Tax issue re. Donald Trump, Michael Cohen, and Stormy Daniels

A reporter on the national beat recently asked me whether Trump might be guilty of tax fraud if he deducted the payments of $35,000 per month that he was making, for some period, to reimburse Michael Cohen, for paying $130,000 in hush money to Stormy Daniels. The payments reportedly included a gross-up for the income tax consequences to Cohen, under the assumption that he would include them without deducting the hush money payment.

This would have been a great question for my Federal Income Tax exam, if only (1) I had heard it in time, and (2) it weren’t too politically sensitive to be a proper exam question. (E.g., one doesn't want students' answers to be influenced by their own political views, or their perceptions as to mine.)

Anyway, here’s a lightly edited & expanded version of my response:

That's an interesting question. The key tax issue is, what would have been Trump’s legitimate business reason for deducting the payments to Cohen?  Clearly there would be tension between Trump’s (1) saying it was just personal, hence not a campaign finance violation, and yet also (2) treating it as deductible (if he did).

But here's an odd aspect of it. Suppose we posit that Trump is a long-time criminal who sought the presidency for multiple reasons, but in part as a money-making scheme that would give him opportunities to defraud the U.S. government and the American people by – just to give a partial list – violating the emoluments clause, putting foreign policy up for sale, having the U.S. government pay fees to his businesses, serving the interests of foreign governments that were giving him a lot of money, and so forth. To the extent that he was seeking to maximize the profits from his preexisting business by becoming president, illegal payoffs to Michael Cohen to help him win the election might be viewed as an expense of this business.

Among the relevant tax law doctrines here is the one holding that one can't deduct as business expenses the costs of seeking to enter a new line of business. So, just as law students can't deduct law school tuition (but an established lawyer may be able to deduct expenses of paying for continuing legal education), Trump in 2015-2016 couldn't properly deduct the costs, such as paying off Cohen, of seeking the presidency, if we consider his seeking public office to involve entry into a new business.

But insofar as he was merely seeking to advance his preexisting criminal career by running for president, the case for the business deduction is strengthened.

In short, I think a strong argument against viewing deduction of the amounts paid by Trump to Cohen for silencing Stormy Daniels as improper (whether or not as meeting the mens rea requirement for tax fraud) relates to the view that Trump incurred these costs as part of an ongoing course of criminal activity, of which his political career is merely a continuing part.  Kind of like Michael Corleone moving the family business to Las Vegas.

So far as the mens rea required for tax fraud is concerned, Trump may also have reasonably believed that this line of argument made the payments to Cohen a proper deduction, since surely we know that he was lying when he said publicly that it was merely a personal and private matter.

A further issue pertains to Internal Revenue Code section 162(c)(2), which denies deductions for “an illegal bribe, illegal kickback, or other illegal payment under any law of the United States, or under any law of a State (but only if such State law is generally enforced), which subjects the payor to a criminal penalty or the loss of license or privilege to engage in a trade or business.”

The payoffs to Daniels via Cohen do not appear to have been an illegal bribe or kickback under relevant U.S. law - except, of course, for the campaign finance angle, which led to Cohen’s guilty plea.  Does this make it a nondeductible illegal payment (to Daniels via Cohen) by Trump?  Does it matter if we accept the apparent DOJ position that a president can’t be indicted while in office?  Does it further matter that the statute of limitations will apparently run while he is still in office if he serves for at least five years?

I suppose we could also ask whether the expense could be deducted or instead was required to be capitalized, as an input to creating goodwill. (Or was it merely about preserving existing goodwill? Cf. the pompous, confused, Delphic, and ultimately verging on useless analysis that Justice Cardozo offered in Welch v. Helvering.)

Sounds like a great topic for further legal research by someone (although I don't think it will be me).

UPDATE: A reader points out that, under the so-called INDOPCO regulations (sometimes called the anti-INDOPCO regs, as they involved substantial retreat from the scope of capitalization that was suggested by the eponymous Supreme Court case), Welch v. Helvering-type outlays generally can be expensed, even if there is creation of future value that in principle might seem to support requiring capitalization. 

Reilly on Shaviro on the pass-through rules

In his newly posted piece on Forbes.com, "Law Professor Argues New Pass-Through Rules (199A) Are Horrible," Peter J. Reilly in Forbes reads my article on the pass-through rules, supplemented by a phone interview. He notes that I published the piece in the British Tax Journal, rather than in the U.S., because (however justifiably) its tone was less temperate than is usual for me.

He notes that I credit section 199A with having "achieved a rare and unenviable trifecta, by making the tax system less efficient, less fair, and more complicated," and that I compare the 2017  proceedings to Gilded Age politics.

It's a fun response by Reilly, and insofar as he disagrees with me it's because my noting that the provision will require business people to "pay large sums to tax lawyers and accountants to figure out how best to structure their arrangements with an eye to minimizing federal tax liability" is good news for accountants such as him.  "So a small portion of those large sums is coming my way."

Reilly also quotes my noting, in the article, that the motivation for the pass-through rules appears to be sociological - aimed at rewarding members of the business elite while excluding member of the more educated professional and academic elites, simply because these are self-consciously distinct groups and the former were driving the bus in 2017.

He responds that this mistakenly classifies accountants as part of the educated classes and the intellectual elite. That may well be right, if one looks just as accountants from a sociological standpoint. But in the 199A list of professions banned from getting the 20% tax cut (other than below income phase-out), accountants were unlucky enough to get grouped, based on prior statutory precedents, with the likes of lawyers, doctors, and artists.

BTW, on a related note, I recently heard through the grapevine an explanation of why, at the last moment in the 2017 enactment process, architects and engineers were taken out of the professional classes' exclusion from full pass-through benefits. The word is that Bechtel told their Congressional patrons (or servants?) to take out engineers, and architects got pulled too because the two groups were listed right next to each other, and a second deletion was thought useful in obscuring the political deal.

Gives you a nice sense of the sheer thoughtfulness behind contemporary Congressional Republican industrial policy.

Talks in Tel Aviv

This Thursday night, on the day after my last class of the semester, I'm heading to Tel Aviv, where I'll be participating in two events next week at the Bar Ilan Law School. First, on Tuesday, December 12, I'll discuss my recent article on international tax policy after the 2017 U.S. tax act (see part 1 here and part 2 here). This may be the last time I discuss this piece at a seminar, but as I'm in effect expanding it (plus other stuff) into a short book, it remains reasonably fresh to me.

Second, on Thursday, December 14, I'll be among those discussing Tsilly Dagan's excellent recent book, International Tax Policy: Between Competition and Cooperation. We international tax policy book authors need to stick together. Her book is complementary to mine, as I'm mainly interested in the unilateral angle (what a given country might want to do absent strategic interactions between countries) and she is more interested in the strategic aspect. In the time allotted to me, I'll discuss underlying dilemmas in the field, the book's main contributions, and follow-up qustions or issues.

Comments at NTA plenary session on fiscal policy after the 2017 act and the 2018 midterm elections

Today at 10:15 am, the National Tax Association's 111th annual meeting had a "plenary session" on the topic of Fiscal Policy After the Midterm Elections. The law prof on the panel was originally scheduled to be Michael Graetz, but he got trapped in NYC by the freak November snowstorm, so yesterday afternoon they decided to call for the left-hander, and asked me if I would be able to sub in as a panelist. I said yes, and here is approximately what I said in my 5-minute opening statement on the panel:

I have 5 points to make today about fiscal policy in the aftermath of the 2017 tax act and last week's midterm elections: 

1) I don’t call what happened last year “tax reform.” Not because it was bad legislation – although I think that in the main it was, despite some good features – but because the term has become completely empty, and now just means “legislation that the proponents like.”

The 1986 Act was called “tax reform” because it related to a particular conceptual model that had captured the term’s then-agreed meaning, and that involved cutting rates and broadening the base while being at least short-term revenue and distribution neutral.

The 2017 act was unfunded, seems fiscally unsustainable, and in some ways narrowed the base, even from a consumption tax perspective (which I consider an entirely valid one for assessing “base-broadening”). For example, a broad-based consumption tax wouldn’t have industrial policy in it like that from the pass through rules.

2) The 2017 act’s proponents undermined its long-term prospects by allowing it to look unprincipled – For example, it doesn’t look like good faith to cut the corporate rate to 21% without either funding it or attempting to limit the use of corporations as tax shelters by high-earning owner employees. The passthrough rule look like sociological discrimination in favor of business types over professional types and employees, for no discernible reason other than the pass-throughs telling Congress “the C corporations got theirs, so we want ours.” Meanwhile, employees not only pay higher rates than non-employees who are doing the same jobs, but lose all business expense deductions.  This is not a defensible policy, even though it’s true that, in practice, actual employee business expense deduction claims may tend to include a lot of junk. 

The new restrictions on state and local income tax deductibility might have been viewed less hostilely in the blue states if the overall bill hadn’t looked to so many people as something that was politically targeted and designed in bad faith.

3) It’s hard to see a sustainable budgetary path forward – Democrats are unlikely to play the fools a third time with regard to addressing the fiscal gap, after Clinton was followed by Bush II and Obama was followed by this tax bill. This is dangerous for our country, and reflects a broader breakdown of cooperative political norms that are really vital to our national welfare.

4) The broader destruction of American social capital in recent years has further bad implications for the tax system – If no one believes in a fair, cooperative policy process any more, and the IRS has next to no auditing capacity and an inadequate budget, could we be risking a serious tax compliance breakdown, from changed behavioral norms?  It’s not impossible.

5) On a brighter note, thank goodness the unhelpful “worldwide vs. territorial” distinction in international tax policy discussion has been put to bed. By repealing deferral, we replaced “now or maybe later” taxation of foreign source income with “now or never” taxation, but the “now” has been significantly expanded. The new international provisions have serious flaws, but could in principle be cleaned up a lot if we still had a functioning bipartisan legislative process. And they do mostly focus on issues of genuine concern that tend to lack clear answers from a policy standpoint.

It’s also interesting to note that other countries are starting to copy aspects of the BEAT and GILTI. This might be good or bad for the U.S. and for the world, and doesn’t prove that the provisions are good ones, but it is an interesting trend to keep in mind.

It could conceivably betoken a future era of greater global cooperation than we observe right now. And why don’t I close now on that relatively optimistic note.

There are two types of people in the world: one kind, and the other kind ...

... Or alternatively, there are two types of people of people in the world, those who believe there are two types of people in the world, and ...

Death to cliched overstatement and all that, but still bimodal division can sometimes help to sharpen a point, brought to mind most recently by the portion of the weekend just past that I spent reading the booklet and/or playing the bonus material from the 50th anniversity super deluxe reissue edition of a famous double album called The Beatles, aka the White Album.

By the time I was in my teens, it was no longer quite so true, in terms of the "two types of people" trope, that one was either a Beatles fan or a Stones fan. Even leaving aside that most people were both, hence it was a matter of relative preference rather than exclusivity (i.e., more like "Jets or Giants" than "Mets or Yankees"), by this time the Beatles were a few years in the past, and hence it was more like "Stones or Grateful Dead." I was more in the former camp, though decently appreciative of the latter. There also was perhaps a bit of "Springsteen or punk / new wave" - although Springsteen had some new wave cred, e.g., Patti Smith had covered "Because the Night" - and here I was definitely in the latter camp. Springsteen felt a bit too earnest, un-ironic, and reverently retro to me - again, with all due respect for his virtues.

One also could say, along I would think with Brian Eno, that the real 1960s choice for older cohorts ought to have been "Beatles or Velvet Underground." (Sorry, Stones.) Except that here, once I caught up with the Velvets' legacy in the late 1970s, my answer was definitely "both."

Returning to Beatles vs. Stones, however - with apologies for returning to a topic that I gather I have addressed here once before, albeit rather a long time ago (in August 2005), I did have a horse in this one despite its being a retro issue by the time I was able to take sides. The Stones spent the 1960s doing one great song after another (albeit, with dross mixed in as album filler). They also had a handful of great albums - in particular, the very good Between the Buttons (1966, with Brian Jones diversifying the sound palette) followed by the immortal Exile on Main Street (1972) and then the crucial comeback album Some Girls (1978). And Jagger in his true glory days could express vulnerability, not just grandiose swaggering, in a way that added to their work's depth. But the Stones had good enough image management - not least by Jagger and Richards themselves - to succeed in creating widespread misapprehension of the true contrast between these two great and artistically overlapping groups.

I refer, of course, to the conceit that the Beatles were mainstream while the Rolling Stones were outrageous rebels. Now, it is true that the Stones sometimes went places where the Beatles, apart from Lennon, didn't entirely want to go. But does anyone today think that "Street Fighting Man," contrasted at the time with "Revolution" as showing that the Stones were more anti-Establishment, was even 10% as cathartic and heartfelt? (BTW, I hold no brief for Lennon's post-Beatles "Imagine," which I find mawkish and unconvincing.)

If the standard Beatles vs. Stones view were more accurate, then we wouldn't see such outcasts and outsiders as Elliott Smith, Kurt Cobain, and Fiona Apple embracing the Beatles so fervently.

I see 2 main distinctions between the Beatles and the Stones. (Other than the Beatles' having the inadvertent wisdom to break up at their peak, hence never have a decline phase other than as individuals.) The first is that the Beatles were outlanders who didn't know the hip London definition of cool; hence they had to make it up for themselves. This aided their being more creative and original. (The Stones were overly in thrall to the idea of simply re-creating the blues as practiced by their heroes - the Beatles' cast of heroes was more diverse and hence more artistically empowering.)

The second was the dynamic nature of the Lennon-McCartney partnership. (But note also that Harrison chafed at being an underling, to the band's artistic benefit, especially at the end.) Jagger once commented that, of every 10 things the Beatles were going to do, both Lennon and McCartney wanted to run 9 of them. He then added, with the benefit of several decades' hindsight, something like: "You can't run a business that way."

No, you can't, which is why the Beatles exploded into a rain and reign of lawsuits and bitter take-down songs about each other, whereas the Stones' corporate enterprise just kept going and going and going, well past the point of tedium. But going back to the very day (back in 1958) when Lennon and McCartney met, there was no clear hierarchy between them, but rather a dynamic tension. Lennon was the older and more forceful one with the cohort of bandmates / followers. But McCartney had more musical chops and had already started songwriting. So it was a continual struggle, friendly and synergistic until it inevitably blew up, that made each of them both better and keener. In a sense, each made the other feel like Scottie Pippen, being strengthened by his daily practice battles with Michael Jordan.

By contrast, Keith Richards has great fun chafing at Jagger in his autobiography, and he notes that he'd write most of a song, then hand it to Jagger to finish up (e.g., the verses in Satisfaction). Plus, he was clearly the main force behind Exile on Main Street. But his chafing reflects that Jagger, as lead singer and group spokesman, was far closer to being the boss than either Lennon or McCartney could ever dream of being in their partnership. This dynamic instability and rivalry (e.g., who gets the next single? Whose material is going to be stronger on the next album? He's written another "masterpiece" - John's very word for "Hey Jude" - how am I going to answer it?), combined with mutual admiration and help, and with their both complementary and overlapping strengths, pushed each of them further than he would ever have gotten by himself (or ever would again).

But this bring us to one last "two types of people" bit. Among Beatles fans, as one of the reviews of the White Album reissue noted, there are Sgt Pepper fans, and White Album fans. Well-honed pop perfection, or crazy creative explosion that's all over the map, sometimes excessive or silly but almost always (if you can peel back the years and all the over-exposure) fresh and startling? Count me as very firmly on the White Album side (although I also give highest marks to the very cohesive Rubber Soul and Revolver albums). It's an astounding achievement, with multiple stunning peaks, and (for the most part) all the more lovable, and admirably audacious, for its flaws.

The expanded reissue has a crisp sound where you can hear separate instruments more clearly, plus a fantastic 75-minute Unplugged album (aka the Esher demos, which I already had but not with such high-quality sound), plus 3 more disks of often very interesting outtakes and alternative or early versions. These last 3 require prior fandom and knowledge in order to be worth it (and again, some of it had been bootlegged with inferior sound), but if you have that they're very interesting. Plus, they often have a great live band feel. The material on these disks confirms that the Beatles mostly made the right choices in developing the White Album material - leaving aside the regrettable over-orchestration of Good Night - but its release further enriches their legacy. (I didn't buy the Sgt Pepper reissue, knowing that there wouldn't be all that much of fresh interest there.)

Here's hoping that next year they'll do something of a multi-disk character with the Get Back / Let It Be sessions (the Abbey Road sessions were too concise and focused to leave as much interesting material lying around). Or maybe it could all be combined in a "Beatles 1969" package.  If they do it right, as they did this time, I'll buy it.

Tax conference in Copenhagen, DK

On Monday, I discussed the new U.S. international tax rules, and what they might mean for the future (from both a U.S. and a European Community perspective) at an International Tax Conference that was held at the Copenhagen Business School.

The slides are available here. The paper on which the talk was based is available here (Part 1) and here (Part 2).

Slide 23 was new, reflecting that I was giving the talk to an EC audience. I elaborated a bit in person on the last text box in the slides, from the perspective of: What should tax policy folks in the EC be thinking about the U.S., as an ally/partner/rival/potential dealmaking counterparty, etc.?

It was lovely to be in Copenhagen, which I had not previously visited, although close family members had (rightly) given it rave reviews. I lucked out on the weather, and if, after getting home after 10 pm last night I had to give a two-hour Tax I lecture this morning at 8:50 am, then I have only myself to blame, and/or I chose to do this with my eyes open.

Sometimes these days, when one visits a lovely European city on business, one asks oneself, on the return: Why exactly am I going back? (Leaving aside all my personal and professional connections in the U.S., which needless to say are entirely binding.)

I absentee-voted before leaving on the trip, as I knew the polls would be closed by the time I got back.

Suppose you were to guess: How many times, while I was in transit or away, did I check any U.S. news of any sort on my various screens or otherwise, leaving aside sports and culture?

If the over-under is one time, and you are betting on this, I strongly advise you to take the "under."

In addition to touring Copenhagen a bit during such time as I had (I was there for about 72 hours), I also managed  to read 3 books on Kindle, each of which I quite enjoyed: Mick Herron's Slow Horses, Angela Thirkill's High Rising, and Donald Westlake's The Fugitive Pigeon. The common theme was (a) escapism / easy to read while tired and/or stressed, plus (b) good literary quality.

It's time for more cat pandering

Gary can be irresistible, unless you are a small prey object or play item.

International tax talk tomorrow

Tomorrow morning, I'm flying to Detroit, thence by wheels to Ann Arbor where I will give a talk at the University of Michigan Law School. It will be in re.my recent Tax Notes article, "Tne New Non-Territorial U.S. International Tax System," part 1 of which is available here, and part 2 here.

This is actually the first of 5 occasions on which I'll be discussing the paper, and/or issues within its purview, within the next couple of months. The other 4 occasions are as follows:

1) this Friday, October 26, at a Fordham Law School conference entitled The Future of the New International Tax Regime, registration & other info available here.

2) Monday, November 5, Copenhagen Business School, International Tax Conference: Recent Developments in International Tax Law, registratrion and other info available here.

3) Friday, November 16, National Tax Association Annual Meeting, in New Orleans, 1:45 pm session on a panel entitled Legal Perspectives on the TJCA.

4) Tuesday, December 11, faculty seminar at Bar-Ilan Law School, Tel Aviv.

I'll also be back in New Orleans on January 5, participating in an American Association of Law Schools annual meeting panel entitled "The 2017 Tax Changes, One Year Later." But here I suspect the paper would be somewhat misdirected in terms of what I anticipate being asked to discuss.

It's always good for business if you can standardize your talks and keep giving the same thing. (At the cost of its being boring for you, and for any repeat audience members.) But in this set of instances I'll be speaking to some rather distinct audiences, besides which my speaking times will vary from 13 minutes to 50. So I will certainly have to do a lot of customizing.

As it happens, the topic remains of current interest to me, as I have in mind the plan of writing a short book updating my 2014 publication, Fixing U.S. International Taxation. I see what's happened since then as affirming and even vindicating the analysis in that book, which I feel in retrospect substantially anticipated what policymakers and scholars would increasingly realize are the real topics of interest in international taxation. (And the book is far less about saying "This is the answer" than "These are the questions.") But there's a need for an update - and I'm doing a fresh (although much shorter) book, rather than a new edition - because the law has changed, the debate has moved forward, and there are lots of new developments to discuss.

So I will have the new enterprise in mind as I discuss the by now months-old article with these various audiences.

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.)

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.

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.

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.

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.)

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.

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.

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.