Back in the U.S.A.

Last Friday, I returned to NYC after almost a month abroad.

Most of my time away was spent in Berlin, where I was a Research Fellow for 3 weeks at NYU Berlin. My professional activity there consisted mainly of working on a new article draft on international tax policy.  Then I spent a week in Vienna, where I taught a mini-course on International Tax Policy for graduate students in Vienna University's doctoral program in international business taxation (DIBT).  Side trips to Amsterdam (for a public speaking event) and Ljubljana (for enjoyment).

Although I enjoyed the trip, it's nice to be back in NYC, which remains my favorite city apart from its winters.

Ninth Circuit oral argument on Altera

I have been reliably informed (and then was able to confirm for myself online) that the Ninth Circuit oral argument in the appeal of the Tax Court's misguided Altera decision is taking place this Wednesday.  I gather that Susan Morse and Steve Shay will be blogging about this, and I'll duly post links thereto.

I previously discussed the Altera decision here and here. Stripped to its substantive (as opposed to administrative law) essentials, it's a case in which the Tax Court ruled that an indisputably correct Treasury regulation, to the effect that the bulk of compensation costs in a cost-sharing deal between related parties should be included in the formula even if they're structured as incentive compensation, was arbitrary and capricious, hence an abuse of discretion. In effect, it's an abuse of discretion to say that 1 + 1 = 2, unless one spends pages of regulatory preamble explaining why taxpayers were incorrect when they filed briefs at the notice and comment stage arguing that 1 + 1 = 1.

The Tax Court relied upon aspects of true arm's length deals that had zero pertinence or relevance to related party paper-shuffling agreements, and accepted expert testimony to the effect that incentive compensation that in fact is worth millions of dollars should be viewed as having a cost of zero.  Here's hoping that the Ninth Circuit straightens things out.

UPDATE: Here is the link for the Morse-Shay posting, further explaining why the Tax Court so clearly erred in striking down the regulation at issue in Altera.

Leandra Lederman adds her comments here.

Busy weekend in Ljubljana

Taking time off from my Berlin stay to enjoy a vacation weekend in Ljubljana (pronounced Loobleeyana), I kept busy by testing my new superpowers.

I also got to practice my famous John the Baptist impression.

Unfortunately, neither special talent seems to have survived my return to places further west.

The international part of the "Framework"

The bit on international in the "framework" is worth quoting in full:

"TERRITORIAL TAXATION OF GLOBAL AMERICAN COMPANIES

"The framework transforms our existing 'offshoring' model to an American model. It ends the perverse incentive to keep foreign profits offshore by exempting them when they are repatriated to the United States. It will replace the existing, outdated worldwide tax system with a 100% exemption for dividends from foreign subsidiaries (in which the U.S. parent owns at least a 10% stake).

To transition to this new system, the framework treats foreign earnings that have accumulated overseas under the old system as repatriated. Accumulated foreign earnings held in illiquid assets will be subject to a lower tax rate than foreign earnings held in cash or cash equivalents. Payment of the tax liability will be spread out over several years.

"STOPPING CORPORATIONS FROM SHIPPING JOBS AND CAPITAL OVERSEAS

"To prevent companies from shifting profits to tax havens, the framework includes rules to protect the U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations. The committees will incorporate rules to level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies."

Let me see if I can make any sense of this. They say it's a territorial system. But they also say that they will be "taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations." This can formally be reconciled, in the sense that what they literally say up top is that they will offer dividend exemption.  Of course, a full worldwide system in which deferral (for the foreign profits of foreign subsidiaries) was repealed would also have dividend exemption. Bringing the foreign profits home would have no tax consequences, since those profits would already have been taxed.


Is that what they are saying, albeit with a reduced rate for foreign source income? Seemingly yes, but then how is it a "territorial" system? And if they are taxing U.S. companies' foreign source income, how do they propose to "level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies"?

The repatriation tax is of course a welcome feature of switching to territorial, but the rate imposed is all important here.  I'm guessing it will end up being very low.  The dual feature, as between cash equivalents and illiquid assets, has a rationale but is likely to be messy at best in practice.

Neither tax reform nor a plan

I often feel impelled to quote that famous line about how the Holy Roman Empire was neither holy, Roman, nor an empire. The supposed tax reform plan that the "Big Six" have just released gets two-thirds of the way there. It is about taxes, but it's not reform - just massive, unfunded tax cuts - and it's not a plan - just rough ideas, sketched in crayon, that a Tax I law student could have done (better) in 24 hours or less.

It's really an insult to have to focus on so sketchy and poorly conceived an issuance.  I have better things to do with my time, and there are more thoughtful people around, on the right as well as the left, with whom it would be more fruitful to interact intellectually.

Just two quick things, as I'm saving international for a follow-up post:

--Why raise the bottom rate from 10% to 12%? I can see no good reason for this apart from malicious class warfare.  It can't be about revenue, given everything else in the plan.

--The 25% rate for business income of pass-throughs may take the prize as the worst new tax policy idea of the past thirty years. They say they'll have rules to prevent conversion of "personal income" into business income - but that just states (a part of) the problem, rather than offering any suggestion that it could be handled with any success or without massive and idiotic complexity. And why should "business income" get a lower tax rate than "personal income" - such as wages - anyway? Do they hate employment, as opposed to being self-employed? If so, why not simply fine people who take jobs working for someone else? That is essentially what they are proposing to do.

Back from Amsterdam

Back in Berlin after 3 days in Amsterdam, where I participated in a KPMG conference meant to enlighten corporate tax directors and such on what to expect and prepare for. I played the role of American expert (as did Danielle Rolfes) and of house pessimist.   The two are strangely linked these days.

Back in Berlin, where I've been writing a new international tax article on the treatment of foreign taxes by the U.S. and other tax systems and how this might related to what I call unilateral and strategic tax policy approaches. This piece pushes forward on some ideas that I've covered more cursorily in the past, and is a nice change of pace for me before returning to my literature & high-end inequality book. Among other things, it's easier to write.

The view from my window at NYU Berlin

Nice to see this corvid right outside my window at NYU Berlin, where at the moment I am working on a new international tax article (as a brief change of pace from my literature book).  I am a fan, or more like a distant admirer, of corvids as a group.

Corvids, due to their strikingly high intelligence, have been called "flying monkeys" by knowledgeable bird experts.  I gather that they need the brains (which are definitely not "bird brains" in the colloquial sense) both for social reasons and to navigate a complex environment. E.g., given that they are willing and able to eat just about anything, they both need to make good choices, and may try to access things that require some work and cleverness.

But, alas, it doesn't seem practical (and might not be prudent) to try to make a new friend here.

I am confident that my cats, if they were on the scene, also wouldn't deem it prudent to seek a closer association, even if they could get through the closed window. This bird is too big for them.

Precise targeting to increase high-end inequality?

I haven't yet read this recently posted article, but I plan to, as it seems to be important (and is by good researchers). But here is the key finding from its abstract:

"Using administrative data linking 10 million firms to their owners, this paper shows that private business owners who actively manage their firms are key for top-income inequality. Private business income accounts for most of the rise of top incomes since 2000 and the majority of top-earners receive private business income - most of which accrues to active owner-managers of mid-market firms in relatively skill-intensive and unconcentrated industries."

This would appear to suggest that the proposed lower tax rates for business owners of pass-throughs are almost precisely targeted to increase high-end inequality as much as possible, in exchange for as little efficiency payoff as possible. These probably tend to be people with low labor supply elasticity and/or who are in effect reaping rents.

What could Trump / Mnuchin mean when they claim taxes won't decline for the wealthy?

Not just Trump but also Mnuchin have been claiming that taxes won't decline for the high-income in the supposedly soon-emerging tax "reform" plan. The fact that Mnuchin is saying it, too, makes one think that maybe it isn't just impulsive lying or oblivious salesmanship, but reflects a view about what they will be able to claim about the ultimate package. Yet this is a deal that they are working on with Paul Ryan, not with Ron Wyden or Chuck Schumer.

So what might they be thinking, if we make the assumption (not 100% certain to be correct) that they actually are thinking strategically about the next stage? The following four things occur to me:

1) The fact that a corporate rate cut is likely to be at centerstage in the package may help them. Their argument that this doesn't help rich people can be both formalistic (corporations are separate taxpayers) and substantive (claims about the incidence of the corporate tax). Two points they will have to ignore, however, are (1) the transition incidence of cutting the corporate rate, which benefits existing shareholders if it wasn't fully anticipated, e.g., due to political uncertainty, and (2) the tax planning opportunities that a low corporate rate may give to high-income owner-employees.

2) They will be trying desperately to ignore the effects on high-income taxpayers of lowering the tax rate on amounts that business owners earn through pass-through entities. This is where the really big distributional action will be, if they go ahead with their reported plans to require people whom the tax system classifies as employees to pay significantly higher tax rates than those whom the tax system classifies as business owners. They'll call this a "small business" tax cut, but the point will be made in response that this a misportrayal of where the bulk of the benefit actually goes.

3) They anticipate announcing a package that takes away state and local tax deductions, and perhaps that also does something to home mortgage interest deductions. But these provisions seem highly unlikely to get through the Senate even if they are in the package and pass the House. Indeed, it's possible that they're being over-optimistic about the prospects even for unified "Big Six" endorsement of this.

4) Might they be planning not to propose repealing what is left of estate and gift taxes? Leaving that out of the package would certainly make it easier to claim that taxes aren't declining for the wealthy. But if I had to guess, they'll just try to brazen through the awkward tension between proposing estate and gift tax repeal and dressing up the package as no tax cut for the rich.

Plus ça change, plus c'est la même chose

After last night's game, the New York Mets' team ERA climbed to 5.02.

In 1962, the Mets' team ERA was 5.04.

Very different eras, but just sayin'.