An Interview with Joel Slemrod on Tax Policy

Aaron Steelman of the Richmond Federal Reserve interviews Joel Slemrod of the University of Michigan, mainly on tax policy issues. Here are some thoughts from Slemrod:

On current taxation of employer-provided health insurance: \”Well, it certainly reduces the after-tax price of health insurance for people. The problem is that it reduces the price below the true social cost, so that people acting in their own family\’s interest, are, at the margin, buying insurance where the value to them is actually less than the true cost. In a word, we are subsidizing high-deductible, low copay insurance policies and, given the upward trend we are seeing in the fraction of our gross national product that goes to health care, I think we ought to be moving toward reducing or eliminating such subsidies. Not only that, it\’s a very unattractive sort of subsidy, because the subsidy rate is dependent on the household\’s marginal tax rate, so the subsidy rate is highest for the highest-income people. And I just don\’t think that even people who would argue for a subsidy would favor such regressivity if they were designing a subsidy scheme from scratch. The reason to be wary about abandoning the subsidy is that it supports the system of employer-provided health insurance, which spreads risks across employees and offsets the problem of adverse selection that can plague health insurance markets; before we eliminate the subsidy entirely, we need to have other policies in place to prevent a collapse of efficient markets for health insurance.\”

On how high-income people react to high tax rates: \”My own view … is that certainly high-income people notice taxes, and they react to taxes in ways that lower their exposure to taxes. The evidence for taxes substantially affecting what one might call \”real\” behavior, such as labor supply or savings, is not as strong as the evidence regarding another class of behaviors we might label \”avoidance.\”\”

On how saving is affected by fear of nuclear war: \”I have three articles that try to estimate whether, when people seriously think there\’s a chance of a nuclear conflagration, this belief affects their saving behavior. In short, do people believe we ought \”to eat, drink, and be merry, for tomorrow we die?\” To test this hypothesis I looked at aggregate saving over time in the United States, across countries, and micro data within the United States, and in all three cases found that when people think, or profess to think, there\’s a chance of a nuclear war, their saving rate goes down, just as economic theory would predict.\”

On how people time their deaths to reduce estate taxes: \”We looked at estate tax return data from the history of the U.S. estate tax and found that when the estate tax was going to change — go up or down — in an anticipated way, then the distribution of deaths around that date was not symmetric. When the tax rate was going to increase, more people died before the rate rose, and when the tax rate was going to be lowered, people held on and more people died after the decrease. Since we wrote the paper, the general \”death elasticity\” finding has been replicated using data from episodes in Australia and Sweden when they ended their estate taxes. Those studies found evidence that people delayed their death to save their heirs\’ money, in some cases, millions and millions of dollars.\”

Mark Bils on price measurement

Brent Meyer of the Federal Reserve Bank of Cleveland has a nice interview with Mark Bils of the University of Rochester, focusing on the subject of price measurement. Here are some comments from Bils:

On why price measurement matters: \”My interest in price measurement really came out of discussions I had with [Stanford economist] Pete Klenow. Our interest was always less in thinking about inflation and prices. It was rather on the fact that whatever you mismeasure on prices affects how you measure real incomes and economic growth. … Because if you overestimate inflation by 1 percent, then instead of being, say, 1 percent per year real growth, it is really 2 percent per year. Well, that means the growth rate is doubled!\”

On inflation and quality change in health care prices: \”If I compare healthcare costs today versus in the year 1800, well, I could go out and buy a bunch of leeches today for almost nothing. And I could have the healthcare I had in 1800. If you had a certain condition and you had $10,000 to get treated at today’s health prices, or $10,000 to get treated at 1960s prices with 1960s technology, I don’t think it’s so obvious that people would want to go back in time to get their important health conditions dealt with. In that sense, you say, I don’t know if there’s inflation. It’s pretty hard to say that there’s been a lot of inflation over the long haul in healthcare.\”

On quality improvements and car prices: \”My first car was a 1983 Accord, which cost $9,600. It was a great car, but it didn’t have any of the safety equipment that you have today. It didn’t have power windows. It didn’t have air conditioning. It didn’t have many features. If you took that same car—it did get good gas mileage, actually—and you tried to sell it as a new car today, I don’t think you would get $9,600 for it, if you had to compete with what’s out there.\”

On why some changes in consumer prices affect macroeconomic national income more than others: \”A consumer price index isn’t an ideal measure of what’s happening to real income. That’s partly why I think that gasoline is a problem—because it’s so much an imported good. When its price goes up, that’s really a big loss in real income. Whereas when it’s a good that’s produced here, the loss in real income is that it takes more resources to produce it. If our efficiency drops in producing food, and then the food prices go up, that’s a real loss in income. If there’s an upward shock in prices, then the farmers—the people selling the food—do at least get some benefit from the price increases.\”

On the imprecision of hedonic adjustments to price measurements: \”There’s a classic example for vehicles. If you look at gas efficiency, miles per gallon, everything else equal, people would rather get better gas mileage. There’s not much question about that. But if you’re using a hedonic equation, and you say everything else that I observe, how much more are people willing to pay for better fuel efficiency? You actually get a negative number. If I take two vehicles, the characteristics I enter for them, plus miles per gallon/fuel efficiency, I’ll see the one that gets better miles per gallon tends to go for a lower price. … [T]here are very limited characteristics that we’re entering about the vehicle. So all these unmeasured characteristics that people like in their cars tend to be in a luxury car, and we’re not recording all those. They may not care so much about the fuel efficiency; they want performance of the engine. So when I, as a price measurer, look just at this, I’ll price fuel efficiency negatively. That means that if all the cars in the country got more fuel efficient, and we employed the hedonics literally, we would say inflation went up. Even with computers there are problems like this. These hedonic coefficients jump around a lot.\”

Alfred Kahn, Deregulator and Expositor

 Alfred E. Kahn died on December 27, 2010. Kahn was best-known in the economics profession for his academic and practical work on deregulation; in particular, as the final Chairman of the Civil Aeronautics Board, he deregulated his own agency out of existence at the time of airline deregulation.  The website of National Economic Research Associates, Inc., has biography with links to obituaries. It also has a copy of an underground classic—a short “Memorandum” that Kahn wrote to the CAB staff in 1977 on the importance of clear writing

Kahn began: “One of my peculiarities, which I must beg you to indulge if I am to retain my sanity (possibly at the expense of yours!) is an abhorrence of the artificial and hyper-legal language that is sometimes known as bureaucratese or gobbledygook. The disease is almost universal, and the fight against it endless. But it is a fight worth making, and I ask your help in this struggle.” Also available is the text of a longer 1998 talk he gave on “My War Against Bureaucratese.”