The time I went to see a House Ways and Means Committee tax hearing

At this session, the Ways and Means Committee was hosting a show and tell, as roughly forty Congresspersons took three minutes each to talk about their favorite proposal for tax reform. Here, I’ll talk about one common pattern for single-industry reforms.

I went to the hearing partly for serious purposes that are off-topic here, but also as a bit of tourism. Most of the work of Congress happens in committees that conduct business in the office buildings that flank the Congress building itself. You’re free to attend. Security-wise, there’s a metal detector at the building entrance, but it’s much easier to enter the House Ways and Means Committee hearing room than, say, your flight to Chicago.

The House Ways and Means Committee hearing room

The House Ways and Means Committee hearing room.

 

I thought it was a great time, but I understand if you’d like a summary of the arguments presented instead of watching the full two hour, 40 minute video. There were a few different forms of proposal, but the one I want to focus on can be summarized in two paragraphs and an image I GIMPed up.

Think back to your first day of Econ 101. You learned that if I own a widget and value it at $10, and you want the widget and value it at $20, then an exchange will occur, let’s say at $15, leaving both of us $5 better off. From my perspective as the seller, beyond selling my widget, I produced $5 of added value for you that I did not capture. I’m some kinda charity over here, an essential engine of the economy that deserves to recapture a tiny fraction of the uncaptured value I add for others via a tax subsidy.

This argumentation form can be used by almost any industry, because as long as it is engaged in voluntary trade with the public it produces uncaptured surplus for the public. All it takes to turn this into lobbying is doing some back-of-envelope calculations to quantify the surplus. To give a local example, have a look at this PDF from the DC DOT  justifying why they want to spend millions of public dollars improving private rail lines solely owned and operated by private companies. At the hearing, there was mention of railroads, mechanical insulation makers, contract research labs, and all sorts of other corners of the economy we don’t spend much time thinking about.

My intent is not to say that this argument is wholly invalid—maybe we want to subsidize patent holders, or solar panel producers, or people operating happy farms—but to clarify that the justification for the tax cut is often tediously identical across industries.

A parody image with a car sharing logo and the caption "We create surplus. So shouldn't law  be bent to favor us?"

My mock-up rendering of what most advocacy ads boil down to.

So that’s the rationale for many of the tax reforms aimed at a specific group. With regards to such reforms, we can divide the voting public into two camps:

  • Parties that benefit from the reform.
  • Parties that have no idea that the reform exists.

To give an example that came up several times, 1 hour 24 mins into the video a Representative from Colorado gives a shout-out to H.R. 2903, the Craft Beverage Modernization and Tax Reform Act of 2015 (herein the CBMTRA).

He points out that this bill regarding craft beverages is supported by brewers with a major presence in his district, such as Miller-Coors and Anheuser-Busch. Toward the end of the hearing a representative from Surly Brewing came out to speak. The bill has some parts about tax accounting that benefit only some small businesses, but by my reading the key provision is a change in how some capital expenses are treated under tax law, shifting them from being depreciated over years to being immediately expensed.

Before I told you about this proposal, were you aware that the CBMTRA even existed? As you read about expensing versus depreciation, is your outrage meter registering anything? That’s why this bill has relatively decent odds of passing.

This is a well-tested strategy, and tax law is littered with the results: single-industry benefits that few people outside of that industry know exists, let alone care to challenge.

Next time, I’ll show some interesting examples from Form 3800.

The time I saw Ezra Klein talk about presenting research

This post and the next are leading up to a discussion of IRS Form 3800. Why should you care about Form 3800, a form you likely have no personal dealings with? Because a form nobody cares about is a great place to hide a lot of things.

I’ll start the story by telling you about the time I saw Ezra Klein, the head of an increasingly popular news outlet. Somebody in one of the World Bank’s research groups invited him to present an explainer to the researchers about how they can get their news out to the public.

He opened strong: we eggheads like to complain that the public just wants fluff and isn’t interested in detailed or technical work, but if the public doesn’t care about your work it’s your fault, not theirs. There’s an interesting and accessible lede to every story, and it’s up to you to find it (and not bury it in academic-level detail).

If you think it’s an especially interesting story, then there’s nothing wrong with directly and politely contacting journalists and telling them about it. Finding recent papers with something new and newsworthy is exactly the kind of thing Ezra’s journalists are trying to do all day.

One WB researcher had a paper on pirates. Does having military officers on board deter them? Yes, he found, but only at a scale such that it’s not deemed cost-effective. Ezra was delighted—pirates!

Another had a paper about textbook provision in countries that rarely see textbooks. She found that teachers don’t hand them out to the whole class as one would expect, because they don’t expect to ever see another textbook shipment again and the conservation/stockpiling instinct kicks in. Ezra was less excited. Maybe the correct audience is not the general public, but the community of people who do procurement and distribution.

The third example was mine, during the Q&A after his talk. I’m writing a paper about a technical issue of great import to the U.S. public—the one tweak that could save the U.S. taxpayer billions of dollars. But you can’t understand it until you know a lot of background about the existing state of a technically complicated system (even more nuanced than Form 3800). How does one get over the hump of background information? Ezra’s reply: you don’t. He thinks that my target audience is not the public at all, but maybe even just one person, the Secretary of the Treasury. Representative democracy and an informed public is great, but we also have to respect the time of our readers, who have lives outside of public policy.

To summarize my read of his position, we can explain anything to the public in a manner that will hold their interest, but that doesn’t me we should. The journalist side doesn’t have the bandwidth to cover it all, and the public doesn’t have the bandwidth to digest it all—even Congressional staffers don’t have that much time.

This is a little more nuanced than the typical story that the public is too dumb or too apathetic, which Ezra rejected at the outset. Rather, it’s a question of the finite resource constraint of a 24-hour day. Readers will only pay attention to so many issues, especially given that they have only negligible power to change anything, and people who curate and prepare issues for the public can only hit so many topics given their own resource constraints. Technocratic issues have an inherent disadvantage on these fronts, because they cost more in time and effort for readers and authors, and the public typically has an even more minuscule influence over them.

Next episode, I’ll visit the House Ways and Means Committee, where a good deal of the more obscure policy is discussed. This is where the lack of public bandwidth will start to matter.

Managing complexity: encoding the tax code

I put together an interactive tool to explore the U.S. individual tax calculation.

Here is a screenshot of the most basic tax form. You can click through to https://b-k.github.io/1040.js and add components for kids, check the boxes to add components for a mortgage, student loans, rents and royalties, and so on.

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What inspired me to develop it this far is that I showed an early draft to friends and colleagues, and for the most part their reaction was complete indifference.

Taxes are not something you understand, I was told, they are something you do. Every year, you stuff numbers into a black box, and the black box spits out a single owed/refunded number, and that’s what taxes are. There is never any need to intuit how the tax system works.

But tax law is of central importance in governance—nobody jokes about the inevitability of death and parking enforcement. And title 26 of the US Code (herein, the tax code) is arguably the most complex part of the law. What does it take to be an informed citizen or policymaker in this context? Continue reading

The space between the signal and the action

In the game-theoretic world, the gunner never shoots: the other side looks at the options down the game tree, realizes that one action will lead to his or her getting shot, and doesn’t take that action. In Game Theory textbooks, cases never go to court: both sides calculate the risk-adjusted expected payoff from trial, and if it is positive for one hyperrational side, then it is negative for the other hyperrational side, and a settlement can be calculated based on that. In both cases, knowledge that an event could occur largely has the same effect as the event itself.

But there was an eight-year glitch in the game-theoretic matrix, which has given us an interesting chance to see what happens between when a signal of a legal position is sent and when the position actually hits.

Here in 2014, the Supreme Court handed down a ruling regarding the patentability of software, Alice Corp v CLS Bank. The first draft of the ruling was published in 2006.

The question in the 2006 case of Labcorp v Metabolite was whether a patent of this form was valid:

1. draw the patient’s blood,
2. measure the level of a chemical in the blood, and
3. correlate that level to the risk of a disorder.

Steps 1 and 2 are by themselves not patentable, because they are physical processes but are entirely not-novel. Step 3 may be a novel correlation, but it is an abstract scientific discovery, and one may not patent abstract ideas or research results. So is the combination of the physical-but-quotidian steps 1+2 with the abstract-but-novel step 3 a physical and novel invention?

The Court’s decision (PDF) was one sentence long: Continue reading

Bureaucrats at their desks

ImageDutch photographer Jan Banning has traveled the world documenting the consequences of war, the homeless and impoverished, and victims of human trafficking. Asked to photograph a story on the administration of international development aid, something he thought to be “un-photographable,” Banning and a journalist set out to visit hundreds of local government offices worldwide. Between 2003 and 2007, they met civil servants in eight countries on five continents. “Though there is a high degree of humour and absurdity in these photos,” Banning says, “they also show compassion with the inhabitants of the state’s paper labyrinth.”