Tuesday, December 17, 2013

First draft of short review article

I have completed a first draft, except for the conclusion, of a brief article entitled "The Economics of Tax Law" that was commissioned from me (with said title attached) as a chapter in the forthcoming Oxford Handbook of Law and Economics.  It's a good thing that I have already gotten this far, since I understand January 15 to be the preferred due date.  (My contract says June 15, but that may just be the non-negotiable drop-dead date when the editors would give up and move on.)

Also making it good that I have only the conclusion left are considerations of length.  I'm at 8,728 words, including footnotes and bibliography, and am enjoined not to exceed 10,000.

Obviously, the economics of tax law is a rather large topic to cover in so little space.  The piece accordingly is a rather high-altitude tour, ranging from optimal income taxation, to why and when tax neutrality promotes efficiency, to the nature of the problems posed for the income tax system by the realization requirement, to the income versus consumption tax debate, to why we may feel enjoined to tax corporate income at the entity level (and what adverse consequences this has), to briefly discussng the perennial, though generally non-actionable, popularity of 1986-style tax reform.

I suppose I will post in on SSRN early in the new year.  While it certainly doesn't break new ground (nor should it), I am hoping to feel good about it as a swift overview.

Tuesday, December 10, 2013

A sense of relief

Last Thursday I taught my last class of the semester.  I won't be back in the classroom until Tuesday, January 21, when Alan Auerbach and I will be doing the first session of the 2014 NYU Tax Policy Colloquium.

That makes this week the very week when I would have had ACL surgery, if I had decided to go under the knife for purposes of fixing my right knee.  The timing idea, had I gone ahead, was to finish fall classes, and then maximize the recovery time before I am next scheduled to teach a class.  I was told that I'd need at least four weeks to get back in the classroom, but the more the better.  I could also expect six grueling months before I'd be largely recovered as a matter of light daily activity, and probably twelve months before I could try anything as rigorous as tennis.

I suffered the injury at the tail end of April.  My first thought was that I definitely wanted the surgery, so I could be physically whole and (among other things) get back on the tennis court.  This was accompanied, however, by a queasy sense that getting surgery at my age just to play tennis (if that's how one thought of it) might be unwise.  Anyway, I'd need to finish my semester first and then do prehab.

I already had a couple of trips planned for the early summer, to Stockholm in May and Israel in June.  These, I determined, were still feasible, meaning that I couldn't have surgery until the end of June.  But one thing I absolutely did not want to do was ruin my summer, when I so vastly prefer it to winter.  There was simply no way that I wanted to spend my favorite months of the year lying in bed and then hobbling around on crutches, rather than enjoying the outdoors.  But once it was September, I'd need to wait for fall classes to end, hence the target date of sometime this week.

I met with three surgeons, decided which one I preferred, and started rehab (or at the time, apparently prehab).  But I hadn't definitely decided what to do.  I'm usually decisive about choices that I face, but this time I kept wavering, not that it mattered immediately, as the "go" decision still lay several months down the road.

By late July, my physical therapist was telling me that I was close to being able to go back on the tennis court.  But I didn't feel ready until late August.  My first time out, hitting with a pro, I felt as if I was a million years from ever actually playing tennis again.  All I could do was hit the ball if it was drilled right at me.

By late September I was actually playing matches, which I now have survived for more than two months, pretty much at my old level (as to both good days and bad).  I even run down a lot of balls - I'm almost as mobile as I used to be, if I'm on my toes and leaning the right way, though less able to change directions or manage a cold start.  I try to be careful in a couple of ways (including how often I play), but so far, mostly so good.  I also can rush to cross streets when the light is turning, as I always used to.  I simply don't do red lights, if I can help it, but early on this caused knee buckling if I even dared to try.

Meanwhile, I've been living my regular life, apart from the nuisance of having to keep up the regimen of daily knee exercise.  My current project (due January 15, but triaged until now behind other, more pressing obligations) is writing a short chapter called "The Economics of Taxation" (not my choice of title) for a forthcoming Oxford U. Press volume, the Oxford Handbook of Law and Economics.  Not as much fun for me, perhaps, as writing a more creative and original paper, but incomparably preferable to lying on my back with painkillers and an ice machine.

UPDATE: Great article about ACL tears, including why they happen.  I'd been noticing that, in the NFL, there seem to be a few every week, while in the NBA point guards have been falling from ACL tears like flies.  Also exactly my experience that it's a "mind-body" issue - ACL tears happen because you're surprised (which requires that you be playing with an opponent, even if there's no physical contact) - you change what you're doing at the last second and thus are awkwardly misaligned at the moment of injury.  Then you feel the  pop, and it's welcome to the world of diminished performance and (at least initially) pain.  The one difference between my experience and that described in the article is that, as merely an amateur / weekend athlete, I could get back to an adequate physical performance level without the surgery - obviously not possible for an NFL or NBA player.

Monday, December 09, 2013

Martin Sullivan on the Baucus international tax discussion draft and my work on foreign tax credits

In today's Tax Notes (12/9/13, 141 Tax Notes 1007-1012), Martin Sullivan is kind enough to offer an analysis of the Senate Finance Committee discussion draft that "draws heavily from the work of professor Daniel Shaviro of New York University School of Law," in particular my articles on foreign tax credits.  I gather that Sullivan has not seen my (still-unpublished) book on international tax policy, which offers a comprehensive broader framework, based in part on those articles.

Wednesday, December 04, 2013

"I have supped full with horrors"

The title of this post is a quote from Macbeth - appropriately enough, since Macbeth is known to Bertie Wooster as the "cat chap" - reflecting that Jeeves had quoted to him the line where Lady Macbeth refers to "letting 'I dare not' wait upon 'I would,' like the poor cat in the adage."  The horrors of which I write here do indeed relate to a cat.

For the last 15 months, our household has been brightened by these two adorable little fellows, littermates whom we adopted in September 2012 at the age of somewhere between 6 and 8 weeks. In the picture, Sylvester is the one on the left, and Gary is on the right.  Among the rituals that they eagerly endorse (besides knocking things onto the floor, following us around the house if something fascinating, such as watering plants, is afoot, swatting at loose yarn, and playing vigorous rounds of Friskabout) is coming downstairs for breakfast, after having starved all night once their food from the evening was gone.

But yesterday, no Gary at breakfast or thereafter.  We didn't see or hear him, and couldn't find him anywhere.  We then recollected that we hadn't seen him the previous evening (which can happen with a cat - it's that air of mystery which they never entirely shed), and that there had been people in our house the previous day doing repairs, which the kittens hate (both the noise aspect and the strangers aspect).

Sherlock Holmes says somewhere that, when you have eliminated the impossible, whatever remains, however improbable, must be the truth.  We were struggling to apply this precept, the problem being that we couldn't distinguish the impossible from the merely highly unlikely.  Could he have gotten out of the house?  It didn't seem possible, but then again cats can have ways.  Had he found a hole somewhere (a radiator seemed to have one) and disappeared into the wall?  Were there human fist-sized openings and passageways behind the walls, which he might be able to navigate and then perhaps get lost or stuck?  Did he get sick or injured and hide?  If he was still in the house and conscious, why wasn't he scratching and meowing?

This went on all day, and it would be an understatement to say that there were long faces in the Shaviro et al household.  But then at around midnight, a family member heard some scratching and meowing sounds.  It turned out that he was in one of the drawers of a little-used dresser.  He is now out and about, and evidently none the worse for having spent perhaps as much as 30 hours there.  We, by contrast, remain a bit the worse for wear, our immense relief notwithstanding.

Remaining mysteries, which I don't imagine we will be able to solve, include (1) how did he get into the drawer, which one would have thought was closed, (2) how did it re-close once he was inside, and (3) why didn't he announce his presence sooner, especially once the workers had left.

But after spending a full day thinking we might never see him again, or that perhaps in a month we would detect a skeleton stuck behind the wall, we are not complaining.

Wednesday, November 27, 2013

The joke with three punchlines

It recently occurred to me that, in the last three weeks alone, I have attended two public sessions devoted to discussing fundamental tax reform.  And these are hardly the only two such sessions that I have attended in 2013 alone, or even since the start of the school year alone.

Fundamental tax reform remains a favorite topic even though, as I once remarked in the opening paragraph of some paper or other, "while frequently in the air, it is rarely to be spotted on the ground."  Indeed, I am admittedly a multiple offender in writing about the topic, which is why I can't remember offhand in which paper it was that I said that.

After a while, however, the topic grows sufficiently over-familiar that I am reminded of the joke (itself perhaps over-familiar by now) in which a bunch of comedians are gathered in a room.  One of them stands up and shouts "39!"  Everyone laughs.  Another one stands up and says "17!"  Everyone laughs.  A newcomer who has heard this going on for a few minutes asks the person next to him what they're doing, and is told that all the jokes are so familiar that each has a number, eliminating the need to recite the entire thing..

So the newcomer stands up and shouts "28!"  Dead silence.  Mortified, he asks the person next to him what he did wrong.  And here's the best thing about the joke, its own over-familiarity notwithstanding.  It has three alternative punchlines, and perhaps not everyone who is reading this blog entry has already heard all three of them:

(1) "You didn't tell it right."

(2) "They heard that one already."

(3) "They don't know that one."

Heard all three punchlines already?  Sorry about that, but perhaps this makes it all the more postmodern (over-familiar joke about over-familiar jokes).

Monday, November 25, 2013

Senate Finance Committee international "Option Z" follow-up

In an earlier post on the Senate Finance Committee's international tax staff discussion draft, I said that Option Z, in which certain foreign source income (FSI) would be 60% taxed at the full U.S. rate but with foreign tax credits for 60% of foreign taxes paid, and 40% treated as exempt but with the remaining 40% of foreign taxes paid being ignored, may be a "treaty-compatible version of what I discuss in my book. To wit, the U.S. taxes FSI at a rate that is somewhere between 0% and the full U.S. rate, and foreign taxes are deductible-plus, but not fully creditable, thus retaining a degree of foreign tax cost-consciousness."  I attributed the possible treaty compatibility to the argument that "you don't literally 'double-tax' any given dollar of foreign income, by virtue of breaking it into two distinct pieces, each of which is formally 'taxed once.'"

Idiotically formalistic though this might be, I viewed it as just deserts for the formalistic legal norm that income must be taxed only once, a norm under which being taxed ten times at a 1% rate each time would be a horrid injustice, whereas being taxed once at 35% would be unobjectionable.

However, Fadi Shaheen, in a message that he has authorized me to quote (I don't otherwise spill the beans here on private communications), says the following:

"1. Wouldn't Option Z keep, if not increase, the complexity the FTC has been causing, which would be better addressed by deductibility? I thought that was the main advantage of deductibility over partial creditability ...

"2. Couldn't one make the argument that if under a substance over form approach two proposals (Option Z and yours) could effectively be the same and one is treaty-compatible, then the other would be too? I understand the formalities involved, but I really don't see much difference in substance."

Some quick responses: On Point 1, agreed that the arcane complexity of the foreign tax credit regime would still be on the books if we adopted Option Z, as distinct from simply making foreign taxes deductible (or deductible-plus in some fashion, but short of 100 percent reimbursement).  I was only thinking about the marginal incentive effects on paying higher rather than lower foreign taxes when I wrote the blog entry.  But on the other hand, with the marginal reimbursement rate on foreign taxes effectively reduced from 100% (in the scenario where deferral has been repealed and foreign tax credit limits do not apply), maybe one could ease up on the existing FTC rules a bit, as their attempted rigor responds to the total lack of cost-consciousness re. foreign taxes that a 100% credit can induce.

On Point 2, agreed as well.  When you have a formalistic rule, evaluating wholly formalistic questions of when it is or isn't being breached is not going to be a very intellectually edifying (or stimulating) exercise.  Hard to say how this would play out in practice.  The underlying question is whether U.S. treaty partners would get upset or not, and what role formal legal arguments would play in making them more tolerant of the end result. I was speculating that creating a decent formal argument that there is no "double tax" might help ease the way to limiting controversy, even though it means that equivalent systems get classified differently.

The one bit of substance that avoiding "double taxation" via the Option Z DOES have is that it requires equivalence between (a) the ratio between the "true" statutory tax rate for a full dollar of FSI and that for domestic source income, and (b) the marginal reimbursement rate for foreign taxes.  It's hard to see why the foreigners, in deciding whether to be outraged or not by U.S. adoption of Option Z, should care about this equivalence one way or the other.  But, then again, formalistic legal exercises have this way of making distinctions that matter little for their own sake potentially dispositive.

Saturday, November 23, 2013

Lunch talks at the 2013 NTA Annual Meeting

Every year at the NTA Annual Meeting, we have two "General Session" lunches, usually with hundreds of people in the audience, with an invited speaker to give a talk.  One problem you face, as a Program Chair, is that lots of the people you might have considered inviting already did an NTA lunch recently. Great minds (in this case, past and current program chairs) think alike, and thus the pool of prospects keeps thinning unless the replenishment rate can keep pace.  I am not sure that it does.

Nonetheless, this year we we were able to do pretty well.  Thursday's lunch featured Peter Orszag, and Friday's Raj Chetty.  Each had substance and broad interest (if not that many jokes), so I felt good from the standpoint of an organizer who has attended mostly good NTA lunches but also a couple that were less successful and/or substantive.

Orszag gave a talk about where healthcare in the U.S. appears to be headed - a matter of huge interest for U.S. federal budgetary purposes, not to mention otherwise as well.  He offered good news for everyone except for the people (and there are many of them in budgetary politics) who prefer bad news. Time will tell if he is right or not, but the viewpoint certainly ought to be more widely known.

Here, for starters, is the part that's absolutely clear.  The rate of growth in annual per capital healthcare expenditure has declined very sharply in the last few years.  If this decline in annual growth rate is sustained, then the long-term fiscal picture is much better than people have been assuming for many years.  The official estimates still don't assume that it will be sustained, since it still looks a bit like an outlier.  But, to assess whether it is a fluke or the new normal, the key question to ask is what's been causing it.

Orszag convincingly rebutted the view that the last few years' economic slowdown is responsible for the reduced growth rate.  A key piece of evidence is that healthcare for people on Medicare who are largely insulated from the state of the economy (especially if they have Medigap plans to deal with their copayments) has been slowing like all the rest.

The slowdown is from the quantity services being rendered, not because healthcare prices are no longer rising.  Orszag attributes it, admittedly tentatively, to changes in financial incentives for healthcare providers.  Medicare is now much less a fee for service system (which encourages rising service intensity).  Instead, it tends to base payments on the medical condition, and where not doing so yet is apparently expected by many to start doing it shortly (so they are preparing).  This means that the hospital or other provider is the one bearing marginal costs of extra patient care.  Similar things are happening, he says, in private healthcare plans.

In effect, he says, there is a transition going on that resembles that in private annuity plans, which switched over the last couple of decades from "defined benefit' (where what you will get at retirement is specified) to "defined contribution" (where the pay-in is specified, and the market determines what it yields).  That shifted risk onto the employees.  Here, to a degree it's the healthcare providers that are facing the shifted risk, and this in effect makes them insurance companies (on behalf of the consumers) even if they are hospitals or doctor groups.  This in turn may have problems of its own, including issues of care being denied or of them mismanaging risk or being forced to band together in huge organizations that have the scale needed for insurance.  But it does potentially bend the cost curve, indicating (if Orszag is right, and he admitted that this is merely his speculation at this point) that our long-term fiscal situation under current policy may be far less dire than most people, including me, have been assuming.

Hard to say when the political system will take note of this, even if one is wholly convinced that it's correct.  After all, falling budget deficits in the last few years have gone almost completely unnoticed by the general public and also the Washington political class.

Chetty's talk was based on the landmark pension savings study, using Denmark data, that he presented at my colloquium earlier this year and that I am actually writing about (in an article that I had to put on the shelf a couple of months ago, and won't be getting back to for a couple months more at the least).  So I won't say anything particular about it here.  The subject was taxpayer inattention, and the implications for being defaulted into retirement savings plans versus getting "incentives" (from an income tax standpoint) for greater contributions.  As you'd expect from Chetty, sober and fair, no undue claims, and careful noting of all the problems in deciding what to make of the research findings for policymaking purposes.

2013 National Tax Association Annual Meeting

The NTA Annual Meeting ended a few hours ago, and (as per my last blog post) I am stranded in my hotel lobby, because that is better than being stranded in the airport.  My flight is just over two hours away, but no need to leave yet.  We are so close to the airport that, when playing tennis on the hard courts here - as it turned out, without injuring my ACL-deficient right knee, although there is always next time to worry about - I could almost have imagined I was playing at the U.S. Open.  All those giant jets taking off and landing right next to you.  Circling birds of prey as well.  I was hoping that they didn't know something about me that I didn't.

Anyway, the conference appears to have been a big success.  At least, this was my own sense of it, and people kept telling me so, in connection with my role as co-Program Chair (with Tracy Gordon). Our main strategy was to be inclusive and accept as many of the submitted papers and panels as we could.  This has a downside, since 4-paper sessions are potentially more jumbled and scattered than those with just 3, and since having lots of parallel sessions at the same time risks thinning out the audience.  But it also means that more people attend, more people get to present, that attendees have more choices, and we thought it would create a richer conference experience.  Inclusive is good.  Plus we just hated having to say No any more than we had to.  (Unfortunately, resource constraints meant that we'd be saying this to dozens of people in any event - but no reason to make it even worse.)

Economists with NTA-related interests presumably already tend to know about the Annual Meeting.  In addition, many of them know about the advantages of going, especially if one is junior.  You get exposure for your own work, feedback on it, you get to meet and talk with other people in the field, etcetera.  But tax law professors, and tax practitioners with broad policy interests, don't participate at the levels that the NTA wants.  (That said, there were at least twenty law profs here this year.)  Equally or more importantly, lots of junior tax people in the law schools may not be aware of the extent to which they may benefit from attending NTA annual meetings.  One of the great things about the NTA, especially for lawyers given the predominance here of economists, is the inter-disciplinary element.  Lots of panels are deliberately designed to include both groups.  But there is also a sufficiently large cadre of tax law professors who already come to the NTA with some frequency that you get to see plenty of your kind, which is good as well (networking, feedback, exchange of ideas, etcetera).

The next NTA Annual Meeting will be held in Santa Fe, at some point in November 2014.  Certainly a nice town in which to spend a few days, by all reports. But here are a few practical tips regarding how to get a paper accepted, based on my experience this year as a program chair.

Tip #1 - Start thinking about it before the Call for Papers goes out next year.  When it does go out, by the way, then even if you have not already joined the NTA (though why wouldn't you do that, especially if reimbursable as a professional expense), you ought to be able to get word, e.g., via the Tax Prof Blog.

Tip #2 - If possible, form the entire panel for a proposed session.  This would consist of either three or four papers, a couple of discussants, and a moderator or organizer (presumably, one of the authors or discussants).  This year, we accepted all of the proposed sessions.  I can't speak for next year's program chairs, but for a couple of reasons forming an entire panel gives you a leg up.  One, we hated to turn down people who had done this much work and put that degree of thought into it.  Two, it made our lives easier, since otherwise we had to accept individual papers and then start grouping into multi-paper sessions, where fit was important but not always easy to provide (and it took a LOT of time).

Tip #3 - Only if you have enough live prospects on your desktop, submit several papers, not just one.  I personally hated turning down ALL of someone's multiple submissions, plus there is a diversification advantage.  If one paper didn't seem like a great NTA fit to us, then maybe another one seemed better suited.  So don't submit sheer dogs, if you have just one good paper at hand and nothing else that's really suitable, but if you do have more than one live prospect, then by all means submit them all rather than choosing.  (Easy for me to say, of course, given that I won't be the one who has to read all of the submissions next year.)

Time for the airport - I will try to post, once I'm there or shortly afterwards, on one of the highlights (unless one calls it two of the highlights): the lunch talks at this year's NTA meeting, which were given by Peter Orszag and Raj Chetty.  (Perhaps with a mention as well of the session honoring Michael Graetz, who was this year's Holland Medal winner at the NTA, this award being one that is granted for lifetime achievement.)

Senate Finance Committee cost recovery draft

I'm sitting around the hotel lobby at the Tampa Bay Grand Hyatt, almost as if I had nothing better to do, because the National Tax Association Annual Meeting ended at 11:45 am and my flight isn't until 5:15 pm.  I had been reluctant to shave it too close, which put me initially on a 3 pm flight, but then they pushed me back to 5:15, so here I am.

The upside to being on such a deferred and unpopular flight (Saturday night the weekend before Thanksgiving) is that my United miles have proven sufficient, for the first time in a while, to get me upgraded to first class.  I am not sure whether my being very pleased about this has more to do with the objective conditions (bigger seat, probably better entertainment options, free dinner and drinks) or with the fact that airline travel is such a crazily status-demarcated activity today, making it a relief to be an aristocrat rather than a plebe/sheep, even if just for one day.  (I am the type who's mildly uncomfortable being High-Status compared to the low-status, but who really hates being low-status compared to the High-Status.)  But one way or the other, airline travel is not a very egalitarian experience these days (and of course the high end aren't in first class - they are in their own planes, where at least we don't have to see them.)

But anyway.  Might as well blog, having already done most of the work that I can do before getting back to my desk, and in a moment I'll post something about NTA 2013 (and 2014).  But for now, I thought I'd say something about the Senate Finance Committee draft on cost recovery even though, to be brutally honest, by reason of being on the road I haven't read it yet, though I hope to do so by Monday.  (But at that point I will be back in full triage mode re. multiple responsibilities.)  I believe I know the basic content of the draft - a very thorough and comprehensive effort at moving towards economic cost recovery, so I'll say something about that.

I gather that the draft covers, not only things like asset depreciation, but even advertising, which has been expensed for decades despite its typically creating long-term value.  I think it's great to have this sort of a benchmark out there, whether or not it's likely to be enacted (and I would think not, even if packaged with a corporate rate cut).

In addition, while I am not a vehement advocate of entity-level income taxation, as compared to a more consumption tax-style expensing-driven approach, two advantages of doing this sort of thing are: (a) it is one way of increasing inter-asset neutrality relative to that in the existing income tax system, although across-the-board expensing can get there as well, and (b) consumption tax-style expensing deductions within what's otherwise an income tax can have bad effects if taxpayers can effectively arbitrage them against realization-based deferral of economic gain on the inflow side, with the mismatch being enhanced via interest deductibility.  So this sort of approach can have desirable second-best features even if one would prefer across-the-board consumption tax-style business taxation.

But there is a problem with going full economic depreciation from where we stand today, especially if the change is paired with rate cuts in a revenue-neutral package.  Shifting to slower depreciation, plus lower rates on new investment, results in economically retroactive transition gain for old assets.  In effect, past decisions that were made under the current structure get rewarded, even though the taxpayers apparently didn't need the lower rate to invest (leaving aside the possibility that they were betting on it and that new investors will anticipate similar retroactive gain in the future).  Moreover, taxpayers who enjoyed faster-than-economic depreciation deductions under the 35% rate would then get to include the future income produced by those investments at the lower rate.  Meanwhile, in an overall revenue-neutral setting, new investments may be less appealing on an after-tax basis than they were before.

In general, if you like the new system better and believe you can first enact and then keep it, the transition price may be worth paying.  But the effect on new investment might be expected to worsen the short-term revenue estimates from the cost recovery scale-back.  OK, once again in theory that might be a small point, albeit in budget politics potentially a big one.  But it's an especially strong concern when we seem endlessly stuck in "secular stagnation," with a down economy and unacceptably low employment levels that just won't go away.  Not the best time for negative stimulus, especially when it is politically impossible to consider any positive stimulus.

Again, props to the Senate Finance Committee staff for working hard on a broad and ambitious proposal that I suspect will rightly remain a benchmark to be consulted in the future.  But these other concerns do merit mention.

Tuesday, November 19, 2013

Senate Finance Committee international business tax reform discussion draft: Part 3

So what is the long-term significance of the Senate Finance Committee discussion draft on international tax reform?  Interesting and ambitious tax reform plans, international and otherwise, get promulgated every couple of years, and nothing much ever seems to happen.  Here, as usual, we can expect the Washington partisan divide, interest group politics, etcetera, to stand in the way.  Senator Baucus and House Ways and Means Chairman Camp, who appear much readier than most of their colleagues to consider engaging in a 1986-style bipartisan process, will both be leaving their posts, and that might well be that.

But even proposals that get put on the shelf can matter, if someone in the future is possibly going to reach onto the shelf and pick out whatever is on top.  As per my prior two posts, I see three big takeaways from the Senate Finance discussion draft.

The first is its proposing to address rampant tax avoidance by U.S. companies.  Now, this is a trend that already has been gathering political momentum over the last few years, from all of the Apple, Google, etc., stories in the newspapers.  Whether it gets anywhere depends partly on U.S. politics - the companies have plenty of friends in Washington, both Republicans who hate all taxes, and Democrats who are friends with particular industry groups.  And whether it gets anywhere also depends on developments outside the U.S., such as the "base erosion / profit shifting" (BEPS) initiative that is being pursued by countries multilaterally.  Much easier for the U.S. to act effectively if not going to alone.  In this broader story, the discussion draft is admittedly just one more grain of sand on top of the dune.

But second, the discussion draft adds credence to the idea of levying a "transition tax" on U.S. companies' unrepatriated foreign earnings, as part and parcel of ending the repatriation tax along with deferral.  This is not only a good idea, if done properly, but one that politicians could potentially love (if they think of it as a one-time pot of "free money").

And third, the 60% / Option Z plan, discussed in my previous post, points the way to taxing resident companies' foreign source income at a rate that is between zero and the full domestic rate, while also rendering foreign taxes less than fully reimbursable, without violating tax treaties via formally defined "double taxation."  Given the arguments for such an approach that I develop in my book, this could end up being a major contribution.

Senate Finance Committee international business tax reform discussion draft: Part 2

OK, just very briefly on some added details of the Discussion Draft.

It's pretty aggressive in expanding U.S. taxation of U.S. companies' foreign source income (FSI), relative to present law that of course reflects the companies' large advances over the last 15 years in perfecting their avoidance of the U.S. tax.  (This in turn has resulted both from technological advances in tax planning, and from changes in the U.S. rules, such as the introduction of "check-the-box" rules for foreign entities that make subpart F, imposing current U.S. tax on suspected tax haven income, close to a joke or a relic.)

That's potentially fine, substantively if not (one suspects) politically, subject to two caveats.  One is the extent to which companies would use creditable foreign taxes to pay more foreign tax, rather than more U.S. tax.  But the other is the U.S. corporate residence electivity question: if we make it too tax-costly to be a U.S. company, increasing numbers of U.S. companies will opt out, via transactions that permit them to take foreign affiliates out of the U.S. chain of direct ownership.  No reason, perhaps, to set the U.S. tax price too low, but one also doesn't want to set it too high.

Among the key features of the Discussion Draft is a choice between "Option Y" and "Option Z," which are two alternative means by which the U.S. tax on resident companies' foreign source income is expanded.  Under Option Z, some FSI of U.S. companies would be fully taxed, with foreign tax credits.  But other FSI, generally I think that which is deemed to carry less of a smell of being "really" U.S. source or of having been artificially shifted through tax planning, is in effect 60% taxable in the U.S. with foreign tax credits, and 40% exempt without foreign tax credits.

Suppose, for example, that the U.S. corporate tax rate is still 35% (although I think the plan is to use the Discussion Draft to help finance lowering the U.S. corporate rate), and that a U.S. company earns $100 of FSI that is subject to the 60% rule under Option Z.  60% of the income is U.S.-taxable but gets foreign tax credits, and 40% is exempt but gets no foreign tax credits.  So the U.S. tax rate on this income, pre-foreign tax credits, would be $21, but the FTC would only reimburse 60% of the foreign taxes paid.

Say that the company pays $20 of foreign tax on this $100 of income.  The foreign tax credit is 60% of this amount, or $12, leaving an overall U.S. tax liability of $9 (i.e., $21 minus $12).  Increase the foreign tax fby $10 to a total of $30, and the FTC increases by $6, or to $18, reducing the U.S. tax to $3 (i.e., $21 minus $18).  So a $10 increase in foreign taxes reduces the U.S. tax from $9 to $3 (illustrating the 60% MRR).

I am starting to think that Option Z is a treaty-compatible version of what I discuss in my book.  To wit, the U.S. taxes FSI at a rate that is somewhere between 0% and the full U.S. rate, and foreign taxes are deductible-plus, but not fully creditable, thus retaining a degree of foreign tax cost-consciousness.  But it appears to be treaty-compatible, because you don't literally "double-tax" any given dollar of foreign income, by virtue of breaking it into two distinct pieces, each of which is formally "taxed once."

I wish I had thought of that!  But I didn't, and the book has gone final.  That petty personal regret aside, kudos to the Senate Finance staff (and their colleagues on other staffs) for filling in this gap.  I still need to spend more time on the proposed legislation, in order to understand the definitional attributes of the income that they would treat this way under Option Z, but it looks like they've actually proposed something that I have been calling for (although, again, not to be vainglorious on the subject of who gave them the idea).

Option Y is a global minimum tax system, under which one must pay 20% somewhere, or else the U.S. will make up the difference.  It therefore results in zero cost-consciousness with respect to foreign taxes, as one's foreign tax liability increases from 0% to 20%.  So not a great idea from a U.S. standpoint, even if we agree that current law is worse overall.  The point once again is that, even insofar as you don't change the foreign tax credit, repealing deferral makes its real world incentive effects worse.

Nonetheless, hurrah for Option Z - which, at a minimum, appears to contain the seeds of a very interesting implementation approach that potentially improves on just about everything else that is currently out there.

Senate Finance Committee international business tax reform discussion draft: Part 1

Today Senator Baucus, the chairman of the Senate Finance Committee, released a staff discussion draft on international business tax reform.  You can find a New York Times description of it here, as well as an official description of it here, not to mention a one-page staff summary here and even detailed statutory language here.

I myself have looked at all of the above except for the statutory language, which I have printed out with the hope of getting to read it during my airplane flight to Tampa tomorrow.  (I will be attending the National Tax Association's 106th Annual Meeting, at which Tracy Gordon and I are the program co-chairs.  If you can tolerate one more link, the conference program is available here.)

One key feature of the discussion draft is its imposing a one-time transition tax on U.S. companies' unrepatriated foreign source earnings.  I gather that these earnings would face a one-time 20 percent U.S. tax, which could be paid over 8 years.  This is an idea that I promoted in my article on corporate residence electivity (available here), not having previously heard anyone propose it, although I honestly don't know if I'm the source of the idea given that sometimes multiple people think of the same thing.

Not surprisingly, I consider this a generally meritorious idea, in part because its anticipation effects, if people think it might be enacted even before it actually is, push towards reducing the incentive to keep funds abroad indefinitely.  However, there is one important question to keep in mind, if it is used as a "pay-for" in a broader international or business tax reform package that also contains revenue reductions, such as from lowering the corporate rate.  Since this is a one-time tax, one wouldn't want to rely on claims of overall revenue neutrality that reflected ignored continuing revenue loss outside of a finite, such as ten-year, budget window.

A second feature of the proposal is its making U.S. companies taxable on their foreign subsidiaries' sales into the U.S. market.  Assuming that tax planners cannot game this rule too easily - a question that I obviously can't evaluate at this point - I'd view this idea as having considerable merit.  Roughly speaking, and despite major formal and substantive differences, it has some potential economic commonality with (a) making the U.S. corporate tax system destination-based rather than origin-based (as Alan Auerbach has proposed), and/or (b) using formulary apportionment, with primary or even exclusive emphasis on the sales factor (as Reuven Avi-Yonah and Kim Clausing have proposed).  In practice, this will often be income that actually was created economically in the U.S., even if the magic of tax planning causes it to be classified as foreign source income.  And in addition, there are efficiency benefits, including but not limited to reducing tax planning games, to causing U.S. tax liability, in one of these ways, to be in part a function of domestic sales.

I presume that this inclusion would be subject to the allowance of foreign tax credits with respect to the sales income.  If I am right about this (and I will correct this posting promptly if informed that I'm wrong), then there is a problem.  U.S. companies would have zero incentive to reduce foreign taxes up to the point of the foreign tax credit limit, given creditability.  OK, but isn't that already true today under the foreign tax credit?  Ah, but there's a difference.  As I discuss in my book - and I think this is an important point - deferral for unrepatriated foreign earnings, which the Discussion Draft would eliminate, is bad in almost all other ways, but it does have the virtue of making U.S. companies foreign tax cost-conscious under most of the realistic scenarios.  The foreign tax credit becomes worse, even if you don't directly change it, when you repeal deferral.  And this, to my mind, calls at a minimum for scaling back the 100 percent reimbursement percentage that the foreign tax credit generally offers when applicable.

More in subsequent posts, I hope - although subject to multiple claims on my time - first on other important features in the Discussion Draft, and then on its potential significance as a marker in the ongoing debate even if we posit that no significant Congressional tax legislation is likely to be imminent.

Friday, November 15, 2013

Inside view of a creative process

This is certainly quite different from the things I do.  But to our cats it's all one (or none), I suppose.

Wednesday, November 13, 2013

Peter Sellers' "The Party"

Last night, while dial-flipping (to use the archaic term for searching the program guide through my cable remote), I stumbled onto Blake Edwards' 1968 Peter Sellers film, "The Party."  I'd heard of it, but little expected to be repeatedly laughing out loud (literally, not figuratively) for more than an hour, this despite having missed the first 25 minutes.  Now it's the next day, and I'm still in danger of laughing inappropriately due to remembering some of the best scenes.

Sellers plays an actor, or rather film extra, from India who is accidentally invited to a big shot producer's lavish Hollywood party, when he is actually supposed to be fired.  It's almost like a silent film.  Though there's dialogue from time to time, it's usually unimportant, and music is usually playing (from a live band at the party).  The film is also visually interesting, almost 3-D-like from its widescreen and deep focus, featuring a series of tableaux in which Sellers is usually either way in the foreground or the background, but with other features (people, fireplaces, gadgets, etc.) demanding part of your attention.

The Sellers character has strong echoes of Clouseau, although it's more restrained, but even more strongly brings to mind Chauncey Gardiner (from Being There, more than 20 years later).  One also thinks of Buster Keaton, except that the Sellers character, rather than being stone-faced, keeps flashing an extremely disconcerting over-intense grin.  He is fanatically determined to retain his dignity and to look as if he is not just fitting in but having a great time, but of course he is awkward, uncomfortable, and out-of-place, and keeps triggering one disaster after another.

Some classic bits: (1) Since he wasn't supposed to be at the party, they don't have seating for him at the dinner table.  They finally bring him a stool that is much too low, so that his chin is only at the table level (and parallel to the bosom of the starlet who is seated next to him).  From this perch he tries to eat soup, and also keeps getting knocked over because he is too close to the door to the kitchen (where a drunk waiter is adding to the mayhem).

(2) He desperately needs to find a bathroom, but every time he pushes open a door there are people inside who are very unhappy to have been disturbed.  He starts wandering around increasingly frantically.  He's tempted by the cat's litterbox, and also by a seemingly convenient bush, but then he stumbles onto the switch to the sprinkler system, which starts drenching him.  Inevitably, but not right away, he falls into the swimming pool while fully dressed.

(3) Unable to find a usable bathroom downstairs, he heads upstairs into the private family space. Here he encounters a hostile nanny, a wild 8-year old with toy weapons, and an aggressive producer who is trying to force himself on an aspiring singer.  When the Sellers character finally finds a toilet, misfortunes with the flush mechanism and the toilet paper lead to escalating consequences that his bumbling efforts to resolve only make worse.

(4) Birdy-nam-nam.

OK, you probably get the idea by now.  Very highly recommended.

Monday, November 11, 2013

Comment papers on my international tax book

This past June, the Jerusalem Review of Legal Studies (JRLS) hosted a session on my forthcoming book on U.S. international taxation. The commentators were Yariv Brauner, Fadi Shaheen, and Stephen Shay.  All have now written short comments that will be appearing, along with my response, in a 2014 issue of the JRLS.  Shaheen has now posted his comment on SSRN, and it's available here.

Thursday, November 07, 2013

6th Annual Global Economic Policy Forum

Today NYU Law School will be hosting the 6th Annual Global Economic Policy Forum.  As per the official announcement, the Forum "brings together world government and economic leaders to discuss issues of economic policy and the capital markets."  This year's Forum will focus in particular on "global, tax, spending, and market issues."  Here is the calendar of main events:

Afternoon Keynote Address by William Dudley, 10th President and Chief
Executive Officer, Federal Reserve Bank of New York.
1:30-2:30 p.m.

Panel 1: The Current Budget Stalemate and Beyond:  Outlook for Federal Spending
Chaired by David Kamin, Assistant Professor of Law at New York University.
Panelists: Robert Greenstein, Founder and President of the Center on Budget and Policy Priorities; Maya MacGuineas, President of the Committee for a Responsible Federal Budget; and Bob Reischauer, Public Trustee of the Social Security and Medicare Trust Fund, former president of the Urban Institute.
2:45-4:00 p.m.

Panel 2: The Current Budget Stalemate and Beyond:  Outlook for Federal Taxes 
Chaired by Dan Shaviro, Wayne Perry Professor of Taxation.
Panelists: Michael Graetz, Justus S. Hotchkiss Professor Emeritus of Law and Professorial Lecturer in Law at Yale Law School, Fred Goldberg, co-head of Skadden’s Tax Group and Global Co-Chair of the Diversity Committee;  and Len Burman, First Daniel Patrick Moynihan Professor of Public Affairs at the Maxwell School of Citizenship and Public Affairs at Syracuse University.
4:00-5:15 p.m.

Panel 3: Market Opportunity and Market Risk
Chaired by Alan N. Rechtschaffen, Co-Chair Comfort Global Economic Policy Forum.
Panelists: Gerald Rosenfeld, Advisor to the CEO and Vice Chairman Investment Banking at Lazard Ltd; Distinguished Scholar in Residence and Senior Lecturer, and
Co-Director, Leadership Program on Law and Business at NYU; Abby Cohen, Senior U.S. Investment Strategist at Goldman Sachs; and ….
5:30-6:45 p.m.

Evening Keynote address by Sir Mervyn King, former head of the Bank of England, Distinguished visiting professor at New York University Law School.
6:45-7:45 p.m.

Cocktail Reception
7:45-8:15 p.m.

As you can see, I am chairing Panel 2, at 4 pm (right after teaching a two-hour class), with an eminent panel featuring Len Burman, Fred Goldberg, and Michael Graetz.  Insofar as I'm the point guard for this panel, I will be pass-first, not shoot-first.  But let's face it, these guys can create their own shots.

Our very rough game plan is as follows.  First we'll discuss the short-term outlook for significant tax law changes (such as revenue-raising or structural reform).  Just a wild guess, but I would be unsurprised if the panelists agreed with me that the short-term outlook for the enactment of significant changes, be they good or bad, is not exceptionally rosy. We will then more particularly discuss the short to medium term prospects for enactment of significant corporate and/or international tas reform, followed by the long-term picture, going to the prospects both for structural reform and for revenue-raising, whether by base-broadening, rate increases, or the enactment of new instruments such as a VAT, carbon tax, or financial transactions tax.

Wednesday, November 06, 2013

Why do we have the corporate tax?

I was recently discussing my forthcoming international tax book with some people when I got a question from an economist who observed that almost no one in public economics is interested in these topics (corporate or international taxation) and almost no one writes about them - it's just a tiny niche area.  The economist challenged me to justify writing about it, when we don't even know why we have the corporate tax.

The "why" question, of course, is meant to be normative, not historical or a question of political economy.  If I am proposing that the taxation of multinational companies' income by a given country should follow approaches A, B, and C, rather than X, Y, and Z, then I am in the normative realm, and a convincing descriptive explanation of why we in fact have corporate and international taxation would not be on point for the normative question, though perhaps illuminating it indirectly - for example, in terms of the set of feasible policies.

Before I turn to the question asked, however, a couple of preliminary observations.  First, I myself certainly have a foot in the art for art's sake camp - I think that interesting theoretical work that clarifies our understanding either of the world, or even just of ideas for their own sake, is great.  But it is certainly comical, and not in a good way, to hear that the vast majority of people in public economics have zero interest in these topics that are in fact quite important in our world, not to mention interesting once you get sufficiently far inside to see what the issues are.  None of those people who do the other stuff have any obligation to work on corporate and international tax issues just because they are important.  And also, lots of different things are important.  But the element of sniffy disdain for dirty reality, concerning central institutions that have large empirical effects, doesn't reflect well on the field as a whole.

Let me also tease out another subtext to the question.  Economists who don't spend any time talking to lawyers may naturally think that the lawyers are too unmoored from having an underlying policy framework to even realize that they have to ask themselves the question of why we have a corporate tax, in order to frame policy claims.  Indeed, in some cases economists may talk to lawyers and find that this appears to be the case.  But as it happens, I do discuss the fundamental underlying why questions at length in my book, and the policy prescriptions do derive from this discussion.  Moreover, the implicit characterization is in general an unfair stereotype, and seems to ignore the value of collaboration across disciplines.

OK, let's start with the fact that we have an income tax.  Obviously one could ask why at that stage as well, but here there is a big literature and people pretty much know what it's all about.  For distributional reasons, or rather based on trading off distributional and efficiency concerns, there's a widespread consensus for having at least a progressive consumption tax.  All you're doing when you make it an income tax is also taxing saving, a.k.a. taxing future consumption at a higher rate than current consumption.  There are arguments on both sides of that, but in the abstract the two instruments are potentially not all that far off each other.

Once you have an income tax, why would you tax "corporate" income?  But equally, why wouldn't you tax it?  Let's approach it from another direction.  Suppose the question were: Should the income tax reach income that is paid into escrow?  That is not a hard question.  If you are taxing income, and have reasons for wanting it to be comprehensive, why wouldn't you tax it just because it was paid into escrow?

How is corporate income different from other income?  Both earned by people, albeit in the corporate case via ownership in a legal entity that is taxed separately from the owners.  The main particular problems posed by the corporate tax are threefold:

First, we don't know who the underlying people are.  Now, this is not quite the same as the question of corporate tax incidence.  If you think the incidence of the corporate tax is shifted from shareholders to, say, workers, the same may hold for business income that is earned by individuals directly, rather than through corporate entities. (Note: A recent Joint Committee on Taxation suggests that the incidence might actually tend to differ in these two cases, but that addresses the underlying question rather than ignoring it.)  Given, however, that the corporate income tax is levied at the entity level, we don't even know who the owners are.  For example, to what extent, in a given case, are they U.S. individuals or foreign individuals?  And suppose that, at the shareholder level, you have tax-exempt entities, with unknown individuals (who aren't the "owners" in a straightforward way) standing behind them.  A reasonable starting point might be to think that, for each of these groups, we would want to (if we could) tax income earned inside a corporate entity the same way (whatever that might be) as that earned outside.

Second, we don't know what type of income it is.  For example, to what extent is it labor income?  Obviously, this can also be a problem with taxing individuals directly, if one wants to tax labor income differently than say, pure returns to waiting or the risk element (bringing us back to the income vs. consumption tax debate).  But with corporations, while it's often mistakenly assumed that we're not dealing with labor income since this would be paid out to workers via arm's length salaries, in fact there is the whole issue of the owner-employee.  This is a very big issue these days in the U.S. corporate tax.  So one reason for having a corporate income tax - though it falls well short of telling us what the instrument should look like - is that it includes significant labor income of one group of U.S. individuals (owner-employees) who aim to profit through share appreciation.

Third, we don't know what to make of the at least hypothetical second level of tax.  In theory, corporate distributions are taxable to shareholders, but it's very hard to generalize about the extent to which this happens (and matters) in practice.  There actually are income tax revenues from dividends, and from capital gains upon the sale of corporate shares, but there is also, under current U.S. law, not just the prospect of deferring the tax for a long time but of permanently escaping it, due to the step-up in basis for appreciated assets at death.

I expressly discuss this in chapter 5 of my book.  For example, when people say, as many do, that the U.S. should lower the corporate tax rate to, say, 25 percent, they are actually proposing a blended tax rate for lots of things that are actually different, and that we should want to tax differently.  For example, insofar as U.S. individuals are earning labor income through a corporate entity, underpaying themselves because they benefit from stock appreciation, there is no reason for a lower corporate rate at all (except insofar as they would face the second level of tax, which of course they can avoid by paying themselves deductible arm's length salaries).  But, as my book explains, when foreign individuals invest in the U.S. or through a U.S. corporation, there are circumstances in which the U.S. is best-off charging a tax rate of zero (i.e., where it has no market power and those individuals will be able to demand the global after-tax rate of return whether they invest in the U.S. or not).

It's in the nature of entity-level corporate taxation that we end up applying one rate to all this different stuff that we would want to tax differently.  (Of course, the dilemma can be narrowed a bit in various dimensions - for example, through "dual corporate income taxes" that attempt to tease out the labor income element.)  What to do given the underlying dilemma is the sort of question that one really needs both lawyers' institutional understanding and an advanced grasp of economics to address meaningfully.  But the fact that it is a messy question should not induce intelligent people to think that it is best ignored.

Thursday, October 31, 2013

Slides for my Columbia talk, describing my international tax book

In a couple of hours, as per my prior blog entry, I will be heading up (using the arbitrary convention, derived from maps rather than gravity, that "north" is "up") to Columbia Law School to present / discuss chapter 1 of Fixing U.S. International Taxation.

Some fairly condensed slides for the talk, aimed at providing a very swift tour of the book's basic ideas, are available here.

Wednesday, October 30, 2013

Presenting my international tax book at Columbia tomorrow

Tomorrow (on Halloween, no less), I am presenting chapter 1 of my forthcoming book, Fixing U.S. International Taxation, at Columbia's Tax Policy Colloquium.  Here is a link to the event from the Tax Prof Blog, here is the Columbia link for the chapter that I am presenting, and here is the link for Columbia's Tax Policy Colloquium.

For that matter, here is Amazon's link for the book itself, which has a February 25, 2014 publication date and can be pre-ordered now for $43.70. Same price here at Barnes & Noble. Act now, of course, while supplies last.

Friday, October 25, 2013

New York Times article by James Stewart on taxing the ultra-rich

The New York Times has just posted on-line an article by James Stewart, discussing mayoral candidate Bill de Blasio's "tale of two cities" theme and recently expressed interest in taxing the ultra-wealthy (whom he defines as those making more than $500,000 per year) to fund pre-kindergarten and after-school care.

It's not clear how much (if anything) de Blasio could actually do in this regard, given Albany's power over tax changes even if they are just in and for New York City.  But I am quoted a few times in page two of the article (available here) with regard to the question of what New York City ought to do, assuming it could set its own tax policy.

Despite the fiscal federalism arguments for setting distributional policy at the national level, I see a pretty good case for New York City raising taxes, up to a prudent point, on people at the very top of the income spectrum.  It is largely a question of market power - how much would we get in tax revenues relative to the problem of inducing exit?  But New York City really does appear to have some market power these days, as a global destination city much like London, implying that we have some leeway to get revenues from the super-rich even though the exit problem clearly must be kept in mind.

For those who still read hard copy of the Times, the article will be appearing in tomorrow's (Saturday's) business section.

Wednesday, October 23, 2013

Fiona Apple concert at the Beacon Theatre in NYC

Last night I saw Fiona Apple in concert at the Beacon on New York's Upper West Side, which all-importantly (for one, not just of my age, but with my knee and back conditions in particular) has seats.  I'm pretty much done, except for an over-the-top special event, attending crowded concerts in open space rooms where people mill around for hours, then crowd in and subtly push past you.  But the Beacon is a nice midsized theater venue, although perhaps the sound could be better.  (From the front of the second level or loge - I couldn't get seats on the ground floor although willing to pay for them - it was hard to hear some of her stage patter, and also the sound balance seemed to be off - Blake Mills' electric guitar was too much louder than her piano when she played it.)

She is really my favorite rock / pop artist who is still arguably mid-career and active.  (The likes of McCartney, Bob Dylan, and Ray Davies don't count, even if I may occasionally buy and moderately enjoy their new albums.)  So I was definitely primed to go, and regret that I didn't also get tickets for the concert the Beacon had added for the previous day in response to high ticket demand.

One of the things you wonder about when you attend a Fiona Apple concert is whether she'll make it through.  There was the famous meltdown some years back, when I gather she felt the sound was bad and stormed off the stage.  There was also a corporate event that she played (in Japan?) a few months back, where she understandably got angry that people weren't listening.  And recently she lost it when a fan urged her to take care of herself so she'd be around for years (I presume, implicitly calling her bulimic).  But this time she made it through, apparently in good spirits.

Someone I know who is less completely pro-Fiona than I am came up with a good phrase to describe her vibe on stage - "jittery bag of bones."  And added the comment that she evidently has "issues," which would not come as a surprise to anyone who listens to her music.  She's not exactly trying to avoid that impression.  I noted in a blog entry here some months back that John Lennon's 1970 primal scream album is about as good a comp for her as anything else that comes for mind, only her work is generally better than that at-times-plodding classic.

The concert had some great high points, but they were a bit interspersed.  She is touring with LA country-folk-rock-popster Blake Mills, and while his guitar playing for her was good (apart from being mixed too high), the concert was close to a 50-50 split between their material.  With all due respect, and though he'd certainly be fun in a small venue, I found her material considerably more gripping.  But good for her, I suppose, after "Left Alone" or "Not About Love," which don't hold back either vocally or emotionally, to be able to take a back seat for a few minutes.

Monday, October 21, 2013

Comments on Zelenak paper discussing the Romney "47%" kerfuffle

As noted in a prior post, last Friday I was at UCLA Law School, attending the Third Annual NYU-UCLA Tax Policy Conference.  My mission (I had decided to accept it) was to offer comments on Larry Zelenak's paper, "Mitt Romney, the 47 Percent, and the Future of the Mass Income Tax."

Larry's paper will be forthcoming at some point in the Tax Law Review, which will have an issue devoted to the 4 papers that were presented at this conference.  My comments will probably appear as well, in the form of a very short commentary paper.  But here is a PDF version of PPT slides that I used as lecture notes (without projecting them) for my brief commentary at the session.

Saturday, October 19, 2013

New (or should I say old) music

"We put a lot of energy and effort into making this album.  Hard work?  Not at all.  We don't work music, we play it!  Cheers to you.  Love, Paul."

OK, I admit it.  Buoyed by Pitchfork's 7.8 rating, I (legally) downloaded the new McCartney album.  It's actually pretty good.  Energetic, fresh-sounding though very recognizable, and it truly does sound in tune with the above quote.  At age 71, he appears to have retained a lot of his basic musical talent (although of course he won't be adding to the past's very greatest high points).  He also appears to have overcome the bouts of excruciating lapses in taste that plagued him every now and then even in the Beatles years and then during most of his solo career.

In news of a less dated musical interest, I'm very much looking forward to what I believe are seats near the front at the Fiona Apple concert in NYC on Tuesday.  Hopefully she'll get through it fine and no innocent well-wishers (or others) will set her off.

Thursday, October 17, 2013

Upcoming commentary on Zelenak / Romney paper

This afternoon, after teaching a class, I am flying to Los Angeles to participate in the Third Annual NYU-UCLA Tax Policy Conference.  This year's subject is Politics and Taxation, and the conference program is available here.

As you can see from the program, I will be commenting on a paper by Larry Zelenak entitled "Mitt Romney, the 47%, and the Future of the Mass Income Tax."  The inspiration for this paper is the collision between two things that are actually, as Larry recognizes, quite different.  The first is his own view, expressed in a recent book, that mass income tax filing can strengthen "fiscal citizenship."  The second is Mitt Romney's ill-received 2012 campaign snark about the "47 percent" whose non-payment of current year income taxes suggested, to Romney's not very capacious brain, both (a) that they would never take responsibility for their own lives and (b) that they wouldn't vote for him since he wasn't offering them anything.

Needless to say, I will have a few things to say on these topics.  Following my perhaps peculiar recent practice, I've made Power Point slides for my remarks that I plan to use as notes for my commentary, but not actually to use (i.e., project) as  slides.  I will post them here when I get a chance, probably early next week.

Wednesday, October 16, 2013

The United States may already have lost

Word this morning appears to be that the House Republicans are ready to cave, and that the Reid-McConnell deal will likely get through both houses, thus ending the default crisis and the government shutdown for the moment.

But the United States may already have permanently tarnished its hugely important reputation, with other countries and in global capital markets, as a safe and secure counter-party (for lending or anything else) with tolerably well-functioning governance.

I mean, this time the whole world really noticed and started to wonder.  You see articles like this ("Viewing U.S. in fear and dismay") and also like this ("Fitch puts U.S. on notice for possible credit downgrade").  By the way, while I don't know anything about Fitch or its motives for threatening the downgrade, this strikes me as much less of a stunt than the earlier Standard & Poor move, which I viewed against the background of S&P's having sullied its reputation in the run-up to the financial crisis.  Why wouldn't one downgrade the U.S. credit rating if we can evidently get so close to default, and when there are people with potential influence in the Republican Party who actually think default would be a good.thing?

Obviously, if nothing like this happens again, the capital markets and the world are likely to forget about it.  But keep in mind that the time extensions being discussed in the Reid-McConnell deal are only a few months, and that the people who set the House Republican strategy over the last few months (often dragging the putative leadership along with them) are likely to keep trying, whether through the same stunts or new ones.

UPDATE: Early evidence concerning the economic costs of the contrived crisis.

Tuesday, October 15, 2013

If you do something unforgivable, you must become unforgiving

OK, let's catastrophize for a moment, in a vein that I hope will seem completely misguided by a couple of days from now.  But while the probability of this may be low, I don't think it's zero.

Suppose the House Republicans pass a bill with ransom demands and then leave town (or else simply refuse to accede to anything without ransom).  Say the Senate and White House reject these demands, and the result is a debt limit breach, and that this in turn has very clear bad consequences.  At this point, having triggered the unforgivable, all the House Republicans could really do is double down, such as by blaming the other side for rejecting their "reasonable compromise" and accusing the Obama Administration and the Treasury of deliberately mishandling  the post-breach cash flows.

Indeed, if House Republicans accept the logic of unavoidable escalation, it is hard to see where they would stop.  Impeachment?  Charges of "economic treason"?  Sometimes the best defense is a good offense, or at least it may feel that way in the heat of battle.  And tribalism being what it is (an argument that applies, of course, to all sides), they would definitely have supporters, no matter how far they went.  In short, this could get very ugly indeed.

We are used to having the parties spin alternate histories, where "we" tried to do good things but "they" messed everything up.  But if what's happened is really unforgivably bad, and if it clearly reflected a major social breakdown amid dueling accusations of fundamentally antisocial behavior, we could end up in a place where the United States has never been before, other than from 1861 through 1865.  And as examples such as World War I show, this can happen startlingly fast, and without anyone's having expected it, quite simply from the logic of dueling escalation.

Cover of my forthcoming book on international tax policy

Monday, October 14, 2013

NYU Tax Policy Colloquium Nobelist update

With the recent Nobel Economics Prize announcement, the Tax Policy Colloquium at NYU Law School has now retroactively had two Nobel-winning economists as speakers: Peter Diamond last year, and Robert Shiller about 15 years ago, with this paper (if I remember correctly) discussing Social Security.  I had seen Shiller present it at an NBER meeting, and I was struck by how interesting and conceptual it was (unlike, say, Feldstein's contemporaneous work about private accounts, which rigorously steered clear of any underlying analytics - and which thus negatively inspired my book on Social Security reform).

Ending of Breaking Bad vs. that of my novel, Getting It

Someone who has read my novel, Getting It, noted that I had commented somewhere that I thought the ending of Breaking Bad was a bit too neat.  But didn't I wrap up everything in Getting It as well?  And didn't characters in both, to some extent - at least, some of them and in some ways - get more either of what they wanted, and/or of what they deserved, than one might have expected?  (I am trying to avoid giving out too much info about either ending.)

But I feel my ending is more sardonic, and thus in its way (i.e., without guns, death, drugs, crime, etcetera), dare I say, darker.  Which is not to overly criticize Breaking Bad for its ending, which I enjoyed too much (especially on re-viewing) to be entirely, as opposed to say 60% or else judged against a very high standard, disappointed by it.

Friday, October 11, 2013

Bringing it all back home

This morning as I left for work, the front door was open and my wife was just outside for a moment.  I realized she didn't have her keys.

Given the role models we have in Washington these days, the idle thought (as a joke, of course) occurred to me: Suppose I closed the front door and told her that she's locked out unless I'm offered some concession.  No matter if I had nothing in particular in mind at the moment - surely, over a couple of hours, I could think of something. Meanwhile, if necessary, I could express wounded sadness if she didn't want to discuss, negotiate, and compromise over whatever I came up with.  Aren't spouses supposed to discuss and compromise?

Needless to say, since I don't believe in following bad role models, and since I value my marriage and am not a sociopath, I decided not to implement this brilliant strategy.

Thursday, October 10, 2013

International tax developments

According to an article in yesterday's New York Times, what I call U.S. corporate residence electivity may be declining.  U.S. companies are apparently finding it increasingly easy to shed their status as such through merger with foreign companies.  This route has always been legally effective (so long as it isn't just a paper-shuffling sham transaction, like "inverting" to create a new Caymans-incorporated parent), but apparently it's becoming more practically available.

Two very different possible legal responses would be:

(a) Broadening the statutory definition of resident U.S. companies to include those that are incorporated OR headquartered here, rather than just those that are incorporated here, and/or

(b) Reducing the relative tax burdens that are associated with being defined as a U.S. corporation.  But a few further points about that:

       (i) While rising U.S. corporate residence electivity clearly lowers the optimal relative tax burdens associated with residence, it's a separate question whether current law burdens should be lowered.  Suppose they were previously much too low.  Then rising electivity might merely mean that they were closer to the optimum, but still too low.

      (ii) One key reason why companies like to avoid being classified as U.S. residents is that such a status impedes playing games to shift profits earned in the U.S. so that they can be reported as having been earned abroad.  One way to reduce the relative tax burdens that are associated with U.S. corporate residence is to increase our rules' effectiveness in combating profit-shifting by foreign resident companies.  This would probably require a "unitary business" approach - that is, looking at the entire global corporate group even if the U.S. affiliate isn't formally the common parent.

      (iii) Responses (a) and (b) above are definitely not a case of either-or.  Indeed, one could do both.  Note also that they are substantively interrelated.  For example, successfully using (a) to reduce U.S. corporate tax residence electivity would weaken the case for (b), or more precisely it would raise the optimal relative tax burden that was associated with U.S. corporate residence.

Wednesday, October 09, 2013

The next stage after a debt default

While I readily admit that I have less ability to predict what will happen in Washington than those who are closer to the scene, I can see a plausible debt ceiling breach scenario going forward.  Unfortunately, it is not a very pleasant scenario.

It appears clear that crashing through the debt ceiling would lead to a sudden and very sharp fiscal contraction, which very likely would lead to a severe recession.  It might also lead to a catastrophic credit event from failure to honor U.S. debt obligations promptly, although admittedly the timing and even the certainty of this aspect are less clear.

The Republicans oughtn't to let any of this happen if they will clearly get the blame.  But they have room to dispute responsibility on both.  A disastrous recession could be blamed on Obamacare, or on naming Janet Yellen to head the Fed, or on excess regulation, or on anything else that "balanced" media commentators are willing to present as one side's view of a legitimate debate.  A credit event could be blamed on the Treasury, for mismanaging cash flows after the debt ceiling breach - perhaps with the further argument that it was deliberate.

So long as responsibility can be disputed - and especially if the Democrats will inevitably "own" the state of the economy in 2014 and 2016 - the Republicans may in the end see no good reason not to do it.  Add the possibility that they will be able to convince themselves that these self-serving explanations are actually true, and you have a very scary situation indeed.

Martin Feldstein heads further down the rabbit hole

As a possible debt limit breach nears (and I now consider it more likely than not to happen), Republicans have begun to argue that debt default isn't actually a problem.

I guess they pretty much have to say that at this point, given how they are getting called out on the extortion angle.  And to be fair, we really don't know exactly what will happen.  The people at Treasury, who are in the best position to know, and who say it would be disastrous (probably around November 1 or so), admittedly have a dog in the fight.  Now, I myself - concededly, without direct personal knowledge / expertise on the question of how it would actually play out - am very much inclined to believe them, but it's certainly legitimate to raise the issue.

So the dispute about how bad it would/will be was bound to get going, given where the debate now stands.  And one therefore naturally expects both sides to start trotting out their heavy artillery.  But at the same time, if you're a piece of heavy artillery and your side contacts you, one perspective that you might consider adopting is that, while we genuinely don't know what would happen (and one can raise the possibility that the Treasury is being too dire), the risks are great enough that surely no sane person should want the actual experiment to take place.

Against this background, I must say that I was startled to read about Martin Feldstein saying the following on Bloomberg TV about the risk of a catastrophic debt default: "I think it's a non-issue.  I think it wouldn't happen....  I think default as such is a scare tactic....  [The Treasury] can't pay for everything, but it can certainly avoid defaulting on the debt.  It can certainly avoid not paying Social Security checks, and so that's going to happen."

Might Feldstein be right?  I don't know enough to say that it's impossible.  But is he being honest?  No, because he has no way of knowing that it is actually true, when it depends (among other things) on Treasury's daily cash flows, computer payment systems, etcetera.  So I think we must give him a grade of F here, even without saying conclusively (as I can't, given the limits of my own knowledge on this issue) that he is definitely wrong.  He presumably was asked to come out and speak the party line, so as to raise a cloud of doubt about the issue of debt default calamity, and for whatever reasons he agreed to do so.  Is he concerned about the effect on his reputation if it turns out that he is wrong?  Apparently not.

This is not the first time that Feldstein has risked his reputation in ways that may strike the outsider as unwise. During the 2012 presidential campaign, he published an op-ed in the Wall Street Journal asserting that Romney's tax plan could indeed add up arithmetically as claimed.  This involved his making at least one comical arithmetical error, and including at least one assumption that he did not mention, but had to know was highly dubious.  Per a response from people at the Tax Policy Center who had released the definitive study showing that Romney's plan could not add up:

"1. He assumes that each dollar of itemized deductions lost by households with income above $100,000 would generate 30 cents in revenue.  However, the Romney plan has a maximum rate of only 28 percent ....

"2. He assumes that taxpayers earning more than $100,000 who currently itemize would lose not only their itemized deductions but also their ability take the standard deduction.  Normally, taxpayers have the option of itemizing their deductions or taking the standard deduction.  [I myself would say that, while one is free to advocate such a change, honesty with one's readers would indicate making this clear.]

"If the standard deduction was retained for all households, and denying itemized deductions was assumed to raise revenue at a more realistic average marginal tax rate of 24 percent under Romney's plan, Feldstein's proposals would fall about $70 billion short of revenue-neutral, even if taxpayers don't change their behavior."

OK, am I being unduly harsh with Feldstein here, because he and I have both to a degree chosen sides,. and not the same side?  What about, say, Krugman?  But Krugman says what he thinks, not what party leaders ask him to say.  What's more, right or wrong, and even if he plays a few rhetorical tricks, he says things that he reasonably thinks he knows about, and believes in good faith are true.  Plus, he generally avoids elementary errors  It's hard to view Feldstein in the same light here.

Overheard this morning on the streets of Greenwich Village

Older woman, speaking loudly and animatedly on her cellphone as she walks down a crowded street:

"How am I supposed to be an affectionate mother?!  You sold the jewelry!"

I guess this helps show that younger people on Facebook aren't the only ones who over-share.

Friday, October 04, 2013

Coase Theorem vs. the two fundamental theorems of welfare economics

As Paul Krugman would say, this post is "somewhat wonkish."

Two facts that came together for me in the last few days are the following:

(1) It has occurred to me that the Coase Theorem, depending on how one states it, is simply a special application of either the First Fundamental Theorem of Welfare Economics or the Second Fundamental Theorem.  (In the Wikipedia link to the Coase Theorem that I've provided here, versions 1 and 2 of the Coase Theorem are the First Fundamental Theorem at work, while version 3 involves the Second Fundamental Theorem.)  I'm probably not the first person to think of this, but I don't recall seeing it stated anywhere, and it leads to an interesting question, which is why people who were familiar with those theorems nonetheless initially found the Coase Theorem surprising and counter-intuitive.  This in turn may help to illuminate what made Coase important.

(2) I was recently contacted, along with a number of other people (many of them with Chicago connections) in law and economics, with regard to a forthcoming tribute to Ronald Coase that I believe will be appearing in the University of Chicago Law Review.  The tribute pieces are meant to be very short (e.g., 500 words), although they are permitted to be longer.

It therefore occurred to me that, by very briefly writing up (1), and including a punchline regarding the questions that I note above, I could also do my part with regard to (2).  So I wrote it up today, in between doing other things, and have sent it in.

The final is just 750 words long (including footnotes), and I will plan to post or link to it here at some point.

Thursday, October 03, 2013

Debt default endgame?

On November 1,  $25 billion in Social Security checks are due to go out.  Some experts anticipate that this will be the forcing event for a debt default resolution, if there hasn't already been a stock market crash or other dire macroeconomic event.

$18 billion in Medicare payments are also due to go out on November 1.  But, as those go to providers, rather than directly to seniors, the short-term optics aren't quite as politically intense.

In the scenario that I've been reading about, the Administration announces, a few days prior, that Social Security checks won't be going out due to insufficient funds.  It attributes this to the House's unwillingness to raise the debt ceiling, no doubt with a personial reference to the Speaker in particular.

In an "optimistic" version of the scenario (keeping in mind that this is a relative term), the House then folds.  But does this necessarily follow?  The House Republicans might instead respond by saying it's not their fault but the Administration's, both for not "negotiating" and for not prioritizing these payments over all the others that the government owes.  They might even vote budgetary authorization for the Treasury to issue and use new debt just for Social Security payments, a la their "partial shutdown" efforts over the last few days.

We might then face a situation where millions of seniors are screaming (and suffering) because they haven't gotten their checks, and yet the battle continues.  Far-fetched, perhaps, but I don't think entirely impossible so long as blame can be contested.  Once you start playing chicken it's hard to fold, and the Republicans might feel they'd simply gone too far to quit the game with nothing.

Wednesday, October 02, 2013

The stopped clock gets it right

Thomas Friedman isn't actually a stopped clock, but I usually don't find his work insightful or even readable.  But every now and then he comes through with a good column.  Today is one of those days:

"What is at stake in this government shutdown forced by a radical Tea Party minority is nothing less than the principle upon which our democracy is based: majority rule. President Obama must not give in to this hostage taking — not just because Obamacare is at stake, but because the future of how we govern ourselves is at stake."

I know people on the Republican side (or, at least, a sane version of the Republican side) who agree that what's going on here is an attempted constitutional coup d'etat.  The coup plotters' contempt for democracy and for a cooperative social fabric is so clear that I really wonder what they would do if actually in power.  I don't think we can assume that they would honor democratic values or constitutional norms.

The House Republican leadership (people such as Boehner and Ryan) appear to be placing themselves in a position where they can't back down from triggering a full-blown debt default without leaving themselves publicly embarrassed and internally discredited.  This could be Nixon's "madman" strategy (his idea that, if you convince the other side that you are crazy enough to pull the trigger, they will have to back down).  But instead they may just be trapping themselves.  The problem is that the Democrats, even if convinced that the House Republicans really will pull the trigger, can't afford to back down, due to the point in Friedman's column.  It would be like Charles Lindbergh paying ransom in a setting where, the very next day, the kidnappers could grab the baby all over again.

So far as I can tell, this creates a very high likelihood that we will have a full-blown debt default, leaving the next move (at some point after October 17) to the Obama Administration. 

Monday, September 30, 2013

NYU Law Magazine feature on the NYU Tax Program

The latest edition of the NYU Law Magazine has a feature about our tax program, in which a number of members of our tax faculty, including me, are featured and quoted.  Hurrah (from a selfish standpoint) for the shout-outs to my forthcoming book on U.S. international taxation, as well as to Getting It, my "satirical 2010 novel with a young, morally challenged litigator as a protagonist."  The feature also includes a photo of me that was taken during the very brief period when I had a beard.  (I now shudder a bit at seeing this, but the fault is my own as I didn't shave it off for the photo shoot.)

Probable government shutdown, with possible debt default to come

Some people I know are glad (all things considered) about the apparently pending government shutdown - not that they actually want it, but simply because, if something bad is bound to happen, a debt default would be even worse.  If it's one or the other - shutdown or default - they are certainly right about this.  But that's not to say that we won't end up with both.

If it does come down to a debt default, I am glad to see that the Neil Buchanan-Michael Dorf argument, to the effect that issuing debt above the ceiling would be less illegal than any of the other options President Obama would have (such as declining to spend appropriated funds) is catching on, such as in today's New York Times op-ed by Henry Aaron.  Legally speaking, the Buchanan-Dorf analysis strikes me as plausible enough.  (Given the lack of clear criteria for defining "correct" legal answers in advance, there often really is no answer until something emerges through the actual legal process, unpredictably even if in the end authoritatively.)  And their approach not only is much less goofy than issuing a platinum coin, but strikes me as more circumspect than a Fourteenth Amendment-based approach.  Moreover, while the Obama Administration certainly should not suggest in advance that it would breach the debt ceiling, doing so on the back end might make sense, perhaps as chaos increasingly loomed and after having demonstrated that a selective payment approach was unfeasible.

But the "least illegal course" approach raises an empirical question that cannot be tested in advance, to the effect of how the markets would actually react to debt issuance that contravened the ceiling.  House Republicans would no doubt be doing their best to create financial market havoc, by shouting that the debt was legally invalid.  And while the debt no doubt would eventually be honored (whether via judicial decision or Congressional action), things could get ugly in the meantime, and leave the U.S. with a permanently stained fiscal reputation.

Even if the this fall's contrived crises play out relatively well, however, we are still on a "Breaking Bad" path as a country. (Yes, I spent the entire late summer through last night enraptured by the show, although, pending re-viewing, I found the final episode perhaps a bit too neat.)  Especially in a non-parliamentary system with multiple veto-like choke points, it's hard to survive having a sizable and powerful group - maybe 20 percent of registered voters, but a primary-day voting majority in one of the parties - that would rather blow up everything than not get its own way.  This is potentially at least as dangerous as domestic terrorism, and perhaps more so.