discretionary spending, entitlement programs and tax reform.

Let’s hope the president takes the senators up on this request. He is in a unique position to elevate the budget debate from day-to-day urgency mode to the realm of leadership, where it belongs.

Six Thoughts on Taxes and Small Business

This morning I appeared at hearing of the Select Revenue Measures Subcommittee of the House Ways and Means Committee on “Small Businesses and Tax Reform.” My full testimony, “Tax Policy and Small Business,” is available here.

My opening statement:

America’s tax system is needlessly complex, economically harmful, and often unfair. Because of a plethora of temporary tax cuts, it’s increasingly unpredictable. And it fails at its most basic task, raising enough money to pay our government’s bills. For these reasons, the time has come for fundamental tax reform.

Such reform could have far-reaching effects on every participant in the economy, including small businesses. To provide a foundation for thinking about these effects, my testimony discusses basic facts about the relationship between tax policy and small business. I make six main points:

1. Today’s tax code generally favors small businesses over larger ones. Provisions such as Section 179 expensing, graduated corporate tax rates, and special, low capital gains taxes benefit businesses that are small in terms of investment, income, or assets.

2. Many small businesses also benefit from the opportunity to organize as pass-through entities. S corporations, limited liability companies, partnerships, and sole proprietorships all avoid the double taxation that applies to income earned by C corporations.

3. The benefits of organizing as a pass through are not limited to small businesses. Some large businesses adopt these forms as well. Although these large firms account for a tiny share of pass-through entities, they represent a substantial fraction of pass-through economic activity. For example, only 0.3 percent of S corporations had revenues above $50 million in 2005, but they accounted for more than a quarter of S corporation income. The situation is even more extreme with partnerships. Only 0.2 percent had revenues above $50 million, but they accounted for 57 percent of partnership income. Lawmakers should therefore take care not to assume that all pass throughs are small businesses.

4. Small businesses face disproportionately high costs in complying with the tax code; they are also more likely to understate their income and underpay their taxes. High compliance costs thus disadvantage responsible small businesses, while the greater opportunity to evade taxes can advantage less responsible ones.

5. An ideal tax system would collect enough revenue to pay for government services while minimizing distortions to economic activity. To the extent possible, economic fundamentals, not tax considerations, should drive business decisions about organizational structure. By treating pass throughs and C corporations differently, our current tax system deviates from that ideal.

6. In discussing reform proposals, it is important to distinguish between businesses—a broad category that includes pass throughs—and corporations, which generally means C corporations. Many tax reform proposals would reduce business tax preferences and use the resulting revenue to cut corporate income tax rates. Such revenue-neutral reforms could lessen the disparity in tax treatment between pass throughs and C corporations. Pass throughs would see their tax burden increase (since they would lose some tax preferences but not benefit from the rate reduction), while C corporations would, on average, see their taxes decline.

Tax Reform: The Wheels Are Beginning to Turn

My first column for the Christian Science Monitor (first appeared here):

America’s tax system is broken. It’s needlessly complex, economically harmful, and often unfair. It fails at its most basic task, raising enough money to pay government’s bills.

Because of Washington’s love affair with temporary tax cuts, it’s also increasingly unpredictable. Americans deserve a simpler, fairer, more pro-growth tax system.

It won’t be easy. Any reform creates losers as well as winners – and losers always let their representatives know how they feel. But Washington is giving hopeful signs that the journey toward tax reform – the first in a quarter century – may finally be under way.

In his State of the Union message, President Obama called on Congress to reform individual and corporate taxes. He reiterated the offer at a press conference Feb.15. Democrats and Republicans have been holding hearings and drafting legislation. The president’s fiscal commission and the Domenici-Rivlin debt-reduction task force (on which I served) have proposed serious reforms, taking hatchets to the trillion-dollar thicket of tax preferences that complicate the code and distort economic activity.

Fixing the corporate tax code looks to be the easier task. Federal and state levies average more than 39 percent, the second highest in the world; we’ll take the top spot in April when Japan slashes its rate. Add in rising concern about America’s international competitiveness and slow economic recovery, and you have a recipe for a bipartisan push to cut corporate tax rates.

Given America’s budget woes, however, we can’t afford to reduce future revenues. Unless Washington demonstrates remarkable spending discipline, we will need all our existing revenues, and more, to cover the costs of an aging population and rising health-care costs.

That’s where real reform comes in. Along with high corporate tax rates, we also have very generous tax breaks, leaving much corporate income untaxed or facing only low effective rates. Far better would be a system with fewer tax breaks and lower rates across the board.

Such reform would reduce distortions and allow economic fundamentals, not taxes, to guide business decisions. As Mr. Obama put it: “Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate … without adding to our deficit.”

Congress should pursue the same strategy with an even bigger challenge, the personal income tax. Dozens of exemptions, exclusions, deductions, and credits complicate the code and make Swiss cheese of our tax base. These preferences mean that trillions of dollars of income go untaxed. As a result, Congress must impose higher rates on the income that does get taxed, weakening economic growth and treating unfairly tax-payers who don’t milk every preference.

Policymakers should cut those tax preferences, use some of the resulting revenue to cut tax rates, and use the remainder for deficit reduction. A good starting point would be the fiscal commission’s proposal to eliminate many tax preferences and use the savings to deep-six the hated alternative minimum tax, cut tax rates across the board, and boost revenues by $80 billion a year. That plan would also make taxes more progressive while retaining slimmed-down deductions for mortgage interest, retirement savings, and charitable giving.

Tax reform will be a journey. The landmark reform in 1986 capped several years of effort. The same is likely to be true this time. If our leaders want to enact the landmark tax reform of 2013, they need to start sharpening their hatchets now.

Does the President’s Budget Raise Taxes or Cut Them?

Here’s a quick multiple choice quiz about President Obama’s new budget.

Over the next ten years, would the budget:

     a. Increase taxes by $819 billion

     b. Cut taxes by $2 trillion

     c. Increase taxes by $1.6 trillion

     d. All of the above.

If you answered (d), you have a fine future as a budget watcher.

As noted expert Johnny Depp demonstrated some months ago, it all depends on how you measure things.

For starters, you might compare ten-year tax revenues under the President’s proposal ($38.747 trillion) to what they would be if there were no new policy actions ($37.928 trillion under the President’s notion of “baseline” policy). That gives you answer (a), a tax increase of $819 billion.

But wait. The President’s baseline assumes that many expiring tax provisions get extended. They include the “middle-income” tax cuts originally passed in 2001 and 2003 and now scheduled to expire after 2012, the “patch” of the alternative minimum tax through 2011, and 2009-style estate tax law through 2012. If you treat extending those provisions as a policy choice—a defensible view since it will take new legislation for them to happen— you should score them not as freebies, but as a $2.845 trillion tax cut. Offset that by the President’s $819 billion in tax increases and you get answer (b): the budget calls for roughly a $2 trillion tax cut.

But wait again. Congress and the President recently had a chance to let the “high-income” tax cuts expire. And they didn’t. And they enacted a new estate tax law for 2011 and 2012 that’s lower than 2009 levels.  Those are now (temporarily) the law of the land. So you might view them as being current policy. And relative to that policy, the President’s baseline represents an $807 billion tax increase. Add in the other $819 billion and you get answer (c), a tax increase of about $1.6 trillion.

The President’s budget would thus cut taxes by $2 trillion relative to current law, but raise taxes by $1.6 trillion relative to current policy. Or something in between if, like the President, you prefer to use a baseline that’s a mix of current law and current policy.

Does your head hurt yet?

If not, please move on to our extra credit short essay question. How can we square any of these figures with the Administration’s talking point that the budget reduces future deficits by $1.1 trillion with about two-thirds of that coming from spending cuts?

Think about that for a moment. On its face, that would seem to imply that one-third of the deficit reduction comes from revenue increases. And that would put the revenue increase somewhere in the neighborhood of $350-400 billion.

Which bears no resemblance to any of our earlier figures.

I am not sure of the exact calculation behind the talking point (anyone?), but it appears that the main issue is that the administration identifies only some tax increases as being related to deficit reduction. For example, the budget includes an additional $328 billion in revenue to finance new transportation projects. Those revenues are not counted as reducing the deficit. And the budget includes another $56 billion in higher revenues from “program integrity” efforts – i.e., administrative actions to improve enforcement of the tax code. As best I can tell, that revenue, too, is not counted as part of deficit reduction (perhaps because budget experts are hesitant about giving credit for purely administrative changes).

With those two adjustments, it appears that the deficit-reducing revenue increases, as the Administration measures them, total about $425 billion over the next ten years. Which is still more than a third of the $1.1 trillion in deficit reduction. But maybe we are close enough for partial credit.

Update 2/17: Turns out the administration’s figure for deficit-reducing tax provisions is $375 billion. How do you get there? Three steps: The President’s budget would raise revenues by $819 billion. However, it would also increase outlays (due to refundable tax credits) by $115 billion. So the net budget impact of provisions that affect revenue is $703 billion. Subtract the $328 billion in unspecified funding for surface transportation, and you have $375 billion (which does include the program integrity efforts). As this shows, a recurring nu(is)ance in budget accounting is that tax provisions often have spending impacts. (Not to mention all the tax preferences that are hidden spending.)

Double Tax Rates, Quadruple the Economic Harm

At last Wednesday’s hearing on tax reform, three witnesses–Rosanne Altshuler, Larry Lindsey, and I–invoked a famous rule of thumb about taxes. We each told the Senate Budget Committee that high tax rates are disproportionately harmful for the economy and that:

If you double tax rates, you quadruple the resulting economic harm.

If a 10% tax rate on some activity does a certain amount of economic damage, for example, then it’s a reasonable guess that doubling the tax rate to 20% would multiply that damage by a factor of four.

It was nice to hear such agreement among the panelists, but judging by the senators’ reaction, this idea is not intuitive. So let me try to explain with a simple example.

Suppose there are five people who might buy a pizza. The first person values a pizza at $14.50, the second at $13.50, the third at $12.50, the fourth at $11.50, and the fifth at $10.50.

If pizzas cost $10, all five people will buy one. The first person gets a net benefit of $4.50, since the pizza was worth $14.50 to her, but she paid only $10. The second person gets a benefit of $3.50, and so on. Add it all up, and the benefit of the pizza market is $12.50 (= $4.50 + $3.50 + $2.50 + $1.50 + $0.50).

Now suppose that the government levies a 10% tax on pizzas; that lifts the price to $11. Now only the four consumers who place the highest value on pizzas will buy them; Mr. $10.50 won’t buy. The four remaining consumers now benefit by $3.50 + $2.50 + $1.50 + $0.50 = $8.00 from buying pizza. The government collects $4.00 in revenue, so the total economic benefit of the pizza market is $12.00, $0.50 less than before. That 50-cent loss falls on the hungry guy who no longer buys a pizza. The $1 loss for each of the four buyers isn’t lost to the economy; instead, it transfers to the government.

Now suppose, instead, that the tax is 20%; pizzas now cost $12 each, and only three consumers will buy. Their total benefit is $4.50 (= $2.50 + $1.50 + $0.50). The government collects $6.00 in revenue, so the total economic benefit is $10.50. That’s $2.00 less than without a tax.

So there you have it. When you double the tax from 10% to 20%, you quadruple the economic harm from $0.50 to $2.00.

Why does this happen? Because doubling the tax doubles the number of consumers who drop out (from 1 to 2) and doubles the average economic value of the pizza sales that never happen (from $0.50 to $1.00). Two times two is four, so the overall effect is to quadruple the economic harm.

Put another way, the value of the second lost pizza ($1.50) is three times larger than the value of the first one ($0.50). So the economic harm of the 20% tax is four times the harm of the 10% tax.

This is a big deal when you design a tax system for the entire economy. To avoid needless economic harm, you should aim for low tax rates and the broadest possible tax base. If you need to raise $6.00 from our mythical food economy, for example, it would be far better to levy a 5% tax on pizzas, tacos, and hamburgers, than a 20% tax on pizzas alone.

I hope that whets your appetite for base-broadening tax reform.

P.S. Did I cook the pizza example to get the increase to be exactly a factor of four? Of course. In the real world, the actual multiple will vary. If the fifth person valued the pizza at only $10.25, for example, the loss from the 10% tax would have been $0.25, and the loss from the 20% tax would have been seven times larger at $1.75. Conversely, if the fourth person valued the pizza at only $11.00, the loss from the 20% tax would have been $1.50, only three times larger than the $0.50 loss from the 10% tax. The double/quadruple rule of thumb assumes an even spread of consumers and their values — a reasonable starting assumption until you have more information.

Seven Ideas to Guide Tax Reform

This morning I appeared at a Senate Budget Committee hearing, “Tax Reform: A Necessary Component for Restoring Fiscal Sustainability.” My full testimony, “Cutting Tax Preferences Is Key to Tax Reform and Deficit Reduction,” is available here.

Here’s my opening statement:

America’s tax system is broken. It’s needlessly complex, economically harmful, and often unfair. It fails at its most basic task, raising enough money to pay our government’s bills. And it’s increasingly unpredictable, with large, temporary tax cuts not only in the individual income tax, but also in corporate, payroll, and estate taxes.

For all those reasons, our tax system cries out for reform. Such reform could follow many paths. Some analysts recommend the introduction of new taxes—such as a value-added tax, national retail sales tax, or pollution taxes—to supplement or replace our current system. Those ideas are worth serious discussion, but in today’s testimony I would like to focus on a more traditional approach to reform: redesigning our income tax.

I would like to make seven main points:

1. Tax preferences pervade the tax code. These preferences total more than $1 trillion annually, almost as much as what we collected from individual and corporate income taxes combined. These preferences narrow the tax base, reduce revenues, distort economic activity, complicate the tax system, force tax rates higher than they would otherwise be, and are often unfair.

2. The first step in any income tax reform should be to broaden the tax base by reducing or eliminating tax preferences. Doing so would help level the playing field among different economic activities, reduce the degree to which taxes distort economic behavior, and make taxes simpler to file and administer.

3. Policymakers can use the resulting revenue – potentially hundreds of billions of dollars each year – to lower tax rates, reduce future deficits, or both. Lowering tax rates would further reduce the economic distortions created by the tax system and would encourage economic growth. Reducing future deficits would help tame our federal debt, which threatens to grow to unsustainable levels in coming years and thus poses a significant risk to our economy.

4. Many tax preferences are effectively spending programs run through the tax code; that poses a challenge for how we talk about tax reform and the size of government. Any cuts to these spending-like preferences will increase federal revenues, but will reduce government’s influence over economic activity. Advocates of smaller government are often skeptical of proposals that would increase federal revenues. When it comes to paring back spending-like tax preferences, however, an increase in revenues may actually mean that government’s role in getting smaller.

5. Other tax preferences, however, are not spending programs in disguise. More and more observers have embraced the idea that tax preferences resemble spending through the tax code. That’s a promising development. Unfortunately, that enthusiasm has sometimes led to the misconception that all items identified as tax preferences are akin to spending. That’s understandable given that these items are often called “tax expenditures.” But it is not correct. Preferential tax rates on long-term capital gains and qualified dividends, for example, are (imperfect) efforts to limit the double taxation that can occur when investment income is subject to both personal and corporate taxes. Such provisions should be viewed and evaluated as tax measures, not as hidden spending programs.

6. Many tax preferences provide benefits to millions of taxpayers; they aren’t just “tax breaks for special interests.” For example, the three largest tax preferences are the exclusion for employer-provided health insurance, preferences for retirement saving, and the mortgage interest deduction. Americans should understand that to get the benefits of tax reform – lower rates, simpler taxes, and a more vibrant economy – they will need to give up some popular tax breaks.

7. Policymakers should re-evaluate the design of any tax preferences that they decide to keep. Some preferences are needlessly complex and could be simplified; that’s true, for example, of the preferences aimed at low-income workers and families. Other preferences might operate more efficiently as credits rather than as deductions or exclusions. Credits can provide more uniform incentives to particular activities – e.g., homeownership – than deductions or exclusions whose value depends on whether a taxpayer itemizes and what tax bracket they are in.

Bottom line: By reducing, eliminating, or redesigning many tax preferences, policymakers can:

  • Make the tax system simpler, fairer, and more conducive to America’s future prosperity;
  • Raise revenues to finance both across-the-board tax cuts and much-needed deficit reduction; and
  • Improve the efficiency and fairness of any remaining preferences.

P.S. The other witnesses included two other Tax Policy Center folks — former director Rosanne Altshuler and co-founder Gene Steuerle — and Larry Lindsey. All our testimonies are available here.

Johnny Depp and the New Tax Law

When the President signs the big tax deal later today, will he be cutting income taxes for most families or sparing them a tax hike? Will he be slashing the estate tax or resurrecting it?

Those questions have a clear answer in the official budget world: the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 cuts both income taxes and estate taxes. Period. Why? Because current law is the official yardstick. And that law says that the 2001 and 2003 income and estate tax cuts will expire when the ball hits bottom in Times Square.

But existing law is not the only reasonable benchmark. Another way to look at things is to ask how taxes will change from 2010 to 2011. Viewed that way, extending the 2001 and 2003 cuts is not a tax cut; it’s a way to prevent a tax hike. And the estate tax deal is actually a tax increase: there was no estate tax in 2010, but there will be one—though small by historical standards—in 2011. In addition, as noted by my Tax Policy Center colleague  Bob Williams, many low-income families will see their taxes go up because the gains from 2011’s payroll tax holiday will be more than offset by the expiration of 2010’s Making Work Pay tax credit.

Depending on your perspective, then, today’s tax deal is anything from a tax increase to a major tax cut. It all depends what baseline you use for measuring.

Which brings us to Johnny Depp. Depp plays the title character in the new film “The Tourist”. He doesn’t know anything about budget baselines, but he does learn how perceptions depend on what your benchmark is:

Inspector: Now, you wish to report a murder?
Depp: No, some people tried to kill me.
Inspector: I was told you were reporting a murder.
Depp: Attempted murder.
Inspector: Ah, that is not so serious.
Depp: No, not when you downgrade it from murder. When you upgrade it from room service, it’s quite serious.

Should today’s tax deal be compared to room service or to murder? I leave it up to you, dear reader, to decide.

Steve Martin Gives a Lesson on Sales Taxes

Steve Martin–yes, the wild and crazy guy–has a new novel. “An Object of Beauty” tells the story of Lacey Yeager, an up-and-comer in New York’s art world in the mid-1990s. I’m 19% of the way through the novel (up to location 779 in Kindle-speak), during which Lacey has been climbing the ladder at Sotheby’s, the famous auction house.

Thus far, my favorite passage depicts how sensitive wealthy art collectors can be to taxes. Sotheby’s has sent Lacey to Washington to deliver a painting to the winning bidder in a recent auction. After getting off her train, Lacey heads over to Georgetown:

The white door of the brownstone swung open with a faint jingle-bell tinkle, and Saul Nathanson waved with full panic shouting, “Don’t come up the steps!”

So many interpretations. Was he shouting at Lacey, the painting, or the taxi driver? “Don’t step on the walkway!” Was the concrete wet? But Saul ran toward them more sheepish than commanding, and they all stayed put.

“I thought by having you bring the picture,” Paul said, panting, “that we were taking delivery of the picture in Washington. But it seems to be disputable that this might constitute taking delivery in New York.”

Lacey looked at Saul, then at the taxi driver. He pulled his cap back and scratched his head. “Oh yeah, sales tax,” he said.

“What?” said Lacey.

“My wife sells jewelry. There’s always a sales tax issue.”

Saul pointed at the driver with a silent “bingo.” “We’ve got to have it shipped to us from New York by a reputable carrier.”

Lacey muttered, “I’m reputable.”

“But unlicensed. We’ve got a questionable situation here. You’ve got to take it back. It’s a difference of almost ten thousand dollars,” said Saul.

The statement hung in the air, until the taxi driver said, “You mean that box is worth a hundred and fifty thousand dollars?”

Lacey turned to him. “Who are you, Rain Man?”

Saul was balanced on his toes. “I’m so sorry, Lacey, we tried to turn you around, but we just learned it an hour ago. Here’s something for you”–he handed her a folded hundred-dollar bill–“and don’t let the painting touch the walkway.”

“I’ll be a witness,” said the grinning taxi driver, implying there could be another tip due.

“I can’t even invite you in,” said Saul. Then he turned to the half-opened door. “Estelle! Wave hello to Lacey!”

Estelle poked her head out of an upstairs window. “Hello, Lacey. Saul’s insane!”

Or maybe he’s highly rational?