Friday, September 28, 2007

New Proposed Legislation - Senator Levin's Ending Corporate Favors for Stock Options Act

Thanks to a tip from Victor Fleischer, i just came across the following link to Senator Carl Levin's newly proposed Ending Corporate Favors for Stock Options Act. For better or worse, this bill is an interesting move in the ongoing set of disputes about tax and corporate governance, taxable income vs. accounting income, etc.

At the risk of excessively repeating myself, here is the link again for my recently posted article draft on this general topic.

The first thing the Levin bill does is limit corporate tax deductions for employee stock options (not just for highly paid executives) to the amount being deducted for financial accounting purposes.

On this, I would start by saying that I generally favor mandating greater tax-book conformity, in response to managerial incentive problems involving tax sheltering and earnings management I advocate only partial conformity in my article because I don't want Congress to start mucking around more with the financial accounting definition of income - it's bad enough that they already do things to the tax definition. This is generally consistent with that view, so long as it doesn't lead a subsequent Congress to muck around directly with the financial accounting definition in order to get an indirect tax result. One objection to this proposal, however, is that we already have a form of discipline on the tax end because the employer deduction generally must be coincident with an employee inclusion. I would think it's uncommon for the net of the two to favor the taxpayers, because presumably the company is more likely than the employee to have a low rate (given net operating losses and such). So, if I'm right that there isn't a systemic problem with the tax deduction being claimed, the only rationale here would be to discourage structuring options to have a bigger tax than financial accounting deduction. Arguably defensible under the skeptical view of the social merits of such tax-accounting "arbitrages" that I express in my piece, unless we don't think people are deliberately structuring into the inconsistency.

Second, the Levin bill lets corporations take the tax deduction in the same year it's reported on the company books, apparently even if the employee hasn't included it yet. This I don't like. Companies that don't need to worry as much about reported earnings, e.g., because they're relatively closely held and thus have a well-informed audience for their financial accounting income, now have a license to play tax games. I actually address this sort of problem in my paper, by the way, by limiting reductions of taxable income towards lower financial accounting income to the amount of previous adjustments in the opposite direction. No such control here. I wonder if the provision should have a negative revenue estimate, given this point.

Third (leaving out some miscellaneous stuff), the bill extends current law's $1 million annual limit on deductions for a publicly traded corporation's payments to top executives, so that it extends to stock options as well as straight compensation. But the existing exception to the $1 million limit for "performance-based compensation" remains. He's just moving stock options out of the performance-based box.

Even if you like the $1 million limit, and few people do, this is just silly. All one needs to do to avoid it is have a virtual stock option instead of a literal one. E.g., you have performance-based compensation that pays you off based on the stock price, but it isn't called a stock option despite having identical economics. Outside the rule, presumably?

Tuesday, September 25, 2007

My new article on SSRN

My new article, The Optimal Relationship between Taxable Income and Financial Accounting Income: Analysis and a Proposal, is now available on SSRN. Here is the link.

International tax policy

This evening I attended the annual Tillinghast Lecture on international taxation at NYU Law School. The speaker was John Samuels of General Electric, who has been called the leading in-house corporate tax counsel in the US today.

I have met Samuels several times over the years when presenting papers at the International Tax Policy Forum in DC, which he directs. My post about my most recent appearance there, where my interlocutors, including Samuels, succeeded in stirring some doubts concerning how I have been thinking about international tax policy, is here.

But this time John was on the firing line, not me. And I was very interested in hearing about the alternative (and as it happens, more pro-US multinationals) view of international tax policy that he holds and had effectively argued for at my ITPF session.

John started by criticizing the standard US (at least in pro-government circles) view of international tax policy as aiming to promote worldwide economic welfare (as distinct from national economic welfare) by advancing capital export neutrality (CEN), which urges, among other applications, that US companies face as high a tax rate on outbound investment as on home investment, so that they will go for the investment with the highest pre-tax yield. He condemned the foolishness of pursuing WW welfare when everyone else is pursuing national welfare.

There was a missing piece at this stage of the talk, but one that he was, I think, prepared to supply. Under the long-standard economic analysis, dating back to Peggy Musgrave's early-1960s work, the right thing to do from a selfish standpoint with outbound investment of your own nationals is to be less generous than the current US international tax regime - not more so. Musgrave describes "national neutrality," under which nations make no effort to ameliorate double taxation, merely allowing deduction of dollars paid to foreign governments on outbound investment. Result under the standard analysis: outbound investment is greatly deterred to everyone's WW detriment. For example, if France and the US both have 40% tax rates, a US firm earning $100 in France ends up with only $36 ($40 French tax leaves $60, then 40% US tax on this residue). Only, within the standard analysis, the US has no reason to change its behavior here unless there is reciprocal forbearance - i.e., France as well as the US retreats on revenue claims via foreign tax credits or exemption of foreign source income. Big difference from free trade, where everyone benefits from being a good guy even if it is unilateral. Here, it has to be reciprocal. Hence, my paper from the above-noted ITPF session where I talked about it in terms of prisoner's dilemmas.

Often when the US tries to clobber its multinationals on outbound investment, this is rationalized as cooperating when everyone else is defecting, from the standpoint of tax harmonization versus tax competition. John's talk was highly critical of US policy on this point, leaving unrebutted the critique that what we're doing might alternatively be rationalized as moving closer to national neutrality by increasing US taxation of outbound investment by shaving foreign tax credits.

The central bone of contention, and of John's answer to this national neutrality point, and of the responses to my article at ITPF the other month, goes to whether US outbound investment is a substitute or a complement for home investment. Substitute is what you'd expect if a given US company has a fixed pool of capital. E.g., we have $10M to invest, and we'll put it either here or there. Tne national neutrality view depends on substitution, rather than complementarity, thus rationalized in terms of where you spend your finite budget. But research by Mihir Desai, Jim Hines, and others fails to find substitution and instead finds complementarity. In other words, making more foreign investments if anything increases a US firm's home investments, rather than crowding them out.

How can this be, when the idea of budget constraints is among the most fundamental in economics? The idea is that the various firms from around the world are competing for capital. Assume for now it's loan capital not equity they are competing for. They're battling each other to borrow money in order to invest it at a high return.

Let's make it concrete. GE or MacDonald's is considering investing in China. Given home country bias in where people buy stock, we assume that these US companies are mainly US-owned, so the profits are going ultimately to US individuals who own the shares. GE or MacDonald's is competing with a German firm (a) to make a given investment in China that is expected to be profitable, and (b) to borrow $$ on worldwide capital markets to fund the iinvestment.

John argues that the US firm can't compete with the German firm if it has to pay more tax due to the US international tax system. Problem # 1: paying a higher tax rate doesn't necessarily make you non-competitive. Example: a 40% taxpayer and a 30% taxpayer can compete without competitive advantage to the former (other than, e.g., in generating funds internally). Both will price their goods for the highest pre-tax profit, the 30% guy simply gets to keep more of it. If the bank offers 10% interest, the 30% guy isn't going to out-compete the 40% guy to put money there; he'll simply do better after-tax (but the home country government does better in the 40% case, making it in this sense potentially a wash).

Problem # 2: Why does GE or MacDonald's have this profitable investment opportunity? Multinationals are set up, modern corporate theory has it, to exploit rents that are available to them through the most efficient ownership structure to exploit these rents. In plain English, MacDonald's has that stupid name that people value, so they can sell manure-filled cow slop for big bucks. GE has internal knowhow and valuable patents or something like that. Rents in this lingo are special opportunities to realize extra-normal returns. Economic theory says that you can tax rents (once established) without changing behavior. E.g., if Michael Jordan's best opportunity is to earn $30 million playing basketball, and second best is to earn $100,000 playing baseball, tax his basketball earnings at 90% and it's still the best thing he's got going.

So why can't one tax the rents, also why are there rents if the Germans are out there competing with GE. Don't they get competed away? Why doesn't it all boil down to Americans getting the normal return on their saving, meaning that we ain't gonna get no richer unless we save more.

Next problem: if GE or MacDonald's isn't tax-deterred from making this investment, how is it going to fund it, as a complement rather than a substitute for home investment, absent a magical money machine? The answer, presumably, is that it raises the money - not from Americans, who aren't saving any more, but from foreign investors on WW capital markets. But now the rent ceases to be captured by Americans unless we posit that GE or MacDonald's, despite being able to attract the rent in China notwithstanding German competition, and despite being so readily tax-deterred on the US side if we don't treat them as favorably as Germany treats the German firm, can decline to share it with the foreign investors. They ostensibly lack the market power to do any more than get the normal rate of return on debt, leaving the extra profit still to be captured by the American shareholders.

Something about this story still doesn't compute for me. I am starting to think that what Samuels is showing is WW inefficiency, not national inefficiency. The world loses if the capital goes through the German firm rather than through GE, despite GE's being the more efficient operator, because the suppliers of WW capital would rather go through that firm in order to get the corporate residence company tax savings. That sounds like a decent WW efficiency argument. But why is it a US problem if Americans, not being the suppliers of the extra capital, aren't going to be the ones who reap the extra profit?

Perhaps at best he's saying that the US tax regime will generate WW inefficiencies while doing little for us given the escape hatch of investing through a foreign firm. So we don't really gain that much, he may be saying, and WW efficiency suffers. But the case he thought he was making was that US living standards will be hurt if GE doesn't get to make that foreign investment that is being competed against by the Germans and that is funded at the margin by foreign capital from somewhere or other. And I am finding it hard to make this story stand up.

Monday, September 24, 2007

NYU presentation of my new paper

Today at NYU I gave a lunchtime presentation, at one of our in-house faculty seminars, of my newly completed paper draft, "The Optimal Relationship Between Taxable Income and Financial Accounting Income: Analysis and a Proposal." I didn't mention the session here in advance because it isn't open to the public.

By the way, the paper has that sub-title after the colon, even though it makes the whole thing clunkier, in order to provide fuller guidance about what it actually tries to do.

Good session. The main points I got that may prompt revisions before I post the paper on SSRN (with a link here) relate to special topics such as executive compensation and treatment of foreign subsidiaries. But I do hope to post and link it shortly.

One always ends up in a huge triage operation deciding what to do next and what to put off. I just resolved one triage in favor of editing the final page proofs of my forthcoming Tax Law Review paper, "Why Worldwide Welfare as a Normative Standard in U.S. Tax Policy?" before revising my accounting paper or working on my new paper, which may end up being a think tank book, and which has the working title: "The U.S. Corporate Tax: What Is It, and Where Is It Headed?" More on that in due course.

I've decided to resolve my next triage in favor of consolidating a bit of progress on the corporate tax project and then getting my accounting paper working draft out.

Leaving aside that I am currently neglecting both in favor of writing this post.

Evil scam

I just received a new variant of the various credit card scams (often claiming to be from Paypal or various banks) that arrive through e-mail from scoundrels bent on larceny.

This one is ostensibly from "" and reads as follows:

"Subject: Notification of Tax Refund on your VISA or MasterCard Now

"After the last annual calculations of your fiscal activity we have determined that you are eligible to receive a tax refund of $209.30.

"A refund can be delayed for a variety of reasons.

"Fox [sic] example submitting invalid records or applying after the deadline.

"Sorry for any inconvenience this may cause and thank you for your patience.

"To access the form for your tax refund please click the link below."

I didn't click on the link but no doubt it would help me to tell the senders everything they want to know about my credit card.

I suppose one could argue, from a Darwin Awards standpoint, that these guys are good for the genome. Meaning that, if you fall for it ... But I am not so hardhearted, nor would such an argument even be correct evolutionary science.

Friday, September 21, 2007

Indirect defense of Obama

An earlier post is largely critical of Senator Obama's new tax plan.

But it's only fair to hold other candidates to a common standard.

So here is Mayor Giuliani, on eliminating the alternative minimum tax (AMT), courtesy of a recent Associated Press article:

The article notes that "eliminating the AMT would be extremely expensive, costing $100 billion in 2010 alone.

"Giuliani told the 700-member audience of the Northern Virginia Technology Council that he wants to cap the tax, and perhaps eventually eliminate it altogether.

"'Over time we can figure out how to eliminate it. ... If we were going to eliminate it, though, we'd have to balance it with additional tax cuts,' Giuliani said, leaving confused expressions on his audience. "That might be by making the Bush tax cuts permanent.'"

Got that? In Giuliani's world, you have to finance the revenue cost of repealing the AMT by enacting other tax cuts as well.

The article suggests that Giuliani may have misspoken. But this is uncertain. Giuliani is on record as stating categorically that tax cuts raise revenue, and that only extreme liberals believe otherwise. So perhaps he thinks that he actually is financing the AMT tax cut by raising revenue by adopting the other tax cuts. Only - doesn't the AMT tax cut necessarily raise revenue also?

I'm confused, but it's gotta be me, not him.

UPDATE: Giuliani is such a grotesque clown that I've got to add a couple of more things about him. First, he apparently said today that criticizing General Petraeus should be illegal. Second, he stated that the reason he now is begging the NRA for support, rather than sticking to his old stance on gun control, is that 9/11 changed everything.

Thursday, September 20, 2007

Lyndon Johnson to the rescue

The other day, playing tennis at Roosevelt Island, I was trying to close out a tough set on my serve. Trailing 3-5, I had gone up 6-5 and now needed to hold. But I was getting tentative.

Every now and then I'd peek between points at the doubles match on the next court involving some much older men. When I see these guys (there are lots of them at the club, playing doubles in different groups), I always ask myself whether I am looking at my own future. They obviously know doubles pretty well, and hit all kinds of strange spins and and lobs along with sharp angles. But if this is my future, I hope I don't start foot-faulting all the time on my serve, as it appears that they invariably do.

Anyway, I saw the guy serving on my side of the net, and suddenly said to myself: "Wait a second, what's Lyndon Johnson doing playing tennis at the next court?" (The guy was a dead ringer.)

I immediately relaxed and won three straight points to take my service game at 15.

Wednesday, September 19, 2007

Comedy special of the day

Dick Cheney has an op-ed in today's WSJ, ostensibly rebutting Greenspan's criticism of the Bush budget record.

The entire column is a laff riot. But for me the comedy highlight was the following:

"Alan has long argued, correctly, that fiscal discipline is a long-term obligation requiring honesty and a willingness to make tough choices. Here again, we agree. And on this measure, President Bush's record is superb."

Cheney then mentions Medicare, to which Bush added an unfunded $20 trillion new entitlement, and Social Security, on which the Bush plan would have had zero net effect on the program's long-term shortfall (although it would have required a future political willingness to follow through on deferred cuts just to break even).

Quote NOT found in this op-ed: "Reagan proved that deficits don't matter. We're entitled to these tax cuts - we won the midterms."

Obama tax plan

I admittedly have a hard time getting interested in politically hypothetical tax reform plans, such as those announced by candidates who appear to be long shots, and who even if elected might have to change course. Then again, it turns out that everyone (certainly including me) should have paid a lot more attention to what Bush was saying about taxes in 1999, since, astonishingly enough, crazy though it was, he actually meant it.

Thus, I suppose I should comment on Barack Obama's tax plan, announced yesterday in a D.C. think tank speech, although i don't think he'll get very far and even if he did he might learn that Democratic Congresses don't follow executive direction (at least from their own party - they're certainly puppy dogs for Bush on national security issues).

Obama's tax advisor is Austan Goolsbee of the University of Chicago, which I would say generally bodes well for his proposals. But he is (obviously) operating in a political environment, and particular one in which he is behind. Not always the best prescription for good policy. Anyway, here goes. According to his website, he proposes the following:

Obama’s middle class tax relief plan would provide $80-85 billion in tax cuts to America’s workers, seniors and homeowners by:

* Cutting taxes for 150 million Americans and their families, allowing them to get a tax cut of up to $1000.
* Easing the burden on the middle class by providing a universal homeowner’s tax credit to those who do not itemize their deductions, immediately benefiting 10 million homeowners, the majority of whom make under $50,000 per year.
* Eliminating the income tax for any American senior making less than $50,000 per year, eliminating income taxes for about 7 million American seniors.
* Simplifying tax filings so millions of Americans can do their taxes in less than 5 minutes.

Obama would pay for his tax reform plan by closing corporate loopholes, cracking down on international tax havens, closing the carried interest loophole, and increasing the dividends and capital gains rate for the top bracket."

A few comments from me:

1) Given the fiscal gap, I'm not a big fan of $80 billion of tax breaks for anyone - those getting them will probably end up giving them back in a few years, through tax increases plus benefit cuts, even if fully financed

2) Apparently a $1,000 tax credit for middle class folks, phased out as income rises. Not great in efficiency terms - no marginal effect on incentives, except for the bad effect of increased marginal tax rates in the phase-out range. Again, I really don't think we're giving people anything on a lifetime basis if they are effectively going to have to pay it back in a few years.

3) I am not a big fan of the home mortgage interest deduction. Admittedly there's no point I can see to limiting it to those who itemize their deductions. A flat percentage credit that cost the same total amount as the current deduction (which rises in value with marginal tax rates) sounds like an improvement - see the recent Batchelder, Goldberg, and Orszag article in the Stanford Law Review on refundable credits. But giving non-itemizers more would require giving itemizers less if it isn't losing revenue, and I doubt this is what Obama has in mind.

4) No income tax for seniors earning $50,000. Just what we needed, a big giveaway to current seniors. Admittedly, we may want to benefit the low-earners among seniors if they don't have enough retirement saving plus benefits. But this is a big tax cut for all seniors unless we raise marginal tax rates on seniors above $50,000 in order to get back to the same place. One possible efficiency benefit, depending on the tradeoff if higher-income seniors face increased marginal rates - seniors have unusually responsive labor supply, so in an optimal tax sense they arguably should face lower marginal rates. But basically I don't like this proposal, and the word pandering occurs to me (as with the $1,000 credit).

5) Simplifying tax filing - I believe this is the Joe Bankman / California "Ready Return" idea. A great idea, and if anything that's understating it. I am hoping Joe publishes his account of the disgracefully sleazy actions of Intuit in California, killing Ready Return there because they thought it would diminish their rents. It's one thing for corporations to seek tax breaks for themselves - that's expected - it's worse for them to try to screw their customers, which is what Intuit was essentially doing.

6) Closing corporate loopholes and cracking down on tax havens - great in principle, but let's see the details. Revenue claims from this could easily be overstated. If worth doing, it should be done to raise revenue on balance given the fiscal gap.

7) Closing the carried interest loophole - I think I've heard of this issue somewhere. While I agree with doing this, one wonders about the revenue claims.

8) Raise capital gains and dividend rates - The former sounds fine on balance so long as it stops sufficiently short of the revenue-maximizing rate (Laffer curves are actually a factor here, unlike on labor income in politically plausible ranges). On dividends, I happen to favor corporate integration, and this is a step away from that, but I'm not convinced corporate integration is worth doing unless the distinction between debt and equity is eliminated. Debt is deductible by the company, includable by the recipien, while equity is neither deductible nor includable in the most commonly proposed integration prototype. This permits sorting of investors so that the tax-exempts hold all the debt and taxables all the equity (with some effort to minimize the second level of tax), possibly leading corporate income to be taxed on average less than once. Anyway, undoing the wrong kind of integration might be defensible even though I'm otherwise not thrilled with the direction.

On balance, not great although I suppose one shouldn't be surprised given the political context.

Tuesday, September 18, 2007

NYU carried interests event

Today I was merely in the audience (a question I asked aside) as 100 or so (!) NYU law students attended a panel on carried interests. Panel consisted of Vic Fleischer, Jon Talisman again for the defense, Cardozo law prof Mitch Engler, and economist Joel Slemrod, currently visiting at Columbia.

Vic gave the basic rundown of the issues. Talisman laid out his case a bit more fully this time than when I saw him at the panel in Washington a couple of weeks ago. Although he noted he was the only non-academic on the panel, it was actually classic first year law school type stuff, aka familiar legal reasoning by analogy. We all know A gets capital gain treatment, B is a little bit like A, C is not unlike B, D is not that far removed from C, and therefore they all should get capital gain treatment. Well done though not to me persuasive.

Talisman made a point in response to my question that I didn't feel I could answer there without unduly hogging the floor, what with other people waiting to ask questions. But it was the classic reasoning by analogy without (I would argue) adequate grounding. He noted that the proposed legislation gives ordinary income rather than capital gain treatment based on disproportion in the interests. E.g., I put in no cash but get 20% of the return as compensation for my services, and the proposed legislation makes this disproportion the ground for denying CG treatment.

Talisman gave the example: A and B both put cash in a partnership that develops shopping centers. Case 1, they participate equally, doing lots of work, and get a 50% return each, which unambiguously gets CG treatment under current law. Why should this change because A does a bit more work than B and thus gets 60-40. For that matter, why is A here different than if he did his own thing completely, blending a lot of labor income in developing the shopping centers with his own cash, and getting CG treatment for the whole thing. So what's the deal with disproportion being fatal to the CG result?

The answer relates to evidentiary problems in determining tax consequences. If, in the case of the solo developer of a shopping center, or the guy who spends lots of time on his stock trading and therefore gets an extra profit, we could impute the labor income, we probably should and would. But we can't - the evidence is assumed to be missing to do the imputed transaction here. Disproportion simply provides evidence that someone must be getting labor income, since why otherwise would they get a bigger share than is merited by the cash down alone. To say we shouldn't impute labor income when we have evidence of it, because we don't in various cases impute it due to the lack of clear evidence, would be rather silly. Why not then give me CG treatment on my labor income in teaching classes? It's merely a technicality that I didn't get to commingle it with some ordinary return on an asset.

Joel Slemrod made a nice analogy to "notches" in the rate structure, which would take too long to explain fully here, but the gist was that, when tax treatment is unavoidably discontinuous (i.e., one iota more CG-like, and the whole thing switches to getting CG rather than ordinary treatment), you want to find break points where people can't cluster just barely on the better side of the line. Having enough of your own money to invest versus needing other people's money is a convenient break point, in this sense, assuming one can police non-arm's length (or at least not generally available) and typically nonrecourse loans. So the analogy Talisman suggested fails here because it doesn't sufficiently suggest actual substitutability between structures.

Mitch Engler gave an analysis from his paper with Noel Cunningham, to the effect that the whole thing should be analyzed as an implicit loan. $10M fund, I as the general partner put in no cash but get a 20% profits interest, this is like making me an interest-free $2M loan. If the interest rate is 10%, the "real" transaction ostensibly had matching $200K payments of compensation from the LPs to me and an interest payment from me to them. Current year result: I have $200K net taxable income from the inclusion, due to rules limiting interest deductions.

Mitch (and Vic) called this the most accurate way to tax the deal, which I didn't necessarily see. One equally could see it as paying the GP $2M cash that he invests in the partnership - why think of this as "really" involving a loan of the value of the profits interest?

On alternative grounds, however, I saw this as an interesting solution. Say $2M is our best estimate of the value of what is given to the GP, because he has 20% of the profit interests in a $10M fund. (Admittedly, valuation may be more complicated. He may have to meet a hurdle rate, on the other hand suppose we expect an extraordinary return here, relative to the cash invested, due to the labor component.) Allowing the GP to defer the inclusion at a market interest rate, and making the LPs (who may be tax-exempt anyway) defer the $2M deduction at a market interest rate, is pretty much neutral compared to requiring current inclusion and deduction. So I am prepared to see the Engler-Cunningham solution as involving time value-neutral loans of tax liability between taxpayers and the government, even if imputing a loan between the parties does not especially resonate for me.

Sunday, September 16, 2007

TIAA-CREF is absolutely the worst, bar none

One alarming thing about being an academic is that so much of one's retirement saving is in the hands of the mega-organization, TIAA-CREF. Perhaps I should be hiding dollars in my mattress instead of working with these guys. It's pretty scary to think that I or my children will need to rely on them some day.

What prompts this reflection is my experiences over the past sixteen months or so with respect to a couple of small TIAA CREF accounts wiith survivorship rights that my late father left to my brother and myself. After months of repeated effort - calling frequently upon the receipt of incoherent correspondence, having to do the same ministerial steps two, three, or four times in a row, and so forth - my brother has actually succeeded in having his share of both accounts transferred to his name. I am still only one for two.

Most recently, I got some correspondence that, among other steps,required me to travel to my bank for a signature guarantee, signed by a bank officer. Okay, I did it, forty-five minutes or so out of a busy day, and sent it in.

This weekend I got a letter back from TIAF CREF. Dear Mr. Shaviro, etcetera, etcetera. You will have to do this form again, because the signature guarantee wasn't filled out. Attached to it, a Xeroxed copy of my last submission. On page 2, someone has helpfully highlighted in orange the instructions for the signature guarantee. Right next to it is the actual signature guarantee itself, fully filled out, everything there, not a line missing, and no indication of what the problem is except that they apparently don't realize it's there, even though they wrote me the letter and took the trouble of highlighting the instructions in orange, right next to my fully filled out text.

What is with these people? Drugs? Drink? I'd like to know.

UPDATE: TIAA-CREF blames my bank. Didn't use the "medallion" insignia, you see.

Thursday, September 13, 2007


It was some months in the making, but I have finally completed a draft of my article, "The Optimal Relationship Between Taxable Income and Financial Accounting Income: Analysis and a Proposal." It is not quite ready for posting, but I hope to get to that stage reasonably soon.

Monday, September 10, 2007

Carried interest panel in D.C. last Friday

Back to the carried interest panel in D.C. last Friday. An interesting starting point for me was the suggestion, made by a good friend there who I only see sporadically, that I am thought to be "walking the line" on this issue. I may not have the phrase right, but the sense of it, I thought, was that I'm perceived as trying to be in the middle. This, I presume, because I have been interested in the question of whether the corporate-level tax gives some merit to the anti-change position on this issue. To my mind as an academic, it's actually the most interesting part of the entire issue in terms of the light it sheds on thinking about tax reform, the taxation of "capital income," etcetera. But probably not very important to thinking concretely about the merits of the carried interest issue as it has been teed up for current consideration in Washington - this by reason of the gaps in the corporate tax base, which make the proxy tax less of a relevant concept.

I do admit I want to be reasonable not shrill on the issue, which (though it sounds good) can actually take one away from calling things accurately when one side is totally wrong. (Cf. "bipartisanship" on Iraq or almost any other current policy debate featuring the Bush Administration on one side.)

So far as making the proposed legal change is concerned - that is, requiring ordinary income treatment for some well-defined category of general partner carried interests - I think the merits in favor really are pretty overwhelming. This was quite clear at the panel, where Jonathan Talisman really didn't seem to me to have that much he could say in support of his stand. (To his credit, he was reasonable & tried to be fair-minded given his position.) All he could really say is that it's a line-drawing problem, lots of other people with labor income get capital gains treatment anyway, so why not let these guys keep it as well. No good answer to: Why not move the lines a bit, even if marginally and arbitrarily, in the right direction.

Proof that the surge is working

Apparently, left-handed shootings by people with reddish hair, occurring between 7:30 and 11:15 in the morning, and where the bullet path suggests that the attacker was between 2-1/2 and 5 inches taller than the victim, are down by 38 percent.

Friday, September 07, 2007

A bit of snark

Okay. fine. Here is the bit where I was quoted in today's N.Y. Times about the carried interest issue:

"'One of the funny things about this debate is that according to the industry, it is not going to raise any revenue but at the same time, it’s going to shut down the industry. They can’t both be true,” said Daniel Shaviro, the Wayne Perry professor of taxation at New York University."

Tuesday, September 04, 2007

D.C. appearance later this week

I will be very briefly in D.C. this Friday (September 7), participating in an Urban-Brookings Tax Policy Center-sponsored hearing on taxing carried interests. It will go from 9 to 10:30 a.m., at the Rayburn Building on Capital Hill. Other speakers are Victor Fleischer, William Stanfill, Eugene Steuerle, and Jonathan Talisman.

It looks like the academics/think-tankers have a working 3-2 majority here. Stanfill is a partner at Silver Creek Technology Investors, while Talisman is at Capitol Tax Partners, so I think I can guess (and in Talisman's case I know) how they come out on the issues here.

UPDATE: Steuerle is the moderator, so no doubt sworn to strict neutrality. Call it 2-2, and may the better arguments win. (Actually, I trust it will be more amicable than this, and I certainly don't foam at the mouth on these issues - e.g., I agree that corporate-level taxation matters to the merits of taxing the service partners, and that symbolic yet ineffective fixes wouldn't be worth doing.)

FURTHER UPDATE: I'm back in NYC after the session, and will blog on it shortly. But a quick correction - I certainly got Stanfill wrong, for which my apologies to him. His pitch is that he should be taxed at the full ordinary income rate, not the capital gains rate. Amusing moment in the session: Victor Fleischer was saying that the general partners (GPs) who run these partnerships typically have only a couple of fellow GPs, if any. He asked: "Isn't that right, Bill?" Stanfill answered that he's had fewer since he started testifying in favor of higher taxes on his industry.