Sunday, March 30, 2008

NYU Tax Policy Colloquium on "How Americans Think About Taxes"

Last Thursday at the colloquium, MIT political scientist Andrea Louis Campbell presented a couple of draft chapters from her forthcoming (but still in progress) Princeton University Press book, "How Americans Think About Taxes."  Once again, as when we had a paper by Carnegie-Mellon political scientist Christina Fong last year, a session with a political scientist outside our usual circles here at the colloquium proved to be a big success, intellectually broadening for all concerned, and fun.

The piece of the book that we saw has two distinct things going on: attempting to explain the determinants of Americans' changing attitudes towards taxes without regard to how this affects political outcomes, and exploring why tax progressivity has recently (at least in the last 7 years) declined.

For the former, Campbell, while still weighing aspects of her approach, at present uses "perceived cost-benefit theory," an adaptation of rational choice theory that takes into account how taxes' form and structure can dramatically shape perceptions wholly independently of substance.  I was basically okay with this, although her use of the perceived benefit side can be (and was) questioned.  Others argued that ideology plays a bigger role than she gave it credit for.

As the paper acknowledges, rational choice has a tough road to hoe in public policy even if one believes it governs behavior in, say, financial markets, given the voting paradox.  If it isn't rational, in a narrowly economic sense, for me even to inform myself (much less vote) in a mass society where I can't significantly affect the outcome, then we may be using the wrong theory.  What makes self-interest almost work a little better here is that people have some inclination to believe that things that are good for themselves are also good policy.  I attribute this to the Pleistocene incentive to be self-interested yet genuinely convinced of the broader merits when arguing "policy" (e.g., where should we go tomorrow) with the other hunter-gatherers.  But there is no evolutionary impetus to deploy one's most advanced cognitive tools and efforts to solve complicated problems that one has no power to decide anyway.

Insofar as rational choice (almost) works in spite of itself with respect to simple choices that would unmistakably be better rather than worse for oneself, it may seem paradoxical that the median voter has let the system become so much less progressive in the last few years.  No policy judgment about optimal progressivity is needed for one to posit that most voters would rather have rich people pay a bit more tax if this meant that they themselves could pay a bit less.  But this basis for considering reduced progressivity paradoxical would only apply in a zero-sum framework, where all current voters are paying a fixed amount of tax and the question is who will pay more and who less.  When you can simply run up the tab at the expense of future generations, as the Bush Administration has done, then current voters both (a) have no reason to bother figuring it out any more (especially if agenda control means they aren't comparing it to alternative changes that lose the same revenue) and (b) could rationally say fine, I don't care about future generations.

So perhaps there is no paradox after all, even leaving aside the role of ideology, normative issues, complicated tax incidence questions, and changed worldwide economic conditions ithat arguably reduce the optimal level of progressivity from where it was 40 years ago.

My version of Amy Winehouse

They say I got to go to rehab, I say "No, no, no"
First it's my knee and then it's my hamstring, ow, ow, oh
My elbow's still inflamed, can't play no tennis game
And still I have to go to rehab, I just go, go, go.

I'd much rather get to play
Than spend thirty minutes every day
Cause there's nothing, there's nothing getting better
It seems like I'll never be okay
But they say I got to go to rehab, I just go, go, go

I used to play lots of squash
But then that got the kibosh

They say I have to go to rehab, I just go, go, go
I ain't got the time, and if I gave up I'd be fine
But if I want to play again it's rehab, so I say, ow, ow, oh.
And all I do is go to rehab, saying "No, no, no."

Thursday, March 27, 2008

Doing their homework

I recently was invited to participate in a DC tax policy forum discussing the Clinton and Obama tax plans. I couldn't go, but I gather that the Clinton people had thought I might be a good person to discuss Obama's tax plan. This in turn is interesting, because many months ago (well before even the Iowa caucuses) I had a blog post that was critical of Obama's then-newly announced proposals. So I suppose the suggestion may in this sense be no coincidence.

As it happens, I haven't posted on any other candidate's tax plans other than ol' Fred Thompson (you know, the actor) along with some snark concerning this now-forgotten guy who used to be a big shot, I think named Rudy Guiliano or Guilianus or something like that (it's hard to remember these days).

I've been thus scattershot about the candidates' tax plans because I find it hard to really take an interest in these things until I have reason to believe that the candidate is actually going to (a) win and (b) propose his or her plan. Plus, I sometimes have an aversion to overly low-hanging fruit, which is what criticizing a candidate's tax plan can amount to given all the political constraints on proposing sensible tax policies. So in a way it was a compliment, albeit less to Obama himself than to his economic advisor Austan Goolsbee, that I considered the plan worth criticizing.

Anyway, someone's campaign must be reading these things given the apparent genesis of the invitation. Good to know I'm not all alone out here.

Sunday, March 23, 2008

Work, publication, and reading update

One work-related item that I did have to take care of in Mexico was the exploding offer (mentioned in an earlier post) for my article on taxable and accounting income. The offer was from the Georgetown Law Journal, and after very minimal efforts to stir up a couple of expedited reviews I decided to accept. A perfectly good placement, and no reason I could see, especially while on vacation, to play silly games aimed at raising the prestige factor slightly.

OK, I'll fess up to the one other bit of work I did, which was to plan (at a basic conceptual level) my remarks at the NYU Tax Policy Colloquium this Thursday, where we will discuss "How Americans Think About Taxes: Public Opinion and the American Fiscal State," a forthcoming (Princeton University Press) book excerpt by Andrea Louise Campbell of MIT's Political Science Department. I like the excerpt, which discusses why tax politics has moved recently in a less progressive direction despite the arguable financial self-interest to the contrary of non-rich American voters. Campbell uses, among other inputs, detailed polling data over several decades and a sophisticated theory of perceived cost-benefit from tax rules. Naturally, given my work and interests, this is a topic on which I have plenty of my own ideas. I anticipate a fruitful discussion.

I also found the time to read 4 books. (Reading fast is a bloody nightmare when it comes to packing for a vacation trip - you end up with plenty of bulk and still have to worry about running out.) First was "Zhou En-Lai: The Last Perfect Revolutionary." This perhaps unlikely bit of beach reading is a book written by a Chinese exile and U.S. emigre who for years had access to top secret Chinese Communist Party files from the 1960s and 1970s. After a slow start it became fascinating and even genuinely moving, showing how Zhou worked with the utterly mad and monstrous Mao, trying above all to survive and also to moderate him but also enabling him. The book reaches the conclusion that Zhou tried to be a decent person but failed because of the demands the system placed on him plus his own human failings such as the need to subordinate himself and comply. Extra points for satisfying the curiosity of one who grew up reading the crazy news from China in the Cultural Revolution era without having any information (which no one in the West had) about what was really going on behind the scenes. E.g., what was the deal with Mao's "closest comrade in arms," Lin Biao? Now I know, and it's a much more interesting story than I had expected.

Second book was "Smile When You're Lying: Confessions of a Rogue Travel Writer" by Chuck Thompson, an at times uproarious collection of travel experiences packaged as an expose of all the fakery and hype in the travel industry. Good not so clean fun.

Third was "Mayflower," by Nathaniel Philbrick, a history of the Plymouth Bay and related settlements from founding through the horrific Indian wars of the 1670s. Guess who were clearly the bad guys. A good read but not in my view great.

Finally, Joshua Ferris, "Then We Came to the End," the only novel I have yet read that is written in the first person plural (a shifting "we" that is one of the strong points). It's set in a yuppie (and otherwise)-filled ad agency and shifts gradually from satire to a bid for something, in the author's view, more. Agreed, the pure satiric take would have risked being very over-familiar after all the TV and other such treatments of same. And anger at the workplace or the bosses (shared by many of the workers in the novel, but not by the author) would have been tedious as well. I did like it, and found it absorbing, but in the end it was perhaps a bit too book-groupish rather than memorable. Reading Ian McEwan (such as "On Chesil Beach"), when one can stand to, can make a lot of other mainstream contemporary fiction look a bit thin.

Back from vacation

We returned yesterday from a week in the Iberostar Tucan in Playa del Carmen, Mexico (near Cancun but much quieter). A pleasant week on a family resort that mixed the idyllic with, I suppose, the tired (such as some of the all-you-can-eat buffets). At my age, the real good news is avoiding injury (from sunburn, being smashed by waves, testing my elbow tendonitis, etc.) and not gaining weight despite the all-you-can-eat system. As Oscar Wilde said, "I can resist anything except temptation," but luckily the desserts and fried foods don't even tempt me any more. The enormous quantities of fresh papaya that I consumed apparently were okay.

One of the Iberostar's best features is the wildlife living on the property - howler monkeys that I got to see daily after stumbling on their PM hangout site in the canopy, big iguanas, peculiar rodents that might be capybaras, and some beautiful though exceptionally pompous peacocks that were strutting around the pathways and in one case decided to challenge me. (I held my ground, figuring that I weigh more.) Best activity was letting waves wash me onto a surfbreaking structure resembling rock but actually a canvas filled with sand. Very slippery in spots where algae had grown onto it.

In the picture here I'm in the background, having ridden a wave onto the structure but not having yet been washed off. (This apparently was the day I decided not to stand up any more before the waves got me - there's only so much pounding you can take at age 50 plus.)

Second picture is one of the local beastie residents whose favorite AM sunning site we discovered. You can see that he or she is sitting on top of another iguana's tail.

Today (Sunday), things are not quite so idyllic. I'm in my office reading literally hundreds of pages for work (appointments committee, etc.) that I decided not to trouble myself with while in Mexico. Or rather, I am finding a way not to read them at the moment.

Friday, March 14, 2008


Well I'm glad on balance, but I got a law review exploding offer (96 hours) for my tax and accounting piece, less than 12 hours before I'm scheduled to leave for the airport.  Managing this from a beach resort while trying to unwind is going to be interesting.

Tax policy colloquium on EC tax policy

Yesterday in the Tax Policy Colloquium, in our 9th of 14th sessions and the last before our one-week spring break (which I will blissfully spend in warmer climes), Ruth Mason presented her paper, "Made in America for European Taxation: The Internal Consistency Test." A lively session, in part because our usual crowd was supplemented by a number of high-spirited EC tax folk who were in town for a conference on EC tax policy that is taking place at NYU today, and indeed at this very moment.

Ruth proposes a Kantian-sounding (but not actually Kantian) diagnostic for tax discrimination, which the European Court of Justice (ECJ) has a mission to strike down while permitting mere "disparity." She would have the ECJ ask whether cross-border activity or those engaging in it would be disadvantaged if the tax law of the jurisdiction that is being challenged were universalized, i.e., adopted to the last comma by all other jurisdictions. It's a proposed diagnostic rather than a proposed standard, because one could analogize it to the skin test for tuberculosis - the question is whether one actually has tuberculosis, not whether one's skin swells where they inject you, but if it doesn't swell then you're home free whereas if it does you face further tests.

The key problem here is that, while we have an objective standard for tuberculosis (once all the facts are known, one unmistakably either has it or doesn't), the same cannot as easily be said for tax discrimination. What is it? Mihir Desai, my co-convenor for the last seven weeks of the colloquium, and I felt that one really needs to define it, at least conceptually, in order to have any sense of what one is trying to do, but lawyers who have spent less time with economists than I have often scoff at this and say no worries, we can proceed anyway. Definition, we don't need no stinkin' definition.

Mihir proposed an idea that Michael Graetz and Al Warren have also written about, to the effect that discrimination might be found if one violates either capital import neutrality (equal treatment of one's outbound investments with those in the source jurisdiction) or capital export neutrality (equal treatment of home and outbound investment). The punchline Michael and Al derive from this, and which Mihir suggested as well, is that tax discrimination, if defined this way, is a hopelessly incoherent concept. All taxes, home and abroad, would need to be harmonized if one wanted to fully satisfy both CIN and CEN, and this is not among the options on the table. The Europeans in the room loudly hooted at this interpretation of what they and the ECJ have in mind by tax discrimination - as I gather they also did in the past, on multiple occasions, when Graetz and Warren proposed this view.

Luckily for me (since I have to make some comments later today at the EC Tax Policy conference here), I felt that the session eventually helped me to understand what they appear to have in mind when they discuss tax discrimination. Very roughly speaking, and falling short of an operational definition, I'd say the idea is (a) negative cross-border tax synergies, or higher total taxes from being in two jurisdictions than one would have had from the sum of being separately in each, that (b) are not considered justifiable all things considered (e.g., considering how bad the impact is, how deliberate it seems to be, how easily the government could have avoided it without being forced to change rules that it might like for "innocent" reasons, etc.).

Not very crisp, and I don't have the time pre-vacation to try to spell it out more, but for me at least this helps conceptually. Seen this way, the idea isn't incoherent, although it is a bit mushy, underspecified, and vague. And not necessarily a bad idea to have courts doing this in an ECJ-type or US national setting.

Wednesday, March 12, 2008

Musical update

Stephen Malkmus' new album sounds at times a bit like the Allman Brothers. All those long hippie guitar rave-ups, albeit on songs that have characteristic Malkmus chord sequences and start-stop dynamics. I'm quite enjoying it, although the analogy isn't entirely praise. The best song, "Out of Reaches," could have been a Pavement ballad. (Now that's higher praise.)

Ray Davies' new album is really good. Probably his best album of new material since Arthur (with the Kinks) back in 1969, although this is not as high praise as it may sound as there are few intervening contenders. The Kinks, after having extraordinary self-direction and integrity in the mid-1960s, when they paid a price for not trying to fit in, spent the next couple of decades being as crassly and reductively commercial as one could possibly be. Plus Ray got too boringly bitter. The current album has a few overly preachy political moments, but overall it's a bit as if Lennon had lived, mellowed, and rediscovered a voice that could work for him.

The new Dengue Fever album is very enjoyable and lively. Not sure if I will want more of their work, but the fusion definitely works.

Friday, March 07, 2008

Intellectual progress at the NYU Tax Policy Colloquium

Yesterday at the colloquium, Mihir Desai, who will be co-leading things with me for the rest of the semester, presented his empirical paper "Foreign Direct Investment and Domestic Economic Activity," which concludes from firm-level data that outbound investment by US multinationals (MNEs) is a complement to, rather than a substitute for, their domestic investment. Hence, contrary to the "runaway plants" scenario that arguably underlies much of US international tax policy, the paper suggests that MNE investment in low-tax environments abroad does not cost the US domestic jobs or tax revenues.

One question I raised at the PM session is whether outbound investment is necessarily distinctive in this regard, if what we have in the main is a story about economies of scale and rising vertical / horizontal integration in an era when the general worldwide business environment may be transforming itself. E.g., suppose we did the same type of study regarding whether investment in California by a nationwide firm is a substitute or a complement for investing elsewhere in the US, and got the same result.

But the main topic was the U.S. international tax policy implications, about which I am reluctant to say too much because it would make this post too long and anyway I'm planning to write about it this summer. But one thing that became clear is that exempting outbound investment by US firms does not necessarily emerge as the logical consequence of the paper's findings, and that when Desai, Jim Hines, and others describe exemption or national ownership neutrality (NON) as an efficiency benchmark, they don't mean a tax policy benchmark. To give a sense of the difference, a lump sum tax such as a uniform head tax is in some settings an efficiency benchmark, but not a reasonable proposed policy. In that setting, the complicating issue is concerns of distribution as well as efficiency. In the international setting, the complicating issue is that one is choosing between inefficient tax instruments and attempting to minimize overall inefficiency.

I call this post "Intellectual progress at the NYU Tax Policy Colloquium" not because of that point in particular, but because it was one of those sessions - meeting our ideal, which one can't always do - at which the group dynamics and interplay resulted in advancing the thinking of lots of participants about these issues. It was a collective exercise and perhaps will show up in the future writings of several of us.

Wednesday, March 05, 2008

My letter to the editor of Tax Notes

This Monday my letter to the editor of Tax Notes regarding Al Warren's critique of the BEIT business tax reform proposal (mentioned in an earlier post) came out. The cite is 118 Tax Notes 1048-1050 (March 3, 2008), and a relevant extract goes as follows:

[A]t least one of [Warren's] key conclusions, dismissing the BEIT plan as having no apparent rationale, is overly harsh in an important way. I therefore wish to augment the debate by explaining why, in my view, the BEIT remains an important corporate tax reform proposal that merits further attention notwithstanding any defects in its current form that he may have demonstrated.

I should note, however, that in two respects my analysis here is orthogonal, rather than directly responsive, to Warren’s. First, he understandably focuses on the exact details of Kleinbard’s most recent description of the BEIT. I wish to focus at a more general level on the central BEIT concept of eliminating the debt-equity distinction by having an annual cost of capital allowance that is both deducted at the corporate level and included at the investor level...

Second, one reason I consider the BEIT potentially appealing relates to a possible direction of U.S. tax law change that neither Kleinbard nor Warren considers because it has not happened yet, and indeed may never happen. Purely as a matter of prediction, and without regard to the policy merits (though they might be positive), I believe there is a strong chance that worldwide competitive pressures will lead the United States to adopt a corporate tax rate that is significantly below the top individual rate .... [This] would give new importance to the way in which the BEIT relates entity level and investor level tax collection.

Only one previously proposed corporate integration plan resembles the BEIT in its approach to the income tax distinction between debt and equity: the comprehensive business income tax (CBIT) that the U.S. Treasury Department proposed in 1992. In effect, the CBIT would revise the tax treatment of debt to be more like that of equity, by denying deductions for interest at the business level and making the receipt of both interest and dividends generally tax-free to investors. The BEIT reverses this, making the tax treatment of equity more like that of debt, by providing cost of capital deductions at the company level along with inclusions at the investor level.

This reconciliation between the tax treatment of debt and equity, accomplished by both the CBIT and the BEIT, could be enormously important. Modern financial innovation has made the tax distinction between the two types of instrument ever more porous and manipulable. Insofar as investors can slap whichever label they prefer on whatever sort of investment position they wish to have, the debt-equity distinction amounts to an election to use either the corporation’s tax rate (via the use of equity) or one’s own (via the use of debt), whichever is lower. It is hard to think of a good rationale for such an election, and allowing it might be all the more significant if the corporate rate were reduced significantly below the top individual rate.

Why reverse the CBIT approach and tax the normal return at the investor rather than the corporate level? This has been my main concern about the BEIT, as the change might not make enough difference to be worth the trouble if the corporate rate and the top individual rate are the same. However, if I am right in my surmise that the corporate rate may soon be lowered significantly below the top individual rate, then at some point it really will matter. What is more, one could argue that the BEIT approach is better in this scenario, if the reason for the lower corporate rate is entity-level capital mobility that does not apply in the same way to high-income individuals who are U.S. residents.

Warren, in my view, misconstrues the best argument for the BEIT’s revision of the CBIT approach when he states that “the rationale for applying graduated rates to some, but not all, components of capital income is not apparent.” So long as administrative considerations, relating to income measurement, are assumed to prevent full flow-through taxation of corporate shareholders, continuing to tax extra-normal returns at the company rate is a design constraint, rather than a deliberate feature. This does not, however, automatically settle the question of how normal returns (which can be measured with reasonable accuracy by observing interest rates) ought to be taxed if rate differences between the company and investor levels, or differences in the amounts being included and deducted, make the choice potentially important...

Tuesday, March 04, 2008

Published at last

My Stanford Law Review article, "Beyond the Pro-Consumption Tax Consensus," has finally been published, along with a response from Joe Bankman and David Weisbach, who I suppose I accused in my piece of intellectually overselling a bit.

The Tax Prof blog has more of the details at

In this exchange, the problem is that we are talking past each other a bit. I am more interested in the pure analytics, they in what is likely to be one's practical bottom-line conclusion. I don't think they really disagree with me about the analytics, only they seem to me a little less interested in looking there as a pure intellectual exercise. And I don't disagree with them about the likely bottom line conclusion in favor of a consumption tax.

Was I just nitpicking? I don't think so. It's important to have a really clean grasp of the analytics before proceeding with real world conclusions, which one should do as well but with all due intellectual reticence given the gap between simplified economic models and real world implementations.

Overheard in my Pilates class

... from a middle-aged woman:

"Obama is STUPID. He should have waited his turn. All my friends are voting for McCain if he wins. His wife is a problem."

Talk of being true to your demographic ...

Monday, March 03, 2008

Adventures in rock concerts

If anyone who will be in the vicinity of NYU Law School by mid-afternoon on Tuesday, 3/4, wants two tickets that I am holding to a potentially very interesting concert but will be unable to use, please let me know. The concert is by Dengue Fever, an LA group with a Cambodian chanteuse that mixes indie /psychedelic rock with 1960s Cambodian pop music. Doors open at 8 pm at the Mercury Lounge on East Houston Street, NYC. It turned out we couldn't go, so I am buying the group's latest album instead.

Other recent album purchases: new releases by Ray Davies (still a great songwriter and vocalist) and Stephen Malkmus (won't know until it's released tomorrow), plus the reissue of Nick Lowe's Jesus of Cool.

Tax policy colloquium session on my tax & accounting paper

Last Thursday at the NYU Tax Policy Colloquium, we discussed my paper from last fall, "The Optimal Relationship Between Taxable Income and Financial Accounting Income: Analysis and a Proposal." Kevin Hassett did his last co-leading gig of the semester unless required to pinch-hit later on. I'm very grateful to Kevin for the great job he did throughout the semester as a very stimulating colleague and discussant. Plus it's been great to talk regularly to someone who disagrees with many in my circle on at least a few contemporary political issues. Same-mindedness and orthodoxy are the enemies of creative thought.

Kevin began the day unenthusiastic about my admittedly tentative proposal, under which publicly traded companies' taxable income would be adjusted part-way (say, 50 percent) towards an adjusted measure of the financial accounting income of the same affiliated group of companies. But in the course of the colloquy he acknowledged to moving in the direction of greater sympathy for my approach, in particular because it tries to address the downside to a full-fledged "one book" approach, which I locate primarily in legislative politics.

Some of the flavor of the discussion at the colloquium session is captured in a new subsection I added near the end of the paper, addressing particular critiques that I have heard often.

"1. Why not simply increase penalties and regulatory oversight? Doing so might be a good idea whether or not the taxable income adjustment was adopted. Moreover, insofar as it reduced the magnitude of the problems posed by tax sheltering and earnings management, it would indeed tend to weaken the case for adopting the adjustment, given the various tradeoffs presented. Nonetheless, even with optimal auditing and penalties, the adjustment would have benefits. For example, it would reduce the managerial incentive to waste resources engaging in transactions that are legally permissible, and thus that would survive heightened scrutiny, and yet that serve no good social purpose beyond advancing the managers’ income manipulation goals. Examples include creating hybrid financial instruments that are debt for tax but not accounting purposes, and engaging in tax shelter transactions that have just enough economic substance to withstand IRS review.

"2. Why not instead directly improve the systems’ income definitions? This as well would be independently desirable, and might reduce the social gain from adopting the adjustment. Nonetheless, it would still leave room for the adjustment to improve matters. Any plausible rules for defining taxable and accounting income are likely to leave room for the exercise of interpretive discretion, which managers would be expected to use in a self-interested fashion to reduce the former measure and increase the latter one. This problem can only be addressed via the relationship between the measures.

"Consider again the case of the tax shelter transaction that has just enough economic substance to withstand IRS review. Such cases may exist even with optimally designed economic substance rules, given the tradeoffs that underlie choosing the proper level of stringency. Accordingly, the taxable income adjustment, which would reduce the tax benefit from engaging in such a transaction, is not simply or even primarily a substitute for directly seeking improvement in the income definitions used by either system.

"3. How can going halfway towards a one-book system be a good idea, if going all the way is not? The experience of countries such as Germany that have moved away from one-book systems may support the inference (with which I agree) that adopting a one-book system in the United States would be a mistake. Why move halfway towards something not worth doing in full?

"The core reason, in my view, for avoiding a predominantly one-book system (even with specified exceptions, such as for foreign subsidiaries) is that it would put the U.S. Congress more directly in the business of defining financial accounting income. My proposal is designed to minimize this danger, and concentrate the incentive effects on corporate managers rather than on politicians whom it would not succeed in reining in. Insofar as the proposal would nonetheless result in increased legislative meddling in the definition of financial accounting income, the case for adopting it would be weakened."

I have now sent the paper to a bunch of leading student-edited law reviews and am hoping for the best.