Tuesday, September 30, 2014

Three interesting but totally different articles in today's Times

An article on the decision not to bail out Lehman Brothers (suggesting that it was in some ways arbitrary, ill-thought-out, deceptively presented, and quite political) builds on recent pieces discussing AIG et al (with no haircut whatsoever for Goldman Sachs) that bring to mind the dual nature of the 2008 rescues.  On the one hand, the Fed's interventions were necessary to prevent true global macroeconomic calamity, well beyond the plenty-bad-enough consequences that we nonetheless experienced, and yet they were politically attacked in a way that could make doing the right thing harder in the future.  (Then again, perhaps the political costs of rescue do help to ease, if only slightly, the moral hazard problems caused by knowing that one is too big or central to fail.)  But on the other hand, they reinforce my sense that in some ways the rescuers' choices really can't withstand much scrutiny, given how they arbitrarily played favorites and reflected the undue political influence of players such as Goldman.

On  a totally separate theme, an article on the European Commission's preliminary finding that Ireland gave Apple tax advantages that amounted to illegal state aid, and may be ordered to collect billions of dollars in back taxes that the Irish government, with an eye to future freedom of action in making deals with companies, may not even want.

Finally, for comic relief, Mitt Romney keeps bringing to mind the song, "How Can I Miss You if You Won't Go Away?"

Book review for Fixing U.S. International Taxation

Christiana Panayi of the Queen Mary University in London has written a book review of my recently published book Fixing U.S. International Taxation.  It should be appearing shortly in the British Tax Review.  The text of the review goes something like this:

"Professor Daniel Shaviro is a well-known and widely published professor of international taxation at New York University. As the title suggests, in this book Shaviro advances several proposals aimed at improving US international tax law. Broadly, his main proposal is to set the average effective rate on foreign-source income of US multinationals somewhere below the statutory corporate rate and above zero. He also proposes to eliminate deferral advantages and to abolish the foreign tax credit, replacing it with a deduction for foreign taxes.

"Shaviro’s writing is clear and highly thought-provoking. In spite of the complexities of the issues in place, the author manages to offer a concise and comprehensible overview of the problems plaguing the current discourse on reform of US international tax law.

"There are six chapters in this 200 page book.

"Chapter one is an introductory chapter. Here, Shaviro identifies the problems with the current rules of US international tax law, and reviews the academic debate on these problems. He sets out “the core dilemmas in international tax policy” and “the defects in prevailing modes of analysis”, before laying down the parameters for his proposals and the main policy implications.

"All of these issues are examined in greater detail in the following chapters.

"Chapters two and three delve into the basics of the US international tax regime. The author focuses on what he considers to be the main building blocks of this regime, namely the rules for determining corporate residence, some source rules such as transfer pricing, the rules on foreign tax credits and the rules on deferral and Subpart F. Chapter three revisits these building blocks, but the focus is on the main incentives and tax planning opportunities that the existing rules create and the possible impact of marginal changes to these rules.

"Chapter four explores the global welfare perspective on US international tax policy. The author reaches the conclusion that global welfare analysis plays a small role, notwithstanding its normative appeal. In fact, in Shaviro’s view, prevailing international tax practices are not greatly influenced by global welfare considerations. In any case, the author argues that the potential gains that are available through global cooperation are much more limited than in the field of international trade. In this chapter, the author goes on to reject what he calls the global “alphabet
soup” and the single-bullet approach of achieving global welfare. The alphabet soup is a reference to the acronyms used for capital export neutrality (CEN), capital import neutrality (CIN), national neutrality (NN), and, more recently, capital ownership neutrality (CON), national ownership neutrality (NON) and global portfolio neutrality (GPN). All of these concepts are analysed at some length. Shaviro concludes that  “[w]hile global welfare considerations may be important when unilateral cooperation is sufficiently feasible, in the main countries must and will make international tax policy choices in a largely unilateral setting”.

"This idea, which he describes as the unilateral national welfare perspective, is further elaborated in Chapter five, wherein the basic elements of this perspective are analysed. Shaviro argues that foreign-sourced income should be subject to a lower rate than is currently the case, but the base should be broadened. Both deferral and foreign tax credits should be eliminated.

"On the basis of these conclusions, Shaviro sets out in Chapter six the practical steps that should be taken to improve US international tax policy. In addition to the above proposals, Shaviro makes further interesting suggestions. Inter alia, he argues that the concept of US corporate residence should include companies that are incorporated abroad but have US headquarters. He also argues for the application of formulary approach to allocating interest expenses.

"Interestingly, though rather briefly, at the end of this chapter, Shaviro touches on the topic of transfer pricing versus formulary apportionment, and emphasises the importance of 'think[ing] about the proper choice of factors' under formulary apportionment. He suggests the use of all three traditional factors (sales, employees and assets), but would give extra weight to the sales factor.

"This book offers an excellent analysis of the topic and it is especially helpful to non-US tax lawyers. One of its main strengths is that while it shows a wealth of knowledge of public finance, the writing is plain and understandable to those not well versed with public economics. Apart from the bold—but practical—suggestions made for reform, the book also identifies issues that need further examination. It provides an excellent benchmark for further research to be undertaken.

"Rather humbly, Shaviro closes the book 'with the hope that you, at least—the current reader—have found new ideas here that will stimulate further reflection'. Most open-minded readers will certainly do so."

Sunday, September 28, 2014

NYU-UCLA conference on Piketty's Capital in the Twenty-First Century

The conference is this Friday, 9 am - 4 pm, alas by invitation only due to space limitations (but we might be able to fit in a few more people), at NYU Law School.  Papers by Liam Murphy (philosophy), Suzanne Mettler (political science), Gregory Clark (economic history), Wojciech Kopsczuk (economics), and myself with Joe Bankman (law).  Piketty to respond verbally to all papers.

Papers are or will be available to those registered for the conference, but not to be posted just yet.  I am reasonably happy with Joe's and my paper, but obviously we will see how others respond.

Friday, September 26, 2014

A short comment on baseball

A now-mediocre player, on a now-mediocre team, gets a walk-off hit at home (apparently, his first such in 7 years) in a meaningless game. Fans go crazy. But living in the past turns sour at some point (as we Met fans well know)..

Sunday, September 21, 2014

Another long silence ...

While on sabbatical, I've been traveling again, mixed personal and work.  Recent locales: Paris, Giverny, Vienna, Budapest, now Vienna again, all fantastic places in very different ways.  I'll be back in NYC on Wednesday.

While away, I've noticed a disagreement about U.S. corporate inversions among 2 friends, Ed Kleinbard at USC Law School and Kim Blanchard at Weil Gotschal.  Ed's views on inversions are well-known, and I generally agree with them (although his approach and mine to U.S. international tax issues certainly differ in some respects - e.g., I am more hostile to the foreign tax credit and more leery about how far we can push residence-based WW taxation of U.S. companies even in the short run).

Kim had a recent letter to Tax Notes disagreeing with Ed (who no doubt will be responding very soon).  I read her piece (from afar) as suggesting that Ed views the new wave of inversions as essentially sham transactions that are purely motivated by tax avoidance, whereas clearly some of them may have significant non-tax effects that may even be sought-after and intended independently of the tax benefits.  E.g., if a big U.S. company merges with a big non-U.S. company, then even if they put the latter company on top for tax reasons, and even if the tax benefits of ceasing to have a U.S. company at the very top are appealing, then the deal may be far from a pure paper-shuffling sham.

I don't think that one needs sham transactions to have the concerns about inversions that Ed has been expressing.  The need to have a real and not wholly insignificant merger, in order to get the tax benefits of an inversion, does indeed provide a potential friction that can reduce the frequency of inversions relative to the scenario where it's purely a paper play, but that doesn't prevent one from having concerns about the effects on the U.S. tax base of permitting them to go forward in the face of their often having significant tax benefits that will increase their frequency.

I would tend to favor treating even economically significant inversions as triggering an automatic deemed repatriation ending deferral (at least for a significant % of foreign earnings) for the U.S. company's CFCs (even if they remain such), possibly with deferred payment that bears an interest rate for the deferral.  I also think we need to find our way towards what I call more residence-neutral rules for determining the source of income earned by companies that are active in the U.S. as well as abroad, i.e., addressing the extra opportunities to strip income out of the U.S. that may arise for foreign-headed multinationals.  But in the interim I'd regard inversions as a problem even when they are "real" transactions with significant non-tax effects.