On March 31, a book called The Timing of Lawmaking, edited by Frank Fagan and Saul Levmore, will come out via Edward Elgar Publishing. Further information about the book is available here.
One of the articles in the volume is my piece, The More It Changes, The More It Stays the Same? Automatic Indexing and Current Policy. I posted an earlier draft on SSRN here.
Here is an abstract for the volume as a whole: "Legal reasoning, pronouncements of judgment, the design and implementation of statutes, and even constitution-making and discourse all depend on timing. This compelling study examines the diverse interactions between law and time, and provides important perspectives on how law's architecture can be understood through time. The book revisits older work on legal transitions and breaks new ground on timing rules, especially with respect to how judges, legislators, and regulators use time as a tool when devising new rules. At its core. The Timing of Lawmaking goes directly to the heart of the most basic of legal debates: when should we respect the past, and when should we make a clean break for the future?"
The abstract for my chapter says (or said) that it "addresses issues associated with automatically indexing fiscal policies, such as those in the U.S. income tax and Social Security systems. Under indexing, a statistical measure - pertaining, for example, to inflation, wage levels, life expectancy, or income inequality - is used to determine changes to nominal legal rules that then take effect automatically. One possible reason for favoring automatic indexing is that it may keep the underlying policy, by some metric, 'the same' as empirical circumstances change. While indexing often makes sense, from the standpoint of a policymaker whose long-term preferences it would keep in place barring further legislative action, identifying the set of 'current policies' that one might want to perpetuate (or change) can be surprisingly difficult. The paper explores broader conceptual issues pertaining to policy continuity and competing objectives when legislation remains on the books indefinitely, with particular reference to examples drawn from the history of the U.S. income tax and Social Security."
Contributors to the volume, other than the two editors and me, listed in the order in which their chapters appear, are David Kamin, Daniel Farber, Tom Ginsburg & Eric Alston, Jacob Gersen & Jeannie Suk, Adam Samaha, Martha Nussbaum, Anthony Niblett, and Mark Ramseyer.
Wednesday, March 29, 2017
Tuesday, March 28, 2017
Short article just published
In October 2015, I participated in a conference at Brooklyn Law School, entitled "Reconsidering the Tax Treaty." I wrote a short article for the occasion (about 3,500 words), entitled "The Two Faces of the Single Tax Principle."
A Brooklyn Journal of International Law symposium issue, based upon the conference, is now available online, and my piece is available here.
A Brooklyn Journal of International Law symposium issue, based upon the conference, is now available online, and my piece is available here.
NYU Tax Policy Colloquium, week 9: Len Burman & Kim Clausing, "Is U.S. Corporate Income Double-Taxed?"
Yesterday Len Burman presented the above co-authored piece, which is still an incomplete draft hence not posted online. It confirms, through distinct data, the finding in Steven Rosenthal's and Lydia Austin's widely noticed 2016 study to the effect that these days only about 30 percent of U.S. corporate equity is held in taxable accounts - as opposed to more than 80% fifty years ago. The main reasons for this decline are the rise of (1) foreign ownership of U.S. shares - although this remains a bit low, relative to the scenario in which home equity bias had entirely disappeared, (2) the holding of corporate stock in tax-free savings accounts such as traditional and Roth IRAs and 401(k)s, along with 529s, and (3) stock ownership by nonprofits.
Should we think of stock held in a traditional IRA or 401(k), in which contributions are deducted upfront and withdrawals are taxed at the backend, as actually tax-exempt? The answer is yes, given that the present value of one's tax liability from the account is zero, if we assume both (a) that the account just earns normal returns that the taxpayer can't scale up (a la Mark Zuckerberg hypothetically deciding to create two comparably profitable Facebooks rather than just one), and (b) that the taxpayer's marginal rate is the same at the contribution and withdrawal stages. Given the deduction limits for these types of tax-favored savings accounts, along with the fact that most people are just putting in publicly traded stock as to which they have no reason to expect special-opportunity above-normal returns, I'm fine with classifying them as tax-exempt for purposes of the studies, so long as we keep the nuances in mind.
The most obvious takeaway from the Rosenthal-Austin and Burman-Clausing bottom lines is that "double taxation" is less of an issue than many analyses of corporate income taxation tend to assume. This may reduce the appeal and urgency of treating corporate integration as a top priority, although it doesn't rebut the existence of the distortions that proponents of integration emphasize.
A further set of takeaways that I get pertain to how we should think about the existing two levels of taxation. These studies help remind us that, if one eliminated the entity-level tax and shifted corporate tax collection purely to the shareholder level (e.g., by taxing dividends and capital gains more rigorously), we would eliminate the existing indirect taxation of tax-exempts and foreigners via the entity-level tax. But the arguments for structural reform of the corporate tax, and for shifting to the owner level, are distinct from the issues around how we ought to tax (or not tax) tax-exempts and/or foreigners who or that hold U.S. equity. So those issues ought to be addressed if one is changing the entity-level tax. (For my money, there is no reason to extend the effective reach of tax-exempts' nominal exemption by letting them escape the tax that they are now indirectly paying; for foreigners the key question for me is incidence: to what extent are they actually bearing the tax?)
What about the owner level? If we're relying more on taxes on this level, it's important to consider features such as interest charges for deferral plus realization at death (as in a recent Grubert-Altshuler proposal), or taxing unrealized appreciation for publicly traded stock (as in a recent Toder-Viard proposal).
But also, at the owner level we may be changing somewhat the mix of income that is being taxed. A not very important example, just to make the basic point, is that if a corporation earns municipal bond income and then uses it to pay dividends, there is no tax at the entity level but there is a taxable dividend. Likewise, there's capital gain if the bond interest leads to stock appreciation and thus capital gain on sale. Obviously, a more important example than this is capital gain to shareholders who sell the stock of U.S. multinationals that have appreciated by reason of their earning huge unrepatriated foreign profits.
In sum, we have these two levels of corporate tax, each frequently avoided, thereby reducing the amount of actual double taxation, and each, at present, bearing differently from the other on distinct types of persons or income. So there are extra complications to keep in mind when one is revising corporate income taxation at one level or the other. Things would be a lot simpler if the two levels applied less distinctively from each other.
Keeping both taxes, even if their degree of integration is improved, is one possible takeaway. Most (but perhaps not all) people in the biz favor lowering the U.S. corporate rate from 35% - say to something in the 15% to 25% range - if this can be done in a manner that is budget-neutral and distribution-neutral. (Among the issues that would have to be addressed, however, is use of the corporate form as a lower-rate tax shelter, e.g., by owner-employees who underpay themselves from the salary standpoint because they are also benefiting from stock appreciation.) The rationale commonly offered is that this would reduce distortions in multiple dimensions (choice of entity, debt vs. equity financing, profit-shifting within a multinational group, etc.)
Why doesn't this argument suggest lowering the corporate rate all the way to zero? After all, then these distortions disappear, rather than merely being mitigated somewhat. Well, to proponents of replacing the existing corporate income tax with a destination-based cash flow tax, it does. But if, as a political economy or administrative matter, one needs both levels of tax in order to accomplish various distinct things that one values, then on balance one might want to retain both levels of tax, with or without express integration mechanisms - as do, for example, both the Grubert-Altshuler and Toder-Viard proposals.
Should we think of stock held in a traditional IRA or 401(k), in which contributions are deducted upfront and withdrawals are taxed at the backend, as actually tax-exempt? The answer is yes, given that the present value of one's tax liability from the account is zero, if we assume both (a) that the account just earns normal returns that the taxpayer can't scale up (a la Mark Zuckerberg hypothetically deciding to create two comparably profitable Facebooks rather than just one), and (b) that the taxpayer's marginal rate is the same at the contribution and withdrawal stages. Given the deduction limits for these types of tax-favored savings accounts, along with the fact that most people are just putting in publicly traded stock as to which they have no reason to expect special-opportunity above-normal returns, I'm fine with classifying them as tax-exempt for purposes of the studies, so long as we keep the nuances in mind.
The most obvious takeaway from the Rosenthal-Austin and Burman-Clausing bottom lines is that "double taxation" is less of an issue than many analyses of corporate income taxation tend to assume. This may reduce the appeal and urgency of treating corporate integration as a top priority, although it doesn't rebut the existence of the distortions that proponents of integration emphasize.
A further set of takeaways that I get pertain to how we should think about the existing two levels of taxation. These studies help remind us that, if one eliminated the entity-level tax and shifted corporate tax collection purely to the shareholder level (e.g., by taxing dividends and capital gains more rigorously), we would eliminate the existing indirect taxation of tax-exempts and foreigners via the entity-level tax. But the arguments for structural reform of the corporate tax, and for shifting to the owner level, are distinct from the issues around how we ought to tax (or not tax) tax-exempts and/or foreigners who or that hold U.S. equity. So those issues ought to be addressed if one is changing the entity-level tax. (For my money, there is no reason to extend the effective reach of tax-exempts' nominal exemption by letting them escape the tax that they are now indirectly paying; for foreigners the key question for me is incidence: to what extent are they actually bearing the tax?)
What about the owner level? If we're relying more on taxes on this level, it's important to consider features such as interest charges for deferral plus realization at death (as in a recent Grubert-Altshuler proposal), or taxing unrealized appreciation for publicly traded stock (as in a recent Toder-Viard proposal).
But also, at the owner level we may be changing somewhat the mix of income that is being taxed. A not very important example, just to make the basic point, is that if a corporation earns municipal bond income and then uses it to pay dividends, there is no tax at the entity level but there is a taxable dividend. Likewise, there's capital gain if the bond interest leads to stock appreciation and thus capital gain on sale. Obviously, a more important example than this is capital gain to shareholders who sell the stock of U.S. multinationals that have appreciated by reason of their earning huge unrepatriated foreign profits.
In sum, we have these two levels of corporate tax, each frequently avoided, thereby reducing the amount of actual double taxation, and each, at present, bearing differently from the other on distinct types of persons or income. So there are extra complications to keep in mind when one is revising corporate income taxation at one level or the other. Things would be a lot simpler if the two levels applied less distinctively from each other.
Keeping both taxes, even if their degree of integration is improved, is one possible takeaway. Most (but perhaps not all) people in the biz favor lowering the U.S. corporate rate from 35% - say to something in the 15% to 25% range - if this can be done in a manner that is budget-neutral and distribution-neutral. (Among the issues that would have to be addressed, however, is use of the corporate form as a lower-rate tax shelter, e.g., by owner-employees who underpay themselves from the salary standpoint because they are also benefiting from stock appreciation.) The rationale commonly offered is that this would reduce distortions in multiple dimensions (choice of entity, debt vs. equity financing, profit-shifting within a multinational group, etc.)
Why doesn't this argument suggest lowering the corporate rate all the way to zero? After all, then these distortions disappear, rather than merely being mitigated somewhat. Well, to proponents of replacing the existing corporate income tax with a destination-based cash flow tax, it does. But if, as a political economy or administrative matter, one needs both levels of tax in order to accomplish various distinct things that one values, then on balance one might want to retain both levels of tax, with or without express integration mechanisms - as do, for example, both the Grubert-Altshuler and Toder-Viard proposals.
Sunday, March 26, 2017
A contrast in styles
On both Thursday night and Saturday night, I saw concerts in Town Hall at West 43rd Street (a very nice smallish setting, apart from being a bit low on bathrooms). However, despite the respective artists' having been born just 12 years apart and having some overlap in influences, the two shows and bands were pretty different.
On Thursday night, it was Yo La Tengo performing a show entitled "And Then Yo La Tengo Turned Itself Inside Out." Despite the reference to their album, "And Then Nothing Turned Itself Inside Out," only three or so of the tracks they played were from the album, most notably "Autumn Sweater." While they rocked out occasionally, a lot of it was jazzy and improvisational, with the aid of a 4-piece horn section plus extra guitarist, drummers, and harpist. Very intense and New York cool - a lot of frowning concentration and interplay between the musicians, but not much gab to the audience apart from introducing the guest performers.
On Saturday night, it was the Zombies of 1960s quasi-fame. The first set was a potpourri, including a couple of songs from their 2015 album. The second set consisted of "Odessey and Oracle"(sic), their subsequently celebrated (though at the time ignored) baroque pop classic from early 1968. Broadly smiling, happy to be there, at this late date, with a good-sized and receptive audience, earnestly recounting stories about particular songs with apologies to those who had already heard them, expressing pride in their old work but wishing people were more eager to hear their new material, etc.
The Zombies also have a range of styles, from ballad to more rave-up, but they're very much in McCartney's 1960s territory. However, they don't sound like they're imitating him (apart from a track on Odessey, called A Rose for Emily, that might be a bit of an Eleanor Rigby rewrite). Instead, they just seem to have similar DNA, including the tunefulness, use of piano-based songwriting, rich harmonies that also show a Beach Boys influence, multiple musical ideas in the same song, and wistfulness without bitterness. Although my technical musical knowledge is extremely limited, they also seem to use more odd chords (III and VI for starters, and with plenty of minor keys) than anyone else of the era apart from the Beatles.
Their only really famous songs are She's Not There, Tell Her No, and Time of the Season (plus Hold Your Head Up from keyboardist Rod Argent's 1970s band). But Odessey and Oracle is well worth a listen if you're the sort who likes Sgt Pepper and Pet Sounds, and who wishes that Satanic Majesties were as good as the Stones' psychedelic singles (Dandelion, She's a Rainbow, Ruby Tuesday, Paint It Black, Lady Jane, etc.).
On Thursday night, it was Yo La Tengo performing a show entitled "And Then Yo La Tengo Turned Itself Inside Out." Despite the reference to their album, "And Then Nothing Turned Itself Inside Out," only three or so of the tracks they played were from the album, most notably "Autumn Sweater." While they rocked out occasionally, a lot of it was jazzy and improvisational, with the aid of a 4-piece horn section plus extra guitarist, drummers, and harpist. Very intense and New York cool - a lot of frowning concentration and interplay between the musicians, but not much gab to the audience apart from introducing the guest performers.
On Saturday night, it was the Zombies of 1960s quasi-fame. The first set was a potpourri, including a couple of songs from their 2015 album. The second set consisted of "Odessey and Oracle"(sic), their subsequently celebrated (though at the time ignored) baroque pop classic from early 1968. Broadly smiling, happy to be there, at this late date, with a good-sized and receptive audience, earnestly recounting stories about particular songs with apologies to those who had already heard them, expressing pride in their old work but wishing people were more eager to hear their new material, etc.
The Zombies also have a range of styles, from ballad to more rave-up, but they're very much in McCartney's 1960s territory. However, they don't sound like they're imitating him (apart from a track on Odessey, called A Rose for Emily, that might be a bit of an Eleanor Rigby rewrite). Instead, they just seem to have similar DNA, including the tunefulness, use of piano-based songwriting, rich harmonies that also show a Beach Boys influence, multiple musical ideas in the same song, and wistfulness without bitterness. Although my technical musical knowledge is extremely limited, they also seem to use more odd chords (III and VI for starters, and with plenty of minor keys) than anyone else of the era apart from the Beatles.
Their only really famous songs are She's Not There, Tell Her No, and Time of the Season (plus Hold Your Head Up from keyboardist Rod Argent's 1970s band). But Odessey and Oracle is well worth a listen if you're the sort who likes Sgt Pepper and Pet Sounds, and who wishes that Satanic Majesties were as good as the Stones' psychedelic singles (Dandelion, She's a Rainbow, Ruby Tuesday, Paint It Black, Lady Jane, etc.).
Tuesday, March 21, 2017
NYU Tax Policy Colloquium, week 8: Daniel Hemel's "The Federalist Safeguards of Progressive Taxation"
Yesterday we resumed after spring break, and dipped a toe into the deep blue waters of constitutional law. Daniel Hemel's paper looks at three recent developments in federalism doctrine, viewed by many as efforts by a conservative Supreme Court to kneecap liberal legislation, and argues that they increase the progressivity of the overall U.S. tax system (counting all levels of government).
First, a couple of brief thoughts on federalism doctrine and practice. Leaving aside some constitutional law professors and perhaps judges, my Rule 1 about federalism arguments in the political process - i.e., discussions of whether state governments should be able to set policies distinct from or even antithetical to those being pursued at the national level - is as follows: Almost everyone is almost always hypocritical.
I don't mean this to impugn people (much though it may sound like it). The thing is, almost everyone cares far more about substantive issues than about which level of government should get to decide things. So, when their side controls the national government, they want the states to have to fall in line, and when the other side controls the national government, they want "their" states to be able to diverge, So people are hypocritical about federalism, not because they're hypocrites, but because it isn't really what they care about.
Modern examples, of course, include the Medicaid expansion, gun or abortion or immigration policies, etc. But I learned the basic lesson about this before I was 20 years old, as an American history major in college. When New England Federalists controlled the national government under Washington, the Virginians were all about "states rights." Then, when the Virginians took over, New Englanders started to talk that way during the Embargo / War of 1812 era. Then of course we all know about the South during the run-up to the Civil War, except that they wanted broad and aggressive federal powers to require enforcement of the Fugitive Slave Act. So one doesn't even need the modern history regarding civil rights and "states' rights" to know the basic score.
But back to the Hemel paper. He notes three constitutional doctrines in the area of federalism that recent Supreme Court jurisprudence has emphasized, all viewed by many as conservative moves, and argues that they will have progressive effects. I'll just discuss two of the doctrines here: anti-commandeering and anti-coercion (the third pertains to sovereign immunity).
Anti-commandeering featured in a recent case, Printz, that barred the federal government (through the Brady Handgun Violence Protection Act) from requiring state and local officials to run background checks on prospective handgun purchasers. The idea was that the feds can't requisition local officials to perform federal tasks.
Anti-coercion featured, I gather not very coherently, in the ACA case (NFIB), where the Roberts opinion said the feds couldn't tell states that they'd lose all their Medicaid funding if they didn't extend coverage to people up to 133% of the poverty line, even though the expansion was funded for a number of years. This apparently was too much a "gun to the head." Some gun, I'd say, and the lack of sharp intellectual contours becomes clearer when one asks: What if Medicaid had included the higher coverage as part of its package from the very start? This of course led to the extraordinary spectacle of Republican governors turning down what was in effect free money for many of their poorer residents. (This, of course, is a drama that continues to play out, with states increasingly accepting the expanded coverage, and the current excitement about Paul Ryan's effort to ... well, if I simply described what he is trying to do it would sound partisan.)
Anyway, the constitutional literature has apparently noted that what all this means, in terms of the allocation of powers, is not that the feds can't use the state governments to advance their own ends in either scenario, but that they need to get consent. So two big favorites of modern legal scholarship - the Coase Theorem and the distinction between property and liabiltiy rules - have been deployed to describe the doctrines' effects.
The Coase idea is that the entitlement to use state government services belongs to the states, not to the feds. So we have an assignment of property rights that can be followed (depending on transaction costs) by bargaining to achieve the net-optimal outcome for the parties. Suppose the only issue raised in both of the above settings - rather than pertaining to ideology and politics around handguns, health care, etc. - was administrative cost. E.g., suppose the federal government could do something at the state and local level at a cost of $12, but the state government could do it for only $10. Then one might expect the feds to offer the state, say, $11 to do it. But if the feds could command the state to do it, the only immediate and direct difference (in the world of this little hypothetical) would be that the state doesn't get the $11. But if it cost the state $12 and the feds could do it for just $10 and the feds could command the state to do it, the deal would go the other way - the state would pay the federal government $11 for permission to beg off.
I don't actually find this an enormously illuminating or realistic way to think about either the handgun checks or the Medicaid expansion. But that's the literature as Hemel finds it. His point is that the anti-coercion and anti-commandeering rules, if these Coasean deals take place, make the federal government "poorer" and the state governments "richer" than under the opposite rule. More on that in a moment.
Turning to property rules vs. liability rules, the paper notes that the states have a "property" right since the feds wouldd need them to agree voluntarily to "sell" it (as in the case where they accept the Medicaid expansion or agree to do gun checks conditioned on the feds, say, paying for the services provided). It's not inalienable - the state can agree to do it - and it's also not a "liability" rule, as it would be if the feds could "commandeer" but then could be sued and required to pay compensation.
The liability rule version of this, though fanciful, offers a useful thought experiment. Suppose the feds could have required the handgun checks, subject only to compensating states financially for the cost of in effect lending out their personnel to do federal jobs. I imagine that the officials in pro-gun states would have remained unthrilled - presumably, political views about gun policy were central to this dispute. Likewise, in the Medicaid example, the states actually were being substantially compensated, and I doubt that the prospect of having to pay more down the road was really central to the reluctance (how often do governors of any party think that far ahead when they have a chance to get current big $$ for their constituents?). So the "liability" rule, if it defined compensable damages in terms of the administrative costs to the state and local governments, would be friendlier to federal power than the "property" rule. (But if we imagined other compensable harms, such as from some measure of the state officials' subjective reluctance to pursue policies they disliked unless the state was given a whole lot more money, it would start to look more similar to the property rule.)
Anyway, the paper's main argument is that, since federal tax financing is significantly more progressive than state tax financing, requiring the feds to buy off the state governments might be expected to increase revenue-raising by the former and lower it by the latter. Hence, absent other adjustments, which the paper does extensively consider, the result would be to make overall tax financing more progressive. This is a nice point. But it is offset to a degree if the big-money policies that the feds want to pursue but can't due to their inability to purchase state cooperation, would tend to be progressive ones a la Medicaid expansion.
First, a couple of brief thoughts on federalism doctrine and practice. Leaving aside some constitutional law professors and perhaps judges, my Rule 1 about federalism arguments in the political process - i.e., discussions of whether state governments should be able to set policies distinct from or even antithetical to those being pursued at the national level - is as follows: Almost everyone is almost always hypocritical.
I don't mean this to impugn people (much though it may sound like it). The thing is, almost everyone cares far more about substantive issues than about which level of government should get to decide things. So, when their side controls the national government, they want the states to have to fall in line, and when the other side controls the national government, they want "their" states to be able to diverge, So people are hypocritical about federalism, not because they're hypocrites, but because it isn't really what they care about.
Modern examples, of course, include the Medicaid expansion, gun or abortion or immigration policies, etc. But I learned the basic lesson about this before I was 20 years old, as an American history major in college. When New England Federalists controlled the national government under Washington, the Virginians were all about "states rights." Then, when the Virginians took over, New Englanders started to talk that way during the Embargo / War of 1812 era. Then of course we all know about the South during the run-up to the Civil War, except that they wanted broad and aggressive federal powers to require enforcement of the Fugitive Slave Act. So one doesn't even need the modern history regarding civil rights and "states' rights" to know the basic score.
But back to the Hemel paper. He notes three constitutional doctrines in the area of federalism that recent Supreme Court jurisprudence has emphasized, all viewed by many as conservative moves, and argues that they will have progressive effects. I'll just discuss two of the doctrines here: anti-commandeering and anti-coercion (the third pertains to sovereign immunity).
Anti-commandeering featured in a recent case, Printz, that barred the federal government (through the Brady Handgun Violence Protection Act) from requiring state and local officials to run background checks on prospective handgun purchasers. The idea was that the feds can't requisition local officials to perform federal tasks.
Anti-coercion featured, I gather not very coherently, in the ACA case (NFIB), where the Roberts opinion said the feds couldn't tell states that they'd lose all their Medicaid funding if they didn't extend coverage to people up to 133% of the poverty line, even though the expansion was funded for a number of years. This apparently was too much a "gun to the head." Some gun, I'd say, and the lack of sharp intellectual contours becomes clearer when one asks: What if Medicaid had included the higher coverage as part of its package from the very start? This of course led to the extraordinary spectacle of Republican governors turning down what was in effect free money for many of their poorer residents. (This, of course, is a drama that continues to play out, with states increasingly accepting the expanded coverage, and the current excitement about Paul Ryan's effort to ... well, if I simply described what he is trying to do it would sound partisan.)
Anyway, the constitutional literature has apparently noted that what all this means, in terms of the allocation of powers, is not that the feds can't use the state governments to advance their own ends in either scenario, but that they need to get consent. So two big favorites of modern legal scholarship - the Coase Theorem and the distinction between property and liabiltiy rules - have been deployed to describe the doctrines' effects.
The Coase idea is that the entitlement to use state government services belongs to the states, not to the feds. So we have an assignment of property rights that can be followed (depending on transaction costs) by bargaining to achieve the net-optimal outcome for the parties. Suppose the only issue raised in both of the above settings - rather than pertaining to ideology and politics around handguns, health care, etc. - was administrative cost. E.g., suppose the federal government could do something at the state and local level at a cost of $12, but the state government could do it for only $10. Then one might expect the feds to offer the state, say, $11 to do it. But if the feds could command the state to do it, the only immediate and direct difference (in the world of this little hypothetical) would be that the state doesn't get the $11. But if it cost the state $12 and the feds could do it for just $10 and the feds could command the state to do it, the deal would go the other way - the state would pay the federal government $11 for permission to beg off.
I don't actually find this an enormously illuminating or realistic way to think about either the handgun checks or the Medicaid expansion. But that's the literature as Hemel finds it. His point is that the anti-coercion and anti-commandeering rules, if these Coasean deals take place, make the federal government "poorer" and the state governments "richer" than under the opposite rule. More on that in a moment.
Turning to property rules vs. liability rules, the paper notes that the states have a "property" right since the feds wouldd need them to agree voluntarily to "sell" it (as in the case where they accept the Medicaid expansion or agree to do gun checks conditioned on the feds, say, paying for the services provided). It's not inalienable - the state can agree to do it - and it's also not a "liability" rule, as it would be if the feds could "commandeer" but then could be sued and required to pay compensation.
The liability rule version of this, though fanciful, offers a useful thought experiment. Suppose the feds could have required the handgun checks, subject only to compensating states financially for the cost of in effect lending out their personnel to do federal jobs. I imagine that the officials in pro-gun states would have remained unthrilled - presumably, political views about gun policy were central to this dispute. Likewise, in the Medicaid example, the states actually were being substantially compensated, and I doubt that the prospect of having to pay more down the road was really central to the reluctance (how often do governors of any party think that far ahead when they have a chance to get current big $$ for their constituents?). So the "liability" rule, if it defined compensable damages in terms of the administrative costs to the state and local governments, would be friendlier to federal power than the "property" rule. (But if we imagined other compensable harms, such as from some measure of the state officials' subjective reluctance to pursue policies they disliked unless the state was given a whole lot more money, it would start to look more similar to the property rule.)
Anyway, the paper's main argument is that, since federal tax financing is significantly more progressive than state tax financing, requiring the feds to buy off the state governments might be expected to increase revenue-raising by the former and lower it by the latter. Hence, absent other adjustments, which the paper does extensively consider, the result would be to make overall tax financing more progressive. This is a nice point. But it is offset to a degree if the big-money policies that the feds want to pursue but can't due to their inability to purchase state cooperation, would tend to be progressive ones a la Medicaid expansion.
Wednesday, March 15, 2017
AMT nostalgia
As per this NYT op-ed, the 2005 Trump tax return is causing some people to salute the alternative minimum tax (AMT) and argue that it should be retained after all.
I actually wrote about this topic nearly 30 years ago, when I was just starting out in academics and reflecting on my legislative staff experience, which had included being on the team that made sure the AMT worked technically as intended. (It did.) But it has had few defenders since, and they haven't included me.
That said, I would want its repeal to be accompanied by adjusting overall revenue and distribution appropriately, which the Congressional Republicans obviously wouldn't do. But let's take a quick look at the relevance of the Trump tax return to the AMT issue.
In his 2005 tax return, Trump had about $150 million of regular adjusted gross income (AGI), reduced to about $50 million by what may have been the last of the late-1990s net operating losses (NOLs), and then to about 2/3 of that by itemized deductions. With predominantly capital gain remaining, he would have owed only about $5 million of tax, but the AMT raised this to about $36 billion total. This implies that his AMTI (alternative minimum taxable income) might have been in the neighborhood of $112 million or so.
Why was it (a) so much lower than AGI pre-NOLs, yet (b) so much higher afterwards? We don't know. So how in this case it was performing the backstop role, and how common that is for a broader range of circumstances, we also don't know.
A key point here is that there often is nothing wrong with allowing NOLs to reduce current year taxable income. If you genuinely lose $100 million in Year 1, and make $100 million in Year 2, that's a net of zero. But in Trump's case, of course, if that $100 million of NOLs was the last residue of his late 1990s gambit that enabled him to deduct more than $900 million of other people's losses that they also were deducting, then his NOL deduction was bad in a policy sense for that reason - but not relatedly to its being hit by the AMT (which generally allows NOLs, as computed for its purposes, anyway, albeit with a rule that stops their current year allowability 90% of the way to zero).
Certainly a bit random if, this time around, the AMT caused Trump to pay closer to the amount to what he arguably "ought" to have been paying, and not enough to induce one (or at least me) to endorse the darned thing, especially if it could be traded in for something with a better-designed impact on people at Trump's income level.
UPDATE: I'm quoted as follows in an article about the AMT:"The current AMT doesn't address sophisticated modern tax avoidance techniques - such as Larry Ellison ... getting a $1 salary and borrowing against the value of his appreciated stock, or companies such as Apple directing their global profits to tax haven subsidiaries."
I actually wrote about this topic nearly 30 years ago, when I was just starting out in academics and reflecting on my legislative staff experience, which had included being on the team that made sure the AMT worked technically as intended. (It did.) But it has had few defenders since, and they haven't included me.
That said, I would want its repeal to be accompanied by adjusting overall revenue and distribution appropriately, which the Congressional Republicans obviously wouldn't do. But let's take a quick look at the relevance of the Trump tax return to the AMT issue.
In his 2005 tax return, Trump had about $150 million of regular adjusted gross income (AGI), reduced to about $50 million by what may have been the last of the late-1990s net operating losses (NOLs), and then to about 2/3 of that by itemized deductions. With predominantly capital gain remaining, he would have owed only about $5 million of tax, but the AMT raised this to about $36 billion total. This implies that his AMTI (alternative minimum taxable income) might have been in the neighborhood of $112 million or so.
Why was it (a) so much lower than AGI pre-NOLs, yet (b) so much higher afterwards? We don't know. So how in this case it was performing the backstop role, and how common that is for a broader range of circumstances, we also don't know.
A key point here is that there often is nothing wrong with allowing NOLs to reduce current year taxable income. If you genuinely lose $100 million in Year 1, and make $100 million in Year 2, that's a net of zero. But in Trump's case, of course, if that $100 million of NOLs was the last residue of his late 1990s gambit that enabled him to deduct more than $900 million of other people's losses that they also were deducting, then his NOL deduction was bad in a policy sense for that reason - but not relatedly to its being hit by the AMT (which generally allows NOLs, as computed for its purposes, anyway, albeit with a rule that stops their current year allowability 90% of the way to zero).
Certainly a bit random if, this time around, the AMT caused Trump to pay closer to the amount to what he arguably "ought" to have been paying, and not enough to induce one (or at least me) to endorse the darned thing, especially if it could be traded in for something with a better-designed impact on people at Trump's income level.
UPDATE: I'm quoted as follows in an article about the AMT:"The current AMT doesn't address sophisticated modern tax avoidance techniques - such as Larry Ellison ... getting a $1 salary and borrowing against the value of his appreciated stock, or companies such as Apple directing their global profits to tax haven subsidiaries."
Wrong road for anti-Trump protestors
I tell a Village Voice reporter that, no, refusing to pay your federal income taxes isn't a good way to show opposition to Trump.
When the going gets tax, the tax profs go on TV
So yesterday, as I was innocently enjoying a snow day at home (and to a degree getting things done, as I was prepared for it), this Trump tax story broke. I heard about it early on, and ended up saying a few words on the Lawrence O'Donnell show after 10 pm.
I was then invited to appear on more TV shows today at 6:30 am and 10 am. The latter I turned down because enough is enough and I do have other things to do, but the former I accepted, despite the 5:30 am car service pickup. Then they called me at 5:15 am, while I was getting dressed, to tell me the gig was cancelled. Ah, the joys of live TV.
I suspect they cancelled because it turned out not to be that big a story, in reality / substance. The released information was too limited and anodyne to tell us much. So I am open to the view that is being widely expressed that Trump may have leaked this himself. (In support of that theory, note how promptly and indeed efficiently the White House responded to word of the leak, essentially by confirming the numbers - is that how this White House typically operates?)
There's not a vast ocean of things that we learn from the leaked 1040, but here are a few quick thoughts:
--He seems to have used up the OPM (other people's money) $900 million NOL that he got in the 1990s, even assuming, as seems reasonable but not certain, that the $100 million loss on the return is the last dregs of that.
--Since he did pay some federal income tax in this year, his reason for hiding his tax returns isn't that they would show he never paid any federal income tax. So the secrecy theories about his business dealings, associates, etc. gain relative force. But of course we don't know if 2005 was a typical tax year for him.
--The AMT liability ($31M out of the $36M total liability) potentially triggered an AMT credit against the regular tax in subsequent tax years. Insofar as AMT liability is attributable to timing differences (e.g,. the rate of depreciation) rather than permanent differences (e.g., an income exclusion) betweeen the two tax bases, such liability generates a tax credit that in later years can be used to reduce regular tax liability to AMT liability. So this may have been mainly a timing thing, albeit without contradicting that he was paying something at some point in time.
--Probably not much by way of charitable deductions (which comes as no surprise). His $17M of itemized deductions might be expected to include significant state and local income tax liability, especially if he was meaningfully subject to the NYS and NYC income tax.
--$31 million of AMT liability, 28% AMT rate (after full phase-in) suggests that he might have had, say, $112 million or so of AMT income. That is less than his pre-NOL regular taxable income for 2005, although we don't know if there was an NOL used in the AMT part as well. (It would have been a separately computed AMT NOL - the two systems run on separate tracks.) Unclear why the AMTI would have been less than the regular taxable income in 2005, although who knows given multiple timing differences between the systems (e.g., you get higher AMT than regular tax depreciation deductions in the later years of an asset's useful life). But maybe the last dregs of AMT NOL were also used in 2005.
--Even so, it seems as if he must have used up the AMT NOL, assuming he got it in roughly the same amount, faster than the regular tax NOL. Again, it's unclear why. Note that the AMT NOL generally can only offset 90% of AMTI, whereas the regular tax AMT can actually be used faster, all else equal, since it can be used to offset 100% of regular taxable income.
--Only $5 million of regular tax liability on $31 million of regular taxable income, presumably reflecting that what was left after the NOLs was mainly capital gain.
--If really interesting tax return stuff from Trump comes out, it won't be the tax people (like me) who get the main insights from it. Rather, the main value will come from investigative reporters who can trace the information about business associates, etc.
I was then invited to appear on more TV shows today at 6:30 am and 10 am. The latter I turned down because enough is enough and I do have other things to do, but the former I accepted, despite the 5:30 am car service pickup. Then they called me at 5:15 am, while I was getting dressed, to tell me the gig was cancelled. Ah, the joys of live TV.
I suspect they cancelled because it turned out not to be that big a story, in reality / substance. The released information was too limited and anodyne to tell us much. So I am open to the view that is being widely expressed that Trump may have leaked this himself. (In support of that theory, note how promptly and indeed efficiently the White House responded to word of the leak, essentially by confirming the numbers - is that how this White House typically operates?)
There's not a vast ocean of things that we learn from the leaked 1040, but here are a few quick thoughts:
--He seems to have used up the OPM (other people's money) $900 million NOL that he got in the 1990s, even assuming, as seems reasonable but not certain, that the $100 million loss on the return is the last dregs of that.
--Since he did pay some federal income tax in this year, his reason for hiding his tax returns isn't that they would show he never paid any federal income tax. So the secrecy theories about his business dealings, associates, etc. gain relative force. But of course we don't know if 2005 was a typical tax year for him.
--The AMT liability ($31M out of the $36M total liability) potentially triggered an AMT credit against the regular tax in subsequent tax years. Insofar as AMT liability is attributable to timing differences (e.g,. the rate of depreciation) rather than permanent differences (e.g., an income exclusion) betweeen the two tax bases, such liability generates a tax credit that in later years can be used to reduce regular tax liability to AMT liability. So this may have been mainly a timing thing, albeit without contradicting that he was paying something at some point in time.
--Probably not much by way of charitable deductions (which comes as no surprise). His $17M of itemized deductions might be expected to include significant state and local income tax liability, especially if he was meaningfully subject to the NYS and NYC income tax.
--$31 million of AMT liability, 28% AMT rate (after full phase-in) suggests that he might have had, say, $112 million or so of AMT income. That is less than his pre-NOL regular taxable income for 2005, although we don't know if there was an NOL used in the AMT part as well. (It would have been a separately computed AMT NOL - the two systems run on separate tracks.) Unclear why the AMTI would have been less than the regular taxable income in 2005, although who knows given multiple timing differences between the systems (e.g., you get higher AMT than regular tax depreciation deductions in the later years of an asset's useful life). But maybe the last dregs of AMT NOL were also used in 2005.
--Even so, it seems as if he must have used up the AMT NOL, assuming he got it in roughly the same amount, faster than the regular tax NOL. Again, it's unclear why. Note that the AMT NOL generally can only offset 90% of AMTI, whereas the regular tax AMT can actually be used faster, all else equal, since it can be used to offset 100% of regular taxable income.
--Only $5 million of regular tax liability on $31 million of regular taxable income, presumably reflecting that what was left after the NOLs was mainly capital gain.
--If really interesting tax return stuff from Trump comes out, it won't be the tax people (like me) who get the main insights from it. Rather, the main value will come from investigative reporters who can trace the information about business associates, etc.
Tuesday, March 14, 2017
Caught in the act
Monday, March 13, 2017
2018 NYU Tax Policy Colloquium
Things are now pretty much official. A year from now at NYU, I will be co-teaching the Tax Policy Colloquium with Lily Batchelder. Subject to both of our schedules, this may indeed become our norm in the future.
But next year we will be switching the day of the week on which we meet from Mondays, as it was this year, back to Tuesdays. We will meet on every Tuesday afternoon, from 4 to 5:50 pm, from January 16 through May 1, with the exception of (1 February 20 (legislative Monday) and (2) March 20 (spring break).
But next year we will be switching the day of the week on which we meet from Mondays, as it was this year, back to Tuesdays. We will meet on every Tuesday afternoon, from 4 to 5:50 pm, from January 16 through May 1, with the exception of (1 February 20 (legislative Monday) and (2) March 20 (spring break).
Friday, March 10, 2017
NYU-KPMG 17th Annual Tax Symposium at NYU Law School
Just now at NYU, I participated in the mid-day debate session at this year's NYU-KPMG Tax Symposium. This year's session was entitled "U.S. Tax Reform - A Perfect Storm."
We had four interesting propositions to discuss (or five, depending on how you count), but not only did the debaters tend to agree on them all - so did the audience. They have people vote after each proposition through little hand-held devices, and each time one side won the support, not merely of all the panelists, but also of close to 80% vote of the audience.
The propositions, and what I had to say about each, are as follows:
1) Should the Blueprint's destination-based cash flow tax with border adjustments replace the corporate income tax?
The NO side carried this by what would prove to be the usual huge margin. Our panel met right after Michael Graetz had discussed his proposal to enact a VAT and use the revenues to lower the individual and corporate income taxes (including through a $100,000 exclusion amount for the former). Graetz had argued that his proposal pretty much accomplishes everything the DBCFT is meant to accomplish, and I decided to use that as an entry point for my brief remarks. I said: It's kind of as if they had decided to enact Graetz's plan, but only as gratuitously modified to make a horrible mess of it. In particular:
a) Graetz would keep the corporate income tax, but lower the rate to 15%. The Blueprints, by repealing it, would in effect go all the way to zero. For time reasons I just said: I agree with Graetz not the Blueprints on this one, but there are arguments on each side and it's a legitimate debate.
b) Due to the wage subsidy, the DBCFT runs into big problems with taxpayer losses that (unlike a typical VAT) it would make nonrefundable. Thoughtful commentators have argued that the interest charge is likely, in practice, to fall well short of fully addressing these problems.
c) The VAT Graetz has in his plan would be WTO-compliant. The DBCFT is highly likely to violate the WTO, and thus risks leading to a trade war or requiring prompt repeal.
d) The DBCFT strips out all of the features in the Graetz plan that aim to address revenue and distributional issues.
e) The DBCFT is a novel instrument that it will be tricky to get right, and I lack confidence that the people designing it will be able to get it right within the time they will have. This is not a knock at the staff, but at the leadership and how I gather they plan to rush it through.
1-a) If NO above, should the plan be adopted without border adjustments?
Once again, NO by acclamation. The specific question proposes increasing the proposed 20% rate to make up for the short-term revenue effect of dropping border adjustability. So I suppose it would mainly amount in practice to a smaller rate cut, still with expensing and net interest nondeductibility.
I mainly addressed the rate cut, saying there's a wide consensus about cutting the statutory U.S. corporate rate within a broader set of changes. I agree that this should be done in the right way, but do not think that this Congress or Administration would do it anywhere close to right.
2) Should the U.S. adopt a VAT and use revenue therefrom to pay for significant personal and corporate income tax rate cuts? (A la, via the Graetz plan.)
YES by acclamation. I said yes, depending on how the VAT revenues are used in terms of the full budget package. VATs in isolation are regressive but are commonly parts of fiscal systems more progressive than that in the U.S. I differ from Graetz in that I would use only some of the revenues to cut income taxes, while using others to fund things that I believe the government should be doing (e.g., with regard to healthcare, education, and infrastructure). But I consider Graetz's proposal, not merely a great deal better than present law, but probably also a whole lot better than anything that's at all likely to pass, be it now or in the foreseeable future.
3) Should FATCA be repealed as part of U.S. tax reform?
All panelists, and apparently the audience, agreed that this would be crazy, after all that the U.S. has done to get global coordination around FATCA. Since it was genuinely uncertain, when FATCA was enacted, that it would work out as well as it did, I compared repeal today to putting your chips on red at the roulette wheel and then, when the wheel comes up red, pulling them back off without collecting your winnings. But I and others did agree that the burdens the U.S. income tax system generally - not just through FATCA - places on nonresident citizens ought to be addressed. Whatever one's ultimate views on citizenship taxation, there's currently way too much burden being imposed relative to revenue collected.
4) Should Chevron deference be given to Treasury regulations that construe the Internal Revenue Code?
This would mean that the courts would evaluate each legal issue resolved by a tax regulation de novo, rather than giving affirmative weight to what the Treasury decided. Under Chevron, the administrative agency's interpretation of an ambiguity in the statute must be reasonable, even if the court thought some other interpretation was more reasonable still. Without Chevron, the court would simply decide what interpretation it felt was the most reasonable one.
Once again, YES (for retaining Chevron deference in tax) by acclamation. Other panelists noted the Treasury's superior tax expertise in interpreting and fleshing out complex statutes than one would expect from generalist federal judges. I noted that taxpayers often place a lot of value on certainty, which would likely be sharply reduced by this change. So they might be unhappy about it on balance even if they were glad that, in particular cases where they dislike a regulation, it would strengthen their hands.
I think of the move to overturn Chevron as part of the contemporary Republican war against the administrative state. Even if one is more sympathetic to that war than I am, tax may be an example of an area in which the people who are subject to the regulation would be far less enthusiastic about it than they might be in some other areas. I noted by analogy that, when Justice Scalia was waging his holy war against the use of legislative history, it was my impression that tax legislative history is widely viewed by people in the field as serving a far more benign role than Scalia saw it as having.
Tuesday, March 07, 2017
NYU Tax Policy Colloquium week 7: Scott Dyreng's (et al) Trade-offs in the Repatriation of Foreign Earnings
Yesterday at the colloquium, Scott Dyreng presented the above-named paper, coauthored by Kevin Markle and Jon Medrano. It examines how having U.S. net operating losses (NOLs) affects U.S. multinationals' repatriation of foreign earnings. Where the repatriated earnings are IRFE (indefinitely reinvested foreign earnings) for financial accounting purposes, repatriation can (a) reduce the present value of the taxpayer's expected long-term U.S. tax liability, and also (b) free up cash to be used more easily as the company prefers. However, this comes at the cost of (c) a negative effect on financial accounting income, relative to keeping the funds abroad (with an assumed future repatriation tax of zero) and acquiring a tax asset in the form of the NOL. The authors' premise, therefore, is that the companies should be expected to trade off (b) against (c), taking (a) as given.
Here are some quick thoughts on the issues that this interesting, although at this point still preliminary, research raises. The first set of issues concerns tax policy in relation to repatriation decisions; the second, financial accounting's effect on behavior by publicly traded companies.
1. Taxes and repatriation
(a) Time value, NOLs, and FTCs - One way of thinking about the underlying issue of how to minimize present value U.S. taxes is as follows. NOLs don't earn interest. Hence, they lose value in present value terms if they must be carried forward. (Not a problem for carrybacks, and subsequent drafts of the paper may try to ease this aspect more.)
Likewise, foreign tax credit (FTC) carryforwards don't earn interest. Note, by the way, that even low-taxed, though not zero-taxed, foreign source income can generate FTC carryforwards if used to wipe out NOLs. For example, suppose Acme would have a $10 million NOL but for its repatriating $9 million in cash that is associated with $1 million in foreign taxes paid. This is treated as a $10M repatriation, raising taxable income to zero, so there is no U.S. tax liability for the $1M in FTCs to offset. Hence, one has a $1 million FTC carryforward even though this was low-taxed income by U.S. standards. One issue that the paper examines is whether companies were especially keen to avoid turning NOLs into FTC carryforwards in the era when the latter had a much shorter carryforward period than the former.
The tradeoff between the two types of carryforwards should be a wash insofar as they have the same carryforward period and the chances or convenience of using one or the other look about the same. Neither carryforward bears interest. But what about implicit or unripe FTCs, associated with taxes paid on foreign earnings, where the earnings haven't been repatriated yet? Here, while there is not literally interest being earned on the deferral of the foreign tax credit claim, they may be growing in an interest-like way.
Suppose I have $X of unrepatriated foreign earnings, associated with $Y of unripe FTCs. If I am continuing to earn a normal rate of return and am paying foreign tax on that return, then Y may be growing at a normal rate of return. Subject to a lot more analysis that I won't attempt here, this might mean that the present value of unripe FTCs is remaining constant. Or, if there is a disparity between relevant rates of return, it might be growing or shrinking in present value terms once one has determined the proper discount rate for a given taxpayer.
I will not attempt further analysis here. It's the type of topic that might appeal, say, to Al Warren or Fadi Shaheen - writers whose recent work has often looked closely at equivalences and incentive effects under particular rate-of-return assumptions, I also agree that one has to think, not just about the FTCs, but also about the earnings and the residual U.S. taxes with which they may be associated. But insofar as taxpayers can still engage in "splitter"-type transactions, despite section 909 of the Internal Revenue Code, there may be some point to thinking about the FTCs in particular, albeit keeping in mind their connection to all the rest.
For now, however, it's enough to note that the unripe FTCs may be preferable to both NOL and FTC carrtyforwards because (or if) they are growing at a positive r of some kind.
(b) FTC carryforwards now vs. in the past - One point of empirical interest in the paper is that, pre-2005 but not post-2005, FTC carryforwards were much shorter than those for NOLs. My quick thought is that FTC carryforwards have probably become much less important over time than they used to be. Not only have foreign corporate tax rates declined relative to that in the U.S. over the last twenty-odd years, but foreign-to-foreign tax planning has improved, e.g., by reasom of companies' ability to take advantage of the check-the-box rules.
(c) 2005 tax holiday - Recent empirical work appears to confirm the ongoing importance of the 2005 tax holiday for foreign dividends, which enabled companies to repatriate earnings at a greatly reduced tax rate for a limited period. If companies had believed that it was a one-time-only event, never to recur, then it might not have affected expectations going forward. But of course speculation has been rife for years that Congress might do it again.
When companies anticipate the possible enactment of a new tax holiday, this both reduces the expected level for them of the ultimate U.S. repatriation tax that they might pay, and increases its volatility. These are distinct effects, each meriting analysis, although in one respect they push in the same direction - both discourage further repatriations before the next holiday.
2. Accounting and behavior
This is our second paper of the semester (Lily Batchelder's was the first) to look at financial accounting's effects on companies' behavior. Here the issues center around the accounting treatment of deferred repatriation taxes.
(a) Two accounting rules, both of them wrong - Say that Acme, a U.S. company, has $10 million of foreign earnings, stashed in a tax haven, with no associated FTCs. Under financial accounting rules, in the standard case Acme will book the deferred U.S. tax liability of $3.5 million as a current expense. This is wrong because Acme surely doesn't expect to pay that much tax in present value terms. Even assuming that there is a taxable repatriation at some point, Acme's managers surely (and reasonably) anticipate that they will get to pay a much lower repatriation tax rate than 35% - for example, due to another a tax holiday, a reduction in the U.S. corporate rate, a shift to territoriality in which any deemed repatriation tax applies at a much lower rate, etc. So the standard accounting rule here likely overstates the expected liability in realistic present value terms.
Now suppose instead that Acme persuades its auditors (which may not be too hard) that the funds have been indefinitely reinvested abroad, making them IRFE. Now the assumed repatriation tax is zero. This is also probably wrong. There surely is some chance of a taxable repatriation, even if at less than a 35% rate, and also the company may be paying an implicit tax, reducing the value of the funds, to put off the repatriation. (This is why it might be willing to pay a repatriation tax above zero, even if it truly anticipates being able to keep the funds abroad indefinitely.)
(b) What would the "correct" accounting rule do? - I would say that, building on the model that I gather financial accountants use for, say, uncertain litigation that has big bottom-line effects, the right answer would involve making a presenr value estimate for the deferred tax liability. Now, this is admittedly hard, as it depends not only on the company's long-term plans but also on future legislation. But if the grounds for the calculation were disclosed, mightn't this be better than using either of the existing methods? It might not only be more accurate on average, but would eliminate the discontinuity between the existing methods.
Okay, I'm not an accountant, but I suspect that this approach merits more attention than it has been getting. The fact that accountants might dislike it, because it forces them to do something that is inherently rather tuncertain, does not prevent its being potentially better borh for investors and for the tax system - the latter, because once companies have chosen IRFE treatment that may create lock-in wholly apart from the tax analysis.
(c) What if the FASB simply repealed the IRFE rule? - From the standpoint of informing investors, this is no panacaea, given the overstatement in many or most cases of actual expected U.S. liability. While we often hear that financial accounting should be "conservative," under-valuing companies can be as harmful to investors as over-valuing them, and can also create undesirable special advantages for the better-informed. But it would certainly be interesting to observe how greatly (or not) managerial behavior would change if keeping funds abroad, despite creating a likely true economic benefit (if the U.S. repatriation tax rate might be significantly lower in the future), created no accounting benefit.
BTW, no colloquium next week - it's our spring break. We will resume on Monday, March 20 with Daniel Hemel's The Federalist Safeguards of Progressive Taxation.
Here are some quick thoughts on the issues that this interesting, although at this point still preliminary, research raises. The first set of issues concerns tax policy in relation to repatriation decisions; the second, financial accounting's effect on behavior by publicly traded companies.
1. Taxes and repatriation
(a) Time value, NOLs, and FTCs - One way of thinking about the underlying issue of how to minimize present value U.S. taxes is as follows. NOLs don't earn interest. Hence, they lose value in present value terms if they must be carried forward. (Not a problem for carrybacks, and subsequent drafts of the paper may try to ease this aspect more.)
Likewise, foreign tax credit (FTC) carryforwards don't earn interest. Note, by the way, that even low-taxed, though not zero-taxed, foreign source income can generate FTC carryforwards if used to wipe out NOLs. For example, suppose Acme would have a $10 million NOL but for its repatriating $9 million in cash that is associated with $1 million in foreign taxes paid. This is treated as a $10M repatriation, raising taxable income to zero, so there is no U.S. tax liability for the $1M in FTCs to offset. Hence, one has a $1 million FTC carryforward even though this was low-taxed income by U.S. standards. One issue that the paper examines is whether companies were especially keen to avoid turning NOLs into FTC carryforwards in the era when the latter had a much shorter carryforward period than the former.
The tradeoff between the two types of carryforwards should be a wash insofar as they have the same carryforward period and the chances or convenience of using one or the other look about the same. Neither carryforward bears interest. But what about implicit or unripe FTCs, associated with taxes paid on foreign earnings, where the earnings haven't been repatriated yet? Here, while there is not literally interest being earned on the deferral of the foreign tax credit claim, they may be growing in an interest-like way.
Suppose I have $X of unrepatriated foreign earnings, associated with $Y of unripe FTCs. If I am continuing to earn a normal rate of return and am paying foreign tax on that return, then Y may be growing at a normal rate of return. Subject to a lot more analysis that I won't attempt here, this might mean that the present value of unripe FTCs is remaining constant. Or, if there is a disparity between relevant rates of return, it might be growing or shrinking in present value terms once one has determined the proper discount rate for a given taxpayer.
I will not attempt further analysis here. It's the type of topic that might appeal, say, to Al Warren or Fadi Shaheen - writers whose recent work has often looked closely at equivalences and incentive effects under particular rate-of-return assumptions, I also agree that one has to think, not just about the FTCs, but also about the earnings and the residual U.S. taxes with which they may be associated. But insofar as taxpayers can still engage in "splitter"-type transactions, despite section 909 of the Internal Revenue Code, there may be some point to thinking about the FTCs in particular, albeit keeping in mind their connection to all the rest.
For now, however, it's enough to note that the unripe FTCs may be preferable to both NOL and FTC carrtyforwards because (or if) they are growing at a positive r of some kind.
(b) FTC carryforwards now vs. in the past - One point of empirical interest in the paper is that, pre-2005 but not post-2005, FTC carryforwards were much shorter than those for NOLs. My quick thought is that FTC carryforwards have probably become much less important over time than they used to be. Not only have foreign corporate tax rates declined relative to that in the U.S. over the last twenty-odd years, but foreign-to-foreign tax planning has improved, e.g., by reasom of companies' ability to take advantage of the check-the-box rules.
(c) 2005 tax holiday - Recent empirical work appears to confirm the ongoing importance of the 2005 tax holiday for foreign dividends, which enabled companies to repatriate earnings at a greatly reduced tax rate for a limited period. If companies had believed that it was a one-time-only event, never to recur, then it might not have affected expectations going forward. But of course speculation has been rife for years that Congress might do it again.
When companies anticipate the possible enactment of a new tax holiday, this both reduces the expected level for them of the ultimate U.S. repatriation tax that they might pay, and increases its volatility. These are distinct effects, each meriting analysis, although in one respect they push in the same direction - both discourage further repatriations before the next holiday.
2. Accounting and behavior
This is our second paper of the semester (Lily Batchelder's was the first) to look at financial accounting's effects on companies' behavior. Here the issues center around the accounting treatment of deferred repatriation taxes.
(a) Two accounting rules, both of them wrong - Say that Acme, a U.S. company, has $10 million of foreign earnings, stashed in a tax haven, with no associated FTCs. Under financial accounting rules, in the standard case Acme will book the deferred U.S. tax liability of $3.5 million as a current expense. This is wrong because Acme surely doesn't expect to pay that much tax in present value terms. Even assuming that there is a taxable repatriation at some point, Acme's managers surely (and reasonably) anticipate that they will get to pay a much lower repatriation tax rate than 35% - for example, due to another a tax holiday, a reduction in the U.S. corporate rate, a shift to territoriality in which any deemed repatriation tax applies at a much lower rate, etc. So the standard accounting rule here likely overstates the expected liability in realistic present value terms.
Now suppose instead that Acme persuades its auditors (which may not be too hard) that the funds have been indefinitely reinvested abroad, making them IRFE. Now the assumed repatriation tax is zero. This is also probably wrong. There surely is some chance of a taxable repatriation, even if at less than a 35% rate, and also the company may be paying an implicit tax, reducing the value of the funds, to put off the repatriation. (This is why it might be willing to pay a repatriation tax above zero, even if it truly anticipates being able to keep the funds abroad indefinitely.)
(b) What would the "correct" accounting rule do? - I would say that, building on the model that I gather financial accountants use for, say, uncertain litigation that has big bottom-line effects, the right answer would involve making a presenr value estimate for the deferred tax liability. Now, this is admittedly hard, as it depends not only on the company's long-term plans but also on future legislation. But if the grounds for the calculation were disclosed, mightn't this be better than using either of the existing methods? It might not only be more accurate on average, but would eliminate the discontinuity between the existing methods.
Okay, I'm not an accountant, but I suspect that this approach merits more attention than it has been getting. The fact that accountants might dislike it, because it forces them to do something that is inherently rather tuncertain, does not prevent its being potentially better borh for investors and for the tax system - the latter, because once companies have chosen IRFE treatment that may create lock-in wholly apart from the tax analysis.
(c) What if the FASB simply repealed the IRFE rule? - From the standpoint of informing investors, this is no panacaea, given the overstatement in many or most cases of actual expected U.S. liability. While we often hear that financial accounting should be "conservative," under-valuing companies can be as harmful to investors as over-valuing them, and can also create undesirable special advantages for the better-informed. But it would certainly be interesting to observe how greatly (or not) managerial behavior would change if keeping funds abroad, despite creating a likely true economic benefit (if the U.S. repatriation tax rate might be significantly lower in the future), created no accounting benefit.
BTW, no colloquium next week - it's our spring break. We will resume on Monday, March 20 with Daniel Hemel's The Federalist Safeguards of Progressive Taxation.
Wednesday, March 01, 2017
Voice of the people
Too tired to read, I was watching the GSN game show Divided, which requires multiple contestants, none of whom know each other, to agree on the answers to various questions, before at the end they must agree on a 60-30-10 split of their winnings. (That's the most interesting part, of course.) In fairly short succession, there were two questions about the U.S. fiscal system - one subjective (what did survey respondents say?), and the other objective. Each was interesting in its way.
Subjective question: 100 people were asked, which is the most unfair tax system? The available choices were (A) gasoline taxes, (B) income taxes, (C) excise taxes on cigarettes and alcohol.
All 3 of the contestants agreed that income taxes would be called the most unfair - they disagreed on whether gas taxes or cigarettes/alcohol would be ranked #2.
Correct answer, in terms of predicting what the survey respondents said: A - B - C (gas taxes deemed most unfair, then income taxes, then cigarette and alcohol taxes).
Making this harder to interpret: We have 2 Pigovian taxes wrapped around an ability to pay tax. Maybe the survey respondents' collective rationale is: externality plus "sin" should be taxed, but externality without "sin" shouldn't be taxed.
Or perhaps it is that taxing "necessities" is worse than taxing ability to pay (since the respondents may feel they need their cars), but taxing "luxuries" (or sins) is better than taxing ability to pay.
Then again, maybe I am trying to make too much of this, when you consider how Divided contestants dealt with the objective fact question about the fiscal system. They were asked: On which of the following items does the federal government spend more than 5% of tax revenues? (A) the Pentagon and the military. (B) Health care programs, (C) science research?
For this one, they would have gotten $25,000 had they immediately answered it correctly. But instead, they let the time tick down for a while - reducing the value of a correct answer - and then got it wrong by answering: A only.
They were right, of course, about military spending, and also about science research's missing the cut (the host said it's at about 1%), but oh so wrong about healthcare. (I mean, c'mon - Medicare? Medicaid?)
I guess they'd never heard it said that the U.S. federal government is an insurance company attached to an army.
Subjective question: 100 people were asked, which is the most unfair tax system? The available choices were (A) gasoline taxes, (B) income taxes, (C) excise taxes on cigarettes and alcohol.
All 3 of the contestants agreed that income taxes would be called the most unfair - they disagreed on whether gas taxes or cigarettes/alcohol would be ranked #2.
Correct answer, in terms of predicting what the survey respondents said: A - B - C (gas taxes deemed most unfair, then income taxes, then cigarette and alcohol taxes).
Making this harder to interpret: We have 2 Pigovian taxes wrapped around an ability to pay tax. Maybe the survey respondents' collective rationale is: externality plus "sin" should be taxed, but externality without "sin" shouldn't be taxed.
Or perhaps it is that taxing "necessities" is worse than taxing ability to pay (since the respondents may feel they need their cars), but taxing "luxuries" (or sins) is better than taxing ability to pay.
Then again, maybe I am trying to make too much of this, when you consider how Divided contestants dealt with the objective fact question about the fiscal system. They were asked: On which of the following items does the federal government spend more than 5% of tax revenues? (A) the Pentagon and the military. (B) Health care programs, (C) science research?
For this one, they would have gotten $25,000 had they immediately answered it correctly. But instead, they let the time tick down for a while - reducing the value of a correct answer - and then got it wrong by answering: A only.
They were right, of course, about military spending, and also about science research's missing the cut (the host said it's at about 1%), but oh so wrong about healthcare. (I mean, c'mon - Medicare? Medicaid?)
I guess they'd never heard it said that the U.S. federal government is an insurance company attached to an army.
Tuesday, February 28, 2017
A brand-new bad idea?
According to both Treasury Secretary Mnuchin and a White House spokesperson, the Administration is considering a "reciprocal tax on countries that tax American imports." This appears to mean retaliation against the use of a VAT that taxes domestic consumption, insofar as such consumption is of imported goods from the US.
So, the use of a tax system (the VAT) that is trade-neutral would trigger "retaliation"? How exactly? Via tariffs on countries with VATs, with the tariff level pegged to their US imports and/or their VAT rates and/or their US trade balance? After all, we can't "retaliate" just by having our own VAT if the tax level on domestic consumption depends on (a) whether it's an import and (b) the country of origin.
I would like to hear anyone with even a rudimentary understanding of economics try to defend such a proposal. (Might this be in Kevin Hassett's future?! Suppose he is unable to talk them out of it.)
So, the use of a tax system (the VAT) that is trade-neutral would trigger "retaliation"? How exactly? Via tariffs on countries with VATs, with the tariff level pegged to their US imports and/or their VAT rates and/or their US trade balance? After all, we can't "retaliate" just by having our own VAT if the tax level on domestic consumption depends on (a) whether it's an import and (b) the country of origin.
I would like to hear anyone with even a rudimentary understanding of economics try to defend such a proposal. (Might this be in Kevin Hassett's future?! Suppose he is unable to talk them out of it.)
NYU Tax Policy Colloquium, week 6: Steve Shay (et al), "'A Better Way' Business Tax Reform: Theory and Practical Complications"
Yesterday at the colloquium, Steve Shay presented an early draft
of an article (being coauthored with Cliff Fleming and Bob Peroni) that
critically reviews the House GOP proposal to replace the existing income tax on
corporate and individual business income with what many call the
"DBCFT" (destination-based cash flow tax). The draft is still
preliminary, so I'm not posting a link or even the abstract. But here are some
thoughts on how one might parse the main issues that the paper discusses: I won't
try to offer a full assessment of the DBCFT here - that would require a very long article.
As it happens, many others are writing such articles (including Shay et al). Given how well it's already being covered, the only way in which I plan to enter this fray via conventional publication is from somewhat of an angle. On June 1, I am giving a talk in Haikko Borga, Finland at the annual meeting of the Nordic Tax Research Counsel, in which I'll discuss how the U.S. ended up considering going this way, how the plan relates to what other countries have done, in particular with VATs, what light it sheds on where we and they might want to get in the long run,etcetera. This piece I believe will end up being published in a Nordic tax journal, but also perhaps in the US if it develops in a direction that I deem compatible with this. It differs from what people have been writing these days in that it might involve looking at the thing from a distance and with an effort at historical perspective, rather than focusing on how it might work or whether, taking all the parts together as given, it's on the whole good or bad.
As it happens, many others are writing such articles (including Shay et al). Given how well it's already being covered, the only way in which I plan to enter this fray via conventional publication is from somewhat of an angle. On June 1, I am giving a talk in Haikko Borga, Finland at the annual meeting of the Nordic Tax Research Counsel, in which I'll discuss how the U.S. ended up considering going this way, how the plan relates to what other countries have done, in particular with VATs, what light it sheds on where we and they might want to get in the long run,etcetera. This piece I believe will end up being published in a Nordic tax journal, but also perhaps in the US if it develops in a direction that I deem compatible with this. It differs from what people have been writing these days in that it might involve looking at the thing from a distance and with an effort at historical perspective, rather than focusing on how it might work or whether, taking all the parts together as given, it's on the whole good or bad.
Okay, enough of that detour; back to some of the main issues that Shay,
Fleming, and Peroni are evaluating:
(1) Distributional effects – The House GOP tax plan as a whole is extremely
regressive, and meant to be so, especially when one adds in the financing for
the tax cuts that, while not currently being provided for, the Speaker no doubt
intends. He wants to massively slash tax rates on rich people and pay for it by
massively slashing benefits for poor people. But let's hold all that to one
side - the DBCFT itself raises more interesting, complex, and potentially
ambiguous distributional issues than this clear underlying intent might have
led one to expect.
Since it's a compound proposal, I think one has to analyze it
distributionally in multiple pieces. And for each piece, one must analyze both
the transition effects of repeal and the long-term effects. These can be quite
different. E.g., even if one were to conclude that the corporate income tax is
mainly borne by labor rather than capital, a surprise overnight repeal would
offer a huge transition gain to shareholders.
Anyway: here is one way of organizing the pieces one needs to
think about, in terms of both the transition and the long-term incidence. BTW,
I'm just looking here at the tax side. Obviously, if net revenues change, one
must also look at what changes end up resulting on the spending side.
(a) repeal the corporate income tax (and other business income
taxes insofar as they are replaced by this).
(b) enact an origin-basis VAT. I put this here as a separate stage
to distinguish between (a) the shift to expensing, and an R-based system in
which financial flows are ignored, and (b) the destination basis piece, which
could end up being called off.
(c) convert the VAT from origin basis to destination basis,
(d) add a wage deduction to the VAT. People have been calling this
a wage subsidy, which is fair enough, but since wages are being taxed under the
individual income tax one really needs to think about them as a whole. Note
that in, say, David Bradford's X-tax, there was a much tighter connection than
there seems to be here between the wage subsidy and the wage tax. There the
idea was to match the business rate to the top individual rate, which only
applied to wages; hence a straightforward net wage subsidy applied until one
reached the top bracket (at which point it became a wash).
(e) replace the exclusion of financial flows under a true VAT with
a rule apparently including them, subject to disallowing net interest
deductions.
(2) Expensing doesn’t automatically yield neutrality – Expensing is commonly lauded as
permitting the tax system to be neutral between assets, and also between
businesses. But the proponents don't plan to make losses refundable, as they
are in a VAT. Instead, they'll offer interest, which is fine (any cash flow
problems aside) if one is going to have enough net "income"
eventually, but otherwise may disadvantage small and medium sized businesses.
Net losses should be especially common here, in contrast to under a VAT, due to
the wage deduction plus, in early years, expensing for new assets plus (one
presumes, as a transition rule) continued depreciation deductions for
pre-enactment assets. There may be a lot of distortionary transactions that end up being used to provide effective refundability.
(3) WTO illegality – It seems to be little disputed these days that the system
would be immediately and successfully challenged as illegal under the WTO, even though an
equivalent instrument (in which the wage subsidy was handled separately) would
presumably be legal. Passing a law that one knows is going to have to be
changed or repealed in a few years is pretty crazy. But if one wanted to look
at it in a positive light, the idea might be: as soon as it's held to be
illegal (which will presumably take a couple of years at least), and before any
sanctions start taking effect, change the system then. Only, we'd have to feel
good about the feasibility of doing this. I don't feel so good about this given
the low health level of our political system, but it could conceivably become a
path to having a conventional VAT.
(4) Hard to tax inbound – We in the US are late to the game, and hence are inclined
to think that VATs are much better administratively than our various tax
instruments. But while this is probably still true, VATs' workability has been
undermined by the rise of e-commerce and global service industries. So finding
and taxing inbound consumer items, by notionally policing the
"border," is much more problematic today than it was when most major
VATs came into force. While the OECD and various countries are trying to
address this, it's unclear how successful they'll be. Would the DBCFT
eventually need to include a use tax that was collected directly from
households? Our income tax treaties may impede requiring exporters to the US,
if they lack a U.S. permanent establishment,
(5) Hard to trace "true" outbound – This is the flip side of the
inbound problem.
(6) Multiple tax rates – Most prior proposal in the DBCFT's ballpark had a single
business rate. Here you have instead a bit of a mess, with different rates for
passthroughs and C corporations, continued income taxation at the individual
level, etc. The multiple rates can raise a host of problems - relating,
for example, to related party transactions and, for that matter, to exactly how
the currency adjustment would play out. The proponents would also need to
figure out and execute rules pertaining to tax-exempts.
(7) Treatment of interest expense – A true R-based system is so much
simpler and cleaner than taxing financial income but disallowing net interest
deductions. For example, the DBCFT would presumably cause taxpayers to prefer
interest income to other income, since it can be used to soak up interest
deductions. We have various such problems under present law, but they're hardly
a good thing. Note also the need to figure out how to tax financial institutions - more urgent here than under VATs, because the countries with VATs also have corporate income taxes that apply to financial institutions, whereas we would be jettisoning that backup.
(8) How would other countries respond? – Apart from filing WTO claims, via tax
competition? Emulation? Taxing US companies more on a source basis, given that
treaty reciprocity had ceased to matter and the US had abandoned the
outbound-taxation field? If the thing is enacted, which I consider unlikely, we
will certainly find out.
(9) No tax on domestic but "outbound' rents - Countries with significant natural
resources often like to tax domestic extraction for export. Also, U.S.
companies that develop valuable IP may create rents that they realize through
foreign sales. One should always want to tax outbound rents domestically, for
two reasons. If they're earned by foreigners, it's efficient and the foreigners
will actually bear the incidence of the tax. If they're earned by domestic
individuals, it's still efficient and inclusion may be desirable from a
distributional standpoint. This point tends to be conceded by DBCFT advocates,
whom I have heard say (a) we could have a special rule for natural resources,
and (b) we're not currently doing a great job with the likes of Apple and
Google anyway. But why give up altogether? That's a clear defect, even if outweighed by other features that one considered clear advantages of the DBCFT.
One irony here, by the way, is that after all the huffing and
puffing in the Treasury White Paper about how only the U.S. can tax the profits
that Apple purported to stash in Ireland, because it's U.S. source income and
the Europeans should keep their hands off, the DBCFT would actually define that income (which pertained to EU sales) as foreign source. So much for self-righteous vehemence.
(10) A very tough transition in multiple dimensions – The rush to enact this thing - if
it gets enacted - is bound, I think, to end badly. The IRS isn't ready for it,
state and local governments aren't ready for it, taxpayers are desperately
scrambling to get ready for it, there's unlikely to be any stress-testing or a
multi-stage process like that which gave rise to the Tax Reform Act of 1986,
last-minute dark deals on obscure aspects are likely to occur, there may not be
enough staff with enough time (and treated with enough respect) to get enough of it
right, technical corrections may be politically impossible, etcetera. So even if this thing can in principle be done well enough to be worth
doing, don't count on its actually happening that way, if it happens.
Monday, February 27, 2017
Martin Feldstein on border adjustment
Today in the Wall Street Journal, a Martin Feldstein op-ed on border adjustment argued that its flaws are purely "illusory," since "[f]oreign exporters would pay for the Republicans' proposed trillion-dollar tax cut."
Whatever one thinks about the merits of border adjustment, this op-ed does not appear to be an entirely above-board intellectual exercise. Two problems in particular:
First, he treats the estimated $100 billion revenue gain, by reason of switching to the destination basis in an era when current-year imports (which would be newly taxed) exceed current-year exports (which would be newly exempted) as borne by foreign exporters. He notes that, once the dollar appreciated relative to foreign currencies such as the Euro, foreign exporters to the U.S. would suffer a reduction in the U.S. goods and services that they could purchase in exchange for their exports to us.
But what about the fact that, as he admits "a rising dollar would reduce the real value of foreign investments owned by Americans"? He dismisses this by looking at it as a percentage of Americans' household net worth. That's a rather different metric than he uses for the foreign exporters.
He also fails to mention that a rising dollar would increase the real value of U.S. investments held by foreigners. That could be a much bigger item than the one that he emphasizes with regard to foreign exporters.
Feldstein is therefore being unexplainedly selective and inconsistent in his treatment of the effects of dollar appreciation, relative to other currencies, on U.S. individuals and foreign individuals.
Second, Feldstein lauds the ten-year revenue gain on the ground that it would "produce enough revenue to make cutting the corporate tax politically feasible .... That revenue is enough to finance almost all of the proposed reduction in the corporate tax."
Here's the problem with this argument. It treats revenue over the next ten years as merely a political constraint that we need to overcome in order to pass what he considers desirable legislation. Fair enough, up to a point. But - less than a year ago Feldstein wrote a piece entitled "America's Exploding Deficit." It denounced U.S. policymakers for potentially turning our country, via rising deficits, into the next Italy, Portugal, or Greece. (But that, of course, was during Obama's presidency.)
Against that background, he now considers 10-year revenue balance just a political problem to be finessed? He realizes, I presume, that the estimated $1 trillion revenue gain might be considered a temporary, rather than a permanent, revenue gain if we think in terms of infinite horizon trade balance.
I wonder - or rather, I really don't much wonder - what Feldstein would have said had a Democratic Administration proposed to use $1 trillion (over 10 years) in temporary border adjustment revenue to pay for something he didn't like - e.g., expanding the social safety net. Thirty years ago, unlike today, he was above this sort of contemptuously and tendentiously partisan sleight of hand trickery.
Whatever one thinks about the merits of border adjustment, this op-ed does not appear to be an entirely above-board intellectual exercise. Two problems in particular:
First, he treats the estimated $100 billion revenue gain, by reason of switching to the destination basis in an era when current-year imports (which would be newly taxed) exceed current-year exports (which would be newly exempted) as borne by foreign exporters. He notes that, once the dollar appreciated relative to foreign currencies such as the Euro, foreign exporters to the U.S. would suffer a reduction in the U.S. goods and services that they could purchase in exchange for their exports to us.
But what about the fact that, as he admits "a rising dollar would reduce the real value of foreign investments owned by Americans"? He dismisses this by looking at it as a percentage of Americans' household net worth. That's a rather different metric than he uses for the foreign exporters.
He also fails to mention that a rising dollar would increase the real value of U.S. investments held by foreigners. That could be a much bigger item than the one that he emphasizes with regard to foreign exporters.
Feldstein is therefore being unexplainedly selective and inconsistent in his treatment of the effects of dollar appreciation, relative to other currencies, on U.S. individuals and foreign individuals.
Second, Feldstein lauds the ten-year revenue gain on the ground that it would "produce enough revenue to make cutting the corporate tax politically feasible .... That revenue is enough to finance almost all of the proposed reduction in the corporate tax."
Here's the problem with this argument. It treats revenue over the next ten years as merely a political constraint that we need to overcome in order to pass what he considers desirable legislation. Fair enough, up to a point. But - less than a year ago Feldstein wrote a piece entitled "America's Exploding Deficit." It denounced U.S. policymakers for potentially turning our country, via rising deficits, into the next Italy, Portugal, or Greece. (But that, of course, was during Obama's presidency.)
Against that background, he now considers 10-year revenue balance just a political problem to be finessed? He realizes, I presume, that the estimated $1 trillion revenue gain might be considered a temporary, rather than a permanent, revenue gain if we think in terms of infinite horizon trade balance.
I wonder - or rather, I really don't much wonder - what Feldstein would have said had a Democratic Administration proposed to use $1 trillion (over 10 years) in temporary border adjustment revenue to pay for something he didn't like - e.g., expanding the social safety net. Thirty years ago, unlike today, he was above this sort of contemptuously and tendentiously partisan sleight of hand trickery.
Friday, February 24, 2017
Trump on the border adjustment tax
Courtesy of a Reuters interview, here's Trump on the border adjustment tax, with my annotations after each sentence:
“It could lead to a lot more jobs in the United States." Good work by his standards, as this is less false than any of the claims that follow. Replacing the corporate tax with the destination-based cash flow tax (DBCFT) could increase U.S. investment, which could conceivably increase U.S. jobs, or at least U.S. wages, over some time period by some amount. How fast and how much is unclear.
"I certainly support a form of tax on the border because everybody else does." Powerfully reasoned grounds for supporting it. Not true, of course, that "everybody else does."
"We’re the only country, we’re one of the very few countries, possibly the only country, that has no border tax." True as to the VAT. He evidently doesn't know the difference between the DBCFT and a VAT. Most of the quotes below likewise appear to be based on his classifying the DBCFT as a VAT. Needless to say, he is unaware that no country has ever had a DBCFT.
"And that’s not a tax to the consumer, because that’s going to be a tax to companies and it’s going to be a tax to other countries much more so than it is to the consumer. That’s a tax to other countries." Three falsehoods in a row. (For them to be lies, however, there would need to be an underlying mental state of knowledge.) Try finding an economist who doesn't think a VAT is a tax on the consumer. It's remitted by the companies, but few if any economists would call it a tax on the companies. It's certainly not a tax on other countries. That would require the US to be successfully exercising monopsony power when it applies the tax to imports.
"And what will happen is, don’t forget there is no tax if we make our product in the United States. So I don’t consider it a tax." Does he realize that VATs apply to domestic consumption? Apparently not. It's true that, under the DBCFT, the business gets to deduct wages. But they're also generally included in income by the employee. Or perhaps he's referring to the fact that there's no tax if the item is exported. But I would say that a tax on domestic consumption, like a tax on domestic production, is still in fact a tax. He may almost grasp that there are arguments for replacing taxes on domestic production with taxes on domestic consumption, but, it would seem, not very clearly.
"That’s a tax if companies are buying their product outside of the United States. But ... if they make their product in the United States, there is no tax. So what is going to happen is companies are going to come back here, they’re going to build their factories and they’re going to create a lot of jobs and there’s no tax.” This largely repeats claims that I addressed above. Note how it's both "a tax to the companies" and yet when they operate here "there's no tax." And also, of course, taxing domestic consumption apparently equals taxing other countries.
“It could lead to a lot more jobs in the United States." Good work by his standards, as this is less false than any of the claims that follow. Replacing the corporate tax with the destination-based cash flow tax (DBCFT) could increase U.S. investment, which could conceivably increase U.S. jobs, or at least U.S. wages, over some time period by some amount. How fast and how much is unclear.
"I certainly support a form of tax on the border because everybody else does." Powerfully reasoned grounds for supporting it. Not true, of course, that "everybody else does."
"We’re the only country, we’re one of the very few countries, possibly the only country, that has no border tax." True as to the VAT. He evidently doesn't know the difference between the DBCFT and a VAT. Most of the quotes below likewise appear to be based on his classifying the DBCFT as a VAT. Needless to say, he is unaware that no country has ever had a DBCFT.
"And that’s not a tax to the consumer, because that’s going to be a tax to companies and it’s going to be a tax to other countries much more so than it is to the consumer. That’s a tax to other countries." Three falsehoods in a row. (For them to be lies, however, there would need to be an underlying mental state of knowledge.) Try finding an economist who doesn't think a VAT is a tax on the consumer. It's remitted by the companies, but few if any economists would call it a tax on the companies. It's certainly not a tax on other countries. That would require the US to be successfully exercising monopsony power when it applies the tax to imports.
"And what will happen is, don’t forget there is no tax if we make our product in the United States. So I don’t consider it a tax." Does he realize that VATs apply to domestic consumption? Apparently not. It's true that, under the DBCFT, the business gets to deduct wages. But they're also generally included in income by the employee. Or perhaps he's referring to the fact that there's no tax if the item is exported. But I would say that a tax on domestic consumption, like a tax on domestic production, is still in fact a tax. He may almost grasp that there are arguments for replacing taxes on domestic production with taxes on domestic consumption, but, it would seem, not very clearly.
"That’s a tax if companies are buying their product outside of the United States. But ... if they make their product in the United States, there is no tax. So what is going to happen is companies are going to come back here, they’re going to build their factories and they’re going to create a lot of jobs and there’s no tax.” This largely repeats claims that I addressed above. Note how it's both "a tax to the companies" and yet when they operate here "there's no tax." And also, of course, taxing domestic consumption apparently equals taxing other countries.
Thursday, February 23, 2017
EU State Aid panel at IFA US branch annual meeting
Today I was the lone American on the IFA panel I mentioned in my prior post, discussing the raft of ongoing, or perhaps soon to be ongoing, EU state aid cases before the European Commission (and ultimately the European Court of Justice). Three quick takeaways:
1) EU tax lawyers with whom I spoke believe that the EC's Apple ruling, whatever one thinks of it on the merits, is extremely well-crafted from a legal standpoint.
2) I noted, although I doubt this was a surprise to many people, that it's currently difficult to imagine U.S. tax policymakers over the next few years paying close attention to the state aid cases. They have a lot of higher agenda items at present, and it's not clear that the Treasury will ever, in the next few years, get up to having a normal-sized bandwidth.
3) Once the EU state aid precedents are out there by reason of EC decisions (assuming they are upheld by the ECJ), EU law permits a whole lot of causes of action attacking claimed state aid to be brought by a wide range of actors: NGOs, rival firms, trade unions, and so forth. These actions would not involve the EC, and they would initially be brought in national courts, with ultimate appealability to the ECJ. So the French and German governments, say, if they have made arrangements with multinational or other companies that are open to challenge under state aid doctrine, might find themselves litigating in defense. I was told that this could definitely happen as to France, and that Germany's recent move supporting Spain in the Santander litigation indicates that it is feeling sensitive too, whether on this ground or based on concern that the EC is over-reaching as an EU political matter.
1) EU tax lawyers with whom I spoke believe that the EC's Apple ruling, whatever one thinks of it on the merits, is extremely well-crafted from a legal standpoint.
2) I noted, although I doubt this was a surprise to many people, that it's currently difficult to imagine U.S. tax policymakers over the next few years paying close attention to the state aid cases. They have a lot of higher agenda items at present, and it's not clear that the Treasury will ever, in the next few years, get up to having a normal-sized bandwidth.
3) Once the EU state aid precedents are out there by reason of EC decisions (assuming they are upheld by the ECJ), EU law permits a whole lot of causes of action attacking claimed state aid to be brought by a wide range of actors: NGOs, rival firms, trade unions, and so forth. These actions would not involve the EC, and they would initially be brought in national courts, with ultimate appealability to the ECJ. So the French and German governments, say, if they have made arrangements with multinational or other companies that are open to challenge under state aid doctrine, might find themselves litigating in defense. I was told that this could definitely happen as to France, and that Germany's recent move supporting Spain in the Santander litigation indicates that it is feeling sensitive too, whether on this ground or based on concern that the EC is over-reaching as an EU political matter.
Wednesday, February 22, 2017
Upcoming talks
I seem to be accumulating a hefty set of appearances for 2017. They include the following:
1) Thursday, February 23 - The USA Branch of the International Fiscal Association is currently holding its annual meeting, in the Waldorf Astoria Hotel in New York City. Tomorrow, from 9 to 10 am, I will be speaking on a panel entitled "State Aid: Where Are We?"
2) Friday, March 10 - I'll be speaking on a panel at the annual NYU-KPMG Tax Lecture, held at NYU Law School. As usual, I'll be with the debate group, which this year may look at such issues as current corporate tax reform proposals.
3) Wednesday, April 12 - At Northwestern Law School's Tax Policy Colloquium I'll be discussing my recent paper, "Interrogating the Relationship Between 'Legally Defensible' Tax Planning and Social Justice."
4) Tuesday, May 30 - At Luxembourg University, at a seminar entitled "BEPS, State Aid, and Tax Competition: A Bird's-Eye View Across the Atlantic," I'll be discussing U.S. international tax policy with respect to OECD-BEPS and the EU state aid cases.
5) Thursday, June 1 - At the Nordic Tax Research Council's annual meeting in Haikko Borga, Finland (near Helsinki), I'll be discussing the Ryan Blueprint tax reform plan.
6) Friday, June 2 - At the European Association of Tax Law Professors' Annual Meeting, in Lodz, Poland, the theme of which is "Corporate Tax Residence and Mobility," I'll be on a panel discussing the future of tax residence. Luckily from a travel standpoint, this one is in the afternoon, whereas the prior one is in the morning.
7) Tuesday, June 20-Friday, June 23 - At the Law and Society Association's Annual Meeting in Mexico City, I'll be discussing a chapter from my book on literature and high-end inequality - probably "Why Aren't Things Better Than This? Class Relations Within the Top One Percent in Jane Austen's Pride and Prejudice."
8 Monday, June 26 - Wednesday, June 28 - This is tentative, but I may attend the 2017 Academic Symposium at Said Business School, Oxford University. Probably as a discussant, rather than as a presenter, if I do indeed go.
That's it for the moment. But in September and October, I'll be spending 3 weeks at NYU Berlin, and teaching an intensive mini-course at Vienna University's Doctoral Program in International Business Taxation on international tax policy. Possible side trips to suitable nearby EU academic institutions.
1) Thursday, February 23 - The USA Branch of the International Fiscal Association is currently holding its annual meeting, in the Waldorf Astoria Hotel in New York City. Tomorrow, from 9 to 10 am, I will be speaking on a panel entitled "State Aid: Where Are We?"
2) Friday, March 10 - I'll be speaking on a panel at the annual NYU-KPMG Tax Lecture, held at NYU Law School. As usual, I'll be with the debate group, which this year may look at such issues as current corporate tax reform proposals.
3) Wednesday, April 12 - At Northwestern Law School's Tax Policy Colloquium I'll be discussing my recent paper, "Interrogating the Relationship Between 'Legally Defensible' Tax Planning and Social Justice."
4) Tuesday, May 30 - At Luxembourg University, at a seminar entitled "BEPS, State Aid, and Tax Competition: A Bird's-Eye View Across the Atlantic," I'll be discussing U.S. international tax policy with respect to OECD-BEPS and the EU state aid cases.
5) Thursday, June 1 - At the Nordic Tax Research Council's annual meeting in Haikko Borga, Finland (near Helsinki), I'll be discussing the Ryan Blueprint tax reform plan.
6) Friday, June 2 - At the European Association of Tax Law Professors' Annual Meeting, in Lodz, Poland, the theme of which is "Corporate Tax Residence and Mobility," I'll be on a panel discussing the future of tax residence. Luckily from a travel standpoint, this one is in the afternoon, whereas the prior one is in the morning.
7) Tuesday, June 20-Friday, June 23 - At the Law and Society Association's Annual Meeting in Mexico City, I'll be discussing a chapter from my book on literature and high-end inequality - probably "Why Aren't Things Better Than This? Class Relations Within the Top One Percent in Jane Austen's Pride and Prejudice."
8 Monday, June 26 - Wednesday, June 28 - This is tentative, but I may attend the 2017 Academic Symposium at Said Business School, Oxford University. Probably as a discussant, rather than as a presenter, if I do indeed go.
That's it for the moment. But in September and October, I'll be spending 3 weeks at NYU Berlin, and teaching an intensive mini-course at Vienna University's Doctoral Program in International Business Taxation on international tax policy. Possible side trips to suitable nearby EU academic institutions.
NYU Tax Policy Colloquium, week 5: Jason Oh's "Are the Rich Responsible for Progressive Tax Rates?"
Yesterday Jason Oh presented "Are the Rich Responsible for Progressive Tax Rates?" The current draft is written in the format for a law review paper. I personally am hoping that he rewrites it as, say, an NTJ paper. While I think a good law review should be quite happy to publish the paper in its present form, the real uniqueness and strengths would come out more if it were done NTJ-style. So high-end cognoscenti would be best served by the NTJ format, although this is not to pre-judge what would be the best career move, get the largest readership, etc.
To explain, Part I of the paper, "The Political Economy of Progressive Rates," does an excellent job of explaining basic optimal tax models that underlie thinking about progressive and other tax rates, along with rational choice-based political economy models that can be used to predict legislative outcomes in a majoritarian framework. But that's just the set-up or background. The real work of the paper is done in Part II, "The Instability of Rate Schedules." Here, given the fact that, in the set-up, for any current set of rate schedules there is a majority that would prefer something else - leading to cycling, and making agenda control important - the paper "uses a set of Markov chain Monte Carlo simulations [to] explore what rate schedules are most likely under majoritarian voting." This takes the form of "heat maps" showing what rate structures emerge most frequently, among the assumed possibilities, under different sets of assumptions, e.g., regarding agenda control and the influence of the rich. "The simulations suggest that (1) rate progressivity becomes more likely as political power is concentrated in the hands of the rich, and (2) progressive rate structures are predominant even if there are relatively more rich than poor."
Under the rational choice model, the voters perfectly understand all the possible tax systems and everyone else's preferences. They are rational utility-maximizers, whose utility depends solely on own consumption and leisure. Disregarding changes to leisure (from adjustments to labor supply) to simplify the exposition, all they care about is having more money rather than less, from how a given tax change affects (a) their own tax liabilities, plus (b) the demogrant that they get given the overall revenue raised. (The demogrant functions as a proxy for positing uniform benefit from government spending.)
I myself tend to be somewhat of a skeptic regarding rational choice models of this kind. First there are the issues about rational choice generally, secondly about assuming that utility depends solely on own consumption and leisure, but also thirdly about applying it to voting in particular.
Last November 8 - before it had become clear to me what political outcomes would become known several hours later on that dark day - I posted the following, in the course of discussing a paper presented by Ilyana Kuziemko the day before at the Colloquium on High-End Inequality:
To explain, Part I of the paper, "The Political Economy of Progressive Rates," does an excellent job of explaining basic optimal tax models that underlie thinking about progressive and other tax rates, along with rational choice-based political economy models that can be used to predict legislative outcomes in a majoritarian framework. But that's just the set-up or background. The real work of the paper is done in Part II, "The Instability of Rate Schedules." Here, given the fact that, in the set-up, for any current set of rate schedules there is a majority that would prefer something else - leading to cycling, and making agenda control important - the paper "uses a set of Markov chain Monte Carlo simulations [to] explore what rate schedules are most likely under majoritarian voting." This takes the form of "heat maps" showing what rate structures emerge most frequently, among the assumed possibilities, under different sets of assumptions, e.g., regarding agenda control and the influence of the rich. "The simulations suggest that (1) rate progressivity becomes more likely as political power is concentrated in the hands of the rich, and (2) progressive rate structures are predominant even if there are relatively more rich than poor."
Under the rational choice model, the voters perfectly understand all the possible tax systems and everyone else's preferences. They are rational utility-maximizers, whose utility depends solely on own consumption and leisure. Disregarding changes to leisure (from adjustments to labor supply) to simplify the exposition, all they care about is having more money rather than less, from how a given tax change affects (a) their own tax liabilities, plus (b) the demogrant that they get given the overall revenue raised. (The demogrant functions as a proxy for positing uniform benefit from government spending.)
I myself tend to be somewhat of a skeptic regarding rational choice models of this kind. First there are the issues about rational choice generally, secondly about assuming that utility depends solely on own consumption and leisure, but also thirdly about applying it to voting in particular.
Last November 8 - before it had become clear to me what political outcomes would become known several hours later on that dark day - I posted the following, in the course of discussing a paper presented by Ilyana Kuziemko the day before at the Colloquium on High-End Inequality:
"The paper notes that, under the “workhorse political economy model” in which voters simply follow their own narrow economic self-interest, it would be paradoxical to find that rising inequality didn’t trigger increased support for redistribution. The model – which, happily, the authors, no less than I, regard as a useful strawman rather than something that is actually credible – posits that each voter’s support or opposition for addressing income inequality is simply a function of mean income minus own income, as this would determine whether symmetrically compressing income inequality would yield one a gain or a loss.
"This is not a convincing model for numerous reasons. Let’s even posit that people didn’t care about anything other than the effect on own income under the above setup. The model would still founder on the paradox of voting – i.e., the fact that, since I cannot have any statistically significant effect on the outcome, my voting (and even informing myself about the economic stakes to me) are a total waste of time when modeled in such a framework. People “shouldn’t” vote, and if rational “wouldn’t” vote, unless something else was going on....
"What’s a better basic account of how voters generally make choices? I rather like this quote from the newly published Christopher Achen and Larry Bartels, Democracy for Realists:
“'[M]ost residents of democratic countries have little interest in politics and do not follow news of public affairs beyond browsing the headlines. They do not know the details of even salient policy debates, they do not have a firm understanding of what the political parties stand for, and they often vote for parties whose longstanding issue positions are at odds with their own. Mostly, they identify with ethnic, racial, occupational, or other sorts of groups and often – whether through group ties or hereditary loyalties – with a political party. Even the more attentive citizens mostly adopt the political positions of the parties as their own: they are mirrors of the parties, not masters. For most citizens most of the time, party and group loyalty are the primary drivers of vote choices.'”
Oh's paper does not, however, make unsupported claims about the model's degree of descriptive accuracy. Instead, in its Part III, "Moving to the Real World," it discusses the issue of what we actually learn from the model. I agree that these models can provide an interesting perspective to add to other perspectives, and hence are worth doing.
BTW, the paper's current title doesn't do a perfect job of conveying what we learn from Part II. In essence, what the simulations show is that, in the model, the rich are more successful in gaining allies when they agree to a plan in which rates below the top income level are lowered. E.g., suppose that there initially were a flat 40% rate throughout. Lowering the tax rate to, say, 20% for the first $100,000 of income would reduce taxes by $20,000 for each individual with more than $100,000 of income. This would exceed the reduction in the demogrant, so they'd be better off. While they would also benefit for lowering the tax rate that applied to income above $100,000, they wouldn't have as many allies if they proposed that. Everyone who was earning $100,000 or less would be opposed, whereas people in the upper ranges of that group would also benefit (despite the reduced demogrant) from lowering tax rates for the first $100,000.
Another way of thinking about the paper is that it illustrates the benefit to people in the upper rate brackets from lowering what are, for them, inframarginal rates. This indeed is a point that may have helped, say, the designers of the 2001 Bush tax cuts - not to mention the current Republican Congressional leadership - in creating false impressions among voters regarding the overall distributional slant of their tax proposals.
Subscribe to:
Posts (Atom)
