Bush versus Trump tax plans

Now that the Tax Policy Center has added an analysis of Donald Trump's tax plan to its earlier analysis of Jeb Bush's plan, Kevin Drum offers the following snark:

"[Trump's plan is] bigger, more energetic, and altogether more taxerrific than Jeb Bush's weak-tea excuse for a tax plan. Bush would increase the national debt by 28 percentage points over the next decade. Trump kills it with a 39 point increase in red ink. Bush raises the federal deficit by $1 trillion in 2026. Trump goes big and increases it by $1.6 trillion. Bush's plan costs $6.8 trillion over ten years. Trump's plan clocks in at a budget-busting $9.5 trillion. And Bush reduces the tax rate of the super-rich by a meager 7.6 percent. Trump buries him by slashing tax rates for the Wall Street set by 12.5 percent."

I realize this is a "glass half-full versus half-empty" type of a thing, but I see an angle to this that's opposite to the one Drum emphasizes.  He notes: "Once again, Bush has brought a knife to a gun fight, and Trump has slapped him silly" - fair enough as campaign commentary, leaving aside the point that these tax plans are mainly for the donors and D.C. conservative leadership types, not the Republican voters, and that those target groups are nonetheless still anti-Trump.

I see the opposite point, which is that all of the Republican candidates are very similar to Trump - it's just a matter of degree.  E.g., in all the above measures, Trump has merely taken insane features of the Bush tax plan and given them a roughly 50 percent boost. This still leaves Bush's substantive tax proposals about 2/3 as insane as Trump's.

I say "insane" because the plans are so fiscally reckless.  They're not going to get the budget cuts or growth boosts that would cause them merely to express a different fiscal philosophy than the one I happen to prefer.  The effects on the super-rich admittedly require a separate and longer conversation.

In sum, to recompute the metaphor above in light of the actual numerical ratios from the TPC studies, Bush's glass of tax crazy is either 2/3 full or 1/3 empty, if we use Trump as the benchmark for a full "glass."  It's not just half-full versus half-empty.

I'm disappointed that "responsible" people on the seemingly adult right, like Martin Feldstein and Glenn Hubbard, either actually want to do the sorts of things Bush advocates, or feel bound to act as if they do. Under present circumstances, and if the Republicans win the White House in 2016, it really doesn't matter which.

American Enterprise session on OECD-BEPS

This morning I was in Washington, where I participated in an AEI panel discussion entitled "The OECD Base Erosion and Profit-Shifting Report: Should the United States Be Worried?"

You can see a video of the two-hour event here.  I come on at about minute 52 (I started a minute earlier than that, but initially my mike was off.)  And my slides, which pretty well tracked my talk (though of course I didn't just read them) are available here.

It mainly went as follows.  Grace Perez-Navarro and Thomas Neubig presented the report on behalf of the OECD. Apart from providing the backstory, details, etcetera, they say that, at least outside the U.S., there is widespread movement in favor of actually adopting the report's recommendations, reflecting multiple levels of support (e.g., from both political leaders and technical staff) in many countries.

David Ernick of Price Waterhouse then offered some U.S. practitioner or taxpayer-based skepticism - arguing, for example, that, as long as our corporate marginal tax rate is higher than the global norm elsewhere, we may not want to join the crowd (even if we would otherwise).

I said - well, my slides are short, so you can have a look for yourself - that it seems unlikely to me that U.S. policy will in fact be significantly swayed by anything about this process. This is typical of U.S. policymaking, but in addition there's been a perception here that the process is anti-U.S. multinationals.  Plus, if it did start making headway, there'd be an awful lot of money deployed to stop it (and this may be happening anyway).  So we are just going to do whatever we do, and if that involves getting tougher on U.S. or foreign multinationals, it will be for our own reasons.

I also said that, if one is proceeding unilaterally, the really tough issue is to decide how one should respond to foreign-to-foreign tax planning.  This is the issue at the heart of battles over our subpart F rules, and other countries' CFC rules, over the decades.  The problem is that, from both a residence country and a source country standpoint, there are rationales both for letting such tax planning go forward, and for trying to impede it.  Read the slides to see how I would explain this.

Martin Sullivan then addressed how to model economic substance - the issue raised by the OECD's focus on "artificial" profit-shifting, and had some interesting points that, like my discussion of foreign-to-foreign tax shifting, reached the normative bottom line, perhaps less generally useful than either of us might have liked, that "it depends" and "it's hard to say."  (But at least we both try to say something about the "it" that "it depends on").  He then expressed skepticism about patent boxes, as a tax preference design, even if one wants to tax-favor domestic R&D activity.

One audience member suggested that some of the presentations, presumably including mine, were a bit too negative and pessimistic with regard to how well OECD-BEPS is actually doing. I agreed that this might be so - I'm best informed on U.S. developments, not those occurring elsewhere, and this tends to make me a pessimist.

Holiday gift ideas

With apologies for the crude solicitation, this is (a) just 61,000 words long, (b) an easy airplane read or tired evening read (or beach read if you are going somewhere warm during the holidays), (c) fun, I hope, and if I do say so myself, and (d) not wholly unreasonably priced.

More on the international tax extenders

According to the Committee for a Responsible Federal Budget, the 10-year revenue cost of making the "active financing" exception permanent is $78 billion, whereas 5-year extension of section 954(c)(6) costs "only" $8 billion.

Obviously, the low-hanging fruit here (especially given the overall ten-year revenue cost of $680 billion on the tax side, or $830 billion for tax plus spending changes) is its showing that almost no one in Washington, and certainly not the Congressional Republicans whose majority status put them in the lead in bipartisan negotiations, actually cares in the slightest about budget deficits and public debt.  Whatever the real merits of deficit and long-term debt concerns, on which reasonable minds differ, it's clear that, in the political sector, yelling about it is purely a partisan sham to harry the other side and discourage the enactment of particular tax or spending proposals that one dislikes on other grounds.  But again, this has been too blindingly obvious for too long to count as much of a revelation.

Turning back to the international tax provisions, it's interesting to note that, even if section 954(c)(6) ends up being extended through the full 10-year period, and even assuming rising annual revenue costs, it would still presumably be less than 25% as costly as the active financing rule. I would assume that this reflects section 954(c)(6)'s redundancy, in many cases, given the general availability of tax planning that uses "hybrid entities" or "hybrid financial instruments."

I would expect a significantly higher marginal revenue cost of extending section 954(c)(6) if the Treasury addressed hybrids, including those created by its 1997 check-the-box regulations.  By the same token, the revenue effect of addressing check-the-box would be much higher absent section 954(c)(6).  But admittedly, even if both were addressed, there's a basic conceptual challenge that revenue estimators face in this area. Since both hybrids and section 954(c)(6) empower foreign-to-foreign tax planning, aiding the elimination of foreign taxes once multinationals have characterized their global profits as foreign source for U.S. tax purposes, it's tricky to determine just how much the companies' foreign taxes, as opposed to their U.S. taxes, would eventually go up in the new equilibrium.  And while I know that revenue estimators do their best with this, and may have useful data that they can draw on (especially for short-term estimating purposes), I do think there's potentially a big uncertainty here, especially once the companies have fully adjusted.

Tax extenders news for international tax buffs

The House version of the tax extenders bill (the "Protecting Americans From Tax Hikes Act of 2015") has now been posted online.

Of note to international tax buffs, the "active financing" exception to applying subpart F to financial income earned abroad by U.S. companies' foreign subsidiaries is made permanent by section 128 of the still-just-proposed Act.

Also, section 954(c)(6), the so-called "look-through" rule that often permits U.S. companies to avoid subpart F on foreign-to-foreign tax planning, without requiring the tedium of using hybrid entities, is extended through the end of 2019, by Act section 144.

The active financing rule's initial enactment and frequent extension have been popularly attributed to GE, at least as a key organizing player. GE presumably doesn't care about this rule any more, given their recent restructuring, but evidently it still has friends.

Extending section 954(c)(6) could certainly be viewed as in tension with the spirit of the OECD BEPS project, but it's not as if this makes it a surprise.

Three analyses of corporate inversions

Martin Sullivan has a good article in this week's Tax Notes, called "A Middle Path for Stopping Inversions.  Here is the link, but it may not work for non-subscribers.

Sullivan notes that the main issue posed by inversions such as that by Pfizer and Allergan "involves a loss of revenue, not employment .... Pfizer's operational headquarters will remain in Manhattan - just as the operational headquarters of Allergan, legally resident in Ireland, has remained in Parsippany, New Jersey."

A revenue issue arises for two reasons. Pfizer-Allergan will now find it easier to strip profits out of the United States through intra-group debt, and it will now have an easier time doing what it likes with the "trapped earnings" that it has given itself abroad, mainly through tax planning, without a taxable U.S. repatriation.

Sullivan, like me, believes that these issues are best addressed in a broader context than just anti-inversion rules.  Thus, he proposes improving our earnings-stripping rules - which, unlike our controlled foreign corporation (CFC) rules, need not be aimed disproportionately at U.S. as compared to non-U.S. companies - and enacting a one-time tax (in effect, a deemed repatriation) on the existing stock of unrepatriated earnings.

Less good, though not wholly devoid of merit, was Carl Icahn's op-ed in the New York Times yesterday. Icahn appears to have a couple of basic misunderstandings of how our international tax rules actually work.  For example, he claims that we impose "double taxation" upon U.S. companies' foreign earnings - apparently not understanding that we have a foreign tax credit. (Indeed, he expressly refers to the "foreign tax deduction.")  He also repeatedly says that the problem is our "uncompetitive" tax system, an annoying cliche that rests on assuming that U.S. multinationals face unusually high tax burdens by global standards. Researchers have tried to study this, and it is probably false. The motivation for inversions rests in their capacity to reduce the companies' tax burdens - which is distinct from the question of whether these burdens are high or low to begin with. 

Icahn does, however, note the importance of earnings-stripping. He also gives props to a bipartisan tax legislative proposal (Schumer-Portman) that would use deemed repatriation (at a reduced rate) to address trapped earnings, although he appears to misunderstand it as allowing voluntary repatriation.

I am perhaps least happy with a Business Insider op-ed by Glenn Hubbard. I don't really disagree with Hubbard's opening claim, which is that, if the deal benefits Pfizer's shareholders, there is good reason for management to want to do it. I am surprised, however, that Hubbard seems to think the main motivation for inversions is that the U.S. corporate tax rate is too high.

Now, it's true that a higher corporate rate raises the tax savings per dollar of earnings-stripping, as well as the tax charge associated with a taxable repatriation.  But for U.S. source activity that yields U.S. taxable income, the corporate tax rate, whatever it is, applies alike to U.S. and foreign multinationals. So it is not directly affected by inversions.

By all means, let's debate how low or high the U.S. corporate tax rate should be. But whether it's lowered significantly or not, let's also strengthen our earnings-stripping rules (so the rate will apply more uniformly to U.S. economic activity).  Also, Hubbard should know that it's not generally efficient to hand transitional windfalls to taxpayers, by wiping out deferred taxes that pertain to profits generated in the past.

And finally, calling the Pfizer deal (as Hubbard does) "self-help tax reform" is a bit gag-worthy.  Agreed that it's self-help, and that we should expect self-help. But preparing for greater earnings-stripping, and wiping out deferred taxes on profits that to a considerable extent may have been placed abroad, as an artificial accounting matter, through tax planning, falls somewhat short of what I would call "tax reform."

If I may deliberately (and egregiously) mix my metaphors, Hubbard's op-ed barks up the wrong tree regarding inversions because he has other fish to fry.  When you have a position, it's tempting to use everything out there as evidence in its favor, but inversions operate mainly at different margins than that posed by the choice of domestic U.S. corporate tax rate.

Upcoming DC appearance

This Friday (December 18), I'll be appearing in DC at a morning session at the American Enterprise Institute, entitled "The OECD Base Erosion and Profit-Shifting Report: Should the United States Be Worried?"

Others speaking at the session will include Alan Viard and Aparna Mathur of AEI, Thomas Neubig and Grace Perez-Navarro on behalf of the OECD, David Ernick from Pricewaterhouse Coopers, and Martin Sullivan from Tax Analysts.

I'll post my slides after the session (probably on Friday afternoon, assuming smooth travels back to NYC, or else next Monday).

Ear candy

Ultimate Painting often sounds like a mix between the Velvet Underground's ballads album and Paul McCartney's white album period, as played by the Feelies. But this one is perhaps a bit Hollies-ish, albeit in a good way.

Hillary Clinton's plan to address inversions

Hillary Clinton has released, through her campaign website, a plan to address corporate inversions, such as the Pfizer-Allergan deal.

In addition to limiting tax-effective inversions to deals in which the foreign "acquirer" is actually larger than the domestic "target" - thereby addressing "minnow swallows whale" deals that potentially can work (if not too extreme) under current law - the plan would also address the U.S. tax benefits that companies anticipate when they plan inversions, along lines similar to those that I have advocated, such as here.

First, the proposal would require companies that invert to pay an "exit tax" on their previously accumulated, but as yet untaxed, foreign earnings.  The logic here is that, in principle, these taxes have merely been deferred, pending the occurrence of a taxable U.S. repatriation of the funds. However, inversion can make it far easier to avoid ever engaging in a taxable repatriation. Thus, in a way it's like skipping town to avoid repaying one's loans from the local bank. The exit tax would take the form of a deemed repatriation, thus eliminating this pointless incentive to "skip town" just because one has tax-planned one's way into having very high reported foreign earnings.

Second, the proposal would address "earnings stripping," which typically becomes a lot easier when a U.S. company expatriates. The classic, most straightforward earnings-stripping device is to borrow money from, and thus pay deductible interest to, foreign affiliates within one's own global corporate group. But under the U.S. rules, if a U.S. company pays interest to a foreign subsidiary, the effect of the U.S. interest deduction is offset by the company's having to pay current U.S. tax on the subsidiary's receipt of the interest income. Inversion permits U.S. companies to borrow from foreign affiliates that are not their subsidiaries (e,g., their new corporate parents), and thus that are not subject to the offsetting inclusion. Addressing this tax planning device, as the plan would do (although I have not yet seen the details) could further reduce U.S. companies' tax incentives to invert.

Not that anyone cares any more about the Jeb Bush tax plan as such, but ...

According to an analysis by the Tax Policy Center, the Jeb Bush tax cut "plan" would yield a static revenue loss of $6.8 trillion over ten years. However, refining the estimate to include feedback effects and annual interest costs raises, rather than lowers, the projected effect on national debt - to $8.1 trillion over 10 years and $22 trillion over twenty years. This reflects that, absent very large spending cuts that have not been specified by the Bush campaign, there would both be huge interest costs from the higher annual deficits, and fiscal drag from the increased public debt overhang. This would apparently outweigh, in the estimate, the dynamic effects of lowering current-year tax burdens on work and saving.

Obviously, who cares about the Bush tax plan as such as this point. It's not as if the poor guy actually has any sort of a chance to win any elected office higher than dogcatcher.  But given that all other Republican candidates are essentially offering larger versions of the same thing, this is indirectly relevant. It suggests that, if a Republican wins the presidential 2016 election (and retains control of both the House and Senate, as one would expect), there will be a high likelihood of the U.S. budget's going down the path of Kansas, or perhaps even Greece.

2016 NYU Tax Policy Colloquium schedule, this time with titles

While I posted our speaker schedule the other day, I didn't have paper titles (which in some cases are tentative). So here goes again, showing the current state of the play:

SCHEDULE FOR 2016 NYU TAX POLICY COLLOQUIUM

(All sessions meet on Tuesdays from 4-5:50 pm in Vanderbilt 208, NYU Law School)

1.  January 19 – Eric Talley, Columbia Law School. “Corporate Inversions and the Unbundling of Regulatory Competition.”

2.  January 26 – Michael Simkovic, Seton Hall Law School. “The Knowledge Tax.”

3.  February 2 - Lucy Martin, University of North Carolina at Chapel Hill, Department of Political Science. "The Structure of American Income Tax Policy Preferences."

4.  February 9 – Donald Marron, Urban Institute. “Should Governments Tax Unhealthy Foods and Drinks?"

5.  February 23 – Reuven Avi-Yonah, University of Michigan Law School. “Evaluating BEPS.”

6.  March 1 – Kevin Markle, University of Iowa Business School.  “Income Shifting Incentives and Implicit Taxes.”

7.  March 8 – Theodore Seto, Loyola Law School, Los Angeles. “The Nonfalsifiability of Welfarism: Some Implications of Preference-Shifting for Optimal Tax Theory”

8.  March 22 – James Kwak, University of Connecticut School of Law. “Reducing Inequality With a Retrospective Tax on Capital.”

9.  March 29 – Miranda Stewart, Australian National University. “Transnational Tax Law: Reality or Fiction, Future or Now?"

10.  April 5 – Richard Prisinzano, U.S. Treasury Department, and Danny Yagan, University of California at Berkeley Economics Department. "Partnerships in the United States: Who Owns Them and How Much Tax Do They Pay?"

11.  April 12 – Lily Kahng, Seattle University School of Law.  “Who Owns Human Capital?”

12.  April 19 – James Alm, Tulane Economics Department, and Jay Soled, Rutgers Business School.  “Whither the Tax Gap?”

13.  April 26 – Jane Gravelle, Congressional Research Service.  “Policy Options to Address Corporate Profit Shifting:  Carrots or Sticks?”

14.  May 3 – Monica Prasad, Northwestern University Department of Sociology. “The Popular Origins of Neoliberalism in the Reagan Tax Cut of 1981.”

Literary struggles

Now that I have taught my last classes of what has been a very taxing (so to speak) semester, in terms of demands on my time for both teaching prep and travel, I have finally, after months away from it, been able to return to working on my still tentative but definitely intended book-in-progress, "Enviers, Rentiers, and Arrivistes: What Literature Can Tell Us About High-End Inequality."

This project was originally inspired by the idea of wanting to do a better and more interesting job of looking at literature, in relation to evaluating high-end inequality, than Thomas Piketty does in Capital in the Twenty-First Century.

This is not meant as a shot at Piketty - it was clever of him to use illustrations from Austen and Balzac to illustrate his concerns about high-end inequality, and it helped him to attract attention that he deserved on other grounds. But just saying that those books illustrate the evils of a rentier society opened my eyes to the possibility of doing more with literature - especially since Balzac in particular is not just about a rentier society, but is centered on arrivistes who are trying to crash the heights of such a society, taking advantage of the fact that things are growing socially and economically more fluid.

Then I had the idea that Wodehouse, whose work I absolutely love, beautifully illustrates the "Great Easing" - the period when rentiers were at their low ebb, relatively speaking, hence making it plausible for Bertie Wooster, the aimless rentier par excellence, to be a mocked and comic, albeit not quite beleaguered, figure. (Unless the threat of being frowned at by your aunt and excluded from chef Anatole's splendid dinners meets the threshold for being beleaguered).

But here are two problems I encountered with this project. Well, three, if we count its being outside my usual comfort zone and having really no close models to draw on (while other people have of course done other interesting things with literature, none that I've seen is quite the same as what I want to do).  One is that I thought it would just be fun, both for me and hopefully for readers. But in a project of this scope, there has to more than that - there has to be clear purpose and direction, which I found myself needing to look for, and to keep on developing and revising, on the fly. It's turning out to have at least a 2 to 1 hard-to-fun ratio, at least in the still-early stages.

Second, I've been struggling with what I call the "Hegel problem." This refers to an I think famous quote about Hegel's work, to the effect that you can't understand the whole until you understand all of the parts, and you can't understand the parts until you understand the whole.

My version of this problem is that it's hard for me to figure out what I want to do with each literary work that I examine, until I know my general approach. But it's hard for me to figure out my general approach, until I've thought about particular literary works in close derail.

To change the metaphor, it's hard to get the chicken without the egg, and the egg without the chicken. But I think (or hope) that I'm getting closer.

Most recently I've been reading scholarly literature about Jane Austen, after initially thinking that I could write about Pride and Prejudice based just on my own reactions and resources. I'm finding this helpful, even though what I'm on about here is NOT to try to add to the body of Jane Austen literature (although this is a subject on which I have now developed some views). I had thought I could write the Jane Austen chapter straight up, then just one more (on Stendhal's The Red and the Black), and then I'd write a more general earlier chapter on just what I am aiming to get from the literary works that I examine. But I think now that I have to write that earlier chapter first, leaving it to be enriched and filled out as my work on later chapters causes me to understand it better.

In short, it seems like the right approach will have to be a back-and-forth mixture of incremental with iterative.  Feasible, I hope, but certainly not easy (and leading to fluctuating confidence levels about the project).

I'd also really like to test the market for getting this book published in a decent placement. This is a project with both upside and downside. It could come closer to mass market than my work usually does. Or it could be hard to publish because I can't pitch it as being wholly within my core expertise. I'm hoping literary critics will like it, but I'm certainly not expecting (or wanting) them to view it as being actually on their turf. And while the thing to do, at some point well before I'm finished, is to look for an agent or publisher, I think that is best put off until I have written not only the first 3 chapters, setting forth my aims and methods, etc., but also at least two chapters on particular literary works. Which requires greater progress on the incremental versus iterative front first.

The book I want to work on next, after this one, should be a lot easier so long as the publisher is interested. I want to update my book, Fixing U.S. International Taxation, to reflect subsequent developments plus how my own thinking has changed or at least clarified. But even if I didn't want to write the literature book first I would want to wait at least 2-3 years before undertaking this, given the continuing pace of international tax policy developments.

Foreign tax credits to the rescue?

Michael Graetz had an op-ed in Friday's Wall Street Journal decrying, on due process of law grounds,  recent European Commission challenges to tax planning by U.S. companies such as McDonald's, Starbucks, Amazon, and Apple.

The issue is the companies' cozy transfer pricing agreements with friendly and accommodating EU countries - Luxembourg, the Netherlands, and Ireland - that helped the companies greatly lower their overall EU tax bills. The European Commission views these agreements as involving illegal state aid, and is threatening the companies with large penalties that Graetz views as in tension with the rule of law, given the lack of prior notice that this might happen.

Graetz does not dispute that the EC is almost surely right in viewing the challenged transfer pricing agreements as substantively ridiculous, shifting reported profits to low-tax countries where there is neither significant economic activity nor value creation.  He expresses concern, shared by the U.S. Treasury, that the E.C. is particularly targeting U.S. companies, in keeping with European self-interest and political sentiment.

But here, as he notes, is the bright side, from the companies' standpoint:

"Ironically, if the EU labels these assessments as underpaid back income taxes, instead of fines, the companies' payments may be used to offset their U.S. income taxes dollar-for-dollar, and American taxpayers would ultimately pay the bill."

He is referring, of course, to foreign tax credits, which, when claimed immediately and in full, can make U.S. companies wholly indifferent to whether their foreign tax liabilities (up to the foreign tax credit limit) are low or high. The companies only cared about their EU tax liabilities because, given deferral, they did not anticipate claiming U.S. FTCs at any particular time.

So far as I can tell, structuring the assessments to qualify as foreign tax-creditable shouldn't be all that hard. After all, Luxembourg and Netherlands are being told: By failing to collect enough income taxes, you offered improper state aid. Rebating the state aid means that you collect those underpaid income taxes after all. So why wouldn't it be creditable, if structured intelligently?

Here's what I would guess might happen next. The companies will immediately use the foreign tax credits, by repatriating just enough foreign earnings to generate the requisite amount of pre-credit U.S. tax liability. So the U.S. Treasury gets no actual tax revenue.

Now, at this point the companies still aren't entirely happy. After all, they presumably would have preferred to pay no further EU taxes and keep the earnings abroad.  Then they wouldn't have incurred a pre-credit U.S. tax liability that needed to be offset by using the FTCs. But from their standpoint, at least the burden of paying those extra EU taxes has been partly offset by the benefit of tax-free repatriation.

Is Graetz entirely correct in saying that, in this scenario, "American taxpayers would ultimately pay the bill?" Formally, yes - but substantively, perhaps no.

Suppose we take as given the repatriations that I am hypothesizing.  Then, by claiming foreign tax credits for the EU penalties, the companies save an equal amount of U.S. taxes, thereby (it seems) shifting the cost from themselves to American taxpayers.

But again, suppose the repatriations only occurred due to the creation of the foreign tax credit claims. Then the U.S. taxes that the credits offset wouldn't otherwise have been imposed. So American taxpayers merely fail to gain revenue, rather than losing it.

Does this take too short-term a view?  After all, suppose that the occurrence of a taxable repatriation at some point was inevitable. Then the companies are getting to wipe out, in the year of the repatriation, U.S. tax liabilities that they otherwise would have incurred in the future.

But why should one think that future taxable repatriations are inevitable?  After all, Congress may at some point enact another tax holiday, or "permanently" lower the repatriation tax rate, or partly/wholly forgive the deferred liabilities in the course of shifting to a territorial system.

Here are the main conclusions I draw:

1) Substantively, the companies still lose despite getting the foreign tax credits (assuming that they do indeed get them). The loss equals the extra EU taxes paid minus the value to them of getting to repatriate without incurring further (U.S.) tax liabilities.

2) U.S. taxpayers lose insofar as the companies would otherwise have had greater taxable repatriations at some point in the future - but the extent to which this is so is quite unclear.

2016 NYU Tax Policy Colloquium

The time is now drawing near(er) - January 19, or just under 7 weeks away - when I'll be co-leading my/the twenty-first NYU Tax Policy Colloquium.  My co-convenor will be Chris Sanchirico of the University of Pennsylvania Law School.  The following is our speaker list; I'll update it at some point soon with tentative paper titles or topics.

SCHEDULE FOR 2016 NYU TAX POLICY COLLOQUIUM

(All sessions meet on Tuesdays from 4:00 - 5:50 pm in Vanderbilt 208, NYU Law School)

1.  January 19 – Eric Talley, Columbia Law School.

2.  January 26 – Michael Simkovic, Seton Hall Law School.

3.  February 2 - Lucy Martin, University of North Carolina at Chapel Hill, Department of Political Science.

4.  February 9 – Donald Marron, Urban Institute.

5.  February 23 – Reuven Avi-Yonah, University of Michigan Law School.

6.  March 1 – Kevin Markle, University of Iowa Business School.

7.  March 8 – Theodore Seto, Loyola Law School, Los Angeles.

8.  March 22 – James Kwak, University of Connecticut School of Law.

9.  March 29 – Miranda Stewart, Australian National University.

10.  April 5 – Richard Prisinzano, U.S. Treasury Department, and Danny Yagan, University of California at Berkeley Economics Department.

11.  April 12 – Lily Kahng, Seattle University School of Law.

12.  April 19 – James Alm, Tulane Economics Department.

13.  April 26 – Jane Gravelle, Congressional Research Service.

14.  May 3 – Monica Prasad, Northwestern University Department of Sociology.

Hilarious vitriol

I've always loved Dylan's Leopard Skin Pillbox Hat from Blonde on Blonde - outrageous, wildly self-confident, absurdist electric blues that perhaps could only be written by someone then-confident that he was "on the side that's winning."

But the much faster, intentionally sillier version from the recent Cutting Edge reissue is also fantastic, maybe even better (!?) despite (or partly because of?) jokey sound effects that were discarded in the final version.

Three talks I gave at the NTA meeting last week

As mentioned earlier, I was at the National Tax Association's 108th annual meeting last Friday and Saturday morning, and gave 3 talks using PowerPoint slides. Here are pdf versions of the slides.

First, here is what I used to discuss my paper, The Crossroads Versus the Seesaw: Getting a "Fix" on Recent International Tax Policy Developments.

Second, here is what I used to discuss papers by David Kamin and Alan Auerbach addressing long-term fiscal uncertainty.

And finally, here is what I used to discuss a state and local tax paper by David Gamage and Darien Shanske, and an international tax paper by Itai Grinberg.

I liked all the papers, and found all of them interesting. Links for some or all of them may be available elsewhere on the interwebs (and I do provide the paper titles in my slides).

Inversions, ethics, and national welfare

Today's NYT reports that, in phone calls to lawmakers and Obama Administration officials defending the Allergan deal, Pfizer's chief has been arguing that the deal, by significantly reducing the company's tax obligations, will "give it more cash that it could invest in the United States and ultimately add jobs."

Unless he is parsing his words awfully carefully via the distinction between "could" and "will" add more U.S. jobs, this is almost certainly false. Despite all the cash that they've stashed abroad and don't want to bring home (at least directly) for tax reasons, I very seriously doubt that Pfizer is cash-constrained with respect to U.S. investments that it would like to make.

The only sense in which the suggestion that Pfizer may invest more in the U.S. post-inversion (possibly adding jobs - which is not to say that overall U.S. employment or wages would be higher than otherwise) is as follows. If Pfizer's enhanced capacity, post-inversion, to strip profits out of the U.S. through intra-company financial transactions lowers the effective tax rate that they anticipate facing on marginal U.S. investment, this  would increase the company's incentive to engage in economic activity in the U.S. But on the other hand, it's possible that some or all of their increased U.S. investment (if any) would come at the expense of investment by purely domestic companies that can't use Pfizer's cross-border tax planning techniques to lower their U.S. tax burdens.

Pfizer, obviously, is doing what's good for Pfizer - be it the management (and/)or the shareholders. Note, however, that these two groups' incentives are not necessarily the same. For example, managers may like larger empires, or over-paying for a  chance to boost accounting earnings per share, and may not mind, to the same extent as the shareholders, causing gain recognition at the shareholder level. It's therefore interesting that, according to the Times article, both Pfizer's and Allergan's stock prices fell upon announcement of the deal.

A natural feature of the political economy landscape of these public deals is that politicians denounce what's happening. Again per the NYT article, Donald Trump is only blaming "politicians," but President Obama has previously called such deals "unpatriotic." (Hillary Clinton is quoted as saying just that it shows we need to change the rules.)

People like me are expected to scoff, and to a degree I do, about criticizing company officials for acting on the incentives that the system actually gives them. It doesn't come as a surprise that companies will invert if this gives them the opportunity to reduce their U.S. tax bills. In that sense, the only potential ethical problems that I would see in this general area are (a) any pursuit of managerial self-interest at the expense of their duty to benefit shareholders, and (b) any effort to go beyond what the law, as correctly interpreted, actually permits, counting on deception or the "audit lottery" (not likely to be a factor here) to get away with results that aren't actually permissible.

That said, I wouldn't feel great about myself if I spent my time, and such expertise as I have in tax practice, working on deals like this for high pay, even if the deals clearly were (or could be made) legally valid. It's not how I'd want to spend my life, and I might feel embarrassed telling people about it (or defensive if they viewed it negatively). But that's a personal choice - and one that, who knows, I might have made differently had my opportunity set 30 years ago been different - and I don't insist on it for everyone else.

Also, just because I myself might view it as a bit naive to cast the issue in terms of the "patriotism" of Pfizer's (Scottish-born) CEO doesn't mean that politicians who favor legislative action to discourage inversions shouldn't be saying it. Political debate is often, on all sides, expressed in spurious or at least simplistically moralizing terms to increase its salience and political appeal to a public that, in effect, is watching (or not watching) from the bleachers eight miles away. So an effort to change the applicable rules in ways that I might support inevitably is going to be cast rhetorically in these terms. Needless to say, there is certainly plenty of political rhetoric that is far worse being issued every single day in the 2016 presidential campaign.

Pfizer inversion into Allergan

If I am getting my back-of-the-envelope numbers right, Pfizer is paying the Allergan shareholders about $40 billion more than the market cap for Allegan's shares.

The NYT article from which I deduce this also says that the companies predict annual cost savings of $2 billion per year over the first 3 years. At least if one discounts for managerial incentives to high-ball this number, it clearly leaves a lot of value to be realized from the anticipated U.S. tax savings. (Plus, why should all the business and tax synergies inure to Allergan shareholders, rather than being split?)

The Times article says that Pfizer has $74 billion in offshore earnings. If this money was associated with zero foreign tax credits (from its being in tax havens), and if we apply the Altshuler-Grubert estimate that profitable U.S. companies lose about 7% a year from game-playing to avoid repatriating foreign earnings, one can certainly start to see some of the extra value being made back, at least if they anticipate being able to get around the Treasury's recently-issued anti-"hopscotch" regulations.

Most of the rest of the extra value, if Pfizer is not over-paying, would presumably come from anticipated greater ease in the use of intra-group debt to strip taxable income out of the U.S. on the company's U.S. operations.

The Treasury has just announced a new set of anti-inversion rules, issued of course with Pfizer in their front-view mirror. Obviously they weren't able to stop this deal, assuming it goes through. But whatever the Treasury does (or not) on the anti-inversion front, with or without legislation that would enable them to go further, it is clear that U,S. rules must respond substantively to the incentives that trigger these deals, not just by trying to slam shut the barn door before all the horses get out.

This does not necessarily mean lowering the U.S. marginal tax rate for corporate income. (Whether or not to do that should depend mainly on separate considerations.) After all, even inverted companies are still taxable in the U.S. on their U.S. operations. And a 1986-style rate cut plus base-broadening that left average tax rates on U.S. corporate operations about the same as previously would matter only insofar as tax planning focused on marginal rather than average tax rates.

It also doesn't necessarily mean that the U.S. should adopt territorial rules. (Again, this is really an independent question.) Among other points - and I won't repeat here my general analysis of why the "worldwide versus territorial" framework is unhelpful - the reasons for inverting are more particular than not wanting one's foreign operations subject to home country tax.

More specifically, I would focus on two steps to reduce the incentive to invert, both presumably requiring legislation. The first is imposing deemed repatriation treatment on U.S. companies with high unrepatriated foreign earnings. This could specifically be a tax consequence of inverting, and/or could simply be imposed without regard to such transactions.

Second, I would strengthen residence-neutral anti-earnings stripping rules that address the use of intra-group financial flows to strip profits out of the U.S. By residence-neutral, I mean other than through our controlled foreign corporations or CFC rules (aka subpart F), which U.S. operating companies can avoid by transacting with affiliated parties that are not their subsidiaries. At a minimum, the earnings-stripping rule of Internal Revenue Code section 163(j) could be made more rigorous. But I would also want to look at rules that look at debt and other internal financing for an entire global group, whether it has a U.S. parent or not. Both Germany and the U.K., I gather, have rules of this kind that would likely be worth examining in this regard.

On the road again

I'm currently en route back to NYC from the NTA Annual Meeting. I decided to go by Acela since airports can be so unpleasant. Using the Acela between New York and Boston isn't quite as much of a no-brainer as doing so between New York and Washington, because the trip is an hour longer, but perhaps still marginally worth it, especially what with free Wifi on board Acela trains these days.

Since I used the Boston Back Bay station, closest to the conference hotel, this did give me the delight of spending almost an hour in an unheated, open-air station, just what one wants in upper New England at this time of year.  But then again each Acela station seems to have some angles one needs to know about when using them.

For example, in Washington they post the tracks for each train well in advance, so people start lining up for the Acelas at least 45 minutes early. By contrast, at Penn Station in New York they deliberately don't tell you until the train is in the station and ready to board. So everyone mills around in NYC trying to figure out what the track will be, so they can be near the front of the line (admittedly a bit of a mania for me, even more so of course in airports where you're worried about the limited overhead space).

I'm always convinced that the people who use Acela more regularly than I do will be better at reading the cues, so I try to keep my eyes open and use the oldest social media form of all (aka, talking to people you see standing near you).  They change the tracks around so that the regulars won't know for sure. But you can watch the redcaps (except you don't want to line up for the Washington train if you're heading to Boston), ask people who are exiting the trains, and compare notes with the regulars. This time around I got to cheat - someone in first class had been told by the station people which track it was. I told her she should sell the information and this would pay for the cost difference between business class and first class. (I don't entirely understand, by the way, why people bother to get first class on the Acelas - doesn't seem to have as much payoff as in the intensely hierarchical airline setting.)

OK, onto the sessions a bit. I will post the slides for my 3 talks (one on my own paper, two on a total of four papers by friends in the biz) once I'm back at my office and can create a link on the NYU website. Because my time at the conference was shortened by teaching obligations on Thursday, plus also a couple of scheduling quirks at the conference, I didn't get to attend any panels at which papers were presented, with the exception of those where I was a participant. I skipped a big-data session that the organizers intended for everyone - maybe a good idea, I suppose, but certainly not as interesting to me as hearing 3 or 4 papers that I had gotten to choose among 8 or 9 alternatives. I also missed Alan Auerbach's presidential address (I suggested that he should pattern it after Nixon presidential speeches, since we are both among Nixon's diminishing stock of still-living "fans" in the ironic sense).  And I missed a lunch talk, I believe by Jim Poterba, that I would have expected to be quite interesting.

I did get to hear a lunch talk by Martin Feldstein, addressing why he thinks we should change tax policy in the ways that he thinks we should change it. The problem was, this was a speech that he could have (and probably has, on multiple occasions) delivered at a National Bankers Association conference or some such venue. Everyone in the room knew too much about many or all of the topics that he was addressing in abbreviated broad-brush overview for the things that he said, whether one agrees with them or not, to be particularly interesting.  Too bad he didn't tailor the talk to us more, but then again we all (me too) have time tradeoffs to think about.

The session honoring Bill Andrews had some nice highlights, but as I'm feeling grumpy I'll just say that it possibly, at times, could have done just a bit more than it did to (a) personalize the occasion to the honoree, and (b) explain in detail, to the (mainly) economists in the audience, just why this older-generation law professor, whom not all of them know much about, richly deserves this honor. Without meaning to slight any of the other presenters, I will say that David Weisbach did a great job of explaining just exactly what Bill contributed to the income versus consumption tax debate (within the historical context of earlier writers such as Nicholas Kaldor), and why Bill's contributions were extremely important and influential, even if not everyone remembers today what his role was in creating what is now general knowledge in at least some circles.

One nice thing about the NTA these days is the extent to which younger-generation (by my standards) tax law professors have adopted it as a regular venue.  It's become a significant setting both for internal networking within the tax law professoriate, and for their meeting and interacting with economists who have overlapping interests. Achieving this was a goal of the NTA leadership some years ago, and they have succeeded beyond expectations (or at least mine). I'd like to think I helped in this process, if only to the same degree as the mythical old lady who spits in the ocean, when it is getting a bit low, and explains what she has done by saying "Every little bit helps."

Lastly, just a quick follow-up to the comment in my previous post that this was almost my last out-of-town conference, etc., appearance of the year.  I was about to rush off to class (and then travel to Boston) when I put up the previous post, and all I meant to say was that I will be participating in an AEI panel on OECD-BEPS on December 18, as further described here.

My almost-last work-related road trip of the year

I've been going to out-of-town talks and conferences a lot this semester, and this week is no exception. This morning, the National Tax Association's Annual Meeting started in Boston. I am missing today's festivities because I have a class this afternoon. But in the evening I will be heading up there, as I'm scheduled to appear on two panels tomorrow and one more on Saturday morning.

Tomorrow at 8:30 am, I'll be presenting my recent paper, "The Crossroads and the Seesaw: Getting a 'Fix' on Recent International Tax Policy Developments," on an International Corporate Tax Policy panel that will also feature papers by Wei Cui, Jennifer Gravelle, and Harry Grubert-Rosanne Altshuler. Steve Shay will comment on my paper.

Then at 10 am, at a panel called Policymaking in the Face of Uncertainty, I will be commenting on the following 2 papers: (1) David Kamin, "In Good Times and Bad: Designing Legislation That Responds to Fiscal Uncertainty," and (2) Alan Auerbach, "Fiscal Uncertainty and How to Deal With It."

On Saturday at 8:30 am, at a panel called Fiscal Federalism, Multilateralism, and Tax Law Design, I'll be commenting on the following 2 papers: (1) David Gamage and Darien Shanske, "Fiscal Federalism from the Subnational Government Perspective: Tax Reform for the U.S. States," and (2) Itai Grinberg, "The New International Tax Diplomacy."

Certainly a diverse set of topics, if I do say so myself.  I have PowerPoint slides for all 3 of my talks, and will plan to post them here early next week.

Also at the NTA Conference, on Friday afternoon, there will be a session honoring the great Harvard law professor, retired by now of course, Bill Andrews.  This is a much-deserved honor.

I first met Bill in fall 1986, when I was at the University of Chicago Law School for a day of job interviews that culminated in my being hired there. (Luckily for my state of mind going into these interviews, I didn't learn until the following year that being interviewed at the U of C tended to mean something like a 10% chance of actually getting an offer.) On the plane from Washington, where I lived at the time, as I headed to the Chicago interview, I read Bill's classic article, Personal Deductions in an Ideal Income Tax. I didn't realize that he was visiting at Chicago that semester - I was just trying to expand my tax academic horizons, which at the time were a bit limited, and a colleague at the Joint Committee on Taxation had praised the article to me.

Quite a surprise to then meet him at Chicago, where (as a neophyte) I didn't have much more to say about it than that I had found it very interesting.  But it wasn't long before I knew a whole more about Bill's great contributions. He was also, as it happens, the third-ever speaker at the NYU Tax Policy Colloquium (in January 1996), where he very illuminatingly discussed the new view of corporate dividend taxation (also the topic of a really great short commentary that he wrote in this volume, which honors the work of David Bradford).

It will be great to see Bill again, and to see his work honored at the NTA.

More shortly on why I am calling the NTA session my almost-last work-related road trip of the year.

Who are these guys?

Butch Cassidy and the Sundance Kid led the Hole-in-the-Wall Gang, which knocked over banks.

In my house we have the Hole-in-the-Head Gang (Gary and Sylvester). They knock over garbage cans.

Paper presentation at McGill Law School

Yesterday, as noted by the Tax Prof Blog, I was in Montreal, at McGill Law School, presenting my recent international tax policy article that offers a kind of sequel or follow-up to my international tax book.

For scheduling reasons related to my teaching schedule here at NYU, I ended up giving the talk at a special session (rather than in their usual Tax Policy time slot). with students in attendance from several different tax classes at McGill, including those in Tax I who had not yet encountered even Canadian, much less U.S., international tax law or policy. So I ended up giving a kind of general lecture on U.S. and other international tax law and policy, rather than mainly focusing on the new article. This was reasonably fun (for them too, I hope), albeit, given my NYU teaching schedule, my second straight day of giving a 3-hour lecture.

I have revised slides regarding the article, but as I will be presenting it at the National Tax Association Annual Meeting next week, I will wait until the week after that to post them here.  At that point, I'll probably also post slides that I am working on for my 2 discussant slots at NTA: one discussing papers by Alan Auerbach and David Kamin, and the other discussing papers by David Gamage and Itai Grinberg.

What do real chefs do?

My guess is, they wear gloves.

Last night I made a fish stew, which I thought came out well if I do say so myself.  But I finely diced a habanero pepper to give the sauce a bit of kick. So far so good. But then, when I took out my contact lenses at the end of the day, the hot pepper residue that apparently remained on my fingers made my eyes burn horribly.  Same problem this morning, even after using such Internet-derived remedies as strong dish soap, rubbing alcohol, milk, and baking powder. (So I apparently will be wearing glasses today.) Only effect of trying all these remedies: now my finger tips are burning.

I've heard of paying a price for one's art (not to over-claim with regard to the fish stew or my general kitchen skills), but this one appears a bit steep.

Revised paper posted on SSRN

I have uploaded onto SSRN a slight revision of my previously posted paper, The Two Faces of the Single Tax Principle, to reflect comments that I received at the Brooklyn conference on October 23.  The new version is available here.  The main change is that I am now more bullish about the view the bilateral tax treaty compatibility of the so-called "option Z" approach to taxing foreign source income that I discuss in the paper.

If Noah Syndegaard were like Jeb Bush and vice versa ...

Syndegaard would have telegraphed through the press that the first pitch was going be high and tight, and the second one a diving curveball on the outside corner. Then, when the game started, he would have missed over the plate, leading to a triple off the top of the wall, and followed it by bouncing a wild pitch to the second batter, scoring the run.

Bush meanwhile would have kept his plans to himself, startled Rubio at the debate, and set him back on his heels for the rest of the evening.

Syndegaard (after the game): "That's my plate out there, not theirs."

Also: "I just didn't want him getting too comfortable. If they have a problem with me throwing inside, they can meet me 60 feet, 6 inches away."

The Royals afterwards: "Waaaaa!!"

All these quotes are courtesy of Metsblog, although the Royals one is a composite / slight paraphrase.

Now, deliberately beaning a batter - as Clemens did to Piazza - is out of bounds like the Utley slide. Syndegaard would have thrown behind the guy's head - the Clemens MO - had he shared the ugly and vicious Clemens goal. But if the Royals think that throwing high and tight, when hitters have been leaning out over the plate, is anything but totally standard baseball, then they've been watching some other sport than the one I watch (and probably not watching their own pitchers).

UPDATE: Then again, perhaps Syndegaard's last pitch (discussed here) merits more attention than his first.

(After Game 4) - Grudging props to the Royals, what a frustrating team to play. They turn MLB back into a little league game, in which every soft ground ball or flare they hit becomes an adventure.

(After Game 5) - I'm certainly glad I went to sleep after the 7th inning. Easier to get the bad news this morning than watch it unfold in real time.

A for audacity

Ted Cruz has apparently proposed a new tax reform plan that would create a two-bracket income tax for individuals, with a $36,000 exemption (or zero bracket) amount and a 10% rate above that - along with a $25,000 tax-free savings account, no payroll tax, no corporate income tax or estate tax or alternative minimum tax or Obamacare tax, etcetera.  It would be accompanied by a 16% VAT.

Obviously, the revenue loss under this plan, using reasonable rather than insane estimating assumptions, would be absolutely staggering. (We really would become Greece, or at least Kansas.) But the truly audacious, or should I say brilliant, aspect of this, as a marketing matter, is that he calls the VAT a "16% business flat tax." So it almost seems as if "business" is paying tax at a higher rate than "individuals" - if you don't realize that the business tax is actually a VAT, which would rather change the optics.

UPDATE: In fairness, I should note that, leaving aside the arguably misleading verbal description, there's nothing unprecedented (in terms of proposals, including those by academics) about Cruz's putting a VAT in place of corporate income taxation. And every announced tax plan from a Republican candidate is both extremely regressive at the top and wildly fiscally irresponsible.

First-year reading groups at NYU Law School

Last year at NYU we started having first-year reading groups. Professors could volunteer, and first-year students could sign up for, small groups that would meet for a couple of hours on four evenings, preferably at the professor's home. I believe we adopted the idea from other schools. The idea is to build connections, bring newcomers inside the community, etcetera.

Last year I interpreted "reading group" a bit too literally, and thus had as my topic Thomas Piketty's Capital in the 21st Century. This had the downside of making the people who signed up commit to reading an 800-page book across four widely separated meetings. It also seemed to suggest having academic discussions that touched on background economic literature, etc. I swiftly came to realize that, while this might be in principle a worthy thing to do, especially since all members of the group are volunteers, it's not really what the first-year reading groups either are or should be about. The first year students already have too much other work on their plates, and shoveling a bit more their way is neither what they do want, or should want, or need.

This year, having seen the light after my own experience and after comparing notes with colleagues, I came up with a very different structure that I think worked better. It didn't involve actual reading, but so what. Instead, we watched four episodes (each about 40 minutes long, from a 1-hour commercial TV time slot) of the 1970s to 1980s TV show The Paper Chase, which of course is based on the 1970s movie and stars John Houseman as the ridiculously imposing Professor Kingsfield. Given the length, we had time to chat both before and after each viewing.

One thing that did work out as planned, I thought, was that the episodes are (thankfully) ludicrously inaccurate as depictions of what being a first-year is actually like these days. Nowadays there's far less hierarchy, pomposity, performance pressure, and rote memorization, and I certainly hope less panic and anxiety, than in the fictional world of the movie and TV series.

In part for this reason, the show was frequently unintentionally funny. But the problem, at least for me, was that, although The Paper Chase is apparently regarded as having been a fairly good show, at least in a comparative sense (considering all the other junk that gets made), it's actually pretty bad in any moderately demanding sense. It predates Seinfeld's raising the sophistication bar a bit for mainstream commercial television (in terms of both structure and black humor), and it even more substantially predates the modern auteurist, niche-marketed cable era of show-runner-curated higher quality television (perhaps initiated by The Sopranos, but with all the famous examples since that everyone knows about).

For next year, my tentative plan is to read two law firm or law school novels, spending two weeks on each and NOT doing stuff that lies as far in the past as the Paper Chase book. One of them would be my novel Getting It, which I genuinely think the students would like, although I recognize the potential awkwardness if particular group members didn't like it. For the other, I am tentatively thinking about either Lindsay Cameron's Biglaw or Lisa McElroy's Called On, although I need to read them first and see what I think. (Other suggestions would be welcome.)

A bit further out in left field, perhaps for the following year I'll do a pair of alternative takes on Tolkien's Middle Earth. I have two in mind, each delightful when read against the background of the canonical books and films. One is Kirill Yeskov's The Last Ringbearer, set a short time after the destruction of the One Ring and told from a pro-Mordor standpoint (e.g., Gandalf was a genocidal racist, Aragorn was a ruthless opportunist, and Mordor was a rising modern industrial society challenging feudalism). The second is Rolf Luchs' The Last Homely Housekeeper, founded on the point that Rivendell, to run smoothly, would have needed low-ranking elves to do all the grunt work on behalf of Elrond's guests, and that such individuals' perspective on all the visiting worthies might well have reflected the old Montaigne line that no man is a hero to his valet.

Crazy candidates and the paradox of voting

It’s well-known that voting is irrational, if one defines the motivation as increasing the probability that the candidate one favors will win. The problem, of course, is that the value of a favorable outcome, multiplied by the percentage increase in the likelihood of that outcome that will result from one’s voting, is indistinguishable from zero. Hence, no one with a positive valuation of his or her time would be expected to bother to vote, under this model.

The “irrationality” of voting, under this model, is even starker if one assumes that voters act on the basis of narrowly economic self-interest. Even if Candidate A, if elected, would cut my taxes by $10,000 relative to Candidate B, my bothering to vote for A can’t possibly make sense economically under this framework. Assuming narrowly economic self-interest heightens the irrationality by placing a ceiling on my potential valuation of alternative outcomes – especially when we keep in mind that a given candidate generally can’t enact his or her entire platform even if elected – there are broader political constraints. (Brendan Nyhan, for example, notes that, at the recent Democratic candidates’ presidential debate, “one issue received little attention: their theory of political change. How exactly would Hillary Rodham Clinton or her rivals pass the programs and proposals they advocate?”)

Under this calculus, by the way, it is not clear that even, say, the Koch brothers are being “rational” in narrowly economic terms. True, unlike we mere voters they can perhaps buy a statistically significant impact on the expected outcome. But would the narrowly financial benefit to them of having their candidates win elections and change policies in their favor, discounted by the probabilistic effect that all their spending actually has on the outcomes, come out positive if one ignored all of the other personal and psychological, but not so narrowly economic, reasons why they spend so much money? I suspect not. But, of course, it’s true that when you have so many billions there’s the problem that other valuable things money actually can buy start to run out – you can’t, for example, buy eternal youth or perfect happiness. If you could but it cost many billions of dollars, the Koches and all other billionaires who were potentially within reach of having the requisite amounts would have reason to be far more stingy with their money than in the actual state of the world, where good things available for cash start at some point to run out. But I digress.

Obviously, the well-known answer to the “paradox” of voting is that people do it for emotional, expressive, social, and participatory reasons. Once voting is viewed as an expressive or consumer act, the metric changes. There is still, presumably, an implicit calculus of cost versus benefit. This is why the Republicans hope to gain from making it hard for Democratic voters to get to the polls – although in 2012 this apparently backfired to a degree, by increasing, for many such voters, the expressive value of making damn sure they voted anyway, even if this meant waiting for hours on a line.

The continued relevance of cost versus benefit also explains why voter fraud is so close to nonexistent unless it can be centrally organized without detection – there’s simply too little payoff to the individual act. But voting as a consumer act destroys the basic paradox, because it saves from absurdity the premise that a given voter will view the benefit as outweighing the cost. (I for one have certainly wasted more time in my life watching bad movies than voting.)

I nonetheless view the paradox of voting as central to how toxically dysfunctional our political system has become. Once you are voting as a consumer act, all rational choice regarding whom to favor is potentially out the window. It’s almost a mystery that people ever bother to vote in favor of their economic or other interests. (Although the “what’s the matter with Kansas?” view posits, entirely plausibly, that often they don’t.) To the extent that people do vote in favor of their own economic and other interests, this presumably reflects expressive, group-solidarity type perspectives, rather than the economic calculus. A candidate who, relative to the other candidates, wants to direct net economic benefits to the likes of me is saying: “I like and favor people of your type.” But there are many different ways to make such a statement.

A key reason the disconnect matters is that it can eliminate any incentive whatsoever to think coherently about whether a given candidate actually would, if elected, tend towards making the world a better place, however one defines this. If I am thinking of buying a car, it is possible that I will be swayed by silly advertising, or by a car dealer who is expert on psychologically exploiting people like me, into making a bad choice. But at least I am the one who decides what car I should buy. I’m not going to fail to take the decision seriously on the basis that I can’t measurably affect what car I will end up owning. With voting as one member of a mass electorate, this is entirely changed. Given that the effect I will have on whom I will end up with is statistically indistinguishable from zero, a huge collective action problem discourages everyone from taking the decision seriously, other than as a consumer act.

One possible outcome, as we’ve been observing lately, is crazy candidates, or those who might not actually be crazy but act as if they are.

I think it also bleeds over into political irrationality by people in office who have incentives to get it right. Take the Iraq war as a case in point. Even if we posit that invading Iraq was enjoyable enough, to the key Bush Administration players, to be worth doing even if it was likely to turn out as badly as it actually did, there still are mysteries such as why, for example, they made no effort to ascertain seriously how the occupation could best be organized. Pro-war forces within the Administration actively suppressed efforts at a realistic assessment (which they not only disparaged but apparently genuinely viewed as mere weak-kneedness), even though the Administration paid the price when things started to go so badly. But when the entire realm of public policy debate is being systematically cheapened and distorted by the fact that individual actors, until they have great power, have almost no direct motivation actually to care about true cause and effect relationships – and when they are performing before audiences composed of individuals who each effectively have no reason to care – rationality gets drowned or shouted out. And of course all the issues are complicated, requiring knowledge and a sense of context. So it’s potentially much too late once a given politician, even if well-motivated (which is hardly a given), gets into a position where he or she can actually exercise significant influence on outcomes.

At the end of the day, “When do you get good political leaders?” becomes a cultural question akin to, “When do you get the Beatles instead of Justin Bieber?” [Not to hate too much on Bieber here, however – I needed to put someone there, and surely he’s much better as a pop star than Ben Carson would be as president.] Not exactly grounds for long-term confidence in our political system or others around the world.

Crowd-sourcing plea (with a reflective update)

I am entirely convinced that I once (or more than once) saw a Monty Python sketch that I think of as having the title, "What if Queen Victoria could fly?" I remember it as a mock-pompous alternative history exploration, in pseudo-BBC documentary style, of how this would have affected European history.  E.g., it suggests that she would have raised British morale by flying overhead, and also could have scouted German military positions.

The problem is that I absolutely cannot find any reference to it on-line.  Or at least, I can't find a reference to its actual existence. It is easy enough to find proof that I have previously referred to it in writing, indeed twice.

Does anyone out there remember such a sketch (be it from Monty Python or something else), or have suggestions as to where one might find it?

UPDATE: As per the comments below, the mystery has been resolved for me - it was Saturday Night Live and Eleanor Roosevelt, not Monty Python and Queen Victoria. Odd how clear my contrary memory seemed to be.

False (or at least altered) memories are an established scientific fact, but I don't recall such a clear prior example from my own memories. But of course that's circular - it concerns possibly false memories about possibly false memories.

My very first or oldest memory in life is undoubtedly altered or at least composite. I recall standing up against the side of a playpen with tan wooden slats - the color of which I accurately remembered (according to my parents, when I asked them some decades ago) - having just, out of whimsy as it seems, tossed all my toys out of it onto the floor. In the memory I am too young to be able to stand unsupported, or to walk. I'm alone in the room, and am probably wondering, pre-verbally: What exactly did I do that for? What am I going to do now? But it feels reflective, rather than cathartic. Then, in the memory, I let myself fall back again onto the soft mattress-like surface of the playpen.

In what's coded as a memory of the same moment, I have also, for the first time ever, come to grasp - and been stunned by - the irreversibility of time. A second of clock time passes - it's infinitely short, I inaccurately believed at the time, and without understanding how multiple seconds would then also have to be infinitely short - and then it's gone, never to return. The phrase that encapsulated for me this startling realization was: "Now is now, and then is then." I reflected on this for a bit, appreciating how important it was.

I suppose that both the playpen memory and that of my becoming aware of time's arrow could have a real historical basis. But my memory of them as simultaneous presumably can't be true, given that at the playpen stage I was probably too young either to understand time or to articulate my understanding.

Talk last Friday at Brooklyn Law School conference on tax treaties

Last Friday was the third straight week that I closed by going to a conference. This time around, however, I only had to get to Brooklyn (rather than to Ann Arbor or Los Angeles), for an IBL Symposium at Brooklyn Law School entitled "Reconsidering the Tax Treaty."

At the symposium, I gave a talk on my short paper, "The Two Faces of the Single Tax Principle." You can find the paper here, and slightly re-edited slides from the talk here.

C'mon, let's not be obtuse

Suppose I went with a friend to a restaurant that had bad food, and that also was way too loud, so we couldn't hear each other speak.

Then suppose I told someone else about the experience and that, when I complained about the din, she said: "That's not the problem - the problem is that the place has bad food."

I would be nonplussed by such obtuse repartee.  Well, yes, I'd think, of course I didn't like going to a restaurant with bad food, but I also didn't like being in a place that's too loud.  If there are two problems, why exactly is the fact that one of them is real supposed to imply that the other one can't also be real?

How much respect for the insight and perspicacity of this individual would I have, after experiencing this conversation? Probably, not much.

I am reminded of this by Harry Frankfurt's lamentable new book, called "On Inequality." I had thought of commenting about this book earlier, but it slipped my mind what with the press of events. But it was brought back to my attention by a link on the Tax Prof blog to a Stephen Carter piece on Bloomberg View.

Herewith Carter, quoting and commenting on Frankfurt:

"Inequality is on everybody's lips these days - everybody on the left, anyway, and a lot of people in the center and on the right as well. But what if everybody's wrong?

"That's the contention of 'On Inequality,' a small, smart new volume by Princeton University philosopher Harry Frankfurt. At the very beginning, he states a simple but powerful thesis: 'Our most fundamental challenge is not the fact that the incomes of Americans are widely unequal. It is, rather, the fact that too many of our people are poor." Progressives, in other words, are shooting at the wrong target. The moral problem posed by the distribution of wealth isn't inequality. It's poverty."

I fail to see the difference between Harry Frankfurt and Stephen Carter, on the one hand, and my imaginary interlocutor regarding the restaurant experience on the other hand. The moral problem? There can't be more than one?

As I have said many a time, including on this blog (such as here) but also, for example, here, low-end inequality and high-end inequality raise fundamentally different issues. The problems associated with poverty may be more important, and are certainly more clearly, less contestably important. But that doesn't rule out the possibility that both sets of problems are important - and indeed, that they might (e.g., as a matter of political economy) be mutually reinforcing.

Of course we should want to make people who are suffering better-off. And I am too committed to beneficence to endorse making well-off people worse-off as an end in itself. But what if high-end inequality has ill effects on everyone else, or indeed on everyone? It is not seriously disputable that there are grounds on which this can seriously be argued (whatever one's own ultimate bottom line conclusion).

Frankfurt and Carter are simply embarrassing themselves by saying that "the" problem is just low-end inequality, and thus that high-end inequality ostensibly can't (apparently as a logical matter?) be a problem. It would behoove them to be more thoughtful, even if they ultimately were to remain on the anti-anti-plutocratic side.

The (pick a noun) of low expectations

Journalist Jake Tapper is getting widespread praise for asking Jeb Bush why, if it's utterly unacceptable to blame George W. Bush for not preventing 9/11, it's fair game to spend 4+ years questioning Obama and Hillary over the Benghazi attacks.

Jeb spluttered haplessly for a few seconds, apparently unable to believe that someone would ask him this, before blathering something about how, well, if Obama and Hillary had ignored prior warnings about the embassy security level, then it's legitimate to question them about this.

What's interesting is what happened next, or rather what didn't happen. The obvious follow-up from Tapper should have been: OK, but in that case, what about the infamous August 6 briefing that GWB received, entitled "Bin Laden Determined to Attack in the U.S.," and GWB's wholly dismissive response. If the current Administration can be challenged for ignoring warnings, then what about that gigantic oversight?

Obviously Tapper knows about this incident. My guess is that he felt it would be too disrespectful towards a member of the political leadership class to challenge him so crisply.  He presumably  felt that he had gone out far enough on a limb already by daring to ask the first question.  Which tells you something, not so much about Tapper in particular, as about the mainstream press.

NYU-UCLA Tax Policy Symposium on Entrepeneurship

The conference was yesterday, and I'm now at LAX awaiting the boarding call for my return flight.

Hopefully this will go more smoothly than my delayed flight out to Los Angeles on Thursday night. But AM travel tends to go more smoothly than late travel. I had needed to pick a late departure time due to a late afternoon class. Missed the Mets' thrilling Game 5 victory, then couldn't sleep until I had thoroughly absorbed the highlights. (Pessimism and fear had lessened the suspense of waiting for wheels-down so I could check the score.)

I would say the conference largely confirmed my prior that designing tax policy to encourage "entrepreneurship" is mainly a blind alley, cant and Ayn Randian rhetoric aside.

The first paper, by Eric Allen and Susan Morse, uses a model in which entrepreneurs have a very small probability of very big success, and have limited time and money that will run out if they don't hit it big enough first to attract the next round of VC financing. Backloaded tax benefits that will help if they succeed (but not otherwise) and that are costly to set up prove in this model to have very little value, and to potentially lower the chance of ultimate success (if accessing them uses scarce resources) even if they modestly raise one's after-tax expected return.

The second paper, by Donald Bruce, shows that it's difficult to link changes to any of the macroeconomic aggregates that we might think encouraging entrepreneurship has in mind, to policies ostensibly encouraging entrepreneurship, using any available measures of who these people are.

The third panel, for which I was the moderator, had a paper by Bill Gentry finding that people whom we might conceivably think of as including entrepreneurs have a lot of unrealized gain.  Vic Fleischer had a paper discussing the point that lots of capital gains these days are actually labor income. The papers had opposing policy suggestions, and I had some things to say at the session, but as both paper drafts are preliminary, perhaps best to leave it for now. (The video may be available on line).

On the fourth and last panel, Steve Shay had a paper, also in preliminary form, suggesting that, even taking as given the case for  providing subsidies or support of some kind for intellectual property creation (not necessarily limited to that which is patentable or copyrightable), it is not clear that we can do a good job either of identifying the things we might want to encourage, or of deciding how best (and how much) to encourage them.

I'm back in NYC as I finish this post, and glad that I will not be back on the road (or at least, going further to a conference than Brooklyn) for the next couple of weeks.