Thursday, August 28, 2014


... are the body's version of McCarthyism.  The immune system can't find enough real enemies, so it invents fake ones and makes everything worse.

Explaining August's nearly unbroken radio silence

Another month almost gone - the last in my favorite three-month stretch of the year (aka the true, as opposed to purely astronomical or even meteorological, summer) - and I have scarcely posted lately.  Thus, for example, I have yet to mention here the Burger King inversion story, although over the last couple of days I have been discussing it with members of the press.

I've been traveling for much of the month, first on vacation and then, as a parent, to help deliver a rising freshman to his college in southern California.  Two side benefits that I got from the latter trip were as follows.

First, I was able to fit in a trip to the Nixon Museum in Yorba Linda.  As a long-time Nixon aficionado, this was a treat indeed.  (I realize that no one under 50 can truly appreciate Nixon's astounding comic, dramatic, and literary greatness as a better-than-fictional character.)

Nixon's memoirs begin with the line "I was born in the house my father built."  Speak of great openings, although I never tried to read the rest as I gather it falls short of his most personally revealing work, "Six Crises."  But the house his father built is actually there at the library, at its original site, and I got to step inside.  Also at the Nixon Library is the famous helicopter from which he did his characteristic V-for-Victory pose before boarding to fly away from the White House after he resigned.  Other features include his and Pat's graves, a reconstruction of the White House East Room, and a fairly balanced review of his career.  (The National Archives now runs the place, helping to account for the balance.)

Rather a melancholic site, however, especially in light of Nixon's grandiose ambitions, along with the certainty that he must have felt, even as late as March 1973, that he had fully achieved them.  His ultimate disgrace not only is recounted there, but affects everything about the site.  Not for him the giant Pharaonic monument that I am sure he wanted.  For one thing, the money evidently wasn't there post-disgrace.  Instead, it is quite modest.  Presumably to help make ends meet, they have to rent out the place for weddings, real estate seminars, and the like.  You don't see that sort of thing in Napoleon's Invalides.

Biggest surprise: We got there just after it opened, and the parking lot was completely full, requiring us to park in the Quaker church lot (I think it was) across the street.  I had been joking all the way there about the giant lines we would face, and then was startled to see this evidently confirmed.  But not so fast.  It turned out that the reason for the full parking lot was a seminar offering pointers to real estate salesman.

Best comment: Standing just outside the main building during a tour, my wife and I saw a little field mouse race down a corner of the sidewalk and disappear into a small hole on the lawn.  She noted that seeing a rat on the grounds would have been more appropriate still.

On to the second side benefit of the trip.  It gave me a chance to read Balzac's Pere Goriot, discussed extensively by Thomas Piketty in Capital in the Twenty-First Century and to feature as well in the review that I am co-authoring with Joe Bankman for the NYU-UCLA Tax Policy Symposium on (and with) Piketty that will take place at NYU on October 3.  (Side-comment: We realized that this was Yom Kippur Eve when we scheduled the event, but it was the only mutually convenient date available).

I had previously read Pere Goriot and several other works by Balzac, back in the 1970s, when it in particular had made a strong impression although I didn't entirely like it, but hadn't been through it since.  Lots of boiling melodrama, long declamatory speeches, etc.  "What will Paris say?"  I must admit that I continue to strongly prefer two roughly contemporary French novels that I regard as similar in genre (i.e., bildungsroman featuring an upwardly mobile adventurer): Stendhal's The Red and the Black, which was published five years earlier, and Flaubert's Sentimental Education, which came out more than 30 years later.  But Balzac certainly has a rude and highly theatrical gusto, and if unfashionably unjaded he is certainly plenty cynical.

In our NYU-UCLA commentary, we will be quibbling a bit with how Piketty interprets Pere Goriot as a social document. But I'll save that for later - with luck we may reach the stage of posting the full piece on SSRN within a couple of weeks or even less.

Tuesday, August 19, 2014

The Obama Administration's move towards greater unilateral executive action

Today's New York Times notes "Mr. Obama's increasingly expansive appetite for the use of unilateral action on issues including immigration, tax policy, and gay rights," which it says has "emboldened activists and businesses to flock to the administration with their policy wish lists."

Esteemed colleagues at other law schools have been playing a prominent role in urging unilateral executive action to address significant tax policy issues that typically, in the past, would have been handled through legislation.  For example,  Steve Shay has written about what the Administration can do unilaterally through its regulatory levers about corporate inversions. Victor Fleischer argues that the Treasury's regulatory authority would permit it to address unilaterally, not just inversions (as to which he says "[t]here is no question that Professor Shay gets the law right" concerning the Treasury's regulatory powers), but also the carried interest loophole for hedge fund managers.

As I was quoted as saying in Fleischer's carried interest write-up, it should be no surprise that the Treasury is thinking in these terms, even though traditionally it would not have acted to change policies that customary practice assigns to the legislative process.  "[W]hen the legislative process is as broken as it has become today ... it's simply inevitable that administrations will care less about such comity, and be more willing to advance their policy views in controversial areas through the unilateral exercise of regulatory authority."

Would it be better if the Obama Administration were more circumspect, even assuming (in keeping with my own views) that Shay and Fleischer are right in tax policy terms?  Definitely yes in a better, but counter-factual, state of the world.  But when the legislative process has so completely broken down, the question changes to that of whether one is sufficiently incrementally worsening things at the institutional level to outweigh the policy benefits.

In other words, suppose the Obama Administration changes policies in these two areas but then the next Republican Administration reverses both sets of regulatory changes, and also pushes through lots of stuff that either comity or blind acceptance of then-prevailing practice discouraged the Bush Administration from doing.  Then the next Democratic Administration flips things back the other way, and so on.  Meanwhile, as the Times article notes, special deals and favors start being meted out through regulatory changes, without even the admittedly limited scrutiny that such things get when done legislatively.

This does not sound like a great state of the world.  But I think it is where we are headed in any event, and under administrations from both parties.  So again, I see the principled question for the Obama Administration as whether it is significantly aggravating / speeding up this process if it takes an aggressive stand during its last 2-plus years in office.

I tend to think not, on the ground that we are headed there with all due speed anyway, and that the next Republican Administration will not be greatly discouraged from doing such things, where it wants to, by Obama Administration forbearance.  Think of filibusters, which minorities always had the power to do, but generally accepted as subject to limitations of convention that have by now almost wholly eroded.  In that type of environment, honoring conventional limitations on the exercise of one's legal rights or powers makes a lot less sense than otherwise.  It's a prisoner's dilemma scenario in which everyone else is defecting anyway.

UPDATE: Jonathan Chait provides a well-chosen hypothetical for critiquing the view that I take above.  In response to discretionary non-enforcement of legal rules - as distinct from issuing new regulations - he argues that, if President Obama can, say, decide not to enforce particular immigration laws, then what is to prevent, say, a President Romney from announcing that he would stop all enforcement actions against the non-payment of estate taxes?

The example is not legally on point for my discussion above, since discretionary non-enforcement of a law on the books is distinct from revising administrative regulations that permissibly define applicable law.  But the same concern about escalating breakdown of accepted norms that we rely on in practice is surely germane.  And the conclusion might either be that one should tread a bit lightly after all, or that we are in big trouble whether one side unilaterally does so or not, given the accelerating breakdown of norms that, as Chait notes, are no less crucial than our express constitutional and legal structure to "secur[ing] our republic."

Monday, August 18, 2014

Forthcoming conference at NYU Law School on Piketty's Capital in the Twenty-First Century

Here is the text of an announcement that has just been sent out.  The event has been in the works for some months now, but I didn't think I should mention it here until it officially went public.

I will mention further details in due course.

Fourth Annual NYU/UCLA Tax Policy Symposium:
Thomas Piketty’s Capital in the Twenty-First Century
NYU School of Law
Greenberg Lounge (40 Washington Square South)
Friday, October 3, 2014, 9:00 AM to 4:00 PM

On Friday, October 3rd, at NYU School of Law, the Fourth Annual NYU/UCLA Tax Policy Symposium will address Thomas Piketty’s groundbreaking and best-selling book, Capital in the Twenty-First Century.  The day-long event will consist of five panels featuring leading scholars who will analyze the book from economic, legal, historical, political science and philosophical perspectives.  Thomas Piketty will participate in the discussion and deliver responses to each of the papers presented.

Confirmed panels and paper presentations are:

·         Wojciech Kopczuk, Columbia University; moderated by David Kamin, NYU School of Law
·         Joseph Bankman, Stanford Law School, and Daniel Shaviro, NYU School of Law; moderated by Eric Zolt, UCLA School of Law
·         Gregory Clark, UC-Davis; moderated by Joshua Blank, NYU School of Law
·         Suzanne Mettler, Cornell; moderated by Jason Oh, UCLA School of Law
·         Liam Murphy, NYU School of Law; moderated by Kirk Stark, UCLA School of Law

All papers will be published in the Tax Law Review in 2015.

Due to the anticipated high interest in this event, participation will be limited to NYU Law and UCLA School of Law faculty, students and invited guests.  An invitation and registration information will be e-mailed shortly.

The NYU/UCLA Tax Policy Symposium hosted by NYU School of Law and UCLA School of Law is a joint annual conference focusing on tax policy issues from both a legal and economic perspective.  It provides a forum in which leading scholars, policymakers, and practitioners can analyze complex tax policy questions and options for reform, and brings together members of both NYU Law’s tax law faculty and UCLA Law’s business law and policy program.  It builds on tax policy symposia that have historically been hosted by the Tax Law Review, the premier law school journal for tax policy scholarship, and the UCLA Colloquium on Tax Policy and Public Finance, started in 2004.  Financial support for this conference is provided by NYU School of Law and the Lowell Milken Institute of Business Law and Policy, UCLA School of Law.

Saturday, August 02, 2014

Kotlikoff versus Baker and Krugman

This past Thursday, Laurence Kotlikoff had a NY Times op-ed with two main points.  First, the infinite horizon U.S. fiscal gap is huge, and ought to be reported.  It stands at $210 trillion, and eliminating it would require an immediate, permanent 59% increase in federal revenues, or else an immediate, permanent 38% reduction in federal spending.  Second, we must immediately start raising taxes and/or cutting benefits in order to address it.  Indeed, "this is not just an economics problem.  It's a moral issue" - which he frames in terms of policy transparency, but surely with an underlying premise that it would be immoral to leave the full burden of policy adjustment to be borne by the members of future generations.

As unsurprising as Kotlikoff's column (if you know his views) are Dean Baker's and Paul Krugman's responses (if you know theirs).

First, Baker: all we learn from this is "why we should not use infinite horizon budget accounting.  Kotlikoff showed how this accounting could be used to scare people to promote a political agenda, while providing no information whatsoever."  E.g., if we just go out 75 years the fiscal gap is far more manageable.   And we could tame it by bringing healthcare costs per capita into line with those in other economically advanced countries, so why cut benefits? And Kotlikoff could / should have pointed out that the unfunded infinite horizon Social Security liability of $25 trillion, which he gives significant emphasis in the Times op-ed, equals just 1.4% of future income  (i.e., the present value of GDP in the infinite horizon forecast).

It seems to me that Baker is showing a different point than he thinks - that we can actually have reasoned debate about the numbers Kotlikoff wants to emphasize, rather than that we shouldn't use them because they will be misunderstood.  But moving on to Krugman, he agrees that the fiscal gap suggests that current policy is unsustainable and will have to change at some point.  "But why, exactly, is that something that must be done immediately?  If you state the supposed logic, it seems to be that to avoid future benefit cuts, we must cut future benefits.  I've asked for further clarification many times, and never gotten it."

But Krugman then answers his own question: "You can argue that it's better to avoid abrupt changes - to put things on a glide path to sustainability.  But that's a much weaker point than you might expect given all the cries of bankruptcy and crisis."

Fair enough.  But there's more to this point than Krugman says here.  In a 2006 book that has the admittedly Kotlikoffian-sounding title "Taxes, Spending, and the U.S. Government's March Towards Bankruptcy," I make a "smoothing" argument that goes beyond just avoiding abrupt changes.  Subject to other considerations such as macroeconomic policy and the aim of benefiting poorer relative to richer age cohorts, and leaving aside political economy issues, I argue that one should generally want to both announce and start implementing indefinitely sustainable policies ASAP.  Credible early announcement can provide greater certainty, and sharing the pain of course correction between all years can have "smoothing" benefits.  For example, suppose that your future healthcare benefits were going to be cut.  If all years are expected to be similar, and if "fat" tends to get eliminated before "bone," you'd probably prefer a 5% cut for all future years to no cut in some years and a 10% cut in others.

Let me add a word about that title, by the way, given that, even by 2006, I had moved further from the Kotlikoff camp and closer to the Baker-Krugman camp than I had been, say, in the late 1990s (although I remain fully in neither camp).  My preferred title was "The Use and Abuse of Fiscal Language."  My publisher, no doubt correctly, felt that this would not serve the book's prospects very well.  And while I discerned a "march towards bankruptcy," this was not nearly so much based on the types of numbers that Kotlikoff likes to cite (and which I agree should be included in public debate) as on pessimism about the capacity of the U.S. political system to handle tough policy choices of almost any serious or difficult kind.  Surely that pessimism remains as plausible as ever, whether or not government bankruptcy is the particular disaster that it's most likely to cause.

Tuesday, July 29, 2014

Conversation with Givewell about tax reform

As Wikipedia explains, "GiveWell is an American non-profit charity evaluator created in 2007 by two former Bridgewater Associates investment analysts, Holden Karnofsky and Elie Hassenfeld."   Their main mission is to identify good causes that might then receive substantial funding.

One of the topics they've identified as a possible cause to consider funding is design work on fundamental tax reform.  So they have been interviewing various people in the field, most recently me.  You can find a file memo regarding their conversation with me here.

I was not as bullish as I would like to have been about charitable funding to develop new tax reform ideas, because of the great respect I have for the various plans that are already out there (e.g., X-tax, Graetz plan, income tax base-broadening), along with my view that the main obstacles are political rather than technical.

Monday, July 28, 2014

Understanding and responding to corporate inversions

[This post has been corrected since it was initially posted.]

The last few days have seen a flurry of discussion about corporate inversions.  Examples include this Washington Post op-ed by Treasury Secretary Jacob Lew, and today’s NYT op-ed by Paul Krugman.

Corporate inversions are transactions in which a U.S. multinational transmutes itself into a foreign multinational by arranging to convert the U.S. entity into a mere subsidiary, rather than the company at the top of the chain.  Once this has been done, there is still a U.S. company conducting U.S. operations.  But there are two big changes on the ground.

First, unrepatriated foreign earnings of the U.S. company's remaining foreign subsidiaries are easier than previously to redeploy without a taxable repatriation.  Once there is a parent that isn't under the U.S. affiliate, they can simply loan their trapped cash to that company, or use it to buy the company's stock.  Even if this generates interest or dividend income of the foreign sub that is taxable under subpart F (and low-dividend stock can be attractive in minimizing this problem), the inversion has usually yielded plenty of interest deductions from loan financing that was used in making the deal.  Apparently the term of art for this, as Edward Kleinbard notes in a Wall Street Journal op-ed, is "hopscotch transactions," since one skips over the U.S. parent in directing one's funds where one likes.

By the way, the importance that companies attach to keeping deferral going shows how unrealistic it is to analyze the value of deferral on the assumption that repatriation is inevitable at some point at the currently applicable repatriation tax rate.  It's well-known in the literature that deferral does nothing to reduce the present value of the expected repatriation tax if it is certain to be incurred eventually and if the U.S. repatriation tax rate will always be the same.  Are companies too stupid to know this?  I don't think so.  I will say more below on why they evidently value continuing deferral despite its not reducing the present value of the deferred liability under the above assumptions.  

Second, inversion makes it vastly easier to reduce taxes on one’s U.S operations.  For example, the use of both intra-company and third-party debt to strip earnings out of the U.S. and make sure they will show up elsewhere instead can be a highly effective tax planning strategy post-inversion.  The key is simply that they use affiliates that are not subsidiaries of the U.S. company.  That prevents both the creation of subpart F income when the U.S. company pays interest to foreign affiliates (since only its subsidiaries can give rise to subpart F income) and the application of the interest allocation rules to treat interest deductions as reducing foreign source income (which would potentially lead to foreign tax credit disallowance).  For fuller accounts, see Kleinbard's op-ed and Stephen Shay’s article in Monday’s Tax Notes.

An earlier flurry of inversions was shut down by the 2004 enactment of an anti-inversion statute in 2004 that basically prevents pure paper-shuffling transactions from working, as in the case where a U.S. company creates a Caymans affiliate that emerges at the end of the day as the parent on top even though nothing substantive has actually happened.  But the rules are now being beaten by transactions that have just enough economic substance to work - e.g., where there is an actual acquisition or merger of some kind, with an actual company located in a country where the U.S. group had some prior activity, but the whole thing is still in fact highly tax-influenced.  So the Obama Administration has been calling for legislation to address these transactions and prevent them from being tax-effective.

On Sunday I was on Arise TV, an Africa-based international news and entertainment station, to discuss inversions for a few minutes on a news show.  The host wanted to address whether inversions are immoral.  My response was, that’s not a very useful way to think about the problem.  Companies are going to do what they do (although it’s true that I myself would feel bad about spending my time doing this sort of deal), and the important thing is that we have rules in place that lead to the results we want.  More on what I mean by that in a moment.

But inevitably, moralistic vocabulary is going to be a part of these discussions.  In 2004 there was talk of “corporate Benedict Arnolds,” and President Obama has been speaking of “corporate deserters.”  This is pretty much how discussion needs to proceed in general public debate if one accepts – as I do – the bottom line conclusion that allowing the transactions to be tax-effective is undesirable.

As summarized by Treasury Secretary Lew, the proposed legislation would cause inversions to be ineffective for tax purposes if the multinational company “is still managed and controlled in the United States, does a significant amount of its business here and does not do a significant amount of its business in the country it claims as its new home ….  [In addition, t]o make sure the merged company is not merely masquerading as a non-U.S. company, shareholders of the foreign company [that ostensibly acquired the U.S. company] would have to own at least 50 percent of the newly merged company – the current legal standard requires only 20 percent.”

I support this legislation because I see no reason why we should let it so be easy for U.S. companies to avoid the repatriation tax that ostensibly has merely been deferred, and because I also see no reason to make it easier for them to strip away U.S. earnings.  But the fact that these are the two problems has four broader implications worth noting here.

First, as Kleinbard has noted, anti-hopscotch rules, making the loan to the new foreign parent subpart F income, could be deployed to address the sidestepping of repatriation taxes that the transactions faciliate.

Second, as a tougher alternative to merely addressing "hopscotch," Congress could consider enacting an “exit tax” when U.S. companies with unrepatriated foreign earnings cease to be U.S. companies – even in deals that would pass muster under the new proposed legislation.  The exit tax could be based on the amount of U.S. tax that the company would have paid had it repatriated all of its earnings just before the change in legal status occurred.  Under the simplest version, the tax due would be the amount of unrepatriated foreign earnings times the U.S. corporate tax, minus the amount of tax reduction that would have resulted from claiming foreign tax credits.  But one could also consider other approaches, such as providing “rough justice” in the form of a lower tax rate in lieu of counting up all the credits.  Obviously, if this were done, subsequent repatriations to the U.S. company by foreign affiliates that had kept their status as such would not be duplicatively taxable all over again.

Third, so far as stripping income out of the U.S. tax base is concerned, it would be desirable to move towards having “residence-neutral” rules that applied similarly to U.S. and foreign multinationals.  In particular, there ought to be ongoing multilateral discussion (such as through the OECD) of causing information from the entire global corporate group to be available to countries that merely host subsidiaries, rather than the parents.  This, for example, would permit the U.S. to apply interest allocation rules neutrally as between U.S. and foreign multinationals, for purposes of measuring U.S. source income.

Fourth, in the tax policy literature, we ought to be operating from realistic, rather than unrealistic, assumptions.  I noted above that deferral does nothing to reduce the present value of the expected repatriation tax if it is certain to be incurred eventually and if the U.S. repatriation tax rate will always be the same.  The reason is that, with further standard assumptions, the amount of tax ultimately due grows at the discount rate, so its present value stays the same.

It’s important for people who are working in the field to understand this point, which often is called the “new view” of dividend repatriations but is in fact a provable theorem (aka a tautology) under the requisite assumptions.  But what they should NOT do is assume that the assumptions are true.  Inversions raise the issue of the deferred tax simply disappearing.  But consider as well the fact that the U.S. could change the repatriation tax rate – for example, by lowering it to zero through the adoption of a territorial system without enactment of a transition tax, or through the enactment of further tax holidays.  (I say “further” because a dividend tax holiday was enacted in 2004, and there has been lots of discussion of doing it again.)

A better way of framing one’s understanding of deferral is to say that it has option value.  By deferring, one gets the option to benefit from future disappearance of the repatriation tax and/or from a reduction in the repatriation tax rate.  This would be economically valuable even if that rate were as likely to go up as down – which almost surely is not the case, especially given that the company will generally control the timing of repatriations.

A recent article by Al Warren did a nice job of explaining the logic behind the new view if one assumes (as he expressly does) not only that repatriation at some point is inevitable, but that the current tax rate on it is fixed.  But from a broader perspective, if one wants to inform current policy debate, what Warren did was assume away the most interesting and important aspects of the real world problem that he addresses (i.e., how to think about deferral when different possible models of international tax reform are on the table).

Friday, July 25, 2014

Cable TV appearance this Sunday

This Sunday (July 27), I'll be interviewed live, at 4 pm EST or so, on an international TV channel called Arise TV that is viewable domestically on-line (, on Time Warner Cable, and on Verizon Fios (481).  The subject will be corporate inversions to eliminate U.S. resident status, and President Obama's recent call for legislation combating them.