I am confused about carried interest

Does anybody have a good reason for the carried interest tax exemption?  It seems to entirely benefit a group that already has very large incomes and doesn't really seem to be in the same class as investment capital that was risked in the marketplace.  Paul Krugman notes how much benefit a retired investment adviser can reap from this exemption:

 First, $13 million of the total was carried interest, which gets taxed like capital gains but is really just commissions that receive special treatment for no good reason. No profits taxes were paid on that income; right there, a minimally defensible tax code would have levied $2.6 million more in taxes on Romney.

I am completely agnostic as to the identity of the person in question -- it would be just as concerning if Barack Obama had millions in carried interest in his tax forms.  The real question is how this exemption (which is commissions) can stimulate economic growth.  I understand the argument for preferential treatment of capital gains.  I even understand how capital gains can end up making moving between houses expensive for no really good reason.  So I comprehend how this can be a matter of academic debate.

But can anyone explain why commissions should get preferential tax treatment?

Admittedly an extreme case

One of my biggest objections to the wildly popular contrarian school of journalism is the way that, rather than following a line of reasoning to an unexpected conclusion, many writers obviously start out with an absurdly counter-intuitive position then try to come up with a list of reasons to justify it.

You know the sort of thing I'm talking about, stories with titles like:

Newt Gingrich's three marriages mean he might make a strong president -- really

Student Loans and Emergencies

From the Incidental Economist's comment section:

As a resident manager of David’s House , a beautiful private nonprofit home away from home for families of sick children at Dartmouth Hitchcock Hospital , like a Ronald McDonald House, one of the saddest and most frustrating things I saw was student loan collectors that would not work with parents who had run out of forbearance time to reduce or temporarily waive student loan payments despite their medical emergencies. Even the federal government will operate this way when a student loan goes into collections. Will not work with the debtor at all. We had collection agencies tracking down parents at our facility because, of course, parents who were living there temporarily needed to make the phone number known instead of keeping it confidential. The student loan crisis: another problem that you economists should address.

The decision to make student loans immune to bankruptcy is going to be a problem in the long run, at least so long as the totals become so high.  I meet a surprising number of students with > $100,000 in debt.  It's one thing to allow large debt to occur as part of developing human capital.  But the punishment meted out to people when their lives go wrong seems way disproportionate to the decision to borrow.  This is even more true when you look at the employment rate among Americans without a college degree.

It makes education into a high stakes gamble (at for those who are not already wealthy) instead of a public good that we provide to improve human capital.

Tax Reform

I am normally not the biggest fan of Greg Mankiw as I am concerned that his anti-tax stance reduces the focus on how we can use a strong taxation system to build a strong economy.  But this post is one that I found myself agreeing with more than I disagreed with.  In particular, note:

Consider the tax on gasoline. Driving your car is associated with various adverse side effects, which economists call externalities. These include traffic congestion, accidents, local pollution and global climate change. If the tax on gasoline were higher, people would alter their behavior to drive less. They would be more likely to take public transportation, use car pools or live closer to work. The incentives they face when deciding how much to drive would more closely match the true social costs and benefits.

And this:

Consider the deduction for mortgage interest . . . Subsidies to homeowners are, in effect, penalties on renters — after all, someone has to pick up the tab. But there is nothing wrong with renting. And once one acknowledges that renters are poorer, on average, than homeowners, the mortgage interest deduction becomes even harder to justify.

These are the sorts of places that tax reform might make a significant difference in building a better system.  It is true that tax reform in these areas would be politically unpopular.  But, in the long run, it might make for a much better and more transparent tax system.

Why I believe in safety nets

Megan McArdle argues:

Who among the parents fighting so hard to get their kids into a good school is going to volunteer to have their kid give up the slot in the upper middle class? People are willing to accept a certain amount of slippage, but only as long as it comes with added job security (government) or special fulfillment (the ministry, the arts)--and even in the latter cases, Mom and Dad will often be strenuously arguing against following your calling. But how many doctors and lawyers would simply glumly accept it if you told them that sorry, junior's going to be an intermittently employed long-haul trucker, and your darling daughter is going to work the supermarket checkout, because all the more lucrative and interesting slots went to smarter and more talented people?

The lack of a safety net makes falling in social status a serious problem.  When basic medical care is linked to being a productive member of the middle class, people are willing to make enormous sacrifices to protect themselves from falling in social class.  If we mitigate the problems and torments of extreme poverty then maybe it won't be seen as terrible to have people shift around in social class.

Now it is true that my focus is on absolute levels of deprivation.  But if the you can be poor with dignity and have basic needs met then maybe that will make us a little more willing to address inequality in general.

Copyrights and patents are intrusive government regulations

They are monopolies that restrict the rights of businesses to make and sell certain products. What's more, they're built around non-rival goods with origins that are often difficult to trace (since virtually all 'creative' works are derived from other earlier ones).

This doesn't mean intellectual property laws are bad. They aren't. Society could not function well without them. What this does mean is that these laws have a cost. They distort markets, raise prices, divert resources from productive areas to legal departments and inhibit creative destruction and the founding of new businesses. We have to balance these costs against the social benefits of encouraging creation and dissemination.

Recently, though, we've lost sight of that need for balance, in no small part because those costs are born by consumers and small companies that lack the wherewithal for PR and lobbying. In the area of copyrights (patents are a subject for another day), we've allowed ludicrous extensions, let lawyers grab works from the public domain, retroactively granted copyrights to works whose creators have been dead for decades, and tried to greatly restrict the concept of fair use.

It's important to remember that the very notion of owning an idea is a useful absurdity. Ideas are intangible and indistinct with no real demarcation from other ideas. It is tremendously useful for a society to encourage creativity and give creators a protected period to disseminate their works, but if we start thinking of protecting intellectual property as an end to itself, all we have left is the absurdity.

Works moved out of the public domain?

Seriously?

The Supreme Court on Wednesday upheld a federal law that restored copyright protection to works that had entered the public domain. By a 6-to-2 vote, the justices rejected arguments based on the First Amendment and the Constitution’s copyright clause, saying that the public domain was not “a category of constitutional significance” and that copyright protections might be expanded even if they did not create incentives for new works to be created. The case, Golan v. Holder, No. 10-545, considered a 1994 law enacted to carry out an international convention. The law applied mainly to works first published abroad from 1923 to 1989 that had earlier not been eligible for copyright protection under American law, including films by Alfred Hitchcock, books by C. S. Lewis and Virginia Woolf, symphonies by Prokofiev and Stravinsky and paintings by Picasso.

 How exactly does this act to promote the creation of new works?  Any possible incentive to the creaters is long past.  Notice that this period ends in 1989 -- how many people would have created more works jsut in case they could get copyright protective in a foreign market 23 years later? 

I am not against intellectual property rights (rather the converse) but I question is need for such long term protection for pieces that are decades old.  At some point the public domain is the right place for these older works, as it gives them a chance to be rediscovered by people looking for inexpensive content.  That is probably a better legacy for the creators than any minimal stream of royalties could be at this late date.

Another post on Unions

Erik Loomis is distressed by a piece in the Atlantic asking about the plastic surgery benefit for teachers in Buffalo, New York. Erik focuses on the fact that the teachers union is willing to give up the benefit if a new contract settlement can be reached and that there are many legitimate reasons to have reconstructive surgery available (e.g. a child who had serious facial damage after a car accident).

Jordan Weissmann, the author of the Atlantic article, focuses on the salaries of the teachers (mean of $52K) and the deadlock on contract negotiations. In some ways, I think everyone is missing the big picture. Teachers are professionals who work for a contract. We do not micromanage the compensation packages of hedge fund managers, either. It is true that teachers are paid directly by the government. But the carried interest exemption (which sets tax rates at 15%) is just as much of a decision to spend money.

After all, selectively taxing one group less is the same as a subsidy.

Put this another way, we could pay teachers less if we made their salaries exempt from income tax. Now this does not mean that specific benefits can't be renegotiated. Nor do I want to deny the reality of increasing health care costs (which are a problem everywhere in the United States right now) which can make benefits that were once reasonable seem excessive. But is it really constructive to focus on whether the teacher's health care plan is correctly designed as a matter of public policy. Or should be be looking at the long term drivers of malaise in our society.

Of course, looking at the long term drivers of malaise means facing up to our low tax rates (guarenteed to be a painful discussion) and dealing with the rate of growth in medical costs.

Reading assignments

Busy week but I wanted at least to throw out a few links to things I'd like to be writing about:

Felix Salmon's take on a subject is always appreciated, particularly when he's focusing on a topic we try to keep an eye on (like for-profit schools).

And staying on the education beat, Dana Goldstein collects almost two centuries worth of teacher-bashing.

The last few news cycles have brought lots of pieces about Bain. A few of them have been really interesting.

I've come across a site for the truly hardcore pop culture nerds, particularly those obsessed with stand-up comedy. There's even an intellectual property angle.

And I have got to make time for this.

Worthwhile Canadian Post

Go and read. The implications for long term care in Canada and the United States is a scary prospect given the retiring baby boom and the need to find ways to care for older adults.

Frontiers in Car development

Some interesting legal questions:

All told, the changes may not best the leap from horses to cars, but they are big enough to undermine many of the legal systems we rely on for things like insurance, not to mention criminal law. If a car doesn't require a driver, can a 12-year-old "drive" to his friend's house? Can a drunk person drive home from a bar? How will insurance work if people share driverless cars? Courts and legislators will be sorting those out for years to come.

Actually, I kind of like the idea of cars that can take home intoxicated people safely. Living in a community with a lot of college students, sub-urban road planning, and a lot of bars, I see a lot of accidents. I worry that some of them might have been prevented with better transportation options. Now, obviously, my preference would be improvements in public transit. But driverless cars might well be a good alternative for people who would like to go out but have limited options for coming home.

Tyler Cowen on Health Care

Tyler Cowen points out a potentially serious issue with health care costs.

The U.S. median wage for 2010 was $26,363. The average health care insurance premium today is over $15,000 and by 2021 it may be headed to $32,000 or so (admittedly that estimate is based on extrapolation). Therein lies the problem

Of course, to me this number just argues for single payer health care (which can bend the curve) and innovation to try and bring cost controls to the medical profession.  Now is it not contradictory to argue for both innovation and greater government  control?  In a sense it is, except that the market has formidable barriers to entry that cannot be easily be navigated.

So, for example, a team of nurses and a pharmacist could not form a company to treat twenty and thirty years for their minor health issues.  Nor do we have a clear distinction between major medical insurance (what if I end up in the ER) versus standard health care insurance (which removes the cost from the patient and is subsidized by the government).

On the other hand, maybe I am discounting the possible benefits of the exchanges?

Health Care on Nights and Weekends

Aaron Carroll has a smart point about the limitations of the current office visit model of health care.  He looks at the percentage of people who have trouble getting care on nights and weekends. It seems that we don't do especially well, even on international standards:

Yeah, we beat Canada. But we lose to almost every other country. Almost two thirds of Americans have trouble getting care on nights, weekends, and holidays. You know what? A significant amount of the week is filled with nights, weekends, and holidays. Especially if you don’t want to miss work. It’s fine to believe that people should try and see the doctor in the office. But if you want that to happen, then you need the office to be available. If retail clinics do a much better job in that respect, you can’t complain when people make use of them

I think that there are two points of interest here.  One, while Canada has a laudable health care system, it has flaws too and so a straight out effort to clone it might overlook opportunities to do better.

The second is that these visits don't even have to be expensive.  Nurses in small retail clinics (you do not even have to have a medical doctor) could diagnose a lot of minor conditions, refer patients to emergency rooms in a crisis, and give instructions for minor care.  Now consider that Pharmacies are open 24 hours in a lot of places.  They have a medical professional with a doctorate behind the counter who is an expert on medications.  Why could pharmacists not prescribe based on the Nurse's diagnosis.  Both pharmacists and nurses are cheaper than medical doctors, used to shift work, and highly trained professionals.

Why could they not do a lot more to simultaneously reduce costs (as clinics are inexpensive, provide an alternative to hyper-expensive emergency rooms, and could get patients seen faster) and improve service (would you spend $75 to get easy treatment for an infection at 11 pm on a Saturday night?).

Why aren't me trying out these sorts of innovations?

Thinking about past and future

while listening to an Austrian techno-musician do dance mixes of the great Lil Hardin Armstrong.

I thought I was done with IP stories for a while

But I can't let this one pass unnoted. From Propublica (via Felix Salmon):

Right now, if you want to read the published results of the biomedical research that your own tax dollars paid for, all you have to do is visit the digital archive [1] of the National Institutes of Health. There you’ll find thousands of articles on the latest discoveries in medicine and disease, all free of charge.

A new bill in Congress wants to make you pay for that, thank you very much. The Research Works Act [2] would prohibit the NIH from requiring scientists to submit their articles to the online database. Taxpayers would have to shell out $15 to $35 [3] to get behind a publisher’s paid site to read the full research results. A Scientific American blog said it amounts to paying twice.