Slides for my talk in Sao Paulo on international tax policy

A pdf of the slides for my keynote lecture at the NEF's Third Annual Colloquium in Sao Paulo, entitled "Rethinking International Tax Policy," is available here.

Upcoming talk this week

This Wednesday morning, at the horrifying time of 4:45 AM, I will be heading to the airport en route to Sao Paulo, Brazil, where I will be the keynote speaker on Thursday, December 1, at the Third International Colloquium, to be held at the Center for Fiscal Studies (called the NEF due to its name in Portuguese), which is affiliated with the University of Sao Paulo Law School. The NEF is a think tank that aims to bring together academics, government representatives, the private sector, and civil society organizations to advance public thinking about tax reform.

A Portuguese-language schedule for this colloquium is available here. Prior keynote speakers were Richard Bird in 2009 and Vito Tanzi in 2010.

My talk will be called "Rethinking International Tax Policy," which I consider adequately descriptive, albeit not, as titles go, especially original or inspired. (How many "Rethinking ..." papers have there been on various legal subjects in the last 20 years?) But I am hoping that the content will be more original than the title.

Brazil is an interesting country, and also has fairly distinctive international tax rules, which I will mention in passing, although I certainly would not claim any more than a very general and superficial familiarity with them.

I have PowerPoint slides for the talk, and will post a pdf of them here on Thursday, if my iPad and wireless access cooperate. I've completed them and thus, I suppose, could post them now, but in general I don't like scooping my own talks at conferences in this way.

Cruel practical jokes

I would never actually do this, but when I see one of my cats sniffing the seat of a soft chair while turning slowly around, preparatory to curling up for a nap, it occurs to me: What if some cruel practical joker had sprayed coyote scent (at a level undetectable by humans) on the spot?

NTA Annual Meeting in New Orleans, part 4

The final panel in which I participated in New Orleans was one at which I presented my article on rising U.S. corporate residence electivity.

Since this article is verging on old and cold (i.e., it's based on a talk that I gave in September 2010, and appeared in the Tax Law Review earlier this year), I decided to use the talk as a vehicle for pushing forward a bit, and including thoughts that I have been developing in the last few months while working on my international tax book in progress. Hence, I called my talk "The Rising Tax-Electivity of U.S. Corporate Residence (... and Beyond)," and used the last couple of slides to push farther than I have thus far in print (other perhaps than earlier powerpoint slides that I have posted at this blog) on how I am thinking these days about how we should tax U.S. multinationals' foreign source income.

The slides are available here. I should note one difference between the version that I am posting and the one that I actually used in New Orleans. The latter included a slide asserting that Desai and Hines are "in error" insofar as they assert that the asserted national welfare norm of national ownership neutrality (NON) supports exempting U.S. companies' foreign source income. But, as Jim Hines noted at the session, there is no error either in identifying NON as a relevant margin at which distortion is undesirable (all else equal), or in asserting that NON supports exemption.

What I would regard as in error is saying that U.S. national efficiency would be maximized by basing our international tax policy on NON. I would argue that this, by over-focusing on one margin when in fact there are many to consider, would affirmatively diverge from minimizing the overall economic distortion caused by the U.S. federal income tax system. Even given this point, however, Desai and Hines are only in error if they do in fact assert that NON establishes that exemption is the most efficient international tax policy for the U.S. to follow.

Now, some may feel that they do effectively assert this, but the articles in which they introduced NON to the literature acknowledge that there are broader efficiency issues to consider. Thus, I decided to remove the "error" claim before posting the slides.

NTA Annual Meeting in New Orleans, part 3

As noted in earlier blog entries, I wanted to offer a brief account of the other two panels in which I participated at the NTA Annual Meeting in New Orleans. Herewith the first additional entry, concerning a panel at which I commented on two empirical papers on international taxation.

The first paper on which I commented was Eric Allen & Susan Morse, "Firm Incorporation Outside the U.S.: No Exodus Yet," which is available here. Allen and Morse use hand-collected data (a phrase in general usage that I nonetheless find charmingly antiquarian, since I would assume people mostly do it with computers) to make a very useful rifleshot finding that contributes to our understanding of U.S. incorporation practices.

As I noted in my residence electivity article, if the U.S. pushes worldwide taxation of U.S. companies especially hard, one might expect rising foreign incorporation by U.S. start-ups. The article notes anecdotal evidence, offered to me by leading practitioners, explaining why in their experience home incorporation remains the norm in most business sectors, even for the potential multinationals of the future. Home incorporation turns out to have significant advantages in the start-up phase. Plus, so long as one places one's valuable international property abroad for tax purposes, the U.S. regime generally is not all that onerous anyway. But I noted suggestive evidence from an article by Mihir Desai and Dhammika Dharmapala that tax haven incorporations have risen in recent years. Might this be the start of a trend? Both I and the authors of that article stroked our chins (metaphorically speaking) and said yes, it's just possible that it might be.

Allen and Morse lay this to rest, however, by finding that the recent tax haven incorporation boomlet appears to reflect almost exclusively action involving start-ups from China and Hong Kong. U.S.-headquartered companies are not contributing to it at any significant level.

Good to know this. Now, I noted that this finding doesn't rebut the possibility that rising tax-elasticity of overseas investment by U.S. companies might still be a current trend and a problem, operating along other margins (e.g., new equity issuances, and clientele effects regarding who ends up investing where). Nonetheless, Allen and Morse have made a very nice contribution by making this new finding about tax haven start-ups, and I imagine that they will be cited regularly for this (certainly by me).

The second paper on which I commented was "Taxes and the Clustering of Foreign Subsidiaries," by Scott Dyreng, Brad Lindsey, Kevin Markle, and Douglas Shackelford, which is not yet available on-line. This paper notes that the empirical literature to date on how U.S. (and other) multinationals (MNEs) shift income between affiliates has generally operated under the assumption that all company choices regarding where to place an overseas affiliate are made independently.

For example, if Acme Products U.S. decides to place a controlled subsidiary in the Netherlands, this is assumed to have absolutely no effect on whether it will also put one, say, in Belgium, France, Germany, Ireland, or the Bahamas (to name just a few where we know that in fact there might be interacting causation). The literature adopts this view, not because anyone actually believes that affiliate choices are independent, but because we don't know how they interact with each other.

The Dyreng-Lindsey-Markle-Shackelford paper attempts to figure out relationships by coming up with "expected" correlations between where one has an overseas affiliate in the absence of a tax motivation, and then comparing this to the actual correlations that are found. E.g., if one found lots and lots of MNEs with affiliates in Germany plus the Caymans, this might suggest that the pairing is tax-motivated unless there are other grounds for expecting it.

The difficulties in deriving findings on this very interesting topic (which potentially would help inform policymakers), include the following:

--It's hard to say what correlations would be expected absent tax considerations. For example, should companies be expected commonly to have affiliates in neighboring countries? Leaving tax aside, one could imagine that a Netherlands sub is either a substitute or a complement for one in Belgium. On the one hand, the MNE is active in the area and thus might want to go to more countries that are nearby. On the other hand, perhaps the Netherlands is close enough to Belgium to reduce the need for a specifically Belgian sub if one starts being active there.

--Likewise, tax-induced relationships between affiliates may turn on either substitution or complementarity. E.g., being in one tax haven may either make a second tax haven less needed than otherwise, or else make the second one all the more valuable, as in "Double-Dutch-Sandwich" type schemes that require laundering profits through several successive locations. In addition, by going to one tax haven, a company may provide evidence that it is the type of company that likes to use tax havens. So, if it was also in other tax havens at "unexpected" levels, this might reflect endogeneity rather than complementarity.

--The real action may involve multi-jurisdictional clustering, not just two-country pairings. But that makes testing for empirical relationships even harder.

--Suppose that having a sub in Bermuda is a substitute for having one in the Caymans for companies following Strategy A, but a complement for those that are following Strategy B. Then one might fail to find net correlations that reflect tax planning, but it would still be going on in case after case.

The authors are quite aware of all these problems, and are struggling ingeniously to refine their empirical strategy. I look forward to the end result, as it could be both interesting and useful. But in the interim, virtue (choosing an interesting project even though it is hard) may serve as its own unfair punishment.

Great news for NYU Law School

We at NYU Law School will be adding a new member to our tax faculty next year, David Kamin, a recent grad who is currently working on tax and budget policy at the White House. Details here. David is going to be an outstanding academic as well a great colleague, and I'm very excited that he will be joining us.

Nudge nudge, wink wink

No, that can't be. Is demure little Ursula actually winking at the camera?

NTA Annual Meeting in New Orleans, part 2

Herewith some quick notes on one of the three panels in which I participated at NTA New Orleans. I guess you could call me a triple threat, as I moderated once, presented once, and was a commentator once.

The moderating gig was for a panel on corporate tax reform, with Rosanne Altshuler, Peter Merrill, and Martin Sullivan. As background, at a session the day before, it became clear to me that Rick Perry jokes have not yet reached their sell-by date, although I would imagine it won't be much longer. There are only so many changes you can ring on the theme of having three things to say and forgetting the third.

But it occurred to me at that prior day's session that I had a fairly good Rick Perry joke in mind that I could use at the corporate tax reform panel. I won't try to re-create it word for word here, but suffice it to sketch out the basic idea, which was that, if Rick Perry, rather than Herman Cain, had been the candidate who was pushing the 9-9-9 plan, he would have forgotten the third 9.

Anyway, at the discussion panelists noted that international is really the key issue even if we are thinking about domestic corporate tax reform. At least for now, Congressional Republicans, no less than the Administration, are committed to revenue neutrality if they lower the domestic corporate rate (say, to 25 percent) and also so if they enact some version of a territorial system that exempts at least a substantial swathe of foreign source active business income. But international looms at center stage even just with respect to the first of these ideas.

In this connection, I mentioned a central conundrum that I gather has been baffling policymakers from both parties. On the one hand, we keep hearing about corporate tax avoidance, such as in newspaper articles about the likes of Google and GE. On the other hand, the revenue estimators and those conversant with them keep telling the policymakers that it is extremely difficult to finance a lower corporate rate through base-broadening. How can both of these propositions be true? Shouldn't we be able to make the "headline babies" pay more through base-broadening?

The answer, of course, is that base-broadening, as conventionally conceived in terms of explicit tax preferences, has only a very limited overlap with multinationals' (MNEs') modern tax avoidance techniques. They mainly exploit structural weaknesses in the income tax, and above all the ease of transferring economic value that arises from people's activity in the US (such as when Google-bots create valuable IP in California, or wherever it is they work their magic) so that the resulting taxable income will appear in someplace low-tax and far away, such as Bermuda.

Thus, aggressively addressing problems with the source rules - or enacting worldwide taxation without deferral for suspect classes of foreign source income - is crucial to revenue neutrality here, as well as to ensuring that the domestic US corporate tax base - which vitally backstops the income tax on individuals for high-flying owner employees - is not entirely gutted with respect to MNEs, leaving it to fall just on domestic businesses (which might then become takeover targets by reason of the tax synergies).

One last point worth noting here, before I adjourn to the next post to discuss the other other panels I was on, is that it's extremely misleading to hear the constant refrain about how the US is "out of step" because everyone else has shifted to exemption. This statement is only true if one is extremely simplistic in using a one-zero scale to classify each international tax system as either US-style or territorial.

What such a classification misses is that most "territorial" countries make some effort to address the Google-style problems that many U.S. advocates of territoriality appear eager to embrace or at least ignore. In other words, the putatively territorial countries impose tax on a lot of "foreign source income" as to which there are grounds for suspecting that it is actually domestic source.

For example, a number of territorial countries limit exemption to foreign source income that is earned in other high-tax countries. The rationale arguably is not what it seems - that one wants domestic companies to pay more rather than less tax abroad - but rather that income which shows up in a tax haven probably wasn't actually earned there, and thus may well have been earned at home.

In my view, limiting exemption to investment in other high-tax countries is the wrong response to the problem, for the same reason that I question the foreign tax credit. From a national welfare standpoint, there is nothing wrong, and indeed it is affirmatively desirable, for one's companies (if owned by domestic individuals) to pay less tax abroad rather than more. Thus, I would counsel alternative means of in effect "tagging" the ostensibly foreign source income that is relatively likely to represent game-playing that erodes the domestic tax base. For example, rules concerning intangibles and intellectual property, as well as interest expense, may be able to serve the tagging function without incentivizing resident companies to pay "just enough" tax abroad to avoid the rule and consequent full domestic taxation.

More on this in due course as I try to advance my still not-entirely-formed thinking about source issues.

NTA Annual Meeting in N'Awlins, part 1

I spent the last two days, and indeed all day both days, at the National Tax Association's annual meeting, which was held this year in New Orleans. All told, I participated in three sessions and attended (depending on how you count) as many as nine others, including an award session for lifetime accomplishment honoring Alan Auerbach, as well as a lunch on Friday in which Peter Diamond gave a keynote address on how policymakers ought to assess the current macroeconomic situation.

Diamond made, to my mind, a compelling and verging on unanswerable case for the proposition that policy makers ought to be VERY concerned about persistent cyclical unemployment, and not, under current circumstances, at all concerned about the immediate prospects for inflation. OK, this is a very familiar point to anyone who reads the New York Times. But in addition to making it well he explained his view, which I largely share, that the long-term fiscal gap, while a significant long-term problem, is not an immediate crisis.

In the course of doing this, he focused on the projected path of the U.S. publicly-held debt to GDP ratio, which is not projected to get really hairy for at least 15 years.

This led to a question after his speech by a well-known (at least within the field) and somewhat idiosyncratic economist who has done important work relating to how we should think about long-term budgetary issues, but who has not previously been named in this blog post (hint hint). This individual strongly holds the view that public debt is an entirely, and I mean 100 percent, meaningless measure and that only the infinite horizon fiscal gap has any economic meaning whatsoever. Hence, in his view, if the infinite horizon fiscal gap, under our best forecasts of current Medicare, Social Security, & Medicaid policy et al, indicates fiscal unsustainability, then it is utterly irrelevant how fast the public debt rises. In his view, if there is a present value of, say, $20 trillion for expected 22nd century unfunded Medicare outlays, the fiscal problem this represents is literally indistinguishable from the case where the U.S. issues (for zero cash) $20 trillion of additional public debt today. If you say: Ah, but we could change Medicare policy before the 22nd century actually gets here, he will answer: So what, it is equally true that we could renounce $20 trillion of explicit debt. Only naive formalists, he is certain, could see any difference whatsoever between the two. (What is more, to him this is a matter of logic or science, not empirics. He alternates between saying that the empirics MUST match up with the economic logic, and that if they don't, then so much the worse for them.)

Diamond, who is familiar with these arguments by this individual, gave them somewhat short shrift. This brought to my mind e-mail debates that I have had with this individual on exactly this topic. In these debates, he repeatedly, and one could almost say a bit indelicately or even tactlessly, told me that the only reason I don't realize that he is correct is because my training as a lawyer has left me cognitively unable to see past mere semantics and form. This struck me as not just ad hominem but affirmatively incorrect, given that (I am pretty sure) at least 99 out of 100 economists would agree with me and not with him. (Indeed, perhaps all 100 unless he was included in the group.)

Anyway, I saw this individual afterwards, and could not resist noting that Diamond shares my view rather than his. I said, while this doesn't prove that we are correct, surely it does suggest that my view doesn't just rest on my being a lawyer.

"Oh, Diamond isn't very serious about the economics of this," he replied - perhaps not quite breezily, which in any case would be clichéd writing on my part, but certainly dismissively.

Speak of non-falsifiable propositions ...

Today's Occupy Wall Street developments

I was distressed to learn today of Mayor Bloomberg's ugly and under-handed quasi-military police action in Zuccotti Park last night. It is exactly the sort of arrogant, sneaky, bad-faith, and self-pleasing venture, complete with police violence and concerted efforts to muzzle live press coverage, that one would expect of such colleagues of his in the media and government businesses as fellow oligarch Silvio Berlusconi. I am hoping that mayoral recall petitions (if there is such a procedure in NYC) will start to circulate.

That said, while I was disappointed by the ruling just issued by the New York State Supreme Court to the effect that, while OWS people must be allowed back into the park, they cannot reestablish a permanent encampment with tents and such, I did feel upon reading the ruling that it appears legally reasonable.

The OWS people need to be very smart now about how best to keep public attention focused on the issues of wealth distribution, rigged crony capitalism, and government policymakers' indifference to the interests of the "99 percent" that I gather motivate them - and how to retain broader public sympathy for themselves and their issues when the other side is just looking for excuses to demonize them - in a tough situation and when they no doubt are upset. Played correctly, it could end up having given them the perfect exit strategy from having to stay in Zuccotti Park (perhaps with ever-dwindling forces) all through the winter. But the next step is crucial, and it's unclear how well their collective decision structure can handle it.

Slides from prior post

In case you saw my last post (on the University of Chicago Tax Conference, where I discussed foreign tax credits) while the link to (a pdf version of) my slides was still broken, I've fixed it, but you can also find them here.

Foreign tax credit discussion in Chicago

I flew to Chicago last night in order to appear on a foreign tax credit panel this morning at the 64th Annual University of Chicago Tax Conference. As I said at the start of my remarks this morning, I was glad to appear there, not just because it's an excellent conference (though it is - surely the best practitioner-led tax conference that I know of anywhere), and not just because I saw many old friends and acquaintances all around the room (although I did, some going back more than 25 years and whom I don't see regularly), but also because the conference was originally inspired and led by the great Walter Blum, whom I had the privilege to know when I started teaching at the University of Chicago Law School in 1987, and who was kind enough as to serve as a mentor (as well as being a friend) back in those days.

Less than 24 hours in Chicago, and I dodged a couple of bullets - first yesterday, when my flight to Chicago was canceled shortly before I was going to leave for the airport. I was re-booked to get there today, long after my session had ended, but I was able to scramble and find another flight. Then today I came extremely close (in distance terms, perhaps a couple of millimeters) to losing a contact lens down the sink in my hotel room. This could have left me a bit like Piggy in Lord of the Flies, albeit in a much friendlier setting.

But then I was able to catch an earlier flight home and was even upgraded to first class (the fruits of just how much travel I have been doing on United and Continental over the last year). I feel so much less like a head of cattle when I get an upgrade.

But perhaps of more interest was the session itself. Phil West of Steptoe & Johnson (a leading international tax practitioner, and former International Tax Counsel at the Treasury) was the main presenter on the subject "The Future of the Foreign Tax Credit." Lowell Yoder of McDermott Will & Emery chaired and organized the panel, as well as whipping it into shape over Giardano's pizza, and the other commentator was Michael J. Caballero, who is currently the International Tax Counsel.

Phil gave a very useful overview of where the foreign tax credit has been, and where it might be conceivably be heading, with a particular eye on a number of recent and ongoing controversies, enactments, and proposals, on many of which Michael commented. But my assigned task, which Phil very kindly gave the audience highly favorable word about, was to shed a different light on discussion of the foreign tax credit (and international tax issues generally) than perhaps one generally hears.

I welcomed this (as who wouldn't, in my shoes) in part because, as I have tediously yammered here from time to time, I really do believe that I have rethought the international tax field in an important way, previewed to some extent in recent articles that I have published but not to be fully laid out until my international tax book comes out (and I would be lucky to finish writing it by, say, mid to late 2012, what with the welter of conflicting obligations that I've either been handed or deliberately accepted).

One doesn't always feel that way about one's work (except perhaps if one is only loosely tethered to reality), even if one likes it, because it is hard to pull off that sort of thing very often, or indeed perhaps at all. But given that I do believe that I've done it this time around, it felt very good to get a strong confirmatory feeling from a lot of the audience - not that anyone there is necessarily chargeable with agreeing with me, but that people seemed to see the significance and, at least, plausibility of viewing the whole field rather differently than in the traditional international tax policy literature.

The first time I previewed these ideas, at a conference in North Carolina back in January 2010, I was distressed not to feel that what I had to say had gone over. But I've thought it through better, learned to say it better, and perhaps people have had more of a chance to think about it.

I also felt like I was in pretty decent form today. Just as NBA players (these are people who used to play something like "professional basketball" back in the distant past when there was such a thing) have good days and bad, so I felt like my jump shot was connecting a bit today. But not to worry, one can always count on worse days as well as better ones.

Anyway, here are the slides from my talk, which in many cases (I hope readers, like the conference attendees, can tell which ones) are borrowed from Phil West's talk, with my comments just added at the bottom to express my response to the standard approach that Phil was very ably laying out.

I should be able to post a fuller PPT version of what I have to say in early December, after giving a 45-minute talk on international taxation as a headliner at a conference in Sao Paulo, Brazil.

English-Al Jazeera story on corporate tax loopholes

I appear more prominently in this one; wish they could have edited out the inadvertent grimace, but I guess that's on me.

CNN Situation Room corporate tax story in which I briefly appear

The CNN story from last night discussing corporate tax avoidance, in which I briefly appear, is available on-line here. I appear near the end, and am quoted in relation to the political prospects for corporate tax reform.

My tax reform talk at yesterday's AAA-CPA Fall Meeting

As kindly linked by the Tax Prof Blog, my talk at the AAA-CPA Fall Meeting yesterday had the following description:

"Dissatisfaction with the U.S. federal income tax has led to widespread discussion of fundamental tax reform including the possibility of replacing it with a consumption tax. What different forms could such a reform take? What are the best arguments for it and against it? And what are its political prospects for enactment? Among the alternatives that Professor Shaviro will discuss are a national retail sales tax, X-tax or flat tax, and a consumed income tax, and he will consider how these proposals’ chances might be affected both by Congressional politics and by the long-term budgetary problems facing the U.S."

This was not a new paper, as I've written extensively on this subject before, such as here. But a pdf version of my slides for the talk, offering a handy if somewhat condensed outline, is available here.

TV update

In addition to taping a short interview with CNN's Situation Room show regarding the Citizens for Tax Justice report on corporate tax dodgers, I also ended up going to the Al Jazeera English studio in midtown to do a short TV interview with them on the same subject. (Each will apparently be used, probably a short snippet only, in a feature story on the CTJ report.)

Extra bonus, while leaving the Al Jazeera studio I met the German film director Werner Herzog, who introduced himself to me while we were both waiting for the elevator. I told him that I am very eager to see his 3-D film on the Lascaux cave paintings, and he noted that it is still playing in Greenwich Village.

The CNN and Al-Jazeera interviews followed somewhat different paths. For CNN, the main question was, is the bottom line of the CTJ report (showing massive though varying levels of U.S. tax avoidance by U.S, companies) accurate and credible? I said yes, and that the CTJ findings are no surprise to knowledgeable people, although no doubt there would be plenty to quibble regarding how they did the measure and in particular cases. On Al Jazeera, same bottom line reason for interviewing me (seeking independent expert assessment of the main CTJ findings), but more interest in questions such as, how does this pattern relate to the concerns of the "Occupy Wall Street" movement.

UPDATE TO THE UPDATE: I haven't been able to determine what ran on English Al-Jazeera. But I've seen the CNN story by Mary Snow (which ran tonight at 5:36 pm EST). I only made it on-screen for a very short soundbite saying that the politics of the 1986 Act can't be replicated today because compromises between the parties are dead. But the producers may also have viewed me as validating that the CTJ study is intellectually respectable (although they ran a he-said she-said on CTJ vs. GE, the latter of which used counter-argument rather than denial).

Perhaps the most interesting aspect of the CNN coverage was how Occupy Wall Street has changed the narrative frame that a major network uses in approaching a story like this. I view this as evidence that OWS is having a significant (whether or not lasting) impact on the framing of public debate, of a sort that companies such as GE are unlikely to welcome.

TV appearance today?

I'll shortly be leaving my office to give a talk this afternoon at a meeting of the American Association of Attorney-Certified Public Accountants, entitled "Can, Should, and Will the Federal Income Tax Be Replaced by a National Consumption Tax?" While my slides are fairly skeletal in proportion to the length and coverage of the talk, I will post them here tomorrow, time permitting.

On the way there, I am stopping by at CNN headquarters for a short interview, a snippet from which may appear this evening on CNN's The Situation Room. The topic will be the newly issued Citizens for Tax Justice report, "Corporate Taxpayers and Corporate Tax Dodgers, 2008-2010."

Just as a preview, I believe that, while one could (and in the right setting should) nitpick and question various aspects of the report's analysis, the bottom line claims are important and have a significant degree of truth.