2019 NYU Tax Policy Colloquium, Phase 1

We now have pretty much finalized our lineup of speakers for the spring 2019 NYU Tax Policy Colloquium, which I will be co-leading with Lily Batchelder.  It looks like this:

1.      Tuesday, January 22 – Stefanie Stantcheva, Harvard Economics Department.

2.      Tuesday, January 29 – Rebecca Kysar, Fordham Law School.

3.      Tuesday, February 5 – David Kamin, NYU Law School.

4.      Tuesday, February 12 – John Roemer, Yale University Economics and Political Science Departments.

5.      Tuesday, February 19 – Susan Morse, University of Texas at Austin Law School.

6.      Tuesday, February 26 – Li Liu, International Monetary Fund.

7.      Tuesday, March 5 – Richard Reinhold, Willkie, Farr, and Gallagher LLP.

8.      Tuesday, March 12 – Tatiana Homonoff, NYU Wagner School.

9.      Tuesday, March 26 – Michelle Hanlon, MIT Sloan School of Management.

10.  Tuesday, April 2 – Omri Marian, University of California at Irvine School of Law.

11.  Tuesday, April 9 – Steven Bank, UCLA Law School.

12.  Tuesday, April 16 – Dayanand Manoli, University of Texas at Austin Department of Economics.

13.  Tuesday, April 23 – Sara Sternberg Greene, Duke Law School.

14.  Tuesday, April 30 – Wei Cui, University of British Columbia Law School.

All sessions will meet from 4:00 to 5:50 pm in Vanderbilt 208, NYU Law School.

I called it above "Phase 1" of the 2019 NYU Tax Policy Colloquium because we are planning to switch to the fall semester, and hence will have 14 more sessions in September - December 2019 (and then again in September rather than January 2020, etc.)

Domestic mischief

How might this have happened? Garbage cans get knocked over rather often in our house, and all resident humans deny responsibility.

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The only lead we have to go on is that this individual was found very near the crime scene. Name Gary, age about 6, known to enjoy playing with rolled-up pieces of paper, which he will even, on occasion, fetch repeatedly (well, up to a point) like a dog.

Broader implications of Trump's tax cheating

My NYU colleague, Lily Batchelder, looks at issues broader than a particular individual's criminality, in an NYT op-ed today.

Altera amicus brief

A number of law professors, headed by Susan Morse of the University of Texas Law School, have filed an amicus brief in the Altera case. I am a signatory, not because I participated in writing it (although I did review it before adding my name), but as a gesture of agreement and support. More particularly, this is an important IRS regulatory case, at least in its broader implications, I believe the government's side in the case is clearly correct, but that the weight of self-interested businesses and people in the tax bar taking the other side requires countering by the considered views of people who care about the proper functioning of the tax system, without having economic stakes to consider. One wouldn't want the court to be deceived about where, in my view, the weight of thoughtful opinion actually lies

The amicus brief is available here.

I blogged about an earlier Altera amicus brief here. Quick background: the case involves transfer pricing, or more particularly use of the cost-sharing regulations to enable U.S. companies to report as arising in tax havens the value of intellectual property (for foreign sales) that was developed by employees of U.S. companies working in the United States. The Tax Court held for the taxpayer, on grounds I personally found ridiculous although there are those who view it more charitably than I do (based largely on what I would call formalistic misunderstanding of how to apply rules that are meant to yield accurate, rather than absurdly manipulable, income allocations). The Tax Court decision also had implications potentially undermining, not just IRS reg authority when being exercised completely reasonably, but also the use of Treasury preambles to new regulations as genuinely explanatory, rather than litigating, documents.

Clint Wallace and Susan Morse took the lead in preparing amicus briefs two years ago that may conceivably have influenced the Ninth Circuit's initial decision (by a 2-1 panel vote) in the government's favor. But one of the majority opinion's two signatories, Judge Reinhardt, had died before the opinion was issued. So it was decided, understandably I suppose, that a new judge had to be appointed to reconstitute the three-judge panel and decide it all over again.

The Morse et al amicus brief is arguing for the good guys in the "all over again" stage.

The NYT's Trump tax fraud story

In an alternative reality that I very much wish was our actual one, today's lead story in the New York Times, "Trump Engaged in Suspect Tax Schemes As He Reaped Riches From His Father," would be a political bombshell. In our actual reality, it may get drowned out, but it shouldn't.

Suppose that this story were about any other twenty-first century major party presidential candidate, premised on his or her having been elected. That is, suppose we had this story about either actual President George W. Bush or Barack Obama, or hypothetical Presidents (because they lost the elections) Al Gore, John Kerry, John McCain, Mitt Romney, or Hillary Clinton. This would be a bombshell story - tax fraud connived at by the president! Talk of impeachment by the other party. Demands for investigations, etcetera.

But in the world we find ourselves living these days, it risks being just another story. We've got credible suspicions of obstruction of justice and collusion with a hostile foreign power to hijack an election. There are immigrant children living in prison camps. We have a Supreme Court nominee who has been accused of sexual assault and perjury. There are Emolument Clause issues that may involve corruption, bribery, and the outright sale of foreign policy favors, etcetera, and on and on. Against that background, investigative journalism that appears to show decades of tax fraud is a bit like someone's kitchen oven exploding in Pompeii on the same day as the Vesuvius eruption. It gets lost in the din.

This whole environment, by the way, has tended to discourage me from commenting actively here on current politics. If you've read this blog for long enough, you may recall that I was a bit harsh at times on Mitt Romney during the 2012 campaign. But this was premised in part on the fact that I actually expected better from him. Plus, while he engaged in some quite aggressive tax planning that seemed open to question and audit challenge, it was well within the bounds of what well-advised people in his industry, working with the leading firms, were doing.

I don't believe that the same can be said of the tax maneuvers described in today's NYT article. Consider the discussion of All County Building Supply and Maintenance, using padded bills to transfer millions of dollars from Fred Trump to his children. As described in the article, fraud is the only word for it. Likewise, while self-serving, somewhat lowball valuations are nothing new in the estate and gift tax planning field, there is a limit. Reputable taxpayers, advised by reputable firms, don't claim values that are only 5 or 10% of the lawful number. And they don't set up clearly sham corporations, although there might be a case where the IRS claimed sham and the taxpayer had opinions from reputable (but well-compensated) tax lawyers explaining why they believed it had economic substance.

There will be a tendency for cynical people to say: "All very rich people do this." I don't think that's correct, at least to anything like this degree. It's partly about very rich people's self-interest. Why commit fraud with all its downside risk, when there are plenty of lawful tax planning opportunities that can significantly reduce one's liability anyway? (If not to the same degree.) And likewise, practitioners in the leading firms generally don't get engaged in this stuff, which would be bad for their professional reputations (and which they might personally find offensive).

In this regard, recall the Panama Papers. Not a whole lot of outright tax fraud by rich Americans was revealed therein - it was more about rich people from other countries. Or the enactment of FATCA to address secret offshore bank accounts. This was generally thought to be about people with high-flying (or mid-flying) cash businesses, not about the names in the New York social register, if such a thing still exists, or Page Six of the New York Daily News.

So if Trump's peer group is very rich people, what the NYT article describes does not appear to be anywhere near "par for the course." On the other hand, if his peer group is criminals - and he has, of course, expressed outrage about Al Capone's being convicted of tax fraud - then this is indeed the sort of behavior about which one would tend to suspect that they're all doing it.

What about very rich people in NY real estate? Here I think it is well beyond the norm, but I admit that I don't know with the same degree of confidence. I am certain that these people are not using people from the leading law firms to engage in tax fraud, but that doesn't rebut the possible existence of a norm more dishonest than that which is followed by rich people generally. I recall, for example, that Jared Kushner's dad was jailed on tax fraud charges, among others.

But I don't think it would be much of a moral defense of Donald Trump to say that rampant criminality and blatant tax fraud were common among NYC real estate tycoons, even if this proved to be the case (and again, my point here is just that I can't say from personal knowledge that it ISN'T the case). It would still be exceptional for people at his wealth level

How could the IRS have missed all this? I don't know the answer to that, but if the Trumps were extreme outliers compared to the peer groups that the tax authorities had in mind, that might offer a partial explanation. Auditors may not try so hard to look for things that they don't expect to find. They're presumably not asking, for example, whether Jeff Bezos got paid $100 in cash to mow someone's lawn and then didn't report it. And while they may audit GE and question its transfer pricing, they're probably not looking for off-the-books transactions in which GE was paid cash and didn't report it. So analogously, by transgressing peer group norms (at least, as defined by the tax authorities), the Trumps may have benefited from the auditors' assuming relatively normal behavior.

What are the tax consequences today? I'd like to hear from estate and gift tax lawyers about that, as it's outside my area of personal expertise. But what I believe to be the case is as follows. Say Fred Trump filed a fraudulent gift tax return in 1990, or fraudulently failed to file. The fraud means that the tax return remains open, and this may support collecting the amount due from the beneficiaries, without any need to prove for this purpose that they were engaged in the fraud. But again, this needs verification from someone who knows more directly about all that.

Last point, are there income tax implications? Suppose that, having in mind here All County, $X was fraudulently diverted from Fred Trump to a company owned by his children. It's treated as a payment for goods, or perhaps alternatively as a salary payment, whereas in fact it's just a concealed gift via the markup. In this scenario, the correct income tax treatment would be that Fred doesn't deduct it (or has higher gross income) and All County doesn't include it, by reason of its actually having been a gift. But if their marginal tax rates are the same, the net effect on their combined income tax liability might be a wash. E.g., if both sides had a 40 percent marginal rate at the time, then Fred would have paid .4X too little in tax, and All County .4X too much. But it would be interesting to know more about All County's tax planning, e.g., did it actually report the transaction consistently with this, if so did it deploy tax shelter losses to offset it, etc.

But here's a further income tax angle suggested by the article. It says that, by age 3, Trump was earning $200,000 per year (in current dollars)  from his dad's real estate empire. If this was being treated as salary, and being deducted by the father and included by the toddler-aged Trump, it could potentially have been criminal income tax fraud. A three-year old generally can't perform services of sufficient economic value to support that salary. And there would be a purported income tax saving from the child's having been able to benefit from the lower tax brackets with the respect to the amount at issue. But that's not to answer the separate question of what would be the IRS's legal recourse today, as the crucial fraud part would have been the deduction on Fred's return, since Donald's return would have involved over-reporting, not under-reporting, of taxable income.

NYU Tax Policy Colloquium schedule shift!

The next NYU Tax Policy Colloquium will be held on Tuesdays from 4 to 6 pm during the spring semester (as they laughingly, or perhaps wistfully, call it here despite how early it starts), which runs from January 22 through April 30, 2019.

But we will then be changing things up, perhaps permanently, by switching to the fall semester. Our current plan is  to hold the 2019-20 colloquium in the fall semester - late August through early December 2019, in lieu of our holding it in "spring" 2020. This will then become a permanent scheduling feature unless we get too much of an enrollment hit from the switch. (It's possible that we'll learn more students are able to fit it into their schedules in the spring than the fall semester, and if so we may have to reconsider.)

Jotwell post on recent Zucman et al paper

A website called Jotwell (for Journal of Things WE Like Lots) encourages its contributors to write very short pieces calling out for praise particular recent articles that were published in one's field.

I tend to participate in this annually, although with the press of other obligations I skipped 2017. But they have just posted this short piece that I wrote that discusses the recent Torslov, Wier, and Zucman NBER paper, The Missing Profits of Nations, which argues that big multinational firms are shifting A LOT (40% or more) of their economic profits to tax havens.

I note in my short piece that there is an ongoing dispute among leading empirical economists regarding whether the amounts being shifted are this high, or significantly lower. My own anecdotal sense of things is that the high estimates are likely to be correct, but I accept that there is a genuine empirical dispute here for the experts in such research to hash out. But in any event Zucman et al have found a creative and interesting new way of addressing the question, as I note very briefly in my piece and they explain at greater length in their paper.

As I note in my short comment, the greater the magnitude of such income-shifting, probably the less the real responses we ought to expect to, say, the recent U.S. corporate rate cut from 35% to 21%. But even if we get only minimal real responses because they do so much income-shifting anyway, it's somewhat of a separate question whether there would be more real responses if the income-shifting were more substantially shut down.

Hypothetical taxation of gambling

The fall semester at NYU Law School has begun, which by now feels fine (although it was kind of tough, as it always is, to start classes before Labor Day). I am teaching the introductory Income Tax class for the first time in several years. It's always fun to see (some?) students finding out that the subject has greater interest and more depth than they had expected.

Perhaps as soon as next week, we will reach the topic of how the Internal Revenue Code treats gambling losses. In brief, what the Code does is deny deductions for net gambling losses during the year. This is probably best rationalized as a proxy for the fact that people - say, gambling in a casino or at the racetrack for an evening here and there - may gamble despite expecting to lose money, viewing it as an entertainment activity. E.g., Person 1 goes to the theater at a cost of $100, because he or she likes to attend plays. Person 2 goes to the casino, expecting to lose $100 but anticipating a sufficiently fun time at the tables while this is happening. In the case where this expectation is precisely satisfied, these two cases look pretty much the same, and the tax law treats them the same by denying the deduction in both cases. (Leaving aside the issue of gambling gains on a different evening, against which the $100 gambling loss could be deducted.)

This is of course a bit of an arbitrary rule. And it has the odd implication that if, say, I bet you $100 on the outcome of the Super Bowl (and neither of us does any other gambling during the year), then as a matter of income tax law the winner has $100 of taxable income, while the loser has a nondeductible $100 loss. Plus, if I lose $200 rather than $100, than I'm actually worse off - perhaps emotionally as well as economically - yet the rule, by denying any deduction, in effect treats me as if I had enjoyed $200 of consumption value.

It strikes me that the taxation of gambling is a more interesting topic theoretically than it is as a practical matter (where rough and ready rules such as what we have today are certainly close enough for government work,). 

To illustrate a part of what I have in mind, suppose there were 3 types of gamblers, each wholly distinguishable from the other two and known both to themselves and the authorities. Suppose further that everyone was perfectly rational, given his or her preferences, and that there were no administrative issues of measurement (as well as none of identification), and also that there were no borderline or mixed-motive cases. Then it is plausible that each should be treated under a wholly separate regime, as follows.

PLEASE NOTE, HOWEVER, THAT WHAT FOLLOWS BELOW IS A THOUGHT EXPERIMENT TO TEASE OUT THE SEEMING IMPLICATIONS OF VARIOUS IDEAS - NOT AN ACTUAL PROPOSAL FOR THE FAR MESSIER REAL WORLD!

Case 1: Taxpayer rationally expects to break even, but wants to bet because taking on the risk is fun: As an example of what I have in mind here, people generally hate and try to avoid the sensation of free fall, yet they also have been known to stand on hour-long lines to ride scary rollercoasters. Suppose, analogously, that I bet $100 on the Super Bowl, despite ordinarily being risk-averse, because it will add to my excitement and pleasure in watching the game. (Or for that matter, I may bet the money on the Patriots as a psychic hedge, because I'm otherwise rooting against them.)

Here, under the strict assumptions that I am making, there is an argument for excluding both gains and losses. There is no reason to tax-penalize the activity, as between consenting adults who are in fact on equal terms. (I'm ruling out the scenario where one is a more skillful bettor than the other, hence should actually expect to win on average.)

The standard insurance argument for income (or consumption) taxation might suggest symmetrically including gains and deducting losses. Then one might raise the Domar-Musgrave point, to the effect that the bettors could offset this by scaling up the bet. E.g., if they want to bet $100, but gains are included and losses are deducted (with loss refundability if needed), they can get there anyway if their tax rates are the same. E.g., if the counterparties both face 33% marginal rates, then instead of betting $100 without tax consequences, they bet $150 with, and get to exactly the same place.

Is it unfortunate that they can do this? Not at all, under my assumptions. The income tax as insurance responds, in rational actor scenarios, purely to undesired risk (e.g., from the "ability lottery" or from having under-diversified human capital by reason of needing to specialize). But here, by assumption, people are rationally doing what they want and like. So, while their presumed ability to offset the undesired "insurance" suggests that maybe it just doesn't matter, ignoring the bet leads directly to the desired result. There is no motivation for making them adjust (even if it does no harm under the assumption that it's easily done, and indeed that in any event they are betting given the degree of mandatory insurance).

Case 2: Taxpayer rationally expects to win, and bets in order to make money: Suppose we have a card-counter in the game of 21, or else a really good poker player, who bets so as to make money, just as other people go to the office in order to earn a salary. Now we face the standard case of risky business investment, in which gains should be taxed and losses deducted (including with loss refundability). Real world loss limitation rules, such as the fact that one cannot use net operating losses to get direct federal payouts at the applicable marginal rate, arguably reflect measurement concerns - we may fear that people are creating tax shelter losses rather than reporting real economic ones. But I have ruled all that out of bounds for purposes of my hypothetical.

This regime of including/taxing gains while deducting/refunding (at the tax rate) losses provides arguably desirable insurance through the tax system in at least two senses. First, it in effect redistributes from better gamblers to worse ones, consistent with the ability lottery scenario where people differ in "wage rate" and can't insure against this privately due to adverse selection. Second, as with any other risky business investment, it provides desired insurance that might otherwise be unavailable. To illustrate this point, I used to know a card counter who went to casinos when he could spare the time, solely to make money. He hated the short-term variation, which in fact was high enough that he could go, say, from plus $35,000 to minus $20,000 (with gambler's ruin potentially looming) in the course of a few hours. He really just wanted to earn his expected return - while also needing to manage his stress over avoiding detection (which required making some deliberately bad bets, so as to throw off the watchers employed by the gambling establishment).

It's worth noting a further assumption that may be needed here to make this approach attractive. Normally we are glad that people are willing to engage in risky activity that has a net expected payoff. But in the case of gambling, the gains are other people's losses. If one thinks of this as rent-seeking or negative externalities, the approach I'm suggesting arguably is undermined. But under my assumptions, as opposed to those that it would be reasonable to apply in the real world, this is not an issue. After all, no one is systematically losing under my gambling hypotheticals unless, as I discuss next, they are deliberately (and rationally) undertaking it as a consumption activity.

Case 3: Taxpayer rationally expects to lose, but happily gambles anyway for the entertainment value: Suppose again that we have two people. The first spends $100 to go to the theater, anticipating an enjoyable show. The second spends a few hours in the casino, expecting to lose $100, likewise regarding this as a fun way to spend the evening. And suppose that the fun comes out of the process of the gambling itself - unlike in Case 1 above, let us assume that it's not from wanting to bear risk as such.

The theatergoer faces, of course, the risk that the play will prove to be a dud (and hence revealed ex post not to have been worth $100, much less a couple of hours  that one will never get back). But at least the financial cost is known in advance. One certainly could imagine the gambler thinking about the evening in much the same way, and thus regretting that in fact it's possible to lose a lot more than the expected $100 (or to have to end the night of gambling sooner than expected).

While we may be starting here to leave far behind the actual psychology behind gambling (which surely includes the hope of winning against the odds), one could, if one liked, conceptually divide the gambler's results into a "consumption component" and an "investment component."  From this standpoint, one might say that the above gambler has what ought to be a nondeductible consumption outlay, in the amount of the $100 expected cost, along with investment variation above or below that which "ought" to be deducted or included, as the case may be.

E.g., suppose I actually break even when I ought to have lost $100. Under the hypothetical approach, I would have $100 of taxable income. (After all, I'm $100 better-off than my otherwise identical peer who actually did lose exactly $100.)  Or suppose I have a rotten night and lose $200, even though I actually should have expected to lose only $100. Now I have a deductible $100 loss.

Note that, with perfect knowledge (by the gambler and the government) of the expected loss, we don't get into Domar-Musgrave adjustments here. If I change how I am actually betting, then I change the expected loss.

If one revised the treatment of Case 1 so that gains were included and losses deducted (rather than both being ignored), it would be receiving the same treatment as Case 3 (given that the expected loss in Case 1 is zero). So those two start to collapse together, once one picks at the examples a bit.

Likewise, once we see that, in Case 2, it's really the positive expected return that one might want to tax (as "ability"), one might start feeling inclined to ask whether, in Case 3, one should want to treat lousy gamblers, who rapidly accumulate large expected losses, less favorably than the more skillful (though still loss-expecting) gamblers, who are able on average to slow the bleeding, and thus to gamble less unprofitably or for longer. This might start to push us in the direction of wanting to treat really bad gamblers more favorably than good ones, e.g., by not simply benchmarking them off the larger expected losses that reflect their lower ability in this respect. This would in effect be insurance against being the sort of gambler who is bad enough at it to have a larger than typical expected loss. (And of course I am assuming that the difference here is in ability, not effort - we're in the same realm as a wage tax that discourages work if our making this adjustment discourages people from learning how to become better gamblers.)

But here, at last, is the ACTUAL takeaway that I derive from all this: Theory, at least of very simple kinds, is more tractable than reality. It's easier to say where greatly simplified hypotheticals would lead us under particular normative views, than to reach confident judgments about the real world, in which multiple, conflicting such hypotheticals may each be more than 0% true, and yet each push us in very different directions.