NYU event on Kleinbard book

Yesterday Ed Kleinbard presented his new book at an early evening session at NYU Law School.  Linda Sugin and I then offered comments.  Unfortunately, perhaps, for the intellectual diversity of the event, we both approached it more from the left, leaving viewpoints more from the right under-represented there.

My remarks went something like this:

The book is great, a tour de force and an important contribution to public debate.  I agree with the great majority of it.  But since that’s no fun to discuss, I’ll emphasize my main disagreement, which relates to high-end inequality, or the recent lift-off from everyone else of not of the top one percent, but rather the top one-tenth of a percent (which is where a recent paper by Emmanuel Saez and Gabriel Zucman finds that U.S. wealth gains since 1979 have been almost entirely concentrated).

I consider rising high-end inequality, in the top one-tenth of one percent, more important and broadly problematic than Ed does.  Now, this is at least partly an empirical question – what adverse effects, if any, does it actually have on everyone else? – but that is hard to evaluate.  So, while both Ed and I are open to evidence, we may have to continue to disagree about the importance of this issue, at least for the time being.

Because of this difference, at least in emphasis, I attach more importance than Ed does to distinguishing, both conceptually and empirically, between high-end and low-end inequality.  A measure like the Gini coefficient fails to do this, and not because of its particular tradeoffs or flaws, but because it’s a single overall measure.  When Ed says that even taxes that are regressive in isolation can create greater equality if they are spent right, he is emphasizing the effect on low-end inequality.  You can’t do much about high-end inequality, at least directly or in the short run, through greater social spending.

Given the greater importance that I ascribe to high-end inequality, I am more eager than Ed is to address it through the fiscal system, which really does mean the tax system.  Now, there may be important non-fiscal tools for addressing it – for example, regulations concerning intellectual property, the financial sector, corporate governance, and campaign financing.  But if we want to seriously address high-end inequality through the fiscal system, it has to be done through higher taxes at the top.

Now, this doesn’t necessarily have to mean higher graduated rates in the income tax, although it could.  Estate or inheritance taxes with fewer planning outs might play a big role as well, as might income tax reforms such as taxing asset appreciation at death, and perhaps finding a way to tax borrowing against appreciated property, so the likes of Larry Ellison can’t avoid tax on high current consumption.  (Ed says, by the way, that he supports the use of estate taxes to address dynastic wealth transfers – but he doesn’t emphasize it much, nor does he fully explain why it might be exempt from the political logic that he offers for steering away from greater high-end rate graduation.)

Although there are lots of different ways to skin the apple, I am more open than Ed is to having high income tax rates at the top, as Diamond and Saez have suggested.  By the way, they stop at 73 percent, including state and local taxes, under a low estimate of elasticity, because they are just trying to revenue-maximize at the top.  There’s an argument for going beyond that if you believe that high-end wealth concentration has net negative externalities, like pollution.

Raising the Social Security earnings cap would be a significant (12.4 percent) tax rate increase on people who are well above the median – but obviously it starts applying long before we reach the top tenth of a percent.  So, while that would be a progressive tax change, it wouldn’t be aimed where my special concerns lie regarding what’s happened since 1979.

Of course, there is more than I’ve acknowledged so far to Ed’s side of the argument against specially aiming higher up.  So let’s back up for a minute.

This is at least three books in one – perhaps more.  But it certainly includes at least the following three:

First, it’s a book about substantive policy analysis.  What are the issues, and what are the tools that we might use to address them?  A core argument is that, in addressing inequality through the fiscal system, we should focus on spending, not tax progressivity.  Again, while I agree with this, it addresses low-end inequality, to the relative exclusion of high-end inequality, and I would like to address both, while using Ed’s approach for the low end.

Second, it’s a book about morals and rhetoric.  The two are linked because appealing to people’s underlying moral beliefs is crucial to rhetorical success.  Here Ed does a great job of attacking market triumphalism. 

But I wonder if he is being either too optimistic about moral argument’s capacity to cajole people into caring more about the bottom end, or else too pessimistic about its doing the same at the top end.  In any event, I wonder about the substantial gap between his optimism and pessimism on these two scores.  And while he views addressing low-end inequality and high-end inequality as substitutes – in his view, pursuing one would undermine pursuing the other – it’s also possible that they could function as complements.

Third, this is a book about political economy.  Ed believes that some approaches to addressing inequality might succeed, while others will surely fail.  Here I’d make the same point about whether addressing high-end and low-end inequality have (a) such different prospects and (b) are necessarily substitutes rather than complements.

Okay, more about the first book, concerning substantive policy analysis.  Ed notes that recent increases in inequality have been driven by the rise of the top 1 percent.

In support of his nonetheless focusing almost exclusively on low-end inequality, the case for addressing it admittedly is much more clear-cut than that for addressing high-end inequality.  When we think about helping the poor, the idea is to make them better off.  That’s not hard to endorse.  But when we think about addressing extreme high-end inequality, is the idea just to make those people worse off?  Why would we want to do that?

The answer is that there are reasons for thinking that extreme high-end inequality may indeed be bad for everyone else.  It’s not just a matter of the declining marginal utility of consumption, which merely suggests that others would get more utility out of a dollar than people at the top do.  Extreme high-end wealth inequality can potentially have directly adverse effects on the bottom 99.9 percent.

But let’s start with declining marginal utility, since Ed disparages it as a ground for wanting to level down as well as up. In the book, he notes that his former clients loved money so much that the theory of declining marginal utility seemed not to apply to them.  But I have two responses.

First, that example does not concern the marginal utility of consumption, but rather of the income and wealth amounts that they get to see reported on pieces of paper.  Neither Ed’s super-rich former clients nor their heirs are likely to spend all of that money any time soon.  So a large part of what they love is the abstraction – gross dollar numbers that they see reported to them.

Among the key elements of this may be keeping score against their peers.  But if you tax all of them at the same high rate, their relative ranks stay the same.  And if what they like is the power and status that it brings them relative to everyone below, that is a mainly zero sum phenomenon.  More power and status for them means less for others.

I also question the admittedly standard practice in welfare economics of taking preferences as given.  I would argue that some combinations of people’s preferences can lead to higher total utility than other combinations.  Suppose one person enjoys hurting or oppressing others.  The standard utilitarian answer to why we shouldn’t let this happen is that surely the victims’ pain is greater than the inflictor’s pleasure.  But what if it isn’t? 

Well, probably it is.  But even if it isn’t, it seems obvious that we could get to a greater overall welfare level if the oppressor’s utility function instead had inputs that were at least neutral regarding whether others were suffering.  And preferences may be socially malleable over time, even if not for a given individual whose ways are set.

It makes sense for us to think about the long run, not just feelings that are based on expectations today.  Say I’m a hedge fund manager who believes that making me pay tax on my labor income at ordinary income rates, rather than capital gains rates, is on a par with Kristallnacht.  A billionaire actually said something like that recently.  And while his comment could not easily have been more ludicrous and offensive than it was, it certainly testified to his genuinely strong feelings.  Does that mean his marginal disutility of paying the same tax rate as the rest of us is really, really strong?  To me, even if so, that means he has preferences that shouldn’t be encouraged, and that over time, with habituation to a better system, could change.

In sum, I think that focusing on the marginal utility of consumption has more juice than Ed attributes to it, insofar as justifying a response to high-end inequality is concerned.  But it’s only a small part of the argument for concern about the takeoff in recent decades by the top tenth of a percent.  Other important points include the following:

--First, the fact that high-end inequality makes other people feel worse than they would in a more equal society.  There is extensive behavioral research evidence confirming this.  People say they’d prefer to have somewhat less in a more equal society, rather than somewhat more in a society where they are far below everyone else.  Utility comes not just from own consumption, but relative consumption.  This reflects that we are a competitive social animal.

--Second, political economy.  I see lots of evidence that a shift towards plutocracy is choking our political system’s capacity to respond to most people’s interests and concerns.  Consider the work of Princeton political scientist Martin Gilens, showing that policy preferences below the very top appear to have almost no influence on policy outcomes.

Case in point, I think it’s in good part because of rising plutocracy that there has been so little interest among policymaking elites in stimulating demand to address high unemployment still lingering from the Great Recession.  You might have to challenge the concentration of power at the very top in order to make the government more responsive to other people’s interests.

Now, campaign finance law might be part of the response, if there weren’t 5 Supreme Court justices asserting that the right to give a billion dollars to a candidate is sacred, while it’s perfectly fine to disenfranchise millions of voters through the equivalent of poll taxes.  But even if the Supreme Court majority actually respected our country’s best traditions, rather than being eager to trample on them, campaign finance reform might not be enough.  When things are so unequal, the power imbalance is going to seep through one way or another.  So you may actually have to address high-end inequality in order to preserve meaningful democracy.

--Third, social solidarity.  The reason you have all these billionaires complaining about Kristallnacht, the moment anyone even looks at them funny, is that such radical inequality as we have today undermines the sense of shared membership and enterprise that you may need for a successful democratic society.  These people end up living lives completely separated from the rest of us, and they grow accustomed to receiving enormous deference most of the time.  They start to find democratic politics and manners unacceptable, and they get paranoid that the voters will take it all away.  I don’t entirely blame so many of the super-rich for feeling this way, even though they appear to have immense political power, with fealty from the leaders of both major parties.  It goes with the territory to feel paranoia.  But the fact that they feel so threatened reflects the destruction of cohesion and social capital.

Let me turn briefly now to Ed’s second and third books – the ones on morals and rhetoric, and on political economy.

On morals and rhetoric, Ed believes that progressives need to focus more on the old-fashioned virtues, including basic human decency, and on saying “social insurance” rather than “redistribution.”  I agree about those rhetorical choices.

But I am not so sure that “we are better than this.”  For example, our country’s racial history makes it difficult to motivate helping people at the bottom.  Ed appeals to altruism, and to the appeal of being a mensch, not a jerk.  But altruism often takes the form of loyalty to one’s own racial, ethnic, or other social group, with an accompanying lack of compassion for, or even hatred of, other groups.

Politics is also importantly driven by economic interests.  And it’s not clear why those who are in the driver’s seat would share Ed’s concern about low-end inequality, even if high-end inequality is allowed to stand unchecked.

Jared Bernstein, in a review of Ed’s book that was extremely favorable, nonetheless made the following comment, based on the book’s title, “We Are Better Than This”:

“Just who is this ‘We’ he keeps talking about? More than any time in our recent history, we are balkanized by income, class, ideology, religion, politics, race, and pretty much every other dimension you can think of. And if there is no coherent ‘we’ then there can be no clear path for ‘us’ to take together that will make us ‘better than this.’"

One of the book’s important themes is combating market triumphalism.  But discrediting it could motivate addressing inequality at the top, as well as the bottom.  If the market’s losers don’t deserve contempt for having lost, then perhaps the winners don’t deserve quite so much genuflection for having won.  And if you can’t counteract the moral influence of market triumphalism, then addressing inequality at both ends is difficult.  The two might be tightly linked.

Finally, let’s turn to the political economy book.  Ed makes a number of judgments that are contestable – which is not to say wrong.  Opposing judgments would also be contestable, as this is a murky area.  To give an example, Ed argues that, if you advocate highly graduated income tax rates, you get into a class war, zero-sum framework where you inevitably lose.  An opposing view would be that you need to weaken the grip of plutocracy at the top before you can achieve anything at the bottom.  I find it hard to tell who’s right.

Plus, there’s the question of why some increases in high-end taxes (such as from base-broadening or making the estate tax more effective) won’t generate the same political backfire as raising high-end rates.  Ed may have specific distinctions in mind, but it’s bound to be debatable.

Insofar as the aim is to avoid angering the rich, the book employs what I call the “Mongo” theory, derived from the movie Blazing Saddles.  Mongo is the gigantic brute who can punch out a horse, and who initially is working for the bad guys.  Gene Wilder tells the good guy sheriff, played by Cleavon Little, “Don’t shoot Mongo – it only makes him angry.”  Likewise here, Ed fears that if you use steeply progressive rates to go after the super-rich, they will oppose the rest of your agenda.  But what if they’ll oppose it anyway?

In the movie, the sheriff tricks Mongo with an exploding Candygram, and Mongo then changes sides.  I’m not sure how we can exploit that insight here.  But leaving the very top alone may do less to placate the opposition, than to leave hostile forces still in control of our political and economic system.

In sum, I agree with Ed that addressing low-end inequality depends much more on revenue adequacy and spending levels than on tax rate progressivity at the top.  But there are distinct reasons for addressing inequality at the top, not just the bottom.  And, as a matter of morals, rhetoric, and political economy, it is hard to be sure whether addressing the two kinds of inequality is more a case of substitution – you can only do one, at most, as Ed believes – or of complementarity, where they are best seen as parts of the same enterprise.

A concern for the 99.9 percent?

According to a recent paper posted by Emmanuel Saez and Gabriel Zucman, "the rise of wealth inequality [in the U.S. in recent decades] is almost entirely due to the rise of the top 0.1% wealth share, from 7% in 1979 to 22% in 2012."

Saez presented this paper yesterday (Wednesday) at the University of British Columbia in Vancouver.  I was actually in Vancouver at the start of the day, by reason of my having presented my Piketty paper (coauthored with Joe Bankman) on Monday, but a change to my flight time prevented me from attending the session.

Here are the slides for my talk from my prior presentation of the paper at Virginia - all that changed in the interim was the title page.  And the photo here was taken right after the talk - I am only actually, not figuratively, backed up against a fence.

World Series note

I was rooting for the Royals, but obviously had to admire Bumgarner's performance.  (Plus, extra bonus points from me because he's left-handed.)

The interesting thing was that he appeared to realize, within a few batters, that he simply didn't have his usual command or velocity, so he adapted.  Rather than throwing nothing but strike after strike (to all four corners of the strike zone), he kept on moving the ball around, but frequently missed the strike zone on purpose - especially high.  The Royals, knowing his usual style by now and presumably over-anxious as well, couldn't adapt and kept swinging at pitches a foot out of the strike zone.

Avi-Yonah reviews Kleinbard

Speaking of Chicago-style legal writing, at least in the sense of frequency as opposed to scope of enterprise, Reuven Avi-Yonah has posted a very short book review of Ed Kleinbard's We Are Better Than This.

The style, as in Avi-Yonah's book review a few months back of my Fixing U.S. International Taxation, is to say, in 6 pages or less: "The author says ABC and DEF.  I agree with ABC but disagree with DEF.  Therefore, the author is to be commended for saying ABC, but criticized for saying DEF."

Actually, in my case, I don't think there was an ABC - just a DEF, but, as I noted at the time, we are all entitled to our own opinions.

In Kleinbard's case, Avi-Yonah defines "ABC" as being concerned about the overall progressivity of the fiscal system but not being too concerned about the super-rich.  This matches Avi-Yonah's views.  In the abstract, Avi-Yonah includes an odd putdown of Thomas Piketty for having an "obsession" with taxing the rich.  The only follow-through in the text of the article is a statement that an "obsessive focus" with raising top marginal tax rates is "misguided," since historical data from Elliott Brownlee suggest that we have not, as a historical matter, actually redistributed more from the top when we had higher (but generally more porous) top income tax rates.  I rather think there is more one could say on this topic.

"DEF," for Avi-Yonah in his review of Kleinbard, is not adopting Avi-Yonah's proposals - in particular, a VAT.  The book review does not explore what might be the similarities and differences between a VAT on the one hand, and Kleinbard's proposing to lift the annual earnings cap on the Social Security tax, on the other hand.  Clearly (and needless to say), these two are very different proposals in quite a few dimensions.  Yet there is enough general economic similarity between them - since a wage tax can resemble a consumption tax, when both are operating prospectively (and subject to tax rate differences, important administrative details that affect their reach, etc.) - that addressing it wouldn't have been out of place, at least in a more ambitious book review effort.

In Avi-Yonah's review of my book, although I tried at the time to put this delicately, it was not entirely clear that he had actually read it before writing his review.  For example, the review found it  surprising that Fixing U.S. International Taxation ostensibly hadn't discussed "national neutrality."  In fact, however, this had actually been a main subject of my book's chapter four, although I hadn't specifically mentioned my extensively discussing it in either the introductory chapter or the conclusion.

Then again, you know the old joke in which a writer says: "I never read the books I am reviewing.  I fear it should prejudice me."

As noted in an earlier post here, I'll be commenting on Kleinbard's book at an NYU book event later this week, and I will probably then post my comments here.  For me, ABC is most of the book, but DEF is the fact that I'm more concerned about rising high-end wage and wealth inequality than Ed is.  One thing I'll discuss, however, is that I recognize reasonable people can disagree about this.

UPDATE: It is fair to note here that Reuven Avi-Yonah takes exception to the suggestion about how carefully (or not) he read my book.  He regards it as an attack on his integrity, which goes beyond any suggestion that I meant to make, and I apologize insofar as it can be taken that way.

"Are you a Chicago-style (Quantity) or a Harvard-style (Quality) scholar?" - I try to be both at the same time

The other day, the TaxProf Blog linked to an Orin Kerr blogpost rightly noting two distinct styles in legal academia: the Chicago style, which involves writing a lot, and the Harvard style, which involves trying to make fewer but more significant, comprehensive, and well-thought-through statements.

A blog with regular entries, like this one, is clearly a Chicago-style enterprise.

But in my academic writing, I try to be both at the same time: closer to Chicago than Harvard frequency, but (apart from a few quick commissioned pieces and such) with the aim of putting more into each project than the Chicago approach deems necessary.

They're not happy

One argument we sometimes hear concerning U.S. international taxation is that, whereas the current U.S. system is "out of step" with world norms, other major OECD nations have figured out what to do.  Just enact a territorial system, exempting foreign source active business income, perhaps with some moderate anti-tax haven rules, and you're done / good to go / insert bland bromide of choice.

One good thing about these other systems, as I emphasize in my book, is that adopting territoriality happens to rid you of both deferral and the foreign tax credit - but not because the tax rate on designated foreign source income.  You can have a positive rate (preferably low for a bunch of other reasons) at that margin and be "full worldwide" in the sense of taxing foreign source income, at whatever rate you do, immediately and with foreign taxes only being actually or implicitly deductible.  (Anti-tax haven rules, however, may effectively make them worse than deductible, a move that might itself have good rationales, as I discuss in the book.)

Anyway, back from the detour to the main point.  If everyone else has gotten it right, and they are now doing so great, why aren't they happy?  The whole OECD / BEPS (base erosion and profit-shifting) issue shows that they do not think they have gotten it right.  Note that a zero rate for foreign source income does indeed increase the temptation for profit-shifting, even relative to the dysfunctional U.S. system (in which resident multinationals with billions stashed abroad may at least find that this reduces the appeal of further income-shifting).

One answer I've heard to this point is that they are only unhappy about income-shifting by foreign multinationals, not their own (e.g., Starbucks in the UK, since it isn't a UK company).  But even if this is true of the domestic politics, try finding an economist who will agree that a "national champions" strategy actually makes sense.

A second answer I've heard is that countries like to let foreign multinationals do some income-shifting, so that they will be more interested in inbound investment.  An example might be the U.S. having no qualms about Toyota using debt to strip the income out of its U.S. plants, since this permits them to invest here without actually facing our 35% statutory rate on much of the profits they derive from U.S. production.  They can only do this successfully because they aren't a U.S. company, and hence don't have to worry about generating taxable passive income via the interest outflows to foreign affiliates (or deduction disallowance against U.S. source income under our interest allocation rules).

The funny thing about this story is that it's the opposite of the first one.  Now we're told that countries want to tax foreign multinationals less than domestics, rather than more.

I do believe this story has some truth, however.  But what's happened in the BEPS controversy, is that the income-shifting has simply gone too far, from the standpoint of various countries including the U.S. (at least in the view of some people here).  In effect, I see the countries thinking: "We were fine with you lowering your effective tax rate from A to B, which is why we didn't enact rules to stop you, but instead you've raced far past that point and lowered them all the way to C, which is less than we think we can and should get from you on domestic economic activity."

This is not to say whether the countries are right or wrong about this, from the standpoint of domestic national welfare - clearly a tough judgment to make, and one that depends in part on your normative inputs.  But I do think it explains why they're not happy.  And if they're not happy, we shouldn't be so quick to conclude that they have made life easy for us by showing us how best to tax income from cross-border investment.

My remarks at this afternoon's Fordham session on corporate inversions

The panel today, which I mentioned in my previous blog post, was off the record, so I can't address any of the particulars of the session.  But here is the written version of my remarks there:

One of the hazards of being asked regularly to comment on things is that you start wanting to be known as a sage who has made great predictions in advance.  So you get football prognosticators who keep picking the upset special, on the view that no one will remember when they’re wrong, but that they’ll be able to crow about it when they’re finally right.

Insofar as I predicted something in this area, it definitely wasn’t the upset special.  If anything, it was more like predicting that the Mets wouldn’t make the playoffs this year.

And anyway, I didn’t specifically say that we’d be back in the inversion soup so soon after Congress addressed the issue in 2004 (if ten years later is indeed soon).  What I said, with a kind of confirmation from the current inversion controversy, is that a really crucial attribute, in assessing what sort of international tax regime the U.S. should have, is what I call the effective degree of our system’s corporate residence electivity.  If we attach potentially adverse tax consequences to being a U.S. company, then it is important to know how avoidable that status is, or isn’t.

There are multiple margins at which you need to think about corporate residence electivity.  One involves new incorporations, and the extent to which tax considerations affect their occurring in the U.S. rather than abroad.  A second margin involves existing companies, both U.S. & foreign, and the question of which of them are the ones to issue new equity and/or make overseas investments.  And inversions involve a third margin: changing the corporate residence of the company at the top of an existing multinational group, as when a U.S. multinational becomes a foreign one.

When I was doing research for an NYU Tillinghast Lecture discussing corporate residence electivity that I delivered in 2010, I was surprised to hear from leading New York practitioners that, even just for new incorporations, effective electivity appeared to be lower than I had expected.  That is, while they typically told their clients to incorporate abroad for tax reasons, they often didn’t win these arguments.  Data about new incorporations actually seem to bear this out (there’s a paper, for example, by Eric Allen and Susan Morse).  But I thought that corporate residence electivity was likely to rise over time, with adverse long-term implications for the extent to which we can benefit from following policies that seek to impose distinctive tax burdens on U.S., as compared to foreign, multinationals.

At the time of my Tillinghast lecture, the pre-2004 inversion fever had abated, because those deals were generally self-inversions with zero economic substance, making them easy to address legislatively.  What we have now are deals with some economic substance, although often very strong tax planning considerations as well, making the design of rules that will block at least some of them, if that’s what you want to do, more challenging than it had been in 2004.

There are several ways we could address inversions like the ones that we are seeing today, involving actual mergers between foreign and U.S. companies that are not pure cases of a minnow swallowing a whale.  One is just to let them happen.  Another is to change the rules by requiring somewhat more economic substance than we do under current law.  A third, emphasized by the Treasury in recently issued regulations, is to reduce the expected tax advantages of these deals.  And a fourth is more generally to address the differences in U.S. tax treatment of U.S.-headed, as compared to non-U.S.-headed, multinationals.

Before saying more about that, I want to address two half-truths that purport to explain why U.S. companies may engage in these deals.

According to the first half-truth: “U.S. companies want to invert because the U.S. tax rate is just too high.” 

Now, it’s true that the U.S. corporate tax has a 35 percent statutory rate, even disregarding state-level corporate income taxes, and that peer countries have lower statutory rates.  But first, the average or effective tax rate matters more for many taxpayer decisions than the statutory rate applying at the margin, and U.S. companies’ overall effective rates do not appear to be out-of-line with those that foreign companies pay.

Second, the U.S. source income of foreign as well as U.S. companies is, at least on its face, generally taxable by us at 35 percent.  If that rate is too high, this goes more to the domestic corporate tax rate question than to inversion issues.

So why isn’t it wholly false to say “U.S. companies want to invert because the rate is too high,” instead of the clearly true statement: “Companies will be more interested in shifting their investments and claimed profits abroad if our rate is high, than if it is low”?  The reason the first statement isn’t wholly false is that there actually is a practical link between inversion and the effective domestic tax rate.

A major reason why U.S. companies want to invert is the hope that this will make it easier for them to reduce reported U.S. source taxable income, even if their true economic activities around the world remain the same.  This reflects what I’d call existing anti-base erosion features of the U.S. international tax rules – involving, for example, interest allocation and subpart F.  These rules, at least when they’re working effectively, can make it harder for U.S. companies than foreign ones to lower their U.S. tax bills through such planning steps as assigning lots of debt, including intercompany debt, to the U.S. affiliates in a global group. 

The second half-truth about inversions goes as follows: “U.S. companies want to invert because we, unlike most other countries, tax our resident companies’ foreign source income.”  Well, perhaps this is even a two-thirds truth.  But it does require amplification and correction, potentially changing its apparent implications a bit, if we actually want to understand it.

Now it’s formally true that we have a “worldwide” system, in which U.S. companies’ foreign source income, even if earned through foreign subsidiaries, is eventually supposed to be taxable here.  Most of our peer countries have territorial systems, in which at least active business income that’s earned abroad is domestically exempt, albeit potentially subject to the reach of anti-tax haven rules.

For three particular reasons, however, the statement can misleading if one doesn’t say a bit more about it.

First, we don’t do a great job of taxing U.S. companies’ officially reported foreign source income.  More than $2 trillion of that income is currently reported for accounting purposes as “permanently reinvested abroad” – which means that the companies have successfully argued to their auditors that they will NEVER have to pay the U.S. repatriation tax.  The reason those companies may be interested in inverting is to make it easier for themselves to access the funds that they have stashed abroad, without as much concern about triggering a taxable U.S. repatriation.  This can reduce their tax planning costs even if they would never have paid the U.S. tax anyway.  Now, this is potentially a pro-taxpayer point, since no one wins except for the lawyers when the companies incur extra tax planning costs, but it does show that we’re not overtaxing as such.  The conclusion might be, not that we are taxing U.S. companies’ foreign source income too much, but that we are doing it the wrong way.

Second, a lot of the foreign source income on which U.S. companies want to avoid paying U.S. tax may actually, as an economic matter, have been earned here.  Again, this goes to the U.S. base erosion and profit-shifting opportunities that are greater here for foreign than U.S. multinationals.  Now, this does mean that the U.S. companies can truthfully say that they are trying to put themselves on more of a par with their foreign rivals, although the issue here is actually U.S. rather than foreign investment.  But we may not be entirely happy about it in either case.

Third, some of the motivation for inversions relates to the past, not the future.  Suppose you are a company with $10 billion of foreign earnings.  If you repatriated the funds today, you would pay $3.5 billion of U.S. tax on this income, minus the amount of any foreign tax credits (which may be trivial if you have stashed most of the profits in tax havens).  The only reason the U.S. doesn’t make you pay that tax is that we have deferral, permitting you to postpone the payment until you actually repatriate the funds.  Deferral is a realization rule.

In theory, deferral – unlike realization in some other cases – doesn’t reduce the present value of your U.S. tax liability.  After all, the amount that’s waiting to be repatriated presumably is growing annually at your after-foreign tax rate of return.  Thus, in terms of my earlier example, in theory you’ll eventually pay $3.5 billion plus interest on earnings of $10 billion plus interest, eliminating the present value benefit of deferral.  So, again in theory, allowing deferral to U.S. companies is like granting them a loan – and not an interest-free loan, but a true loan with a floating market rate that automatically depends on actual rates of return.

As soon as you invert, however, this may change.  Even if the U.S. company’s prior foreign subsidiaries remain below it on the ownership chain, with the new foreign parent standing above both, it may now become much easier in practice to avoid ever paying the U.S. repatriation tax.  You may have more ways than you had pre-inversion to actually access the funds while you sit and wait for the next corporate tax rate cut, or foreign dividend tax holiday, or the enactment by Congress of a territorial system, all of which might potentially reduce or even eliminate the deferred tax bill.

So allowing U.S. companies to invert without triggering realization of the deferred gain is a bit like allowing them to increase the likelihood of default on a loan.  This is why there has been some talk of an exit tax – a deemed taxable repatriation – when U.S. companies invert, even if the U.S. company’s foreign subsidiaries still stand below it in the ownership chain.

“Exit tax” is an ugly-sounding term.  It brings to mind Soviet-era harassment of dissidents.  So let me propose a term that sounds better and yet is metaphorically accurate: loan repayment acceleration.  When you own your home subject to a mortgage, and you sell the house and buy a new one, they generally make you repay the loan.  I think we should consider applying such an approach to deferral, via deemed repatriations when U.S. companies expatriate, on the view that the loan’s “credit risk” – i.e., the chance that it will never be repaid, has likely increased.  This doesn’t mean that the special tax rate here should be as high as 35 percent, even in the absence of foreign tax credits – but perhaps a zero tax rate on deemed repatriations when you invert, by reason of not deeming them at all, is too low.

Now, companies that invert are typically looking forward as well as back.  They want to ease profit-shifting and their access to foreign earnings for the future, not just retroactively for the earnings that already are stashed abroad.  So the tax motivations for a given deal are likely to go beyond easing the company’s full access to permanently reinvested earnings.

Given that issue, I would like to see us move in the direction of adopting what I call more residence-neutral rules for determining the source of income – and in substance, not just formally, although this is tricky when the methods used to address base erosion include treating resident companies’ claimed foreign source income as currently taxable, rather than re-defining it as actually U.S. source.

I also agree that we have to accept that we are living in a world in which corporate residence electivity, genuine capital mobility, and inevitable source tax reporting flexibility mean that it’s going to be growing ever harder to hold the line.  Indeed, some retreat from relying on entity-level corporate income taxes, and income taxes more generally, is surely in order – perhaps even a large retreat, depending on what else is on the tax reform table.  But that requires a much bigger conversation, and in the interim I believe that we should take some steps to hold the line a bit longer, both on the corporate inversions front and with regard to base erosion and profit-shifting generally.

Even if we are in retreat with regard to taxing corporate income at the entity level, there is a difference between an orderly withdrawal and a rout.  Making it too easy to escape the U.S. tax net, especially when that means that you can get a kind of retroactive windfall gain from reducing the expected tax burden on foreign earnings that you accumulated in the past, would in my view make the retreat too much of a rout.

Yet another upcoming event at which I'll be a speaker

On Thursday, October 30, from 6:30 to 8:30 pm, NYU Law School will be hosting a book event for Ed Kleinbard's We Are Better Than This: How Government should Spend Our Money.  At this session, Ed will speak for a while, then Linda Sugin and I will both offer, say, 10 minutes each of commentary, followed by open discussion in the room.  A link for the event that includes a further registration link is available here.

The book is great - important, convincing, highly informative, entertaining, both erudite and sure-footed on a wide range of topics, and a major public service.  I'll make more particular comments at the session, and then post something about them here.

Roundtable discussion on corporate inversions

This Thursday, October 23, from 12 to 2 pm at the Fordham School of Law, I will be participating in a roundtable discussion on tax inversions.  Details are available here, and you can register for free on-line.

The other panelists will be David Shakow (a fellow academic, although he is also in practice), John Samuels (from General Electic), Paul Oosterhuis (from Skadden Arps), and Harry Grubert (from the Treasury Department).  These individuals are all aptly described as heavy hitters, with plenty of Washington connections and Treasury or Capital Hill experience in addition to field knowledge.

I might possibly be one of the more pro-government and anti-inversion of the panelists (so far as allowing the deals to have full intended effects is concerned), but I am certainly not doctrinaire, and it's possible that others will say things I'm not expecting.

I'll post something here afterwards, perhaps including a rough version or outline of my remarks.

New project

I've been reluctant to mention this here, for fear of jinxing a still inchoate new thing, but I appear to be moving towards (and into) a new book project, inspired by one of the small sidelights in the Piketty article that I coauthored with Joe Bankman (and that we will soon be posting on SSRN).

There's a short section of that article, representing one of my parts of this true joint project, in which we discuss Piketty's much-noted discussion of literature to help illuminate past rentier societies that he believes may tell us something about the future.  In particular, he discusses Austen and Balzac.  We quibble with his use of Balzac (who describes not just rentier society but more particularly the struggles of would-be arrivistes), and then briefly note other 19th and 20th century literature that is also about adventurers and arrivistes, before briefly commenting on Wodehouse's Bertie Wooster, who is the true comic embodiment of rentiers' decline amid the mid-20th century Great Easing.

This may, I am hoping, end up inspiring a book that, if it meets its objectives, will be fun both to write and to read, discussing the wealthy and the arrivistes, along with underlying social attitudes about both and their evolution over time, in fiction of my choice over the last two-plus centuries (e.g., Austen, Balzac, and Wodehouse, among others).  I'll be looking at the fictional worlds in these books, not in any close detail at the actual contemporaneous societies, and with no presumption that the books I choose to write about are the "right" ones in any sense other than that I personally find them fun and interesting (and usually, though not always, of high literary merit).

More travel and recent travel

I will be reprising my talk on the Piketty book in a talk at the University of British Columbia Law School in Vancouver on Monday, October 27.  Details here.

Good session in Charlottesville last Thursday when I last presented this paper, although the air travel aspect was not as much fun.  (Five-hour delay heading out, including a flight that returned to NYC after many minutes in the air, due to mechanical problems; one-hour delay heading back.)

The main comments I got in Virginia concerned the likely virtues of spelling out, a bit more thoroughly than the current draft does, the implications for tax instrument design of (a) different normative concerns about rising high-end inequality, and (b) different sources of rising wage inequality that one might to address, if one modifies Piketty's assumption that r > g is doing most of the work.

I also got an interesting sidebar comment on my blog, generally praising it but saying that, when I discuss politics, I am (a) too ungenerous to Republicans, (b) at least implicitly too generous to Democrats who often are equally in bed with plutocracy (I say "implicitly" because I don't actually praise them much here), and (c) insufficiently mindful of the sharp divides within the Republican camp - as shown by the populist and anti-rent-seeking passions that helped to retire Eric Cantor to a life where he will have to accept multimillion-dollar paychecks in lieu of being an inside player.  Point taken; I will try to do better.

Bill Gates on Piketty

As promised in an earlier post, here are some thoughts on Bill Gates' recent blog post on Piketty.

By the way, I would see no reason to take notice of this just because he's Bill Gates.  That does indeed in a way automatically make it of interest, because it's a famous multi-billionaire's response to a book about rising high-end inequality.  But I have too many conflicting demands on my time to bother noticing it here based on that fact alone.

Rather, the reason I comment on it here is that, in addition to that, the post actually is intelligent and interesting.

Early on, Gates says: "I very much agree with Piketty that:

o        High levels of inequality are a problem—messing up economic incentives, tilting democracies in favor of powerful interests, and undercutting the ideal that all people are created equal.

o        Capitalism does not self-correct toward greater equality—that is, excess wealth concentration can have a snowball effect if left unchecked.

o        Governments can play a constructive role in offsetting the snowballing tendencies if and when they choose to do so.

"To be clear, when I say that high levels of inequality are a problem, I don’t want to imply that the world is getting worse. In fact, thanks to the rise of the middle class in countries like China, Mexico, Colombia, Brazil, and Thailand, the world as a whole is actually becoming more egalitarian, and that positive global trend is likely to continue.

"But extreme inequality should not be ignored—or worse, celebrated as a sign that we have a high-performing economy and healthy society. Yes, some level of inequality is built in to capitalism. As Piketty argues, it is inherent to the system. The question is, what level of inequality is acceptable? And when does inequality start doing more harm than good? That’s something we should have a public discussion about, and it’s great that Piketty helped advance that discussion in such a serious way."

While I wholly agree with this, admittedly what it makes it especially noteworthy is that Gates is saying it.  How many others whose economic success approaches his would?

Gates then makes the following points, to each of which I respond after noting it:

1) Other economists have questioned the central importance that Piketty attaches to "r > g" in explaining rising high-end inequality.  That is certainly true.

2) Do "different types of capital" have "different social utility"?  For example, if A uses his capital to build his business, B gives all of her capital away to charity, and C uses his for high-end consumer goods, such as a yacht and a private plane, then the first two are delivering greater value to the society than the third.

No surprise that Gates should want to value charitable giving.  My understanding of his charitable activity is that it actually does, at least very frequently, have great social value.  But I wonder how widely applicable the conclusion he draws is.  Super-rich people who choose to add their money to Harvard's $36 billion endowment might as well throw it in the ocean instead, unless we see general merit to investing money in hedge funds. 

His distinction between saving and consuming could also be questioned.  The issue is really one of net positive externalities, if any, from the one choice as compared to the other.

3) Wealth accumulation decays as well as rises.  Half of the people on the Forbes 400 list of the wealthiest Americans made it to the top themselves.  We aren't dominated by people who bought huge land parcels and have been collecting rents ever since.  You get savers but also wastrels, and also wrenching economic change that creates new fortunes that outstrip old ones.

Here again I agree, but the topic raised requires more discussion than Piketty, Gates, or for that matter Bankman and I in our recent article have given it.  The question here, a subpart of what if anything is wrong with high-end inequality, concerns the relevance of turnover as to the particular families that are extremely rich.  In a simple optimal income tax model, it doesn't matter, but in the real world it might.  I think there is major room for work on how to think about the impact of high-end inequality under different circumstances.

4) Piketty has over-focused on wealth and income data relative to consumption.  Gates also notes that income data can be misleading for lifecycle reasons, e.g., if one is a medical student with low income and high loans but one expects a million-dollar surgeon in a few years.  Gates argues that "consumption data may be even more important [than wealth and income data] for understanding human welfare.  At a minimum it shows a different - and generally rosier - picture from the one Piketty paints."

Yes, I agree that income data can be misleading for lifecycle reasons.  Note that, for wealth data, the related problem is simply our inability to measure human capital and include it as wealth (which at least in many senses it is).  But the problem with consumption data is that it ignores unspent wealth that one can consume whenever one likes.  Suppose I have $1 billion but spend "only" $1 million on consumption this year.  I am better off than someone who spends $1 million and has nothing left.  In addition, given the choice I made, presumably reflecting my preferences, I am presumably better-off in a long-term sense than if I had consumed the entire $1 billion this year.  

A consumption measure misses this. By the way, that does NOT establish that a consumption tax fails to measure wellbeing on an appropriate basis.  After all, while it only taxes me this year on the $1 million that I actually spend, the present value of the deferred liability on the rest of the $1 billion is the same as if I had spent it this year (assuming constant perpetual consumption tax rates, etc.).  So the consumption tax doesn't get it wrong, at least in the trivial sense that seems indicated by looking just at current year liability, because one has to consider the deferred tax.  But if one is looking at current year consumption totals to judge how well off people are, it is not obvious how one could similarly be taking into account the deferred consumption.

5) Gates favors moving to a progressive consumption tax plus an estate tax.  Here I may be fairly substantially in accord with him.  I have written in the past about the case for progressive consumption taxation, and while I've increasingly grown concerned that it wouldn't in practice do enough about high-end wealth accumulation, I have been coming to think that, in principle - ignoring political economy problems! - taxing inter vivos donative transfers to other individuals plus bequests could take care of the rest.

6) Finally, Gates puts in a last word in favor of philanthropy, and notes that he and his wife are keen on its benefits while uneasy about the transmission of dynastic wealth.  Here I'd say that it depends on what sort of philanthropy is going on.  Private foundations in which the dynasts retain control probably are not adequate here, although admittedly this is not a subject that I know much about.  But also, when very rich people decide where the money should go, this is not always for the best.  You get, for example, charities for the rich (Harvard, the Metropolitan Opera, etc.) that may not be worth anything near the implicit budgetary cost of excusing application of the high tax rate on bequests that Gates suggests should otherwise be levied.

Overall, I'm quite impressed by this contribution to the debate even though I don't agree with all of it.

Slides for my talk at the U Va Law School concerning Piketty

Yesterday at the Law and Economics Colloquium at University of Virginia Law School, I presented the article on Piketty, coauthored with Joe Bankman, that we earlier had presented at the NYU-UCLA Symposium.  This time around, as a solo act, I revised the slides, which you can see here, and talked extemporaneously rather than having prepared remarks like those which I had previously posted here.

On Slide 3, standing at the far right, you can see the alter ego or stand-in for Joe and myself, as we thought of it when writing the paper.

Tax Notes article on the Boston College conference on reforming entity taxation

In my last post, I linked to Amy Elliott's Tax Notes article from this past Monday, entitled "Academics Dismiss Corporate Tax Reform Consensus as Superficial."  But for some readers it may behind a paywall.  So here are the parts most pertinent to the topic highlighted in the article title:

"Bipartisan talk of corporate tax reform is easy to come by in the halls of Congress, but it's merely talk, agreed a group of academics gathered in Newton, Massachusetts, on October 10.

"'The big consensus about corporate tax reform is really a superficial consensus,' said Daniel N. Shaviro of the New York University School of Law, speaking at a conference on entity taxation hosted by Boston College Law School and cosponsored by Tax Analysts. 'There's no obviously good way of doing it and that means that any proposal you put forth, . . . even if it would be an improvement, is going to have serious objections.'

"Harvard Law School professor Stephen E. Shay indicated he has lost hope for major tax reform in the near term. 'I don't view fundamental tax reform or any major piece of reform as remotely plausible for the next couple of years -- at least until some event-changing election,' he said. 'Any tax reform has to win a majority. The practical problem that we face today is we have -- unlike in [1986] -- a vastly more disparate set of objectives with respect to tax.'

"Shay added that the consensus that really needs to be built is between House and Senate Republicans. The party that controls the Senate 'is actually much less important for this issue than some people put credence on,' he said, adding that Congress is still struggling with the core structural problem presented by corporate tax reform: how to ameliorate its negative effect on owners of passthroughs.

….

"Brian Galle of Boston College Law School said he's not convinced that the passthrough model is the right way to tax corporate income. He said he thinks the U.S. tax system should increase the number of available rate structures and the nuance within those structures, providing for different rates for different kinds of business income.

"'The elasticity of salary can be very different from the elasticity of business income, [and] within business income, you can have very different elasticities between old-and-cold businesses,' entrepreneurial businesses, domestic versus foreign-owned businesses, and real-property-heavy businesses, Galle said.

Revenue-neutral tax reform 'is just another form of tax holiday,' Galle said, adding, 'It's locking in the fairly light burden that's resulting right now from a system that's been severely undermined by fairly abusive behavior in some cases.' He said that if Congress were to sign on to another revenue-neutral reform plan, 'it just tells industry that if they can undermine the next system and riddle that next system with holes, then they can clamor for another revenue-neutral deal.'"

A couple of quick comments in response to Galle's interesting points, which I didn't get a chance to say anything about at the session.  His first point about the elasticities of different types of income I agree with, except that it doesn't necessarily weigh against thinking that the passthrough model would be best if (counterfactually) it were feasible.  Rather, to me it suggests that, even when you are taxing individuals directly, the tax rate you want to apply may depend both on who it is and on what type of income it is.

His second point is a great one, and I think especially applicable to international taxation, in which the multinationals that have greatly reduced their tax burdens through aggressive planning might now be happy to lock in the end result by a different mechanism.  There is a legitimate issue of whether and how much their tax burdens, depending in part on elasticity, U.S. market power (or ability to coordinate effectively with other countries if this increases the collective market power that the cooperating governments can deploy).  But the fact that they have succeeded in lowering it so much does not establish that the right level is so low.  This is a problem for proponents of "burden-neutral" international tax reform, as much as for Congress if it wants to put on a 1986-style tax reform hat for the international area in particular.

Odds and ends

Today I head to Charlottesville, in order to present (tomorrow) the article on Piketty's Capital in the 21st Century that I recently coauthored with Joe Bankman, at the U Va Law School's law and economics seminar.  Joe and l will probably post the article on SSRN soon.  Later this week, when I'm back in NYC, I'll post my slides for the talk.

Bill Gates - yes, him - has posted a short piece responding to Piketty that, whether one agrees with it or not, is actually interesting and worth reading.  I may respond to it briefly on this blog when I get the chance.

Also,. Tax Notes published a short piece on Monday describing the conference at Boston College that I attended, addressing tax reform and entity taxation.  The piece's title, "Academics Dismiss Corporate Tax Reform Consensus as Superficial," accurately conveys not the point of view in my paper but what appeared to me to be a broader consensus in the room.  More on that to come, shortly as well.

Slides for my talk at the Boston College - Tax Analysts Conference on Reforming Entity Taxation

Last Friday, at the conference in Boston that I mentioned in my prior post, I presented a short (just under 10,000 words) paper entitled "Not So Fast? Evaluating the Case for 1986-Style Corporate Tax Reform."

Along with other papers from the conference, it should be appearing in Tax Notes within the next few weeks.  But you can click here to view a PDF version of the slides I used in presenting the paper.

Frontiers of quasi-tax fraud

Pleasant day at the Boston College - Tax Analysts conference yesterday; I'll post the slides from my talk in a couple of days, and perhaps post the paper on SSRN not long after that.  One nice thing about the "biz" is that you keep periodically seeing old friends and making new ones on the talks & conference circuit.

The conference had 3 sections.  The first, at which I spoke, was on corporate tax reform.  My paper expresses great skepticism about (though a hair short of outright opposition to) the mania among DC policymaker types these days for 1986-style corporate tax reform, via a cut in the rates that's financed by broadening the base but without otherwise significantly changing the existing US federal income tax system.  Although nothing like this view appears to be heard within the DC policymaker echo chambers, plenty of people at the conference were quite inclined to take a similar view.  It would be nice to think that I talked them into it, but in fact I got the sense that they already felt similarly about it.

The second session was on partnership taxation, and the third on international taxation.  Because I am so much more familiar with the latter, I found the former more eye-opening.

Talks and papers by Karen Burke, Andrea Monroe, and Greg Polsky suggested something that I gather is well-known in partnership tax circles, and that I must admit to finding a bit shocking.  Because (a) partnership tax rules are so complex that only a handful of people really understand them - perhaps a thousand across the entire country? - and (b) people at the IRS generally don't understand them, and (c) the audit rate for partnership tax returns is below 1%, compliance with partnership tax rules that are meant to block abusive tax planning that contradicts the actual tenor of the rules has pretty much completely collapsed.  Wildly unsupportable tax return positions, backed by the issuance of dishonest tax opinions or no tax opinions, are taken routinely, costing the US government billions of dollars per year.  These mainly involve (a) claiming capital gains treatment for what is clearly ordinary income under the existing rules (even taking as given the capital gains character of certain "carried interests" under existing law, (b) trumping up and specially allocating losses, without regard to economic substance type rules regarding transactions and allocations, and (c) similar game-playing to avoid income or gain recognition and/or assign it to the wrong people, including tax-indifferent parties.

The basic problem is that you have esoteric, complicated rules, understood by few and verging on never being audited, so that the lack of transparency means one can give dishonest and clearly false opinions that meet the standard of a "reporting position."  This is all taxpayers need if they are not publicly traded companies (which may need to meet "more likely than not" for accounting reasons).  And if you are a partnership expert, even if you understand the dishonesty of the opinions you are writing and signing, (a) there's no risk, (b) you wreck your career if you won't write these opinions and get large billings if you do, (c) everyone else is doing it, (d) the IRS isn't enforcing the rules anyway, so maybe you can persuade yourself that the rules don't actually mean what they clearly say?, and (e) even though the positions you endorse, at least to the "reporting position" level, are clearly wrong, they are not so wrong that you'd go to jail for tax fraud if it came to light.

Someone compared this to the Son-of-BOSS style scam tax shelter opinions of 10+ years ago, and said this means not much has really changed, despite people's congratulating themselves that the abusive tax shelter era is over.  So why couldn't people go to jail for this, as they did in Son-of-BOSS?  The answer is that, in Son-of-BOSS, they went to jail for fraudulently backdating documents, providing false information to the IRS, etc.  They didn't go to jail for the opinions themselves, which were ludicrously erroneous (I have read some, and even critiqued them as an expert witness in an administrative proceeding), because bad though the opinions were the author could pretend to just be stupid, wrong-headed, or dense - they weren't quite wrong enough to lead to a jail term, even if wrong enough (as many courts found) to suggest that clients could not in good faith rely on them.

This is certainly an area where a lot can be done.  And one of the panelists suggested that, whereas the IRS typically makes $10 in underpaid taxes per $1 spent on audits, here the yield would be far higher.  But it would take IRS resources, and might also risk complaint from members of Congress on behalf of well-connected taxpayers who have benefited from the quasi-fraud.

Another week, another conference

Later today I am flying to Boston to participate in a Boston College Law School - Tax Analysts conference (to be held tomorrow) on reforming entity taxation.  I will present a short (about 9,000 words) paper entitled "Not So Fast?  Evaluating the Case for 1986-Style Corporate Tax Reform," in which I argue that, essentially because the corporate tax is such a multifaceted mess, it's not incredibly clear how much we would improve things via the apparent consensus package in which the corporate rate would be lowered, and the revenue cost offset through income tax-style base-broadening, without significant broader tax reform.

I have slides for the talk that I will probably post early next week.  My article, along with all the rest for the conference, should be appearing in Tax Notes, perhaps some time in November.  I will also post the article on SSRN pre-publication, absent any objection from the conference organizers and Tax Analysts folks.

Next week I go to the University of Virginia Law School to present my paper (coauthored with Joe Bankman) responding to Piketty.  I'll post the slides afterwards - they and my remarks are different than those for the conference we just had at NYU Law School, although the paper is the same.

I'll also be presenting the Piketty paper in Vancouver at the end of October and again at USC in late November, and my paper on behavioral economics and retirement saving at the National Tax Association conference in Santa Fe in mid-November.

Article and video for last week's Piketty symposium at NYU

The NYU Law School website now has an article here describing last week's Piketty symposium.

It also contains video of all of the sessions. Scroll about three-quarters of the way down, and you can find the video for the talk that Joe Bankman and I gave.  Piketty's response to Wojciech Kopszuk and us is right below.

A couple of quotes from the article:

Stanford’s Joseph Bankman and NYU’s Daniel Shaviro were the day’s oxymoron: a comedic duo of welfarist tax scholars. But they were serious about their topic, praising Piketty’s critique of the undue moralizing of “ability” as an explanation for high-end wealth concentration and exploring the constitutionality of a national wealth tax in the United States. (Piketty’s response to the latter: “I realize that this is unconstitutional, but constitutions have been changed throughout history. That shouldn’t be the end of the discussion.”)

Later on Piketty is quoted, from a post-event interview with the article's writer, saying the following:

“By and large, the problem you run into when economists or law professors study inequality is that they’ve benefited from rising inequality. They’re not in the top 1 percent, but they’re surely in the top 2 or 3 percent. I’m not going to say that determines their entire view, but you can’t say it has no impact. That makes them generally positive about the US economy, how it rewards talent, and what they think of wages.”

Now now, not very nice of him, eh?  Actually, it's fine.  Indeed, I very much agree with what he says here, and so indicated in my talk.  Joe and I also make a similar point in our article.

UPDATE: Having watched the video of my remarks (listed under "Bankman," but I go first), I can only say: my gawd but I talk fast.  It's kind of different when you're doing it, rather than watching it.  But I think it can be followed aurally, and it's reasonably coherent because I wrote it out in advance.

Piketty's response to the Bankman-Shaviro paper

Points that he made in his comments included the following:

--While Bankman and I discuss the seeming gap between the book's approach and that of tax policy literatures such as optimal income taxation, his 2013 article, co-authored with Emmanuel Saez, addresses optimal capital taxation in light of the inequality issues.  But he sees only so much value in these sorts of mathematical workings out of underlying objectives.

--He sees a wealth tax as not a very radical idea given the widespread use, including by U.S. state and local governments, of real property taxes.  He doesn't see those taxes as meaningfully related to local amenities.  A real property tax becomes a wealth tax if you broaden it to all property and make it a tax on net rather than gross wealth.  But he seemed to agree that, given these differences, existing real property taxes are a very different instrument than wealth taxes.

--He favors moderate use of lots of different tax instruments, rather than primary reliance on just one.  E.g., given the shortcomings in practice of capital income taxes, inheritance taxes, and wealth taxes, why not have some of each rather than just one.  (David Gamage, who gave an NYU Tax Policy Colloquium paper this past year taking such a stance will no doubt be pleased to hear this.)

--As effectively a Rawlsian, his main normative concern is with the worst-off individuals, so he might not greatly object to extreme high-end inequality per se, except for its leading to capture of the political system by the wealthy, with the result that popular control is undermined and policy just serves their interests.

My remarks at the Piketty symposium today

This is a hard paper to present.  I’m tempted to say: Why don’t you all just spend 20 minutes looking through it yourself, and then we’d be happy to take questions.  But instead Joe [Bankman] and I will offer a few highlights.

The paper’s motivation is that we were struck by the large intellectual gap between Capital in the 21^st Century and a bunch of literatures that influence our work – for example, those on optimal income taxation, fundamental tax reform, and a lot of mainstream public economics.  Obviously, Thomas knows this literature well.  But he has written a popular book, and one that’s engaged in a very different sort of project than most of the literature.  Plus, he objects to certain of the literature’s standards and practices.

We were both bothered and stimulated by the disconnect.  We aim to adjudicate it to a degree, and to examine how each undermines or enriches the other.  But this makes the paper hard to present.  Just discussing any one aspect among many – say, the theory of lifecycle saving, or “ability” in the optimal income tax literature – could take 20 minutes all by itself.

So, what’s the bottom line?  Let’s start with the tax policy literature.  Logically and analytically, it does fine, at least granting assumptions that are useful and reasonable within particular realms.  And that’s important.

You know the old joke, told about Ford’s Theater in April 1865.  “Other than that, Mrs. Lincoln, how did you like the play?”  Well, I for one actually care a lot about the play.

But the book suggests that often important things have been missed, and simplifying assumptions treated as if they were entirely true.  For example, if you over-focus on lifecycle saving relative to bequests, or if you model utility as purely a function of own consumption – leaving declining marginal utility as the only welfare-based motivation for concern about inequality – then you may miss important things.

And suppose the book is correct in attributing rising high-end inequality mainly to the excess of r over g.  If it’s correct, high saving and/or high returns to saving and/or bequests have negative distributional externalities that are important yet have been ignored.

Word choice can tell you a lot.  Consider the terms “saving” as compared to “capital.”  The tax policy literature tends to talk about “saving,” which is a verbal noun, denoting the aftermath of a choice.  It uses “capital” mainly as an adjective – as in capital income, capital asset, or capital gains, though with the all-too-telling exception of “human capital.”  Thomas’ book, of course, is about “capital,” specifically other than human capital, which he objects to amalgamating with the rest.  And the book treats capital not just as a thing, but also as the marker for a social group, as in “capital versus labor.”  In the tax policy literature, by contrast, we typically discuss “high-earners versus low-earners.”

The savings literature is fundamentally ex ante and about individuals’ preferences and decisions.  Such a perspective is important, but it can lead to missing the forest for the trees, and also to unconscious normative identification with savers’ particular interests.  This is not a surprise, perhaps – prominent academics are often pretty well-heeled, even if not all the way at the top.

Capital in the 21^st Century, by contrast, is fundamentally ex post, emphasizing the measurement of realized outcomes.  But risk, among other underlying components, is hiding behind the scenes.  Thus, while the years 1815 to 1900 were a lot better for capital than 1914 to 1970, who knows how it would turn out in the “What If?” scenario where you could turn back the clock and let history unfold again.

An ex post approach is also valuable, but can result in amalgamating things that are distinct, and in ignoring important nuances that are relevant to choices between policy instruments.  Consider the tax policy literature’s decomposition of r into multiple elements, including the “normal” risk-free return that surely is below g, even if it’s more than, say, the 3-month rate for U.S. government bonds.  There’s also the risk element, including both the expected risk premium, if any, and the actual risky outcome.

Ex ante risk can affect tax incidence, since investors can adjust it in light of the tax regime.  In particular, the impact of a capital income tax on risk can be addressed by choosing investment positions in light of the tax treatment of gains and losses.  In effect, you can undo at least some of the automatic insurance that results from taxing winners more than losers.

Now consider the tax policy literature on gifts.  Henry Simons famously endorsed double-taxing them, based on their commonly representing consumption by both the donor and the donee.  The logic is strong, in terms of measuring individual welfare, whether or not you accept the conclusion.  Louis Kaplow helps explain why we might want to subsidize gifts, relative to Simons’ baseline, given the altruistic externality when a donor makes double consumption possible.  But you may want a high tax on gifts and bequests if they have big negative distributional externalities, and if you don’t assign much weight to high-end altruistic externalities.

I realize I’m being very summary and cursory here, especially for the students in the audience.  But again, the paper offers a fuller discussion.

One last set of points before I pass the baton to Joe.  At least in the U.S., as the book agrees, the main driver of rising high-end inequality in recent years has not been the relationship between r and g.  Instead, it has been rising wage inequality, suggesting a central role for human capital, or what we call “ability” with deliberate scare quotes.

Now, even in the 19^th Century literature that the book so delightfully deploys, we see evidence of ability’s important role.  Is Pere Goriot about a rentier society?  Well, certainly yes to a degree.  But it’s also one of many classic 19^th century novels that focuses on an adventurer or arriviste who aims at the highest social heights despite starting out with very little.  Yes, Rastignac accepts Vautrin’s advice against wasting his time with law studies – you see, law firm hiring was really bad back then – but that’s just because the real action was in the salons and opera houses.

I wish I could discuss at length our paper’s twentieth century updating of the rentiers versus adventurers literature to include P.G. Wodehouse and Bertie Wooster.  Bertie, of course, is the rentier par excellence, turned object of mockery, from the period of the Great Easing.  Surely his tribulations are more evocative than any economic study in showing what had and hadn’t happened to rentiers since the turn of the century.  But I suppose I should move on.

We like the book’s critique of self-satisfied moralizing about “ability.”  High-earners often like to think that it means IQ or character or honest toil or helping humanity.  But the ability to generate high earnings is purely about the relationship between a given individual and the environment in which she happens to find herself.  If enough of the people in a society are vicious racists, then having white skin may increase one’s potential earnings.  Math skills help more in some environments, resistance to dysentery in others.

There’s an analogy to evolution.  No set of genes is fit in the abstract – it depends on the environment.  And to moralize evolution’s winners would be silly.  Now, it’s true that economic competition with perfect markets and the invisible hand is somewhat more benign than nature red in tooth and claw.  But that merely supports an efficiency argument against too much downward redistribution.  And even that argument depends on the relationship between high-end wages and marginal social productivity.

We agree with Thomas that high-end wages often don’t reflect marginal social productivity.  But while the book attributes this mainly to corporate governance problems, the really huge salaries of recent years have often been earned at arm’s length – whether we’re talking about hedge fund managers, or other entrepreneurial free agents in the financial sector, or the founders of a wildly successful new business venture.  The gap between high-end wages and social value created is often less about corporate governance problems than about the distinction between marginal private productivity and marginal social productivity, as in the case of rent-seeking and heads-we-win, tails-you-lose bets in the financial sector.

Okay, over to Joe.

Day-long workshop with Thomas Piketty at NYU

Just an hour ago here at NYU, we completed this year's NYU-UCLA tax policy symposium, featuring Thomas Piketty and his best-selling book Capital in the Twenty-First Century.  It felt like a success, in keeping with our high expectations.

All five of the papers, and a response by Piketty, will be featured in the Tax Law Review next year.  The first, by Wojciech Kopczuk, raised issues that have been prominent in economists’ responses to Piketty, regarding such issues as the uncertainty of whether wealth inequality has increased as much as income inequality and the difficulty of projecting future trends.

My paper, with Joe Bankman, discussed what we see as the gap between the standard tax policy literature (ranging from optimal income taxation, to welfare economics, to the fundamental tax literature, to various sectors of public economics) and the analysis in the book, and what light this gap might shed on each.  I will post my portion of our joint talk shortly, since I wrote it out in advance.

Next came a paper by Gregory Davis, discussing English data from as far back as the 1200s (!) that seem to conflict with the inheritance story that Piketty tells.  Then, a political science paper by Suzanne Mettler discussing why the U.S. political system has responded so disparately over time to redistributive policy aims.  Last, a paper by Liam Murphy discussing alternative philosophical grounds for objecting (or not) to high-end inequality, and grouping Piketty with Rawls and Dworkin, the latter for his embrace of meritocracy to the extent of thinking that people who freely choose well “deserve” to do better than those who freely choose poorly. (Hence a view of rentiers as less deserving than the self-made rich, a distinction that I wouldn't personally embrace absent consequentialist reasons for the distinction.)

Large and distinguished audience even in the afternoon, broad-based participation, full engagement from a very well-known author who chose to spend the day with us, truly inter-disciplinary dialogue.  So the thing went well.