Comments on Risk Markets And Politics: Tax Futures, "In Real Life"

AMT, I addressed those contractability questions o...

2008-02-20T11:05:10.299-05:00

AMT, I addressed those contractability questions on my recent BNN appearance. No time to link now, but the basic idea is that we will spin-off markets if it looks like the current contracts are rendered ineffective.

Ken, I am not really sure what your point is. Ultimately we care about effective rates, but contracts on marginal rates are the first building block to be able to the former.

But no one trading the contract cares about effect...

2008-02-19T09:58:41.286-05:00

But no one trading the contract cares about effective tax rates; the contract is about nominal ones.

If you make just over the minimum to reach the 35/39.6% bracket, your effective tax rate is significantly lower than your marginal one.

Trading effective tax rates would give away the game on squealing about how high marginal ones are.

Congress is increasingly creative at adding rate b...

2008-02-12T12:37:35.615-05:00

Congress is increasingly creative at adding rate bubbles to phase out benefits. The stimulus package just added another 5% bubble starting at $75k/$150k. Other bubbles are 5% for personal exemption phaseout, approximately 1% for itemized deduction phaseout, 5% for child credit phaseout, and education credit phaseouts galore. Then there is the 35% marginal rate of the alternative minimum tax up to about $400k income as the AMT exemption is phased out. For all these reasons, the Schedule X statutory marginal income tax rates typically fall short of the actual (effective) marginal tax rates.

This intentional obfuscation of effective tax rates by Congress is a huge challenge to the construction of useful Tax Futures contracts. There is no good alternative to a contract based purely on the statutory rate, but such a contract is a very imperfect hedge when the effective rate is often much higher than the statutory rate, and unpredicatably so.

The statutory rate contracts provide a partial picture of our tax future, but they probably have more value as entertainment or forecasting than as a hedge.