A federal appeals court has ruled invalid the three recess appointments to the National Labor Relations Board President Obama made on Jan. 4, 2012. (My birthday, as it so happens.) The basics of the situation are pretty well known.  During this time period, the Senate was holding pro forma sessions during which almost no members were present.  The court ruled that these sessions implied that the Senate was not in recess, implying that the recess appointments clause (Article II, Section 2, clause 3) of the Constitution does not apply.  One can certainly debate whether the court’s reasoning is correct, but that’s not my goal here.

Rather, I just wanted to point out an interesting aspect of this scenario.  In 2012, the Democratic party held a majority of the seats in the Senate.  Accordingly, it seems reasonable to think that President Obama’s nominees would have been confirmed if the Senate had voted on them.  They did not vote on them at least partly because there weren’t enough votes (60) to invoke cloture on their consideration.  (I say partly because cloture is a costly process, so I don’t want to imply that cloture would have been invoked on these appointments even if the Democrats did have “the votes.”)

A motion to adjourn requires only a majority vote in the Senate and, more importantly, is not  subject to debate (so it can’t be filibustered).  Accordingly, viewed within the Senate rules, a “weak confirmation option” is available to the majority party: if a nomination is being (or will be) filistered by the minority, the majority could just adjourn and let the president fill the positions (albeit temporarily) with the recess appointment power.  (Of course, this comes with the concomitant risk that the president might similarly fill other positions at the same time, but let’s set that aside.)

In the case at hand, the Senate did not do this.  Instead, it was operating under a unanimous consent agreement that called for the Senate to hold pro forma sessions every third day.  At least part of the reason it did this is the requirement (Article I, Section 5, clause 4) that neither chamber recess more than 3 days without the permission of the other.  (Which, to be honest, is a bit of an odd requirement in a number of ways.)

Thus, to the degree that a Senate’s “recess” must be longer then 3 days to trigger the president’s recess appointment powers, the filibuster and Article I, Section 5, clause 4 of the Constitution combine to give the House of Representatives the power to stymie the president’s ability to fill positions that require the advice and consent of the Senate.  Of course, the Senate’s difficulty in this regard is self-imposed (i.e., its self-imposed supermajority requirement to end debate), but I’ll leave that well-worn topic for another day.

In concluding, I leave you with this.

In light of my take on last night’s legislative shenanigans, a few very smart people have asked me, in a sense, “sure, perhaps, but do you REALLY think that’s what happened?”  Most of these objections (and the media’s narrative) suggest that Boehner thought he had enough votes for H.J.Res.66 and, upon seeing the too-close-for-comfort on  HR 6684, realized that he did not.  In other words, Boehner miscalculated, pure and simple.

This is a very good question for a number of reasons.  First, it correctly implies that I don’t really know what was going through any of the relevant actors’ minds in the days leading up to yesterday, not to mention what everybody was thinking last night.

Second, the question provokes one to think about what strategic analysis is supposed to do.  In some ways, my answer to this is classically dodgy.  Game theory is prescriptive: properly done, it informs the analyst about what one should do. Even then, it requires that you have some idea about how the other people are going to act.

More importantly, game theory is not supposed to (and generally can’t) tell you why somebody did something.  Furthermore, this statement isn’t merely some escape clause along the lines of “well, it’s just a model.”

No, the very foundations of game theory and strategic analysis lead logically to the conclusion that in some circumstances, rational/strategic behavior will necessarily not be indicative of what motivates it.  It is not too strong in my opinion to assert that this fact is the “heart” of signaling models, which have played a key role in my yammering about recent events.  (And are at the heart of the classic movie clip I posted in my previous post.)

Think of it this way: suppose (1) that everyone thinks that he really wanted to win that vote last night (I’ll come back to this in a second) and (2) that Boehner also wants to get as “conservative of a deal” as possible from the Democrats in averting (or, perhaps, in response to falling off) the fiscal cliff.  Point (2) is of course known by everyone.  After reading this post, Democrats also realized that Boehner might claim to not be able to deliver GOP votes for a moderate (much less liberal) resolution of the fiscal cliff. Accordingly, they and Obama tell Boehner “maybe you can deliver ’em, maybe you can’t. You don’t have any reason to tell us (particularly in private) that you can.  Prove it.”

Now, point (1) of my supposition — that Boehner doesn’t want to bring out a bill that doesn’t have the votes — comes into play.  According to this supposition, Boehner would not bring forward a bill and then pull it without it getting a vote unless he didn’t have the votes.

If we really believe that we know exactly how much Boehner “wanted to have and win that vote” on H.J.Res. 66 last night, we can form a reasonably precise estimate of Boehner’s beliefs about the GOP votes heading into last evening.  But, if our belief about this is too high — i.e., if we think Boehner wanted to win (or, didn’t want to lose/pull) that vote more than he really did — the Boehner has an incentive not only to stage a dramatic “let’s vote….oh no, let’s stop!” AND he and his other policy-interested GOP colleagues have an incentive to bolster and shepherd the narrative of, “aww shucks, poor Boehner….He really screwed that one up.”  Because to say that it wasn’t that big a deal implies that the whole melodrama should be taken as simply a larger and more elaborate way of simply claiming to not have the votes.

This brings me back to the first part of the supposition.  There’s been increasing talk (and here) about whether Boehner might not be reelected Speaker on January 3rd because of all of these shenanigans.  I have separate thoughts on that, but they’re outside of the current discussion. (Short version: no, he need not fear, in my opinion.)  But this kind of talk is exemplary of the second-order incentives I am talking about in terms of Boehner and the GOP stoking (or at least not dousing) the flames of a narrative of a rowdy/uncontrollable/maverick GOP conference. The whole act of bringing up and then not taking a vote on an unpopular, dead-in-the-water tax bill is pointless unless observers think that this was costly to the man who made it happen: Boehner. 

(I might come back to discussing the apparent conflict between this and the conference’s solid affirmation of Boehner’s leadership in another post.  I’ll simply note at this point that I’m not seeing many quotes from GOP members alluding to that public support.)

(Similarly, I might revisit the intriguing point about why Boehner didn’t actually just go ahead and have the vote.  Short version: I think it might have passed.)

Well, that’s it for now. Thanking those of you who have read and questioned for pushing me to think even more about what I can and, more importantly, can’t do, I leave with you with this.

Note: a road map is in order. I first describe what happened tonight in the House of Representatives.  Then I discuss one game theoretic take on Boehner’s “pulling of `Plan B’…”

Tonight, the House of Representatives passed a rule, H.Res.841, that called for the consideration of two measures, HR 6684, and H.J.Res.66.  Both of these bills are illustrative in terms of how the House Republican leadership is dealing with the fiscal cliff “crisis bargaining” situation.  The rule passed the House by a vote of 219-197, with 13 Republicans voting against it and no Democrats voting in favor of it.

The first business brought up by John Boehner under the rule was HR 6684.  The bill, titled “Spending Reduction Act of 2012,” puts off the sequestrations (spending cuts) component of the fiscal cliff and makes some other cuts.  Aside from the sequestration aspect, the bill is a bit of a hodgepodge.  Some of the various items are potentially important and subtle, but beyond the scope of this post.

(As an aside, the CRS summary of HR 6684 describes the bill as containing this doozy:  “Amends the Congressional Budget Act of 1974 to authorize the chair of the Committee on the Budget of the House of Representatives or the Senate to make adjustments to any legislative measure to conform to the discretionary spending limits of this Act.”  I have a hard time seeing the Senate agreeing to that.)

HR 6684 was considered under a closed rule, with all points of order waived.  After an hour of debate, as specified in the rule, HR 6684 passed the House by a vote of 215-209, with 21 Republicans voting against it.  Note that 7 members did not vote (with Rob Bishop (R, UT) voting “present” and 6 other members not voting at all): the bill duly and properly passed…but just barely. (My friends at Voteview, as usual, provide a timely and interesting take on this vote.)

After this nailbiter, maybe Boehner headed out to have a cigarette and calm his nerves, leaving the House to consider and agree (in a nonunanimous but bipartisan way) to a conference report dealing with the 2013 Defense Appropriations bill and then suspended the rules to

1. Name the VA medical center in Spokane, Washington, the “Mann-Grandstaff Department of Veterans Affairs Medical Center” (which Scott Rigell (R, VA) bravely stood alone in opposing),
2. Designated the VA facility located at 9800 West Commercial Boulevard in Sunrise, Florida, as the “William ‘Bill’ Kling VA Clinic” (which was unanimous), and
3. Designate Mt. Andrea Lawrence. (which 6 Republicans and 1 Democrat opposed)..

The House then went into recess for 2 hours, during which Boehner met with his GOP colleagues behind closed doors.  He then issued this press statement:

“The House did not take up the tax measure today because it did not have sufficient support from our members to pass.  Now it is up to the president to work with Senator Reid on legislation to avert the fiscal cliff.  The House has already passed legislation to stop all of the January 1 tax rate increases and replace the sequester with responsible spending cuts that will begin to address our nation’s crippling debt.  The Senate must now act.”

Now the game theory.  It is interesting to consider Boehner’s incentives (as well as those of GOP members as a whole) at this juncture.  As I wrote earlier, even if Boehner can reliably command/deliver the votes of a majority of the House, he nonetheless has a strategic incentive to appear to lack control of his caucus conference.  In addition, as I also pointed out earlier, some GOP members may have an incentive to appear to take a hard line.

As The Hill’s Russel Berman put it tonight, Boehner “argued that his fallback plan was the best the House could do in the absence of a broader deficit agreement with the president.” I now come to the point of this post: tonight’s vote was strategic.  The possibility of a vote on Plan B happening tonight was brought up voluntarily by Boehner. As is now obvious, he didn’t have to take this vote today. More importantly, he didn’t have to suggest that he would take this vote today. (Also, note that while Boehner may have spent the day twisting arms, counting votes, and trading horses, the consideration of “Plan B” began just in time for evening news on the east coast.)

So, maybe Boehner was surprised by the vote on HR 6684 and backtracked out of necessity.  Or, perhaps he knew/suspected that he didn’t have the votes for one or both bills.  By bringing up a vote and then canceling it (and by perhaps coincidentally doing it during the evening news), Boehner got a public spotlight on “Plan B” and, arguably, now made a point that, among some of his conference, even exempting millionaires from a tax cut is simply a bridge too far for his conference.

The “math of politics” here is a second-order application of Boehner’s incentive to appear to not have the ability to deliver votes.  That is, purposely staging a vote that will ultimately not happen can be a strategic response to (for example) Democrats labeling claims that Boehner “does not have the votes” a bluff.  (Here, a “second-order application” means applying knowledge of the first-order incentives to figure out what your incentives become once others realize your first order incentives.  See my link at the end of the post for a far better illustration of this.)

In game theory, there is an important distinction between what are called “costly signals” and “cheap talk messages.”  In a nutshell, cheap talk messages are like me telling you that I really think the Pittsburgh Steelers will win the 2013 Super Bowl and costly signals are like me betting $100 that they will. (And, sadly, no, I’m not betting the $100. Also, consider this point the next time you hear someone say “if I were a betting man…”)

From a game theoretic point of view, cheap talk messages can not credibly reveal certain types of information. For example, suppose that you’re in a watering hole on Carson St. before a Steelers game and, like everyone else in this watering hole, you want to impress everyone that you are truly the most confident/optimistic Steelers fan.  Well, if simply saying that you think the Steelers will win the Super Bowl would impress everyone in this way, then everyone else would say this, too.

On the other hand, if you bet $100 on the Steelers and some of those present aren’t as optimistic as you, then some or all of those people will not mimic you and accordingly not send as strong a signal as you do about your faith in the Steelers.  As a result, you will (or should) accordingly be viewed as a greater Steelers fan by your fellow patrons.

A similar analogy for what Boehner might have done tonight is as follows.  When I tell you that I love you and nobody else is around, that’s cheap talk.  When I tell you the same thing in front of thousands of people, that’s a costly signal.  It’s costly in the second case because the presumption is nobody likes to be rejected in public. So, when observers describe tonight as “a major defeat for Boehner that will give significant leverage to Obama in talks on a deal to prevent looming tax hikes and spending cuts,” say that Boehner “had hoped to demonstrate Republican unity by passing a bill through the House,” or conclude that “any bargaining power Boehner had with Obama — or hoped to have — is gone.  … What happened on the House floor tonight made a bad bargaining situation for Boehner that much worse,” my natural contrarianism leads me to pause.  Boehner set this situation up for himself.  Boehner knows how to count votes.  And, importantly, Boehner and the GOP had this “problem” before during the Boehner-Obama-Cantor “Grand Bargain” drama that eventually led to the fiscal cliff, and it is interesting to note that the last time, some pointed to whack-a-mole dynamic hiding in the failure of the Grand Bargain, with John Bresnahan, Jonathan Allen & Jake Sherman writing at the time that

Details of the potential “big deal” with President Barack Obama leaked before House members were briefed on the broad outlines of any agreement. “That was a huge problem,” acknowledged a top House Republican aide. “Boehner got way out in front of where he should have been. He pulled back because he had to do so.”

So, in conclusion, I agree with Chris Cillizza that tonight’s drama “was a gambit by Boehner designed to be a show of force to President Obama. This was Boehner putting himself out on a limb in hopes wavering members would follow him. This vote mattered to Boehner.”  Oh, yes, this vote mattered.  But I think it’s too early to conclude like he does, that Boehner “lost it.”  Good signaling games often have more than touch of irony.  Such is the case here.  In particular: losing can be better than winning but only if you do it in public and people think you don’t want to lose.

I leave you with this classic moment of game theory in film.

To all you single guys out there, it’s not how you start the date, it’s how you finish it, sir. A lot of people can, you know, start the date with flowers and candy, but if you don’t finish the date – you know what I mean? — Shaquille O’Neal

Budget negotiations are kind of like an NBA game: there’s a lot of blah blah blah, get some nachos, some more blah blah blah, Jack Nicholson throws a fit, and then BAM! the real game (sometimes) commences in a flurry right at the end.

In the current tête-à-tête between Boehner and Obama regarding the resolution of the “fiscal cliff” (and, presumably, other related issues such as the AMT exemption extension, corporate taxes, and the debt ceiling), the public stances of the two sides have moved very little. Congressional Republicans (including Boehner) have accused Obama of slow walking “our economy right up to the ‘fiscal cliff.’” By this, I assume that Boehner means that Obama has not put forward an explicit proposal that, in theory, Congress could agree to and send to Obama for his signature.

Why has Obama not made an explicit offer?  The answer to this is also the reason that budget negotiations are “like NBA games.”  A fundamental point to recognize at the outset is what is called “selecting on the dependent variable”: when you analyze high-profile negotiations — negotiations where it makes any sense for one side to ask the other to make a public proposal — there is by presumption already “more at stake” than simply the policy implications of any ultimate agreement (or lack thereof).

In other words, the fact that we have a name for the “fiscal cliff” is proof that the choice of a path around (or over) the cliff carries more than simply fiscal repercussions.  As I discussed before, there is some latent uncertainty about Boehner’s ability to deliver the votes of his GOP copartisans in the House.  (There are similar concerns about Obama’s ability to deliver Democratic votes in the House but, leaving the Senate aside for the moment, this is necessarily at least somewhat ancillary to Boehner’s ability to deliver votes, since the GOP holds a majority of the seats.)

So, one strategic question that confronts Boehner is how to get GOP votes behind a deal to send to the Senate.  But, before moving to that, consider the following point.  If the deal is to involve any changes to the tax code (for example, partially or wholly extending the Bush tax cuts), the bill must originate in the House.  In such a case, Boehner can’t wait for the Senate to “move first.”  Given that public support for tax hikes on the wealthy is high, members of the Senate, regardless of their partisan affiliation, have no incentive to step forward with their own bill.

On the other hand, while he may not say it himself, many others have claimed that Obama “has a mandate” to raise taxes (and, depending on whom you ask, cut spending).   One theory here is that the GOP might want to allow/require Obama to “own” the tax increase that would presumably be part of any public proposal he might make.  I will will call this idea — that Congressional Republicans want to firmly affix “credit” for the tax increase/spending cuts to Obama — the albatross theory. However, this theory doesn’t do enough work, in my opinion, since Obama has already owned tax increases on the rich during the campaign. In addition, the theory I describe below, which I call the whack-a-mole theory, offers exactly an opposite prediction in terms of what (perhaps some of) the GOP would do if Obama offered a proposal.

Whack-A-Mole Politics. At the heart of the whack-a-mole theory is an adverse selection problem for the GOP.  In this scenario, each member of the House is confronted with the problem of signaling his or her “true type” to his or her constituents.  While some (or even all) members may want to resolve the fiscal cliff, each of them also arguably wants to send a signal to his or her constituents about the degree to which he or she would not compromise.

Think of it this way: a member from a somewhat conservative district wants to compromise, but also wants to demonstrate that he or she is also somewhat conservative. If he or she never has something to reject prior to agreeing to a resolution of the fiscal cliff, his or her constituents have no real reason to think that he or she isn’t a Democrat in Tea Party Clothing.  Given that the Senate is not going to make a proposal, Obama must be the one to offer for the member to reject.

The strategic situation is captured (or, perhaps, butchered) in the graphic below.  It portrays the political bargaining space as two dimensions: taxes and spending.  For simplicity, I have located Obama’s “ideal policy” as “high taxes, high spending.”  (This is all relative.)  I have also located the hypothetical voter as “medium taxes, medium spending.” The fiscal cliff outcome is pictured as “high taxes, low spending.”

For simplicity, suppose that (the voter believes) there are two types of GOP incumbents: “Weak” and “Strong” Republicans.  Weak Republicans like higher taxes and higher spending than Strong Republicans.  This situation is portrayed in the next figure. The voter’s preferred levels of taxing and spending are closer to the Strong type (by design), so he or she would vote for a Strong Republican over a Weak Republican, ceteris paribus.

If presented with a take-it-or-leave-it proposal, (the voter thinks that) either type of incumbent would accept any proposal that is closer to the incumbent’s most-preferred combination of taxes and spending than the fiscal cliff.  This set of proposals is pictured for each type in the next two figures.

Now, if we overlay these two figures, you find the sets of proposals that (the voter believes) would distinguish the Strong and Weak types of incumbents.

Okay, all well and good.  Intuitively, Weak types accept proposals closer to Obama’s most-preferred combination than do Strong types.  There are some proposals that both types would accept.

Now think about the fact that Obama does not, in fact, get to make a take-it-or-leave-it offer to the House.  In fact, the reverse could be taken as a rough approximation of the situation.  This suggests why the House GOP wants to make it seem like Obama should make a proposal — why he “has a mandate to raise taxes,” why this is the “time for him to lead.”  To the degree voters think that rejecting an offer from Obama carries some risk of falling off the fiscal cliff (I won’t belabor the details of that here), both Strong and Weak types of incumbents in this example have an electoral reason to elicit a proposal from Obama. In particular, if Obama made a proposal, he would face two choices:

1. Propose something that only weak types would accept, or
2. Propose something that both types would accept.

(Proposing something that weak types would reject either results in policy really far from what Obama wants—so that he would then need to “pull a McConnell” and veto his own bill—or gets rejected with certainty by both types and doesn’t change the voter’s opinion about the GOP incumbent’s type.)

Presuming that electoral pressures on the incumbent are strong enough, choosing Option 1 leads to a rejection by both types and the GOP incumbent scoring “electoral points” with the voter regardless of the incumbent’s true type. (Note to my game theory-aware readers: no, this belief formation by the voter is generally inconsistent with the incumbent’s behavior. I must defer my discussion of voter’s beliefs until another time.  Let’s just say that I am not sure how many voters regularly apply second-order logic to figure out that both types have an incentive to reject any proposal that only a weak incumbent would accept. Moving on…)  In a political sense, then, Obama has an incentive to not propose and withhold the House GOP incumbents any chances to score points with their constituents by rejecting/attacking Obama’s proposal in an attempt to show that, yes, they will avert the fiscal cliff, but only along a conservative-enough path.

Option 2 is viable for Obama, but represents a distinct loss to Obama in terms of policy.  That is, making such a proposal would provide Obama with a bill from the House that Obama would sign, but it is presumably worse (farther away from his preferred combination of taxes and spending) than he might be able to get if he forces the House to send something through the Senate first.

Please Let Me Refuse You…  Before I Agree with You. The basic idea I want to get across here is that the GOP may have an incentive to get Obama to make a proposal because they want to reject it initially–directly the opposite of the “albatross” theory discussed above.  The question of what Obama “should” do in this situation is more complicated, and requires a theory of the importance/role of time (and the Senate).

Speaking of time, I’m out of it right now.  Maybe I’ll come back to the proposal problem in a later post.  After all, like an NBA game, the real exciting stuff will probably occur at the end, as (in my opinion — and maybe the public’s) Obama doesn’t need to provide the GOP any opportunities to prove their bona fides. For now, I leave you with this.

Of course, the fiscal cliff is attracting a lot of attention (including by me).  This is understandable, as it has been built up for two years, follows directly from the current partisan-cum-policy wrangling of the Democrats and GOP, and — most importantly — stars Barry O. and Johnny B. in a wacky “odd couple-meets-buddy film” romp through the fallow weeks of the NBA season.

But a much more sinister, almost art-film-esque drama is silently brewing and gaining steam in DC as well.  The almost indecipherably and entirely incongruously-named “Alternative Minimum Tax Exemption Extension” issue remains unresolved.  (Here’s a good succinct take on it.)

What is this dark horse, you ask?  Well, the basics of taxation are hardly basic. The Alternative Minimum Tax, or AMT, is essentially a second tax system intended to tax the rich. (Here’s a nice description with some examples.) In an imperfect nutshell, the idea of the AMT is that you calculate your federal income tax the normal way, calculate your income tax according to the AMT and then pay the higher of the two (that’s the key incongruity of the naming system, in my opinion). The details are potentially very complicated, because the AMT is designed partly as a stop-gap protection against some of the tax code’s historically more-abused deductions (i.e., “loopholes”).

If you know anything about the AMT, you probably know that it is not “inflation adjusted.”  Oddly, the AMT is pretty close to a flat tax (26% up to $175K and then 28% on the income over $175K).  If that were “it,” inflation adjustment would be a truly minor issue. However, as you might expect, that’s not “it.”

Federal income taxes have three big components aside from rates and brackets.  These are deductions, exemptions, and credits.  Credits are simply refunds in another guise (though, while some can result in you paying negative taxes, most do not.  In that case, a credit results in a refund only to up to the amount that you already paid in taxes in the first place).  I will not discuss them in any more detail here, as they are not really related to this debate.

A deduction is an amount you reduce your taxable income by.  A famous (and currently debated) example is the homeowner’s mortgage interest deduction. If you earn $75K and pay $10K in interest on your home mortgage, your taxable income (aside from other deductions, etc.) is $65K.  Money spent on deductible expenses is often called “pre-tax money,” because in a real sense you get to pay it before it gets taxed.

Under the AMT one loses many common deductions and other’s homeowner’s mortgage.  Many of these increase in nominal value with inflation, so there’s one implicit reason people refer to the AMT as not inflation adjusted.

More important for this debate is the exemption. In a nutshell, an exemption is a deduction that you get without spending any money.  It’s kind of a catch-all allowance that reduces one’s taxable income.  In the standard income tax system, a taxpayer gets an exemption equal to $3,800 for each taxpayer and dependent.  (In addition, an individual gets a $5,950 standard deduction (couples get $11,900), which is essentially an exemption that one can take if one doesn’t claim (most) other deductions.)  Under the AMT, on the other hand, the exemption is much higher.  In 2011, it was $48,450 for an individual, and $74,450 for a married couple.

Note. Some day I might write about the astonishing “marriage penalty” contained in the AMT (the first hint: 2 x $48,450=96,900>74,450.). For now, simply note that when I say “married” below, I technically mean “Married, filing jointly,” because I have no idea why one would do otherwise if you knew your were going to pay the AMT.)  In addition, I am not going talk here about the “rolling back” of the exemption, but it does figure where appropriate into some calculations at the end of the post.  (shut up. – ed.)

Calculating AMT. So, to keep it simple, let’s just call the AMT a 27% flat tax on income after the homeowner’s interest deduction and the exemption.  Then, one’s AMT is essentially

AMT = 0.27 (Income-Mortgage Interest-$48,450) if you’re single, and
AMT = 0.27 (Income-Mortgage Interest-$74,450) if you’re married.

…Of course, in reality things are a little more complicated, but I’m trying to make a simple point here. (too late – ed.)

But…WHAT IS THE ALTERNATIVE MAXIMUM CLIFF?!?   Ahh, yes. “The Alternative Maximum Cliff” is approaching because the 2011 level for the exemption was the result of an extension passed by Congress that expired at the end of 2011, returning the exemptions to $33,750 for individuals and $45,000 for couples.  So…the current AMT is

AMT = 0.27 (Income-Mortgage Interest-$33,750) if you’re single, and
AMT = 0.27 (Income-Mortgage Interest-$45,000) if you’re married.

The biggest tax increase as a result of non-extension of the exemption will be for a married couple making about $350K a year.  And, no, nobody should cry for such people. (That’s why this is kind of shocking – ed.) Such a married couple faces a tax increase — even holding the Bush tax cuts fixed and assuming the fiscal cliff is completely delayed — of $7,951.50.  That’s a 2% tax increase in terms of their actual income.

The final and even more important point about this is as follows.  The couple I just described was almost certainly paying AMT last year, too.  However, if Congress does not extend the exemption, the number of people who owe AMT will jump enormously.  In particular, the exemption is used to calculate AMT tax liability, and you owe the AMT if your AMT tax liability is higher than your standard tax liability.  So, a drop in the exemption potentially affects every individual or married who earns moderately high incomes.

But, “Will the (new) AMT affect me?”  Here’s a highly approximate answer for most people. This is for the new system if there is no extension—if there is an extension, the system will likely be almost the same as last year’s, so your status from last year return is a good (but imperfect) guess about this year’s.

Denote your gross income by Y. Add your standard exemptions under the regular income tax system (for a family of four, this is $15,200) to your state and local income taxes.  Denote this amount by X. Then, check my Jeff Foxworthy-esque “if-thens” below:

If you’re married, then

If Y < $150,000 and X > $48,600 – 0.08 * Y, then you might owe AMT.
If $150,000 < Y < $450,000 and X > $71,280 – 0.35 * Y, then you might owe AMT.
If Y > $450,000 … then “why, you might go screw yourself.”

If you’re single, then

If X > $112,500 and X > $36,450 – 0.08 * Y, then you might owe AMT.
If $112,500 < Y < $247,500 and X > $66,825 – 0.35 * Y, then you might owe AMT.
If Y > $247,500 … well, you know.

What’s the politics of this?  Well, the confluence of this “opportunity” and the fiscal cliff is interesting.  Essentially, if Congress wants to play by its budget accounting rules, it can do so more easily by allowing the exemption extension to expire.  Call it the Triple-Ex budget trick. I just came up with that. So…time to retitle this baby and sign off, leaving you with this.

On the eve of the most universal of American family holidays, I am thinking of the question of names. In particular, the interaction of surnames and marriage.

In the interest of both “setting the stage” and providing at least the appearance of a disclaimer, I should acknowledge, that (1) I am married and (2) my spouse and partner-in-crime, Maggie Penn, has (quite rationally, when you think about it) chosen not to take my last name.

Perhaps as a result of the fact that our naming configuration differs from that adopted by each of our (wonderful, awesome, inspirational, and—to be honest—classically liberal) sets of parents, I have realized that our approach of leaving our names unchanged in every respect after our marriage provides a special, and arguably idiosyncratic, visceral value to me.

I will dispense with the traditional explanation that my spouse is an established scholar on her own.  From such an explanation, instrumental benefits such as citation counts, professional reputation, and other benefits flow from maintaining an independentce in nomenclature above and beyond that traditionally accorded to spouses in years past.

Rather, I increasingly think that there is a very important point inherent in recognizing that names come from birth. And, as an ancillary effect, that marriage “merely” adds to the lineage of one’s life as opposed to overriding the events, happenstances, and detritus that came before (or, perhaps more provocatively, “caused”) the “marital event.”

My own experience suggests that there is significant value in at least two aspects of not having a common marital nomen (or, respecting word order rather than history, cognomen). Specifically, “keeping one’s name” (an idiom that has a distinctly and unfairly selfish feel) is arguably valuable insofar as it (1) reifies (or, perhaps, enforces acknowledgment of) the separate and important paths that led (at least in equilibrium) happily to the betrothal, and (2) puts the potential futures (or, perhaps bargaining positions) of the two equals on suitably equal footing.

The first of these reasons–the reficiation of the independent paths by which the betrothed came to be such–is particularly important when dealing with an instantiated third party.  (Or, for example, in colloquial terms, a child.  But, to be fair this could be a colleague, a neighbor, or a candidate for public office.) In short, when I am dealing with someone, there is a presumption that should be implicit in the conversation, given my wearing a wedding ring, that the whole enchilada of “this” is, barring explicit assurances to the contrary, presumably fair game for conversation with my spouse.  (After all, she and I can have pillow talk about our murder sprees and not be subject to the sovereign’s prying ears in terms of incrimination…So how could you expect to be immune from me telling her about your “secret USB drive” containing each and every one of AC/DC’s songs, ripped by your old college roommate?)

Having different surnames–not by choice but because our parents don’t happen to share surnames (not there’s anything wrong with that, conditional on your surname, of course)–reinforces this very important concept.  My spouse is my equal.  Names don’t matter, except to the degree that they are, in fact, simply external impressions (labels) of who we “are.”  That might be my own weird reasoning, but at least I find it compelling, and I (at least functionally) always have.

Two side points. 1. I say “functionally,” because I used to have a strong aversion to the concept that “labels matter.”  I have since “grown up,” and as a presumptive “relative elder,” I see the wisdom in labels.  Examples include “Professor,” “Unindicted,” and “Silver Preferred.”

2. I have yet to hear a meaningful retort that is not equally consistent with the imperative that, at weddings, we should have a coin toss (probably right after that really fun garter toss) in which the marriage “naming rights” are awarded.  That is, I won’t go too far into the gender inequity inherent in traditional naming conventions, but I’m willing to do so.  Only because an active opposition to my points here suggests that you have an interest in the status quo, not “surname convergence,” as it were.  But, you know, bring your best.

Second, the idea that one partner takes the other’s name, regardless of how that assignment takes place, differentiates the two spouses in terms of future negotiations.  In particular, whoever takes the other’s name is (for the sake of argument, yadda yadda) impaired in future negotiations because he or she (come on, “she”) has, upon introduction, revealed that, at some point in the past, been married. (And, before you say, well, that means he/she must be desirable, note that this effect would manifest itself in people voluntarily adding random surnames to themselves.  I only know of one occasion of this, and that has just been weird, though kinda awesome, too.

In the end, I like to walk into a room, particularly one in my house, and think that we’re all there for the same reasons.  (For example, I would never let a plumber into the pantry, and I would make a cook use the potty outside.) Marriage is collaboration, and I always want not only to know that everybody is there for the same reasons, but also that they know that I’m there for the same reasons.  The “math of politics” point of this post, as silly and introspective as it might be, is that securing for your partners the determinants of bargaining power is not nearly as effective as securing their knowledge of your knowledge of their possession of those determinants.  In other words, it’s not simply about being equals: it’s about both sides knowing that both sides know that both sides know that both sides now that both sides know … that both sides are equal.

With that, I wish you all this.  Happy Thanksgiving! And, more importantly, thank you, thank you, thank you Maggie, for being my partner in crime.

There has been a resurgence of interest in the question of which groups may or may not explicitly support and endorse candidates for election.  In particular, some church groups have begun to provide explicit endorsements of specific political candidates, and a lawsuit was recently filed seeking to force the IRS to enforce the requirement that these groups not participate in “any political campaign on behalf of (or in opposition to) any political candidate.”

The question I want to address in this post is pretty simple, but one that seems to me to be frequently overlooked.  It is captured by the (typical) title of the following article: “Churches Risk Tax-Exempt Status to Endorse Candidates.” The title seems to imply that a church must choose between paying taxes and staying apolitical.  But this isn’t true, is it?  (Although the phrase “no representation without taxation” is catchy and fittingly consumerist, in my opinion.)

Well, given that I’m still typing this post, you can probably guess correctly that the answer is, “no, a group can be tax-exempt and politically active.”  In particular, clearly political groups such as the MoveOn.org, EMILY’s List, Partnership for America’s Families, and the  College Republican National Committee are all tax-exempt.  These four are so-called “527 groups,” which are generally permitted to engage in political activities (e.g., voter information, issue advocacy) but not endorsement of specific candidates. The 527 classification also applies to political action committees (PACs), which essentially represent the “political bank accounts” of various political parties, candidates, and anyone else interested in accepting donations to use in support of specific candidates.  (Things get a little confusing here, as these groups are subject to campaign finance laws in addition to the tax code.)

In addition, some clearly political groups are classified as 501(c)(4) groups, including the ACLU and the Sierra Club.  These groups are tax-exempt and prohibited from endorsing political candidates.  Things are a little complicated regarding how much lobbying these groups can do, but presumably the main reason that churches do not consider reclassifying themselves as 501(c)(4) is that, in general, donations to 501(c)(4) groups are not tax-deductible.  Similarly for 527 groups who, in addition, must generally make public where their donations come from (this has caused an increase in the use of 501(c)(4) groups in “issue advocacy” in the most recent election cycle).

My point, then, is that the question at hand is not, really, about religious freedom.  As a rule, the federal government doesn’t tax churches. (In fact, a church doesn’t even need the 501(c)(3) status to be both tax exempt and for donations to the church to be tax-deductible.) Rather, there are two questions at play in this debate, both about campaign finance.

First, should taxpayers be subsidizing political donations?  Currently, donations to (say) the ACLU or the Republican National Committee are “post tax,” meaning that they cost me the full freight in terms of foregone mad money.  A donation to a church is “pre tax,” implying that my donation costs me only about 65% of my mad money.

Second, should churches play a central role in campaign finance regulation? Donations to PACs and other 527 groups are not tax-deductible.  Allowing churches to endorse and otherwise directly support candidates for election implies that it is cheaper for a voter to support his or her favored candidates by giving to a church that supports the candidate.  In addition, churches are (appropriately) not required to make public their donors or sizes of their donors’ individual donations.  So, allowing churches to become directly involved in elections would completely gut campaign finance reform as we currently “do it.”

Additionally, note one final key point: churches are already allowed to engage in issue advocacy, and I personally think churches should do so for a variety of reasons.  In this regard, churches are already given special dispensation under the tax code, relative to most other 501(c)(3) groups.  Thus, to charge that the tax code is somehow infringing on religious freedom is simply disingenuous.  The separation of church and state goes both ways, after all.

With that, I leave you with this.

With the 2012 election firmly in the rearview mirror, the discussion has turned to the impending fiscal cliff.  In a nutshell, the looming budget cuts (sequestrations) and tax increases are the result of the 2011 budget deal that increased the debt ceiling and staved off the need for further budget wrangling between the GOP and Democrats until, well, now.

Arguably, the 2011 budget deal represented a kind of agreeing-to-disagree (or, perhaps, “wait and see”) approach with respect to the hard choices facing aspiring budget balancers.  As I’ve written about before, the simple reality is that the earnest budget balancer must raise revenues in some fashion. This was perhaps okay with GOP glitterati, but definitively not if this revenue came about as the result of an arguably transparent increase in marginal tax rates.  (Rather, we should have a tax cut that was (more than) offset by limitations on deductions, which is not only a silly and cynical move to obfuscate, but doubly disingenuous, insofar as it misdirected attention from the absolutely unfair and economically unwarranted differential treatment of capital gains and interest income.)

So, anyway, with President Obama’s reelection, the bargaining game is a little clearer now.  Here’s where the “math” of this topic comes in (though there’s some math inherent in the preceding soapbox topping, too).  The fiscal cliff empowers Obama to the degree that he fears the triggers of the 2011 agreement less than do Boehner and his GOP colleagues (not to mention McConnell and his GOP colleagues).

In my corner of the spectrum, this is to my knowledge often referred to as either “Romer-Rosenthal bargaining” (due to Romer and Rosenthal (1978)) or, perhaps, crisis bargaining.  I often refer to this situation as the former, but to be fair and transparent, it’s really not.  The details are not that complicated, but the simplest explanation is that Obama doesn’t actually get to commit to a proposal.  Rather, he can make non-binding statements about what he would or would not veto, similar to Matthews (1989).

So what?  Well, theory indicates that there are two questions that are central to determining how this plays out (supposing that all of the players are rational and believe that each other is rational, and so forth—but if that doesn’t hold, then, well, you’re on your own, kid).  Making things (overly) simple and presuming that the Senate Democrats have the same preferences as President Obama, these two questions are:

1. What is the set of outcomes that both the GOP and Obama prefer to falling off the cliff?

2. What are the relative costs to the GOP and Obama of delaying an agreement between now and then?

An interesting and general characteristic of traditional, complete information bargaining models (which assume that, in this example, both Boehner and Obama know the answers to questions 1 and 2, above, and know that each other know the answers to these questions, and so on…) is that delay will not occur.  In other words, presuming (as seems realistic, given market reactions) that neither Obama nor Boehner prefers to wait to secure any given resolution to the crisis, there should be no delay in reaching this agreement.

To be practical about the matter, I don’t think they have refuted that prediction yet.

However, I also do not believe that Obama knows how much Boehner can stand delay in reaching agreement.  In particular, Obama seemingly has no interest in delay, as he has real matters to deal with, but Boehner has a much less transparent position.  Should he resolve this issue because of the uncertainty’s effects on financial markets?  Or would resolving it too quickly undermine his ability to corral his more boisterous copartisans?

This uncertainty, which I believe is definitively descriptive of Obama’s beliefs about Boehner (particular after the 2011 experience), might very well partially characterize Boehner’s beliefs about his own standing.  Regardless, it raises the important possibility of delay prior to ultimate agreement emerging as “option value” for Boehner.  That is, even if (or, actually, particularly if) Boehner is completely certain about, and assured in, his own standing with the GOP caucus, he has an incentive to vacillate, preen, and stonewall while dealing/negotiating with Obama regarding the final resolution to avert the fiscal cliff.

Note that this prediction comes about precisely in the absence of any assumed “ego rents” on the part of Boehner.  In a nutshell, the uncertainty about Boehner’s bargaining position relative to his own caucus can generate sufficient incentives for him to “act the diva,” and seem to hold court in a fashion befitting LeBron’s act leading up to “The Decision.”  The simple explanation of the strategic incentives underlying this is that Boehner can utilize Obama’s uncertainty about Boehner’s bargaining ability to make it appear like, even if Boehner does “care at least as much as Obama” about resolving the fiscal cliff in an expeditious fashion, that Boehner can’t “deliver a deal” equal to Obama’s “reservation price” (or, in other words, that Boehner can’t get his caucus to agree to Obama’s demands).  The implicit value to Boehner is that Obama, on the margin, will give in a little to secure what he perceives as the marginal certainty of securing a deal from Boehner’s copartisans.  In other words, at the end of the day, as 2011 purportedly demonstrated, Boehner may ironically (but completely classically from a game theoretic vantage point) benefit from being able to portray himself (accurately or not) as not being able to corral his own troops.  “Sir, I told them gruel was sufficient to survive the night, but they simply insisted they’d die without gruyère.”

In such a setting, delay is essentially inevitable: given such uncertainty on the part of Obama about Boehner’s ability to deliver his own caucus (which is essentially the same as Obama being unsure about Boehner’s own “reservation price”), Boehner will/should at least “test the waters”–probably by losing/delaying some sort of test vote in the House.

Why does this matter? Well, once you recognize that Boehner has this incentive, then one recognizes that Obama has an incentive to overstate his willingness to “wait the GOP out.”  In other words, Obama’s uncertainty abut the GOP’s ultimate and effective preferences (more appropriately, the shared knowledge of Obama’s uncertainty) creates an incentive for Obama to create uncertainty about his own resolve.

Where does this end?  Well, my (and let me be clear it is at best a) guess is that the two sides agree to letting the Bush tax cuts expire for the top 2% of earners, limit deductions for something like the top 5% of earners, and take “halvesies” on some of the (discretionary & non-military) spending cuts.  I’ll leave it for another post, but these revenue tricks will probably net much less than one might expect if you apply the straightforward calculations based on the normal tax code, because a lot of the top 5%, not top 1% of households are already paying the alternative minimum tax (AMT) and accordingly having their deductions rather severely curtailed.  Thus, the “new revenue” from such a deal would be muted relative to expectations.

I am not sure that this is a bad outcome.  I feel like everybody (all 28 of us) who is paying attention to the details of this important part of the federal budget dynamic is implicitly hoping for a take-it-once-fix-it-all pill, and I also feel that all of us know that this might work ceteris paribus, but that nothing with respect to fixing a ~$1 trillion deficit within a year or two should be taken as ceteris paribus.

On that note, I leave you with this.

Somewhere in the midst of this year’s elections, there is a debate about the structure of the federal government’s tax system.  A common complaint about the system (and, increasingly, the Affordable Care Act) is dubbed “double taxation.”  In this post, I describe the complaint and note its nonsensical nature.

In a nutshell (and framed in terms of corporate taxes, perhaps the most frequent target of this charge), the complaint about double taxation is as follows.  Suppose you own a corporation that earns $100, taxed at 35%.  The corporation’s after tax revenue is $65.  Suppose, as the sole shareholder, you take this income as a dividend.  TO keep things simple, suppose that this dividend income is taxed at the highest personal marginal income tax rate, also 35% (some dividends are currently taxed at lower marginal rates).  Then you end up with $42.25 after both rounds of taxation. In other words, the income was taxed at an effective tax rate of 57.75%.

I have two points.  First, the concept of double taxation by the same government is a red herring.  It is misleading, in the sense that it suggests that you’re paying twice for the same thing.  That is, the implicit claim is that you’re paying twice for that admittedly abstract service, “governance.” But, in reality, since we’re running a deficit, you’re currently not even paying a full “once” for it. Consider first the following example.

Suppose that the government sends you two tax bills, one for “domestic spending,” and another for “defense spending.”  After you pay the first one, the resulting money from which you have to pay the second has already suffered the ignominy of taxation!  The second tax bill is less legitimate, no?  No.

Put another way, suppose that the government outsourced all of defense to Chuck Norris and a band of mercenary zombies (to prepare for the 1000 years of darkness).  Instead of collecting the second tax to pay Chuck and his loyal brain eaters, you are instead directly sent a bill from Chuck for the same amount as you would have paid in taxes.  Is this double taxation?  No, because it’s a bill, not a tax, right?  In other words, is it double taxation whenever someone pays an admission fee to a National Park?  Or how about when you pay for a passport?  In short, the correct answer is “double taxation is a red herring.”

Corporations are a choice. The second point I will make is more specific.  The point of most double taxation arguments these days is that corporate income is double taxed and, essentially, this is unfair.  I am not in the business of saying what is fair, but I am happy to describe my reasoning for why something is reasonable.

A simple argument for why it is reasonable for corporations to pay taxes goes as follows. Corporate taxes are avoidable: simply carry on the same economic activity without a corporate structure. That is, make all of the arrangements using traditional contracts, signed by you as the sole proprietor.

Why don’t corporations do this?  Well, because corporations extract large and real benefits from resource pooling made possible through the provision of limited liability to shareholders.  (There are also tax benefits from incorporating, but I will set this obvious target to the side.  And I won’t touch this one.)

Without going into too much detail about limited liability, suffice it to say that the benefits corporate structure are entirely derived from the state’s role in enforcing contracts and adjudicating liability.  In other words, corporations are ancillary to the rule of law of which the state is the ultimate purveyor.  Accordingly, any constitutional tax structure that the state’s citizens choose to impose on corporate income is reasonable.  (By constitutional, I am waving off tax structures such as those that base tax rates on forbidden criteria such as the race or ethnic origins of the shareholders.)

Note that this point implies that fairness objections to international double taxation (taxation by two nations’ governments) are inconclusive as well.

There are a number of other arguments (e.g., the voluntary nature of dividend distribution, the issue of capital gains and (expected future) taxes being priced into assets), but I will conclude here by pointing out that I am not arguing that the taxation of income necessarily should be differentiated according to the income’s source.  Rather, the argument that it should not should be engaged directly.  Arguing that something is “double taxed” shows that one is either thinking only halfway or telling a half-truth.

As I shake off post-Steelers-disappointment and look forward to the BEST MONDAY NIGHT OF THE YEAR I leave you with this.

At least among social scientists and their supporters/detractors, there was a fairly active discussion of the House of Representatives version of the Commerce, Justice, Science, and Related Agencies Appropriations Act, passed back in May.  For example, Christopher Zorn wrote this, Ezra Klein presented a well-intentioned take on the issue, Brendan Nyhan presented this defense, and then there’s this misguided & facile, but highly placed piece by Charles Lane. (Apologies for all of those I did not include here.)

I am not going to defend or oppose NSF funding here.  In my opinion, there’s no “right” position on this, and even if there were, there is little reason to suspect that people would agree even on what constitutes evidence.  After all, there are reasonable arguments for and against the government funding any research or, for that matter, education.

I just wanted to note that the efforts to reduce funding for social science research continue. Specifically, as described here in Science by Jocelyn Kaiser, NIH funding for general social science research and economics research in particular is to be eliminated according to the draft appropriations bill the Labor, Health and Human Services, Education, and Related Agencies Subcommittee of the Committee on Appropriations of the U.S. House of Representatives.

In a press release, the elimination of funding for social science research is described as ensuring that “the NIH support only research projects that are highly meritorious, based on peer review processes, and that continue the agency’s historical unbiased position toward specific diseases.

As I said, I don’t take a position on whether social science research funding “should” be cut. I just think it is important to note that the developments make even clearer the irony of sophomoric and facile pronouncements by those who truly don’t have the time,  knowledge, or perhaps the inclination to consider the deeper questions at hand in these budgetary battles.  The use of limitation riders and their ilk has a venerable history of screwing with big politics through the use of disarmingly little screws.

Finally, for those (quite appropriately) more concerned with Big Bird than with Big Science, note that this version of the appropriation bill cuts over $100 million in funding for the Corporation for Public Broadcasting.  It also prohibits funding for Planned Parenthood unless it certifies it will not provide abortions, effectively bars implementation of a new NLRB rule regarding union elections, and eliminates funding for the new Center for Consumer Information and Insurance Oversight, a key oversight office for the Affordable Care Act.  This office is responsible for regulating health insurers (like limiting inflation in insurance premiums and like ensuring that insurers provide enough coverage to their customers), and setting up and managing health care exchanges for states that (choose to) fail to do so on their own.

By appearances, this might seem just another mundane appropriations bill (of which there are typically 14 or so through the year).  But appearances can be deceiving.  Accordingly, I leave you with this.