Upcoming Zoom event on Literature and Inequality.

On October 15, at 4:30 pm EST on Zoom, I'll be discussing my recently published book Literature and Inequality, with commentators Kenji Yoshino and Branko Milanovic.

The invite with Zoom link is here, and you need not respond in advance in order to attend.

Tax Policy Colloquium, week 4: Adam Kern's Illusions of Justice in International Taxation

 Yesterday at the Tax Policy Colloquium, Adam Kern presented his paper, Illusions of Justice in International Taxation. It is a chapter from his Princeton Politics Department dissertation in process (in the realm of political theory) entitled Principles of International Taxation. Kern is also an NYU Law grad who took the colloquium a couple of years back. The project aims to bring philosophical principles and expertise to bear on international taxation – to date a very under-inhabited field by philosophers, although a few, such as Peter Dietsch, who appeared at our colloquium a few years back, have been working in it.

The project, like Liam Murphy’s and Thomas Nagel’s The Myth of Ownership, has both what one might call a destructive or ground-clearing component – aiming to clear away ill-reasoned implicit philosophizing in the field – and a constructive one, aiming to erect something else in its place.

The chapter we discussed is mainly concerned with ground-clearing. As such, like Murphy-Nagel, it has relatively little to say to the likes of me, since I already agreed with its critiques of what I would agree are ill-founded and ad hoc normative principles. Nonetheless, it may make a significant contribution to the field, given that those principles may be far more widely accepted than I tend to realize. I tend to focus on their proponents’ complementary arguments that raise consequentialist and indeed welfarist issues.

The project differs from, without contradicting, my international tax writings in that it is centrally concerned with exploring what would be a globally just international tax regime. My work generally takes for granted national “selfishness” (i.e., exclusive or nearly exclusive concern with the welfare of one’s own people), not because that is necessarily morally defensible, but because it’s the world we live in & which mainly interests me. I do think about multilateral cooperation to achieve better end-states, insofar as it appears to be feasible or sustainable within the selfish framework, and I also consider the possibility (since it appears to be realistic) that countries may value cooperating rather than defecting in a prisoner’s dilemma-type setting, even if they could get away with more defecting than they undertake, so long as they believe that others tend to be similarly minded. But that still is very different than asking what a given country would do if it accepted that global justice should guide its actions.

Okay, turning to the paper itself: It discusses the Capture Principle, which it defines as holding that (i) countries have a package of rights to tax income generated from activities inside their borders, and (ii) the value of the package should be proportionate to the amount of income generated from such activities. Put more in everyday language, I would say that the Capture Principle holds that source-based income taxation is just. Hence, countries not only can (and perhaps even should?) justly engage in it themselves, but should accept the justice of other countries doing so as well. The paper rejects this principle, and a subsequent chapter apparently does the same for the Affiliation Principle (and hence for residence-based income taxation).

At least from this chapter, it is not entirely clear to me what a given country that currently is engaged in source-based and residence-based corporate (and other) income taxation should do once it realizes that the Capture and Affiliation Principles are wrong. And the project does not rule out the possibility that these approaches could be largely sensible in practice, albeit as interpreted and modified to further, rather than set back, global justice. But they don’t stand on their own as inherently just or as having more than contingent and instrumental value. By analogy, consider the Murphy-Nagel rejection of entitlement to one’s own market-derived labor income as inherently just. This does not contradict viewing market arrangements as having desirable incentive effects that might lead to a system in which people’s after-tax returns are generally strongly affected by the level of their pretax earnings.

Very quickly, the chapter’s main arguments can be summarized as follows: Proponents of the Capture Principle, as applied to the source-based taxation of foreign multinational companies (MNCs), base it on a notion of reciprocity between the MNCs’ foreign owners and their domestic customers. (As an aside, I would tend to think of the relevant reciprocity as more between different countries’ governments, acting on behalf of their own residents.)  But all their arguments fail, even if one accepts arguendo their underlying moral premises.

First, the Principle of Fair Play, which abhors free-riding, posits that, since the MNCs are benefiting from locally created public goods and infrastructure, they have a moral obligation to contribute to funding it. The paper argues, however, that merely positing a duty so to contribute does not show that such contributions should depend on applying source-based corporate income taxation. What ought to be contributed is indeed the very question at issue.

Second, the Compensatory Principle finds a moral obligation to reimburse the source jurisdiction for the (marginal?) costs imposed by the MNC’s inbound activity. As an aside, I have always found this frequently-heard argument peculiar, because countries generally want inbound investment and consumer goods, based on their considering these things net benefits to themselves, not net costly. Arguing that it’s only fair to reimburse costs is a bit ill-directed to the circumstance of perceived net benefit. This is why countries typically welcome inbound investment, as well as inbound consumer goods unless they are being protectionist, even if they would also like (subject to concerns about tax competition) to get some revenue.  However, since the paper is generally accepting arguendo the contested principles’ underlying premises, it emphasizes the fact that marginal cost imposed is so ill-related to domestically sourced income. It contrasts, for example, an MNC that sends heavily laden trucks along a country’s roads, in the course of generating only minimal profits, with one that makes a ton of money through derivatives trading.

Third, the Contributory Argument, in two different flavors, purportedly supports source-based corporate income taxation of foreign-owned MNCs. In its proprietary version, it notes that, if countries rightfully have the property right to exclude outside access from their physical space and consumer markets, a source-based corporate income tax follows from that. The paper responds that there may be no particular reason why the access fee would take that form. (But might it be a permissive form?) In its distributive version, the contributory argument asserts that nations are entitled to their shares of the global surplus that they help create, ostensibly justifying the use of a source-based corporate income tax to realize that rightful claim. The paper responds that the creation of global surplus is simply too intermingled among all nations to allow for treating source-based income as a proxy therefor.

A war fought on enemy territory – Again, in all these cases, the paper accepts arguendo lines of argument that the author may not accept – and, in one case, expressly states in a footnote that he does not accept – in order to show that, even if  the broad principles are valid, the conclusions don’t follow.

Two other arguments that it appears to accept arguendo – and that I myself don’t accept, very likely with the author’s agreement – are that (1) the geographical source of income can meaningfully be determined, at least in principle, and (2) for the distributive version of the Contributive Argument, that (a) allowing producers to reap the full market prices from what they offer is not just potentially efficient but also independently just, and (b) that this just claim transfers from a given individual to his or her country. In common with Murphy and Nagel, I think of markets as being rightly favored in appropriate circumstances because of their efficiency properties in those circumstances, not on independent grounds of moral entitlement to the market values one is able to realize.

Accordingly, the chapter’s main structure is to attack propositions in the form A -> B, based on accepting A arguendo even though welfarists such as me (and also many non-welfarists, including Kern) would not accept A to begin with, other than conceivably on contingent empirical grounds.

The use of source-based corporate income taxation in international tax policy – Many of the paper’s rebuttals reflect corporate income taxation’s unrelatedness to rationales for taxing outside MNCs. The case for income taxation stands on views about tax burden distribution as between (resident) individuals. Its origins and rationale have nothing to do with the international setting. But once one has an income tax on resident individuals, one may have good reason for extending it first to resident corporations, and then to foreign corporations on what is deemed to be their domestic source income. Even if these two extensions make perfect sense, however, it would be a surprising coincidence if the income taxes thereby imposed on foreign MNCs happened to match the various rationales that have been extended for source-based taxation of outsiders.

But what are the proponents of the Capture Principle really (or mainly or also) saying? – While there are also reasonable consequentialist arguments in favor of source-based corporate income taxation, I agree that the views justifying the Capture Principle on separate moral grounds can be found in the literature. But I wonder if the paper takes them more seriously than one needs to – or perhaps, even than the proponents really take these arguments themselves. They often are trying to rationalize current practice, or else something close to it or plausibly evolved from it, rather than seeking to deduce in the abstract how cross-border taxation might work. So perhaps what they are mainly saying is that a system that assigns a large role to source-based corporate income taxation (a) is not wholly ridiculous, and (b) facilitates desirable multilateral coordination. E.g., all income is “taxed once,” even leaving aside residence-based taxation, if everyone has a source-based tax, their rules for it are reasonably consistent, and tax havens don’t end up with much under these rules because so little happens in the havens on either the production or the consumption side.

For myself, that claim is good enough, not to prove itself or resolve anything, but to help set up a framework for analysis, including by interrogating it, and potentially rejecting it in whole or in part on empirically rooted consequentialist grounds. Plus, again I’m personally interested less in the ideal, which I see as beyond practical reach anyway, as in thinking about how countries’ (and their political actors’) incentives and perceived interests shape behavior, hopefully in directions that might be better rather than worse from both a national and a global standpoint.

Thus, as with Murphy-Nagel (and this, of course, is good company), I view it as an allied and constructive effort that doesn’t speak as much directly to me as to others who may need to have their consciousnesses raised, so to speak.

Tax policy colloquium week 3: Natasha Sarin's "Understanding the Revenue Potential of Tax Compliance Investments"

Earlier today at the Tax Policy Colloquium, Natasha Sarin presented her paper (co-authored by Lawrence Summers), Understanding the Revenue Potential of Tax Compliance Investments.

The paper argues that restoring the IRS budget to a 2011-equivalent level, by increasing its budget by $107 billion over the next ten years (mainly for auditing and technological improvements), could increase federal income tax revenues by more than $1 trillion. It criticizes Congressional Budget Office estimates that are more conservative both in looking only at smaller budgetary increases, and in failing to include properly measured (or any) indirect revenue gains (i.e., those from taxpayers other than the ones who are actually audited).

 

A 10-1 Marginal Revenue Payoff from Increasing IRS Outlays – If we lived in a different world than the one we actually live in, the claim of a 10-1 revenue payoff here would verge on being self-refutingly absurd. So badly under-funding the IRS would require such gross negligence, verging on deliberate sabotage, that one really wouldn’t expect it. But in fact this estimate reflects a 20-plus year partisan war against the IRS that has not been waged in good faith. So it isn’t surprising at all.

 

Even absent the current partisan environment, however, one might expect Congress deliberately to under-fund the IRS. This offers two big advantages to members who are seeking reelection The big money folks in their districts or states don’t like being audited, and are presumably ready to put their money where their mouths are. And, if the IRS performs poorly because it has deliberately been under-funded, the under-funders can grandstand in front of ill-informed voters by holding hearings, complaining about it, etc.

 

Determining the Revenue Payoff – Again, the paper offers a rough ballpark estimate of $107 billion in IRS budget increases (over 10 years) as raising tax revenues by over $1 trillion. (Charles Rossotti has estimated $1.6 trillion.) This would mainly be backloaded in the 10-year estimating period, because it takes a while to ramp up. And there would be large revenue gains outside the 10-year window.

 

As noted above, the CBO excludes indirect revenues (much the larger piece) from official estimates, deeming them too uncertain. But this illogically responds to uncertainty with infinite discounting.

 

Excluding out-year revenues means that, after engaging in no present value discounting within the 10-year budget, one arbitrarily switches at the boundary line to infinite discounting. This is not an intellectually defensible approach.

 

Why stop at $107 billion over ten years and restoring 2011-equivalent revenue levels? – This may reflect political reality, but otherwise it makes no sense. Suppose one is still earning a 10-1 return on increased IRS outlays at the margin reached after the 10-year increase (which is only about $10B extra a year, after years of budgetary sabotage). Then it would be silly to stop there, although it is true that well-used budget increases might require first ramping up the iRS’s absorption capacity.

 

In describing how one might think about the question of just how high the IRS budget should go as the revenue payoff presumably (at some point) starts to decline, a useful structure is provided by the marginal efficiency cost of funds (MECF), first described by Slemrod and Yitzhaki in a 1996 article. Roughly speaking, the MECF from a given revenue increase = (Revenue + effect on taxpayers’ deadweight loss) / (Revenue – effect on government administrative costs).

 

Thus, for example, suppose the government raised $10 in tax revenues, and that the change increased taxpayers’ DWL by $3.50, while also costing the government $1 to collect. Taxpayers would be worse off by $13.50, while the government would have netted $9, so the MECF for this change would be 1.5.

 

The lower the MECF the better, all else equal. A perfect seamless lump sum tax would have an MECF of 1.0, and a Pigovian tax might come out lower. But real world tax instruments are likely to have higher MECFs that also tend to rise with the marginal use of the instrument.

 

Now suppose the government gets a 10-1 revenue boost out of increasing the IRS budget. The MECF for a $1 increase in the budget equals (10 + the effect on DWL) over 9. That yields a pretty low MECF unless the effect on DWL is high. But note that increasing IRS audits, while it would increase taxpayer DWL in some respects (such as requiring them to go through the audits), might also reduce DWL in some dimensions. Suppose for example, that it makes taxes, although higher, also somewhat more neutral because it reduces the effective tax preference for cheating and over-aggressiveness. It also might cause some taxpayers to give up the game and reduce costly evasion and avoidance effort.

 

Plus, it might increase equity in both the vertical and the horizontal dimensions. Given how little we audit high-income taxpayers, greater auditing might in practice make the tax system more progressive, while also increasing equality of tax treatment as between the honest and sketchy at similar pretax income levels.

 

MECF helps to show why one would want to stop well short of increasing auditing to the point where it broke even budgetarily at the margin. Suppose, for example, that a $1 increase in the IRS auditing budget increases revenues by only $1.01, because we have crossed over so far into the realm of diminishing returns. The MECF from doing this would be ($1.01 + effect on DWL) / .01, which does not look good at all.

 

Thus, in principle one should stop increasing audit levels (and other aspects of the IRS budget) when the marginal return, keeping in mind equity considerations as well, no longer looks good compared to alternative choices. But we would appear at present to be far, far short of that.

 

Additional points of interest raised by the paper

1) How would raising $1 trillion over 10 years in this way, mostly from high-income taxpayers, affect the merits of other proposed instruments for increasing progressivity, such as wealth  taxes or mark-to-market taxation? The answer, I’d say, is that this really isn’t an either-or choice. Those instruments should be used if (and only if) they score well enough in a distributional and efficiency-based analysis. Better IRS auditing capacity can cause such instruments to perform better than they otherwise would, however.

 

2) How should one account for budgetary out-years? The 10-year window, with its infinite discounting for things outside the boundary, is especially disastrous in cases, such as that of ramping up the IRS’s budget and audit capacity, where positive returns lie disproportionately outside the window. Curtailing the period of analysis does less harm when in-years and out-years are fundamentally alike. But it makes no sense to be as myopic as Congress deliberately is under existing budget rules. Infinite-horizon budget forecasting (under a defined set of policies that may not be sustainable) is a valuable intellectual tool, whether or not one wants to deploy it in official budget rules.

 

3) How should Congressional budgeting account for the revenue gains from increased IRS spending? Ignoring the gross revenue increases is nothing short of idiotic On the other hand, looking purely at the net revenue effect would turn net revenue-maximization into the implicit default, which isn’t quite right either.

Tax policy colloquium, week 2: Clinton Wallace's Democratic Justice in Tax Policy Making

 Yesterday at the colloquium, old friend (and former NYU Visiting Assistant Professor) Clinton Wallace presented his paper, Democratic Justice in Tax Policymaking.  

The article explores how to make tax policymaking more “democratically legitimate.” It notes critically that “various scholars and policy makers have sought to channel tax policy making away from democratic input and towards prescribed outcomes…. [T]hese moves are grounded in strands of public choice theory that are expressly critical of democratic decision making.” It favors instead empowering the normal majoritarian legislative process, while increasing its transparency and the information that is available to voters. Further details are available in the 3-paragraph abstract that you can find right at the front of the above link.

 

I give the article kudos for interrogating “our” elitism, i.e., that of tax policy experts who often believe (and I plead guilty) that their sense of what the tax system ought to look like is normatively preferable to what Congress is likely to do. However well-meaning we might be, we need to be healthily self-interrogating regarding our biases and inclinations.

 

I also wish to acknowledge upfront a possible criticism of my response to the paper. I wish I had a nickel for each comment I’ve ever gotten, on one of my papers, that took the form of “Why did you write the paper you were interested in writing, rather than the wholly different one that I (the speaker) was interested in reading?” This is usually a stupid form of comment, because both of those two papers might be worth writing, and one is entitled to follow one’s own fancy. So I hope I am not doing too much of that here.

 

1) Democratic legitimacy, democratic deficit

 

While the paper at this stage does not entirely define “democratic legitimacy,” I would think that this does or should have a whole lot to do, in present circumstances especially, with what is often called the democratic deficit. That, in turn, can be defined as an insufficient level of democracy in political institutions and procedures, in comparison with the theoretical ideal of democratic government.

 

That ideal, in turn, is of course is not self-defining. Indeed, one could read (or write) an entire library about it, and many have. But it brings to mind such concerns as the following:

 

(a) the relative political power held by different types of people and groups, which it suggests should not be too unequal. This is part of why vote suppression is so vicious and evil – no milder words will do – even leaving aside its effects on electoral outcomes. But one person, one vote is not enough to satisfy the theoretical ideal of not-too-unequal political power.

 

(b) whether majorities’ subjective preferences are being sufficiently honored (insofar as consistent with minority rights),

 

(c) whether the members of such majorities are getting what they would want with accurate empirical information. Fooling people into supporting self-harm, which they are then able to get because their candidate wins the election and then sets about robbing and immiserating them, does not meet democratic government’s theoretical ideal.

 

In my view, the democratic deficit is currently a seventy-alarm fire with multiple components. But one of them, predating Trump, is the empirical evidence adduced by the likes of Larry Bartels and Martin Gilens to the effect that the policy views of the bottom 99% have no discernible impact on most areas of public policy.

 

This is a key sense in which the focus on democratic legitimacy led me to expect a different paper. Removing delegations to experts and other means of limiting legislative majoritarianism, even when accompanied by offering voters more extensive information regarding, e.g., how their current year tax bills would change under proposed legislation (and who sponsored each provision in such legislation) doesn't strongly address what I consider the main sources of today’s gaping democratic deficit, even if one favors those changes. But perhaps this is just a labeling issue.

 

2) The “undemocratic impulse” among tax policy experts

 

In what I think is one of its signal contributions (whether or not one fully agrees), the paper criticizes what it calls the “undemocratic impulse” among experts to dictate outcomes that are (in their view) the best. This is a very useful phrase, given the need among even the most benevolently minded experts in a given area to be properly self-aware and self-interrogating. However, the paper attributes the “undemocratic impulse” to public choice theory, which I would question on 2 grounds: actual causation, and what public choice theory is / does. I would say instead that those who are subject to the “undemocratic impulse” may invoke public choice theory as an ideological tool. However, it can also be used to criticize actual democratic and majoritarian institutions from the standpoint of democratic government’s theoretical ideals.

 

(a) “Undemocratic impulse” (if that’s what it is) without public choice theory – Stanley Surrey, the famous Harvard law professor who invented the tax expenditure concept and served in JFK’s and LBJ’s Treasury Department, on his way to becoming the most influential tax academic in US history, notoriously favored delegating tax law details to experts, such as the Treasury Department staff. He was a firm critic of legislative majoritarianism in tax policymaking, as in his classic 1957(!) article, "The Congress and the Tax Lobbyist: How Special Tax Provisions Get Enacted."

 

Surrey notes here how interest group capture of the legislative process gives rise to sacrifice of the public interest, by reason of logrolling between different business interests and the disproportionate power of higher-income taxpayers. It’s almost pure Mancur Olson interest group theory, but without the theoretical apparatus and based on years of personal observation rather than any sort of a theoretical model (public choice theory or otherwise). Surrey’s view epitomized how idealistic experts very often view the legislative process, based in part on empirical knowledge that gets slighted in that process, albeit not from a purely “neutral” perspective as no such thing exists. Less clear, however, is whether this viewpoint is actually “anti-democratic,” or is based instead on observing how democratic institutions fail in practice to satisfy the dictates of democratic theory. Maybe some of each.

 

(b) Public choice theory – While it’s true that public choice theory can be used as an ideological tool by one who is hostile to public control over policymaking, it also (i) has aspects of science or logic, not just ideology, and (ii) can be used from a pro-democratic standpoint to identify flaws in how majoritarian institutions work in a mass society.

 

Consider Arrow’s theorem, which the paper groups among public choice theory’s “indictments of and attacks on democratic decision-making.” The theorem is simply logically true within its terms, like it or not, although what to make of it is of course another matter. But it does not “predict” that in practice there will be a lot of cycling between outcomes (indeed, its literature explores what might produce stability and/or particular outcomes). It also does not support viewing voters’ and legislators’ preferences (especially if we are thinking cardinally, not just ordinally) as normatively irrelevant.

 

Likewise, a democrat should be no less interested than an anti-democrat in the observations about interest group politics that Olson theorized and Surrey observed. The reign of narrow, concentrated interests over broad and diffuse ones is potentially invidious to satisfaction both of the majority’s interests and of its preferences.

 

3) Concrete proposals

 

In addition to favoring more legislative majoritarianism and less delegation to experts / insulation of policymaking from control by elected politicians – on which my preferences are more case-by-case than a priori, although I admit to having frequent sympathy for delegation where I feel it might work decently – the paper also favors a number of measures to strengthen Congress’s accountability by better informing the public. This is an aim I generally favor, although there is much to debate in the paper’s particular proposals. Indeed, one need not believe that measures of this kind can greatly increase democratic legitimacy and shrink the democratic deficit – given where we are these days – in order to view them as good things. One also need not favor more legislative majoritarianism, rather than less, in order to agree that, when elected politicians are directly controlling policy, transparency is vital even if less effectual than one might have wished. But given the length of this post, along with the clarity with which the paper presents these proposals, I will leave them to readers to examine on their own.

New Jotwell post on Boushey et al, Recession-Ready

 For a while I've been publishing annual very short pieces in Tax Jotwell, aka "The Journal of Things We Like (Lots)," which is a forum for bringing to broader attention recently published pieces that one especially likes. 

My 2020 entry has just been published, and you can find it here. It discusses a book that was recently published by the Hamilton Project, edited by Heather Boushey, Ryan Nunn, and Jay Shambaugh, and entitled Recession-Ready: Fiscal Policies to Stabilize the American Economy. You can actually download the book for free here.

If the Democrats control both houses and the presidency in 2021, it's vital, among other urgent priorities, that they enact policies like those discussed here in order to stave off the next effort at fiscal sabotage (like that which slowed the recovery in the early Obama years).

Tax Policy Colloquium, week 1: Steven Dean's A Constitutional Moment in Cross-Border Taxation

Oscar Wilde famously said that the only thing worse in life than being talked about is not being talked about. In yesterday's NYU Tax Policy Colloquium, our first of the year (in our 26th year) and the first ever on Zoom, I had a somewhat different experience. I found that the only thing better than being needed is not being needed. 

To explain: I was the lead commentator, so I offered introductory remarks, which my co-convenor Lily Batchelder then supplemented, and to which our author, Steven Dean, then responded. But towards the end of Steven’s comments, the Internet in my house crashed, taking me off the session entirely. Luckily, Lily ably kept the ship afloat by running the queue. I eventually got back into the meeting by downloading Zoom on my phone and rejoining that way, but phone Zoom has much worse functionality (plus I’m unfamiliar with it).

 

This meant that I missed a lot of the discussion, from what was probably our largest ever colloquium audience (I think we topped out at about 68 people). This was so much the worse for me, but I hope no problem for everyone else. (Back in the past when we had smaller audiences, I used to participate actively throughout the sessions, but in recent years, people in the audience have had enough to say that it’s generally best for me to pipe down after my opening comments.)

 

I suspect I am not the first ever person teaching a class on Zoom to have the system crash. Fun! Obviously, with a regular lecture or seminar class and no co-teacher, this would be pretty bad.

 

Anyway, the title of the paper is A Constitutional Moment in Cross-Border Taxation. Here is an overview of what I raised, with additional context added as well.

 

The paper is part of a book project that Steven plans to pursue when (so much the worse for us at NYU) he has returned to Brooklyn Law School rather than running our tax program. The project’s main aims, as the paper makes clear, are normative. Dean (I’ll switch to the last name from now on, for convenience) wants international tax rules around the world better to promote social justice, both within a given country (progressivity) and between countries (the global South and marginalized, low-income countries, versus the global North and powerful, high-income countries).

 

This paper, however, is mainly descriptive. Its chief premises, as I read it, are as follows:

 

1) International tax law around the world is dominated by what one could call (slightly modifying the paper’s terminology) a “classification and assignment regime.”

 

2) This is substantively a “constitutional” regime, even if not formally so. (The paper combines these two points by discussing a “classification and assignment constitution,” but I find it useful to separate the two pieces.)

 

3) This constitutional regime is subject to informal but effective amendment at what Bruce Ackerman called “constitutional moments.”

 

4) The world may currently be at such a moment.

 

And finally, back to the normative:

 

5) Multinational companies (MNCs) should pay more tax on their profits, and marginalized / low-income countries should both get more of the revenue, and have more say regarding rule design, than they now do.

 

I’ll turn now to specifying more fully what these claims mean in the paper, and then commenting briefly on them.

 

1) The classification and assignment regime –

 

This term refers to tax systems’ first “classifying” income (e.g., as belonging to a cubbyhole such as interest, dividends, royalties, active business income, etc.), then “assigning” it for tax purposes to a given country or else to the given affiliate of a multinational company (henceforth, MNC) that the MNC most likely exclusively uses in that country, if it has a permanent establishment (PE) there.

 

In particular, however, it rests on the importance to tax planning of separate entity accounting within an MNC’s affiliated group of companies, accompanied by the use of transfer pricing and includability/deductibility for intra-group cash flows (such as interest and royalties) to determine each affiliate’s share of the overall group income. This regime leads naturally to the easy creation of stateless income, along with the enhancement of tax competition between countries.

 

What isn’t or wouldn’t be part of the classification and assignment regime? Examples include the following:

 

a) Unitary taxation of the entire worldwide corporate group, with some method such as sales-based formulary apportionment (FA) being used to determine what group income arises where.

 

b) Possibly, although this is debatable (as I discuss further below), such prominent recent features of the international tax landscape as the enactment of digital service taxes (DSTs), the EU state aid cases such as that between the European Commission & Ireland with respect to its arrangement with Apple back in the day, and ongoing OECD-BEPS initiatives.

 

c) Depending on how one ends up deciding to use the term, deemed dividend rules might be viewed as inconsistent with the CAA regime. Once you have deemed dividends, as under controlled foreign corporation (CFC) rules such as the US’s subpart F, or likewise under the US’s GILTI rules, then in effect you have taken a step towards unitary taxation. E.g., if ALL of the CFCs’ profits are treated as deemed dividends to the parent, then the prior steps of applying CAA have been pretty much overridden. As it happens, the existing deemed dividend rules are more limited than that in their scope.

 

In terms of the semantic answer to the question of whether existing deemed dividend rules are part of CAA, I think the answer is Yes if you are using CAA to refer to the existing regime, but it’s No if you’re asking whether a CAA methodology is being used in full. The deemed dividend rules still have Classification, but they override the formalism of Assignment.

 

2) It’s a Classification and Assignment Constitution, not just Regime

 

For the point that is being made here, we can start with Reuven Avi-Yonah’s prominent argument, first made a number of years back, that there is such a thing as the “international tax system.” The cynics had tended to say: “No, there isn’t. All we have is a whole bunch of countries with their own rules.” But Reuven argued, with analogies (for example) to customary international law, that there is a coherent whole with continuities and consistent principles. David Rosenbloom prominently disagreed, and I’ll discuss further below the context in which they had this debate, and why they agreed that it mattered.

 

I read the Dean paper as saying, yes, there’s a coherent system, and not only that but it’s materially a constitutional system even though there is no formal or written global international tax “constitution” as such, nor are there courts enforcing it.

 

To give an example of what I think the paper has mind by way of a constitution, consider the possibility that Congress will enact a wealth tax in 2021. (Just a hypothetical; I’m not expecting this to happen.) It would be litigated straight up to the Supreme Court, where it’s a pretty good bet that the 5 committed Republican justices (yes, that’s how I view them) would vote together to find it unconstitutional. 

 

We would then have learned ex post that Congress could not implement a wealth tax (at least, without apportionment between the states), because the relevant actors within the system relied on the Constitution to strike it down.

 

In positing a constitutional system in international tax, the paper posits that there are similar constraints in place here, albeit not enforced in the same manner as US constitutional limitations on the domestic taxing power.

 

3) Constitutional moments

 

Bruce Ackerman famously posited that the US Constitution can effectively be amended, without formal resort to the Article 5 process, at what he called “constitutional moments.” The basic idea is that, at a period when there is great public focus and debate on what the Constitution permits, one of the parties (say) endorses legislation that would be unconstitutional under the current understanding, wins the requisite elections, implements, the other party eventually assents, etc.

 

In illustration, suppose we know from the history of Supreme Court jurisprudence that minimum wage laws were unconstitutional in 1920 but constitutional in 1950. Without Ackerman’s constitutional moments idea, it would seem that one or the other of these pronouncements must have been wrong. But under the Ackerman theory they could both have been correct when decided, with the reversal reflecting informal but nonetheless legally effective amendment of what the Constitution means in the 1930s.

 

Key examples he has in mind include the New Deal and the Civil Rights Era. I seem to recall that Ackerman pronounced the “Reagan Revolution” to have been a failed constitutional moment.

 

In the paper, Dean cites a couple of examples of his own. He views Justice Marshall, in the 1803 Marbury v. Madison decision, as having effectively amended the Constitution, in an analogous way, by proclaiming judicial review (which, at a minimum, had not previously been universally accepted). And in the international realm, he views the US enactment of subpart F in 1962 as having perhaps been effectively a constitutional moment, amending the Classification and Assignment Constitution as it had existed previously, by providing that one could modify or depart from it by taxing deemed dividends. This one took, just like New Deal legislation in the aftermath of the famous “switch in time that saved 9,” in that other countries not only accepted subpart F but enacted their own CFC rules.

 

Next, here are some of my main thoughts in response to the paper’s analysis:

 

1) Do we have a classification and assignment regime?

 

Again, deemed dividend rules for CFCs, such as subpart F and GILTI, appear to be inconsistent with it. Also, if FA is inconsistent with it, note that transfer pricing rules often have a formulary component. And one could certainly argue that DSTs, the EU state aid approach of the European Commission, and OECD-BEPS are all consistent with CAA, and merely apply it differently.

 

Avi-Yonah, when he argued that there is an “international tax system” (albeit, he didn’t say “constitution”), was making a normative argument for US “anti-hybrid” legislation that he argued was in the spirit of the existing regime. (Taxpayers exploit hybridity by structuring their affairs so that different countries’ rules apply inconsistently as to the same concept, e.g., Affiliate A’s cash payment to Affiliate B is deductible interest in A’s country, but isn’t includable interest in B’s country). So he was saying: There’s a coherent regime, it’s a good one on balance, hybridity violates it, and therefore, as a normative matter, we should voluntarily enact new legislation that helps preserve its intended functioning.

 

The paper, by contrast, is saying that the regime exists as a descriptive matter, and that, because of its “constitutional” status, countries are disempowered (whether we're glad of this or not) from violating it.

 

2) Is this regime a “constitutional” one?

 

This raises the questions of what the enforcement mechanisms are. Not a higher court, so presumably the difficulty of enacting a rule that departs from the norm without running into ineffectiveness and pushback.

 

Would convergence and imitation, creating similar rules in different countries and sustaining the similarity as rules change first here then there, be enough for this to be a “constitutional’ matter? And what is at stake when we address this question? How does it affect the analysis? These questions will, I’m sure, be further addressed in the book manuscript.

 

3) Constitutional moments

 

Ackerman’s descriptive claim is not only obvious, but meant to be. We knew before reading his work that, yes, the minimum wage was unconstitutional according to the Supreme Court in 1920, and constitutional in 1950. And he counts on our knowing this. The novel claim that he is making is normative: he’s saying that this reflected, not correct vs. incorrect constitutional interpretation, but the fact that the Constitution had been amended in between.

 

One question one might ask here is whether this interpretation risks tautology or non-falsifiability. A country proposes something that’s rather novel. Then it either retreats, showing that it faced a constitutional barrier, or it sticks to its guns & shows that the CAA has been amended.

 

Are there simply livelier and duller moments in the evolutionary process for the international tax regime, such as it is? And again, does it matter for the analysis whether there are constitutional moments, rather than just periods when the observed regularities are changing fast rather than slowly?

 

4) Back to the normative side: advancing social justice

 

Again, the central concern motivating the paper is with social justice, defined both in terms of progressivity within a given country, and the interests of the global South as distinct from those of the global North.

 

The paper’s analysis arguably suggests that what it considers the injustices rife in the current system are mainly a legal problem, and hence also political in the sense of the political factors that drive legal and constitutional outcomes. (E.g., by analogy, the US Supreme Court would be making a legal claim if it struck down a wealth tax, and its so deciding would reflect the politics of Supreme Court appointment and confirmation.)

 

As one who is somewhat of an economist fellow traveler, albeit a law professor rather than an economist, I have been inclined to view the distributional characteristics of the existing international tax state of the play as reflecting economic forces, along with countries’ incentives when they have limited jurisdiction and are “selfish” (i.e., concerned mainly with the welfare of inside players).

 

From that perhaps more cynical perspective, why would we ever expect “marginalized” countries to get much sway? One might think they deserve it, without expecting them to get it.

 

Also, are many of the aspects that the paper suggests are non- or anti-CAA regime actually more orthogonal to the global north vs. south debate than directly relevant to it? E.g., a lot of those items (DST, EU state aid cases, much of OECD-BEPS) are arguably about the competing interests of “producer” and “consumer” states (with respect to highly profitable MNC activity) within the global North. And while those efforts are often hostile to a third set of countries, tax havens, the tax haven countries are far from being coterminous with or identical to the global South.

POSTSCRIPT: As an aside, I am glad for Steven, but very sad for NYU and myself, that he will be leaving us at the end of the year (he has been the director of our tax program) to return to Brooklyn Law School. I'll miss him, although hopefully still see him frequently, at least via Zoom. One of the reasons I so value him, not just as a friend but as a member of our tax community, is that he brings what in our environs is a unique, albeit badly needed, perspective on international tax policy matters. It's so hard around here to escape from just getting US perspectives on things. Through international travel and connections, at least before the pandemic, I was able to encounter and learn from UK and EU perspectives, and to a lesser degree those from certain leading Asian countries. But Steve adds a global South perspective that is really an important part of having a balanced, or at least less parochial, viewpoint.

Kleinbard tribute

A tribute to Ed Kleinbard that Joe Bankman and I co-authored for the ABA Tax Times is now viewable here.

Back to life a bit

 This blog has recently been less active than it used to be, but a regular source of weekly posts is about to resume. With the NYU Tax Policy Colloquium resuming this Tuesday (you can see the schedule here), I will resume posting weekly ruminations, if that's the best word, regarding that week's paper.

A few points about this exercise:

1) Since our sessions are off the record to allow for frank discussion, I don't comment on the discussions themselves, although they may help to shape the thoughts about the paper that I end up posting here.

2) For multiple reasons, I do not trash or criticize the papers, which would be (a) unkind and unfair given my platform here, (b) bad for business in multiple ways, and (c) bad for personal relationships in what I have found on the whole to be (at least 90 percent of the time) a very amicable field in which people generally interact constructively. This is not to eliminate the possibility of one's reading between the lines regarding how persuasive or helpful I found a given paper's analysis. But then again, when I look back at my own past writings I may feel today that I was sometimes closer to the mark than other times.

3) My main interest in these posts, and also to a large degree in the sessions as well, is not does the paper succeed, or even how can it be made better (although I am happy to explore that with any interested author), but rather what we all together can learn about how best to understand the issues that the paper raises.

Forthcoming article

The article I wrote earlier this year, What Are Minimum Taxes, and Why Might One Favor or Disfavor Them?, will be appearing in the fall 2020 Virginia Tax Review.

In the past, I've typically published specialty tax articles (i.e., those less directed at a general law review audience) in NYU's own Tax Law Review. But we are making an effort these days to save space for newer, younger, and more diverse voices.

Revised (and close to final) schedule for the 2020 NYU Tax Policy Colloquium

Things might still change a hair, but here is the latest news on the schedule for the 2020 NYU Tax Policy Colloquium. Since we will be doing the entire thing on Zoom, anyone who wants to attend virtually is welcome to do so. Just (a) let me know that you want to be on our weekly email distribution list, and (b) respond to my assistant saying that you'd like to attend, in any week when that is so, in order to get the Zoom link. Anyway, here it is:

SCHEDULE FOR FALL 2020 NYU TAX POLICY COLLOQUIUM

(All sessions are on Tuesdays, meeting online from 2:00 to 3:50 pm EST)

 

1.     Tuesday, August 25 – Steven Dean, NYU Law School. “A Constitutional Moment in Cross-Border Taxation.”

2.     Tuesday, September 1 – Clinton Wallace, University of South Carolina School of Law. “Democratic Justice in Tax Policymaking.”

3.     Tuesday, September 8 – Natasha Sarin, University of Pennsylvania Law School. “Understanding the Revenue Potential of Tax Compliance Investments.”

4.     Tuesday, September 15 – Adam Kern, Princeton Politics Department and NYU Law School. “Illusions of Justice in International Taxation.”

 

5.     Tuesday, September 22 – Henrik Kleven, Princeton Economics Department. “The EITC and the Extensive Margin: A Reappraisal.”

6.     Tuesday, September 29 – Leandra Lederman, Indiana University Maurer School of Law. “Of Risks and Remedies: Best Practices in Tax Rulings Transparency.”

7.     Tuesday, October 6 – Daniel Shaviro, NYU Law School. “What Are Minimum Taxes, and Why Might One Favor or Disfavor Them?”

8.     Tuesday, October 13 – Steve Rosenthal, Urban-Brookings Tax Policy Center. “Tax Implications of the Shifting Ownership of U.S. Stock.”

9.     Tuesday, October 20 – Michelle Layser, University of Illinois College of Law. “How Place-Based Tax Incentives Can Reduce Economic Inequality.”

 

10.  Tuesday, October 27 – Michelle Hanlon, MIT Sloan School of Management. [Paper on taxpayer responses to the 2017 tax act, using survey data.]

11.  Tuesday, November 10 – Owen Zidar, Princeton Economics Department. “The Tax Elasticity of Capital Gains and Revenue-Maximizing Rates.”

12.  Tuesday, November 17 – Abdoulaye Ndiaye, NYU Stern Business School. “Redistribution With Performance Pay.”

13.  Tuesday, November 24 – Lilian Faulhaber, Georgetown Law School. “Searching for Coherence: The Overuse of Excess Returns and Excess Profits.”

14.  Tuesday, December 1 – Erin Scharff, Arizona State Sandra Day O’Connor College of Law. “Revisiting Local Income Taxes.”