Friday, November 27, 2015

Hilarious vitriol

I've always loved Dylan's Leopard Skin Pillbox Hat from Blonde on Blonde - outrageous, wildly self-confident, absurdist electric blues that perhaps could only be written by someone then-confident that he was "on the side that's winning."

But the much faster, intentionally sillier version from the recent Cutting Edge reissue is also fantastic, maybe even better (!?) despite (or partly because of?) jokey sound effects that were discarded in the final version.

Tuesday, November 24, 2015

Three talks I gave at the NTA meeting last week

As mentioned earlier, I was at the National Tax Association's 108th annual meeting last Friday and Saturday morning, and gave 3 talks using PowerPoint slides. Here are pdf versions of the slides.

First, here is what I used to discuss my paper, The Crossroads Versus the Seesaw: Getting a "Fix" on Recent International Tax Policy Developments.

Second, here is what I used to discuss papers by David Kamin and Alan Auerbach addressing long-term fiscal uncertainty.

And finally, here is what I used to discuss a state and local tax paper by David Gamage and Darien Shanske, and an international tax paper by Itai Grinberg.

I liked all the papers, and found all of them interesting. Links for some or all of them may be available elsewhere on the interwebs (and I do provide the paper titles in my slides).

Inversions, ethics, and national welfare

Today's NYT reports that, in phone calls to lawmakers and Obama Administration officials defending the Allergan deal, Pfizer's chief has been arguing that the deal, by significantly reducing the company's tax obligations, will "give it more cash that it could invest in the United States and ultimately add jobs."

Unless he is parsing his words awfully carefully via the distinction between "could" and "will" add more U.S. jobs, this is almost certainly false. Despite all the cash that they've stashed abroad and don't want to bring home (at least directly) for tax reasons, I very seriously doubt that Pfizer is cash-constrained with respect to U.S. investments that it would like to make.

The only sense in which the suggestion that Pfizer may invest more in the U.S. post-inversion (possibly adding jobs - which is not to say that overall U.S. employment or wages would be higher than otherwise) is as follows. If Pfizer's enhanced capacity, post-inversion, to strip profits out of the U.S. through intra-company financial transactions lowers the effective tax rate that they anticipate facing on marginal U.S. investment, this  would increase the company's incentive to engage in economic activity in the U.S. But on the other hand, it's possible that some or all of their increased U.S. investment (if any) would come at the expense of investment by purely domestic companies that can't use Pfizer's cross-border tax planning techniques to lower their U.S. tax burdens.

Pfizer, obviously, is doing what's good for Pfizer - be it the management (and/)or the shareholders. Note, however, that these two groups' incentives are not necessarily the same. For example, managers may like larger empires, or over-paying for a  chance to boost accounting earnings per share, and may not mind, to the same extent as the shareholders, causing gain recognition at the shareholder level. It's therefore interesting that, according to the Times article, both Pfizer's and Allergan's stock prices fell upon announcement of the deal.

A natural feature of the political economy landscape of these public deals is that politicians denounce what's happening. Again per the NYT article, Donald Trump is only blaming "politicians," but President Obama has previously called such deals "unpatriotic." (Hillary Clinton is quoted as saying just that it shows we need to change the rules.)

People like me are expected to scoff, and to a degree I do, about criticizing company officials for acting on the incentives that the system actually gives them. It doesn't come as a surprise that companies will invert if this gives them the opportunity to reduce their U.S. tax bills. In that sense, the only potential ethical problems that I would see in this general area are (a) any pursuit of managerial self-interest at the expense of their duty to benefit shareholders, and (b) any effort to go beyond what the law, as correctly interpreted, actually permits, counting on deception or the "audit lottery" (not likely to be a factor here) to get away with results that aren't actually permissible.

That said, I wouldn't feel great about myself if I spent my time, and such expertise as I have in tax practice, working on deals like this for high pay, even if the deals clearly were (or could be made) legally valid. It's not how I'd want to spend my life, and I might feel embarrassed telling people about it (or defensive if they viewed it negatively). But that's a personal choice - and one that, who knows, I might have made differently had my opportunity set 30 years ago been different - and I don't insist on it for everyone else.

Also, just because I myself might view it as a bit naive to cast the issue in terms of the "patriotism" of Pfizer's (Scottish-born) CEO doesn't mean that politicians who favor legislative action to discourage inversions shouldn't be saying it. Political debate is often, on all sides, expressed in spurious or at least simplistically moralizing terms to increase its salience and political appeal to a public that, in effect, is watching (or not watching) from the bleachers eight miles away. So an effort to change the applicable rules in ways that I might support inevitably is going to be cast rhetorically in these terms. Needless to say, there is certainly plenty of political rhetoric that is far worse being issued every single day in the 2016 presidential campaign.

Monday, November 23, 2015

Pfizer inversion into Allergan

If I am getting my back-of-the-envelope numbers right, Pfizer is paying the Allergan shareholders about $40 billion more than the market cap for Allegan's shares.

The NYT article from which I deduce this also says that the companies predict annual cost savings of $2 billion per year over the first 3 years. At least if one discounts for managerial incentives to high-ball this number, it clearly leaves a lot of value to be realized from the anticipated U.S. tax savings. (Plus, why should all the business and tax synergies inure to Allergan shareholders, rather than being split?)

The Times article says that Pfizer has $74 billion in offshore earnings. If this money was associated with zero foreign tax credits (from its being in tax havens), and if we apply the Altshuler-Grubert estimate that profitable U.S. companies lose about 7% a year from game-playing to avoid repatriating foreign earnings, one can certainly start to see some of the extra value being made back, at least if they anticipate being able to get around the Treasury's recently-issued anti-"hopscotch" regulations.

Most of the rest of the extra value, if Pfizer is not over-paying, would presumably come from anticipated greater ease in the use of intra-group debt to strip taxable income out of the U.S. on the company's U.S. operations.

The Treasury has just announced a new set of anti-inversion rules, issued of course with Pfizer in their front-view mirror. Obviously they weren't able to stop this deal, assuming it goes through. But whatever the Treasury does (or not) on the anti-inversion front, with or without legislation that would enable them to go further, it is clear that U,S. rules must respond substantively to the incentives that trigger these deals, not just by trying to slam shut the barn door before all the horses get out.

This does not necessarily mean lowering the U.S. marginal tax rate for corporate income. (Whether or not to do that should depend mainly on separate considerations.) After all, even inverted companies are still taxable in the U.S. on their U.S. operations. And a 1986-style rate cut plus base-broadening that left average tax rates on U.S. corporate operations about the same as previously would matter only insofar as tax planning focused on marginal rather than average tax rates.

It also doesn't necessarily mean that the U.S. should adopt territorial rules. (Again, this is really an independent question.) Among other points - and I won't repeat here my general analysis of why the "worldwide versus territorial" framework is unhelpful - the reasons for inverting are more particular than not wanting one's foreign operations subject to home country tax.

More specifically, I would focus on two steps to reduce the incentive to invert, both presumably requiring legislation. The first is imposing deemed repatriation treatment on U.S. companies with high unrepatriated foreign earnings. This could specifically be a tax consequence of inverting, and/or could simply be imposed without regard to such transactions.

Second, I would strengthen residence-neutral anti-earnings stripping rules that address the use of intra-group financial flows to strip profits out of the U.S. By residence-neutral, I mean other than through our controlled foreign corporations or CFC rules (aka subpart F), which U.S. operating companies can avoid by transacting with affiliated parties that are not their subsidiaries. At a minimum, the earnings-stripping rule of Internal Revenue Code section 163(j) could be made more rigorous. But I would also want to look at rules that look at debt and other internal financing for an entire global group, whether it has a U.S. parent or not. Both Germany and the U.K., I gather, have rules of this kind that would likely be worth examining in this regard.

Saturday, November 21, 2015

On the road again

I'm currently en route back to NYC from the NTA Annual Meeting. I decided to go by Acela since airports can be so unpleasant. Using the Acela between New York and Boston isn't quite as much of a no-brainer as doing so between New York and Washington, because the trip is an hour longer, but perhaps still marginally worth it, especially what with free Wifi on board Acela trains these days.

Since I used the Boston Back Bay station, closest to the conference hotel, this did give me the delight of spending almost an hour in an unheated, open-air station, just what one wants in upper New England at this time of year.  But then again each Acela station seems to have some angles one needs to know about when using them.

For example, in Washington they post the tracks for each train well in advance, so people start lining up for the Acelas at least 45 minutes early. By contrast, at Penn Station in New York they deliberately don't tell you until the train is in the station and ready to board. So everyone mills around in NYC trying to figure out what the track will be, so they can be near the front of the line (admittedly a bit of a mania for me, even more so of course in airports where you're worried about the limited overhead space).

I'm always convinced that the people who use Acela more regularly than I do will be better at reading the cues, so I try to keep my eyes open and use the oldest social media form of all (aka, talking to people you see standing near you).  They change the tracks around so that the regulars won't know for sure. But you can watch the redcaps (except you don't want to line up for the Washington train if you're heading to Boston), ask people who are exiting the trains, and compare notes with the regulars. This time around I got to cheat - someone in first class had been told by the station people which track it was. I told her she should sell the information and this would pay for the cost difference between business class and first class. (I don't entirely understand, by the way, why people bother to get first class on the Acelas - doesn't seem to have as much payoff as in the intensely hierarchical airline setting.)

OK, onto the sessions a bit. I will post the slides for my 3 talks (one on my own paper, two on a total of four papers by friends in the biz) once I'm back at my office and can create a link on the NYU website. Because my time at the conference was shortened by teaching obligations on Thursday, plus also a couple of scheduling quirks at the conference, I didn't get to attend any panels at which papers were presented, with the exception of those where I was a participant. I skipped a big-data session that the organizers intended for everyone - maybe a good idea, I suppose, but certainly not as interesting to me as hearing 3 or 4 papers that I had gotten to choose among 8 or 9 alternatives. I also missed Alan Auerbach's presidential address (I suggested that he should pattern it after Nixon presidential speeches, since we are both among Nixon's diminishing stock of still-living "fans" in the ironic sense).  And I missed a lunch talk, I believe by Jim Poterba, that I would have expected to be quite interesting.

I did get to hear a lunch talk by Martin Feldstein, addressing why he thinks we should change tax policy in the ways that he thinks we should change it. The problem was, this was a speech that he could have (and probably has, on multiple occasions) delivered at a National Bankers Association conference or some such venue. Everyone in the room knew too much about many or all of the topics that he was addressing in abbreviated broad-brush overview for the things that he said, whether one agrees with them or not, to be particularly interesting.  Too bad he didn't tailor the talk to us more, but then again we all (me too) have time tradeoffs to think about.

The session honoring Bill Andrews had some nice highlights, but as I'm feeling grumpy I'll just say that it possibly, at times, could have done just a bit more than it did to (a) personalize the occasion to the honoree, and (b) explain in detail, to the (mainly) economists in the audience, just why this older-generation law professor, whom not all of them know much about, richly deserves this honor. Without meaning to slight any of the other presenters, I will say that David Weisbach did a great job of explaining just exactly what Bill contributed to the income versus consumption tax debate (within the historical context of earlier writers such as Nicholas Kaldor), and why Bill's contributions were extremely important and influential, even if not everyone remembers today what his role was in creating what is now general knowledge in at least some circles.

One nice thing about the NTA these days is the extent to which younger-generation (by my standards) tax law professors have adopted it as a regular venue.  It's become a significant setting both for internal networking within the tax law professoriate, and for their meeting and interacting with economists who have overlapping interests. Achieving this was a goal of the NTA leadership some years ago, and they have succeeded beyond expectations (or at least mine). I'd like to think I helped in this process, if only to the same degree as the mythical old lady who spits in the ocean, when it is getting a bit low, and explains what she has done by saying "Every little bit helps."

Lastly, just a quick follow-up to the comment in my previous post that this was almost my last out-of-town conference, etc., appearance of the year.  I was about to rush off to class (and then travel to Boston) when I put up the previous post, and all I meant to say was that I will be participating in an AEI panel on OECD-BEPS on December 18, as further described here.

Thursday, November 19, 2015

My almost-last work-related road trip of the year

I've been going to out-of-town talks and conferences a lot this semester, and this week is no exception. This morning, the National Tax Association's Annual Meeting started in Boston. I am missing today's festivities because I have a class this afternoon. But in the evening I will be heading up there, as I'm scheduled to appear on two panels tomorrow and one more on Saturday morning.

Tomorrow at 8:30 am, I'll be presenting my recent paper, "The Crossroads and the Seesaw: Getting a 'Fix' on Recent International Tax Policy Developments," on an International Corporate Tax Policy panel that will also feature papers by Wei Cui, Jennifer Gravelle, and Harry Grubert-Rosanne Altshuler. Steve Shay will comment on my paper.

Then at 10 am, at a panel called Policymaking in the Face of Uncertainty, I will be commenting on the following 2 papers: (1) David Kamin, "In Good Times and Bad: Designing Legislation That Responds to Fiscal Uncertainty," and (2) Alan Auerbach, "Fiscal Uncertainty and How to Deal With It."

On Saturday at 8:30 am, at a panel called Fiscal Federalism, Multilateralism, and Tax Law Design, I'll be commenting on the following 2 papers: (1) David Gamage and Darien Shanske, "Fiscal Federalism from the Subnational Government Perspective: Tax Reform for the U.S. States," and (2) Itai Grinberg, "The New International Tax Diplomacy."

Certainly a diverse set of topics, if I do say so myself.  I have PowerPoint slides for all 3 of my talks, and will plan to post them here early next week.

Also at the NTA Conference, on Friday afternoon, there will be a session honoring the great Harvard law professor, retired by now of course, Bill Andrews.  This is a much-deserved honor.

I first met Bill in fall 1986, when I was at the University of Chicago Law School for a day of job interviews that culminated in my being hired there. (Luckily for my state of mind going into these interviews, I didn't learn until the following year that being interviewed at the U of C tended to mean something like a 10% chance of actually getting an offer.) On the plane from Washington, where I lived at the time, as I headed to the Chicago interview, I read Bill's classic article, Personal Deductions in an Ideal Income Tax. I didn't realize that he was visiting at Chicago that semester - I was just trying to expand my tax academic horizons, which at the time were a bit limited, and a colleague at the Joint Committee on Taxation had praised the article to me.

Quite a surprise to then meet him at Chicago, where (as a neophyte) I didn't have much more to say about it than that I had found it very interesting.  But it wasn't long before I knew a whole more about Bill's great contributions. He was also, as it happens, the third-ever speaker at the NYU Tax Policy Colloquium (in January 1996), where he very illuminatingly discussed the new view of corporate dividend taxation (also the topic of a really great short commentary that he wrote in this volume, which honors the work of David Bradford).

It will be great to see Bill again, and to see his work honored at the NTA.

More shortly on why I am calling the NTA session my almost-last work-related road trip of the year.

Friday, November 13, 2015

Who are these guys?

Butch Cassidy and the Sundance Kid led the Hole-in-the-Wall Gang, which knocked over banks.

In my house we have the Hole-in-the-Head Gang (Gary and Sylvester). They knock over garbage cans.

Wednesday, November 11, 2015

Paper presentation at McGill Law School

Yesterday, as noted by the Tax Prof Blog, I was in Montreal, at McGill Law School, presenting my recent international tax policy article that offers a kind of sequel or follow-up to my international tax book.

For scheduling reasons related to my teaching schedule here at NYU, I ended up giving the talk at a special session (rather than in their usual Tax Policy time slot). with students in attendance from several different tax classes at McGill, including those in Tax I who had not yet encountered even Canadian, much less U.S., international tax law or policy. So I ended up giving a kind of general lecture on U.S. and other international tax law and policy, rather than mainly focusing on the new article. This was reasonably fun (for them too, I hope), albeit, given my NYU teaching schedule, my second straight day of giving a 3-hour lecture.

I have revised slides regarding the article, but as I will be presenting it at the National Tax Association Annual Meeting next week, I will wait until the week after that to post them here.  At that point, I'll probably also post slides that I am working on for my 2 discussant slots at NTA: one discussing papers by Alan Auerbach and David Kamin, and the other discussing papers by David Gamage and Itai Grinberg.