Today's Supreme Court decisions on Trump's taxes

Trump won both decisions in one sense - due to his continuing opportunity to force delay, vital information that could shed light on his criminality and worse will remain secret, even from the New York DA, until after the November election. 

But he lost both decisions in terms of the legal issues. This shouldn't be surprising, of course, since his legal position is so many light years beyond the pale of US constitutional norms. As the Supreme Court rightly put it, he is in effect claiming to be a King, despite two centuries of legal and political history to the contrary.

Given the egregiousness of his likely crimes and the already compelling evidence of them, it seems clear that the House of Representatives should be able to make a case for extensive discovery that no reasonable court, acting in good faith, could credibly rebut. (Which is not to say that no judges or justices will try.) But the time frame for this is long enough that it might not matter. If he stays in the White House post-election, it is not clear to what extent normal legal norms will matter. If he is out, this might be the least of his problems.

One odd feature of Trump v. Mazars that caught my attention is the following passage, which I have taken from the up-front syllabus of the decision:

"Historically, disputes over congressional demands for presidential documents have been resolved by the political branches through negotiation and compromise without involving this Court. The Court recognizes that this dispute is the first of its kind to reach the Court; that such disputes can raise important issues concerning relations between the branches; that similar disputes recur on a regular basis, including in the context of deeply partisan controversy; and that Congress and the Executive have nonetheless managed for over two centuries to resolve these disputes among themselves without Su- preme Court guidance. Such longstanding practice ' ‘is a consideration of great weight’ ' in cases concerning 'the allocation of power between [the] two elected branches of Government,' and it imposes on the Court a duty of care to ensure that it does not needlessly disturb 'the compromises and working arrangements' reached by those branches.'"

This is an extraordinarily, perhaps even willfully, blind thing to say when you have an administration that has, as its position, allowing no Congressional discovery whatsoever. In context, the rogue nature of the current administration is something that should be judicially cognizable. You can't reasonably defer to the political branches working things out when one of them has decided to act in bad faith and without regard to the Constitution, the principle of separation of powers, or 200 years of previously undisputed practice. The current administration makes no secret of, and leaves no possible ground for doubt concerning, its wholesale rejection of "compromises and working arrangements" that reflect the existence of coequal executive and legislative branches.

The new baseball rule for extra innings

When the 2020 baseball season finally starts (i.e., if the pandemic doesn't stop it), there will be a new rule at the major league level, under which, for extra innings, each team will start with a runner at second base. The idea is to make scoring more likely, hence shortening the games that burn out teams' pitching staffs while also asking too much of the fans. (I certainly can't follow Mets' night games for very long, if at all.)

I'm not inherently against the new rule either on tradition grounds or because it's so arbitrary. To me, it's an empirical question of how it affects the fan experience of following the games. But in that regard, I wonder if it will backfire. We'll see.

One possibly interesting strategic element follows from the fact that the runner who starts out on second base is the one who made the last out in the previous inning. (Or his lineup replacement.) Suppose the Mets had a speedy outfielder batting in the ninth, with two outs, no one on base, and Wilson Ramos on deck. Would the other team consider walking the outfielder to pitch to Ramos, just so he could make the last out? He is said to be the slowest runner in baseball, so the idea would be to handicap the Mets if the game went to extra innings, unless they were willing to sub him out.

But on to the big problem. What worries me about the rule is that it might lead to boring one-run strategies. That is, have the extra inning's first batter bunt the free baserunner over to third, with the next one bunting him home. That would be little fun to watch if it happened too frequently. And when it did succeed, there would be two outs and no one on base, limiting further scoring and excitement.

Suppose the visiting team fails to score in the top of the inning, or scores exactly one run.  That would put a huge premium on one-run strategies in the bottom of the inning, such as bunt-bunt with the runner on second.

But if you think about it recursively, then in the top of the inning the visiting manager is going to be anticipating what the home manager might do in the bottom of the inning. Scoring zero runs in the top, as a consequence of seeking to maximize expected runs but falling short, leaves one open to the home team manager's getting the relatively easy run, in the bottom of the inning, by following the boring strategy.

To put it differently, a visiting manager with a runner on second base and no outs becomes more likely to follow a one-run strategy once he knows that the home manager will also start out with a runner on second base.

Again, it's an empirical question whether the new rule will backfire in this way. Good idea to try it out in a 60-game season, so it can be discarded or tweaked if it malfunctions.

Zoom link to my session at the Critical Tax Conference regarding my minimum tax paper

I recently posted a link to the sessions that 11 of us (i.e., US tax law professors) held recently at a Critical Tax Conference that took place via Zoom (rather than in Gainesville, FL) once the pandemic got in the way. But now, courtesy of the Tax Prof blog, I can offer links just to my session (here), or to each of the 11, now available separately (here).

My minimum tax paper, which I discussed at the session, is available here.

Past laurels

I've listened a few times to the new Bob Dylan album, and I do think it's quite nice in its mellow way. But today, while we were out for a drive, we were just a couple of minutes from our destination when it ended, so I put on "All I Really Want to Do" (written in 1964 and released on Another Side of Bob Dylan in 1965).

My gawd, what a difference. That song, one of his really great ones, is so cracklingly alive - funny and sarcastic and sincere and ambiguous and powerful. He playfully gives this astonishing catalog of all the things you shouldn't do with or to a romantic partner, including playing multiple types of head games. It's jokey and rhymey, but at the same time a brilliantly assembled and variant list.

Then the classic ending about not wanting to make her to "see like me, feel like me, or be like me" - which of course is also so right. But he laughs, which has always conveyed to me his sense of the utter weirdness of anyone being like Bob Dylan. But throughout, the sarcasm and sincerity are so inextricably mixed, including the obviously suspicious come-on inherent in "All I really want to do, is, baby, be friends with you." Yeah right. The ambiguity is a large part of what makes it so great. (Missing, of course, in the Byrds' pretty and tuneful but shallow version.)

It is too bad for other artists, in a way, that we listen to Dylan today because he did such great things more than 50 years ago.

Another, much briefer, Ed Kleinbard tribute

Today at a Zoom conference I was asked to offer brief words about Ed Kleinbard. Not wanting to repeat myself entirely, I said approximately the following:

Ed was a great personal friend, but today I want to emphasize the professional side.

He became the most respected and admired practicing tax lawyer in America – but that wasn’t enough for him. He saw how much of the tax law is arbitrary and formalistic. But instead of concluding “Ah, it’s just a game,” he decided to change his career at age 55, which is incredibly brave, and not at all easy. It brings to mind Michael Jordan going to play baseball, except Ed succeeded.

He combined an incredible understanding of capital income taxation, including its international components, with a zeal for doing good in the world, through the use of logic and rigor. He was brilliant and boundlessly energetic, and made a number of major contributions. Just to name two: his work in bringing “stateless income” to wide public attention. And, his grossly under-appreciated work on the business enterprise income tax or BEIT, paired with dual income taxation.

He also has a book coming out next year with the Oxford University Press, called “What’s Luck Got to Do With It?” It’s about fairness, opportunity, and the importance of luck, but of course with a specific policy focus as well. I and others aim to make sure that it does come out as scheduled, although, given the projected publication date, it may not yet have been copy-edited.

As a mutual lawyer friend noted to me yesterday, Ed “didn’t suffer fools and mountebanks well.” Of course, you didn’t have to be one to get into a policy argument with him! (As a number of our mutual academic friends can testify.)

He also does not seem to have liked it when people’s work was sloppy or careless. This reflected his belief that people should care about doing things well.

We can all learn from Ed – certainly I can – that what we’re doing in tax scholarship isn’t just art for art’s sake, although that matters too, but is also moral, both because it affects people and because it’s right to try to do things well, not poorly.

I’ll miss him, and so will our field.

Zoom talks online

You can now see online the Zoom paper presentations that 11 tax scholars, including me, gave at the Critical Tax Conference a couple of months back. With closed captioning, no less. I discussed my minimum tax paper, which I also discussed today via Zoom at the Oxford Tax Policy Centre's annual symposium.

The link for the 11 Critical Tax Zoom talks is here. I'm the eighth one down.

In memory of Ed Kleinbard

I wanted to express my very great grief, both personally and professionally, regarding the death of Ed Kleinbard, who succumbed last night to a vicious cancer that he had been fiercely, bravely, and creatively battling for many years.

 

I'll start by repeating some words written by Joe Bankman. Then I'll switch to a personal note.

 ; 

From Joe: “Ed spent the first 25 years of his career in practice, where he helped shape the tax treatment of derivatives and wrote academic and practical articles on tax reform.  He served as Chief of Staff to the Joint Committee on Taxation from 2007-2009, and then accepted a full-time appointment at USC in 2009.

 

“In the next ten years, Ed wrote over a hundred pieces, ranging from books, to book chapters, long law review articles, and op-eds.    He was one of the two or three most widely-read, and influential, tax scholars in the country.

 

“He is perhaps best known for his work on corporate tax avoidance.  He coined the phrase ‘stateless income’ to describe the ability of multinationals to site their worldwide income to tax-haven countries with zero rates of tax.  Most of his writing is on distributive justice.

 

“Ed was a friend and co-author.  He was funny, loyal, passionate, and acerbic.”

 

On my own personal note: I heard about Ed long before I first met him. He was a legend in the NYC and national tax bars – among people who don’t take easily to viewing others as legends. But in his case one had no choice - he stood out like a star among planets.

 

The first time I ever met him was at an NYU Tax Policy Colloquium. He arrived 5 minutes late, hence didn’t introduce himself at the start. As it happened, at that session, I kept praising what I called important work by a man named Ed Kleinbard. (It concerned a piece he had written on “tax cubbyholes” that did an extraordinary job of explaining how tax law converts the multidimensional continua of real world financial instruments into discrete, manipulable, discontinuously treated categories. This was a novel point when Ed first made it.)

Meanwhile, Ed had a lot to say at the session, and a couple of other NYC tax practitioners in the room kept calling him “Eddie” (a form of address that I don’t think he preferred). Finally I asked him who he was, he said “Ed Kleinbard,” and everyone laughed because of how I had been praising his work. Someone told me afterwards that, if I had known who he was all along & been playing dumb in this way, it would have proved I was a natural Dean candidate. (But of course no such bad luck.)

 

I soon became good friends with Ed, who by this point was close to his career change (Joint Committee of Taxation chief of staff, then law teaching & scholarship). Indeed, I wanted to recruit him to the NYU law faculty, although this did not end up happening. I always learned from him, and always found him delightful. A true polymath, among other things.

 

Because the academic world, like so many other realms, is at times a social club, some of his work did not receive as much respectful attention as it deserved. I have here particularly in mind his work on reforming the corporate tax (and capital income taxation more generally), such as through the business enterprise income tax (BEIT) and dual income taxation. Far worse ideas than his - which is a very good one - have gotten far more attention than the BEIT ever did.

 

Ed is the second great friend of mine in academics to die tragically before his time. The first was David Bradford. (I’d also count Walter Blum, but at least he got to live into his 70s before succumbing, also prematurely, to cancer.) Each one’s death leaves me feeling bereft – not that it is about me. I would so like have dinner with each of them again, and discuss things of mutual interest, both personal and professional.

 

The last time I saw Ed was at USC last December, where I flew out to give a talk. As it happened, the day before I flew out there, I had a terrifying health scare, which turned out NOT to materialize. (I.e., a preliminary test raised the possibility of something very bad, but a follow-up test that I had the next week showed that I was actually okay.)

 

With that potential bad news haunting me, I stepped into a restaurant in downtown LA to meet Ed for dinner, the night before my USC talk. Almost his first words upon seeing me were that I didn’t look so good. We talked it out, and he was incredibly encouraging, as well as empathetic and enlightening given his own  health issues. He also offered great advice in the event that things should turn out badly, in the follow-up test, rather than well. I almost felt as if I had let him down by turning out to be okay.

 

I remember thinking afterwards that there wasn’t anyone in the world, leaving aside immediate family, who could have been so supportive and encouraging, as well as concretely helpful, as Ed was in that conversation. (Knock on wood re. my escape: and, for ALL of us, any such reprieves are only temporary.)

 

I am sure I am not the only one who wants to think about how best to honor Ed. One or more public events honoring both him and his work should certainly be a part of this, even if it has to be held via Zoom. Something ought also to be published as a part of this, with many people’s contributions. I hope to be able to hear &/or say more about this in the days to come.

NYC Tax Policy Colloquium - time finally set

In my earlier post about this year's Zoom-only Tax Policy Colloquium, I noted that the time for our PM sessions had not been set. After internally discussions we've now been able to put it at 2 to 3:50 PM, EST, on fall semester Tuesdays.

One advantage of this time, we hope, is that people from California to Europe will find it feasible. Probably a tougher sell in, say, Australia, but one can always hope.

As noted earlier, we're planning a cocktail or tea time after the session, for a small group by Zoom. Given the time of the sessions, these probably won't happen right afterwards, but perhaps at 5 or so EST, varying with the presenting authors' preferences. (And we'd probably skip a given session if the author opted out.)

Finally, here again is our schedule for the fall semester:

1.                         Tuesday, August 25 – Steven Dean, NYU Law School

2.                         Tuesday, September 1 – Clinton Wallace, University of South Carolina School of Law

3.                         Tuesday, September 8  – Natasha Sarin, University of Pennsylvania Law School

4.                         Tuesday, September 15 – Adam Kern, Princeton Politics Depa't and NYU Law School

5.                         Tuesday, September 22 – Henrik Kleven, Princeton Economics Department

6.                         Tuesday, September 29 – Leandra Lederman, Indiana University Maurer School of Law

7.                         Tuesday, October 6 – Michelle Hanlon, MIT Sloan School of Management

8.                         Tuesday, October 13 – Steve Rosenthal, Urban-Brookings Tax Policy Center

9.                         Tuesday, October 20 –Michelle Layser, University of Illinois College of Law

10.                      Tuesday, October 27 – Daniel Shaviro, NYU Law School

11.                      Tuesday, November 10 – Owen Zidar, Princeton Economics Department

12.                      Tuesday, November 17 – Abdoulaye Ndiaye, NYU Stern Business School

13.                      Tuesday, November 24 – Lilian Faulhaber, Georgetown Law School

14.                      Tuesday, December 1 – Erin Scharff, Arizona State Sandra Day O’Connor College of Law

The Supreme Court denies cert in Altera

Yay, the Altera case is finally over, as the Supreme Court denied the taxpayer's petition for a writ of certiorari.

Given how the 2017 tax act changed the relevant law going forward, this case really was not cert-worthy. Plus, in my view and that of many of my colleagues in the international tax policy community, the taxpayer's case was extremely weak, even though it somehow won (unanimously!) at the Tax Court level. The view taken in Treasury regulations, to the effect that taxpayers could not (still further) game the cost-sharing regulations between themselves and tax haven subsidiaries by disregarding incentive compensation, was clearly correct on the merits, and had ample support within relevant existing law.

Plus, the taxpayer's challenge to the adequacy of the Treasury / IRS response to their (in my view) feeble arguments at the Notice & Comment stage not only was itself feeble, but threatened to undermine Treasury preambles as a useful document for taxpayers, by converting them from an explanation that tries to be helpful into a pre-litigation document.

Had the Supreme Court granted cert here, it would probably have betokened either confusion on their part, or a breathless eagerness to find cudgels to throw at the IRS and Treasury (or perhaps regulatory discretion more generally).

Insofar as there are still open disputes on the Altera issue winding their way either through the audit process or the courts, one hopes that all parties will have the good sense simply to settle them without much further ado - perhaps on IRS-friendly terms given the case's 9th Circuit outcome.

Familiar tax rules in unusual times

According to a WSJ piece (subscription required) from last Friday by Richard Rubin and Theo Francis:

"U.S. companies brought home $124 billion in foreign profits in this year’s first quarter, the highest level since an immediate rush after the 2017 tax law, according to data released Friday by the Commerce Department.

"The repatriations, made just as the coronovirus-related recession was starting, were a sign of how much companies may have needed cash in their U.S. operations."

This is interesting in relation to thinking about international tax policy, as it reminds us of how contingent and changeable our core assumptions may be, even if based on years of observation and experience. Let me back up to explain.

Until the 2017 tax act, U.S. international tax law had a rule called deferral, under which foreign source income (FSI) earned through foreign subsidiaries wasn't taxable to the U.S. parents until it was repatriated for tax purposes, such as through the payment of a dividend. The rule's origins rested on absurd formalism: the notion that there was actually a meaningful separation between a U.S. parent and wholly-owned foreign subsidiaries (as distinct from foreign branches), simply because they were separate legal entities. The reason the rule persisted for so long was that it was generally contested (both politically and intellectually) how resident multinationals' FSI ought to be taxed, given that (a) the companies' domestic source income was (at least in principle) being taxed here, and (b) nonresident companies' FSI (from our perspective) wasn't being taxed here.

So maintaining deferral, subject to the repatriation tax, was an absurd ceasefire in place that persisted simply because how best to replace it was unclear. The 2017 tax act, for all its faults and foibles, did at least offer up some sort of solution, in which deferral was repealed but the domestic taxability of resident companies' FSI otherwise increased (through the transition tax plus the enactment of GILTI).

One common assumption that guided the entire debate was that US multinationals'' repatriation decisions were extremely tax-elastic. At the core, repatriation is completely meaningless economically IF their internal capital markets function entire seamlessly. While it was known that this wasn't 100% true - causing "lock-in," as companies awaited tax holidays or the repeal of deferral - to create some deadweight loss - it was deemed sufficiently true to be a good basic operating assumption, subject to one's remaining aware of the need for nuance. Second, it was thought to be the case that big U.S. companies generally weren't enormously cash-constrained, and that, for example, even if their U.S. domestic investments were sometimes quite low, e.g., during recent recessions before the current one, this had more to do with a shortage of appealing investment opportunities than of cash.

Maybe this time would have been different. That is, consider again the $124 billion that just came home due to an apparent rise in hunger for available cash. (If it was brought home for other reasons, such as fearing that the funds would be less "safe" otherwise, that might not change the analysis).

This money came home in the absence of adverse tax consequences - at least, from the repatriation itself; subsequent tax burdens from how the cash is used may still end up being affected. So we don't know how much of it would have come home in the presence of a repatriation tax (which would itself have depended on the companies' broader tax positions and ability to use further tax planning).

But if we accept that bringing the money home did matter more than it usually would have, then we get two likely conclusions:

(1) the U.S. Treasury would have gotten unusually high tax revenues from the repatriation tax under 2020 circumstances, making the repeal of deferral more regrettable than it might otherwise have seemed (subject to macroeconomic concerns about getting the $$ now rather than during an upturn), and

(2) the deadweight loss from cases in which companies decided NOT to bring the money hom,e given the tax bite would have been higher than usual under 2020 circumstances, making the repeal of deferral more welcome (i.e., less regrettable) than it might otherwise have seemed.

The overall takeaway depends in part on the relative magnitude of these two effects, i.e., on what would have happened under the counterfactual. We don't know, and it might not be the most desirable place in which to deploy scarce revenue-estimating resources. But the broader point, that things we take for granted may sometimes change, is worth more generally having in mind.