Does the Tax Code Favor Robots?

In recent months, a number of scholars and commentators have articulated versions of the following argument: (1) U.S. tax law favors capital over labor;1 (2) Robots are capital; 2 (3) Therefore, U.S. tax law favors robots over labor. 3 Three implications tend to be drawn from this syllogism: (a) that U.S. tax law leads to inefficient investments in automation;4 (b) that automation—because it is capital-intensive and capital is tax-favored—will result in a reduction in tax revenues;5 and (c) that policymakers should respond to the automation trend either by imposing explicit taxes on robots or by raising taxes on all capital.6 This short essay seeks to illustrate why the line of argument above is misguided. First, the claim that U.S. tax law is biased toward capital rests entirely on an unstated (and uncertain) normative premise: that the United States should tax income rather than consumption. If an income tax is the baseline, then U.S. tax law exhibits a pro-capital bias; if a consumption tax is the baseline, then U.S. tax law exhibits an anti-capital bias. Which baseline we choose depends on normative choices that claims of capital-favoritism tend to occlude. Second, robots do not only (or even primarily) represent “capital”; they also embed the labor of engineers and others. The labor of robot makers is often taxed at unfavorable rates relative to the labor of the workers whom automation threatens to displace. Third, the idea that U.S. tax law incentivizes firms to replace human workers with robots rests on doubtful logic, and the claim that automation will erode the tax base finds little support either. This essay is not an argument against capital income taxation or a defense of the current Code, which does tax capital income but not all that much. I believe, though, that the case for capital income taxation will be stronger if it is based on firm foundations rather than on dubious claims of robot favoritism. The essay also is not a full treatment of the arguments for and against taxing capital. Its objective is to evaluate one such argument and to show why it is unpersuasive. Part I of the essay examines the claim that the U.S. tax system favors capital over labor. Part II turns to the question of whether robots represent capital or embedded labor. Part III considers the case for explicit taxation of robots or broader taxation of capital once illusions about the tax code’s pro-robot bias are cleared away

Regulation and Redistribution with Lives in the Balance

A central question in law and economics is whether nontax legal rules should be designed solely to maximize efficiency or whether they also should account for concerns about the distribution of income. This question takes on particular importance in the context of cost-benefit analysis. Federal agencies apply cost-benefit analysis when writing regulations that generate multibillion-dollar impacts on the U.S. economy and profound effects on millions of Americans’ lives. In the past, agencies’ cost-benefit analyses typically have ignored the income-distributive consequences of those regulations. That may soon change: on his first day in office, President Joe Biden instructed his Office of Management and Budget to propose procedures for incorporating distributive considerations into agencies’ cost-benefit analyses, thus bringing renewed relevance to a long-running law-and-economics debate. This Article explores what it might mean in practice for agencies to incorporate distributive considerations into cost-benefit analysis. It uses, as a case study, a 2014 rule promulgated by the National Highway Traffic Safety Administration (NHTSA) requiring new motor vehicles to have rearview cameras that reduce the risk of backover crashes. As with most major federal regulations that impose large dollar costs, the principal benefit of the rear-visibility rule is a reduction in premature mortality. Quantitative cost-benefit analysis typically translates mortality reductions into dollar terms based on the “value of a statistical life,” or VSL. Any distributive evaluation of the rule will depend critically on a parameter known as the “income elasticity of the VSL,” which reflects the relationship between an individual’s income and her willingness to pay for mortality risk reductions. Although agencies’ cost-benefit analyses use the same VSL for all individuals regardless of income, the Department of Transportation—of which NHTSA is a part—has issued guidance on the income elasticity of the VSL for other purposes. When this Article applies the Department of Transportation’s income-elasticity guidance in its distributive analysis, the rearvisibility rule appears to be regressive: it generates net costs for lower-income groups and net benefits for higher-income groups. Rerunning the distributive analysis with equal-dollar VSLs at all income levels, the rule appears to be progressive: lower-income individuals are the primary beneficiaries and higher-income individuals are the losers. This Article goes on to explain why assumptions about the relationship between income and the VSL will have important implications for distributive analyses of other lifesaving regulations. This Article then asks what agencies ought to do: Should they incorporate distributive objectives into cost-benefit analysis by assigning greater weight to dollars in lower-income individuals’ hands, and should they assign different-dollar VSLs to individuals with different incomes? The two questions are closely linked. Incorporating distributive objectives into cost-benefit analysis of lifesaving regulations while maintaining equal-dollar VSLs for the rich and the poor will potentially produce perverse outcomes that—according to standard economic thinking—actually redistribute from poor to rich. After canvassing options, this Article concludes that the status quo approach—equal weights for low-income and high-income individuals’ dollars, equal-dollar VSLs for low-income and high-income individuals— makes practical sense in light of expressive concerns, informational burdens, and institutional constraints. This Article ends by reflecting on the case study’s lessons for broader debates over legal system design, and it explains why the issues that arise in the rear-visibility case study are likely to affect other efforts to redistribute through nontax legal rules

Indexing, Unchained

Inflation indexing is an important and controversial issue in the design of tax systems and transfer programs. The choice of whether—and how—to adjust policy parameters for inflation carries significant political, distributional, and macroeconomic implications. In recent years, indexing has gained particular attention in three policy contexts: (1) whether to switch from an “unchained” to “chained” inflation index when calculating Social Security benefits; (2) whether to make a similar unchained-to-chained shift when setting federal income tax parameters such as bracket thresholds and deduction amounts; and (3) whether to index basis for inflation when calculating capital gains. Hundreds of billions of dollars ride on the resolution to these three questions. Across all of these contexts, the debate over inflation indexing is generally framed in terms of “accuracy.” When the National Commission on Fiscal Responsibility and Reform chaired by Alan Simpson and Erskine Bowles recommended in 2010 that Social Security cost-of-living adjustments be calculated using the “chained” Consumer Price Index (CPI), the commission emphasized that chained Consumer Price Index (CPI) is “a more accurate measure of inflation.”1 The Center for a Responsible Federal Budget, a Washington, D.C.-based think tank that picked up the chained CPI mantle after the Simpson-Bowles commission dissolved, likewise listed accuracy as its primary justification for chaining: “[P]olicymakers should ensure that the most accurate measure of inflation is being used,” the group declared in a white paper, and “[a]n overwhelming majority of economists from both parties agree that the chained CPI is a far more accurate measure of inflation than the CPI measurements currently in use.” 2 When the Obama administration proposed a switch to chained CPI across federal tax and transfer programs in 2013, it foregrounded the “accuracy” argument as well.3 The case for capital gains indexing has proceeded on similar premises. For example, Reed Shuldiner—in a comprehensive and insight-packed 1993 article on indexation—argued that computing capital gains without adjusting for inflation produces an “inaccurate” result.4 The congressional Joint Economic Committee, in a 1999 report, similarly said that indexing is necessary in order to “measure capital gains correctly.”5 Lawyers Charles Cooper and Vincent Colatriano—in a 2012 article urging the Treasury Department to index capital gains for inflation via executive action—wrote that capital gains indexation would “more accurately assess[] the actual increase in a person’s wealth or purchasing power.”6 Accuracy-based arguments for capital gains indexation sprung to life again in 2019 when President Trump asserted that he had the power to index capital gains for inflation of his own accord.7 Critics of chained CPI and capital gains indexation have joined issue on the accuracy point. The AARP, which opposes the use of chained CPI for Social Security cost-of-living adjustments (COLAs), has argued that chained CPI is “even less accurate than the current formula.” 8 Hundreds of economists who signed a letter opposing the use of chained CPI for Social Security in 2012 agreed that the annual Social Security COLA “should be based on the most accurate measure possible of the impact of inflation on beneficiaries,” but disputed that chained CPI was the best way to achieve that goal.9 More recently, in the debate over whether the Trump administration should index capital gains for inflation via executive action, critics of the move have argued that indexing capital gains, but not other elements of the tax code, would lead to the “mismeasurement” of income—a direct counterpoint to the “accuracy” claim pushed by proponents.10 This Article argues that—across all three of these indexing debates (and several more)— the emphasis on “accuracy” misses the mark in two respects. First, inflation is not a quantity that exists in the world apart from how it is measured. It is not like the distance from London to New York, which can be measured accurately or inaccurately. To say that chained CPI is more “accurate” than unchained CPI is something like saying that a U.S. liquid pint measure is more “accurate” than an imperial pint measure. We may have good reasons for using a U.S. liquid pint rather than an imperial pint—or vice versa—but “accuracy” is not one of them. Likewise, we may have good reasons for caring more about the month-to-month change in the price of a fixed basket This Article argues that—across all three of these indexing debates (and several more)— the emphasis on “accuracy” misses the mark in two respects. First, inflation is not a quantity that exists in the world apart from how it is measured. It is not like the distance from London to New York, which can be measured accurately or inaccurately. To say that chained CPI is more “accurate” than unchained CPI is something like saying that a U.S. liquid pint measure is more “accurate” than an imperial pint measure. We may have good reasons for using a U.S. liquid pint rather than an imperial pint—or vice versa—but “accuracy” is not one of them. Likewise, we may have good reasons for caring more about the month-to-month change in the price of a fixed basket. Second, and more importantly, the adjustment of policy parameters over time is not, at its core, a question of technical accuracy. How Social Security benefits ought to change year to year, how the schedule of tax rates ought to change over time, and whether inflationary gains ought to be included in the tax base are not questions of measurement. They are, instead, value judgments. “Accuracy” in this context turns out to be both an illusion and a distraction. Seeing through the mirage of “accuracy” is important not only because it offers a clearer-eyed view of the values at stake in indexing debates, but also because it opens up broader vistas for tax and transfer policymaking. For example, rather than focusing on whether “unchained” or “chained” versions of the Consumer Price Index provide more “accurate” measures of inflation, we might ask whether pensioners and disabled adults ought to share in the gains from economic growth. An affirmative answer to the latter question would suggest that Social Security benefits ought to be tied to an index that tracks overall economic changes (e.g., nominal gross domestic product) rather than an index that tracks only price-level changes (e.g., unchained or chained CPI). Likewise, instead of a crimped choice between unchained and chained CPI for tax bracket thresholds and deduction amounts, we might imagine tying tax system parameters to deficit levels or business cycle measures. And instead of an argument about capital gains indexation framed in “accuracy” terms, we might imagine a more direct discussion about whether (and how much) the income tax should operate as a tax on wealth. Each of these questions will require more than this short Article to answer. The modest goal here is to show why indexing decisions ought to be “unchained,” so to speak, from a narrow focus on “accurate” measures of inflation. Part II introduces the indices according to which tax and transfer parameters are adjusted and the contexts in which indexation questions arise. Part III—the heart of the Article—presents the case against “accuracy” as an objective for parameter adjustment. Part IV considers implications of this argument for participants in policy debates and for scholars engaged in the law and macroeconomics enterprise

The State-Charity Disparity and the 2017 Tax Law

This is an edited version of a speech given at the state tax symposium. The author first gives an overview of how the 2017 tax bill changed the treatment of state and local taxes which are no longer deductible to the extent said taxes exceed $10,000. The author then contrasts this to the treatment of charitable contributions which remain deductible. The author considers the similar functions undertaken by charities and state governments and concludes there is little justification for their divergent treatment