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.

Wednesday, April 25, 2018

Death of Leonard Silverstein

I recently got notification by mail of the death of Leonard Silverstein, at age 96. He was a leading D.C. tax lawyer, and the founder of Silverstein & Mullens, a tax specialty firm that in 2000 merged into Buchanan and Ingersoll. As his Washington Post obituary notes, he became a prominent D.C. arts philanthropist, and was otherwise active culturally and artistically (e.g., president of the D.C. Alliance Francaise, as well as being an amateur watercolorist and pianist). I didn't know about any of that before reading the obituary, but was unsurprised to learn it, as it fit his air, from when I knew of him, of having an underlying intellectual depth and breadth.

Silverstein founded (in 1959!) the Tax Management Portfolio series of practitioner guidebooks, which is why I got the notification, as I was the author for the passive loss rules volume in that series (for which he recruited me when I had just left the Joint Committee on Taxation and was starting my academic career at the University of Chicago). He also successfully cajoled me to write a few very short practitioner pieces for a tax practitioners' real estate journal as the passive loss regs started coming out.

Each only took me a few hours to write, but their publication led to an amusing episode that I've always remembered. A former fellow tax associate at my pre-Joint Committee law firm, who had preceded me into academics, came across these pieces, at a point when my first academic writings had not yet appeared in print (and of course there was no SSRN yet). He evidently concluded that this must be how I was directing my writing efforts as a legal academic, which would have been horrifyingly naive and misguided, as the University of Chicago Law School would have rated their value towards my earning tenure at zero. I ran into this individual at a conference, and while, he was trying to be gracious, his excruciating politeness about the pieces, along with an involuntary smile that he couldn't quite suppress, brought to mind a man talking to one whose pants have fallen down and doesn't realize it. But I figured there was no need to tell him what I was actually doing from an academic standpoint; he'd find out soon enough. (Yes, we're in an ego-driven and competitive profession, and he was certainly no worse than anyone else, including me.)

Anyway, back to Leonard Silverstein. While the 1986 Act was in process, lobbyists who had technical issues to raise with staff would talk to us at the JCT. He was very good, in the sense that he understood our perspective as people who wanted the provisions we were working on to make consistent sense internally and be workable. E.g., I recall his deftness in saying that his client had asked him to raise two issues, one of which lacked merit but he had to mention it before we moved on, and the second more substantial. He was right about their relative merits, and I understood how he was working me but in a way that I had to appreciate. (Plus, the issue he raised truly was meritorious, in absolute terms whether or not comparatively so to the rest of the landscape, as the provision at issue, relating to the disallowance of miscellaneous itemized deductions, was a bit sketchy to begin with, in that it could result in overmeasuring net income.)

I subsequently heard from someone else that he referred to a couple of us at JCT, with whom he was discussing these issues, as "the kids on the Hill," which I found amusing - I was in my late 20s - but by no means offensive. There was something a bit peculiar about an eminent senior law firm partner in his mid-60s, no doubt accustomed to deferential treatment most of the time, having to plead his case before a couple of bright-eyed recent law school grads who were excited about being near the pulse of what was happening at that moment. We certainly met plenty of senior law firm partners who were clueless about the sorts of arguments we'd respect, had never been contradicted by anyone for several decades, and thought they give us orders as if we were grocery store clerks. But he seemed to me to have a bemused and tolerant, albeit perhaps slightly weary, sense about the peculiarity of the status reversal implicit in his having to plead with us, at his career stage, to agree with him.

I thus got to like Silverstein, while not forgetting that he had his job to do and I had mine. Maybe it was mutual, as I'm sure we bantered a bit about the merits of the issues that he raised, I think with some shared enjoyment. When he found out that I was leaving JCT, he asked me if I wanted to join his firm, and when I said I was going to U Chicago he brought up the Tax Management Portfolio, which paid me enough to be worth my while at the time.

I don't recall seeing him in person after I left Washington in 1987, although while I was still in Chicago (through 1995), we discussed TMP follow-ups by phone. But I've always remembered him fondly, and he somehow conveyed to me a sense of being a substantial person even though we never discussed anything that wasn't narrowly professional.

Monday, April 23, 2018

Why resist the irresistible

Sylvester (the black-and-white) and Gary (with stripes) have never been able to resist what I call the "crack sweater," because they respond to it so strongly. Indeed, they're the ones whose constant kneading has caused it to look so shabby.
The book I'm reading on Kindle is Margery Sharp's Something Light. Just discovered her after a mention in the Sunday NYT Book Review. Very good mid-century English comic writer; she's been compared to Barbara Pym and Elizabeth Taylor (the novelist, not the actress), but also has what's almost a touch of Wodehousean absurdity.
Eventually the babies (as we still call them at age 6) settle down, but it still makes reading a bit more challenging.

Update on nearly completed international tax article

I'm very close to completing a full draft of a lengthy article on U.S. international taxation in the aftermath of the 2017 act. All I need to write, at this point, is the conclusion and an abstract. Lots of footnote work is also needed, but that's unlikely to affect substance.

The article's current working title is "The New Non-Territorial U.S. International Tax System." Final length may approach 30,000 words, although I feel that it moves fast through the issues that it covers, rather than lingering. It covers a great deal of ground, in part by reason of its joining together (1) a general normative discussion of how to best think about the main set of international income tax policy issues, and (2) a moderately detailed assessment of 3 key international provisions in the 2017 tax act: the BEAT, GILTI, and FDII.

Combining both of these parts in a single piece makes it a rather long haul. But I think this is the right design for the paper, as the two are interrelated. It's hard to assess the new rules without a normative framework. And I think it's worth my while to update the framework that I've set forth in previous work (such as my international tax book) given the changes since then in the legal environment.

I'll be presenting the piece in Vienna and Oxford in June, Ann Arbor in October, and Copenhagen plus presumably NTA (in New Orleans) in November. My current publishing plan is to put it in Tax Notes, for rapid turnaround and broad professional readership. Given the piece's length, it probably would need to appear in successive weeks as part 1 and part 2. Maybe, with luck, I can shoot for September publication. I'd then be able to post the article on SSRN once a few weeks have psssed (Tax Notes has rules about this).

In principle I suppose I should incorporate the ideas in the piece into a second edition of my international tax book, but I'm not sure if this will happen, as I might prefer to spend the time and effort working instead on my literature and high-end inequality book(s).

Friday, April 20, 2018

A new mix of experiences for me

In more than twenty years in New York City, I've never before looked out at the beautiful white flowering pear trees that festoon the West Village in late April, while listening to howling northern winds and knowing that I'm about to head out in the sub-freezing wind chill wearing my winter coat, earmuffs, and gloves.

Thursday, April 19, 2018

Tax policy colloquium, week 12: Emily Satterthwaite on VAT exemptions for small businesses

This past Tuesday at the colloquium, Emily Satterthwaite presented Electing Into a Value-Added Tax: Survey Evidence From Ontario Micro-Entrepreneurs. This interesting empirical work has both a quantitative and a qualitative dimension, derived from surveying small suppliers in various lines of business at Toronto-area farmer's markets. (Now there is some empirical research that I'd actually like to do - going to farmer's markets, which I do intensively anyway from spring through fall, at least in years when there actually is a spring.)  The subjects were people who are not required to register as businesses under Canada's VAT, because their annual gross receipts are less than $30,000 in Canadian dollars ($23,000 US). But they are allowed to register voluntarily if they wish.

The research sheds light on the design question of how high or low small-business VAT exemptions should generally be. In addition, micro-entrepreneurs' behavior (and expressed attitudes or knowledge) around elective VAT participation may also be more generally illuminating, both about VATs and, more generally, this sector of the economy.

1. My priors on high vs. low mandatory VAT registration thresholds
In practice, VAT small-business mandatory registration thresholds vary quite significantly. I gather that there is no small business exemption in Sweden - if you have $1 of relevant sales, you are supposed to file. In Canada, as noted above, the threshold currently stands at about $23,000 in US dollars, and is trending down annually, since the nominal amount hasn't been changed in more than 20 years and isn't indexed to inflation. In the UK, by contrast, the threshold for mandatory VAT participation exceeds $100,000 in US dollars.

While I haven't previously thought much about whether VAT mandatory registration thresholds should be low or high, I come equipped with attitudes (which I am of course quite willing to reexamine) suggesting that one would want to aim towards the low end.

Now admittedly, in favor of a relative high registration level are the points that:

(a) The social value of accurately measuring and collecting each dollar of correctly determined tax revenue is generally much less than a dollar. A payment of tax is a transfer, so the dollar is just moving from one dollar to another. Getting it right is obviously worth something - presumably, in efficiency and/or distributional terms - or else we'd just have a lump sum tax of some kind, but the marginal value of correctness is presumably just some fraction of the full dollar. This of course is standard Kaplow et al.

(b) Small businesses are likely to have higher marginal compliance costs per dollar of revenue collected than big ones; also the marginal administrative costs of auditing them may be relatively high. So one might have to climb up the scale a bit before it's worth it.

But there are also a bunch of reasons or arguments for wanting to aim low. For example:

(a) VAT exemption amounts generally function as a notch or a cliff - unlike, say, income tax exemption amounts. E.g., if you're one dollar under the VAT registration ceiling, you don't have to collect any VAT from your customers. But once you hit the ceiling you have to collect it all, from the first dollar onwards. One of the students in the class found this great article about problems that this has been causing in the UK. Setting the threshold high tends to result in a bigger notch, and under the Sweden approach there would be no notch. The notch literature suggests that they're generally bad as a design matter, unless the notch occurs at a low point in a multimodal distribution. Not clear how or why one would find such a thing in small business size, however.

(b) VAT exemptions can in effect create a tax preference for small business, inefficiently steering consumer demand towards them and inducing them to stay under the threshold. If you want a comprehensive and relatively neutral tax base, significant exemption thresholds will be at least a matter of regret.

(c) Consider again the point that small businesses are associated with higher marginal compliance and administrative costs. I noted above the possible conclusion that this may support exempting them from the tax. But suppose we look at it the other way around. Small businesses generate negative externalities if they're exempted. If it's better to have a comprehensive system with not just tax payments but information reporting that extends as broadly as possible, then one may think of the small businesses as imposing disproportionate costs on the system, rather than the system as imposing disproportionate costs on them. Or one may adopt a Coasean joint causation perspective, a la the railway and the hay fields.

Again, my hunch from all this tended to come down on the side of setting thresholds low rather than high. But on the other hand there's a paper by Michael Keen and Jack Mintz, modeling the broader social welfare effects (but in light, I suspect, of the authors' considerable empirical knowledge), that suggests it may often be optimal to set the threshold relatively high. I tend to have a very high regard for those two individuals' work, so that does move the needle for me a bit.

2. When do or should small suppliers voluntarily register to participate in the VAT?
Again, Canada allows small suppliers voluntarily to register for VAT participation, and the paper's main contribution is exploring when and (in their own stated terms) why they choose to do this or not.

But for starters, what one should think of voluntary registration? We tend to think of choice as good, especially where the state benefits from more people participating (so there presumably is no downside if they voluntarily opt in), unless one is especially concerned about the cost of having to choose. With respect to tax elections in particular, however, it's often the case that (i) electivity is good if people are using it mainly to lower their compliance and planning costs, but (ii) it's likely to be bad if they're using it to lower their tax liabilities, since the value of the $$ to the government is an externality from their standpoint and it's unclear why this filter would relate closely to whom we want to bear higher vs. lower taxes.

But anyway, when should we expect people to opt into the Canadian VAT? Financially, it tends to have both an upside and a downside. The upside is that one need not charge the VAT on sales directly to consumers. The downside is that VAT-registered businesses that sell directly to you will still charge the VAT, but you won't get it refunded. This is especially disadvantageous if you then sell to another VAT-registered business, in which case, the ultimate downstream VAT collected ends up being higher than if all were registered, as there is unreimbursed cascading for the liability charged on your mid-stream purchase.

The paper's empirical findings are roughly consistent with this. It finds no significant effect on the upstream side (i.e., whether a given farmer's market micro-entrepreneur purchased inputs from VAT-registered businesses), but it does find significant effects on the downstream side (i.e., whether one sells directly to consumers, discouraging registration; or to other VAT-registered businesses, potentially encouraging it).

There is also some indication that informal considerations may matter. E.g., registering or not might involve either signaling or communicating type, although the alternative theories that might apply here are numerous. These might also feed back into influencing the normative analysis.

Wednesday, April 18, 2018

Youtube videos in which I discuss inequality

NYU Law School has now posted three Youtube videos (each just over a minute long) in which I discuss inequality.

In the first one, available here, I discuss the differences between high-end and low-end inequality.

In the second, available here, I discuss high-end inequality and luck.

In the third, available here, I discuss the extent to which U.S. efforts to address income inequality have succeeded (or not).

Wednesday, April 11, 2018

Tax policy colloquium, week 11: Jason Furman on growth and inequality

Yesterday at the colloquium, Jason Furman, who is now at the Harvard Kennedy School, presented Should Policymakers Care Whether Inequality is Helpful or Harmful for Growth?  Here are some of my thoughts about this very interesting paper.

In common parlance there are these 2 things, “growth” and “inequality,” that often are discussed without the speaker being very precise about what exactly either of them means.

The old conventional wisdom held: growth is good, inequality is bad, but there is a tradeoff between them. Not only they are empirically correlated, but more of either tends to result in more of the other.

There is an emerging new conventional wisdom in some circles holding that one can indeed have it all, i.e., greater growth plus lesser inequality, again with not just correlation but causal arrows running both ways.  Hence, directly addressing either can be win-win, improving the other as well.

The paper says: Not so fast. Jason suggests that, if he were a betting man, he would put his chips down in favor of "win-win" if the betting odds were 50-50, but not if they were much tilted the other way. This of course is just a description of his personal subjective probability for the causal relationship. But in part by reason of the relatively close odds, he says to those who favor addressing higher inequality: Don't bet the house on this being true. After all, even if it's true that reducing inequality could increase growth. And that's not likely to be the reason why you care about inequality. So don't unduly play down the other concerns by making the inequality debate one that is instead about growth.

Abroader point that the paper makes is conceptual: We need better-defined, more normatively meaningful, and more precisely differentiated categories than those that are offered by the general terms "growth" and "inequality."

I will herein further discuss these issues in 3 parts: first growth, then inequality, then causal theories and takeaways from the topic and the paper.

1.         GROWTH
In the literature that Jason has in mind, "growth" is typically defined as the increase over time in GDP, either absolute or per capita. The higher future GDP is relative to current GDP, the better.

To dramatize the argument that he's making, let’s start by abstracting from time. What would we do if our policy goal was that current GDP be as high as possible, full stop (i.e., not just, all else equal)?

As a tax person, I naturally think of making tax changes first. So Step 1 might be to replace all taxes on income, consumption, wealth, etcetera, with lump sum taxes, such as uniform head taxes. Hence we would wholly avoid discouraging productive economic activity.

Why stop there, however? We could also, at gunpoint, force people of all ages to work long hours. After all, this would increase GDP, and this by hypothesis is our sole policy aim.

Or if that's too radical, we could further raise lump sum taxes, such as uniform head taxes, in order to fund income subsidies, under which, the more you earn, the more the government pays you (instead of you paying it).

Something else we might do, if all we cared about was increasing GDP, was to confiscate people's wealth (while somehow credibly promising that we would never do it again). The income effect of wiping out people's savings would be to induce them to work more, so as to start replacing it.

By the way, lest this last idea seem too fanciful, it's worth noting that, in the dynamic growth model that the Joint Committee of Taxation used with regard to the 2017 tax act, one of the sources of GDP growth within the budget window was the assumption that, with the fiscal gap being reduced outside the window with lump sum takeaways from people who had, say, expected retirement benefits under present law, such individuals would farsightedly respond by working more in response to the expected calamity for them. Not too much was said publicly about this supposed cause of "dynamic" growth effects.

Does this sound like an appealing policy proposal? I figured it wouldn't. But what makes it so unappealing is that we don't actually care just about GDP. The measure ignores the value of leisure, distributional considerations (i.e., who gets $$ or leisure), and all other relevant amenities and disamenities.

Given the obviousness of the point that maximizing current GDP is not a well-stated policy goal - except as modified to take account of a whole lot more - why would growth proponents state the long-term social goal as maximizing future GDP? The short answer is that they're being foolish or myopic insofar as they focus just on GDP, without reference to distributional considerations, how much people have to work if they'd rather not, and a wide array of relevant amenities and disamenities. But I think their doing has been encouraged by a couple of things:

(1) Since we know less about future distribution than current distribution, people who are seeking a rhetorical edge as they urge the enactment of what they assert are pro-growth policies, have a degree of freedom simply to assume or assert that a rising tide lifts all boats (in tension with the actual facts about rising US GDP over the last 20 years, which has featured about a 0% share at the bottom).

(2) There are multiple narratives associated with comparing the future to the present that can lead to treating GDP growth as something to be welcomed more unconditionally and unreservedly than just good old GDP itself. For example, there are:

--Biological narratives: We like to think of our own lives as improving over time. And parents often want their children to have better lives than they are having themselves.

--Psychological narratives: Habituation to one's current material circumstances may prompt wanting them to improve.  And, by dreaming of a better future, one may sometimes soothe one's discontent about the present.

--Historical narratives: Humanity’s economic rise from the Stone Age to the dawn of civilization to the Industrial Revolution and beyond has not gone unnoticed. We may also have examples of mind of countries that "succeeded" versus "failed" from common starting points, with the former experiencing far higher GDP growth. Examples might include the U.S. versus Argentina (which were on a par, as to per capita GDP, in the 19th century, or West Germany versus East Germany between the end of World War II and 1989 unification, or South Korea vs. North Korea. But in each of these examples GDP growth might be better seen as a consequence of greater success, rather than itrself an independent cause.

But whatever the force of these narratives, they don’t support ignoring that, for the future just like the present, GDP and social welfare are not equivalent. So I commend the paper for suggesting that we should be skeptical about just maximizing future GDP, just as we would not treat maximizing current GDP at all costs as a plausible summum bonum.

2.         INEQUALITY
The paper doesn’t interrogate “inequality” to the same extent that it does “growth.” But it could!

For example, I frequently emphasize the important differences between high-end inequality (e.g., plutocracy) and low-end inequality (e.g., poverty), notwithstanding that they are commonly  blended together in a single term (or in a composite measure, such as the Gini coefficient). They may matter for different reasons, and have different effects.

Thus, suppose one thinks inequality may reduce growth because the super-rich capture the political process and engage in rent extraction. That's about the high end. Or suppose one thinks that poverty leads to a failure to develop children's human capital. That's about the low end.

In my view, the typical welfare economics maxim that the main reason for aversion to inequality is that material consumption has declining marginal utility does a better job of capturing the main issues by low-end inequality, but much less with respect to high-end inequality.

Even if high-end and low-end inequality were effectively the same, a given Gini measure that equates them could be under-informative regarding how the composite actually affects people's wellbeing in one society, as compared to another.  It may matter, for example, whether a given society features high or low social and economic mobility. Or it may matter whether (a) old elites are being challenged by new ones, or (b) it's just new people not much different than the old.

Then of course there are such questions as "equality of what?"  Typical candidates might include wealth, consumption, personal lifetime income, dynastic lifetime income, status, legal rights, political power, opportunity, etcetera.

One may also subscribe to an ethical theory under which it matters whether, or to what extent, economic success and failure are thought to be deserved. Meritocracy, for example, can be thought of as a theory of distributive desert. A meritocrat might ask: To what extent do people's success and failure in my society depend on what I define as merit?

While there is no tension between any of this and the paper, it suggests an arena in which the paper's deconstructive exercise could further be pursued.

Sometimes we say: What we need in Area X is a good theory. That is not the issue when we're considering the relationship between inequality and growth. Rather, there are if anything too many good theories. And, in at least some cases, they may be inconsistent, rather than complementary or offsetting.

Here are just a few:

(1) High-end inequality leads to greater growth, perhaps because the rich save and invest more (Kaldor).

(2) High-end inequality leads to lower growth, because (perhaps via its effect on the fiscal self-interest of the median voter), it prompts the adoption of higher capital income taxes that are anti-growth (Alesina-Rodrick).

(3) High-end inequality leads to lower growth, because the rich use their greater sway to increase rent-seeking (Acemoglu et al). Note that this theory, while having the same causal relationship as Alesina-Rodrick, bases it on a view of the rich as politically strong, rather than politically weak. Hence, one might expect some tension or even incompatibility between the two theories.

(4) Higher growth leads to greater high-end inequality, perhaps because technological transformations proceed via tournaments with concentrated mega-winners.

(5) Higher growth leads to lower high-end inequality, perhaps under a Kuznets model in which it eases (from the diffusion of new knowledge and production methods) as the society grows richer.

(6) Low-end inequality leads to higher growth, perhaps via the deployment of a mass low-wage workforce.

(7) Low-end inequality leads to lower growth, perhaps from wasted human potential as children in poor households suffer from under-privilege.

Each of these theories might at least sometimes be true, and several could be true (perhaps even offsetting each other) at the same time. But the plethora of causal pathways undermines thinking that there will be a stable relationship between inequality and growth, even disregarding all the issues raised by too simplistically deploying either of these two terms.

The paper urges of thinking in terms of a 2 X 2 grid, which might (under a progressive's view of the issues) look like this:
PRO-GROWTH                         ANTI-GROWTH
PRO-EQUALITY      Education, aid poor children,     Capital income taxation
pro-competition (antitrust,          Redistributive taxation?
weaker IP), min wage/unions?
ANTI-EQUALITY    Opposite of Box 2?                     Opposite of Box 1?

Needless to say, there is considerable controversy regarding the assignments above of particular items to particular boxes. But insofar as something does indeed belong in Box 1, it would be dismaying, albeit unsurprising, to see it being rejected by prominent political actors.

A key argument of the paper is that, in economically advanced countries that have been politically stable and considering a relatively limited policy spectrum, there should be a "lexicographic" preference for Box 2 policies (upper right) and against Box 3 policies (lower left). The rationale is as follows. Suppose we look at advanced and (heretofore) stable countries with relatively pro-market policies, such as the US and the UK, and compare them to countries with very different, more pro-regulatory and redistributive policies, such as France or the Nordic nations. The growth differences between them over time have been so small that surely the distributional differences are more consequential. Hence, in a country like the US we should start by ranking our policy choices based on their distributional effects, and only use growth effects as a tiebreaker. The paper agrees that this approach is generally not well-suited to poorer countries with still-developing (or undeveloped) economies, in which basics such as the rule of law may be in question.

Adopting this lexicographic preference for looking at distributional effects first, and growth (or efficiency) effects only secondarily, would be a rather large change in U.S. policy debate. Consider how it compares to consideration of the 2017 tax act. Or consider the Kaplow-Shavell proposition, much debated in the law schools, that distribution issues should be left purely to the tax and transfer system, with all other legal issues (e.g., concerning corporate governance, torts, contracts, intellectual property, etcetera) being analyzed purely on efficiency grounds.

I'm reminded of Boris Bittker's gibe, from the 1970s, to the effect that the Yale Law School faculty was a mix of young fogies (who cared only about efficiency) and old Turks (who cared only about equity or fairness). The young fogies prevailed for decades, but might the tide be turning again?

Wednesday, April 04, 2018

Tax policy colloquium, week 10: Ajay Mehrotra on US history and the VAT

Yesterday at the colloquium, Ajay Mehrotra presented an early stage of an interesting and important long-term research project that's entitled "The VAT Laggard: A Comparative History of U.S. Resistance to the Value-Added Tax." The project aims to explore why the U.S. remains the only advanced industrialized nation that doesn't have a VAT or other such national consumption tax.

One underlying datum for the inquiry is that there have been at least five particular moments in U.S. fiscal history when the enactment of a national consumption tax has been on the agenda poliitically, and seemingly had some chance of happening, but didn't. So among the questions posed is whether these were unique events, or instead had common causation, perhaps even sounding in "American exceptionalism." The moments were as follows:

1) Early 1920s - With post-World War I fiscal retrenchment taking place amid a switch from the Wilson Administration to Republican leadership, major tax changes were being considered. The great Treasury economist T.S. Adams, known to tax folks today mainly by reason of the Graetz-O-Hear article that described his central role in creating the international tax credit, also more or less invented the VAT in 1921, and tried unsuccesfully to get it adopted by Congress. Business ambivalance and opposition to such an instrument, which was not as yet well understood or in place anywhere, apparently played a role in this outcome. So did the fact that the income tax had helped finance World War I and that the Republicans were not aiming to go back to pre-World War I finance. What happened instead was mainly just a lowering of income tax rates, which had risen to very high levels in order to help finance World War I.

2) 1940s - The Roosvelt Administration publicly considered the possible adoption of a national retail sales tax, in order to help finance World War I.  States' opposition, reflecting that many of them had recently adopted their own retail sales taxes, was one of the factors behind the decision to rely instead on expanding the income tax.

3) 1970s - The Nixon Administration publicly floated the idea of replacing residential school property taxes with a national VAT to fund public education. The 1976 Blueprints tax reform study also discussed the adoption of a national consumption tax, and Ways & Means chair Ullman notoriously lost his 1980 reelection bid after advocating the national adoption of a VAT. The late 1970s tax revolt and election of Reagan appears to have shut this down. Tax reform in 1986 was really focused on the income tax, although the 1984 Treasury "bluebook" report did discuss consumption taxation as an alternative option.

4) 1990s and early 2000s - By this decade, national consumption taxation had become a standard feature of tax reform discussion, such as in the 1995 Nunn-Domenici plan, and the report of President Bush II's 2005 Presidential Advisory Panel on Tax Reform.

5) 2016 and 2017 - Ted Cruz's "business flat tax" proposal in his presidential campaign would have been a VAT by another name, and then the DBCFT, as I discuss here, would have replaced corporate income taxation with a VAT plus wage deduction.

A further important point to reflect on here is that, at the global level, countries with VATs tend to have less progressive tax systems than the US, but more progressive fiscal systems. This reflects that VATs often help fund larger-scale social welfare benefits. But the correlation raises underlying causal questions, such as which caused the other insofar as there wasn't independent causation for each. One might also note that, at the state level in the US, states that rely heavily on sales rather than income taxes seemingly do not tend to have more progressive fiscal systems. But this may partly reflect both (a) using sales taxes in lieu of income taxes, rather than both as distinct from just the latter, and (b) the lesser market power underlying states' sales taxes than those of many countries, given the ease of moving between states or even just avoiding retail sales taxes via cross-border / online / mail order shopping.

What might be some of the leading theories regarding why this never happened? (The word "this," of course, embraces a range of very different options - e.g., VAT as add-on and VAT as income tax replacement.) An initial list, pending the fruits of Mehrotra's research, might include at least the following:

1) General VAT enactment obstacles - There's no need for American exceptionalism to support the observation that voters around the world generally do not leap up and cheer when a new and potentially capacious tax instrument is proposed. The two main stimuli that have led to VAT adoption in other countries are: (a) replacement, as per the VAT's introduction in continental Europe in the 1950s as an improvement on prior gross receipts taxes that imposed cascading tax burdens on interbusiness sales, and (b) outside pressure, as in cases where countries were pushed by the EU to adopt VATs as conditions of membership, or by the IMF to adopt them as conditions of receiving aid. Another example of the same phenomenon is New Zealand's adoption of a VAT in the face of significant budgetary pressure.

In the US, (a) has been attempted  but perhaps the taxes targeted for replacement haven't been unpopular enough, while (b) hasn't happened to us at least yet. (Future fiscal crisis, or at least entitlements funding crisis, anyone?)

2) American exceptionalism - When one is speaking about American exceptionalism, the leading suspects include (a) slavery and the indelible sin of ongoing racism, (b) the importance of the frontier, among others. Each of these could arguably play a role here. (A) helps explain the lack of a broader social welfare system that would strengthen the need for VAT financing, given our heterogeneity's effect on voter interest in helping the poor. (B) helps explain anti-government sentiment that might heighten opposition to higher taxes. But Mehrotra's research may help to illuminate any connections.

3) The Larry Summers joke - Someone please ask Larry Summers: Did he actually make the famous VAT joke? I'm told that a mention of  this first appeared in the NYT in the 1980s, but apparently even this reference isn't a direct quote but rather refers to the report that he said it.

The joke, in any event, goes something like this: The U.S. doesn't have a VAT because conservatives view it as a money machine while liberals view it as a tax on the poor. But if only liberals came to realize that it is a money machine, and conservatives that ti is a tax on the poor, then surely we would get it immediately.

As I've noted elsewhere, the joke is "deliberately paradoxical. Why should each side be so fixated on the bad outcome, rather than the good one, as judged from its normative perspective? The underlying empirical claim would therefore appear to be nonsensical, if not for the fact that it also appears to be true." With regard to current non-adoption of a VAT, including as a hidden component of corporate income tax replacement via a business flat tax or the DBCFT, I've suggested the relevance of risk aversion. From the standpoint of both Democrats and Republicans, a fiscal system with a VAT could be BETTER by their lights than the existing one if they get to control the other adjustments to taxes and outlays, but WORSE by their lights if the other side gets to do so. This creates a bit of anxiety and uneasiness about adding this instrument to the fiscal system even if one is currently in control.

4) Path dependence - Mehrotra will also, in the project, be exploring the idea of critical moments at which, perhaps, something just because it happens (or more specifically, for reasons idiosyncratic to that era), but then it has broader ramifications down the road because it has set the path. The QWERTY keyboard is of course the classic path dependence story. Assuming the literature is right, it was initially adopted to slow typists so they wouldn't jam early machines, but is not suboptimal for modern keyboards yet locked in. As applied to the VAT, however, one question to keep in mind is whether, or to what extent, recurrence of the national consumption tax issue implies fresh causation each time - with or whether out common explanations, e.g., from something in the "American exceptionalism" area.

I don't rule out possible future U.S. adoption of a VAT, although I consider it neither imminent nor especially likely. Or, to put it differently, if there are 100 most-likely U.S. national futures, let's say in parallel universes any of which might prove to be ours, some of them surely feature a national consumption tax, with or without the name, although I'm not here offering to bet on just how many or how few. (That would be a subjectivist, rather than a frequentist, measure anyway.) Multiple pathways to a national consumption tax might include (1) conservative control and it replaces a lot of income taxation without Graetz-style adjustments to retain progressivity, (2) liberal control and it funds new programs such as free college tuition or Medicare For All, and (3) fiscal crisis where it's deployed to "save Social Security and Medicare."