Tuesday, July 8, 2014

Who's Afraid of the Big Bad Unfunded Liabilities?

What's the right way to think about tax dodging?

It isn't always that easy for me to think about public finance. The combined US budget at local, county, state, and federal levels easily tops a trillion bucks, and that's without any "temporary" spending. That sure seems like a lot, but I'm not sure what to compare it to. I have a similar problem thinking about budget shortfalls. Is the FY 2014 budget deficit of $564B too much? Too little? Just right? Compared to what? Moreover, how can the typical taxpayer know that she's getting her dollar's worth out of the spending done on her behalf?

Making it more complicated is that a lot of the projects (defense spending especially) conducted on behalf of US constituents notionally generate value well into the future. What's the PDV (present discounted value) of a new carrier group? And how about debt service? At very low interest rates, service costs are extremely sensitive to small rate changes, meaning that the cost of debt financing is hostage to the myriad forces that dictate borrowing costs (it ain't just the Federal Reserve, in case anyone's told you otherwise). Heck, debt service problems are for money that's already been borrowed. What about money that the political elite has only promised to borrow?

Since I have trouble thinking about these things as they are, I've made it a habit to disregard the linguistic fluff and use a common word to describe public spending not covered by current taxes. That word is "promise." Debt is a promise, one backed by the weight of the common law. You are contractually obligated to pay your debts. Congress is constitutionally obligated to pay the debts of the nation. Debt takes precedence over all other obligations in bankruptcy (unless politically favored constituents can jump the queue under the aegis of a duly elected government that proves comfortable disregarding the rule of law). But debt is far from the only promise you (or Congress) can make. You can promise to walk the dog, to take the kids out for pizza, to buy your wife a new car after a fallen tree destroyed the old one, or to replace the batteries in your smoke detectors (when was the last time you checked yours?). Congress can promise to pay for your retirement, buy your prescription drugs, care for your wounded veterans, or secure your borders. These are also promises, but they don't have the same common law support that debt enjoys. They're statutory promises; statutes can be overridden or repealed. There's no stare decisis in the legislature.

But that doesn't mean that they're not credible promises. It's bizarrely hard to cut government programs. Unfunded liabilities are, for all practical purposes, as good as actual debt obligations. Maybe more so, since programs like OASDI and Medicare are far more of a political third rail than, say, making Treasury bondholders take a haircut.

But something else occurs to me as well: there are a number of shadow promises that haven't even been made yet that make it yet harder for me to think clearly about public finance. The looming geriatric tsunami will bring with it lots of new clamoring for things that'll make Boomers' retirements more pleasant. Add to that the very real probability of new programs to tackle ballooning student debt issues, and it shouldn't take too much imagination to conclude that the standard metrics of Debt/GDP ratios (which is a dumb metric anyway, what with the comparing stocks to flows) and the like grossly misstate the nature of the problem: an over-extension of promise, explicit or otherwise.

Hedging against a future of Promises Gone Wild is either prudent or paranoid, depending on whom you ask. Either way, the disquiet that tends to accompany broken promises is unpleasant whether or not you've pinched your pennies and stitched in time. In the language of EE, each of the three types of promises (debt, unfunded liabilities, and shadow spending) threatens to impose a fairly substantial negative externality on citizens, particularly way out in the tails of the distribution. It is quite natural to conclude that there exist some people who would prefer not to subject themselves to the hassle.

So here's the bit that's been bothering me. I have the impression that the typical voters considers people who avoid the inevitable costs of zealous promise-making to be cowardly, unpatriotic cheats. FATCA legislation stands next to no chance of being struck down, and for all the noise partisan Americans make about renouncing their citizenship and packing their bindle for Canada should their guy lose the election, if someone actually up and does it (particularly if he's wealthy), scorn inevitably follows.

So the question: is emigration euvoluntary? Do the reasons for emigration matter? Rather, do the reasons for emigration matter more than the consequences? The treasury is still out the same receipt whether or not someone leaves because she married a foreigner or if she left in protest of a Republican in the Oval Office. How important is the cheap fluff talk in determining the moral intuitions? Is tax dodging different than routine emigration? Why or why not? What does this imply for strategic public talk?


  1. Bryan Caplan, in a post that I can't find, says that Social Security and Medicare are so wildly popular that we'll be willing to hike taxes to fund them. The left has a plan to just raise the level of income that's subject to FICA, making it a progressive tax. In any case, SS taxes were raised before by St. Ronnie. He took a wallop in the midterms but then he came back to landslide. Barry did something vaguely similar with Medicare -->

    This is a little bit removed from the main point of your post but I guess it's my reckoning that this camel's (taxpayer's) back can sustain more straw (higher tax burden).

  2. What about the shameless corporate tax avoidance from the likes of Google, Starbucks and Amazon? That's where the real money owed in taxes is being lost, along with all the other large corporations who are getting away with blue murder as far as taxation is concerned. By the way, tax avoidance is legal, it is tax evasion that is not, good accountants will make sure that the minimum amount of tax is paid in line with tax laws. Valen from UK online payday loans direct lenders service.


Do you have suggestions on where we could find more examples of this phenomenon?