Saturday, July 30, 2016

The Democrats' new "strategy"

As the NY Times notes today, "Democrats marked a decisive turn in their campaign against Donald J. Trump this week, moving to recast the 2016 not as a conventional battle between left and right but as a national emergency that requires voters of all stripes to band together against a singularly menacing candidate....  [T]hey used their convention to portray Mr. Trump as a dangerously unstable figure and a friend of foreign despots like Vladimir V. Putin of Russia .... [and] suggested Mr. Trump might have authoritarian impulses of his own."

In my title for this blogpost, I put the word "strategy" in scare quotes because there's something quaint about calling it merely a "strategy" to point out something so important that appears so clearly to be true.

However, the advantages that I am hoping the "strategy" will have include the following:

1) It is widely recognized as true.  Thus, the article swiftly pivots to quoting David Boaz, the Executive Vice President of the libertarian Cato Institute - hardly a hotbed of pro-Democratic or pro-Hillary sentiment.  He says, of the critique of Trump: "I really don't think that's too over the top.  We have one candidate who's not even pretending - he is promising to be a one-man ruler."

Many other conservative and/or Republican commentators, including both politicians and bloggers, journalists, etc., have been saying the same thing for months.  The critique is not something the Democratic convention-planners cooked up in late-night strategy sessions.  There has been a growing tidal wave of people of many different viewpoints coming to realize that it is true, and saying so.

2) Like all good campaign "strategies," it leverages the other candidate's political strengths against him.  So much of what Trump does clearly fits the narrative that he will have trouble trying to disconfirm it without neutering himself.  Plus, he may just go along decisively confirming it (as with his mid-Democratic convention call for Russian espionage against the United States government).

3) It puts pressure on the many people who are still backing Trump out of cynicism, opportunism, or convenience (i.e., who are not themselves committed authoritarians).  One might think that the likes of a Mitch McConnell or a Paul Ryan wouldn't have to worry about having backed Trump if he loses the election.  After all, he presumably can't destroy our way of life and system of government as a private citizen.  So the fact that they supported something terrible, despite (I think) knowing, albeit perhaps not caring, about how terrible it is, would not have been directly proven to the general public.  But the thing is this.  Trump is going to stay in the news for a while after the election, even if he loses, and there is a good chance that he will act in an increasingly unhinged fashion.  Think of Sarah Palin after the 2008 election.  She remained a gigantic news story for several years afterwards, during which time she increasingly discredited herself and thereby shamed people who had been willing to support her for Vice President.  Trump will be an even bigger story than she was, although not necessarily for longer.  And even beyond growing increasingly verbally and behaviorally unhinged (if that's possible), he might also conceivably experience a humiliating financial crackup.  So people who have backed Trump, even if they did it while holding their noses a bit, face the risk of having this thrown in their faces, to their political detriment, for several years at least.

Obviously, this is not an issue for Ted Cruz.  So, if he were to run (or when he runs) in 2020, then outside of the Trump bitter-enders (who might still be important in the Republican primaries), he would be viewed as free of this particular taint.  If he were to lose the general election, it would be for other reasons.  But many other Republicans should know today that, even if Trump loses, they face the risk of being deeply tainted.

Then again, all this assumes that the "strategy" works, at least in the sense that (whether by reason of it or not) Trump loses the election.  That in turn presupposes that enough voters both object to authoritarianism, and can recognize it as such despite all of the noise.

Friday, July 29, 2016

How many pomegranate seeds did Persephone eat anyway?

Because I like summer so much (even when it's been muggy, as in NYC recently), I found myself thinking: Why did Persephone have to eat those six pomegranate seeds when Hades was holding her prisoner in the Underworld, according to the Greek myth, causing us to have six green months and six barren months?  Couldn't she at least have eaten fewer seeds, if not fasted altogether?

But when I checked online, I found a startling lack of consensus regarding just how many seeds she is supposed to have eaten.  It appears alternatively to have been one, three, four, or six.

Thursday, July 28, 2016

The sphinx without a secret

Oscar Wilde has a short story called "The Sphinx Without a Secret," about a woman who appears to have a great mystery in her life - going to a private apartment at certain times in the week, etc.  After she dies, someone who's fascinated with her investigates, and finds out that the great secret is there was no secret - it was just a sham to create the appearance of mystery and excitement.

Donald Trump's Russian connection isn't quite the same as this - he isn't trying to create a mystery regarding whether he is a foreign agent.  But the underlying truth here is, I think, as unmysterious as hers.  I believe one can predict it with confidence, although obviously verifying (or modifying) it would be desirable.

Here's the basic model for understanding it.  U.S. politicians often have big donors who give them lots of money, and with whom they have close relationships and shared understandings, while generally avoiding express quid pro quos.  (Plus, each side in such a relationship does in fact have multiple allies, along with multiple parameters guiding its behavior.)

Not to pick on Republicans here relative to Democrats, but a classic example would be Scott Walker's relationship with the Koch brothers.  They've given him lots of money, he tends to pursue their objectives, but he could honestly say that he'd do so anyway.  He tends not to talk to them much directly (a liberal Boston radio jock embarrassed him by calling him on the phone and pretending to be a Koch; Walker fell for it and spoke with him very accommodatingly).  Part of the donor's game is simply to exert influence over the donee's worldview, plus of course they have selected each other based on prior compatibility.

I would start with this as my model for Trump and the Russians, only there are some differences.

1) The Koch brothers are American citizens with strong views about U.S. policy.  Russia is a foreign power whose leader regards the U.S., in large degree though not always, as an enemy.  Putin recognizes that we have some common interests and foes, but his chief foreign policy goal is to restore Russian-U.S. parity or better, including Russian dominance in its territorial sphere at the expense of NATO allies.  Hurting the U.S. is generally good from his standpoint, all else equal, and he would certainly like to expel us from as much of Europe as he can.

2) Scott Walker, I presume, has lots of funding sources.  By contrast, I gather that there is substantial evidence that Trump has been heavily reliant on Russian financing for more than a decade.  Other than Credit Suisse, I gather that few if any banks active in the U.S. credit market will fund him anymore, because he has proven to be too bad-faith a business partner.

3) Scott Walker knows and understands the norms of U.S. politics, e.g., regarding how you moderate the degree of quid pro quo.  (And again, there are Democrats and their financial backers whom I could sub in here.)  Trump, needless to say, doesn't understand this, and has zero inclination to try to learn it.

4) Scott Walker is within the psychologically normal range of human nature.  Trump is an extreme narcissist.  So the fact that these guys are his "friends," and have been helping him out and working with him for so many years, means that they and everything they want (unless directly at his expense) are by definition good.

I suspect that mostly covers it.  I think that, if you asked Putin, under truth serum, is Trump your stooge, he would say Yes, and we've worked hard for many years to make him one.  If you asked Trump under truth serum, he would say: No (obviously, this would be unacceptably hurtful to his self-esteem), but he would add that the Russians are really good people, they've helped me out, and I sympathize with them and understand their needs.

Is there an implicit threat that they'd pull the funding if he didn't give them what they want?  I don't doubt that they would, but I presume he is not focused on that, and may even be naive about it.  (Why would his friends, who are such nice guys, ever do that to him?)  There's often an iron fist under the velvet glove of an ongoing relationship - but that doesn't mean that express blackmail threats are being regularly (or ever) issued.

Does this sound too stupid and naive on Trump's part?  I don't think so.  Josh Marshall of Talking Points Memo, who has played an important role in developing this story, has been very cautious here, as he should be, but what he hasn't done at all here is invoke what he calls "Trump's Razor."  This is the proposition that, in trying to figure things out about Trump, one should always "ascertain the stupidest possible scenario that can be reconciled with the available facts."

Trump's Razor hasn't failed Marshall yet in this election cycle, and I don't think it would it fail him here if he thus invoked it.

Monday, July 25, 2016

Another brick in place

I seem to have completed a draft of chapter 7 of my literature book, concerning Anthony Trollope's The Way We Live Now.  Here is the layout so far:


1. Introduction

2. The Mapmaker’s Dilemma in Evaluating High-End Inequality


Introduction to Part 2

3. Why Aren’t Things Better Than This? Jane Austen’s Pride and Prejudice

4. A Rising Tide Rocks All Boats: The Threat of Rising Prosperity in Stendhal’s Le Rouge et le Noir

5. The Arriviste as Morally Compromised Cat’s Paw: Balzac’s Le Père Goriot and La Maison Nucingen

Summing Up Part 2


Introduction to Part 3

6.  Art, Heart, and “Schmart” in Charles Dickens’ A Christmas Carol

7.  Don’t Blame Them? Plutocrats, Capitalism, and Foreigners in Anthony Trollope’s The Way We Live Now

Chapter 8, which will conclude Part 3, is almost certainly going to discuss E.M. Forster's Howards End.  I have thought about discussing Saki's The Unbearable Bassington, which I love, but choosing Forster is probably preferable on multiple grounds.

Sunday, July 24, 2016

The Hungry Tiger

I once (as an adult) read The Wizard of Oz, which (as books can be) is fuller than the movie, but  you can also see that the 1938 filmmakers did a great job of compressing and tightening the plot to increase its dramatic impact.  Then I read Book 2 (I haven't read the other twenty or so), which also was fun and had a memorable character called  the Hungry Tiger.  Per Wikipedia:

The Hungry Tiger is a massive beast who is friends with the Cowardly Lion. He is always hungry no matter how much he eats, and longs to eat a "fat baby," though he never would because his conscience will not allow him to do so. He asks Nanda for permission to eat her and when she declines, he asks for a large quantity of beefsteakspotatoes, and ice cream. He wishes that a dentistcould remove his appetite. At the banquet in the Emerald City at the end of Ozma of Oz, he acknowledges that he is finally full.

My memory of the Hungry Tiger, from Book 2, is that he is always saying to people: I'm so hungry I almost feel like eating you, but what would be the point, I'd just be hungry again in an hour anyway.  This in turn now brings to mind Buddy - the fellow shown here below - although he is fortunately far too small to think of us as food, other than as its suppliers via the crunchies we give him.  

The thing about Buddy is how opposite in temperament he is to the Hungry Tiger.  Even if he had human-like anticipation and foresight, he would NEVER fuss along the lines of "What's the point? I'll just be hungry again soon."   He is far too buoyant and (if one can say this of a cat) essentially optimistic to despond like that - even as he gets older and creakier, and thus generally starts to feel much worse physically.

So he'll whine for food if he thinks it might work, even if you just fed him five minutes ago.  But, unless he's exceptionally hungry, if it doesn't work he just figures: That's fine, plenty of other nice things to do (such as going to one of his favored napping spots).

Whenever I get agitated about something, say about the election, I realize what a valuable lesson about temperament and mood one could try to learn (if such things were learnable) from Buddy.

Friday, July 22, 2016

Greg Mankiw on universal basic income

Here he makes the same point that I have (here, for example).  But no, he didn't get it from me - the point is well-known to people who think about it carefully.

Easy writing versus hard writing

The tax and social justice paper that I mentioned in an earlier post took me just over three days.  The slightly shorter Jane Austen chapter for my literature book has taken (so far) hundreds of hours, spread out over multiple drafts and a couple of years.

Whistling (if not quite singing) in the rain

In last night's RNC speech, Trump was almost commendably up-front about the fact that he is proposing to replace the U.S. legal and political order with a Putinist dictatorship.  By squinting a bit, however, I can discern three silver linings:

1) Prognosticators generally see a 60% to 80% chance that he will lose the election.

2) If he wins, we don't know for sure that the institutional barriers will fail.  This depends on other politicians in both parties, on Executive Branch employees and the military if (when?) they get illegal and improper orders, and on civil society institutions including the press.

3) We also don't know for sure that he means it.  If not, it wouldn't be the first time that purchasers of Trump products failed to get what they were promised.

Thursday, July 21, 2016

Tax and social justice paper

I noted in an earlier blog post that I am writing a short piece for the tax and social justice conference that is upcoming at NYU in late September.  The piece now has a title - "Interrogating the Relationship Between 'Legally Defensible' Tax Planning and Social Justice" - and I've actually written it, or at least a 10,000 word first draft.  It went really fast, verging on writing itself.  And it does indeed take the unusual form, for the last 80 percent, of a dialogue between two fictional individuals with somewhat differing viewpoints.  At the moment, although one always must distrust the infatuation associated with something you have just written and that came together easily, I rather like it.

I'm not planning to post it before September, but here is the abstract:

"Large-scale tax avoidance by wealthy individuals and large companies that is legally defensible under relevant national tax laws can nonetheless have major adverse effects on social justice and/or public morale.  However, its legal defensibility complicates analyzing its ethical implications, as compared to the more straightforward case of committing tax fraud.  Legal defensibility also complicates the analysis of the extent to which advocates of human rights principles and policies should focus on such desiderata as “good corporate tax behavior” and the ethics of tax professionals.

"Much of this complexity pertains to (1) issues of ex ante legal uncertainty regarding whether a defensible position would actually be upheld if closely scrutinized, (2) the multifaceted character both of tax professionals’ ethical obligations and of their incentives, and (3) the ambiguity of people’s personal ethical obligations to act altruistically, rather than just self-interestedly.  It also is hard to judge the tactical questions associated with focusing on these issues, rather than on the tax rules’ content.  Ethical challenges may help to undermine social acceptance of current practices, but also may distract from legal reform efforts."

Interpreting last night's Cruz-Trump set-to

I haven't been watching the Republican Convention - shambolic versions of the Nuremberg Rallies aren't my thing - but Martin Longman's distinctive take on what happened seems to capture an important aspect, missing in most of the other accounts that I've seen.

It appears that the Trump camp (1) had full notice of what Cruz was planning to do, (2) organized the response of booing him off the stage and having Trump crowd his exit, and (3) informed him that this was their plan.

They may have hoped that he would find this intolerable and back down, but they couldn't have been counting on this, at least not 100%.  What I think they were counting on is that, if he stuck to his plan and they stuck to theirs, the media takeaway would be "Cruz is punished and shamed for breaking his pledge" - making it a pro-unity moment, no less than when Trotsky was escorted over the Soviet border.

Since it didn't play out that way in the media, did they learn anything?  I would say, all they learned is something that they already knew: that this is what can happen when, unlike Putin, you are still subject to the bias of an "unfair" media.

UPDATE: Right on cue, Trump said exactly what I thought he would say about the "dishonest" media's reporting of the Cruz speech.

Health club blues (and glitter rock)

Ever since recurrent nagging injuries forced me off the tennis court, probably for good, I've relied on elliptical machines (plus diet) as the lead weapon in my hand-to-hand combat against the aging process (aka, very slow and orderly retreat).  The problem is that I keep having to find music to listen to while I'm plodding through my 35 minutes.  I have a 50+ year back catalog to draw on, but it has to be something I like hearing right now, that's sufficiently up-tempo, and it can't be too new to me (for a new album - and I do still think in "album" terms - I still need 2 or 3 conventional listens before it can work for me at the health club).

Today's successful re-discovery was Roxy Music's classic 1975 concept album - the Sergeant Pepper of painful romantic self-delusion - Siren.  Highly recommended if you like 1960s or 1970s rock, or for that matter Radiohead.

Wednesday, July 20, 2016

Presented without comment (due to Godwin's Law)

From an email I just got from Eric Trump: "Across the world right now, people laugh at us!  They think we are too soft."

Tuesday, July 19, 2016

New territory?

I admire David Cay Johnston's investigative work.  He has been a NY Times reporter on the tax beat, gave the Tillinghast International Tax Lecture at NYU once, and recently has been publishing in the Daily Beast, among other places.  A number of his recent columns, such as this one most recently. concern tax and other matters relating to Donald Trump, whose history Johnston has been investigating for some years (predating the 2016 campaign).  He has a book on Trump coming out shortly.  Among the topics I presume it will cover is Trump's mob ties, which he has discussed, for example, here.

Given the unique times that we are living through these days, I seriously wonder: What happens to unfriendly investigative reporters if Trump wins the election?  That's not the sort of question I've ever thought it necessary to ask before, in the U.S. context - even Nixon's enemies list seems to have been largely a matter of venting.*  But we are in new territory, with a candidate who likes to talk about loosening the libel laws, and who threatened Amazon and Jeff Bezos because he didn't like some articles in the Washington Post, and who openly admires Vladimir Putin.
*Of course, we'll never really know what Nixon's second term might have looked like, had he kept on riding high after the POWs came home, instead of getting consumed by Watergate. But aides such as Haldeman appear to have been fairly vigilant about limiting the crazy stuff that he actually did.

Monday, July 18, 2016

Jotwell posting on Branko Milanovic's "Global Inequality"

This year, for (I think) the fourth time, I've written a brief laudatory review of a recent publication on Tax Jotwell, which stands for "journal of things we like (lots)."  My subject this year was Branko Milanovic's Global Inequality: A New Approach for the Age of Globalization (2016).

You can find my review here.

Friday, July 15, 2016

Upcoming "Human Rights and Tax" conference at NYU Law School

On September 22-23, the Centre for Human Rights and Social Justice will be holding a conference at NYU Law School called "Human Rights and Tax in an Unequal World."  They issued a call for papers here, although the deadline has passed and various people were invited upfront, so the organizers could structure panels on particular topics.  Afterwards they will publish a conference volume containing papers from the sessions.

The conference offers the possibility of creating interesting synergies from bringing distinct groups together.  Tax people and human rights people generally are not in dialogue with each other.  Even where members of both groups are concerned about the same issues - for example high-end inequality - it's fair to say that they come at it from very different angles.  In tax practice, "human rights" sometimes refers (rather inaptly, I would say) to efforts by EU tax counsel to resist, on behalf of corporate clients, document discovery that is sought by the tax authorities.

I talked with the organizers at the planning stage, and will be writing a short paper and giving a talk about it at Session Four, meeting on Friday, 9/23, from 10:30 to 11:45 AM.  The session's title is "Private Actors and the Public Purse: The Roles of Corporations, Lawyers, and Accountants in Tax Abuse."  My paper doesn't have a title yet, but I've written the abstract (which I may post after I've had a chance to mull it over a bit more) and am starting to map out the piece, at least in my mind.

I'm going to look at a bunch of issues as to which there are really two sides, reflecting complexities that relate, for example, to the relevance of legal uncertainty (and the audit lottery), and to how one should think about the underlying ethical issues, both from a tax professional's standpoint and that of an individual planning his or her professional life.

With the idea of trying something a bit different (and I hope fun and interesting), I am thinking of writing the paper in the form of a dialogue between two thoughtful individuals who take conflicting views (although with overlap, since both are reasonable) of the main points of contention that I will be addressing.

Monday, July 11, 2016

Readings on meritocracy

Per the Arts & Letters Daily, which I scan regularly in search of interesting items, today I found a link to a piece from the Hedgehog Review, a triennial publication that "offers critical reflections on contemporary culture."  Their current issue features three short articles on "Meritocracy and Its Discontents," one of them by Robert Frank, with whom I am co-teaching the NYU inequality colloquium late this fall.

Another of the three short articles, and the one linked by the Arts & Letters Daily, is by Helen Andrews, a researcher (not previously known to me) at a conservative and pro-free market Australian think tank.  It contains the following provocative passages that, given their concise crispness, I am thinking I should quote from, in one of the two opening chapters of my literature book on high-end inequality:

"Meritocracy began by destroying an aristocracy; it has ended in creating a new one. Nearly every book in the American anti-meritocracy literature makes this charge, in what is usually its most empirically reinforced chapter. Statistics on the decline of social mobility are not lacking. In 1985, less than half of students at selective colleges came from families in the top income quartile; in 2010, 67 percent did....  [Data show the] growing tendency of the members of America’s cognitive elite to marry each other, live near each other in “Super Zips,” and launch their children into the same schools, and thence onto the same path to worldly success.... 'Our new multiracial, gender-neutral meritocracy has figured out a way to make itself hereditary.' ....

"[Yet n]ot since the Society of the Cincinnati has a ruling elite so vehemently disclaimed any resemblance to an aristocracy. The structure of the economy abets the elite in its delusion, since even the very rich are now more likely to earn their money from employment than from capital, and thus find it easier to think of themselves basically as working stiffs. As cultural consumers they are careful to look down their noses at nothing except country music.... 'It is as if the new elite are saying, ‘Look! We are not some exclusive club. If anything, we are the most democratized of all groups.’”

Friday, July 08, 2016

A new NYU colloquium

This fall, during the second half of the semester (on Mondays from October 24 through December 5, from 4:10 to 6 pm), I will be participating in a brand-new NYU colloquium, entitled the Colloquium on High-End Inequality.  My co-teacher will be Robert H. Frank, the eminent economist who is the Henrietta Johnson Louis Professor of Management, and a Professor of Economics, at Cornell University.  Frank is well-known for his work addressing positional externalities and rising high-end wealth concentration, among other topics.

The structure will be just like of that of the tax policy colloquia that I have been doing for more than twenty years, except for its being in the fall semester and just over its last seven weeks.  Thus, we'll have an interdisciplinary approach, a weekly paper and author, a morning session with just the students (although authors are invited to this), and an afternoon session with the author and students that is open to the public, followed by a small-group dinner,  I am hoping that a wide range of people in the New York area who are interested in high-end inequality will come to the afternoon sessions.

Here is our schedule.  Titles not in quotes indicate that we know the topic, but not necessarily the identity of the particular paper.

October 24 – Robert Frank, Cornell University.  Either “Falling Behind” or “Success and Luck.”
October 31 – Kate Pickett, Department of Health Sciences, University of York.  Issues in health and inequality.  [Pickett is the co-author, with Richard G. Wilkinson, of "The Spirit Level: Why Greater Equality Makes Societies Stronger."]
November 7 – Daniel Shaviro, NYU Law School.  “The Mapmaker’s Dilemma in Evaluating High-End Inequality.”
November 14 – Alan Viard, American Enterprise Institute.  Progressive consumption taxation.  {Viard is the co-author, with Robert Carroll, of "Progressive Consumption Taxation: The X-Tax Revisited."]
November 21 – Ilyana Kuziemko, Princeton University Economics Department.  “Support for Redistribution in an Age of Rising Inequality: New Stylized Facts and Some Tentative Explanations.”
November 28 – Adair Morse, Haas School of Business, University of California at Berkeley.  “Trickle-Down Consumption.”
December 5 – Daniel Markovits, Yale Law School.  “Meritocracy and Its Discontents.”

Thursday, July 07, 2016

The academy [or at least some members of it] fights back, part 2

In a recent blog post, I mentioned that I am among 25 legal academics who recently signed either of two amicus briefs that were filed with the Ninth Circuit in the appeal of the Tax Court's Altera decision.  As I noted in that post, even apart from the merits of the particular issues, our decisions thus to express ourselves (when there are plenty of other demands on one's time) reflected - at least in my case - "realiz[ing] that a whole lot of money has been flowing into challenging Treasury regulations ... and that no one with money to spend has an incentive to support the government's side."  This can create a dangerous imbalance in both the judicial process and the political process.

That consideration also influenced my decision to sign two comments that multiple law professors recently submitted to the Treasury Department, expressing support for two proposed regulations that were recently issued under Code section 385 in the context of inversion transactions.  This comment addresses the recent proposed rule that would recharacterize certain related party debt as equity.  This one addresses the so-called "serial inverter" rule, affecting companies that engage in multiple inversion transactions over a three-year period.

The analysis in these comments is terser than that in the amicus briefs, reflecting the difference between the two contexts.  But I suspect that few of the other comments that end up being submitted, with regard to these regulations, will set forth, as we do, the grounds for believing that the rules at issue both serve important policy goals and are within the Treasury's authority.

NYU Tax Policy Colloquium, spring 2017

In the first few months of 2017, I will be co-teaching the NYU Tax Policy Colloquium for the 22nd time.  My colleague will be Rosanne Altshuler of the Rutgers Economics Department, and we’ll be meeting on Mondays (apart from one Tuesday, due to Presidents Day) from 4:00 to 5:50 pm, in the main NYU Law School building.  Here is our schedule:

1.  Monday, January 23 – Lily Batchelder, NYU Law School

2.  Monday, January 30 – Mark Gergen, Berkeley Law School

3.  Monday, February 6 – Alan Auerbach, Berkeley Economics Department

4.  Monday, February 13 – Allison Christians, McGill Law School

5.  Tuesday, February 21 – Jason Oh, UCLA Law School

6.  Monday, February 27 – Stephen Shay, Harvard Law School

7.  Monday, March 6 – Scott Dyreng, Duke Business School

8.  Monday, March 20 – Daniel Hemel, University of Chicago Law School

9.  Monday, March 27 – Leonard Burman, Urban Institute

10.  Monday, April 3 – Kathleen Delaney Thomas, University of North Carolina Law School

11.  Monday, April 10 – Julie Cullen, UC San Diego Department of Economics

12.  Monday, April 17 – Miranda Perry Fleischer, University of San Diego Law School

13.  Monday, April 24 – Joel Slemrod, University of Michigan Business School

14.  Monday, May 1 – Richard Vann, University of Sydney Law School

Wednesday, July 06, 2016

Altera amicus brief

I've previously blogged about the appalling decision by the Tax Court in Altera v. Commissioner. This decision permitted U.S. IP companies that execute fake cost-sharing arrangements with their wholly owned tax haven affiliates - fake in the sense of existing only on paper, via the circular flow of funds - to avoid even having to "cost-share" (i.e., reduce allowable U.S. deductions) with respect to the incentive compensation that they pay their U.S. employees.

The decision invalidated Treasury regulations on the subject, based on the Tax Court's apparent misunderstanding, not just of administrative law, but even of basic transfer pricing principles relating to what one actually learns and doesn't learn, with regard to the economics of related party arrangements, by dint of looking at true arm's length deals.  The relevant legal doctrine holds that the latter may illuminate the former, insofar as the circumstances were comparable.  The Tax Court appears to misapprehend, in a really fundamental way, what comparability (and taking account of relevant differences) actually means.

Altera therefore was not a  specialist court's finest moment.  One could understand some perplexity regarding the relevant administrative law doctrines, which have been in flux in the tax area recently, but the Tax Court's transfer pricing analysis should have reflected a higher level of understanding than it did. Worse still, Altera undermines, not just the tax treatment of myriad other cost-sharing arrangements - the revenue consequences of which could reach the billions of dollars - but also transfer pricing generally, and indeed Treasury regulations generally.

A number of us (by whom I mean legal academics) therefore felt it was important to add our voices to the appellate process.  Otherwise, the Ninth Circuit might lend more credence to the Tax Court's analysis of the transfer pricing issues than that analysis actually deserves.  We also realize that a whole lot of money has been flowing into challenging Treasury regulations - in Altera, the legal challenge appears to have been carefully planned and years in the making - and that no one with money to spend has an incentive to support the government's side.

Hence, at least two amicus briefs were filed this week,with 25 total signatories, explaining why the Ninth Circuit should reverse the Tax Court's decision in Altera.  This brief, of which Clint Wallace was the primary author (and I am among the signatories) mainly addresses the "commensurate with income" standard in section 482 (mistakenly dismissed by the Tax Court as irrelevant).  This brief, of which Susan Morse was the primary author, mainly addresses the arm's length standard.

Convincing the Ninth Circuit to reverse a 15-0 Tax Court decision on a relatively esoteric topic (from the non-specialist's perspective) is certainly a steep uphill climb.  But I hope readers of these two briefs will agree that they make an intellectually overwhelming case for doing so.

Tuesday, July 05, 2016

Cleaned-up version of my remarks at AEI on June 17 concerning corporate integration

As noted in earlier posts, just under three weeks ago I participated in a panel discussion at the American Enterprise Institute of the corporate tax reform plan recently disseminated by Eric Toder and Alan Viard.  You can find a video of the session here, and view my slides for the talk here.

AEI subsequently posted a transcript of the event.  Here is a significantly cleaned-up version of my remarks as transcribed:

Thank you for inviting me, and for coming up with a very interesting plan. Why don’t I start by clarifying that the title or my talk [“Tower of Babel or Smorgasbord?: Comments on Toder-Viard 2016]  is not a characterization of the plan itself, but rather of something broader.

The Toder-Viard plan has a lot of very interesting details one could delve into.  For today, however, I thought it would be more interesting to put it into the context of other tax reform plans. So my title refers to the corporate tax reform field generally.

When you look at fundamental tax reform relating to individuals, there is a surprisingly high level of consensus. Now, it’s true that Diamond and Saez argue for a top individual rate as high as 70 percent. Most people in Washington don’t subscribe to that, so there’s an area of disagreement. There also is a longstanding debate (such as that between income tax and consumption tax advocates), concerning how one should tax the “normal” rate of return of saving.

Apart from these issues, however, there is considerable agreement regarding what the tax system for individuals ought to look like.  But in corporate and other business tax reform, it almost seems as if everyone has his or her own plan.  Here are just a few examples from the last thirty-plus years:

--William Andrews’s ALI plan, involving dividend exemption,

--Alvin Warren’s ALI plan, involving imputation credits.

--the comprehensive business income tax (CBIT) plan, basically an entity-level income tax,

--Edward Kleinbard’s dual business enterprise income tax (dual BEIT),

--Alan Auerbach’s modern corporate tax,

--Michael Graetz’s recent proposals,

--the recent corporate tax reform plan by Harry Grubert and Rosanne Altshuler.

So there are just a lot of plans out there.  Indeed, the main reason I don’t have my own plan is that I am still holding out.  I will issue it as soon as Congress promises to enact it immediately with no changes – an offer that no one has made to me just yet.

Now, even if all experts agreed about how to do corporate or broader business tax reform – that is, even if we didn’t have this Tower of Babel where everyone has his or her own plan - it’s still not clear Congress would listen. Experts really don’t have that sort of clout here. But since it might conceivably help, it’s worth asking: Why do so many eminent, intelligent, leading academics and think- tank people have such different plans for corporate and broader business tax reform?

The reason, I think, is that there’s really no perfect answer to the issues presented.  Thus, reform turns into a game of pick your poison, about which there is naturally disagreement.

Lewis Carroll’s Red Queen said that she could believe six impossible things before breakfast.  It was just a matter of practice. For corporate tax reform to have a single slam-dunk, clearly-best answer, one would need to believe just two impossible things.

The first impossible thing one would have to believe is that perfect flow-through of corporate income to the shareholders or other owners is feasible. I say owners, by the way, because there are different types of financial instruments with varyingly stock-like economics.

The second impossible thing one would have to believe is that taxing owners indirectly at the entity level rather than directly at the owner level, isn’t going to make any difference, even for administrative or political economy reasons.

If just those two impossible things were true, corporate tax reform would be easy. You’d just figure out how much corporate income pertained to each owner, and then you would tax that person or not tax that person exactly as you wished.

But of course it’s not so easy in practice. The first problem pertains to perfect flow-through.  Toder and Viard have a mechanism that would do this for publicly traded stock.  But in all other cases, it’s problematic.  You may have valuation difficulties.  Then there are non-pro rata deals among the owners.  Finally, when you have taxable income at the entity level that isn’t equal to economic income (for example, due to realization issues or deliberate tax preferences), it’s just very hard to come up with a good answer as to how the divergences should be allocated among the owners.

This is why partnership taxation is such a nightmare, both in the U.S. and elsewhere. Once economic income doesn’t equal taxable income, and even if you perfectly understand the deal between the owners, there’s no good answer to the question of who should get the tax benefits, especially in the face of some effort to limit the extent to which they are effectively  tradable.

Now consider tax-exempts and foreigners.  It seems clear that the extent to which we’re going to tax either Harvard University, a pension fund, or foreigners on income that any of them earned through a corporate entity has a very good chance of being affected in practice by whether we are imposing taxation at the entity level or at the owner level.  Taxing these persons indirectly, at the entity level, via a tax on companies in which they own shares, is at a minimum optically different than imposing the same tax, say, on corporate distributions to these persons.

This can motivate wanting to retain some degree of entity-level taxation. But once you do that, a number of design problems may emerge. One is that the entity rate doesn’t always equal the owner rate. A second is that, if you’re taxing on a residence basis, then U.S. entities that are subject to the U.S. corporate tax are not equivalent to U.S. individuals. There is cross-border shareholding.

Then, of course, you have the problem that all of these plans deal with in different ways: if you’re imposing tax at both the entity level and the owner level, how are you going to coordinate those two taxes in order to get the right overall answer, while also minimizing the various distortions that may be created?

I’m not saying that these challenges are unsolvable. Various plans address them in different ways.  But it’s going to be difficult in any event, and there are bound to be tradeoffs and imperfections, leading to different design preferences among corporate and business tax reform advocates.

Let’s just briefly ask, how do we want to tax foreigners who invest in or through companies that are subject to U.S. federal income taxation?  Under present law, we are clearly taxing them to some extent (whether or not they ultimately bear the incidence of this tax) when they own stock in U.S. or other companies that pay tax here.

Suppose we think of the U.S. tax system as aiming to maximize national welfare for U.S. citizens or residents (however we might choose to define the “us” that we distinguish from the rest of the world’s “them”).  This would imply that we might want to revenue-maximize with regard to foreigners — getting as much money from them as we could – subject to a few caveats.  The first is, of course we’re concerned with economic incidence, not nominal incidence . It may not be that easy to make foreigners bear a U.S. tax, given that they can invest elsewhere.  So this depends on our having market power of some kind, such as by reason of their earning location-specific rents here.

Second, one needs to take into account any adverse effects that taxing them might have on us. For example, if their investing here makes us richer (such as by reason of its raising labor productivity and thus wages), then that’s an indirect effect that you have to think about.

Finally, there are issues of comity and feasibility. There’s a Monty Python episode in which a man in a bowler hat says: “I think we should tax foreigners living abroad.”  That’s the perfect plan for any country that both can actually do it and does not need worry about retaliation of any kind.  In practice, however, it may not be so easy.

The result is that we have a very complex situation, with regard to how much we should try to tax foreigners.  There’s no simple formula that gives us the right answer.

Tax-exempts add another layer of complication. Consider tax subsidies for charities. It’s not clear how big these subsidies should be. Nor is there a consensus in the charitable field regarding how we should treat the entities’ intertemporal choices.  Then consider retirement savings vehicles.  Even some of the people who favor income taxation may view their reasons for having this policy preference as consistent with allowing individuals who save for retirement to exempt the normal rate of return on at least some of this saving.  But for extra-normal returns we may reach a different conclusion.

In sum, it’s quite reasonable to think that, even insofar as we have reasons for reducing entity-level corporate income taxation, that doesn’t necessarily mean that we want to lighten the tax burdens currently borne with respect to corporate income by tax-exempts and foreigners.  Instead, a ceasefire-in-place approach might make sense until such time as those distinct policy questions are separately examined.

OK, I just want to briefly mention the latest twist on corporate tax reform. An earlier speaker mentioned the Hatch plan, which would make dividends deductible but subject to withholding tax.  This could end up being the same as imputation, because in effect it ends up substituting the shareholder’s marginal tax rate for that of the entity.

Under the Hatch plan as I understand it, suppose a U.S. company repatriated $1 billion from tax havens.  Under current law, this might cost the company $350 million of U.S. tax, a price that the company may not be willing to pay.  In effect, the Hatch plan says, so long as you pay the entire intra-company dividend to shareholders, who will get it tax free, we’ll relabel the $350 million of tax that you must pay as a withholding tax on them, rather than as an entity-level tax on you. Therefore, the financial accountants won’t make you deduct the $350 million tax cost from financial accounting income.

The implicit claim is that this relabeling would make the company willing to bring the money home, on the view that its managers only cared about accounting income and earnings per share, not about shareholder welfare.  Mere relabeling of the $350 million remitted to the Treasury by the company therefore ends up making an enormous difference.

The Hatch plan would be a real acid test of that view, so I don’t know whether or not the proponents’ apparent expectation regarding managerial behavior would actually end up being borne out.  But it’s certainly bold and interesting, not to mention cynical.

Okay, turning to the Toder-Viard plan in particular, the 2014 version clearly was true corporate integration.  But Eric and Alan realized that it raised some issues requiring further thought.  One was the distinction between publicly traded and other businesses.  Another was the overall revenue loss, and a third (related to the second) was the big gains effectively offered to foreigners and tax exempts.

They’ve made some big changes in Toder-Viard 2016. The entity-level corporate tax rate is 15 percent, rather than zero.  This gives rise to a credit. The 15 percent withholding tax for interest paid to tax exempts is a feature that I like, for the reasons they give for it.  However, while I agree that these changes needed to be made, in some ways it’s less pure a corporate (and business) tax reform plan than it was in the 2014 version. Thus, admittedly arbitrarily, I’m going to reclassify it a bit.

There can often be a surprising degree of overlap between (A) “corporate integration” plans and (B) other “corporate tax reform” proposals that may be either broader or narrower in scope.  Suppose we put Toder-Viard 2016 in Group B, rather than in Group A, even though it could really be put in either. 

In any plan that lowers the entity-level corporate rate, one faces the question of whether, and if so how, to try to pay for it.  If one pays for it on the tax side, one needs to determine the source of the offsetting revenues.  This can be from either inside or outside the broader category of corporate and business taxation generally.

“Inside” funding models include Toder-Viard, Grubert-Altshuler, and 1986-style corporate tax reform, in which you lower the rate and broaden the base. “Outside” funding models might rely on, say, enactment of either a VAT or a carbon tax.

Let’s narrow the field a bit. I don’t think 1986-style corporate tax reform is the answer here. I had a piece in Tax Notes a couple of years ago called “1986-Style Tax Reform: A Good Idea Whose Times Has Passed.”  When you’re looking at corporate tax reform in particular, however, the case for this type of approach is especially weak.  There’s really not enough potential base-broadening to pay for much of a cut in the entity-level corporate rate.  Also, you may end up benefiting old investment, relative to new investment, unless you put in transition rules that are theoretically feasible but probably wouldn’t happen as a practical matter.  Plus, you face the question of whether the base-broadening applies (but without a rate cut) to non-corporate businesses. Also, if the corporate rate is lower, you have the problem of owner-employees underpaying themselves so that their labor income will be taxed at the lower entity rate, rather than the higher individual rate.  While that can be addressed, such as by enacting a Scandinavian-style dual income tax, it often hasn’t been in 1986-style proposals.

I’m also skeptical about the outside funding proposals that rely on enacting a VAT or a carbon tax. The problem is that, even if we should and do enact one or both of these taxes, the revenues will have rival claimants.  If I am designing my own corporate integration or rate reduction proposal, it’s tempting for me to say: I want those revenues for my plan. But other people with their own proposals of any kind (whether tax-related or not), along with people who are concerned about the long-term U.S. fiscal gap, might reply: Great, but what about us?  We would like to claim those revenues, too.

So I have two in-category finalists of credible inside-funding proposals: Toder-Viard and Grubert-Altshuler.  Both involve lowering the corporate rate, but financing it within the broader system of corporate and business taxation.

There’s a lot to like in Toder-Viard 2016. For example, I like the fact that you’re collecting the tax annually, but also with the averaging proposal that they describe.  In addition, they’re doing something about debt versus equity, including through their proposal with regard to tax-exempts.  But I remain concerned that the plan may discourage going public, although they offer a transition rule that may help to a significant degree with regard to people’s timing in going public.  And relatedly, I do still worry about the publicly traded versus non-publicly traded divide. I think that’s clearly the core problem.

With regard to narrowing that divide, they emphasize realization at death, which would be desirable even absent their proposal, but arguably becomes more urgent with it. Politically, however, realization at death is a hard sell that hasn’t happened yet, and that possibly never will.

Turning to Grubert-Altshuler, I like that plan too, and I’m not here to adjudicate which of the two plans is better.  But there I worry about the deferred tax.  As they concede, their interest charge doesn’t compleetly solve the lock-in issue, because of the problem when you get a big value jump in one year, followed by expected reversion to the normal rate of return.  Their point is that they would nonetheless significantly reduce lock-in relative to present law, a point that is certainly correct.

The big problem with their averaging / interest charge proposal is that of so-called sticker shock. Say Mark Zuckerberg had an enormous early value jump with respect to Facebook, after which his stock reverted to earning just a normal annual rate of return, and that he continued holding the stock until he died. The tax that was due at this time (what with interest on deemed past years’ accruals) could be a hard sell politically. Also, suppose the deferred tax is just out there, waiting. You would have people lobbying Congress to urge that it be eased or eliminated.  So I worry about the deferred tax collection as a potential major sticking point in practice, even though in principle, the plan is a good one.

One last final note on which I’ll close: One of the great tragedies of popular music history was that the Beach Boys’ “Smile” album never came out in 1967.  The version that finally came out in 2003 proved it to be a brilliant song cycle. At the time, however, the Beach Boys just put out a 29-minute micro-version, called “Smiley Smile,” that was pretty much garbage. One of the Beach Boys commented at the time: “We settled for a bunt, instead of trying to hit a grand slam.”

Now, the Beach Boys really blew it.  But corporate tax reform is different. Sometimes it’s better to settle for a bunt than to try to hit a grand slam.  So, while there are multiple ambitious plans out there, including Toder-Viard and Grubert-Altshuler, whose enactment I would welcome, skepticism about the political prospects might motivate trying to proceed more modestly.

One could simply ask: What are the worst problems we face in corporate and business taxation today, and how might these problems be addressed more narrowly?

My big three might be, first, problems with debt – including, not just debt versus equity, but also the use of interest deductions in base erosion and profit-shifting.  Second, disguised labor income of owner-employees if we significantly lower the corporate rate.  Third, international tax policy, which almost everyone agrees is an enormous mess.

So my narrow or “bunt” option might involve the following.  First, stronger thin capitalization rules or other limits on interest deductions.  Second, something addressing the distinction between normal returns and extra-normal returns, and taxing the latter at a higher effective rate than the former.  And, finally, international tax reform, although I won’t further abuse my time limit here by saying anything particular about that.

In sum, there are a lot of good corporate tax reform plans out there.  I’d prefer most of them to present law.  And perhaps we should think of the existing cacophony as offering Congress an empowering smorgasbord, rather than a dissuading Tower of Babel.  But it might conceivably be more promising to proceed more narrowly.  Even narrower changes, if well-chosen, could leave the overall system in considerably better shape than it is today.

Short paper posted on SRRN

I have just now posted here on SSRN my short paper, or rather talk, Ten Observations Concerning International Tax Policy, that appeared in Tax Notes on June 20, at 151 Tax Notes 1705-1710.  Among other topics, it discusses why there is so little scholarly consensus regarding international tax policy, and what we learn from the recent wave of U.S. corporate inversions.

Friday, July 01, 2016

Very interesting graph

I am a fan of Branko Milanovic's work on global income inequality, including his most recent book, about which I've written a short piece that will be appearing on Tax Jotwell at some point soon.  (It was supposed to appear in June, but they have a publishing backlog, as lots of tax folk have agreed to contribute annual short features.)

Anyway, here is a very interesting graph that Milanovic recently posted.  It's called "Cumulative real income growth between 1988 and 2008 at various percentiles of the global income distribution." As you can see, it gives insight into relative, as well as absolute, changes over the covered period at different points in the overall global distribution.  A key reason why the 10th to 70% percentiles beat the mean rate of growth is that many of the world's poorer (if not poorest) countries, circa 1988, have done so well.  (Absolute gain even at the very bottom, but much less than for people somewhat above that range.) Also much faster than average growth at the top, due to what one might call the "Piketty story."  And much worse results for the 70th through 90th percentiles globally, indeed with not all levels having experienced net positive growth at all, reflecting the other big part of the "Piketty story."