Saturday, November 15, 2014

National Tax Association Annual meeting in Santa Fe, part two

Okay, more on the general sessions at this year’s National Tax Association Annual Meeting.  The Day 2 luncheon speaker was Mark Masur, Assistant Secretary of the Treasury for Tax Policy.  He mainly discussed the prospects for business tax reform in the next Congress.  I was struck by how measured and realistic he was concerning (a) the merits of the reform, which even if net-positive are not exactly a slam dunk, home run, or whatever sports metaphor denoting a huge triumph you happen to prefer, and (b) the prospects for enactment of the reform in the near term, which even a confirmed optimist might rate no higher than, say, 10 to 15 percent  He views the playout of the current issue in Congress regarding extension of expiring tax benefits as likely to provide instructive information regarding how the big players in Congress are likely to be interacting over the next two years.  Obviously, finding a mutually acceptable approach to the expiring tax benefits (including, for example, regarding whether and how they might be financed) ought to be a great deal easier politically than working out business tax reform (which I myself view as a non-starter anyway, unless Congress decides to accept significantly reduced tax revenues).  So if they can’t even do the easier task without a lot of sturm und drang, the significance will be easy to discern.

Next up, in terms of general sessions, was a colloquy concerning three different approaches to business tax reform / taxing capital income, each considerably more ambitious than just broadening the base (from an income tax perspective) and cutting the corporate rate.  Eric Toder, Alan Auerbach, and Ed Kleinbard each discussed their particular reform proposals, after which the audience succeeded in its aim of prodding them to say what they thought was wrong with each other’s proposals.

Toder, along with Alan Viard, has proposed repealing the entity-level corporate income tax, which would be replaced with an individual-level tax on the accrual of gain and loss (without regard to realization) on shares of publicly traded corporate stock.  In other words, shareholders of publicly traded companies would be taxed on a mark-to-market basis.

This proposal would clearly solve a lot of problems with the existing regime.  As I attempt to explain in some length in my books Decoding the U.S. Corporate Tax and Fixing U.S. International Taxation, once you are taxing corporate income at the entity level, rather than the owner level, you have guaranteed yourself a number of very serious problems, made worse in practice by “unforced errors” such as distinguishing as we do between debt and equity.

The big concern is about its non-application to non-publicly traded businesses.  Suppose, for example, that this regime had been in place before Facebook went public.  Would it still have done so?  And how effectively would we be taxing Mark Zuckerberg if it didn’t?  The pass-through regimes we have under existing law (partnership taxation and subpart S) have their own set of very serious problems that are not easily mitigated.

Auerbach would replace the existing corporate tax (and the current rules for taxing non-corporate businesses) with what is essentially a destination-based VAT, modified to (a) reach all cash flows, financial as well as real, and (b) allow wages to be deducted, as they are being taxed to workers.  This could easily be part of an overall X-tax regime, as advocated by David Bradford, and more recently by Robert Carroll and Alan Viard, in which, once again, we would pretty much solve most of the problems I analyze in my corporate and international tax books.  Concerns that might be raised about it include (a) relating it properly to the taxation of individuals, if not accompanied by the enactment of a broader X-tax, and (b) whether its treatment of financial flows, which are deductible / includable or not depending on whether or not they in effect cross the U.S. border, would invite abusive gaming that was hard rather than easy to address.

Kleinbard has proposed a business enterprise income tax (BEIT) in lieu of current rules for both corporate and non-corporate businesses.  Businesses would get interest on basis via a cost of capital allowance (COCA).  This resembles proposals (just for corporations) to address the distinction between debt and equity by providing an allowance for corporate equity (ACE) – in effect, an imputed interest deduction on equity to match the actual interest deduction for corporate debt – except that Kleinbard would use the COCA in lieu of actual interest deductions, an important distinction from ACE proposals given that financial instruments denominated debt can be used to pay out a lot more than just the normal risk-free rate of return.  The proposal would in effect make the entity-level tax a consumption tax, since interest on basis is present value equivalent to expensing, but rents and owner-employees’ undistributed labor income would face the entity level tax.  At the individual level, Kleinbard would impute a taxable return to holding debt, stock, etcetera, but the income being imputed here would exceed the COCA deductions being claimed at the entity level, if the basis of these financial assets exceeded the basis of business assets at the entity level.  This might often be the case, due, e.g., to owner-level sales of stock that had appreciated at faster than the normal rate of return, along with cost recovery deductions being taken at the entity level.

The BEIT as envisioned by Kleinbard would also involve worldwide taxation for all U.S. companies, at the full domestic rate and without the deferral that present law generally provides for amounts earned through foreign subsidiaries.  In other words, full global consolidation.  He would allow a foreign tax credit, which I of course don’t like (I’ve argued extensively elsewhere in favor of lowering the US tax rate on foreign source income in lieu of providing foreign tax credits).

One of the main challenges one could raise to Kleinbard’s proposal is that taxing U.S. companies on a current basis on their foreign extra-normal returns (i.e., those in excess of the COCA deduction), at the full domestic rate albeit with foreign tax credits, would be problematic in a world that has lots of countries with territorial systems for taxing multinationals (although it is true that some of these countries use residence-based rules to address income-shifting to tax havens).  He argues that meaningful corporate residence rules, based on such factors as where the managers are rather than just where the company at the top of the chain is incorporated, would make it extremely hard for existing U.S. companies to expatriate.  The current inversion problem reflects that our corporate residence rules are so formalistic and porous.  But even if existing U.S. companies can’t readily expatriate under a BEIT with much tougher corporate residence rules - which is very plausible - there are serious issues about the long-term sustainability and impact of a global regime for U.S. businesses if other countries are doing it very differently.

One point of general agreement was that all three proposals might offer enormous improvement over current law if they could actually be enacted without being wrecked by political considerations.  But none seems likely to be imminent, which of course is no argument against making sure that people hear about them.

The last general session at this year’s NTA Annual Meeting honored Jim Poterba, this year’s Holland Award winner for lifetime contributions to the field of public finance.  Even leaving aside Jim’s outstanding academic work over decades, which by itself amply supported the prize, the session permitted dozens of leading public finance economists around the country, to whom he has been a tremendous mentor and inspiration, to express their gratitude.  Jim proves the proposition that sometimes virtue and merit are duly rewarded.

Once I'm back in NYC, I will post here the slides for my talk on my behavioral economics / retirement saving paper, Multiple Myopias, Multiple Selves, and the Under-Saving Problem.  I will also probably post my comments on a very nice paper for which I was the discussant, presented there by USC economist Mark Philips.  I had planned to simply post here remarks that I had written out in advance.  But as I was thinking about my remarks at the actual session, which I had time to do as Mark went third, I decided I wasn't entirely happy with what I had in hand, and spoke extemporaneously instead.  If I get a chance to write that up briefly, I will do so and post it.

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