Tuesday, October 21, 2014

Yet another upcoming event at which I'll be a speaker

On Thursday, October 30, from 6:30 to 8:30 pm, NYU Law School will be hosting a book event for Ed Kleinbard's We Are Better Than This: How Government should Spend Our Money.  At this session, Ed will speak for a while, then Linda Sugin and I will both offer, say, 10 minutes each of commentary, followed by open discussion in the room.  A link for the event that includes a further registration link is available here.

The book is great - important, convincing, highly informative, entertaining, both erudite and sure-footed on a wide range of topics, and a major public service.  I'll make more particular comments at the session, and then post something about them here.

Roundtable discussion on corporate inversions

This Thursday, October 23, from 12 to 2 pm at the Fordham School of Law, I will be participating in a roundtable discussion on tax inversions.  Details are available here, and you can register for free on-line.

The other panelists will be David Shakow (a fellow academic, although he is also in practice), John Samuels (from General Electic), Paul Oosterhuis (from Skadden Arps), and Harry Grubert (from the Treasury Department).  These individuals are all aptly described as heavy hitters, with plenty of Washington connections and Treasury or Capital Hill experience in addition to field knowledge.

I might possibly be one of the more pro-government and anti-inversion of the panelists (so far as allowing the deals to have full intended effects is concerned), but I am certainly not doctrinaire, and it's possible that others will say things I'm not expecting.

I'll post something here afterwards, perhaps including a rough version or outline of my remarks.

Monday, October 20, 2014

New project

I've been reluctant to mention this here, for fear of jinxing a still inchoate new thing, but I appear to be moving towards (and into) a new book project, inspired by one of the small sidelights in the Piketty article that I coauthored with Joe Bankman (and that we will soon be posting on SSRN).

There's a short section of that article, representing one of my parts of this true joint project, in which we discuss Piketty's much-noted discussion of literature to help illuminate past rentier societies that he believes may tell us something about the future.  In particular, he discusses Austen and Balzac.  We quibble with his use of Balzac (who describes not just rentier society but more particularly the struggles of would-be arrivistes), and then briefly note other 19th and 20th century literature that is also about adventurers and arrivistes, before briefly commenting on Wodehouse's Bertie Wooster, who is the true comic embodiment of rentiers' decline amid the mid-20th century Great Easing.

This may, I am hoping, end up inspiring a book that, if it meets its objectives, will be fun both to write and to read, discussing the wealthy and the arrivistes, along with underlying social attitudes about both and their evolution over time, in fiction of my choice over the last two-plus centuries (e.g., Austen, Balzac, and Wodehouse, among others).  I'll be looking at the fictional worlds in these books, not in any close detail at the actual contemporaneous societies, and with no presumption that the books I choose to write about are the "right" ones in any sense other than that I personally find them fun and interesting (and usually, though not always, of high literary merit).

More travel and recent travel

I will be reprising my talk on the Piketty book in a talk at the University of British Columbia Law School in Vancouver on Monday, October 27.  Details here.

Good session in Charlottesville last Thursday when I last presented this paper, although the air travel aspect was not as much fun.  (Five-hour delay heading out, including a flight that returned to NYC after many minutes in the air, due to mechanical problems; one-hour delay heading back.)

The main comments I got in Virginia concerned the likely virtues of spelling out, a bit more thoroughly than the current draft does, the implications for tax instrument design of (a) different normative concerns about rising high-end inequality, and (b) different sources of rising wage inequality that one might to address, if one modifies Piketty's assumption that r > g is doing most of the work.

I also got an interesting sidebar comment on my blog, generally praising it but saying that, when I discuss politics, I am (a) too ungenerous to Republicans, (b) at least implicitly too generous to Democrats who often are equally in bed with plutocracy (I say "implicitly" because I don't actually praise them much here), and (c) insufficiently mindful of the sharp divides within the Republican camp - as shown by the populist and anti-rent-seeking passions that helped to retire Eric Cantor to a life where he will have to accept multimillion-dollar paychecks in lieu of being an inside player.  Point taken; I will try to do better.

Friday, October 17, 2014

Bill Gates on Piketty

As promised in an earlier post, here are some thoughts on Bill Gates' recent blog post on Piketty.

By the way, I would see no reason to take notice of this just because he's Bill Gates.  That does indeed in a way automatically make it of interest, because it's a famous multi-billionaire's response to a book about rising high-end inequality.  But I have too many conflicting demands on my time to bother noticing it here based on that fact alone.

Rather, the reason I comment on it here is that, in addition to that, the post actually is intelligent and interesting.

Early on, Gates says: "I very much agree with Piketty that:

o        High levels of inequality are a problem—messing up economic incentives, tilting democracies in favor of powerful interests, and undercutting the ideal that all people are created equal.

o        Capitalism does not self-correct toward greater equality—that is, excess wealth concentration can have a snowball effect if left unchecked.

o        Governments can play a constructive role in offsetting the snowballing tendencies if and when they choose to do so.

"To be clear, when I say that high levels of inequality are a problem, I don’t want to imply that the world is getting worse. In fact, thanks to the rise of the middle class in countries like China, Mexico, Colombia, Brazil, and Thailand, the world as a whole is actually becoming more egalitarian, and that positive global trend is likely to continue.

"But extreme inequality should not be ignored—or worse, celebrated as a sign that we have a high-performing economy and healthy society. Yes, some level of inequality is built in to capitalism. As Piketty argues, it is inherent to the system. The question is, what level of inequality is acceptable? And when does inequality start doing more harm than good? That’s something we should have a public discussion about, and it’s great that Piketty helped advance that discussion in such a serious way."

While I wholly agree with this, admittedly what it makes it especially noteworthy is that Gates is saying it.  How many others whose economic success approaches his would?

Gates then makes the following points, to each of which I respond after noting it:

1) Other economists have questioned the central importance that Piketty attaches to "r > g" in explaining rising high-end inequality.  That is certainly true.

2) Do "different types of capital" have "different social utility"?  For example, if A uses his capital to build his business, B gives all of her capital away to charity, and C uses his for high-end consumer goods, such as a yacht and a private plane, then the first two are delivering greater value to the society than the third.

No surprise that Gates should want to value charitable giving.  My understanding of his charitable activity is that it actually does, at least very frequently, have great social value.  But I wonder how widely applicable the conclusion he draws is.  Super-rich people who choose to add their money to Harvard's $36 billion endowment might as well throw it in the ocean instead, unless we see general merit to investing money in hedge funds. 

His distinction between saving and consuming could also be questioned.  The issue is really one of net positive externalities, if any, from the one choice as compared to the other.

3) Wealth accumulation decays as well as rises.  Half of the people on the Forbes 400 list of the wealthiest Americans made it to the top themselves.  We aren't dominated by people who bought huge land parcels and have been collecting rents ever since.  You get savers but also wastrels, and also wrenching economic change that creates new fortunes that outstrip old ones.

Here again I agree, but the topic raised requires more discussion than Piketty, Gates, or for that matter Bankman and I in our recent article have given it.  The question here, a subpart of what if anything is wrong with high-end inequality, concerns the relevance of turnover as to the particular families that are extremely rich.  In a simple optimal income tax model, it doesn't matter, but in the real world it might.  I think there is major room for work on how to think about the impact of high-end inequality under different circumstances.

4) Piketty has over-focused on wealth and income data relative to consumption.  Gates also notes that income data can be misleading for lifecycle reasons, e.g., if one is a medical student with low income and high loans but one expects a million-dollar surgeon in a few years.  Gates argues that "consumption data may be even more important [than wealth and income data] for understanding human welfare.  At a minimum it shows a different - and generally rosier - picture from the one Piketty paints."

Yes, I agree that income data can be misleading for lifecycle reasons.  Note that, for wealth data, the related problem is simply our inability to measure human capital and include it as wealth (which at least in many senses it is).  But the problem with consumption data is that it ignores unspent wealth that one can consume whenever one likes.  Suppose I have $1 billion but spend "only" $1 million on consumption this year.  I am better off than someone who spends $1 million and has nothing left.  In addition, given the choice I made, presumably reflecting my preferences, I am presumably better-off in a long-term sense than if I had consumed the entire $1 billion this year.  

A consumption measure misses this. By the way, that does NOT establish that a consumption tax fails to measure wellbeing on an appropriate basis.  After all, while it only taxes me this year on the $1 million that I actually spend, the present value of the deferred liability on the rest of the $1 billion is the same as if I had spent it this year (assuming constant perpetual consumption tax rates, etc.).  So the consumption tax doesn't get it wrong, at least in the trivial sense that seems indicated by looking just at current year liability, because one has to consider the deferred tax.  But if one is looking at current year consumption totals to judge how well off people are, it is not obvious how one could similarly be taking into account the deferred consumption.

5) Gates favors moving to a progressive consumption tax plus an estate tax.  Here I may be fairly substantially in accord with him.  I have written in the past about the case for progressive consumption taxation, and while I've increasingly grown concerned that it wouldn't in practice do enough about high-end wealth accumulation, I have been coming to think that, in principle - ignoring political economy problems! - taxing inter vivos donative transfers to other individuals plus bequests could take care of the rest.

6) Finally, Gates puts in a last word in favor of philanthropy, and notes that he and his wife are keen on its benefits while uneasy about the transmission of dynastic wealth.  Here I'd say that it depends on what sort of philanthropy is going on.  Private foundations in which the dynasts retain control probably are not adequate here, although admittedly this is not a subject that I know much about.  But also, when very rich people decide where the money should go, this is not always for the best.  You get, for example, charities for the rich (Harvard, the Metropolitan Opera, etc.) that may not be worth anything near the implicit budgetary cost of excusing application of the high tax rate on bequests that Gates suggests should otherwise be levied.

Overall, I'm quite impressed by this contribution to the debate even though I don't agree with all of it.

Slides for my talk at the U Va Law School concerning Piketty

Yesterday at the Law and Economics Colloquium at University of Virginia Law School, I presented the article on Piketty, coauthored with Joe Bankman, that we earlier had presented at the NYU-UCLA Symposium.  This time around, as a solo act, I revised the slides, which you can see here, and talked extemporaneously rather than having prepared remarks like those which I had previously posted here.

On Slide 3, standing at the far right, you can see the alter ego or stand-in for Joe and myself, as we thought of it when writing the paper.

Tax Notes article on the Boston College conference on reforming entity taxation

In my last post, I linked to Amy Elliott's Tax Notes article from this past Monday, entitled "Academics Dismiss Corporate Tax Reform Consensus as Superficial."  But for some readers it may behind a paywall.  So here are the parts most pertinent to the topic highlighted in the article title:

"Bipartisan talk of corporate tax reform is easy to come by in the halls of Congress, but it's merely talk, agreed a group of academics gathered in Newton, Massachusetts, on October 10.

"'The big consensus about corporate tax reform is really a superficial consensus,' said Daniel N. Shaviro of the New York University School of Law, speaking at a conference on entity taxation hosted by Boston College Law School and cosponsored by Tax Analysts. 'There's no obviously good way of doing it and that means that any proposal you put forth, . . . even if it would be an improvement, is going to have serious objections.'

"Harvard Law School professor Stephen E. Shay indicated he has lost hope for major tax reform in the near term. 'I don't view fundamental tax reform or any major piece of reform as remotely plausible for the next couple of years -- at least until some event-changing election,' he said. 'Any tax reform has to win a majority. The practical problem that we face today is we have -- unlike in [1986] -- a vastly more disparate set of objectives with respect to tax.'

"Shay added that the consensus that really needs to be built is between House and Senate Republicans. The party that controls the Senate 'is actually much less important for this issue than some people put credence on,' he said, adding that Congress is still struggling with the core structural problem presented by corporate tax reform: how to ameliorate its negative effect on owners of passthroughs.

….

"Brian Galle of Boston College Law School said he's not convinced that the passthrough model is the right way to tax corporate income. He said he thinks the U.S. tax system should increase the number of available rate structures and the nuance within those structures, providing for different rates for different kinds of business income.

"'The elasticity of salary can be very different from the elasticity of business income, [and] within business income, you can have very different elasticities between old-and-cold businesses,' entrepreneurial businesses, domestic versus foreign-owned businesses, and real-property-heavy businesses, Galle said.

Revenue-neutral tax reform 'is just another form of tax holiday,' Galle said, adding, 'It's locking in the fairly light burden that's resulting right now from a system that's been severely undermined by fairly abusive behavior in some cases.' He said that if Congress were to sign on to another revenue-neutral reform plan, 'it just tells industry that if they can undermine the next system and riddle that next system with holes, then they can clamor for another revenue-neutral deal.'"

A couple of quick comments in response to Galle's interesting points, which I didn't get a chance to say anything about at the session.  His first point about the elasticities of different types of income I agree with, except that it doesn't necessarily weigh against thinking that the passthrough model would be best if (counterfactually) it were feasible.  Rather, to me it suggests that, even when you are taxing individuals directly, the tax rate you want to apply may depend both on who it is and on what type of income it is.

His second point is a great one, and I think especially applicable to international taxation, in which the multinationals that have greatly reduced their tax burdens through aggressive planning might now be happy to lock in the end result by a different mechanism.  There is a legitimate issue of whether and how much their tax burdens, depending in part on elasticity, U.S. market power (or ability to coordinate effectively with other countries if this increases the collective market power that the cooperating governments can deploy).  But the fact that they have succeeded in lowering it so much does not establish that the right level is so low.  This is a problem for proponents of "burden-neutral" international tax reform, as much as for Congress if it wants to put on a 1986-style tax reform hat for the international area in particular.

Wednesday, October 15, 2014

Odds and ends

Today I head to Charlottesville, in order to present (tomorrow) the article on Piketty's Capital in the 21st Century that I recently coauthored with Joe Bankman, at the U Va Law School's law and economics seminar.  Joe and l will probably post the article on SSRN soon.  Later this week, when I'm back in NYC, I'll post my slides for the talk.

Bill Gates - yes, him - has posted a short piece responding to Piketty that, whether one agrees with it or not, is actually interesting and worth reading.  I may respond to it briefly on this blog when I get the chance.

Also,. Tax Notes published a short piece on Monday describing the conference at Boston College that I attended, addressing tax reform and entity taxation.  The piece's title, "Academics Dismiss Corporate Tax Reform Consensus as Superficial," accurately conveys not the point of view in my paper but what appeared to me to be a broader consensus in the room.  More on that to come, shortly as well.

Monday, October 13, 2014

Slides for my talk at the Boston College - Tax Analysts Conference on Reforming Entity Taxation

Last Friday, at the conference in Boston that I mentioned in my prior post, I presented a short (just under 10,000 words) paper entitled "Not So Fast? Evaluating the Case for 1986-Style Corporate Tax Reform."

Along with other papers from the conference, it should be appearing in Tax Notes within the next few weeks.  But you can click here to view a PDF version of the slides I used in presenting the paper.

Saturday, October 11, 2014

Frontiers of quasi-tax fraud

Pleasant day at the Boston College - Tax Analysts conference yesterday; I'll post the slides from my talk in a couple of days, and perhaps post the paper on SSRN not long after that.  One nice thing about the "biz" is that you keep periodically seeing old friends and making new ones on the talks & conference circuit.

The conference had 3 sections.  The first, at which I spoke, was on corporate tax reform.  My paper expresses great skepticism about (though a hair short of outright opposition to) the mania among DC policymaker types these days for 1986-style corporate tax reform, via a cut in the rates that's financed by broadening the base but without otherwise significantly changing the existing US federal income tax system.  Although nothing like this view appears to be heard within the DC policymaker echo chambers, plenty of people at the conference were quite inclined to take a similar view.  It would be nice to think that I talked them into it, but in fact I got the sense that they already felt similarly about it.

The second session was on partnership taxation, and the third on international taxation.  Because I am so much more familiar with the latter, I found the former more eye-opening.

Talks and papers by Karen Burke, Andrea Monroe, and Greg Polsky suggested something that I gather is well-known in partnership tax circles, and that I must admit to finding a bit shocking.  Because (a) partnership tax rules are so complex that only a handful of people really understand them - perhaps a thousand across the entire country? - and (b) people at the IRS generally don't understand them, and (c) the audit rate for partnership tax returns is below 1%, compliance with partnership tax rules that are meant to block abusive tax planning that contradicts the actual tenor of the rules has pretty much completely collapsed.  Wildly unsupportable tax return positions, backed by the issuance of dishonest tax opinions or no tax opinions, are taken routinely, costing the US government billions of dollars per year.  These mainly involve (a) claiming capital gains treatment for what is clearly ordinary income under the existing rules (even taking as given the capital gains character of certain "carried interests" under existing law, (b) trumping up and specially allocating losses, without regard to economic substance type rules regarding transactions and allocations, and (c) similar game-playing to avoid income or gain recognition and/or assign it to the wrong people, including tax-indifferent parties.

The basic problem is that you have esoteric, complicated rules, understood by few and verging on never being audited, so that the lack of transparency means one can give dishonest and clearly false opinions that meet the standard of a "reporting position."  This is all taxpayers need if they are not publicly traded companies (which may need to meet "more likely than not" for accounting reasons).  And if you are a partnership expert, even if you understand the dishonesty of the opinions you are writing and signing, (a) there's no risk, (b) you wreck your career if you won't write these opinions and get large billings if you do, (c) everyone else is doing it, (d) the IRS isn't enforcing the rules anyway, so maybe you can persuade yourself that the rules don't actually mean what they clearly say?, and (e) even though the positions you endorse, at least to the "reporting position" level, are clearly wrong, they are not so wrong that you'd go to jail for tax fraud if it came to light.

Someone compared this to the Son-of-BOSS style scam tax shelter opinions of 10+ years ago, and said this means not much has really changed, despite people's congratulating themselves that the abusive tax shelter era is over.  So why couldn't people go to jail for this, as they did in Son-of-BOSS?  The answer is that, in Son-of-BOSS, they went to jail for fraudulently backdating documents, providing false information to the IRS, etc.  They didn't go to jail for the opinions themselves, which were ludicrously erroneous (I have read some, and even critiqued them as an expert witness in an administrative proceeding), because bad though the opinions were the author could pretend to just be stupid, wrong-headed, or dense - they weren't quite wrong enough to lead to a jail term, even if wrong enough (as many courts found) to suggest that clients could not in good faith rely on them.

This is certainly an area where a lot can be done.  And one of the panelists suggested that, whereas the IRS typically makes $10 in underpaid taxes per $1 spent on audits, here the yield would be far higher.  But it would take IRS resources, and might also risk complaint from members of Congress on behalf of well-connected taxpayers who have benefited from the quasi-fraud.

Thursday, October 09, 2014

Another week, another conference

Later today I am flying to Boston to participate in a Boston College Law School - Tax Analysts conference (to be held tomorrow) on reforming entity taxation.  I will present a short (about 9,000 words) paper entitled "Not So Fast?  Evaluating the Case for 1986-Style Corporate Tax Reform," in which I argue that, essentially because the corporate tax is such a multifaceted mess, it's not incredibly clear how much we would improve things via the apparent consensus package in which the corporate rate would be lowered, and the revenue cost offset through income tax-style base-broadening, without significant broader tax reform.

I have slides for the talk that I will probably post early next week.  My article, along with all the rest for the conference, should be appearing in Tax Notes, perhaps some time in November.  I will also post the article on SSRN pre-publication, absent any objection from the conference organizers and Tax Analysts folks.

Next week I go to the University of Virginia Law School to present my paper (coauthored with Joe Bankman) responding to Piketty.  I'll post the slides afterwards - they and my remarks are different than those for the conference we just had at NYU Law School, although the paper is the same.

I'll also be presenting the Piketty paper in Vancouver at the end of October and again at USC in late November, and my paper on behavioral economics and retirement saving at the National Tax Association conference in Santa Fe in mid-November.