On a lighter note than this horrifying election year ...

... I'll self-indulgently revive this golden oldie (from my standpoint).

Advice re. the presidential election from a fortune cookie?

Video of the EU state aid panel at NYU Law School last Friday

Video is here; my talk starts at 53:24.

Halloween horror

Not to be a killjoy, but NYC's annual Halloween parade can truly be a nightmare for locals such as myself.  Due in part, I think, to incompetent management by whomever was in charge of the police presence, it was verging on impossible to cross 6th Avenue, which New Yorkers sometimes need to do. After yesterday's colloquium, our customary small group went to dinner somewhere east of 6th, so that we could get there (and the speaker could get back to her hotel) without needing to cross 6th.  But this meant that I had to try to cross 6th at about 8 pm in order to get home.

The distance I needed to cover is 0.5 miles according to Google Maps (I had thought it was a hair less). But getting home took 90 minutes, and I was lucky to make it home at all (it involved entering the NYC subway to use their tunnels, although I didn't end up having to take a train up and back).

Meanwhile, people were actually getting groped Trump-style by mask-wearing hooligans, hardly a surprise under the circumstances.  And no police person to whom I spoke had any idea how best to cross 6th.  (More precisely, several had definite ideas that proved to be incorrect.)

High-end inequality seminar, week 2: Kate Pickett

Our two papers for this week were by Kate Pickett and Richard Wilkinson (available here and http://www.law.nyu.edu/sites/default/files/upload_documents/EJSP%20WilkPick%20final.pdf),  Pickett was kind enough to fly over from York University in northeast England to present and discuss this work.

I view the papers as raising two main topics of interest to colloquium participants.  First, how should we evaluate the papers’ main causal claim?  Second, what follows if this claim is accepted?

1. Causal claim

The papers examine evidence regarding the empirical relationship between income inequality on the one hand, and health/ behavioral ills that have a social gradient on the other hand.  (“Social gradient” means that, within a given society, they tend to be negatively correlated with income.)

The following ills are positively correlated with a society’s measured income inequality (e.g., based on Gini coefficients or the level of the 80^th percentile versus the 20^th percentile, among alternative measures that can be used): lower life expectancy, higher infant mortality, worse educational performance by children, and the frequency of teenage births, homicides, other violence, imprisonment rates, mental illness, drug and alcohol addiction, and obesity.

Likewise, measures of social trust and economic mobility are negatively correlated with income inequality.  All this, of course, is based on adjusting for income levels.  And the ills are positively correlated with income inequality even among the wealthy in a given society.

An initial question is: should we accept the correlation?  It’s based on an enormous weight of evidence from different societies and time periods (all involving recent decades, however).  It really seems to far too much evidence of correlation to ignore or reject.

Second question: how do we explain it?  When A is shown to be correlated empirically with B, we can posit either that A causes B, or that B causes A, or that something else causes both.

Wilkinson and Pickett posit that income inequality causes the social bads. They argue that this is intuitively plausible, reflecting that we are competitive social beings, equipped for both egalitarian and hierarchical relationship patterns, but happier and less anxious in the former (which seems to have prevailed in real evolutionary time from the very distant past until the rise of agriculture only a few thousand years ago).  But they also argue that it best fits the evidence.

What about the theory that the bads cause income inequality?  Among the counters to such a view is the fact that, in the data, there tends to be lag from a given society’s rise in income inequality to its experiencing greater social gradient health and behavioral ills.

What about the theory that something else explains both?  Suppose we point the figure at culture – e.g., positing that something about U.S. and U.K. culture make us prime hosts both for income inequality and for social gradient ills (e.g., from having highly competitive cultures).  Wilkinson and Pickett note, however, that the evidence fits their causal theory pretty well, whereas it’s difficult to make it work in terms of cultural fits.  For example, why should Scandinavian countries resemble Japan, and why should Spain be so unlike the (historically far more unequal) Portugal when their cultures are so different?

I am strongly inclined to accept both the claimed correlation and the causal explanation that Wilkinson and Pickett offer.  But there is going to be an ongoing social science debate about this, which I believe their side will decisively win.

2. Issues raised by accepting the causal claim

a) Is it culturally or ideologically specific to the present?

I wonder if inequality today is different from inequality in the past.  The data obviously doesn’t go nearly far back enough to test this as one might like,

Consider the medieval epoch in Europe, during which inequality and hierarchy were considered entirely natural, by analogy to the family. Familial hierarchy running from parents to children is indeed a mental module that humans appear to have.  And might it be generalized under propitious (for it) circumstances? Consider cats, naturally feral yet able to adapt their kitten-to-mother mental module to the circumstances of modern pet culture.

Not to be too whimsical here, but could today’s problems with inequality – not by any means to idealize it in the past – have something to do with the difficulty of adapting the familial module to a mass society, plus the consequences of experiencing it in a modern capitalist context where it has become intertwined with meritocratic ideology?

b) What is the “bad” that affects people?

The paper discusses “status threat.” This brings to mind nature documentaries and books about baboon society, full of violence from above and the continual need to defend oneself from rivals below.

Maybe not entirely a bad metaphor – baboon society is said to have considerable resemblances to ours – but in a modern social context, would the “bad” result more from vertical status differences, or from uncertainty and ambiguity in relative rankings?

Robert Frank would be inclined to shelve “status threat” explanations that seem to sound in bullying and resentment, in favor of positional externalities from consumption levels. There verticality might potentially make things worse, depending on how people judge the relevance for themselves of consumption levels way above their own.  But this need not be a case of either-or.

c) Different kinds of inequality

I’ve been emphasizing the differences between high-end and low-end in equality (plutocracy versus poverty).  The evidence adduced concededly does not as yet do much to address that issue.

Thus, for example, when one of the papers notes that high-inequality U.S. states have more social gradient ills than their peers, the former are a mix of the likes of New York and the District of Columbia, with the likes of Mississippi and Louisiana. These issues are important to address when one is thinking about policy responses to the negative social effects of inequality.

d) Policy implications

i) The pollution analogy.

Inequality appears to generate negative externalities, in a manner analogous to that caused by pollution.  How should this shape our responses?  Suppose we are thinking in terms of a Pigovian pollution tax.

In the canonical Pigovian case (with the full information that’s possible in a textbook example), we know what marginal disvalue, expressed in monetary terms, the people adversely affected by pollution face on each additional quantum of it.  And while of course we won’t precisely know this in any real world example, at least it gives us a useful framework for  thinking about the proper design of a pollution tax.

In the case of inequality, we don’t know which types matter the most, whether the marginal harm rises in any sort of continuous fashion, or really anything about how best to price it.  Also, whereas in the Pigovian pollution tax we have consumers whose current utility functions and circumstances determine the cost, in the inequality case we’re asking how people would relatively value their wellbeing under two completely different scenarios.  They cannot easily judge this, even in theory.

So even if one comes out in favor of fiscal measures addressing inequality due to its negative externalities, we don’t have a great model available regarding how best to do this. 

Of course, this is not the first time that we have faced such a problem in instrument design – as discussed, for example here (in an article on taxation and the financial sector that I coauthored with Doug Shackelford and Joel Slemrod).

ii) High-end versus low-end inequality

I have been arguing for some time that we need to think about high-end versus low-end to a degree distinctly.

One reason is that the policy tools one would use to address them differ.  Low-end inequality may be addressed in large part through public spending on public goods, along with consumer goods that are necessities and/or potential areas for market failure.  For example, as Ed Kleinbard and others have noted, the tax system is generally less on point here than ensuring people of good quality healthcare, education, childcare, transportation options, etcetera.

For high-end inequality, by contrast, we may be inclined to think primarily in terms of high-end marginal tax rates (and the tax base), inheritance taxation, the scope and term of IP protection, corporate governance, rules for the financial sector, etc.

A second reason for distinguishing between high-end and low-end inequality is that our rationales for wanting to address them may be quite different.

With respect to poverty, anyone equipped with basic beneficence should care about alleviating it, in order to make people better off.  But concern about plutocracy requires further motivation, since the aim is surely not to make a bunch of people worse-off. 

Under standard public economics and optimal income tax models, in which people care only about own consumption, the declining marginal utility of material resources provides the only rationale for concern about plutocracy (although there might also be ad hoc egalitarian weighting of a social welfare function).  But if harms are being caused, the analysis may change dramatically – including by rebutting the view that one would never want to set a high-end tax rate above its revenue-maximizing level.

Against this background, the Wilkinson-Pickett evidence, in my view, does more to influence how we should think about high-end than low-end inequality, even though it is pertinent to both.

Latest on Trump's tax scam

It's generally accepted that Trump appears somehow to have deducted $916 million of losses, over time, despite the fact that these were predominantly other people's losses, not his.  The question has been how he purported to do this, but the NYT appears to have advanced the ball with this story, which is based on the discovery of a 1991 opinion letter from Willkie Farr (itself available here).

At the front, the Willkie Farr opinion lists eight uncertain tax issues on which the tax plan to make other people's losses deductible by Trump depends.  One of these it describes as "more likely than not" to be resolved favorably to Trump upon a full IRS vetting.  For the others, it says that there is merely "substantial authority" for Trump's position.

The Times article says "substantial authority" means that one has about a one-third chance of being legally correct.  I have heard of its being used to describe as much as a 40% possibility of legal correctness.

One of the odd things about tax opinions generally is that they don't quite explain what the likelihood of correctness means.  After all, it's explicitly probabilistic for "more likely than not," and implicitly so for "substantial authority" even though the term appears to address the nature of support for the position. Presumably it uses a subjectivist conception of probability, based on the writer's risk-neutral assessment of zero-value betting odds. Perhaps this reflects an underlying thought experiment involving multiple repeated independent trials (in alternative universes?) or a grouping of equally plausible (albeit distinct) positions, all of which then get tested rigorously.

Another peculiarity about tax opinions with multiple issues that are assessed probabilistically is that there is no analysis of the degree of correlation between the probabilities.  E.g., suppose each of two positions "should" be correct, and that we define that as 70% likelihood correctness. Is the likelihood that both are correct 70% - the case of perfect correlation between them - 49% (i.e., not collectively even more likely than not) - the case of perfect independence - or somewhere in between?

Tax opinions generally do not address this at all.  In a typical case, however, there's almost no chance that they are perfectly correlated - the technical issues are distinct.  On the other hand, perfect independence is often unlikely.  For example, two legal issues that are distinguishable may nonetheless both be strongly influenced by the question of whether or not a given arrangement is economically meaningful.

Returning to the Willkie Farr tax opinion, if all of the issues were perfectly independent we're in the neighborhood of a 2/10 of 1 percent chance that the overall position was valid (from assuming six 40% probabilities plus one at say 55%).  With perfect correlation, it would rise to 40%.  But since perfect correlation is unlikely I imagine that reasonable views about actual correlation might place the probability of overall correctness anywhere from, say, 5% to 20%.  And that's based on Willkie Farr's judgment, even though (with all due respect to Willkie Farr) there may have been a bit of preliminary opinion-shopping on Trump's behalf to get the most favorable view that any reputable NYC law firm was willing to provide.

What about audit review?  I suspect it was not seriously reviewed, and here's why.  It involved a gigantic NOL,  having in the main a deferred impact on tax liability, while also raising many complex issues.  It would be natural for an IRS auditor, seeking immediate bang for the buck, to figure: Even if I get this reduced substantially, surely there will be something left, meaning that Trump would have NOLs for the next few years anyway (assuming no possibility of immediate cancellation of indebtedness income given the insolvency / bankruptcy issues).  And also, while this was still early in the era of the 1990s rise of tax shelters, the IRS may by that point have had more fish to fry than auditors to mind the fry pan (so to speak).

So, a bit like Dupin's purloined letter, it may have been so blindingly visible that it didn't get looked at seriously.

Back to the presidential race.  What should we make of this?  Well, for me, the fact that Trump, if he were president, would probably respond to the article by instructing his people in the Justice Department to shut down the New York Times and find some excuse for indicting the article's authors weighs a bit more heavily on the scale than the tax scam itself, as does his being a self-proclaimed sexual assaulter, a credibly accused fraudster and racketeer, and apparently a stooge (at best) in support of Russian interests at the expense of our own. So it doesn't worsen my views of Trump, although at this point there is literally nothing that could do so.

Observations concerning the broader institutional background to the section 385 regulations

As noted in a previous blog entry, I had planned to attend an NYC Bar Association event this Wednesday evening discussing the newly issued section 385 regulations.  It turns out now that I unfortunately won't be there.  However, since I had already prepared remarks for the session, I've decided to flesh them out slightly and post them here.

In short (or long), what I had planned to say was something like this:

I’ll address 3 topics.  The first is the use of regulations, instead of legislation, to address the second big wave of corporate inversions.

The second is the currently highly contested issue of the breadth of the Treasury’s regulatory authority generally.

And the third is the use of interest deductions to strip out US source taxable income, in relation not just to the new section 385 regulations but corporate tax reform.

1.         REGULATIONS VS. LEGISLATION

The Treasury’s recently issued section 385 regulations emerge from the 2^nd wave of corporate inversions.  Twelve years ago, the first wave of pure paper-shuffling self-inversions promptly gave rise to the enactment of section 7874.  This was not just a bipartisan process, but a Republican-led one, as George W. Bush was president and the Republicans controlled both houses of Congress.

The second wave of inversions raised harder policy issues, because it involved, not just paper-shuffling, but real business transactions, even if significantly tax-motivated.  But I think it should easily have been a bipartisan no-brainer to slow down the inversions wave, at least as a stopgap while deciding what to do about their underlying causes.

By the way, whether or not the U.S. statutory corporate tax rate is too high, that is not what second-wave inversions are about.  Instead, they’re about two main things.  The first is the gigantic buildup of foreign earnings that, as an accounting matter, have been labeled as permanently reinvested abroad.  Companies want to be able to access the funds more conveniently without taking an actual tax hit or a reported earnings hit.  The second is the aim of using interest deductions to reduce U.S. source income, which is easier for foreign corporations than U.S. corporations.

Both of these issues need to be addressed, but it’s foolish to encourage an inversion wave before we get around to dealing with them.  So it should have been uncontroversial to slow down inversions in the interim.  But because the legislative process in Washington has completely broken down, due to partisan disputes since 2009, this was not possible.

As many will recall, the Treasury initially thought that it couldn’t do anything if Congress wouldn’t act.  But then Stephen Shay and others weighed in to say that the Treasury actually does have some reg authority, so we got the first set of anti-inversion regulations, followed by the section 385 regulations that we’re discussing today.

Some people have been shocked by this, because they think it violates informal comity norms between the executive branch and Congress that have been well-accepted for many decades.  They’re right that the Treasury is indeed departing from those norms.  But guess what.  Those norms are dead, and they’re not coming back.  They were killed by the breakdown of the bipartisan tax legislative process that we used to have.  Once that happened, there was no reason to expect the Treasury, with either party in control of the executive branch, to figure that it would just defer until Congress got around to legislating.  So long as our politics is so dysfunctional, the action is inevitably not just going to disappear – it’s going to move up Pennsylvania Avenue from Capital Hill to the Treasury Building (or else the White House).

Just to put this in the context of the upcoming election, even if we assume that Clinton wins, Republicans in Congress have already announced their plan to confirm no judges, devote the next four years to investigations, and gear up for impeachment proceedings.  So I don’t think there will be a whole lot of actual legislating.

Whether all this is good or bad, taxpayers and their advisors are going to have to get used to it – and, of course, adjust their lobbying and other government outreach accordingly.  But it brings us to the second question: how broad is the Treasury’s regulatory authority, both in specific cases and in general.

2.         THE TREASURY’S REGULATORY AUTHORITY

I’m not going to address today the particulars of challenges to the Treasury’s claim of regulatory authority under section 385.  But I will say this: Congress deliberately gave the Treasury very broad discretion.  It wasn’t limited to things that Congress particularly had in mind when it enacted the grant.  And of course the Treasury hasn’t limited the new regulations to inversion transactions.  It has addressed broader issues that relate to interest deductions, via the distinction between debt and equity.  So any court challenges that are based on Treasury’s discretion under section 385 face a steep uphill climb.

One unfortunate byproduct of the breakdown of the legislative process is that, while Congress can use any tool it likes, the Treasury can only use the tools that it has.  Thus, suppose it would make more sense to disallow interest deductions than to reclassify what’s nominally debt as equity.  The Treasury may not have that choice when it’s exploring what to do.  But that doesn’t necessarily mean that it shouldn’t do anything. If the best response is unavailable, it shouldn’t be the enemy of the good.

Now, the shift in ability and willingness to act from Capital Hill to 1500 or 1600 Pennsylvania Avenue has happened at the same time as other tectonic shifts in the legal environment.  Treasury regulations are now, in the aftermath of the Mayo Foundation Supreme Court decision, fully subject to the standard administrative law regime.  This raises transition issues, given all the regs that were finalized before Mayo, and it has also required both the Treasury and the Tax Court to face a bit of a learning curve.

One recent chapter in this process was the Tax Court’s ludicrously misguided decision in the Altera case, concerning transfer pricing under the cost-sharing regs, which is currently on appeal to the 9^th Circuit.  One of the things that the Tax Court did particularly poorly in that case was look at the regulatory preamble that accompanied the regulations at issue in light of the requirement of reasoned deliberation to qualify for deference. 

While reasoned deliberation by administrative agencies is a good thing, the Tax Court’s ham-handed version of testing for it meant that the role of regulatory preambles was bound to change.  Instead of preambles’ being useful and informative documents that explain the Treasury’s reasoning and beliefs to taxpayers, as they had previously been, the Tax Court ensured that, henceforth, they will simply be litigating documents, composed with an eye to heading off future regulatory challenges.  That’s unfortunate but necessary from the Treasury’s standpoint, and we can certainly see it at work in the lamentably interminable Treasury preamble to the section 385 regulations.

Once again, the new world we live in now may be worse than the old one, but we’d better get used to it, because it’s not going away any time soon.

3.         INTEREST DEDUCTIONS AND CORPORATE TAX REFORM

Again, the section 385 regulations are not just about inversions, but more broadly about the use of debt that yields interest deductions to strip profits out of the U.S. tax base.  This reflects the fact that our current rules for addressing excess leverage are very weak, especially for non-U.S. companies that don’t need to worry about subpart F.  It also reflects how weak our earnings-stripping rules are, under section 163(j).

Our defenses against the use of interest deductions against earnings-stripping are weak in two senses: absolutely, and relatively for foreign as opposed to U.S. companies. That of course has been a key reason for the second inversions wave.  Peer countries, such as Germany and the UK, appear to have absolutely tougher rules against earnings-stripping than we do, if I’ve been accurately informed by people who know those countries’ rules better than I do, but they also don’t place the same relative weight on corporate residence as our overall regime does, given the role played by subpart F. And importantly, I gather that they look at the global debt of a worldwide affiliated group, without being confined to looking at the resident company and its foreign subsidiaries (as distinct from corporate parents and siblings).

I think that the U.S., if we are able to overcome the breakdown of our tax legislative process, needs to consider addressing earnings-stripping through rules that look at the debt of the entire multinational group, whether it is U.S.-headed or not.  And while I have been, and remain, pessimistic about the legislative prospects for corporate tax reform, there are several pieces of a package that one could imagine making sense for everyone who is rational, including the companies themselves.

While the companies are unlikely to welcome tougher rules against earnings-stripping, they could support an accompanying reduction in the corporate rate.  And while in isolation they might not like a deemed repatriation of their trapped foreign earnings, this could be at less than the full rate, and they’d benefit from loosening the use-of-funds shackles that they now face.

So there are important things that the Treasury can’t do on its own, but that Congress could do if our politics got less poisonous and dysfunctional.  That’s a lot to hope for, but we do have an election next week, so perhaps this is as good a time to be hopeful as any.

Webpage for the High-End Inequality Colloquium

We now have an NYU webpage up for the Colloquium on High-End Inequality that Robert Frank and I will be co-running at the law school for the next 6 weeks (Mondays through December 5).  It shows the full schedule and links for the first couple of papers, and links for more papers are to follow soon.

Available here.

Today's OECD-BEPS conference at NYU Law School

Interesting OECD-BEPS conference today at NYU Law School.  The whole thing should be streamable on the NYU Law School website by sometime next week.  But herein a quick summary regarding the day's 4 panels:

PANEL ONE, on which I participated, discussed the EU state aid cases. From Hein Vermeulen and Dennis Weber I learned that it's very wide open at this point whether the European Court of Justice will sustain the European Commission.  I wonder if the US outcry, including via the Treasury White Paper, is strengthening the EC's hand, by making a reversal look like bowing to American pressure rather than reflecting the conflicting currents in EU jurisprudence.

Itai Grinberg, who has been very critical of the EC (whereas I say the US should not be so overwrought about it) was the other panelist.  After our colloquy, I get the sense that we disagree far LESS than I had thought, even though our bottom lines differ.  Perhaps the video will help show this.

Here are the slides for my talk.  While linked to my EU state aid paper, they also talk quite a bit about the source concept, as in "How should we think about the source of Apple's income?"

I use the words "origin basis and destination basis" here, reflecting how they've been used, for example, in VAT / X-tax type discussions.  People in international income tax policy debate often use somewhat different words to mean similar things.  One could reconcile the lingo a bit by saying that origin basis means taxing it in the production jurisdiction, while destination basis means taxing it in the market jurisdiction.  It's also sometimes put in terms of residence country taxation vs. source country taxation, but I didn't use that terminology because, when you're asking where the source of income is, it causes confusion to use the term "source jurisdiction" for one of the two possibilities.  Plus, the residence jurisdiction can differ from that of economic production, given cross-border choices in corporate residence.

PANEL TWO discussed country-by-country reporting of profits, employees, etcetera.  There appeared to be wide agreement, extending to speakers on other panels, that this is potentially a "game-changer."  It may tend to move the location of reported profits to being far closer to that which would be suggested by formulary apportionment (FA), even if FA isn't formally adopted.  After all, if you report lots of sales in a given high-tax jurisdiction, it may be hard to resist agreeing that profits arose there.  And if you want to support a higher profit allocation to a given low-tax jurisdiction, it may help to put more employees there.

The move in an FA direction tends to require more distortion in association with profit-shifting (since it requires than transfer pricing's paper-shuffling), but it presumably greatly reduces taxpayer discretion.  I wonder if it will create a new motive of tax competition to lower one's corporate tax rate  - so that companies will want to locate enough employees in one's country to justify allocating profits there.  This of course is not unrelated to how Ireland reached agreement to help Apple.

PANEL THREE discussed treaties and less-developed / least-developed countries. It covered some of the challenges and difficulties involved with trying to broaden the participatory sphere from OECD countries to the rest, and explored the relative roles that the UN and OECD can play.

PANEL FOUR discussed how the US has been implementing (or not) OECD-BEPS, and suggested that we are already substantially compliant.  The US may have lost politically in OECD-BEPS, since we wanted stronger CFC rules but didn't get them, and were far less enthused about strengthening "source country" (meaning destination-based or market country) taxation and perhaps to a degree did get that.  At least one panelist believed that we win from CBCR.  I would assume the reasoning here would be that US companies will have to report more profits in the US post-CBCR, arguably to our benefit, although they might also have to report more profits in market countries rather than tax havens, arguably (or at least directly) to our detriment.

What would Trump really care about as president?

The obvious answer is, the same things he cares about as a candidate for president.  These are (1) attacking, and if possible silencing, people who criticize him or report things that he would rather not have reported, and (2) enriching himself.

The easiest way to get #1 is to secure a compliant Justice Department, packed with his people, while letting Republicans have whatever they like in tax policy and judicial appointments.

The third thing he may care about - it's hard to fully understand why, but the statements he keeps making about Putin, to his apparent political disadvantage, make one wonder - is aiding Russian foreign policy to achieve all of its aims, even perhaps maximalist ones.

It was 30 years ago today

Today is the thirtieth anniversary of the 1986 World Series, Game 7, when the Mets defeated the Red Sox to complete their miraculous comeback.

I had suffered, then rejoiced, during the end of game 6, via a TV at the foot of the bed where I was staying with friends during a visit to NYC.  (I still lived in Washington, where I was working for the Joint Committee on Taxation. The Tax Reform Act of 1986 had been enacted just days previously, and I was out on the road explaining the parts I had worked on to various tax lawyer groups.)

During the climactic moments of Game 6, I had kept turning the TV off then on again and muttering to myself.  I meant to turn it off for good at the very moment the Mets lost (as they were down two runs, with two outs and no one on base, in the bottom of the tenth inning). As the rally proceeded, I moved slowly backwards towards the pillow end of the bed, and the tenor of my muttering started to change.

My now-wife was with me, trying to sleep (so I was trying to keep the muttering as low as possible).  I told her afterwards that she had now seen the very worst of me; there were no more secrets to worry about.

But on to game 7, the one that is 30 years ago today.  She must have gone to see her family, as I was in an NYC hotel room, hosting several friends from college and/or law school who had dropped by to see the game.  We went through anxious moments early on, as Ron Darling faltered and Bruce Hurst was mowing the Mets down for the third time in just over a week.  But when Keith Hernandex doubled to narrow the score to 3-2, we knew what was going to happen.  (I think the Red Sox knew at that point, too.)

Colloquium on high-end inequality

Yesterday was the first day of the seven-week Colloquium on High-End Inequality that I am co-leading with Robert Frank.  Afternoon sessions, from 4;10 to 6 pm in Vanderbilt 202, are open to the public.

Our first session was devoted to several of Bob's short pieces, including one on the importance of luck, another on expenditure cascades, and a third on winner-take-all markets.  The following is a fleshed-out version of my main comments:

2 discussion topics today: the relevance of luck, what if anything is wrong with high-end inequality.

1. Luck

Obviously, luck matters in life. Everyone knows that.  So why, in relation to thinking about high-end inequality, is it particularly worth mentioning?

Because of the alternative view – which, here, is not that everything was predetermined or inevitable, but that all success is just flat-out deserved, period.

3 examples from the papers: Bob survived a dangerous heart attack, Mike Edwards of ELO was buried by a hay bale, Michael Lewis happened to sit next to a Salomon Brothers spouse, who gave him the idea to write Liars Poker, and launch his amazingly successful career.

The first two counterfactuals, but for the luck, are indisputable.  Bob wouldn’t have lived, Mike Edwards wouldn’t have died.  And there’s no particular policy payoff to them, apart perhaps from promoting emergency treatment and road safety.

But for Michael Lewis, some might say: C’mon, he was Michael Lewis. He had extraordinary talents. Surely he was bound to succeed anyway.

Now, that may or may not be true.  We don’t get to run a thousand simulations in which we see how many times he becomes “Michael Lewis.”  But suppose that he wouldn’t have comparably succeeded in many or most of those simulations, even if he never got a heart attack or was buried by a hay bale. What would we learn?

Maybe it’s just attitudinal. Even if you’re highly successful, you should retain proper humility and compassion.

My own answer is that the role of luck, which Bob highlights in his papers, doesn’t matter all that much substantively to how we should think about high-end inequality.  But it might matter not just attitudinally in people’s private thoughts, but also rhetorically in public policy debate.

I think it matters rhetorically due to what I’d call the ideology around meritocracy.  We live in a society where everyone who’s successful claims to have earned it. It’s not just Donald Trump pretending that he didn’t get $14 million from his dad. It’s all kinds of people who were born on third base and believe they hit a triple.

Meritocracy becomes toxic when it divides the world into deserving “winners” and stupid, pathetic “losers,” and that’s where I think our culture often is these days.

Correcting attitudes become all the more important when we have winner-take-all markets.  One person makes a billion & the second makes nothing. Even if the winner was a hair “better,” not just a hair luckier or five seconds earlier, the discontinuity between relative merit and relative reward is well worth keeping in mind.

But suppose all market outcomes were fixed given people’s genetic endowments.  It would still be brute luck what genetic endowment you had.  And it would still be brute luck how your particular talents happened to fit your particular environment.  For example, how much would Michael Lewis’ particular endowments help him in modern Somalia, or 12^th century England?

If you think of Shaquille O’Neal as having been lucky, not just to be over 7 feet tall but to live in a society with millions of basketball fans, you’ll have a point in mind that applies far more generally.

So for me, realizing that successful people were often lucky, in the sense of Michael Lewis and the dinner conversation with the Salomon spouse, doesn’t do that much work, for three reasons.

First, I already knew it was true.

Second, I define luck broadly enough that it had to be true.

Third, I don’t subscribe to a theory of distributive desert that’s based on inherently deserving what you’ve earned.

Instead, for me the rationale for property rights and keeping tax rates at reasonable levels is just about incentives & their effects on behavior.  But admittedly we (including I) have intuitions about desert that are not entirely reducible to this.

2. What (if anything) is wrong with high-end inequality?

In the public economics literature, often the only reason for mitigating high-end inequality is the declining marginal utility.  You’d never reduce a rich person’s wealth by a dollar unless at least a penny, or some fraction of it, was successfully transferred to someone else.  This follows from the standard assumption that people only derive utility from own consumption.

Bob challenges this approach by emphasizing the importance of status and relative position, which are affected by relative consumption.  Plus, he posits socially costly expenditure cascades from the top on down.

I myself tend to agree with these points, but I want to note a few possible objections.

First, it’s often argued that all this is just “envy” and should be discounted.  This combines a descriptive claim about people who care about relative position, with a normative claim about envy’s unworthiness to be counted.

Second, recall the old phrase “keeping up with the Joneses.” Suppose that relative position matters more laterally, between peers, than it does vertically, or from the super-rich on down.  Then we might want to tax positional goods relative to non-positional goods, but with no particular reference to rich versus poor.

One definition of positional goods might be market consumption generally, as distinct from leisure. So we might want a high rate of consumption tax, as a kind of pollution tax on negative externalities, but it wouldn’t necessarily be progressive.

Third, what if high-end inequality has positive externalities as well as negative ones? An example might be, the market for luxury goods, including high-end healthcare, leads to technological advances that then become cheap to provide for everyone.  So why limit the analysis to negative externalities from high-end inequality?

Two upcoming panel appearances

In each of the next two weeks, I will be speaking (probably for about 15 minutes each time) on an international tax panel that is meeting in the NYC area.  In each case, I plan to post a version of my remarks here afterwards.

First, next Friday, October 28, NYU Law School will be hosting an event (as I've mentioned here previously) called Divergent Country Views of Base Erosion and Profit-Shifting.  Details available here.  I'll be moderating and commenting on a panel that meets from 8:15(!) to 9:45 am, discussing the European Commission's state aid cases.

At this session, I will not be just reprising my recent Tax Notes paper on the topic, which is available here.  For example, I will focus much more than I did in that paper on the relevance of "source" issues to the analysis.

Second, on Wednesday, November 2, from 6 to 8:30 pm, I'll be participating in a session sponsored by the New York City Bar Association (and held at the NYC Bar building, 42 West 44th Street), entitled Beyond Labels: Exploring the Revised Scope of the Final and Temporary Section 385 Debt-Equity Recharacterization Regulations.  Details are available here.

I'll be speaking towards the back end, maybe at 7:45 or so.  As we will already, by then, have extensively discussed the nuts-and-bolts aspects of the topic, I'll offer a more big-picture perspective on three issues: the use of regulations instead of legislation to address corporate inversions, issues around Treasury regulatory discretion and court challenges to regs generally, and the prospects for international tax reform that includes addressing earnings-stripping via the use of interest deductions.

Musical tidbit

I've started listening to Big Star's Complete Third on Spotify.  The first third of it is demos from the start of this famous and ill-fated project - stunningly beautiful solo acoustic performances by Alex Chilton of great songs that generally ended up on the album.

Paper on the Treasury White Paper and EU state aid posted on SSRN

With permission, I have now posted on SSRN my paper on the Treasury White Paper and the EU state aid cases, which appeared in Tax Notes and Tax Notes International on September 19 of this year. It's available here.

UPDATE: The piece was temporarily taken down by SSRN, because it requires permission from Tax Notes, which I have.  I've communicated this (with relevant proof) to SSRN, and I am hoping it will be back up soon.

FURTHER UPDATE: Ah, we're back in business.  I thnk it's the same link as previously, but just to be sure, use this.

A partly supply-side theory of Trumpism

A recent Vox column by Dylan Matthews exposes the fatuity, or at least inaccuracy, of widespread assumptions that Trump voters, however unworthy their ranting idol, have economic grievances that reflect their "living on the edges of the economy" and having been "left behind."  To the contrary, their "median household income [is] $72,000, a fair bit higher than the $62,000 median household income for non-Hispanic whites in America .... Trump support [is] correlated with higher, not lower, income, both among the population as a whole and among white people. Trump supporters were less likely to be unemployed or to have dropped out of the labor force. Areas with more manufacturing, or higher exposure to imports from China, were less likely to think favorably of Trump."

Instead, support for Trump correlates with racial resentment, which, in turn, I believe, often correlates with living in all-white communities where one doesn't actually meet or get to know African-Americans or non-white immigrants..

It's widely recognized that Trumpism also reflects people's living in a bubble where the only media or other information sources that they get to see are those confirming their ideological biases.  Needless to say, this phenomenon is not limited to Trump supporters, and it's always unhealthy even if not always this toxic.

In this regard, however, I thought of two things that might usefully be put together.  First, a shout-out to Cass Sunstein, who wrote about the self-selected media bubble phenomenon as early as 2002 in his book Republic.com (the revised or "2.0" edition of which is available here).

Second, I thought of something I heard about many years ago, when the post-Yugoslavian civil war between Serbs and Croats was at its height.  I heard it said (via someone who grew up in Yugoslavia during the Tito era) that, for many years, intense Serb versus Croat ethnic identification was very much on the wane, at least in areas where members of both groups lived. It really seemed to be something from the past. There was intermarriage, people didn't strongly identify with their groups or stay away from the other one, etcetera.  But then, of course, when the larger state broke up, ambitious Serb and Croat politicians deliberately took the opportunity to stir up ethnic hatred and violence as a way of strengthening their own political positions.

The fact that this proved so successful showed that people still remembered enough of those old hatreds to be capable of sinking back into them. The haters on both sides are fully morally responsible for what they became. But it was also an act of insidious political entrepreneurship by the leaders who chose to stir up the hatred, because they saw that it would be to their advantage.

I think there is something similar going on with Trumpism.  Media entrepreneurs, from Fox News to the further-out fringes, have seen that they could build their audiences by exciting racial and ethnic hatred. Their consumers evidently decided to embrace this, but also were probably changed by exposure to it.  So one can see this in part as a John Kenneth Galbraith-type manipulative advertising story, in which the entrepreneurs take an active role in shaping people's preferences, albeit requiring those people willingly to take the first, second, and third steps themselves.

This is a point that one could add to Sunstein's Republic.com analysis.  Not only do people retreat into like-minded media bubbles, thus entirely separating their realities from each others' realities, but there's an entrepreneurial environment in which extremism and hatred "sell."  Thus, powerful market incentives invite creating the sort of monstrous dysfunctionality that we see rampant in the 2016 presidential campaign.

I have no particular proposal to make about all this, but it might help one better to understand Trumpism, and in particular the nihilistic rage and hatred that seems to have consumed people who often aren't doing all that terribly.

Sleep of the innocent

Some of us are lucky enough not to know anything about our toxic presidential election.

NYU Colloquium on High-End Inequality - starting next Monday (October 24)!

Long-planned but finally approaching, our half-semester NYU Law School Colloquium on High-End Inequality is finally starting next Monday.  Robert Frank of Cornell University and I will be the co-convenors.  Sessions will meet at the main NYU Law School building, Vanderbilt Hall (40 Washington Square South) from 4:10 to 6 pm.  A small group will go to dinner after each session; those who wish to go to a particular dinner (subject to space availability) should get in touch with us.

The sessions are open to the public.  Papers should shortly become available online, but in any event we'll be sending them out in weekly emails to all who ask to be put on the email distribution list.

The schedule is as follows:

October 24 – Robert Frank, Cornell University. 5 short pieces: (1) Why Has Inequality Been Growing?, (2)Why Luck Matters More Than You Might Think, (3) Does Inequality Matter?, (4) Why have weddings and houses gotten so ridiculously expensive? Blame inequality, and (5) The Progressive Consumption Tax.  Guest commentator: K. Anthony Appiah, NYU Philosophy Department.

October 31 – Kate Pickett, Department of Health Sciences, University of York.  (1) Income Inequality and Health: A Causal Review; (2) The Enemy Between Us: The Psychological and Social Costs of Inequality (both co-authored by Richard Wilkinson).

November 7 – Ilyana Kuziemko, Princeton University Economics Department.  Support for Redistribution in an Age of Rising Inequality: New Stylized Facts and Some Tentative Explanations (coauthored by Vivekinan Ashok and Ebonya Washington).

November 14 – Alan Viard, American Enterprise Institute.  Progressive Consumption Taxation: The X Tax Revisited (chapters 1-3) (coauthored by Robert Carroll)

November 21 – Daniel Shaviro, NYU Law School.  The Mapmaker’s Dilemma in Evaluating High-End Inequality.  Guest commentator: Liam Murphy, NYU Law School.

November 28 – Adair Morse, Haas School of Business, University of California at Berkeley.  Trickle-Down Consumption (coauthored by Marianne Bertrand).

December 5 – Daniel Markovits, Yale Law School.  Meritocracy and Its Discontents.

Where we are as a country

People at Trump rallies are openly calling for the sexual assault accusers to be jailed - as well as for Election Day violence and voter intimidation, the murder of Hillary Clinton if she wins (they might settle for jailing her if she loses), and violent revolution if she wins. Trump has also been very clear that "unfair" reporting alone is enough to render the outcome "rigged." So absent pro-Trump advance censorship he will reject the voters' verdict.

Global Tax Conference at NYU

On Friday, October 28, from 8 am to 4:30, we'll be hosting a conference at NYU Law School (in Vanderbilt Hall, room 210) entitled Divergent Country Views of Base Erosion and Profit-Shifting. This is a follow-up to the June 1 conference on OECD-BEPS that we co-sponsored in Amsterdam with that event's hosts (and co-sponsors this time as well), the Amsterdam Centre for Tax Law.  More information, including re. how to register, is available here.

The conference will feature divergent views - the title is definitely right about that - from academics, practitioners, and business people from the U.S., the EU, and Brazil, regarding OECD-BEPS, the EU state aid cases, country-by-country reporting, and less-developed-countries' issues with treaties.  Indeed, here is the schedule:

8:15 AM – 9:45 AM:  Panel 1:  European Commission State Aid Cases

• Dan Shaviro (NYU Law) (moderator)

• Itai Grinberg (Georgetown Law Center)

• Hein Vermeulen (University of Amsterdam)

• Dennis Webber (University of Amsterdam)

9:45 AM – 10:00 AM:  Coffee Break

10:00 – 11:30 AM:  Panel 2: Predictive Value of BEPS Country-by-Country Reports

• Joshua Blank (NYU Law) (moderator)

• Steve Wrappe (KPMG)

• David Ernick (PwC)

• Reena Bhatt (Geller & Company)

11:30 AM – 1:00 PM:  Lunch Break

 Afternoon Session (Vanderbilt Hall Room 204)

1:00 PM – 2:30 PM:  Panel 3: Less Developed Countries and Tax Treaties

• Rick Reinhold (Willkie Farr & Gallagher) (moderator)

• Steve Dean (Brooklyn Law School)

• Lily Faulhaber (Georgetown Law Center)

• Michael Lennard (UN – by video)

2:30 PM – 3:00 PM: Coffee Break

3:00 PM – 4:30 PM Panel 4: US Compliance with the OECD BEPS Project

• Mitchell Kane (NYU Law) (moderator)

• Stephen Shay (Harvard Law School)

• Dennis Webber (University of Amsterdam)

• Gustavo Vettori (Fundação Getúlio Vargas)

4:30 PM:  Concluding Remarks