Sunday, April 19, 2015

Sign of the times

Last year my wife and I went to the Tribeca Film Festival for the first time, saw an absolutely stunning, wrenchingly sad, film called Gabriel, plus a documentary that was just OK.

This year, we're headed back for 4 bites at the apple, no pun intended.  The first two, Bleeding Heart and The Wannabe, were both pretty good - much more interesting than most commercial films, and of the two Bleeding Heart felt more authentic and less genre, but Wannabe was arguably better-done / more professional.  We split 50-50 on which we preferred.

One thing that's getting tiresome is the half-hour sitting in the theater before the show starts (you have to get there early), watching all the sponsors flit by on-screen.  The ads for a Lincoln car, which we've now seen multiple times at both of the pre-shows, truly overload on the 21-tens wannabe billionaire lifestyle cliches.

Let's see: "meticulously curated," "incredibly personal," crafted for "impact plus subtlety," you not only get a personal interview to buy the car but a "dedicated" personal interview.

If they left anything out, I can't think what.

Friday, April 17, 2015

Someone thinks we're stupid

The House of Representatives just voted to repeal the estate tax, while also preserving the tax-free step-up in basis at death for appreciated assets.

As others have said, one couldn't ask for a clearer illustration of House Republican priorities than this unfunded $269 billion tax cut (over the next ten years) for the richest 0.2 percent of households.

But do they also have to insult everyone's intelligence?  Paul Ryan explains that he is trying to help "family farmers ... [and] small and minority business owners."  He claims that, the estate tax is "absolutely devastating" to family farms - even though there has literally never been a single substantiated case where this folk tale (selling the family farm to pay the estate tax) actually took place.

He also claims that repeal would remove "an additional layer of taxation" from assets that have already been taxed.  This despite preserving the tax-free step-up in basis at death for appreciated assets.

Ryan can do what he likes, but it's a shame that he feels free to say things that so clearly are untrue.

Thursday, April 16, 2015

Why don't people respond much to marriage penalties and bonuses (insofar as they don't)?

Just a couple of more thoughts about marriage penalties and bonuses in the U.S. federal income tax law, prompted by discussing the issues that were raised by this week's colloquium regarding Larry Zelenak's paper.

First, insofar as marriage rates are observed not to respond much to marriage penalties and bonuses, even in an age when unmarried cohabitation has become far more socially permissible than it used to be, what would be the reason? 

Maybe this sounds a bit too obvious.  It's a big personal life decision, etcetera.  Plus, people often don't know what the marital stakes are, although websites such as fivethirtyeight.com try to fill the gap by offering primers.  But a big piece of it may be the following.  Even the members of tightly-knit couples cannot be entirely unmindful of the statements that they may implicitly make towards each other through their words and actions.  Thus, for either prospective spouse to say “No, let’s not get married as it would cost us $4,000 a year,” may unavoidably risk signaling something about his or her personal level of commitment.  That makes it different from, say, mutually agreeing to live where rents are $4,000 a year lower.

Second, as a kind of pedagogical note, as this came up in discussions during the day, one shouldn't necessarily think that a low behavioral response at the marital margin to marriage penalties means that they are an efficient way of raising revenue.  There is still the question of taxable income elasticity given one's marital status.  Thus, even if secondary earners aren't deterred from marriage by marriage penalties, they may be deterred from working by the marginal effect that this has on them.


One also shouldn't be too swift to conclude that net marriage penalties or bonuses at a particular income level must be affecting vertical distribution.  Suppose "the rich" will pay the same overall taxes either way, and that marriage penalties and bonuses only affect the distribution of the burden among them (what I'd call a "horizontal" distribution question).  Then it's just an issue of how to tax the rich, and whom to define as how rich, rather than affecting things vertically overall.  But admittedly, even if this is true in the long run, the short run can be different, as in the recent case where marriage penalties were pretty much ignored in the course of restoring the 39.6% top bracket.

Marriage or joint filing penalty in student loan repayment plans

I heard about something interesting this week, from students in my Tax Policy Colloquium and brought to their minds by Larry Zelenak's paper on marriage penalties and bonuses.  It was news to me, but apparently is common and perhaps well-known in the demographic of near-graduates from college or professional school who have huge student loans to pay and are making use of the federal income-conditioned repayment program.

Under this program, of course, the more one earns after graduating, the more one may have to pay annually.  Obviously this functions like a marginal tax on earning more, but what I hadn't known about was the interaction with marriage and filing status.

Apparently, the program relies on adjusted gross income (AGI) from borrowers' tax returns to determine how much one needs to pay in a given year.  First point, don't get married and file a joint return, so far as the program's incentives are concerned, if, say, you are both going to be lawyers earning junior attorney salaries.  (Actually, the examples I heard about may have concerned a student borrower marrying someone else, as opposed to two student borrowers getting married.)

Second point, you can get married after all, so long as you use the "married filing separately" category.  Since the program looks at AGI, doing this keeps your spouse's earnings out of the AGI on your tax return.  And apparently the loan repayment benefits from doing this may significantly outweigh the general disadvantageousness, within the income tax, of married-filing-separately status.

But apparently that comes at a further tax cost, since I am told (though I have not independently checked this) that those who select the married-filing-separately status are barred from taking advantage of special income tax deductions, subject to an income phase-out, for student loan interest.  To beat that as well as the loan program, you have to not get married.

It's obviously preposterous to have the application of the student loan repayment program turn on whether married individuals select "married filing jointly" or "married filing separately."  But is the question of how the loan repayment program operates, with respect to household or marital status, any different from that regarding tax and transfer rules generally?

One difference might be that, depending on the numbers and also on responsiveness in the affected population, marriage penalties here may simply be "too large," even if one is not wholly averse to them in all circumstances given the broader issues raised by household status.

A second difference is that we might need to think more about the purposes being served by the income-conditioned loan repayment program.  Suppose that it is rationalized, not just as tailoring loan repayments to ability to pay (and thus generally offering income insurance to participants), but also as specifically addressing the payoff that the borrower has derived from the education that triggered all those student loans.  The idea might be: We're sharing the risk by making you pay more if the educational loans really pay off big-time (at least, ignoring the point that correlation needn't imply causation - I may not make it big BECAUSE what I learned or my degree helped me so much).

Insofar as that is the rationale, one might conclude that purely individual rather than household "taxation" should apply here.

Nice job, CEOs

Due to pigheadedness, at least 50 percent of it mine, we've had a scheduling conflict at NYU the last couple of years, with both the Tax Policy Colloquium and the Law and Economics Colloquium meeting on Tuesdays in the spring semester.  This unfortunately will continue next year, as no one has blinked.

Just as a matter of topic, not all of the L & E papers interest me, and the same of course is true in the other direction as well, but there are cases running both ways in which the organizers of one would have liked to attend the other.

Good example next Tuesday, when we will have a very interesting paper on the optimal taxation of housing consumption by David Albouy.  Meanwhile, the Law & Economics Colloquium will have a paper by Rob Daines (formerly NYU, now Stanford) on options and executive compensation.

Here's the abstract:

"In the wake of the backdating scandal, many firms began awarding options at scheduled times each year. Scheduling option grants eliminates backdating, but creates other agency problems. CEOs that know the dates of upcoming scheduled option grants have an incentive to temporarily depress stock prices before the grant dates to obtain options with lower strike prices. We provide evidence that in recent years some CEOs manipulate stock prices to increase option compensation. We document negative abnormal returns before scheduled option grants and positive abnormal returns after the grants. These returns are explained by measures of a CEO's incentive and ability to influence stock price. We document several mechanisms CEOs use to lower the strike price, including changing the substance and timing of the firm’s disclosures."

Nice stuff, huh?  I am glad these CEOs are working so hard; it's just too bad for whom they're working.

Wednesday, April 15, 2015

Vastly easier and less painful tax filing

Nice article in today's Times about Joe Bankman's longstanding advocacy of less painful tax filing.  The story of how Intuit has been "ferocious" (the Times reporter's word) in opposing this otherwise almost universally win-win reform, spending millions of dollars on lobbying to oppose it, is one more dark chapter among many in how interest group politics distorts public policy.  Intuit would evidently rather sell us things than have us get them far more cheaply and efficiently.

NYU Tax Policy Colloquium, week 11: Lawrence Zelenak's For Better and Worse: The Differing Income Tax Treatments of Marriage at Different Income Levels

Yesterday, Larry Zelenak to present the above paper, which reviews a familiar issue in light of the rise in recent decades of unmarried cohabitation.  In my view, the main significance for marriage tax issues that is raised by unmarried cohabitation is the following.  I view households, involving people (including couples) who in some way pool and internally allocate resources owned by different members, as an important category in distribution policy.  The rise of unmarried cohabitation reduces the tax system's ability to discern "true" couples based on looking at marriage.  This complicates using household information.

While the paper is basically consistent with this take (also addressed, for example, by Anne Alstott here), it places more relative emphasis than I might on the particular horizontal comparison between cohabiting couples that are basically the same, for purposes relevant to the fiscal system, except that some are married and others not.  That comparison matters, on both efficiency and equity grounds, but the broader couples versus non-couples comparisons are as important or even more so.

The following is adapted from an outline that I prepared for my part of the discussion at the session yesterday, fleshed out with some of my thoughts on the particular topics.

1.  The case for using household-based information
     (a) Couples status versus marital status - Same point as above; while one could certainly argue that one's being married or not is relevant to how one is treated by the fiscal system, the central point for me is that understanding people's household circumstances is important.
     (b) What are households and why do they matter? - In general, for people who are not in the same household, the control, use, or benefit from particular resources depends mainly on legal title.  If I win the lottery, then, even if I buy the gang a round of drinks (for some reason, I have here "It's Always Sunny in Philadelphia" in the back of my mind), basically the beneficiary is me, family members aside - not, say, mere roommates even if I were still in a stage of life where I had them. Even leaving aside children, parents, and other relations, there are certain relationships, typically including but not limited to married couples, in which legal title as between particular individuals may matter less than the household's norms and rules for using the collective resources.  Consider a couple with a joint bank account and/or general sharing of expenses in some way.  BTW, there does NOT have to be a claim here of equal sharing - just that legal title generally matters less than internal household processes for determining how the overall resources of members should be used.
     Grant this, and the fiscal system cannot meaningfully address my current economic circumstances, such as based on my income, without also considering (a) income of other household members, (b) consumption needs and productive capacities of other household members, including in non-market settings such as providing childcare, and (c) the intra-household incidence problem.  On this one, suppose we had separate individual filing and that this caused high-income spouses to pay more tax while their low-income partners paid less.  Would this redistribute within the household?  Not necessarily - it would depend on how the household actually "works" in allocating its after-tax resources.
     (c) What's the issue? - Not just separate versus joint returns, but using vs. not using, as well as different ways of using, household information.  For example, having joint returns in which the rate bracket dollar amounts are doubled, relative to those on separate individual returns, can be equivalent to having separate individual returns but with income-splitting (i.e., my spouse and I are each presumed to have earned half of our combined income).

2.  Limited relevance of Boris Bittker's famous "trilemma"
     a.  Overview - Bittker in 1977 famously set forth the "trilemma" - one can't simultaneously have progressive rates, equal taxation of same-income couples whether married or not, and marriage neutrality.
     Here's a simple illustration of the trilemma.  Say we have a zero rate on the first $50,000 of income, and a 50% rate above that.  Ann and Bob earn $50,000 each, whereas Carol and Dave's earnings are $100,000 / zero.  With separate returns and no other adjustments, Carol and Dave will pay $25,000 more in tax than Ann and Bob.  With joint returns, they'll pay the same amount - just how much depends on where the joint return zero bracket amount ends - but that necessarily means that there will either be a marriage penalty to Ann and Bob, a marriage bonus to Carol and Dave, or else some combination of each.
    I have great respect and admiration for Bittker, who showed his mettle once again by writing something in 1977 that people are still talking about.  But I wouldn't make it as central to the analysis today as it sometimes still is.
     b.  Is it really a trilemma? - True, you need progressive rates for the story to get off the ground.  But since we will probably decide separately whether to have progressive rates - including those, outside the income tax, that arise at the low end of the income spectrum from phasing out safety-net type benefits - it's really a dilemma, same taxation of same-income couples versus marriage neutrality, that's premised on having progressive rates. So let's consider the relevance of those two competing considerations.
     c.  Same taxation of same-income couples - Premised on household pooling and our difficulty both in observing the actual internal splits and in targeting tax incidence as between household members, this objective has some value, conditioned on one very important modification.  There is a huge difference between a one-earner couple and a two-earner couple - say, with children, to make it especially stark - that are earning the same overall income.  The one-earner couple has extra labor services available, outside the formal job market, from the one who doesn't have a market job.  That individual may have decided not to work in the labor market, as opposed to lacking opportunities.  Treating the two couples as the same both ignores the real difference in their resources and can lead to strongly discouraging secondary earner labor supply.  Hence the powerful case for, at a minimum, secondary earner deductions or credits, childcare expense deductions or credits, etc.
     d.  Marriage or couples neutrality - Even without moralizing, there can be positive externalities to these relationships, e.g., the insurance benefit if both have resources and one could thus help the other upon job loss, sickness, etc.  This may benefit them both, but is also a positive externality insofar as society would otherwise either have to give more $$ to the hard-luck member of the couple, or would regret that individual's bad luck.
     Another, perhaps more obvious, issue in the externalities realm goes to the effect on children.  While I gather the empirical literature suggests that having two parents is associated with the best outcomes for children, I don't happen to know to what extent this literature has dealt with, say, issues of correlation versus causation.  E.g., suppose the benefit wasn't from having two parents, so much as from having parents who succeeded in keeping their relationship going, reflecting their underlying "types."
    Note also that it is surely not true that all marriages, even with children, ought to be kept together.  There are some out there as to which it's best for all concerned if they end, and overly tax-discouraging this could be bad.
     e.  The missing issue: secondary earner labor supply - Discussed above, but this is a really central issue that one must keep in mind and that the trilemma or dilemma leaves out.  It's an issue of both efficiency and distribution, with lots of other important implications mixed in as well (e.g., concerning the broader evolution of gender roles and power relationships).

3.  The rise of cohabitation outside marriage raises accuracy concerns, more (in my view) than the particular fairness concerns that the paper emphasizes
    Again, a central argument of the paper is that the rise of unmarried cohabitation makes marriage penalties especially unfair, since married and unmarried cohabitants may in substance be so much alike.  I might instead view the greater avoidability of marriage penalties (since one can now more easily cohabit without incurring them) as reducing fairness concerns about marriage penalties.  This reflects my seeing the issue more in terms of the greater difficulty of correctly observing household status that I do indeed view as at least potentially normatively relevant.

4.  The paper's case for equalizing marriage penalties and bonuses
    One of the paper's main arguments is that, assuming the system otherwise remains mainly as it is today, one should try to equalize the maximum marriage penalty and marriage bonus at a particular income level.  I think there's something to this, and I'd spell it out as follows: Suppose - a crucial prerequisite - that one normatively values marriage neutrality at a given income threshold.  And suppose that rising departures from it have efficiency and/or equity costs that rise at more than a linear rate.  E.g., just for a convenient illustration that's admittedly a bit artificial, suppose that doubling a marriage penalty or bonus makes it, in some sense, four times as bad.  Then if one of the marriage penalty or bonus was $X, and the other was $3X, shifting things around so both were $2X would reduce the combined social cost of the two errors.  But again, this presupposes both using marriage neutrality as one's baseline, and not having the conclusion disrupted by other considerations.

5.  Marriage penalties versus bonuses towards the lower end of the income distribution
    The paper shows how huge, relative to income, marriage penalties can be towards the lower end of the income distribution, by reason of the phaseout of the earned income tax credit.  Surely these marriage penalties are too big, all things considered, although my preferred solution wouldn't be to shrink the EITC.  The paper further argues that, given the evidence suggesting that children do better in two-parent families, we should have if anything marriage bonuses, not penalties, in this range.
    While this argument has some force, under its premises, there is also another side to it.  Suppose that children in two-parent households fare better than those in one-parent households.  If we respond (presumably for incentive reasons) by giving the former a bonus, we have an anti-insurance system in place.  That is, we reward those who are already better-off by reason of their being better-off.
    The EITC, of course, already has this character insofar as someone who gets a job gets more money out of it than someone who tries but fails to get a job (assuming the former remains short of the cutoff).  But while improving incentives is good, so is providing insurance rather than anti-insurance.  These objectives are in conflict, necessitating tradeoffs, if we provide marriage bonuses at the low end because we believe kids do better in two-parent households.

Wednesday, April 08, 2015

NYU Tax Policy Colloquium, week 10: Lillian Mills' Managerial Characteristics and Corporate Taxes

Yesterday at the colloquium, Lillian Mills presented the above article (coauthored with Kelvin Law), finding that among publicly traded companies, those whose CEOs have prior military experience engage in less aggressive tax planning – e.g., involving less use of tax havens and leading them to have smaller reserves for uncertain tax benefits (most likely due to differences in tax planning, not in willingness to reserve for uncertainty).  Due to this difference, companies with former-military CEOs pay higher effective tax rates than peer companies that otherwise are similar but don’t have former-military CEOs.

If correlation is causation running from the CEO’s background to the company, this would mean that the former-military CEOs are inducing over-payment of tax – relative to that what they could actually get away with, even if it reflects super-aggressive transactions – of an estimated $1M to $2M per year.  However, there appear to be offsetting benefits to the companies, relating to what may well be behaviorally-linked less aggressive behavior in other realms.  For example, the companies with former-military CEOs are less likely to face class action lawsuits, announce financial restatements, and backdate their stock options.

The paper’s current form invites one to speculate about military culture or personality types as causal factors.  For example, does military training make one more ethical about reporting matters?  More risk-averse?  Or are people with these attributes more likely to serve in the military, even going back to the era of the U.S. military draft?  Of note, the great majority of the former-military CEOs whose tenures contributed to the data set were not, say, lifers who retired as generals and then went to high-level private sector jobs (a la Alexander Haig ending up at United Technologies), but rather people who served for a few years in their 20s, including during wartime via the draft, and then started private-sector careers that culminated in their making CEO decades later.

Here are a few of the main thoughts that I had with respect to the paper:

1) While causal questions are important and interesting for their own sake, they don’t necessarily matter much to many of the main conclusions that one would draw from the study.  Thus, consider the choice between treatment and selection to explain former-military CEOs having different values, if these are viewed as explaining the finding.  In other words, did the military change them, or did certain types of people find the military?  (This could have happened even during the draft era, given that it wasn’t wholly unavoidable and that people who enlisted voluntarily as officers may have been the chief future-CEO pool.)  Likewise, suppose we are choosing between the scenario where the CEO is the true cause, and that where Board of Directors are more likely to choose former-military CEOs when they favor the strategy (merely to be implemented by the CEO) of being less aggressive across the spectrum.

While all this is worth knowing, if one can figure it out, it might not matter enormously either for the tax policy payoff, or for what it tells about the strategic setting in which companies (whether via the Board or the CEO) might be deciding about aggressiveness across the board.

2) Again, the paper finds that companies with former-military CEOs pay higher effective tax rates (ETRs), all else equal.  The ETR is a fraction.  The numerator is taxes paid worldwide (using two alternative measures: cash taxes and GAAP taxes).  The denominator is worldwide reported earnings.  Thus, companies with former-military CEOs would not need to pay more tax than other companies in order to have higher ETRs.  Having lower reported earnings due to lesser accounting aggressiveness, while doing the same tax planning, would have this effect as well.

The finding that these companies make less use of tax havens supports concluding that the numerator is at least part of the story.  I also agree that, in context, their having lower accounting reserves for aggressive tax positions probably reflects lesser tax aggressiveness, rather than greater accounting aggressiveness in determining what is a sufficiently uncertain position to require a reserve.  But the issue of the denominator might lower the estimated tax cost associated with former-military CEOs.

3) There is prior work finding both “technological” and “cultural” explanations for correlation between aggressive tax planning and other bad stuff, such as accounting treatment that blows up or looting of the company by rogue executives.  An example of a technological explanation is the view that, once you can use tax planning as the excuse for creating a byzantine corporate structure with multiple “special purpose entities” that no one but the insiders understands, looting becomes easier.  While the evidence in this paper for a cultural explanation does not rule out the simultaneous importance of technological factors, it adds to the case for concluding that those factors can’t do the job all by themselves.  A great example, from an earlier paper by other authors that this one mentions, is evidence that, in Russia, companies whose executives paid bribes to avoid traffic tickets suffered from greater looting by insiders than randomly selected Russian companies.

4) Presumably, an across-the-board cultural trait of lesser aggressiveness, and hence greater trustworthiness where CEO or company behavior cannot be perfectly observed, might have greater value in some types of industries than others.  One thing that seems clear, from anecdotal evidence that the paper mentions, that selling to consumers isn’t the key factor.  If it were, then companies like Apple might be a lot more reluctant than they actually are to be seen as engaged in aggressive tax planning.  Suppose that Apple’s international tax machinations caused people to think: “Wow, they’re so sneaky that I bet the iPhone 6 has undisclosed defects.”  But that evidently is not the case.

5) One obvious policy implication is that government regulatory agencies – and not just the IRS – should look more broadly for evidence of aggressive behavior in deciding whom to audit or monitor the most.  Perhaps a company that cheats on OSHA is more likely to need a tax audit, and one with aggressive tax shelters is more likely to cheat on OSHA.  I suppose the IRS might also incorporate former-military CEOs into its thinking about where to target its marginal auditing efforts, but subject (obviously) to the concern that companies would pick former-military CEOs for this reason when they were planning to get more aggressive.

The paper has no direct or first-order bearing on the question of what we should think about the social effects or the moral defensibility of more aggressive versus less aggressive tax planning.  The point, rather, is that aggressive tax planning may be associated in practice with other types of aggressiveness that may have downsides for the companies engaging in them, in particular by reason of agency costs.

But here is a small, second-order point.  Suppose a company is choosing at the margin between Strategy A (greater aggressiveness that reduces tax liability but imposes other costs) and Strategy B (lesser aggressiveness that results in tax “over-payment” relative to the maximally aggressive scenario, but that has collateral benefits).  Socially speaking, we may want to push companies towards Strategy B.  After all, taxes paid are socially a transfer between pockets, but other aggressiveness may involve broader social costs.  This might marginally induce one to favor more intensive auditing of aggressive companies than would have been optimal (given that auditing is costly) in the absence of collateral effects on other aggressiveness.

Saturday, April 04, 2015

Maybe it's time to let it go

This post contains the story of a grievance that I forgot for 40 years, but that recently has recurred to me, even without the help of a madeleine.  It's funny to me now, like something out of a novel involving a character who is remote from my present self, but I can also relive the feelings that I had at the time.

As background, I have recently completed a first draft of an article ("The Mapmaker's Dilemma in Assessing High-End Inequality") which I'll be presenting at a couple of conferences in May.  It's adapted and extracted from chapter 2 of my book-in-progress (when I have the time, which won't be for a couple of months), which currently bears the working title: "Enviers, Rentiers, and Arrivistes: What Literature Can Tell Us About High-End Inequality."  Not sure if I'll publish the Mapmaker piece separately.  I rather like it at the moment, and thus perhaps I should.  But I find its merits as a freestanding piece harder to judge than those of more standard work.  Also, I'm not sure where it ought to go, other than as part of a book chapter - it's not a conventional law review (or tax) article.

Anyway, it discusses a couple of philosophical issues, because one of the questions I'm asking is how well one can understand the issues posed by high-end wealth inequality if one is equipped only with a version of welfarism that in effect assumes we have "utilometers," the only acknowledged inputs to which are utility from own consumption of market goods plus leisure.  Big hint: I don't think this framework is even close to adequate in this particular setting, although it may work well enough in some other settings.

But on to the Proustian madeleine.  The point that, to get at these issues meaningfully, one must have at least in the back of one's mind some basic philosophical questions has served as a bit of a time machine for me, sending me back to my freshman year at Princeton in 1974.  I took a moral philosophy class that first semester, and we read the likes of Kant and Mill.  I recall hating Mill's Utilitarianism - the book not the philosophy - for such poorly reasoned passages as that on Socrates vs. the pig and the higher versus lower pleasures.  I actually discuss this a bit in Mapmaker, although I have mellowed and am more forgiving of Mill now than I was, say, in law school (when I wrote a scathing student paper about this).

But this brought back memories of another experience that I had in that philosophy class.  It involved the precept instructor who graded my first paper for that class, which was also the second paper I ever wrote as a college student.

OK, more background.  I come from an arts and academic family in which everyone, when I was growing up, was graded on how "smart" they were.  Even pets.  This made it high-stakes for me to feel as if I was excelling all the time.

I had thrived well enough in the Bronx High School of Science, although it was a true shark tank in the honors classes, and this had predisposed me to want to see how I matched up academically at Princeton.  I immediately thought: pretty darned well, which was good to know since, socially, I could acutely feel the disadvantages of being just 17 (and from a somewhat sheltered background) when almost every other freshman was at least 18.  My neighborhood schools had encouraged letting kids skip grades if they were doing well academically.  I might even have gone to college at age 16 (as had one girl in a family I knew) if my parents hadn't had the good sense to veto this.

Anyway, newly arrived at college, and with academic aspirations (I was planning to go into history), I decided to take a bunch of courses that required writing papers every two or three weeks.  My very first paper, while I don't recall what it was, got an A.  So that was reassuring.  (I don't claim to have been very mature or measured, or even in the least bit Zen, at age 17.)

Next up came a paper for the philosophy class, concerning Kant and the categorical imperative.  The professor was the great Thomas Scanlon.  But at Princeton the lecture classes are broken into smaller units that meet once a week, called precepts.  My precept instructor (and thus grader) was a graduate student in philosophy named M--- Hunt.  I probably shouldn't give the first name here, although a recent Google search for this individual proved unsuccessful.

I had what I thought was an interesting idea about the categorical imperative - and keep in mind, this is a freshman in week 3 or so of the fall semester, who has not to that point read any philosophy except for the assigned reading so far.  It occurred to me: There has to be a "level of generality" issue here (although I suspect I didn't have it labeled that crisply).  Kant says, the maxim you act on must be susceptible to being generalized without contradiction.  Suppose I am planning to go to the Burger King at 12 pm tomorrow.  If everyone went there at this exact time, it would be overcrowded.  So there's a contradiction.  But surely that's not what the categorical imperative really means.  It doesn't refute the idea: it shows that you have to think it through at the next level.

My intuition was: Silly though the Burger King hypothetical may be, there might actually be a fundamental issue here.  How generally must something be stated?  Might this be really important for figuring out what the categorical imperative could actually mean?

To this day, I think that's not bad for a 17 year old freshman, reading his first-ever philosophy texts in week 3 of the semester.  But when I got the paper back, Hunt had given it a C+.  My second college paper grade ever, and to my overheated young mind this wasn't much different from getting an F.

The scribbled explanation for the bad grade came maybe halfway down on page 1 of the paper (which was probably only 3 to 5 pages, at the most).  I had said something to the effect of, Surely the categorical imperative must have some at least implicit requirement of finding the appropriate level of generalization, whatever that might turn out to be.

But M --- Hunt scribbled in the margin, something to the effect of: No, there is no such thing as a principle of generalization in the categorical imperative.  And apparently if you're wrong, you get a C+.  This then remained the worst grade I ever got on an assignment in college or law school.

Being as young and unsure of myself as I still was, I was shaken by this grade.  My confidence wobbled a bit, but I was also angry, and I felt wronged.  The grade seemed unjust, and the ground on which it was given, mindless and dismissive.  But, at age 17, I didn't even consider going to talk to Hunt, or for that matter to Scanlon.

I decided I had to prove myself, to myself, academically.  This didn't mean working round the clock - I also wanted to have a social life, even though I was pretty much the only freshman out of 1,000 at Princeton who couldn't yet legally drink.  After all, my competitiveness applied to the social realm, too.   But in addition to taking papers seriously, I also went manga (as kids now would say) on my fall semester final exams, preparing with incredible thoughtfulness, and rigor, and yellow pads full of notes.  I got an A+ on two of my fall 1974 final exams (in history and political science - philosophy probably didn't have a final).

As it happens, the political scientist who gave me an A+ had one great theoretical contribution at that point in his career (although he later had more).  This was his claim that Lebanon's parliamentary structure for power-sharing was responsible for the wonderful peace prevailing there among all the competing ethnic and religious groups.  Oops (Lebanon blew up in 1975). So perhaps I had learned something well that wasn't all that well worth learning.  But no matter.

That was my peak as a student - fall of my freshman year.  After that, I was never as motivated again, either by grades or by pleasing the professors.  While I always did well academically, I tended to follow my own beats, so to speak, rather than trying to figure out what the professor wanted.  The impact on my grades was discernible but, as they were plenty good enough for my purposes, I didn't care.  From the standpoint of external validation, the twin A+'s had given me all the proof I felt I needed.

After the end of the fall 1974 semester, I didn't think about M--- Hunt for years.  But in writing my book chapter over the last couple of months, because I was back on ground covered in that class (albeit not Kant), the episode has recurred in my mind.  I still feel it was unjust, and I still hate M--- Hunt, although at least it's all quasi-funny to me now.

UPDATE: Okay, I admit it.  I don't really hate her anymore.  That just felt like a good ending when I was writing this piece.

Wednesday, April 01, 2015

New York Times op-ed on the tax code and artists

In today's NYT, New York-based writer Amy Sohn has an op-ed entitled "How the Tax Code Hurts Artists."  She notes in particular that the alternative minimum tax (AMT) "hits a disproportionate number of actors, screenwriters, and directors" because it denies deductions for employee business expenses and state and local taxes:

"Most unionized entertainment professionals receive their income as wages, which means that on paper, they're employees.  But unlike most other groups of workers, entertainers must pay a hefty chunk of their income (around 30 percent) to obtain and negotiate work.  This is in the form of commissions to agents (10 percent), managers (10 to 20 percent) and lawyers (5 percent); job-seeking travel; office or rehearsal-studio rental; business meals; union dues; coaching and classes; advertising and publicity; and research materials.

"Because of where their work is concentrated, entertainment workers also tend to live in high-tax states like New York, Illinois, and California."

I know a bit about this issue, as I worked on it (as a junior Congressional staffer) when the AMT in its current form was created, as part of the Tax Reform Act of 1986.  Not only is Sohn right that it makes no sense to deny significant employee business deductions under the AMT, but we on the staff  heard about it at the time,  We specifically met with people representing actors et al who complained about this very problem.

We were sympathetic, but we couldn't do anything about it (given that we were just staffers executing someone else's policy calls), I would say for the following four reasons:

(1) It would have cost revenue, and every last nickel from the AMT was being counted on to make the overall revenue estimates work.

(2) The more skeletal prior version of the AMT didn't provide such deductions, and it was being made "tougher," not loosened,

(3) The Treasury and Congress had been targeting penny-ante employee business and miscellaneous itemized deductions, on the view that a lot of bogus junk was being claimed, plus the view that eliminating such items was desirable simplification even if claiming a nickel here or a dime there was substantively meritorious.  But this was not responsive to actors and such, who, as we were told at the time, often had very high expenses in this category, reflecting that their work was quite differently structured than that of most other "employees."

(4) Whichever Congressman or Senator raised the issue - and I believe someone from New York, Illinois, or California did - either didn't have enough marginal clout to get this addressed, or exercised such clout as he or she had at different margins instead of this one.  You can't get everything you want if you are, say, a junior coalition member.

The state and local tax deductibility issue, of course, is normatively more complicated.  And, though presumably not distinctively an issue for actors in particular, the AMT also errs in not offering personal exemptions for dependents - clearly an important input to what, for want of a better term, one might follow convention and call "ability to pay."

Glad to see this issue getting attention in the NYT, as it is a meritorious one.

NYU Tax Policy Colloquium, week 9: Shu-Yi Oei's Can Sharing Be Taxed? (co-authored by Diane Ring)

1) “Sharing” or cash money?
 Oei’s and Ring’s Can Sharing Be Taxed? does a great job of offering a thorough background regarding the tax issues associated with the rise of the so-called “sharing” economy – involving Internet-based businesses such as Uber, AirBnB, TaskRabbit, and all of their competitors in the fields of lateral or peer-to-peer provision of rides, cars, lodging, specialized handyman work, etcetera.  It thereby offers a valuable foundation for follow-up work that is more normatively focused, and which I gather the authors themselves plan to write.

Someone should write an article on this topic called “Thanks for Sharing!”  But “sharing” – apparently the industry’s term for itself – is a misnomer.  The sharing economy is about being paid cash money for services and/or the use of property, not about “sharing” like people on a hippie commune in the 1960s.  So there is a bit of cant in the name that the industry has given itself.

That said, the emergence of the so-called sharing economy is surely a good thing.  In completely standard economic terms, declining transaction costs have permitted the occurrence of more deals for mutual benefit, and thus the realization of more social surplus.  “Sharing” thus involves an expansion of markets – capitalism on the march – albeit, at least in the early stages, in a refreshingly decentralizing way.

This could support two pro-“sharing” narratives.  The first is that they in fact create a lot of surplus.  The second is that taxing “sharing” activities would risk eliminating this surplus.

Only, these two narratives are in tension.  The greater the surplus, the more you can tax it without causing it to disappear.

Now, the so-called sharing economy does more than just create new surplus by taking advantage of reductions in transaction costs.  A second theme is its undermining certain regulatory regimes.  This, too, might be a good thing if one happens to dislike those regimes.

What about the sharing economy and tax?  Frank Easterbrook once compared mid-1990s scholarship about “Internet law” to what he called the “law of the horse.”  Money quote: “Lots of cases deal with sales of horses; others deal with people kicked by horses; still more deal with the licensing and racing of horses, or with the care veterinarians give to horses, or with prizes at horse shows. Any effort to collect these strands into a course on 'The Law of the Horse' is doomed to be shallow and to miss unifying principles.”

Whether or not Easterbrook was correct back then on that topic (Larry Lessig disagreed), Oei and Ring refreshingly, and I think correctly, take the same view here, arguing that the tax issues posed by “sharing” businesses are readily amalgamated with those we already know.  A few new rules and approaches might be needed, and there are compliance / burden-managing challenges to consider, but no new paradigms to puzzle about.

2) Are all of the major types of sharing businesses relevantly the same?
 Possibly not.  Indeed, they may differ in ways that are relevant to how tax and other regulatory systems should address them.  Let me take 3 examples: Uber, AirBnB, and TaskRabbit.  I don’t know enough about them to say definitively that they are relevantly different – but the possibility that they might be merits further attention.

a) Uber, along with similar businesses such as Lyft and Sidecar, addresses thin markets where you can’t hail a cab.  Sure, they are frequently to be seen on the streets of Manhattan (other than right at 5 o’clock when the shifts change), but try the outer boroughs or Los Angeles and you could stand there all night.  Even insofar as you could have scheduled a car service in advance, Uber can offer far greater last-minute flexibility.  And then there’s the surge pricing option, controversial (as such things tend to be) but potentially a life-saver in some circumstances.

But there’s something else going on too.  Uber et al undermine taxi medallions, by offering competition that the holders did not expect, e.g., when they purchased the medallions.  (I was almost stranded in Milan, at a rail station several miles from my hotel, which I had no way of finding, due to a one-day cab strike protesting Uber.)

This might be a good thing if one dislikes the medallion system’s restraint of competition, subject to what one thinks about the transition issue when medallions unexpectedly lose value because competition has been allowed to emerge.  But it adds an extra issue to the story.

There is arguably a public goods character to having cabs you can hail, with pre-set prices that you know about before you go somewhere that will require hailing a cab to get home.  One could perhaps argue for subsidizing this service, but artificially maintaining medallions’ value is probably not a good way to go about this.

b) AirBnB, along with similar businesses such as Roomorama, expand a spot market that existed beforehand, but perhaps increase the convenience of using it.  However, it’s been suggested, although I lack personal knowledge on this score, that these “sharing” websites provide less added value than Uber et al, in terms of expanding what one can find.  For example, people use Facebook, Craigslist, etcetera to do the same thing, which they couldn’t really do in lieu of using Uber et al.  This suggests that placing, say, information reporting burdens on home-sharing businesses might lead to greater opt-out than doing the same thing for ride-sharing businesses.  At the least, this possibility merits further scrutiny.

AirBnB is not, however, just about the folks with a spare room or a sofa, or who are leaving town for the weekend.  Apparently some of its not-so-secret sharers are in effect in the hotel businesses, holding multiple establishments for this very purpose.

There is also a regulatory avoidance issue here, pertaining to hotel occupancy taxes (which AirBnB had not been collecting, but now concedes in some jurisdictions that it should).  As it happens, these arguably are not great tax instruments.  While there would be a clear theoretical case for a Pigovian hotel occupancy tax that charged for negative externalities, these are unlikely (even if they outweigh positive externalities) to be well-measured by the actual tax instruments.  The main reason for charging hotel occupancy taxes may be attempted tax exportation – trying to make non-voters pay – but if the jurisdiction lacks significant market power, the incidence will mainly be borne by local property-owners, and the tax’s main effect may be reduce the efficiency of local real estate usage.

Of course, even if one dislikes hotel occupancy taxes, undermining them via the sharing economy might not be the best way to proceed.  Note, however, that even if one can make AirBnB play nice, the same presumably won’t hold for Craigslist, so one faces the question of how the market will react in practice.

c) TaskRabbit – Here it seems to be clearest that what’s going on is expanding markets, without the same regulatory overlap (unless, say, people are avoiding licensing requirements such as those for plumbers and electricians).  Here, too, one has the Craigslist et al set of options, which might reduce the tax authorities’ gain from making TaskRabbit play ball, but suppose TaskRabbit adds more value than AirBnB (not that I know it does).  Then enlisting it to help, say, with information reporting would be potentially more promising.

3) In theory, should we tax sharing arrangements “neutrally” vs. other business activity?
 To income tax folk, as distinct from “sharing” enthusiasts, the answer may seem to be clearly Yes.  After all, the people who “share” their services or property are being paid money.  Nonetheless, at least 3 types of arguments to the contrary could be made:

The first would be that taxing them less, at least in the formative stages, would permit valuable “infant industries” to emerge, or reward innovation that the market does not fully reward given imitation, or respond to regulatory cartelization by existing businesses.  I’m certainly not endorsing this line of argument; just noting it.

Second, suppose sharing activity is more tax-elastic than other business activity, because it tends to substitute “down” to untaxed substitutes such as leisure and non-taxable barter, rather than “up” to more conventionally organized business activity.  This would support a Ramsey / inverse elasticity type of argument for taxing it at a lower rate.  But again, one would have to establish the factual predicate.

Third, suppose taxing sharing activity is costlier, per dollar of revenue that would rightly be collected, than taxing other business activity.  This might, at a minimum, support “rough justice” approaches that sacrificed accuracy for getting it, on average, approximately right (e.g., taxing gross income rather than net income, if the costs are hard to establish, but at a reduced rate).  But it also might conceivably support accepting lower taxation of the sector in practice

4) “Tax opportunism”
 The paper notes that prominent sharing businesses, especially initially, were often a bit aggressive in claiming favorable tax treatment – for example, by denying that they faced obligations under existing law to issue 1099s, collect hotel occupancy taxes, etcetera, where at least arguably such obligations existed.  It calls this “tax opportunism.”

Not a huge surprise, of course, to find businesses aggressively using legal ambiguity in their favor.  Perhaps the main conceptual distinction here – whether or not it matters normatively – is that, at least to date, the main source appears to have been “found” ambiguity that exists by reason of the new business model, as distinct from “made” ambiguity, as in the case of a company that, say, engineers hybrid financial instruments in order to achieve favorable tax and accounting treatment.

The paper notes “regulatory arbitrage,” a useful category for describing made ambiguity that Vic Fleischer has written about.  Such planning often involves what I have called “semantic arbitrage,” e.g., claiming that the same instrument is “debt” under a given EU country’s tax law, yet “equity” under U.S. tax law, or “debt” for tax purposes yet “equity” for accounting purposes.  This is not actually “arbitrage” in the finance sense, but the term is useful and there may often be reasons why we dislike the end result.

For income taxation of sharing activity, the question of whether the actual service providers are employees or independent contractors may importantly affect the character of the intermediary’s reporting, and even potentially withholding, obligations.  But I am not convinced that analysis either of whether, say, Uber drivers are employees or independent contractors under existing income tax law, or of how they would be classified, say, for purposes of tort law, will greatly advance our understanding of what reporting or withholding obligations ought to be imposed on Uber.

5) Compliance problem 1: Information reporting
Information reporting can be a very powerful tool that increases compliance.  Intermediaries in the sharing industry appear to be generally well-situated to do it.  The main argument against making them do it pertains to the possibility that this will distort the development in the market in some way, e.g., via exit to Craigslist and beyond.  Someone should do empirical work on these issues.

6) Compliance Problem 2: mixed-use assets
When small-time players use personal assets such as their homes or cars in a sharing business, thus creating mixed-use assets, the reporting and compliance issues may grow bad enough to raise the question: Is the game worth the candle?  An alternative is to consider not just simplified reporting (e.g,. fixed mileage charges), but even elective low-rate inclusions, with dollar ceilings, that are based on gross rather than net income.