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.

Jumping the gun on "taxes and entrepreneurship"?

This Friday, October 16, is the date of the fifth (I think) Annual NYU-UCLA Tax Policy Symposium. It will be held at UCLA, and I will be flying out there late on Thursday night (after an afternoon class) in order to be the moderator for one of the panels.

This year's topic is Tax and Entrepreneurship, and the schedule is available here. The session I'll be moderating has the title "Can Entrepreneurship Justify the Capital Gains Preference?" It will feature papers by Victor Fleischer and William Gentry, and Ed Kleinbard will be our featured commentator (although I might possibly have a couple of much shorter things to say as well).

I will admit that I am somewhat of a skeptic about this topic on the merits, although it's timely and well-chosen in terms of contemporary debate. Consider the title of the day's first panel: "Goals and Design Principles - How Should We Use the Tax System to Encourage Entrepreneurship?"

While I haven't seen the papers for this panel, I think its title is jumping the gun a bit. Who's to say that we should be using the tax system to "encourage entrepreneurship"? I start out as very skeptical about this.

To think otherwise requires going outside standard economic models to posit a kind of market failure that has not, to my knowledge, been convincingly demonstrated. What makes this particularly ironic is the fact that proponents of "encouraging entrepreneurship" may often think they are being pro-market, and indeed in some cases this may rise to the level of ideology. But clear thinking reveals that, without a market failure claim, the case for particularly "encouraging entrepreneurship" collapses.

Let's start here by employing a conventional neoclassical model. People work and invest in order to reap economic rewards, and at the margin the market (and thus social) value of what they supply equals the cost to them of supplying it. We get the efficient outcome, but then, alas (from an efficiency standpoint), the tax system drives a wedge between supply and demand by taxing the value of economic production.

By imposing the tax, therefore, we are discouraging all productive activity, "entrepreneurship" included but without there being anything special about it.  So while reducing discouragement of all productive activity would be a good thing, from an efficiency standpoint, why exactly do we want to "encourage entrepreneurship"?  Unless there's more to the story, such an approach would inefficiently favor one branch of productive activity - which we haven't even, as yet, defined, or ascertained that we can identify in practice even if we know what we mean in theory - relative to other productive activity.

Is it being claimed that "entrepreneurial" activity is more tax-elastic than other modes, providing an efficiency reason for applying a lower rate?  No, that does not appear to be the primary claim, and if it were the rhetoric wouldn't specify positive "encouragement." If anything, successful "entrepreneurs" may often end up earning rents, which would imply lesser tax-elasticity and thus that perhaps we can tax them more highly than others without creating efficiency costs.

The claim is rather one about positive externalities. Supposedly, the successful entrepreneurs transform society, create economic progress, expand employment and others' wealth (not just theirs), create higher consumer surplus from the products they introduce, etcetera. Now again, this is an argument about market failure - not about freeing up markets. Only because (or rather if) these supposed magicians are creating benefits to others that they can't personally capture, and that markets don't enable them to extract, do we have any particular reason to "encourage" their activity relative to any other type of market activity.

Suppose we agree that intellectual innovators and pioneers help to transform society or expand the economy, making things better for everyone. Are these the same people as the "entrepreneurs" who would benefit from a lower capital gains rate in the scenario where they hit a home run? Are the supposed "entrepreneurs" in the data sets that studies use - e.g., self-employed businesses or whatever categories they employ - the same people as the ones who, in this story, are creating positive externalities?

Suppose we have a creative innovator, a unique individual who is poised to do great things that could have a general social payoff.  To what extent are the positive externalities that this individual is likely to generate correlated with the taxable income that he or she ends up earning? Is there a theory explaining why, the more this individual earns, the greater the external benefit to others?

If we are looking to intervene economically in the market, via the tax system, by tax-favoring some activities relative to others, how high on the list should these "entrepreneurs" be relative to all other individuals and activities that might yield positive externalities? What about nursery school teachers?  Artists? Scientists? What about - well, fill in the blank.

What about people who look a bit like entrepreneurs, so far as our identifying markers are concerned (e.g., being self-employed or getting long-term capital gains down the road), but who are imposing negative externalities, such as from rent-seeking? Are they relevant to the story as well? How much do we actually know about the balance between the negative externalities they create, and the positive externalities that "good" entrepreneurs create?

Okay, I realize that there is a burgeoning literature on "entrepreneurship." I'm loosely familiar with it, but certainly don't know it that well. Hopefully I will learn a bit more about it at the symposium. But based on what I know so far, I am skeptical about the extent to which this literature makes a convincing connection between (a) credibly demonstrated net positive externalities and (b) the "entrepreneurs," identified via imperfect markers, who ostensibly should be "encouraged."

I also am suspicious of the incoherent market triumphalism that celebrates "winners" without recognizing that the case for particularly encouraging them through the tax system rests on a claim of market failure, rather than on one about markets' virtues.

UPDATE: I am pleased to see that the papers at the NYU-UCLA symposium generally or mostly approach the topic without premature buy-in to the stance that I criticize above.

Slides for "Taxing Potential Community Members' Foreign Source Income"

This past Friday, I attended the Taxation and Citizenship Conference, held at the University of Michigan Law School, and ably organized by Reuven Avi-Yonah and Allison Christians.

I presented my paper "Taxing Potential Community Members' Foreign Source Income," which is available here.

The slides for my talk - which don't attempt to present the entire paper, as that would have been a real mess in a 15-minute time slot - are available here.

This is a fun and important topic, although (as I note in my paper), it's awfully hard to get a handle on how one should define "us" versus "them" for purposes of identifying individuals who will be treated as domestic taxpayers (a bad rather than a good thing for them, as it means they are potentially taxable on their foreign source income).

While I don't come to closure on that issue, I do note, mainly in the mode of preliminary exploration, that some of what I say regarding in my international tax book regarding entity-level corporate income taxation might also apply to the taxation of individuals - but with modification to reflect the differences between the two settings. I also sound what I think are a couple of fairly novel notes regarding how to think about taxing resident individuals' foreign source earned income, currently exempted (up to a dollar ceiling) under IRC section 911.

One subject of widespread agreement at the sessions, albeit not among the topics centrally addressed in my paper, was that FATCA, requiring foreign financial institutions to report to the U.S. regarding U.S. individuals' bank accounts, was aimed at people living in the U.S. who are committing tax fraud - not at U.S. citizens living abroad who may face onerous U.S. reporting requirements under the income tax, independently of FATCA. The question of burdens being imposed - often quite disproportionate to the tax revenue actually at stake - on our expatriates is something that requires more attention  than it has gotten to date from U.S. policymakers.

A new Yogi Berra-ism

On Friday I was at a conference on citizenship and taxation at the University of Michigan Law School. More on this, including my slides, within the next couple of days.

One of the other people at the other conference teaches in South Carolina, and was describing the horrible damage caused there by the storm. Much of the state is underwater, and reservoirs for drinking water have become compromised and temporarily unusable.

Without intending in the slightest to make light of this terrible situation, which has my full sympathy and concern, I couldn't help thinking of what Yogi Berra presumably would have said about this:

"There's no water there - it rained too much."

Anyway, I hope things return to normal there ASAP and with as little lasting damage as possible.

The tell

U.S. international tax policy debate is ramping up for a big fight over the OECD BEPS proposals. There is clearly going to be a lot of scholarship with competing bottom lines, and also a lot of straight-out advocacy, which on the corporate side will be very well-funded. The lines between scholarship and advocacy, and between plausible advocacy and hack work, will not always be clear.

With this in mind, I was disappointed by a piece I read this weekend, lead-authored by the eminent economist Gary Hufbauer, whose work I have admired and indeed cite in my international tax book. Hufbauer et al argue that OECD-BEPS is predominantly bad for the U.S. 

Okay, this is one side in the debate, and it is potentially plausible in at least some scenarios, although I lean more to the other side. Just on a personal level, I happen to have friends whom I respect on both sides of the debate.

But then I go to Appendix A at the end of this piece. It makes the claim that criticism of Apple and its affiliates for paying too little tax is factually inaccurate.  To quote:

"Apple and its stakeholders probably paid to the IRS around $25 billion between June 2014 and June 2015. This works out to a robust 45 percent of global profits in that year. Excluding the [shareholder-level] capital gains estimates, Apple and its stakeholders still contributed nearly $16 billion, or about 30 percent of global profits. The accusation that Apple and its stakeholders are shirking their responsibility as US taxpayers is not supported by the facts. "

Wow, all that well-documented tax planning to such little effect. Should Apple perhaps fire its CFO and tax director?

But here are a few details about how Hufbauer et al made these calculations:

--The measure of U.S. taxes paid that they use is almost certainly false as used. It's derived from GAAP reporting that treats deferred U.S. taxes that will in theory be paid by Apple at some point in the future as if they had been currently paid. This would be fine if the expected present value of the deferred taxes was the same as the amounts reported. But this is quite unlikely under real-world circumstances that permit companies to anticipate never paying this tax, at least at the current 35% rate. (Consider future tax holidays, lowering of the U.S. corporate rate, enactment of exemption without a present value-equivalent transition tax, etc.)

Apple would probably have had no problem persuading its accountants to treat the associated earnings as "permanently reinvested abroad" (or "PRE" in standard lingo), permitting it to treat the deferred taxes as zero rather than as equivalent to current cash taxes. It's well-known that Apple doesn't use the PRE designation to nearly the same degree as many other companies, apparently because they want to position themselves in public debate as relative good guys. Given not just this point but Apple's actual repatriation practices, we know with certainty that its current period cash taxes are far lower than its GAAP-reported taxes. Given the issues concerning how, if, and what tax rate future taxable repatriations will occur, there is a strong argument that current period cash taxes are generally as good or better a measure of actual tax burdens, even though what actually matters is true expected present value.

For this reason, work that I respect generally attempts to figure out cash taxes paid, even though they aren't reported. For a study of Apple, given their unusual non-reliance on PRE, it's absolutely necessary to try to do this, or at least to acknowledge the point.

Ignoring (or not knowing) this, as Appendix A does, is not what one would expect of competent professional work.

--The estimated tax on employee compensation is included in the numerator. But the employees' taxable income from that compensation is not included in the denominator.  That fails the test of using a consistent standard that compares apples to apples, etc.

I titled this blog post "the tell." This of course is a poker term, referring to giving yourself away. I had particularly in mind the following two sentences: "To sum up these calculations, Apple and its stakeholders probably paid to the IRS around $25 billion between June 2014 and June 2015. This works out to a robust 45 percent of global profits in that year." 

This is just really bald. From one sentence to the next you have a shift between the inconsistent numerator and denominator, written in such a way as to obscure it. Whose are the global profits, after all? Not those of "Apple and its stakeholders."

BTW, they even include Social Security and Medicare taxes estimated to have been paid by Apple employees. While one could in principle argue for this - leaving aside both incidence questions and the issue of linkage between Social Security taxes and benefits, which could turn these into prepayments for retirement income and services rather than "taxes" - this is a large departure from accepted frameworks of comparison. Once again, it means that the careless reader may end up comparing apples to oranges.

--They also include, in the taxes-paid numerator, shareholder-level capital gains and dividend taxes.  Now, here at least (unlike with employee compensation) there is a reason for keeping the income that gave rise to these tax liabilities out of the denominator. If you have a pure double tax on corporate income, you wouldn't count the same income twice, at both the entity and shareholder levels, in the course of determining the tax burden on the overall enterprise.

But capital gains can relate to past earnings that might not have been taxed at the time, and/or to expected future earnings that might not be taxed in the future.

Hufbauer et al note that the period they measure includes an "exceptional period for Apple [in terms of] its stock market valuation." Especially if this was an atypical period for Apple stock, significant adjustments might be required. Now, Appendix 1 does suggest that they made certain adjustments for both timing and period-related elements of the capital gain. But once I've seen them using the GAAP taxes-paid measure without reference to its possible inaccuracy, and once I've also seen their putting taxes on employee compensation in the numerator but keeping the associated income out of the denominator, it becomes much harder to give them the benefit of any doubt on how they adjusted. There is simply no reason to trust them on this issue, once one has seen how they handled other issues.

Stop using the Gini coefficient!

I have felt for a while that statistical measures of aggregate inequality, such as the Gini coefficient, are not very informative because they agglomerate two different issues: high-end inequality and low-end inequality.

Here, for example, is what I said about it in a recent book review:

"According to an old joke, a statistician whose head was on fire, while his feet were encased in a block of ice, reported that, on average, he was very comfortable.  Less well-known, however, is the kinship of a sort between this poor fellow and the Italian statistician Corrado Gini, who not only devised the famous Gini coefficient, but urged its use in measuring a given society’s aggregate income or wealth inequality.

"The problem Gini missed relates to interpretation, rather than to measurement.  Under the Gini coefficient, extreme inequality at both the top and the bottom of the social scale will not statistically offset each other, giving us a false reading of zero aggregate inequality, along the lines of the fire-and-ice example.  Instead, each will raise the quantum of inequality that the measure detects.  However, the coefficient still has the defect of amalgamating two normatively distinct phenomena in a single measure.

"Low-end inequality matters because it indicates that some people are worse-off than the rest of us.  Basic human beneficence indicates trying to help such individuals.  To be similarly concerned about high-end inequality, from the standpoint of beneficence – which would oppose making those at the top worse-off as an end in itself – one needs to make the case that it is bad for everyone else.  I myself am among those who believe that the extraordinary rise, in recent decades, of the top 0.1 percent has indeed had harmful effects on the remaining 99.9 percent.  Yet whether those of us who believe this are right or wrong, both the main issues raised by high-end inequality and the main fiscal policy (and other) instruments that one might use in addressing it, are very different than those associated with addressing low-end inequality."

The problems with using Gini were most recently brought to mind by recent discussion of a paper by Bill Gale, Melissa Kearney, and Peter Orszag which asked "how much of a reduction in income inequality would be achieved from increasing the top individual tax rate to as much as 50 percent. We calculate the resulting change in income inequality assuming an explicit redistribution of all new revenue to households in the bottom 20 percent of the income distribution. The resulting effects on overall income inequality are exceedingly modest."

One issue raised here is that raising the ordinary income rate can't do anything about all economic income that isn't subject to this rate, whether because it is treated as capital gains or remains unrealized. Likewise, taxing inheritance is not part of the exercise - whereas, whether doing so is a good idea or not, it's clearly more closely related than annual taxable income to all of the Piketty issues.

More on the Gini front, however, here is part of John Quiggin's response, which is very like-minded to my view of the topic:

"What does this [i.e., the Gale-Kearney-Orszag finding] mean? Two things:

"(i) As is well known, the Gini coefficient is a lousy measure of income inequality, much more sensitive to the middle of the income distribution than to the tails. [Note: as Quiggin acknowledges, Gale et al look at considerably more than just Gini - I am telescoping the discussion here.]

"(ii) The proposed redistribution would substantially improve the welfare of the poor, with most of the burden being borne by taxpayers in or near the top 0.1 per cent.

"It’s obvious, as the authors note, that the 90-50 measure won’t change, since neither group is affected (there’s no simulation of behavioral responses which might have indirect effects). But, since the 99th percentile income is very close to $400k, there’s very little impact on this group either. But the tax, as modeled, raises a lot of money from the ultra-rich incomes. As a result, distributing the proceeds at the bottom of the distribution raises incomes substantially, which explains the big changes in the 90-10 and 99-10 ratios.

"The real lesson to be learned here, one I came to pretty slowly myself is that old-style measures looking at quintiles or even percentiles of the income distribution are no longer very relevant. The real question, in the economy of Capital in the 21st Century is how much should go to the ultra-rich."

Or at least, I would say, that's the real question insofar as one's interest is high-end inequality in particular. (With no adverse implications for the relevance of low-end inequality.)

The farce of "arm's length" transfer pricing and "cost-sharing"

I'm currently teaching a class on U.S. international tax law, which has helped me to reconnect with nitty-gritty details of the existing rules that don't always feature in my (or other people's) analyses of broader conceptual issues in the field.  In a class that is coming up soon, we will be discussing the U.S. transfer pricing rules.

From a purely pedagogical perspective, when I read the recent case of Altera Corp. v. Commissioner, decided unanimously by 15 U.S. Tax Court judges on July 27 of this year, I felt like the recipient of a rare gift. Most of the transfer pricing cases are long, fact-specific, and based on past iterations of the transfer pricing regulations that the IRS and Treasury subsequently tried to fix. This tends to leave the cases' continuing precedential value and broader interest far too limited to justify spending a lot of the time on them in a 3-hours-per-week general survey course.

The frequency of changes to the relevant regulations reflects Rule 1 of U.S. transfer pricing litigation, which holds that the government always loses. (This is not quite literally true - but in the few transfer pricing cases that the government won there were generally egregious taxpayer blunders, unlikely to be repeated, such as failing to do anything to establish a proper fig leaf, and/or leaving memos in the files avowing an intention to use bogus transfer prices.)

By such standards, Altera is a dream case for three reasons. First, the regulations under which it was decided remain almost up-to-date. (They were issued in 2003, and subsequently revised in 2011, but not, it appears, relevantly to the main issue in the case.)  Second, Altera was decided on summary judgment, so its discussion and analysis almost exclusively pertain to broader legal issues, rather than to narrower factual ones. Third, there could be no better illustration than this case of the farcical nature of U.S. transfer pricing practice, and of the need for it to change.

I view Altera as a farce in three acts (more on this shortly), but this does not count the already farcical set-up. Section 482 of the U.S. Internal Revenue Code authorizes the Commissioner to restate the claimed terms of purported transactions between commonly-owned businesses if "he determines that ... [this] is necessary in order .. clearly to reflect ... income."  These words could hardly sound more deferential to the Commissioner's administrative discretion. But unfortunately, the regulations state that "the standard to be applied in every case is that of a taxpayer dealing at arm's length with an uncontrolled taxpayer."

This is far more limiting that "clearly reflecting income," and can be read as suggesting a need to treat actual arm's length transactions between unrelated parties as relevant legal precedents for IRS transfer pricing determinations under section 482. Now, there is a huge literature about all this, which (in my reading, at least) has reached the predominant conclusion that an arm's length approach is completely useless, due to the both theoretical and practical problems that it faces. But for many in the field, adherence to arm's length appears to remain a matter of quasi-religious faith.

Altera itself concerned a regulatory election, under which U.S. taxpayers with foreign affiliates can opt to use an approach called "cost-sharing" for purposes of determining the applicable transfer prices within the group. In the typical case, a U.S. company with U.S. employees who live, say, in California or the Pacific Northwest is creating what it hopes will be valuable intellectual property (IP) that can be profitably exploited worldwide.  Cost-sharing is a device that they use to shunt as much of the overall profits as possible to tax haven subsidiaries in, say, the Cayman Islands.

Now, in the real world of transactions between unrelated parties there sometimes are actual "cost-sharing" agreements. For example, two companies with complementary skill sets might agree to collaborate on something that they hope will make them both a lot of money.  In such a case, they may agree that the ultimate profit split will be affected by how much $$ each of them has expended in the development process.

Then there is fake cost-sharing between affiliates, the topic of interest here. Back to our U.S. company. It has all the employees and all of the relevant skills for developing particular IP. But it creates a Caymans affiliate that, in substance, contributes nothing to the process. But the Caymans affiliate does indeed observably purport to contribute cash to help pay for developing the IP. Where did it get the cash?  Easy, the U.S. parent will typically have given it the cash, in exchange for all of its equity, so that the affiliate could hand the cash right back to the U.S. parent via the pretense of paying for a portion of the development costs. The Caymans affiliate may then get, say, 100% of the upside with regard to profits from selling the IP in all countries outside the U.S.

In short, the typical deal is like (one suspects) almost no actual cost-sharing arrangement in the history of arm's length transactions.  One party (the U.S. parent) contributes everything, while the second party (the Caymans sub) contributes nothing, except for giving back cash that the first party had placed in its bank account 5 minutes earlier.

It is already giving these transactions too much credit to say that the Caymans affiliate has effectively gotten the entire foreign "upside" in exchange for nothing. Its getting this upside (and thereby "bearing risk" regarding how great this will actually be) is completely meaningless, given common ownership. But in fact no party to a true arm's length cost-sharing arrangement would get the opportunity to make this sort of a deal. You don't get a piece of the upside without bringing something real to the table. So it's fundamentally ludicrous to look at actual arm's length cost-sharing deals for evidence of how a particular item within the broader deal ought to be treated in related-party arrangements.

Giving away all the foreign upside in exchange for nothing is already a nice feature of supposed cost-sharing arrangements between commonly owned affiliates. But it's better still if, contrary to the supposed logic of section 482 cost-sharing, you can also give disproportionate deductions to the U.S. affiliate. This further increases the proportion of taxable income that can be treated as arising in a tax haven, rather than in the U.S.

Taxpayers have assiduously pursued these opportunities. Earlier versions of the cost-sharing regulations had proven ripely exploitable, forcing the IRS to revise them, but it had also taken two beatings in prior litigation concerning the earlier regulations.

So the farce really started long before Altera. In Altera itself the legal issue was relatively narrow, although (as we will see) its implications are considerably broader. Taxpayers evidently saw how they could take advantage of the fact that common practice in the IP industry involves giving the "talent" incentive compensation such as stock options.  Thus, if the engineering team contributes to hitting a home run, such that the value of the company's stock skyrockets, the members of the team get to see the value of their compensation go up accordingly.

A trick that taxpayers came up with was to argue that, under the cost-sharing regulations, this incentive compensation - often a huge piece of the overall development costs - should be excluded from those that the Caymans affiliate needs to "share."  This wouldn't matter economically, but it would permit the U.S. parent's taxable income to be lower, and the foreign affiliates' share to be higher, than if such costs were included in the cost-sharing formula.

Even before the final version of the 2003 cost-sharing regulations came out, it was clear that the IRS would require including incentive compensation in the costs to be "shared." So the regs would have to be invalidated in this regard, if the above plan was to work. Taxpayers therefore set up a farce that played out in the following 3 stages:

(1) The industry and its friends flooded the notice-and-comment process that gave rise to the 2003 regulations with extensive information documenting that true arm's length cost-sharing deals NEVER require the parties to share the cost of each other's incentive compensation.  They also explained why this was so. For example, it would give unrelated parties odd incentives, e.g., to try to drive down each other's stock price so that the costs one had to share would be lower.  Needless to say, these considerations don't actually apply to related party deals, where there is only one affiliated group, playing on both sides, and thus there is no possible concern about thus harming deal concord.

The taxpayers of course did not have to show (as would have been impossible) that arm's length parties would ever make a deal in which one side provides all the value, and the other gets a huge piece of the upside despite adding nothing that the other side needed. For good measure, the taxpayers proffered statements by reputable leading experts, saying, for example that there is no economic cost to a corporation or its shareholders of providing stock-based compensation. If this is true, I would like to offer $5 per firm for options just like those that high-end IP firms grant to their star employees.

(2) As no doubt was expected, the Treasury stuck to its guns in the final regulations. It kept the requirement that incentive compensation be included in cost-sharing.  In two important respects - each no doubt anticipated by the strategists on the other side - the way in which this was done placed the regulations in legal peril. First, the transfer pricing regulations as a whole continued to say that the standard in all cases is that of arm's length transactions between unrelated parties. There was no separate reliance on clear reflection of income. Second, the preamble to the regulations offered conclusory statements to the effect that the Treasury was simply unpersuaded by the evidence that taxpayers had offered in step (1) of the farce. The preamble did not carefully explain, for example, why the facts evinced concerning true arm's length deals had little bearing here, given other differences between the two settings. What made this unsurprising was common practice by the Treasury. Preambles generally are not written as litigation documents - although, after Altera, they probably will be - because the Treasury evidently believes (or has believed) that its seemingly broad administrative discretion makes this unnecessary.

(3) The final stage of the farce took place before the Tax Court in Altera. The taxpayer's litigators successfully peddled a dramatic story of stubborn regulatory high-handedness. In fact, what the Treasury had been guilty of was indifference to evidence that was logically irrelevant. But 15 Tax Court judges bought the story sufficiently to be unmoved even by the IRS argument that cost-sharing's elective character as a taxpayer method should make full adherence to "arm's length" unnecessary here, even if it is required elsewhere under the transfer pricing regulations.

Altera likely has broader implications for the tax regulatory process. Taxpayers will regularly flood the notice-and-comment process with evidence and arguments that the Treasury has now learned it will need to rebut expressly and extensively, such as in preambles to final regulations.  The point need not be to persuade the Treasury - just to delay it and raise the legal risks it faces. The preambles, or other published support for final regulatory pronouncements, will need to be written as litigating documents, in cases where a serious and well-funded legal challenge can be anticipated.

In addition, the transfer pricing regulations generally (i.e., not just in cost-sharing) are likely to be subject to multiple challenges.  These regs have developed over the years to have an ever more "formulary" character.  They set forth multiple approaches that look, say, at the profit split or rates of return being claimed by the different members of a commonly owned group. In many of these cases, taxpayers may be able to adduce evidence that, in arm's length deals of a seemingly (but not actually) similar character, particular aspects of a given formula are not in fact taken into account.  So the farce of existing transfer pricing practice has a good chance of getting a lot worse.

How the Treasury should respond to this is not entirely clear. But one thing they certainly should do is delete, as soon as possible, the statement in the regulations that arm's length, rather than clear reflection of income, applies "in every case."

There are also arguably broader implications for the ongoing BEPS process. Obviously, Altera is not a relevant precedent outside the United States. But it shows what can happen if one doggedly tries to apply arm's length "evidence" and reasoning outside their actual realm of economic meaningfulness and relevance.

Bankman-Shaviro article on Piketty's Capital in the 21st Century

These days virtual publication matters more than actual, so far as readership is concerned. But I'll nonetheless note that the article I co-authored last year with Joe Bankman, "Piketty in America: A Tale of Two Literatures," has now officially come out.  It's at 68 Tax Law Review 453-516 (2015).

The online version, differing little from the final one, is available here.

The Tax Law Review issue (vol. 68, #3) in which it appears contains all five of the papers from the symposium on Piketty's book, Capital in the Twenty-First Century, which took place here at NYU just over a year ago. The others are by Gregory Clark (with Neil Cummins), Wojciech Kopczuk, Suzanne Mettler, and Liam Murphy. There's also a response by Piketty that mainly covers some aspects of what he had in mind with the book.  He appears to have no quarrel with our commentary.

Chirelstein memorial session

The Chirelstein memorial session at Columbia was quite nice. Lots of people have great memories of him, with complementary stories, and a very clear picture emerges of a unique and delightful man.

One thing we heard a lot about, at the session, was how much Chirelstein ostensibly liked students. He definitely liked teaching and performing. But one thing my group at Yale Law School - an extremely skeptical and hard-bitten group regarding most of our professors, but unabashed Chirelstein fanboys - most liked about him was that he wasn't cuddly or ingratiating or seeking our approval or friendship.  He seemed above all that - albeit wholly lacking (thank goodness) in Kingsfieldian pretense and pomposity.

Oddly, of the 8 speakers, only one of them (Stephen Cohen) was part of the tax world. We heard lots and lots about Chirelstein's engagement with colleagues concerning contracts (and also about his path-breaking corporate finance work), but very little about tax.

I'm not sure why there weren't more tax speakers - for example, his Columbia tax colleagues Graetz and Raskolnikov were there, not to mention his one-time Columbia tax colleague (and co-author) Zelenak. I also would have had plenty to say about Chirelstein, if I had been asked. But admittedly I was by no means an intimate of Marvin's, nor I suspect, were these other individuals.  The answer may be that Chirelstein preferred the contracts world and contracts people to those in tax, leading to closer personal connections there, by his choice.