Friday, October 19, 2018

2019 NYU Tax Policy Colloquium, Phase 1

We now have pretty much finalized our lineup of speakers for the spring 2019 NYU Tax Policy Colloquium, which I will be co-leading with Lily Batchelder.  It looks like this:

1.      Tuesday, January 22 – Stefanie Stantcheva, Harvard Economics Department.
2.      Tuesday, January 29 – Rebecca Kysar, Fordham Law School.
3.      Tuesday, February 5 – David Kamin, NYU Law School.
4.      Tuesday, February 12 – John Roemer, Yale University Economics and Political Science Departments.

5.      Tuesday, February 19 – Susan Morse, University of Texas at Austin Law School.
6.      Tuesday, February 26 – Li Liu, International Monetary Fund.
7.      Tuesday, March 5 – Richard Reinhold, Willkie, Farr, and Gallagher LLP.
8.      Tuesday, March 12 – Tatiana Homonoff, NYU Wagner School.
9.      Tuesday, March 26 – Michelle Hanlon, MIT Sloan School of Management.

10.  Tuesday, April 2 – Omri Marian, University of California at Irvine School of Law.
11.  Tuesday, April 9 – Steven Bank, UCLA Law School.
12.  Tuesday, April 16 – Dayanand Manoli, University of Texas at Austin Department of Economics.
13.  Tuesday, April 23 – Sara Sternberg Greene, Duke Law School.
14.  Tuesday, April 30 – Wei Cui, University of British Columbia Law School.
All sessions will meet from 4:00 to 5:50 pm in Vanderbilt 208, NYU Law School.

I called it above "Phase 1" of the 2019 NYU Tax Policy Colloquium because we are planning to switch to the fall semester, and hence will have 14 more sessions in September - December 2019 (and then again in September rather than January 2020, etc.)

Tuesday, October 09, 2018

Domestic mischief

How might this have happened? Garbage cans get knocked over rather often in our house, and all resident humans deny responsibility.







'







The only lead we have to go on is that this individual was found very near the crime scene. Name Gary, age about 6, known to enjoy playing with rolled-up pieces of paper, which he will even, on occasion, fetch repeatedly (well, up to a point) like a dog.


Thursday, October 04, 2018

Broader implications of Trump's tax cheating

My NYU colleague, Lily Batchelder, looks at issues broader than a particular individual's criminality, in an NYT op-ed today.

Wednesday, October 03, 2018

Altera amicus brief

A number of law professors, headed by Susan Morse of the University of Texas Law School, have filed an amicus brief in the Altera case. I am a signatory, not because I participated in writing it (although I did review it before adding my name), but as a gesture of agreement and support. More particularly, this is an important IRS regulatory case, at least in its broader implications, I believe the government's side in the case is clearly correct, but that the weight of self-interested businesses and people in the tax bar taking the other side requires countering by the considered views of people who care about the proper functioning of the tax system, without having economic stakes to consider. One wouldn't want the court to be deceived about where, in my view, the weight of thoughtful opinion actually lies

The amicus brief is available here.

I blogged about an earlier Altera amicus brief here. Quick background: the case involves transfer pricing, or more particularly use of the cost-sharing regulations to enable U.S. companies to report as arising in tax havens the value of intellectual property (for foreign sales) that was developed by employees of U.S. companies working in the United States. The Tax Court held for the taxpayer, on grounds I personally found ridiculous although there are those who view it more charitably than I do (based largely on what I would call formalistic misunderstanding of how to apply rules that are meant to yield accurate, rather than absurdly manipulable, income allocations). The Tax Court decision also had implications potentially undermining, not just IRS reg authority when being exercised completely reasonably, but also the use of Treasury preambles to new regulations as genuinely explanatory, rather than litigating, documents.

Clint Wallace and Susan Morse took the lead in preparing amicus briefs two years ago that may conceivably have influenced the Ninth Circuit's initial decision (by a 2-1 panel vote) in the government's favor. But one of the majority opinion's two signatories, Judge Reinhardt, had died before the opinion was issued. So it was decided, understandably I suppose, that a new judge had to be appointed to reconstitute the three-judge panel and decide it all over again.

The Morse et al amicus brief is arguing for the good guys in the "all over again" stage.

The NYT's Trump tax fraud story

In an alternative reality that I very much wish was our actual one, today's lead story in the New York Times, "Trump Engaged in Suspect Tax Schemes As He Reaped Riches From His Father," would be a political bombshell. In our actual reality, it may get drowned out, but it shouldn't.

Suppose that this story were about any other twenty-first century major party presidential candidate, premised on his or her having been elected. That is, suppose we had this story about either actual President George W. Bush or Barack Obama, or hypothetical Presidents (because they lost the elections) Al Gore, John Kerry, John McCain, Mitt Romney, or Hillary Clinton. This would be a bombshell story - tax fraud connived at by the president! Talk of impeachment by the other party. Demands for investigations, etcetera.

But in the world we find ourselves living these days, it risks being just another story. We've got credible suspicions of obstruction of justice and collusion with a hostile foreign power to hijack an election. There are immigrant children living in prison camps. We have a Supreme Court nominee who has been accused of sexual assault and perjury. There are Emolument Clause issues that may involve corruption, bribery, and the outright sale of foreign policy favors, etcetera, and on and on. Against that background, investigative journalism that appears to show decades of tax fraud is a bit like someone's kitchen oven exploding in Pompeii on the same day as the Vesuvius eruption. It gets lost in the din.

This whole environment, by the way, has tended to discourage me from commenting actively here on current politics. If you've read this blog for long enough, you may recall that I was a bit harsh at times on Mitt Romney during the 2012 campaign. But this was premised in part on the fact that I actually expected better from him. Plus, while he engaged in some quite aggressive tax planning that seemed open to question and audit challenge, it was well within the bounds of what well-advised people in his industry, working with the leading firms, were doing.

I don't believe that the same can be said of the tax maneuvers described in today's NYT article. Consider the discussion of All County Building Supply and Maintenance, using padded bills to transfer millions of dollars from Fred Trump to his children. As described in the article, fraud is the only word for it. Likewise, while self-serving, somewhat lowball valuations are nothing new in the estate and gift tax planning field, there is a limit. Reputable taxpayers, advised by reputable firms, don't claim values that are only 5 or 10% of the lawful number. And they don't set up clearly sham corporations, although there might be a case where the IRS claimed sham and the taxpayer had opinions from reputable (but well-compensated) tax lawyers explaining why they believed it had economic substance.

There will be a tendency for cynical people to say: "All very rich people do this." I don't think that's correct, at least to anything like this degree. It's partly about very rich people's self-interest. Why commit fraud with all its downside risk, when there are plenty of lawful tax planning opportunities that can significantly reduce one's liability anyway? (If not to the same degree.) And likewise, practitioners in the leading firms generally don't get engaged in this stuff, which would be bad for their professional reputations (and which they might personally find offensive).

In this regard, recall the Panama Papers. Not a whole lot of outright tax fraud by rich Americans was revealed therein - it was more about rich people from other countries. Or the enactment of FATCA to address secret offshore bank accounts. This was generally thought to be about people with high-flying (or mid-flying) cash businesses, not about the names in the New York social register, if such a thing still exists, or Page Six of the New York Daily News.

So if Trump's peer group is very rich people, what the NYT article describes does not appear to be anywhere near "par for the course." On the other hand, if his peer group is criminals - and he has, of course, expressed outrage about Al Capone's being convicted of tax fraud - then this is indeed the sort of behavior about which one would tend to suspect that they're all doing it.

What about very rich people in NY real estate? Here I think it is well beyond the norm, but I admit that I don't know with the same degree of confidence. I am certain that these people are not using people from the leading law firms to engage in tax fraud, but that doesn't rebut the possible existence of a norm more dishonest than that which is followed by rich people generally. I recall, for example, that Jared Kushner's dad was jailed on tax fraud charges, among others.

But I don't think it would be much of a moral defense of Donald Trump to say that rampant criminality and blatant tax fraud were common among NYC real estate tycoons, even if this proved to be the case (and again, my point here is just that I can't say from personal knowledge that it ISN'T the case). It would still be exceptional for people at his wealth level

How could the IRS have missed all this? I don't know the answer to that, but if the Trumps were extreme outliers compared to the peer groups that the tax authorities had in mind, that might offer a partial explanation. Auditors may not try so hard to look for things that they don't expect to find. They're presumably not asking, for example, whether Jeff Bezos got paid $100 in cash to mow someone's lawn and then didn't report it. And while they may audit GE and question its transfer pricing, they're probably not looking for off-the-books transactions in which GE was paid cash and didn't report it. So analogously, by transgressing peer group norms (at least, as defined by the tax authorities), the Trumps may have benefited from the auditors' assuming relatively normal behavior.

What are the tax consequences today? I'd like to hear from estate and gift tax lawyers about that, as it's outside my area of personal expertise. But what I believe to be the case is as follows. Say Fred Trump filed a fraudulent gift tax return in 1990, or fraudulently failed to file. The fraud means that the tax return remains open, and this may support collecting the amount due from the beneficiaries, without any need to prove for this purpose that they were engaged in the fraud. But again, this needs verification from someone who knows more directly about all that.

Last point, are there income tax implications? Suppose that, having in mind here All County, $X was fraudulently diverted from Fred Trump to a company owned by his children. It's treated as a payment for goods, or perhaps alternatively as a salary payment, whereas in fact it's just a concealed gift via the markup. In this scenario, the correct income tax treatment would be that Fred doesn't deduct it (or has higher gross income) and All County doesn't include it, by reason of its actually having been a gift. But if their marginal tax rates are the same, the net effect on their combined income tax liability might be a wash. E.g., if both sides had a 40 percent marginal rate at the time, then Fred would have paid .4X too little in tax, and All County .4X too much. But it would be interesting to know more about All County's tax planning, e.g., did it actually report the transaction consistently with this, if so did it deploy tax shelter losses to offset it, etc.

But here's a further income tax angle suggested by the article. It says that, by age 3, Trump was earning $200,000 per year (in current dollars)  from his dad's real estate empire. If this was being treated as salary, and being deducted by the father and included by the toddler-aged Trump, it could potentially have been criminal income tax fraud. A three-year old generally can't perform services of sufficient economic value to support that salary. And there would be a purported income tax saving from the child's having been able to benefit from the lower tax brackets with the respect to the amount at issue. But that's not to answer the separate question of what would be the IRS's legal recourse today, as the crucial fraud part would have been the deduction on Fred's return, since Donald's return would have involved over-reporting, not under-reporting, of taxable income.

Tuesday, September 25, 2018

NYU Tax Policy Colloquium schedule shift!

The next NYU Tax Policy Colloquium will be held on Tuesdays from 4 to 6 pm during the spring semester (as they laughingly, or perhaps wistfully, call it here despite how early it starts), which runs from January 22 through April 30, 2019.

But we will then be changing things up, perhaps permanently, by switching to the fall semester. Our current plan is  to hold the 2019-20 colloquium in the fall semester - late August through early December 2019, in lieu of our holding it in "spring" 2020. This will then become a permanent scheduling feature unless we get too much of an enrollment hit from the switch. (It's possible that we'll learn more students are able to fit it into their schedules in the spring than the fall semester, and if so we may have to reconsider.)

Wednesday, September 12, 2018

Jotwell post on recent Zucman et al paper

A website called Jotwell (for Journal of Things WE Like Lots) encourages its contributors to write very short pieces calling out for praise particular recent articles that were published in one's field.

I tend to participate in this annually, although with the press of other obligations I skipped 2017. But they have just posted this short piece that I wrote that discusses the recent Torslov, Wier, and Zucman NBER paper, The Missing Profits of Nations, which argues that big multinational firms are shifting A LOT (40% or more) of their economic profits to tax havens.

I note in my short piece that there is an ongoing dispute among leading empirical economists regarding whether the amounts being shifted are this high, or significantly lower. My own anecdotal sense of things is that the high estimates are likely to be correct, but I accept that there is a genuine empirical dispute here for the experts in such research to hash out. But in any event Zucman et al have found a creative and interesting new way of addressing the question, as I note very briefly in my piece and they explain at greater length in their paper.

As I note in my short comment, the greater the magnitude of such income-shifting, probably the less the real responses we ought to expect to, say, the recent U.S. corporate rate cut from 35% to 21%. But even if we get only minimal real responses because they do so much income-shifting anyway, it's somewhat of a separate question whether there would be more real responses if the income-shifting were more substantially shut down.

Tuesday, September 11, 2018

Hypothetical taxation of gambling

The fall semester at NYU Law School has begun, which by now feels fine (although it was kind of tough, as it always is, to start classes before Labor Day). I am teaching the introductory Income Tax class for the first time in several years. It's always fun to see (some?) students finding out that the subject has greater interest and more depth than they had expected.

Perhaps as soon as next week, we will reach the topic of how the Internal Revenue Code treats gambling losses. In brief, what the Code does is deny deductions for net gambling losses during the year. This is probably best rationalized as a proxy for the fact that people - say, gambling in a casino or at the racetrack for an evening here and there - may gamble despite expecting to lose money, viewing it as an entertainment activity. E.g., Person 1 goes to the theater at a cost of $100, because he or she likes to attend plays. Person 2 goes to the casino, expecting to lose $100 but anticipating a sufficiently fun time at the tables while this is happening. In the case where this expectation is precisely satisfied, these two cases look pretty much the same, and the tax law treats them the same by denying the deduction in both cases. (Leaving aside the issue of gambling gains on a different evening, against which the $100 gambling loss could be deducted.)

This is of course a bit of an arbitrary rule. And it has the odd implication that if, say, I bet you $100 on the outcome of the Super Bowl (and neither of us does any other gambling during the year), then as a matter of income tax law the winner has $100 of taxable income, while the loser has a nondeductible $100 loss. Plus, if I lose $200 rather than $100, than I'm actually worse off - perhaps emotionally as well as economically - yet the rule, by denying any deduction, in effect treats me as if I had enjoyed $200 of consumption value.

It strikes me that the taxation of gambling is a more interesting topic theoretically than it is as a practical matter (where rough and ready rules such as what we have today are certainly close enough for government work,). 

To illustrate a part of what I have in mind, suppose there were 3 types of gamblers, each wholly distinguishable from the other two and known both to themselves and the authorities. Suppose further that everyone was perfectly rational, given his or her preferences, and that there were no administrative issues of measurement (as well as none of identification), and also that there were no borderline or mixed-motive cases. Then it is plausible that each should be treated under a wholly separate regime, as follows.

PLEASE NOTE, HOWEVER, THAT WHAT FOLLOWS BELOW IS A THOUGHT EXPERIMENT TO TEASE OUT THE SEEMING IMPLICATIONS OF VARIOUS IDEAS - NOT AN ACTUAL PROPOSAL FOR THE FAR MESSIER REAL WORLD!

Case 1: Taxpayer rationally expects to break even, but wants to bet because taking on the risk is fun: As an example of what I have in mind here, people generally hate and try to avoid the sensation of free fall, yet they also have been known to stand on hour-long lines to ride scary rollercoasters. Suppose, analogously, that I bet $100 on the Super Bowl, despite ordinarily being risk-averse, because it will add to my excitement and pleasure in watching the game. (Or for that matter, I may bet the money on the Patriots as a psychic hedge, because I'm otherwise rooting against them.)

Here, under the strict assumptions that I am making, there is an argument for excluding both gains and losses. There is no reason to tax-penalize the activity, as between consenting adults who are in fact on equal terms. (I'm ruling out the scenario where one is a more skillful bettor than the other, hence should actually expect to win on average.)

The standard insurance argument for income (or consumption) taxation might suggest symmetrically including gains and deducting losses. Then one might raise the Domar-Musgrave point, to the effect that the bettors could offset this by scaling up the bet. E.g., if they want to bet $100, but gains are included and losses are deducted (with loss refundability if needed), they can get there anyway if their tax rates are the same. E.g., if the counterparties both face 33% marginal rates, then instead of betting $100 without tax consequences, they bet $150 with, and get to exactly the same place.

Is it unfortunate that they can do this? Not at all, under my assumptions. The income tax as insurance responds, in rational actor scenarios, purely to undesired risk (e.g., from the "ability lottery" or from having under-diversified human capital by reason of needing to specialize). But here, by assumption, people are rationally doing what they want and like. So, while their presumed ability to offset the undesired "insurance" suggests that maybe it just doesn't matter, ignoring the bet leads directly to the desired result. There is no motivation for making them adjust (even if it does no harm under the assumption that it's easily done, and indeed that in any event they are betting given the degree of mandatory insurance).

Case 2: Taxpayer rationally expects to win, and bets in order to make money: Suppose we have a card-counter in the game of 21, or else a really good poker player, who bets so as to make money, just as other people go to the office in order to earn a salary. Now we face the standard case of risky business investment, in which gains should be taxed and losses deducted (including with loss refundability). Real world loss limitation rules, such as the fact that one cannot use net operating losses to get direct federal payouts at the applicable marginal rate, arguably reflect measurement concerns - we may fear that people are creating tax shelter losses rather than reporting real economic ones. But I have ruled all that out of bounds for purposes of my hypothetical.

This regime of including/taxing gains while deducting/refunding (at the tax rate) losses provides arguably desirable insurance through the tax system in at least two senses. First, it in effect redistributes from better gamblers to worse ones, consistent with the ability lottery scenario where people differ in "wage rate" and can't insure against this privately due to adverse selection. Second, as with any other risky business investment, it provides desired insurance that might otherwise be unavailable. To illustrate this point, I used to know a card counter who went to casinos when he could spare the time, solely to make money. He hated the short-term variation, which in fact was high enough that he could go, say, from plus $35,000 to minus $20,000 (with gambler's ruin potentially looming) in the course of a few hours. He really just wanted to earn his expected return - while also needing to manage his stress over avoiding detection (which required making some deliberately bad bets, so as to throw off the watchers employed by the gambling establishment).

It's worth noting a further assumption that may be needed here to make this approach attractive. Normally we are glad that people are willing to engage in risky activity that has a net expected payoff. But in the case of gambling, the gains are other people's losses. If one thinks of this as rent-seeking or negative externalities, the approach I'm suggesting arguably is undermined. But under my assumptions, as opposed to those that it would be reasonable to apply in the real world, this is not an issue. After all, no one is systematically losing under my gambling hypotheticals unless, as I discuss next, they are deliberately (and rationally) undertaking it as a consumption activity.

Case 3: Taxpayer rationally expects to lose, but happily gambles anyway for the entertainment value: Suppose again that we have two people. The first spends $100 to go to the theater, anticipating an enjoyable show. The second spends a few hours in the casino, expecting to lose $100, likewise regarding this as a fun way to spend the evening. And suppose that the fun comes out of the process of the gambling itself - unlike in Case 1 above, let us assume that it's not from wanting to bear risk as such.

The theatergoer faces, of course, the risk that the play will prove to be a dud (and hence revealed ex post not to have been worth $100, much less a couple of hours  that one will never get back). But at least the financial cost is known in advance. One certainly could imagine the gambler thinking about the evening in much the same way, and thus regretting that in fact it's possible to lose a lot more than the expected $100 (or to have to end the night of gambling sooner than expected).

While we may be starting here to leave far behind the actual psychology behind gambling (which surely includes the hope of winning against the odds), one could, if one liked, conceptually divide the gambler's results into a "consumption component" and an "investment component."  From this standpoint, one might say that the above gambler has what ought to be a nondeductible consumption outlay, in the amount of the $100 expected cost, along with investment variation above or below that which "ought" to be deducted or included, as the case may be.

E.g., suppose I actually break even when I ought to have lost $100. Under the hypothetical approach, I would have $100 of taxable income. (After all, I'm $100 better-off than my otherwise identical peer who actually did lose exactly $100.)  Or suppose I have a rotten night and lose $200, even though I actually should have expected to lose only $100. Now I have a deductible $100 loss.

Note that, with perfect knowledge (by the gambler and the government) of the expected loss, we don't get into Domar-Musgrave adjustments here. If I change how I am actually betting, then I change the expected loss.

If one revised the treatment of Case 1 so that gains were included and losses deducted (rather than both being ignored), it would be receiving the same treatment as Case 3 (given that the expected loss in Case 1 is zero). So those two start to collapse together, once one picks at the examples a bit.

Likewise, once we see that, in Case 2, it's really the positive expected return that one might want to tax (as "ability"), one might start feeling inclined to ask whether, in Case 3, one should want to treat lousy gamblers, who rapidly accumulate large expected losses, less favorably than the more skillful (though still loss-expecting) gamblers, who are able on average to slow the bleeding, and thus to gamble less unprofitably or for longer. This might start to push us in the direction of wanting to treat really bad gamblers more favorably than good ones, e.g., by not simply benchmarking them off the larger expected losses that reflect their lower ability in this respect. This would in effect be insurance against being the sort of gambler who is bad enough at it to have a larger than typical expected loss. (And of course I am assuming that the difference here is in ability, not effort - we're in the same realm as a wage tax that discourages work if our making this adjustment discourages people from learning how to become better gamblers.)

But here, at last, is the ACTUAL takeaway that I derive from all this: Theory, at least of very simple kinds, is more tractable than reality. It's easier to say where greatly simplified hypotheticals would lead us under particular normative views, than to reach confident judgments about the real world, in which multiple, conflicting such hypotheticals may each be more than 0% true, and yet each push us in very different directions.

Wednesday, August 29, 2018

My John McCain story (such as it is)

I just belatedly remembered that I have a John McCain story of a sort. It goes back to 1997 or so, and is perhaps more about TV, media, and promotion than McCain as such, but he did, from my standpoint, have an amusing cameo in it.

At the time, I had just published my book Do Deficits Matter?, and the publisher was seeking to help me get publicity to boost sales. So I got a call from a booker from Good Morning America, asking me if I wanted to appear on the show and apparently get a chance to discuss deficit issues briefly.

I said yes, even though I had to get there, pre-show, at something like 5:30 in the morning, which was no fun. I also had an Income Tax class to teach that morning, but say it was at 10, so I knew I'd get to it on time.

When I arrived at the show, I found out that I had been misled by the booker, who just wanted to have warm bodies in the room. They were going to be discussing deficit issues with a visiting celebrity, none other than John McCain, and they invited all members of the audience to submit proposed questions on index cards. 2 or 3 would then be pre-chosen to ask their questions live on the show. I didn't bother to submit, but I also, out of curiosity, didn't leave. I was feeling a bit grumpy by this point, however (despite scoring loot in the form of a free Good Morning America t-shirt).

They also had another guest on the show who had become a celebrity. She had actually worked in the same law firm as me, and indeed in the office next to mine, and we had been on friendly terms. I remember thinking that it would have been nice to go over and say hello to her, off-camera, except that security would have hustled me out pronto, long before I could get within eyeball range. The consequent feeling of relegation to plebe status added, I suppose, to my resentment about being there.

When the show was over, McCain, being a professional politician, came over to shake hands with all the plebes in the studio audience. I shook his hand but didn't leave right away, because I was hoping to talk to someone who worked for the show about the dragooning that I by now so resented. Then I said to myself, the hell with it, and decided to file out. This brought me within a few feet of McCain, who was still lingering and talking to people. We made eye contact, and he growled at me, kind of angrily, "I already shook your hand!"

My thought at the time was: With all due respect, it's not as if shaking your hand is such a great thrill that I'd be angling for an encore. So get over yourself, if you don't mind. Once was quite enough for me, just as it understandably was for you.

This then lingered as the event's final indignity, although the whole thing had turned comic in my mind by the time I got to my tax class.

Friday, August 24, 2018

Review of my international tax article

Many thanks to David Elkins for his thoughtful discussion / review of my new international tax article (on broad priniples and the 2017 tax act in particular) in today's Tax Prof blog, available here.

Sunday, August 19, 2018

Random musical aside

I happened to hear recently, for the first time in a while, one of my all-time favorite songs, Sam Cooke's Bring It On Home to Me.  Looked it up on Wikipedia to learn more about it, and gleaned several fun facts:

--It was only a B side.  The A side was Having a Party - obviously a far lesser song, although one can understand what the record company was thinking.

--The backup vocalist with the deep voice, whose call-and-response interplay with Cooke is so powerful, was Lou Rawls.

--The piano player, who does his part so beautifully although it's simple enough that I suppose any really first-rate session pianist could have nailed it, was Ernie Freeman, who did a lot of jazz, pop, and R&B records and worked with Woody Herman, Duane Eddy, and Frank Sinatra, among others.

--Cooke must not initially have realized how good a song it was, as he offered it to fellow singer Dee Clark, who turned it down.

Act soon when supplies start

Subject only to a bit more light editing, I seem to have finished, at last, a complete draft of the book on literature and high-end inequality that I started in 2014.  I'm usually a fast writer, but in this case I had to spend years deciding exactly what I was doing and learning how to do it well. Plus a whole lot of disparate research was required for each new topic.  And I wrote long chapters that I subsequently deleted from the project and published separately as freestanding law review articles.  Etcetera.

My current working title is Dangerous Grandiosity: Literature and High-End Inequality Through the First Gilded Age. This, too, has changed multiple times in the course of the project.  I would certainly be willing to discuss alternative title suggestions with a publisher, as they can often come up with something crisp and salable.

Whether or not this book is either the best or the most important thing I've written, I think it is my favorite, although this partly reflects the particular tastes and values that led me to write it. (I can be very self-critical, although I generally prefer to keep that to myself.)

I've talked with a couple of editors / possible publishers in the past, but before I had fully nailed down the project. My aim was not just to gauge interest, of which I found some, but also to get feedback, which several gave generously and which I found very helpful.

The book clearly has more upside sales potential than my tax policy books, but also less of an automatic built-in audience, and I don't have the same instant cred when doing something like this as when writing about, say, corporate or international tax policy. That's fine, I'm willing to earn it and feel that the book is up to this challenge. (And I've gotten positive feedback about particular chapters.) But I do now face the question of how best to go about publishing it. E.g., university press versus high-brow independent press, and it really needs the right fit to get its best shot at landing audibly.

Monday, August 06, 2018

International tax policy article, part 2, posted on SSRN

I have just now posted on SSRN the second part of my recent Tax Notes / Tax Notes International article discussing U.S. international tax policy.

It's available for download here.

The abstract goes something approximately like this: "This paper, published in Tax Notes on July 9, 2018, is the second half of a two-part paper examining and analyzing the three main international provisions in the 2017 tax act. Part 1 discussed normative frameworks for international tax policy. Part 2, contained herein, focuses on the base erosion and anti-abuse tax (the BEAT), global intangible low-taxed income (GILTI), and foreign-derived intangible income (FDII)."

I am thinking that this may be of greater practical interest than Part 1 to people who are looking, not just for an overview of the major international tax provisions in the 2017 U.S. tax act, but also for what I would say is a genuinely evenhanded assessment of its purposes, virtues, and defects, including suggestions for how the above rules might best be changed if one took as given the broad-gauged policy views that appear to have motivated them.

Tuesday, July 31, 2018

I think the NYT's article title says it all

Today in the NYT, an article entitled "Trump Administration Mulls a Unilateral Tax Cut for the Rich" discusses the latest tax and budgetary outrage - a term that I think is justified here - that is under consideration in Washington:

It starts: "The Trump administration is considering bypassing Congress to grant a $100 billion tax cut mainly to the wealthy, a legally tenuous maneuver that would cut capital gains taxation and fulfill a long-held ambition of many investors and conservatives."

The idea would be to index assets for inflation for purposes of measuring capital gain, while not adjusting anything else for inflation.

To illustrate one of the main problems with doing this, Daniel Hemel and David Kamin explain:

"Imagine that a taxpayer buys an asset for $100 that is fully financed by a loan. Assume that the real interest rate is zero, that the inflation rate is 10%, and that the nominal interest rate on the loan is 10% as well. One year later, assuming no change in the real value of the asset, the asset will be worth $110 on account of inflation. If basis is indexed for inflation, the taxpayer can sell the asset for $110 and recognize no taxable gain. Assuming that the interest is properly allocable to a trade or business, the taxpayer can claim an interest deduction of $10 with no offsetting gain, despite the fact that the taxpayer is in the same pretax position as previously.  Put differently, the effort to eliminate the taxation of phantom gains leads to opportunities for the creation of phantom losses."

Inflation is in principle worth addressing, but comprehensively - albeit subject to the complexity costs of doing so, which are less worth incurring when the inflation rate is relatively low (as it has generally been for a number of years). But addressing inflation so selectively and piecemeal, creating heightened inconsistencies all across the Internal Revenue Code, is likely to make things worse, such as by encouraging rampant tax sheltering.

There are also other obvious problems with the proposal. Its being so regressive and losing so much revenue when the long-term fiscal gap is already exploding due to the 2017 tax act, ramped-up military spending, etc., goes beyond being reckless. It is also extremely aggressive as a regulatory move, exposes the hypocrisy of those doing it (who would be outraged if a Democratic administration were half as aggressive), and (as Hemel and Kamin argue) there is a good chance that the courts, at least if they address the issue in good faith, will strike it down as beyond regulatory discretion.

What's more, capital gains already benefit from deferral and a low rate, and even the issue of double taxation of corporate profits (where it's a sale of appreciated corporate stock) already verges on being a non-problem due to tax rate changes, not to mention adjustments in the capital markets.

In sum, despite the fact that inflationary gain is phantom gain as an economic matter, this is a horrible proposal and not one that I believe is being advanced in good faith, either legally or as a policy matter. Rather, it is another payoff to favored constituencies, and when it's financed (as it must be in the long run) many Trump voters will be among the main losers.

Monday, July 30, 2018

International tax policy article, part 1, posted on SSRN

Earlier this month (on July 2 and 9) I published, in 2 parts, my new international tax policy article, The New Non-Territorial U.S. International Tax System, in Tax Notes and Tax Notes International.

The publishers permit SSRN posting after an exclusive period. Thus, as of today, I am permitted to post Part 1 of the article, and have done so. It's available here. I will post Part 2 next Monday (August 6).

Part 1 discusses normative frameworks for international tax policy, while Part 2 discusses the BEAT, GILTI, and FDII. I suppose that, stretching things desperately, one could say that Part 1 leaves the reader with a cliffhanger, as it sets the stage for assessing those three provisions but holds off on actually doing so. (The article would simply have been too long for Tax Notes had I published the whole thing at once.)

Although I've been authorized by the publisher to post Part 1 today, the usual drill is that SSRN takes it down after a couple of days on copyright grounds and I have to contact them with copies of the authorizing emails in order to get it back up.  Kind of annoying, as the take-down usually occurs right when the download traffic, be it high or low overall, is at its peak. I'm going to try to forestall this by contacting SSRN upfront, but we will see if this works.

Tuesday, July 24, 2018

Good news from the 9th Circuit - Altera reversal

I haven't yet found this online, because it just came out this morning, but the 9th Circuit has reversed the - sorry for sounding shrill here, but it's justified - egregious and embarrassing Tax Court decision in Altera v. Commissioner.  In Altera, the Tax Court held - unanimously! - that the IRS exceeded permissible administrative discretion when it amended its transfer pricing regulations to make them less of a tool for profit-shifting to tax havens than they had previously been. The issue arose under an election companies have to use cost-sharing agreements with their foreign affiliates to profit-shift, and the taxpayers were insisting that the state of the law required that they be allowed to pretend that incentive compensation they paid to their own employees was irrelevant and, in effect, cost zero. This was based on a misleading analogy to how companies at arm's length act when they are engaged in actual cost-sharing and (typically) each have their own incentive compensation arrangements. It also was based in part on embarrassing expert testimony to the effect that incentive compensation should be viewed as costing the company zero.

Not to repeat it all, but I discussed why the Tax Court decision is so bad here, and an amicus brief to the 9th Circuit, lead-authored by Clint Wallace, that I signed here. So it's great that the Ninth Circuit has now reversed, based on a very thorough discussion of the relevant legislative and regulatory history, along with Congress's and the Treasury's underlying policy concerns, and adopting arguments very compatible with (and similar to) those in our amicus brief.

The Tax Court decision did not merely permit taxpayers to game the system in a manner that is entirely contrary to the logic behind cost-sharing (which is itself flawed, but better than having absolutely no constraints). It also seemed to reward an aggressive taxpayer strategy that I was concerned we'd see more of in the future. (And we still may.) This is to spend lots of money making lots of bogus arguments in the notice and comment phase of regulatory issuance, and then to get the regulation struck down as "arbitrary and capricious" unless its preamble is written, not to inform taxpayers and advisors as has been the general past practice, but instead as a litigating document that responds carefully and fully to each argument made in notice and comment, no matter how meritless and frivolous.

The Ninth Circuit is to be commended for getting it right. Now, it's true that it relies on the Chevron standard for reviewing administrative regulations, which may well be on the Supreme Court's chopping block in the near future. But in this particular case, it shouldn't matter, as the IRS regulation at issue, concerning the treatment of incentive compensation in cost-sharing arrangements between affiliates, was not only a reasonable interpretation, but clearly the most reasonable interpretation, and indeed perhaps the only reasonable one.

UPDATE: The 9th Circuit's Altera decision is now available here.

SECOND UPDATE: Leandra Lederman blogs about the decision (including key administrative law aspects) here.

Dr. Seuss's The Lorax

Having had young children, although they are grown now, I spent some years extensively reading out loud the greater part of Dr. Seuss's oeuvre. I tended to group his books into two categories - those that are astounding works of genius, and those that are a bit more rote or formulaic albeit clever (inspiration hadn't hit quite as strongly in these) and that also tended to be full of tongue-twisters that could become annoying to read out loud repeatedly.

Wodehouse, a fave of mine, is similar. His books are always skillfully done, but some have immense comic inspiration coursing through them, while others are more like rote exercises that make light reading but are disposable and forgettable.

A few examples of Category 1 (genius) for Dr. Seuss: Green Eggs and Ham, The Sneetches, Cat in the Hat & its sequel, One Fish Two Fish Red Fish Blue Fish, And To Think That I Saw It On Mulberry Street.

Also in Category 1, and of particular interest to law and economics types: The Lorax. I believe that people have even written about it in the biz. E.g., it offers a classic illustration of externalities and common pool problems. (Exam question: Could these have been solved by assigning the Once-ler ownership rights to all Truffula trees?)

But The Lorax also seems to posit a violation of rational choice by the Once-ler, who completely fails to anticipate that the trees are running out until the last one faces the axe. We know people sometimes fail to exhibit appropriate planning depth, but it isn't really explained here.

Anyway, today's NYT has an article discussing a recent article in Nature (available here, but it may be restricted-access) about The Lorax.

First point of interest, the backstory: Ted Geisel (Seuss) "was fighting to keep a suburban development project from clearing the Eucalyptus trees around his home. But when he tried to write a book about conservation for children that wasn't preachy or boring, he got writer's block.

"At his wife's suggestion to clear his mind, they [went on a Kenyan safari] ..... And if you haven't guessed by now, it was there that The Lorax took shape - on the blank side of a laundry list, nearly all of its environmental message created in a single afternoon."

This is how inspiration tends to work, even if you aren't a Seuss.

Per the Nature article, this more particularly involved his seeing an acacia tree, along with patas monkeys that commensally use it without harming it. So it was the original truffula tree, and they helped inspire the Lorax himself.

The NYT article continues: "[S]ome have worried that [the] Lorax ... isn't really a good teaching model because he comes off as a self-righteous eco-warrior with unfounded anger." Well, right at the start, the narrator calls his voice "sharpish and bossy," and he continues to act that way throughout the story.

Per an interview that the NYT writer, JoAnna Klein, conducted with Nathaniel Dominy, the Nature paper's lead author, while "[t]he prevailing sense among literary critics is that the Lorax is too angry .... [i]f you see the Lorax not as some indignant steward of the environment, but instead, as a participating member of the ecosystem [that is being threatened], then I think his anger is so much more understandable and I think forgivable."

That's a reasonable point, but it's also part of Seuss's aesthetic to have the spokesman be shrill and hence a bit self-defeating. It's a part of his combining moral lessons with an aversion to the smug sententiousness of prior children's literature that he found, not just boring, but insulting to his child audience. So he frequently complexifies a book's stance and impact by standing apart from the messenger (in cases where he assigns someone the role of being "right" - which he only does occasionally).

For another example of the same thing, consider Green Eggs and Ham. This is a book with a clear moral message for children: be openminded, try things, expand your horizons, etc. But who is the messenger for this point? The very annoying and over-zealous Sam-I-Am. There's something distinctly odd and off about Sam-I-Am's persistence, which is part of the fun even though he's right.

More examples of moral complexity in Seuss: Should the kids tell mother what happened in the Cat in the Hat? Are the child's fantasies (which he must keep to himself) more important and valuable than the mundane truth that his parents demand, in And To Think That I Saw It On Mulberry Street?

So we can combine the Nature article's explanation for why the Lorax is so shrill - he's personally threatened, and hence feels justifiably defensive and anxious - with understanding how Seuss uses this type of strategy to help make his best works far more memorable and powerful than 99.9% of the young children's literature that is out there.

Thursday, July 19, 2018

Locker room talk

In the health club locker room yesterday, a couple of folks nearby were talking about their jobs, which for the young NYC crowd that mainly frequents these places always seems to involve Internet startups and the like.

One of them apparently works on fund-raising for real estate projects, and he said the "Trump tariffs" have been a disaster for this business, causing multiple projects to be deemed economically unfeasible.  He also said something about an 18-month timeline for the projects to get going, so I wasn't sure if the real estate construction slowdown that he identified is being driven by what's happened already, or by what might happen next.

Tuesday, July 10, 2018

Tax Notes article on international tax provisions in the 2017 act

Last week, Tax Notes published part 1 of my article, The New Non-Territorial U.S. International Tax System, and this week it published part 2.

Part 1 discusses normative frameworks for international tax policy, while part 2 discusses the BEAT, GILTI, and FDII. As per the above photo, part 2, which is presumably of wider practical interest, made the cover.

Consistently with editorial permission, I'll be posting the entire article on SSRN on July 30.

Monday, July 02, 2018

International tax talk at Oxford

Last Wednesday I gave a talk at Oxford Academic Symposium in re. my new international tax article. Slides are available here; they're basically a shortened version of my Vienna slides from a couple of weeks previously, the relative brevity reflecting that I had less speaking time.

Meanwhile, Part 1 of the paper came out today in Tax Notes and Tax Notes International. Part 2 will be out next Monday (July 9), and I'll be allowed to post the paper (both parts) on SSRN on July 30.

It was nice to see old friends at Oxford. On my way back home, I stopped briefly in London and got to see Oscar Wilde's An Ideal Husband, the Mel Brooks Young Frankenstein musical, and Christo's installation in the Hyde Park Serpentine, which you can see here.

Thursday, June 21, 2018

The Supreme Court overturns Quill

I'm glad about the Supreme Court decision in South Dakota v. Wayfair, allowing states to require Internet retailers to collect sales taxes. Indeed, I was among the tax law professors who signed the Daniel Hemel-penned amicus brief urging this result. The ostensibly constitutionally mandated effective tax preference for out-of-state retailers was distortionary and lacking in any good rationale given the ease of collecting sales taxes via modern technology.

One could see the Quill/Wayfair issue as helping to illustrate my old point that tax cuts or tax preferences can make government effectively "bigger" even if they reduce tax revenues, and thus that their elimination may effectively make the government "smaller." At least when we are talking about fiscal matters - let's leave aside for now, say, the issues around government agents who put children in cages - a meaningful, rather than formalistic, view of the "size of government" should be based on its distributional and allocative effects, relative to some baseline. (Although the choice of baseline is admittedly a vexed issue.) Thus, suppose that in Case 1 the government "taxed" $X from you on Day 1 and gave the same amount back to you (as "spending) on Day 2.  Versus, in Case 2, it took half as much from you on Day 1 but either gave it to someone else or spent it on subsidies for the coal industry. I'd say the government is "bigger" in Case 2 than Case 1, even though the formal measures of "taxes" and "spending" are lower.

Giving Internet sales an effective exemption from state sales taxes, against the background of general under-collection of use taxes, could be viewed in tax expenditure terms as analogous to taxing all sales and then giving the money back to Internet sellers as a special outlay on their behalf. The fact that the effective exemption arguably wasn't intended as a subsidy is immaterial if the question we are asking is simply what level of distortionary economic effects result from state sales taxes. These effects may now be lower, and if the states want to have the same net revenue as before they can do so by lowering their rates. If they choose increased revenues, this might conceivably lead to "larger government" in some dimensions, but there would still be an offset by reason of the greater neutrality as between retailers.

Monday, June 18, 2018

Back in the USA

Yesterday we got back to NYC after spending just over a week in Vienna and Czechia (Prague and Cesky Krumlow). These days it's nice to be away, especially in cities that have beautiful architecture and well-functioning transit systems (if less varied food than NYC), not to mention that being abroad permits one to take a step back from the constant blaring of horrible US political news. I really quite like being in Europe, even if inevitably less at home there than in my native country.

It was vacation, except for a talk at Vienna University on my forthcoming international tax paper, at which I learned that, since in a sense it's two papers (international tax policy lessons of recent years, plus analyzing 3 key provisions in the 2017 act), neither of which is wholly uncomplicated, it's basically impossible for me to present the whole paper unless I have at least 45 minutes. I did indeed have that much time on this particular occasion. But the next few times I present it, I'll probably have only 20 minutes, so it appears that I'll need to jettison one half or the other almost entirely.

Slides for the talk are available here.

Overheard on the street ...

... between two parents who were walking their kids to PS 41 in Greenwich Village (probably for day camp, rather than school):

"So, what did you guys do for Father's Day?"

"We went to Central Park. No meltdowns, it was relatively seamless, couldn't have been better!"

Thursday, June 07, 2018

Forthcoming talk in Vienna

I've been quiet here lately because it's the summer, both at NYU and in tax policy circles (albeit, not so much in terms of our actual weather here in the northeastern U.S.).

Since finishing my article on the international provisions in the 2017 tax act (forthcoming in Tax Notes on July 2 and 9), I've mainly been working on my book on literature and high-end inequality. I'm getting towards the finish line for what I see as volume 1, which ends before World War I with literature from the First Gilded Age in the U.S.

But I am heading across the Great Pond tomorrow to spend a week-plus in Vienna, Prague, and Cresky Krumlov (a small and apparently beautiful city in Czechia that is reachable from Prague). The work-related tie-in for this is that on Monday, June 11, I'll be discussing my international tax paper at a Vienna University Tax Seminar.

Slides for the talk are available here.

Thursday, May 24, 2018

Forthcoming article on U.S. international tax law

I have on a couple of occasions mentioned here the tax article that I've been working on, when time permits, since late January.  Entitled The New Non-Territorial U.S. International Tax System, it discusses and evaluates three of the main new international tax provisions in the 2017 tax act: the BEAT, GILTI, and FDII.  (This includes attempting to explain, very simply and intuitively rather than technically, what these provisions appear mainly to be "about.")

I have now completed the piece, and it will be appearing in Tax Notes in two parts, on July 2 and 9.

The two-part publication was necessary due to its length (close to 30,000 words), and made sense due to a natural breakpoint between the two main parts.  The first half focuses on international tax policy conundrums and dilemmas in general, and the second half on the BEAT, GILTI, and FDII in particular.

I put both halves of the analysis in the same article due to their complementarity. One needs the first part in order to ground the evaluation in the second part.  And I think the second part helps show that the normative discussion in the first part is focusing on things that countries actually care about - which cannot comparably be said about standard-fare generalizations regarding, for example, the supposedly central choice between "worldwide" and "territorial" models, neither of which any major industrial country appears to want in its unalloyed entirety.

While I don't pull my punches in evaluating the BEAT, GILTI, and FDII, the piece is written in a far kinder, more tolerant, and even verging on forgiving, spirit than my piece on the passthrough deduction. I expressly address in the new piece my reasons for taking a different tone here.  I also offer general thoughts regarding how the provisions might be changed or improved, taking the more defensible underlying policy aims as given, albeit without getting into the weeds as some outstanding recent pieces, such as this one, have.

On July 23, with Tax Notes' permission, I will be posting the article on SSRN. Evidently I'm fine with losing a few downloads under the official count, in exchange for having, I hope, significantly more actual readers.

I'll also be discussing the piece in Vienna on June 13, in Oxford at the end of June, in Ann Arbor on October 24, and in Copenhagen on November 5. (Time permitting, I'd be happy to add, say, Australia, New Zealand, China, or Japan to the tour, assuming roundtrip business class tickets, but no one has as yet asked.)

Monday, May 21, 2018

Back in NYC

Someone (aka Gary) appears to be glad that I'm back.















Luckily, he doesn't know what I was doing while away.

Thursday, May 17, 2018

Text of my Stanford book talk!

I did my Stanford book talk today, regarding my literature & inequality book (and the chapter on E.M. Forster's Howards End in particular; thought it went well.

If interested, you can find the text of my talk here.

The abstract goes something like this:

We are an intensely social species, and often a rivalrous one, prone to measuring ourselves in terms of others, and often directly against others. Accordingly, relative position matters to our sense of wellbeing, although excluded from standard economic models that look only at the utility derived from own consumption of commodities plus leisure. For example, people can have deep-seated psychological responses to inequality and social hierarchy, creating the potential for extreme wealth differences to invoked feelings of superiority and inferiority, or dominance and subordination, that may powerfully affect how we relate to each other. 
The tools that one needs to understand how and why this matters include the sociological and the qualitative. In my book-in-progress, Dangerous Grandiosity: Literary Perspectives on High-End Inequality Through the First Gilded Age, I use the particular tool of in-depth studies of particular classic works of literature (from Jane Austen’s Pride and Prejudice through Theodore Dreiser’s The Financier and The Titan) that offer suggestive insights regarding the felt experiences around high-end inequality at different times and from different perspectives. A successor volume will carry this account through the twentieth century and up to the present.

Wednesday, May 16, 2018

Official link for my Stanford book talk tomorrow

As previously noted, tomorrow at Stanford I'll be discussing my literature & high-end inequality project, as a whole, with particular focus on my chapter on Forster's Howards End. Elizabeth Anker of Cornell will be the commentator. The official link for the event is here.

Tuesday, May 08, 2018

Poster for Stanford book talk

And here (as well as right below) is the poster for my Stanford book talk, albeit still missing a link at the bottom.

Upcoming West Coast events

Late next week, I will be at Stanford Law School to participate in a couple of events.

First, on Thursday, May 17, at 4 pm, I'll be giving a talk entitled "Gilded Age Literature and Inequality." This relates to my literature book project - now in two parts, with Book 1 to be entitled Dangerous Grandiosity: Literary Perspectives on High-End Inequality Through the First Gilded Age.

I'll be speaking for up to 40 minutes, and have more or less written up a talk that I may post afterwards on SSRN and/or here. In addition to discussing the project in general, it focuses in particular on my chapter discussing E.M. Forster's Howards End. Elizabeth Anker of Cornell (both the law school and the English Department) will be the respondent, and then there will be Q and A.

There doesn't seem to be a link posted yet for this event, but I will provide it here once available.

Then, on May 18-19, there will be a Law and Humanities Conference at Stanford, hosted by Bernadette Meyler of Stanford (who also kindly arranged my literature book event) and Simon Stern of Toronto.

As per the conference program, I'll be participating, including as the respondent at a May 19 panel entitled "Areas of Substantive Law" that will feature papers by Daniel Williams of Harvard, Andrew Gilden of Williamette, and Sherally Munshi of Georgetown.

I'm looking forward to these events, which I anticipate will be welcomedly (to coin a new word) horizon-expanding.

Thursday, May 03, 2018

Just enjoy it

Gary might be even happier than I am about summer's better-late-than-never arrival at last. But it's surely a close call.

Wednesday, May 02, 2018

Tax policy colloquium, week 14: Mitchell Kane on international tax policy and tax treaty interpretation

Yesterday, in our final session of the 2018 NYU Tax Policy Colloquium (my 23rd season of same), my colleague Mitchell Kane presented "International Tax Reform: The Tragedy of the Tax Commons, and Bilateral Tax Treaties."

The current draft was written before the 2017 tax act took form, but the act then added greatly to its immediate policy relevance (as will no doubt be reflected in the next draft). In particular, it's directly relevant to the question of whether one of the key international provisions in the 2017 act, known as GILTI (for "global intangible low-taxed income") is compatible with bilateral tax treaties. This is not just a U.S. question under U.S. tax treaties, although it certainly is that, since, if other countries choose to enact GILTI-like rules they would face the same question under other treaties.

In broad outline, GILTI works as follows. (And again, I have a forthcoming article draft that discusses it in more detail.) U.S. companies, with respect to much of their foreign source income (FSI), including that earned through their foreign subsidiaries, must (1) compute the portion that exceeds a 10% deemed return on tangible business assets held abroad, (2) include 50% of that amount in taxable income, and (3) pay U.S. tax on whatever liability remains after claiming foreign tax credits for 80% of the foreign taxes paid on that income.

Simplified illustration: say Acme Products has $100X of relevant FSI, and $100X of foreign business assets. A 10% return on the latter is $10X, so we reduce the relevant FSI by that amount, to $90X. Then we include half of it (or more specifically, include the whole thing then deduct half), reducing the net GILTI inclusion to $45X. At a 21% U.S. corporate tax rate, that would yield U.S. tax liability of $9.45X. But suppose the relevant foreign taxes paid on the FSI are $10X. 80% of that is $8X. So the U.S. tax liability on the GILTI inclusion is reduced from $9.45X to $1.45X.

Why foreign tax credits for only 80% of the foreign taxes paid? This reflects an issue that I think I can reasonably say I introduced to the literature, namely the incentive effects, from a unilateral national welfare standpoint, of having a 100% marginal reimbursement rate (MRR) for foreign taxes paid. Full foreign tax credits offer a 100% MRR. GILTI is a kind of global minimum tax rule at a 10.5% rate, but with full foreign tax credits U.S. companies with tax haven income might simply pay the full 10.5% abroad (perhaps economizing on the tax planning needed to stash it in pure havens) and we'd get zero revenue. There's no direct gain to U.S. interests in this scenario from U.S. companies, to some extent owned by U.S. individuals, now paying higher foreign taxes and still no additional U.S. taxes.

The 80% foreign tax credit restores some incentive to economize on foreign taxes paid. It also kind of makes the GILTI a 13.125% global minimum tax. In theory, pay that rate globally and you'll zero out your U.S. tax liability on GILTI. (But sometimes this is only true in theory, not in practice, due to various odd features of GILTI that can result, for example, in the loss of foreign tax credits due to a mismatch between when the taxable income arose under U.S. versus foreign law.)

This brings us to the treaty issue. Bilateral tax treaties between the U.S. and other countries generally say that one should offer either exemption or foreign tax credits for FSI of a resident of one of the treaty partners that was earned in the other treaty partner's jurisdiction. So how can we both tax GILTI, to a degree, and offer only incomplete foreign tax credits?

I noted this issue in my work on foreign tax credits, but I think it's fair to say that I expended close to zero intellectual capital in trying to resolve it. I left it for others to ponder, and happily they did. First Fadi Shaheen wrote on the issue, and now Mitchell Kane is following up. (Side point: it appears that the only thing they disagree about is whether they disagree about anything.)

Here is a very quick summary of Shaheen's contribution: Both formally and in terms of the purpose of the foreign tax credit, it's permissible to take a dollar of FSI and divide it into a portion that gets exemption and a portion that gets the foreign tax credit. A case in point is Option Z in international tax reform proposals that were disseminated a few years back by then-Chairman Baucus of the Senate Finance Committee. It provided that FSI would be 60% taxable and with full foreign tax credits allowed, and 40% exempt. Hence, if one put the two pieces back together, and given the then-prevailing 35% U.S. corporate tax rate, the covered FSI would in effect be taxed at 21 percent and would get 60% foreign tax credits.

Returning to Shaheen's generalization, he argues, to my mind convincingly (on all grounds relevant to statutory interpretation) that, so long as the two pieces add up to at least 100%, a mixed approach is U.S. model treaty-compliant. (The case for its being OECD model treaty-compliant is apparently clearer still.) If that's correct, then GILTI is more generous than it needs to be in order to satisfy tax treaties. Again, it taxes only 50% of the FSI (even ignoring exclusion of the deemed return on tangible business assets), yet offers 80% foreign tax credits.

Case closed if one accepts the analysis, except for one further issue. Treaties are bilateral, whereas GILTI applies globally. So, might it be an issue if Country A were to argue that less than 100% of the FSI that U.S. companies derived there was getting either exemption or foreign tax credits, given interactions with other FSI and foreign taxes within the GILTI basket? This is an issue that Kane and Shaheen both plan to consider further. (Shaheen's article, like Kane's draft, preceded GILTI.)

Even at this earlier stage, Kane offers a further development of Shaheen's explication of how one can combine exemption with creditability without relying entirely either on one or on the other, so long as one provides sufficient relief under the two approaches considered jointly. I believe that his interpretation of what a typical bilateral tax treaty requires can be explained as follows:

(1) The residence country can't cause its residents' FSI to be taxed higher than domestic source income (considering both its and the source country's taxes), unless this results from the source country's imposing a higher tax;

(2) Where the above follows from the source country's tax, the residence country can't impose any residence-based tax on the FSI. But where the source country charges less tax on it than the residence country would if the income were earned in the residence country, the residence country can charge a tax equaling anything up to the amount of that shortfall. (Charging more would lead to violation of Rule 1 above.)

While this may initially sound both a bit abstract, and not especially close to the precise language of bilateral tax treaties addressing "double taxation," Kane has done historical research showing how this relates to and fulfills the purposes expressed throughout the history of the treaty process regarding why double taxation is considered potentially bad and what the rules against it are trying to accomplish. So it is defensible based on underlying intention, as well as more formally via his analysis of typical treaty language.

Thursday, April 26, 2018

Tax policy colloquium, week 13: Wolfgang Schön on taxation and democracy

Earlier this week at the colloquium, Wolfgang Schön presented his paper, Taxation and Democracy, offering a broad-ranging inquiry into a set of related topics that include the following:

1) How should we think about "congruence," or the importance or not of having voters and taxpayers be the same people? Issues raised here include taxing resident and visiting non-citizens on their domestic source income, taxing other inbound income, and the voting and taxation rights of citizens abroad.

2) How is the imposition of tax burdens generally justified? The two alternative mechanisms that the paper discusses are content and consent. Content is top-down, and involves the application of principles to protect taxpayers against unfair or arbitrary measures. The US constitutional bar on bills of attainder would be an example, albeit not one pertaining to taxation in particular. Content-based protections may need to be judicially enforceable in order to operate as significant constraints, although perhaps notions of fairness can function this way if heeded by players in the political process, Consent, by contrast, might emerge from voting, except that if it need not be unanimous then one has the issue of majorities vs. minorities. The former might oppress the latter by reason of outvoting them, or the latter might prevent the former from having their preferences heeded, by reason of disproportionate influence on the political process, or because there are multiple veto points that permit them to triumph via inertia.  In the cross-border context, consent can rely on exit, rather than just on voice.

The paper also discusses various international issues that overlap in varying degrees with #1 and/or #2 above, e.g., Dani Rodrik's statement of a "trilemma" that prevents countries from having all three of (a) national sovereignty, (b) democratic control over policies, and (c) integration into the global economy. This includes concern that tax competition may make entity-level corporate taxation, and/or redistributive taxation, impossible for a given country to pursue unless it is able (perhaps at high cost) to opt out of the global economy.

 A large part of the paper's inspiration is comparativist, and responds to the fact that judicial oversight with regard to taxation is extremely variant as between countries. In the US, constitutional review of federal tax statutes is extremely limited. There is of course whatever remains, as constitutional law, of Eisner v. Macomber, the infamous 1920 case that held it unconstitutional to impose tax on stock dividends since they weren't a realization. (Not taxing them was in fact substantively unproblematic, but the murky reasoning would have caused huge problems had the Supreme Court subsequently taken it seriously.) More generally, a federal wealth tax might be unconstitutional under current doctrine without apportionment between the states, and there are also, say, the uniformity and origination clauses to consider. 

But to show how different it is in a number of EU countries, consider the passthrough rules that Congress enacted in 2017. I have written an article arguing that they are wholly arbitrary and unprincipled. But obviously, being an American, it never occurred to me that this might have any relationship to viewing the passthrough rules as unconstitutional. And of course, in the US legal setting, it has no such possible implication.

But apparently, if Germany had enacted the passthrough rules, a court that agreed with me regarding how arbitrary and unprincipled they are would likely conclude that this made them unconstitutional under German law. That is certainly a bracing new perspective to think about. All the U.S. palaver about reining in the courts, democratic deficit, etcetera would not get in the way, and arguably that the passthrough rules were constitutional would focus on discerning reasonable rationales for them that my article rejects.

While this is certainly the road not taken in the US - nor do I expect it to be taken, nor am I sure how having taken it would affect things (e.g., it depends on what the courts are like in this scenario), it broadens one's perspective to see how other countries differ. The US is indeed unusual, if not entirely "exceptional" (the UK goes even further) in limiting, as it does, constitutional review of what are claimed to be arbitrary tax provisions, but one enriches one's intellectual horizons in being aware of a greater range of possibilities.