Discontinuity contest

The Center for New Revenue is considering a contest, with $1,000 in total prizes, for papers illustrating the policy problems with a tax or public policy discontinuity.  The target is cliffs, gaps, notches, or discontinuities that occur when an additional dollar of income (or a smidgen of something else) creates a marginal tax rate that is over 100 percent:  Some people call this phenomenon the “skyline” tax rate, referring to what marginal income tax rates look like when shown on a graph. This iteration is not an actual plan yet.   Comments appreciated.

Here are examples:

“[A]s a consequence of a tax code provision penalizing parachutes greater than 3 times taxable income, CEO parachute contracts frequently contain “cutback” provisions limiting the parachute to this threshold. When their companies are acquired, CEOs exercise options in bulk to raise their taxable income and boost their threshold.”   https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3075467

Illinois’s marijuana ad valorem tax rate for smokeable product with 34.999 percent THC concentration is 10 percent; concentration of 35 percent jerks the rate up to 25 percent.  Spraying raw plant material with potent concentrates, or diluting concentrates with CBD or terpenes might let sellers come in just under 35 percent THC. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3481584

And there’s this late 20th century notch, from NTA President Drew Lyon, https://books.google.com/books?id=D_FgitCMcg8C&pg=PA214#v=onepage&q&f=false:

How might contest entrants show problems with a cliff?  Maybe by showing actual economic distortion that the cliff creates?  Maybe by showing strange and useless behavior by taxpayers seeking to stay on the correct side of the cliff?

I think this would be fun – and promotion of good policy by shining the light on bad policy.

If this goes forward, the Center for New Revenue will be looking for judges – economists, lawyers, and maybe government officials and media people.

 

 

Movie Review: “The Laundromat”

If there is a better “comedy-drama” film about tax havens, I’d like to see it.  The Laundromat goes into the folks behind the Panama Papers scandal, and ends with a message from Meryl Streep, as herself:

“Tax evasion cannot possibly be fixed while elected officials are pleading for money from the very elites who have the strongest incentives to avoid taxes.”

It’s just out, and maybe it’s not for everybody.  A friend said she didn’t follow it very well.  But for anyone who has been in international tax, at least on the government side, it should be fun.

From Wikipedia:

The Laundromat is a 2019 American biographical comedy-drama film directed by Steven Soderbergh, with a screenplay by Scott Z. Burns. It stars Meryl StreepGary OldmanAntonio BanderasJeffrey WrightDavid Schwimmer,  Matthias SchoenaertsJames Cromwell, and Sharon Stone.

Weeks after its limited theatrical release, but just two days before its scheduled wide streaming release, the two men at the center of the film, Jürgen Mossack and Ramón Fonseca sued Netflix on October 16, 2019, attempting to block the film’s release. They argued that the film defamed them. Netflix responded the next day, calling the suit “laughable” and saying the film was “constitutionally protected speech.”

+++

This comes 38 years after the “Gordon Report” on tax havens by my old boss Richard A. Gordon, http://www.archive.org/stream/taxhavenstheirus01gord/taxhavenstheirus01gord_djvu.txt

State stores ≠ State liquor stores

“Majority of Pennsylvania voters want legal cannabis, poll shows — just not in state stores,” says a headline in the Pennsylvania Capital-Star.

But that’s totally misleading, because that’s not what the poll asked.  Here’s the actual question: “How likely would you be to support the legalization of marijuana if it were sold by the state liquor stores instead of by private companies?”

Not state stores selling just marijuana — state liquor stores, selling both.

Is that difference a big deal?  Yes.  Public health scholars pretty much agree that liquor and cannabis should never be sold together.  Selling cannabis in state liquor stores would violate that principle.  Maybe the average voter, too, can figure out that selling two intoxicants at the same cash register is not a great idea.  The municipal cannabis store in Evergreen, Washington doesn’t sell liquor.  No cannabis store in the country does.  Mixing booze and weed is problematic – and so is the question the poll asked.

Prominent marijuana journalist and legalization proponent Ricardo Baca had this headline:   “Why Cannabis and Alcohol Sales Should Never, Ever be Co-located.”  Co-use is not the only problem Baca identifies.  He points out the danger that the liquor industry will gobble up the nascent cannabis industry – and mainly argues that deadly alcohol should be in a separate category from safer cannabis.

For what they are worth, here are the answers from Pennsylvania to the state liquor store question:
Much more likely 12%
Somewhat more likely 20%
Somewhat less likely 18%
Much less likely 40%
Do not know 11%

A better question for voters is this, from North Carolina in 2013:

“If marijuana were legal in NC, do you think it should be taxed and sold in state-owned stores the way liquor is, or in private retail stores, like beer and wine are?”

58% State-owned stores.
19% Private stores……….
23% No opinion……………

Not alongside liquor, but in like liquor, in separate, single-purpose stores.  A nuance? I don’t think so.  Now maybe state liquor stores in North Carolina are more popular than state liquor stores in Pennsylvania.  But selling cannabis alongside liquor is not the same as selling the two drugs in separate places.

 

Tax Nicotine or Vaping Liquid?

Tax Nicotine or Vaping Liquid?

The U.S. House Committee on Ways & Means, by a 24-15 vote, has approved a tax on e-cig liquid by nicotine content, “$50.33 per 1,810 mg.” or $$27.81 per gram.

Senate Democrats have introduced similar legislation.

A tax could pass veruy quickly.

That nicotine tax goes along with what drug policy scholars say about taxing marijuana.  They’d like to tax by THC content, at least where practical.

Canada is already taxing by THC, for concentrates like vaping liquids and other processed products.  (Raw material, less practical to tax by THC, is still taxed by the gram, with potent flower taxed more than weaker trim.)

But tax policy folks on the left and right suggest taxing by total vaping liquid instead of just nicotine.  None of that liquid is good for you.  But hat’s a dramatic difference in the tax base.

From the Tax Policy Center on the left, click here.

From the Tax Foundation on the right: https://taxfoundation.org/tax-nicotine-products-quantity/

I like taxing THC where practical, in liquid, but I tend to side with the tax policy folks here.  Taxing by nicotine is harder to enforce, but mainly, we don’t know exactly what we’re mad at.  Without nicotine, though, or THC or some active agent, I think kids wouldn’t vape.  So this is a hard issue. Continue reading Tax Nicotine or Vaping Liquid?

Let’s tax plastics first

One step at a time.  Start with plastics, tax other carbon later.

Plastic’s enormous negative externalities are more localized than burnt carbon’s.  A nation or a state could readily tax plastic, unlike all carbon.   A simple weight tax would be an easy, easy place to start.  Refinements, if any, could come later.

AND a tax on plastics would largely avoid the trickiest part of carbon tax design — the task of creating a Border Trade Adjustment.  A BTA would be essential for a carbon tax, to keep foreign manufacturers from beating tax-paying domestic competitors.  A carbon BTA would be the work of many lifetimes.

But a tax on plastics can simply omit a BTA.  Plastics used in manufacturing are trivial, so domestic producers need not fear imports beating the system.  It would cost more to figure the tax than it would yield.  You could tax manufacturers and first importers by the gram or pound.  You could start with single-use plastics.  This is even more obviously needing to happen than taxing even weed.

 

 

The other side: Arguments for NOT taxing nicotine in e-cigs

I’ve suggested taxing e-cigs by nicotine content.  Here’s another view in CAPS:  some excerpts from an interesting post from the Tax Foundation that takes the other side:

“NICOTINE CONTENT ALONE DOES NOT DETERMINE NICOTINE ABSORPTION. DIFFERENCES IN ELECTRONIC CIGARETTE DEVICE DESIGN, AS WELL AS NICOTINE PRODUCT DESIGN, HAVE BIG IMPLICATIONS FOR HOW MUCH NICOTINE IS ABSORBED BY THE CONSUMER.”  I don’t doubt that, but don’t know enough about it.

“NICOTINE IS THE ADDICTIVE SUBSTANCE IN THE PRODUCTS, BUT NOT THE MAIN HARMFUL INGREDIENT.”  I thought it was the main harmful ingredient.  But the non-drug substances in vapor can’t be good for the consumer.

“TAXING BASED ON NICOTINE CONTENT WOULD FAVOR LOW-NICOTINE LIQUIDS AND COULD ENCOURAGE INCREASED CONSUMPTION IN QUANTITY OF LIQUID. FOR INSTANCE, A 3 PERCENT NICOTINE-CONTAINING VAPOR POD WOULD BE TAXED AT $0.68 WHEREAS A 5 PERCENT VAPOR POD WOULD BE TAXED AT $1.15.”  But wouldn’t consumers be seeking nicotine directly, and thus be indifferent between low-nicotine and high-nicotine liquids?  That is, wouldn’t they titrate, vaping until they got enough?  Taxing by volume of liquid, without regard to nicotine content, would incentivize the production of high-nicotine products.  If nicotine is “not the main harmful ingredient,” such an incentive would be OK.  But is vaping itself the harm-producer?

“TAXING BASED ON NICOTINE CONTENT WOULD REQUIRE EXTENSIVE TESTING, AND ENFORCEMENT WOULD BE EXPENSIVE.”  Canada is taxing liquid cannabis by THC, but I don’t know the cost of enforcement.  I suppose nicotine testing would be similar.

Still thinking here.  It looks like a key question is whether it’s nicotine or vaping generally that should be the target of the tax.  I’m listening.