Monday, March 30, 2015

TV ad for TaskRabbit?

Since tomorrow, at the colloquium, we will have a paper that discusses taxation of the sharing economy (Uber, AirBnB, TaskRabbit, etc.), I couldn't resist sharing my idea for a TaskRabbit TV ad.

A young woman in medieval garb is sitting weeping in a room that has bars on the windows and a giant spinning wheel, and that is filled with straw.  Suddenly a nasty-looking, diminutive imp (clearly Rumpelstiltskin) pops up in front of her.  He asks what's wrong.  She explains that the King has told her she will be executed in the morning unless she has spun all of the straw in the room into gold.

"No problem," he says, "I can do it for you."

"What's it going to cost?"

"No necklace?  No ring?  Why don't we just say, oh ... your first-born."

"No way!" she says, smiling suddenly.  "I can just use TaskRabbit."

She takes out her phone, starts punching at it with her thumbs, and in no time at all is looking at options and placing a call.

Enraged, the little imp stomps his right foot into the ground so hard that he sinks in up to his waist. He is on the verge of grabbing his left foot and tearing himself in half, while she, oblivious, is smilingly talking on her phone, when the TaskRabbit logo replaces them on screen.

"TaskRabbit!  Live smarter!  Just tell us what you need, choose a tasker, and then sit back and relax!"

Cut back to the room, where there is a giant hole in the floor and no Rumpelstiltskin, the young woman is sitting cross-legged on the floor in the corner texting, and either a crone or a Brooklyn hipster has already converted half of the straw to spun gold and is working diligently on the rest.

Wednesday, March 25, 2015

Overheard on the street

Walking home at the end of the workday, I passed by a couple of guys, and over-heard the following monologue from one of them, which seemed script-worthy, so I kept it in mind and wrote it down as soon as I got home:

"I was immediately head over heels, and I was like, oh no, this is going to disrupt my sleep.  But luckily, I didn't have to pursue her, she pursued me.  I met her on Friday.  She texted me on Saturday. I texted her back on Sunday.  On Monday ... "

But at this point I was too far past them to hear whatever came next.  Anyway, it's Wednesday.

NYU Tax Policy Colloquium, week 8: Leigh Osofsky's The Case for Categorical Nonenforcement

Yesterday we continued our theme this semester of branching from tax towards other law, rather than towards public economics, by discussing the above paper.  "Categorical non-enforcement" is a label that one might, subject to dispute, extend to the Obama Administration's currently contested immigration plan, but there are also various tax applications of the concept.  More on this momentarily.

Despite the paper's title suggesting that it is "for" the allowability of categorical non-enforcement, it's probably better viewed as anti-anti-categorical non-enforcement, in the sense of questioning standard arguments against it from con law, which it argues rest on drawing exaggerated or unpersuasive distinctions.

As an initial aside, however, one of the things we happened to look at in the course of the day was excerpts from the Obama Administration's Office of Legal Counsel (OLC) memo explaining why the immigration plan is within the President's power to faithfully execute" the laws.  I was a bit disappointed by the OLC's reasoning, finding it a bit thinner than I would have liked, given that as a matter of policy I am highly sympathetic to what the Administration is trying to do.  For example, it relies on the claim that the "categorical" policy of suspending deportation within certain categories is actually case-by-case, since they could actually override it for unstated reasons in any particular instance, which they don't appear actually to be planning to do.  This is arguably a bit formalistic, rather than substantive.  And it relies on the fact that Congressional legislation deliberately extended other benefits to the groups that get favorable treatment here, ostensibly showing consistency with Congressional intent.  But that might be a bit like saying that, if the bank gives me a toaster when I open a new savings account, the underlying intent supports also separately giving me a clock radio.

None of which is to say that a 5-4 Supreme Court vote striking down the immigration plan would merit much of a presumption that it had been reached through good-faith legal reasoning, rather than on political grounds.  Too much water under the bridge at this point (even before we get to see what they do in King v. Burwell).

But anyway - back to the paper.  It does a nice job of showing that it's hard to draw lines between permissible and impermissible exercises of executive discretion regarding how to enforce the tax laws in the face of limited resources and diverse underlying objectives on the part of Executive Branch officials.  Here are a few examples, all raised in the paper, but arguably very different from each other.

1) President Romney in 2013, or present Bush-Walker-Whomever in 2017, announces categorical non-enforcement of the estate tax.  "I will not allow a single IRS auditor to review any Death Tax issue whatsoever.  It's time for us to drive a stake through this heart of this unfair, job-destroying, family-farm-endangering monstrosity."  The OLC memo in support notes that Congress repealed the estate tax for 2010, then raised the exemption amount, and left substantial scope for avoiding it through tax planning even though the "loopholes" were well-known.  It also claims that estate tax audits may be considered after all on a case-by-case basis, under criteria that it declines to explain and in seeming tension with the President's sweeping statement.

Whether or not this hypothetical executive quasi-repeal of the estate tax would be justiciable, I would call it clearly illegitimate.  But I would agree that the Romney, Bush, Walker, or Whomever Administration could shift some audit resources from the estate tax to other areas that it cared more about (e.g., EITC enforcement).  I would probably disagree with this shift as a matter of policy, but presumably up to a point this is what elections are about.  After all, it seems unlikely that the Executive Branch is required to set audit rates purely on the basis of an objective of maximizing correctly-determined tax revenue, even though that objective should presumably be an important input to the allocation of auditing and other such resources.

2) Frequent flyer miles appear clearly to be taxable under section 61 of the Internal Revenue Code, in cases where one accumulates through business use (deductible or reimbursed) and then uses them for personal travel.  True, there are some valuation and timing issues, but there basic taxability seems clear.  Nonetheless, the IRS has announced that it will not assert income tax deficiencies by reason of people's using such frequent flyer miles.  In other words, it's effectively acting as if there were an unenacted exclusion for the value of such items.

This is certainly categorical non-enforcement of a kind.  But note the likely motivation for it: Any attempt to enforce would lead to a huge outcry, almost certainly followed by the prompt bipartisan enactment of legislation blocking enforcement or expressly excluding at least standard-case frequent flyer miles.  So the IRS commissioner who directed a shift to enforcement would merely get the Congress mad at him or her without actually accomplishing anything.

Arguably there is a kind of "rule of law" violation here.  If Congress wants frequent flyer miles excluded, they should say so through legislation.  But the IRS is not really to blame here, e.g., in the sense of showing a proclivity to over-reach.  It is just declining to fall on its sword and get another black eye with Congressional leaders in exchange for no benefit (other than to the rule of law in general).  I certainly can't blame the IRS for not being so noble as to want to take a bullet for abstract reasons here.

3) It has recently come out that the IRS audit rate for large and complex partnerships is about 0.8 percent, despite the fact that there appears to be a lot of suspect or outright bogus tax planning going on this sector.  (More on this on May 5, when Gregg Polsky will be presenting a paper on this topic at the colloquium.)  The reason the audit rate is so low, even though the IRS is thereby leaving a whole lot of lawful tax revenue on the table, is that it simply lacks the staffing and expertise, especially in light of extremely complicated audit requirements that Congress imposed with respect to large and complex partnerships in the 1980s.  It therefore is fair to say that the low audit rate here represents a shocking and costly misallocation of auditing resources, albeit one reflecting constraints that the IRS faces rather than its own preference for any such misallocation.

The paper argues: Why not go to full-out non-enforcement here, so that what's going on even at 0.8% will be more transparent?  Might this help induce Congress to address the problem?  (It's presumably not unaware of the problem today, but, even apart from political gridlock and Republican hostility to high-end enforcement, there is the fact that high-income partners who are benefiting from the aggressive tax planning have friends in both parties.)

I'm not entirely sympathetic with this argument.  In effect, the IRS commissioner, Secretary of the Treasury, or some other such individual should start shouting, jumping up and down, waving his or her hands in the air, etc.  But going all the way to zero enforcement isn't quite the point (and might further backfire if it effectively invited others to join the party).

4) The paper discusses a well-known partnership tax case called Diamond v. Commissioner, in which the IRS succeeded in requiring a taxpayer to treat the receipt of a profits interest in exchange for services as a taxable event.  The IRS quickly, it appears, came to agree with commentators who viewed the decision in Diamond as anomalous.  The holding not only departed from standard practice, but raised valuation issues, and arguably was in tension with generally taxing labor income on a realization basis.  The IRS decided not to follow up, or use Diamond in audit disputes, but for a long time failed to explain its position publicly, presumably in part because it was still figuring things out.

Was this categorical non-enforcement of Diamond?  I would view it instead as IRS determination of what it thought the law actually was in this area.  At worst, the IRS might have been a bit slow to announce (as it eventually did) how it actually viewed and would be proceeding in this area, but it wasn't declining to enforce Diamond if it didn't agree that this decision (in just one circuit) offered a reliable general guide to how the receipt of profits interests in exchange for services generally should be taxed.

Friday, March 13, 2015

Deep thought for the day

People like cats for reciprocating their feelings but just a bit less; people like dogs for reciprocating their feelings but just a bit more.

Wednesday, March 11, 2015

Since I haven't had any cat posts for a while ...

Yogurt-drinker deploys highly sophisticated lapping technology.  Arguably more impressive than the first-generation iWatch.  Then again, cats and their forerunners have been working on it for millions of years.

NYU Tax Policy Colloquium, week 7: George Yin's Protecting Taxpayers from Congressional Lawbreaking

Last year at the Tax Policy Colloquium, I thought that the balance had perhaps tipped a bit too far towards economics rather than tax law, from the standpoint of best serving our students and much of our audience.  This year, partly due to deliberate adjustment but also due to the papers we happen to have drawn, it's been more "legal," and often less focused on tax law in particular than, say, constitutional and administrative law, than ever previously in the 20 years I've been doing this.  I wonder if there is any broader trend here at work, regarding shifting interests in tax academic scholarship, or if it is just idiosyncratic.

A couple of weeks ago, we had Linda Sugin's paper on standing in tax cases.  On March 24 (which is  our next session, as March 17 falls during our spring break), Leigh Osofsky will have a paper on "categorical non-enforcement" -  the scenario where an agency announces it will not be doing anything to enforce Rule X.  That is basically an administrative law question with a strong constitutional overlay, although the paper's inquiry is situated in tax.  And yesterday, George Yin's paper had us thinking about statutory interpretation and the Speech and Debate Clause of the U.S. Constitution (which protects federal legislators from being "questioned in any other place" regarding certain legislative acts).

"Protecting Taxpayers from Congressional Lawbreaking" is mainly an intensive case study.  In 2014, the House Ways and Means Committee, during Dave Camp's chairmanship, publicly released confidential tax return information that pertained to 51 taxpayers in the tax-exempt sector.  This related to publication of a referral letter to the Department of Justice regarding claims of criminal misconduct by Lois Lerner regarding audits of organizations, including in particular Tea Party entities, that were seeking tax-exempt status under Code section 501(c)(4), but would not qualify if, among other relevant aspects, they exceeded limits on permissible political activity.

As an aside, I feel justified in using scare quotes when referring to the IRS "scandal" in this matter.  BTW, if the Tax Prof Blog keeps on counting off the days, Day 1,000 of the "scandal" is less than a year away now, and Day 10,000 - if I have counted correctly - will fall on August 16, 2040.

Why the scare quotes?  There's a real issue here, which a Republican Congressional majority has wholly legitimate reasons to pursue in the face of a Democratic executive branch.  Suppose, as would not surprise me at all, that there are plenty of 501(c)(4)s on both sides of the political divide that are violating, or at least closely skirting, the provision's limits on political campaign activity.  Then this is a logical subject for administrative enforcement, subject to discretionary determinations about competing priorities in the face of limited resources.  But it would be illegitimate, and potentially criminal, to target the groups on one side of the political divide more than those on the other side - or, for that matter, to target more "extreme" relative to more "mainstream" groups, in the eyes of the IRS beholder, even if left and right get equivalent treatment,

The problem, as in the endless Benghazi investigations, is that the desire to find some sort of a scandal vastly exceeds what has actually been found, and that the investigation arguably is not being conducted entirely in good faith.  The Yin paper notes that, in the 1970s when the Ways and Means Committee investigated charges of political bias by the Nixonized IRS, it specifically looked for departures from neutral treatment of differing groups overall.  This time around, there appear not to have been similar efforts to test for this in a fair and reasonable way, as opposed to hunting for hunks of red meat to toss to the base. (And often red meat out of context, so to speak.)

I suspect, by the way, that from the standpoint of Chairman Camp, engaging in tendentious grandstanding on this issue was a service worth rendering to the Congressional leadership, helping to preserve his discretion to pursue tax reform proposals that have won widespread admiration (if zero political traction, but that isn't his fault) without having the party leadership on his throat.  This is the sort of tradeoff that people in real political situations often have to make.  Camp may actually have made the right call, from the standpoint of what he could do that would have the greatest overall net public value.  You have to pick your spots.  And the need for such tradeoffs is a good example of why I personally would never want to be in politics, even as an appointee to the type of position that tax law academics sometimes can get.

But I digress.  Returning to the topic of the Yin paper, the referral letter to the Department of Justice concerned supposed perjury by Lois Lerner.  Before the time when she had admitted in testimony to being aware of Tea Party groups, she had been involved in email correspondence identifying some such groups, along with other groups (e.g., the World Wildlife Foundation, Miss America Foundation, and an organization that was directed aid to victims of the Boston Marathon bombing) that might merit auditing.  But the Committee chose to make public, not just the referral letter, but confidential tax return information from the associated attachments, despite having the issue clearly raised.  Indeed, the Committee met and, on a party line vote, agreed to let the whole shebang be published, including confidential information pertaining to all these taxpayers.

Seemingly none of these needed to be published in terms of the political aims being served, other than perhaps confidential info pertaining to the Karl Rove-affiliated Crossroads GPS, as to which the Committee probably could have gotten the group's consent.  So why did they publish the whole thing, when it was urged that they shouldn't?  Importantly from my standpoint, there doesn't seem to have been any particular malice towards the groups whose privacy rights at least formally suffered. A reasonable guess, as per the paper, might hold that the committee simply wanted to avoid any appearance of doctoring or limiting the public record, working closely with Crossroads GPS, etc.

The Yin paper agrees that no significant harm was done to anyone, and that probably no one even particularly cared (among the groups whose confidential info went public).  But it takes the view that the precedent is potentially very dangerous, since the next time around a tax committee on the Hill could decide to publish other people's or entities' tax information out of pure malice or at least indifference.  So it discusses at the end possible measures to discourage this, e.g., by giving the Joint Committee on Taxation a measure of gatekeeper discretion to try to keep the Members away from stuff that they don't need to see.

Much of the paper, however, focuses on legal analysis of whether the committee's release of the information was a felony under federal criminal law (more specifically, Internal Revenue Code section 6103).  It concludes that the action WAS a felony, although not punishable in court due to the legal immunity that is provided by the Speech and Debate Clause.

Given the conclusion, which I agree with, that the Speech and Debate Clause would prevent prosecution of the dissemination even if it was a felony, the inquiry is a bit academic, so to speak.  My go-to literary reference for such issues ("Would this be a crime if we could prosecute it, which we can't?") is the argument in Catch-22, between two atheists, regarding what God would be like - benign or malicious - if He actually existed, which they both agree He doesn't.  But it would matter at least in a hortatory sense - one presumably shouldn't commit felonies, even if one can't be prosecuted, and if one does then one faces criticism on that ground.  So let's take a look.

Code section 6103 criminalizes the release of confidential tax return information.  But section 6103(f)(1) affords the tax committees access to such information, and section 6103(f)(4)(A) provides that such information "may be submitted by the committee to the Senate or the House of Representatives, or both."  This in turn led, and was expected to lead, to general publication of the tax return information at issue in this case. 

Suppose we accept that "may be submitted" means "may be released to the general public," although perhaps one could poke away at the distinction.  The Yin paper argues that there is an inherent or implicit limiting clause here - the submission / release must be something akin to "reasonable," although the threshold might be lower than that (e.g., not entirely unrelated to the committee's performance of its legislative functions."

How could the release here fail to meet the unstated threshold limiting the power to cause the release of tax return information without commission of a felony?  The paper's argument is that the referral had purely to do with a claim that Lerner had been committing perjury, and the other confidential info was 100% unrelated and irrelevant to that.

I tend to question this analysis.  Again, the Ways & Means Committee was conducting a political war against the Obama Administration (but that's how our political system works), and the criminal referral on the narrow perjury claim was related to its broader argument of unfair and possibly criminal political bias by the Administration or at least the IRS.  I believe that the committee fell very far short of establishing that, and acted in an irresponsible way that did not appear to reflect a spirit of good faith inquiry.  But again, that is how our political system generally operates, and it's not only probably best, but surely the current state of U.S. constitutional and statutory law, that we give this sort of activity a very broad zone of non-criminality.  The proper sanction for what the Committee did in the IRS "scandal" generally is that, in the court of public opinion, they should be viewed as having failed to make their case, and also as having acted tendentiously and irresponsibly.  Or at least, that's my judgment.  Others may disagree, and that's what political debate is all about.  But action by the Committee that was pursuant to its side of the political war (here, presumably wanting to avoid any appearance of doctoring the public record, working hand-in-glove with a Rove group, etc.) is something that I'd be very reluctant to criminalize, even absent the Speech and Debate Clause.

What might I criminalize here, based on reading an implicit limitation of some kind into the provisions statement that tax return information "may be released."  Basically, I'd look to stuff that was malicious and not related to lawful purposes such as investigating and debating claimed executive malfeasance.  An example would be releasing confidential tax return information of people or entities that the Committee disliked, in order to embarrass or otherwise hurt them.  But again, no hint of this in the case at hand.

One more statutory interpretation issue may further, in my view though not that of the paper, undermine the argument that the Committee's action was felonious albeit protected.  For 50 years (though ending in 1976), the committee was empowered to submit "any relevant or useful information" to the Senate or House.  But the words "relevant or useful" were stricken from the statute in a 1976 technical corrections bill.

This clearly seems to lay out the legal contours, pre-1976, of what would then have made a release of tax return information by a tax committee non-felonious.  The information would have had to be "relevant or useful."  In the paper's view, that threshold was not met in the present case, because the information was completely irrelevant to the perjury claim.  (But on the other hand one could argue that it was relevant to the broader political war concerning bias.)  But again, the most obvious way to interpret deletion of the words "relevant and useful" is as indicating that the limitation no longer applies.  Post-1976, under this view, relevance and usefulness no longer need be shown.

The paper rejects this interpretation by arguing that there is no evidence that Congress meant to loosen the requirements for releasing tax return information, when they didn't indicate so anywhere, e.g., not in the legislative history, floor debate, or anything else, and when in general what the 1976 revisions did was tighten the rules governing transmission and release of tax return information, in response to the Nixon Administration scandals.  Hence, it is more inclined to view "relevant and useful" as evidencing the prior scope of limitations that remained in place or if anything were meant to be tightened.  E.g., suppose the reason for removing the words was that they unduly weakened the implicit limitation that follows from the context.

But it is hard to rule out the possibility that someone on the tax committees, during the legislative process in 1976, decided deliberately to strike those words in order to free the committees' hands a bit more, even though no mention was made of this and everyone else was getting the rules tightened.  So I might view the prior existence and 1976 removal of these words as leaning against the paper's argument that the Camp committee's release of the tax return information was a (non-prosecutable) felony.

Although I thus tend to disagree with the paper's legal conclusion, I should note how refreshingly in good faith the argument is - not always something one can take for granted when people are discussing hot-button political topics, such as this one.  Yin not only was appointed by Republicans, rather than Democrats, both times that he served on Capital Hill, but is well-known as having no political ax to grind.  In addition, Tax Notes publicly quoted him in 2014, when the issue first came up but before he had researched it, as saying he couldn't comment on the merits without knowing more about them.  Plenty of commentators on the political wars in Washington would have followed the Red Queen's lead, in Alice in Wonderland, when she says "sentence first, verdict afterwards."

Tuesday, March 10, 2015

A change in the weather is known to be extreme / I'm glad we're finally changing horses in midstream

It would be difficult to overstate my relief at the change in the weather that has finally hit the New York area. I certainly hope that those in New England and the upper Midwest are out of the horrors as well.  It happened at a specific moment.  This past Sunday, the brutal, horrible, and unrelenting winter that we have been suffering through for months (and yes, I realize that Boston and Detroit, to name just two places, had it much worse than us) suddenly disappeared and apparently (knock on wood) won't return before the next winter season at the end of 2015.

I am reminded of the old joke about the guy who loves going to the dentist, and having cavities filled without any anesthesia, just because it just feels so darned good when it's over.  The end of the winter is a bit like that, except that I would much sooner have skipped the whole thing.  (I only go to the dentist for pragmatic reasons.)

Thursday, March 05, 2015

Death of Jerome Kurtz

Another sad passing from among the tax professoriate.  Jerry Kurtz, a former colleague of mine at NYU who is most famous for his time as IRS Commissioner, died last Friday.

Kurtz took over at the IRS not long after its low ebb during the Nixon era, involving what definitely were actual scandals involving White House malfeasance.  He both helped to restore the actual and perceived integrity of the IRS, and had strong tax policy views involving the desirability of income tax base-broadening that commissioners have not always pushed as strongly as he did.  He was a disciple of Stanley Surrey, and while I did not agree 100% either with Jerry or with Stanley (whom I never met, as he died the year before I entered academia), they were forces for good.

Kurtz also participated in the transformation of NYU Law School and our tax program into what they are today.  At an earlier stage, only the tax program, not the law school, had enjoyed an eminent national reputation.  As the law school rose, and as both legal academia and law practice were transformed, the tax program had to change in some ways, just to keep its high place.  Jerry Kurtz and the late Paul McDaniel (also a great man) were then-dean John Sexton's first two wartime consiglieres (as I jokingly called them) towards this purpose, at least starting the count from when I got here.

Jerry was a great person in all senses, and I will miss him.

Wednesday, March 04, 2015

Tax Policy Colloquium, week 6: Ruth Mason's "Citizenship Taxation"

Yesterday at the colloquium, Ruth Mason discussed her paper, Citizenship Taxation.  I enjoyed reading it enough to conclude that I may want to write about this topic as well.  (I generally agree with the paper, but it’s a rich topic and perhaps a fruitful area for me to deploy some of my interests and approaches.)

Here are some of the points from my notes that I thought worth discussing.

(1) The U.S. as outlier (again!).
Here we go again.  To paraphrase Ray Davies in a 1960s Kinks song, “we’re not like anybody else.”  The U.S. is the only country to impose (at least in theory) worldwide taxation on all non-resident citizens.  Other countries may tax some non-residents on a worldwide basis, via the use of standards other than just current year physical presence to determine who is really still a member of the domestic community, but no one else does it flat out based on citizenship.

Other examples: we don’t have a VAT, our statutory rate for corporations is unusually high, and in the international realm we employ deferral / foreign tax credits far more extensively than anyone else.

Now, everybody else could be wrong and we could be right.  Or our circumstances could be distinctive.  But it is natural to wonder, given, for example, the “wisdom of crowds” line of argument.

(2) Benefit tax rationales.
The literature discussing citizenship-based taxation often employs a benefit tax rationale.  On the one hand, U.S. citizens living abroad aren’t using the roads, etc.  They also generally can’t get U.S. public assistance, or use healthcare subsidies that apply within the U.S., etc.  On the other hand, in theory the U.S. Army is protecting them, plus they have the valuable option to return, which lots of other people might pay good money for if it were on sale.

All this might call perhaps for an intermediate U.S. tax burden on U.S. citizens living abroad - which we actually have, given section 911(b), which permits excluding about $100,000 of earned income, and the allowance of foreign tax credits.  But benefit tax rationales are not widely accepted these days, as compared to ability to pay, which of course raises the core question here: Whose ability to pay?

Suppose that, by reason of my living abroad, the U.S. government saved a marginal $10,000 that it would otherwise have spent giving me services.  Even without any normative attachment to benefit taxation, it might make sense to reduce the U.S. tax bill I would otherwise have incurred by $10,000, as this properly aligns my incentive regarding where to live, from the fiscal standpoint and assuming that there are no other relevant considerations.  But not much of what the U.S. government does on my behalf invites this sort of marginal cost analysis.

 (3) Defining “us” versus “them.”
Here is the nub of the issue.  From a utilitarian standpoint, everyone in the world matters equally.  Numerous other philosophical approaches agree that everyone counts the same in the relevant sense, although they have other ways of implementing the idea that everyone matters equally.

But just as individuals, rather than being perfect altruists, generally act for their own benefit and that of loved ones, so it is generally accepted that countries can care primarily just about “us” (the members of the national community), as opposed to “them” (everyone else).  Indeed, just like a buyer and seller in a market negotiation, it is widely considered fine if everyone would like to extract as much money from each other as possible, albeit subject to rules of honesty and fair dealing, not doing bad things, and acting altruistically in extreme cases (e.g., rescue when you see someone drowning, seeking to prevent genocide abroad).

Let’s just take it as given that this personal, family, or community-based selfishness can be justified philosophically.   Many regard it as a prudentially required exception to universal morality (we don’t have to be saints, especially when everyone else isn’t being a saint).  I gather that Ronald Dworkin tried to fit it into his philosophical system more holistically, but I don’t generally find myself in agreement with his full approach.

But even taking all this as given, it is difficult to find firm normative footing for the determination of who fits into our community.  Personally, I care about the people I care about (and for close family members or other associates, there’d be an argument that I ought to care even if I didn’t).  But, in the impersonal setting of a national mass community, it is hard to establish definite guideposts re. what we are trying to do.

If I am a citizen who goes abroad for a month, I’m surely a full U.S. person for the year (not just 11/12).  Arguably the same, whether or not we choose to impose full citizenship taxation, if I go abroad for three years but always plan to return.

If I am here illegally, I definitely should count normatively, at least to a degree.  (Not to dive into the murky, for me, waters of immigration law and policy.)  This is why most of us would insist on allowing illegals to get treated in the ER when they face dire medical problems.  And we shouldn’t be happy about having a two-class society here, the Americans here and the others, whether the latter are lawful guest workers or illegals.  But I digress.  The point here is simply that residence inevitably counts – we care more about people who are right in our faces than about others – but it is not all that counts given that I can be away from what continues to be my community.

What we mean by the “us” whom we agree to care about, once we have accepted an approach that mainly limits altruism to the members of one’s own community, is most likely going to be multi-dimensional, rather than turning on a single metric such as citizenship.  Specifying a legal rule to define the members of our community (who may be subject to at least some elements of worldwide taxation, even when they are abroad) may involve the usual tradeoff between complexity and accuracy.  But as I discuss below, there may also be efficiency benefits to a multi-factor approach.

(4) What about “them”?
 For those in the “them” category, in principle we might want to revenue-maximize – that is, get as much money from them (in real economic incidence terms) as we can.  This is not diabolical; it’s just how transactional counterparties commonly deal with each other. 

This of course leads to the Monty Python Principle: “Tax all foreigners living abroad.”  So why don’t we try to do that?  Well, obviously, it would not be a great idea to try, at least without more of a hook.  We don’t have jurisdiction, we don’t have information, it would violate comity and get them really angry, they would retaliate in various ways that we wouldn’t like, etcetera.  And more generally, cooperation for mutual gain is always a good idea when it can be done.  But, when we turn to the treatment of “us,” it’s worth keeping in mind that there is a hypothetical perspective from which we might like to tax all foreigners living abroad.

(5) The basic paradox: if you’re “us” and we care about you, you lose.
Once we accept that we can’t, and generally won’t even try, to “tax all foreigners living abroad,” something that is at least facially paradoxical arises when we consider taxing at least some nonresident citizens on their foreign source income.  This tax burdens the individual who has to pay it.  So we are effectively saying: “If we care about you, we’re going to burden you.  If we don’t care about you, because we have decided not to classify you as a member of our community, then we’re not going to burden you.

Now, one thing we clearly do care about, when taxing members of our community whether they are currently residents or not, is deadweight loss that we impose on them through our rules.  We don’t necessarily care directly about deadweight loss that is imposed on non-members, since we are at least mainly excluding all “thems” from our social welfare function, but for “us” it matters.  And this is pretty much the proof that the current U.S. regime for taxing nonresident citizens is defective and needs to be revised.  It appears to impose a lot of deadweight loss, from compliance burdens and the like, relative to the revenue that is actually raised.  This results, for example, from tax filing requirements who owe little or no U.S. tax (e.g., due to the earned income exclusion plus foreign tax credits).  Now, we may gain valuable information from the filing (or, rather, we would if people actually filed), but this is still a serious concern.

A question meriting further thought: Why don’t we extend more transfers or other social welfare, safety-net style benefits to non-resident citizens?  Perhaps there are good reasons for not doing so, but at the least it requires further thought.  Presumably if we had greater tax-transfer integration, such as via a Mirrleesean demogrant / income tax system, we would at least consider giving the demogrant to non –resident “us.”  Or perhaps not, if there are particular incentive issues to keep in mind here.  But worth some thought in any event.

Circling back to “us” versus “them”: Suppose we can tax U.S. citizens living abroad, but we classify these individuals as “them” rather than “us.”  Only, suppose that, because they are arguably “us,” we can get away with it – other countries won’t start to scream, retaliate, etcetera.  Then we would have a “them”-based reason for imposing the tax (and also for withholding welfare benefits and not caring so much about deadweight loss).  In short, it could be the one case of “Tax all foreigners living abroad” that we could actually pull off.  And this would imply not caring so much about deadweight loss that we impose on nonresident citizens.  But it does strike me as a bit harsh.

(6) Two-stage analysis for immigrants: before & after they become “us”
Let’s leave aside all the issues about illegal residents, as that’s a very different topic and neither raised by Ruth’s paper nor an area of personal expertise on my part.  Instead, let’s consider people who might like to immigrate to the U.S., at least conditionally on comparing it to other places where they might choose to live, and whom we are considering admitting to our community voluntarily.  They are not here yet, and suppose they will only come here if we let them.

I bring up these people because Ruth’s paper rightly expands the scope of the inquiry to them, by noting that, when we are considering the taxation of nonresident U.S. citizens (as well as green cardholders) on their worldwide income, prospective immigrants are among those whom we should have in mind.  Suppose, for example, that immigrants whom we would like to attract would take note of the U.S. worldwide tax system for citizens and green cardholders, when they are deciding where to go.

Since prospective immigrants are not “us” yet, we might want to maximize the sum of (1) the present value of the money we could get by admitting them, plus (2) the positive externalities that their presence would generate for us.

In terms of (1), you can be crude about it, if you like, and charge an upfront fee for a passport.  Malta and Cyprus do this, and can charge extra-high fees because they can offer EU passports.  Several Caribbean countries also sell passports, albeit for less as they can’t offer an EU passport.  The closest the U.S. comes to charging an upfront fee is via our EB-5 immigrant investor program.

For the most part, however, we are a bit more decorous about exchanging money for admission to our community, in that we allow immigrants – once admitted – to pay under the installment plan, rather than up-front.  That is, immigrants generally can be expected to generate positive tax revenues for the U.S. by reason of paying income and other taxes once here.

We probably should admit more of these people than we do, especially if positive externalities are significant too (as I suspect they are).  But from the standpoint of efficient pricing, telling prospective green cardholders in particular that at some point they would be getting taxed on their worldwide income even if they weren’t living in the U.S. might not be an optimal way to structure the “fee.”  We’re telling them, “It’s going to cost you even if and when you don’t find yourself living in the U.S., which might be the scenario in which they would value it the least.  I have heard it said that well-heeled foreigners who are thinking of spending significant time in the U.S., and who have access to temporary admission under various of our categories, often are advised against seeking a green card.

(7) Relevance of multiple margins (citizenship & residence)
As David Gamage notes in a paper that he presented at our colloquium last year, it is often preferable to have many small distortions, rather than a few large ones.  Citizenship-based taxation may induce people to renounce U.S. citizenship.  Residence-based taxation can encourage them to make sure they are out of the country for at least the requisite time each year.  A rule based on domicile may discourage having one here.  And so forth.  But a standard that relies on several different factors may end up, with proper design, inducing less tax-motivated distortion overall.  Obviously, the fiend or goblin (to avoid saying “devil,” as that’s become such a cliché) is in the details.

(8) Foreign taxes
I’ve written extensively (such as here, here, and here) against the desirability of providing full and immediate foreign tax credits in the setting of business taxation.  My main argument is that foreign taxes are a cost from the unilateral domestic standpoint, hence we should want domestic taxpayers to be foreign tax cost-conscious.  Indeed, straightforward deductibility for foreign taxes (so they will be treated as equivalent to other outlays or forgone inflows)  is the way to go, from a unilateral national welfare standpoint, unless there is more to think about here.  As it happens, I agree that there actually is more to think about in the setting of corporate income taxation, e.g., because if profits show up in a tax haven that may be a “tag” for discerning profit-shifting away from home, whence my conclusion that, for U.S. companies, we might favor a better-than-deductibility, worse-than-creditability bottom line effect.  Well-designed anti-tax haven rules can have this effect.

Exemption is an implicit deductibility system.  Of course, if you limit exemption for the foreign source income of resident companies via anti-tax haven rules, you may get back into that intermediate range (or even beyond, if the rules are poorly designed)

How do these arguments apply to taxing nonresident individuals on their foreign source earned income?  While the topic may require further thought, my initial thought is that a similar basic analysis does indeed apply.  Suppose, for example, that an American is deciding whether to work abroad in lower-tax Singapore or the higher-tax UK.  It may be desirable, from a U.S. standpoint, if he or she bases the analysis on after-foreign tax income, rather than before-foreign tax income.  After all, from our standpoint those taxes are just a cost, as we don’t get the tax revenues.

While it might be the case that the use of tax havens at the expense of the domestic tax base is not as much a problem for individuals’ earned income as it is for companies’ reported profits, that would only push harder towards the deductibility, as opposed to creditability, side of the spectrum.  And even if we treated foreign taxes on U.S. individuals’ foreign earned income as effectively deductible, rather than creditable, then (assuming a treaty-compliant design, which might not be impossible) we might decide to apply a significantly lower tax rate to foreign than domestic earned income, e.g., for the reasons I will discuss next.

The exclusion under Code section 911(b) for about $100,000 of qualifying foreign earned income has the desirable effect of pushing away from effective creditability.  You can’t claim foreign tax credits with respect to foreign earned income that we don’t tax.  But that doesn’t tell us whether zero is the right rate (perhaps even without being so capped), or is too low a rate.  That depends on other considerations.

(9) Foreign earned income
Even leaving aside the treatment of foreign taxes, should we tax U.S. individuals’ foreign earned income at the full domestic rate?  An “ability to pay” perspective would suggest that the answer is yes.  But there may be an efficiency argument (from a national welfare perspective) in favor of a lower rate.  This argument is borrowed from Mihir Desai’s and Jim Hines’ analysis of “national ownership neutrality” (“NON”).

Suppose the following, as Desai and Hines do in the NON context: Each “outbound” dollar is replaced by an “inbound” dollar from a foreigner who earns income that is taxable in the U.S. by reason of the outflow.  Translating it from their context to mine, let’s take a simple case, grossly overstated by me just so one can grasp the argument.  Suppose that, if I leave NYU for a year to teach at a foreign university (which will pay me in lieu of NYU’s doing so), NYU will hire a foreigner to teach in the U.S. in my place, and pay U.S. tax on the substitute salary.  At a rough approximation, even if the U.S. gave me an incentive to visit abroad by not taxing my foreign earnings (and again, the U.S. may have no direct reason to view payments to the foreign tax authority as equivalent to paying U.S. tax), it would not have lost any domestic tax base.  U.S. salaries would be the same, and the IRS would be taxing that foreigner, who would otherwise have escaped its clutches.

Suppose we take this hypothetical to be appropriate – as Desai and Hines do in the setting of cross-border business investment.  (They of course do not make any such claim, or at least they haven’t yet, with regard my hypothetical, which they might join other readers in finding fanciful.)  They then argue that the optimal U.S. tax rate on the foreign source income is zero, so that there will be no distortion at the margin of U.S. companies deciding how much to invest abroad rather than at home.  (Again, the claim is that the lost domestic investment is actually zero, net of the inbound flows it induces that would not otherwise have occurred.)

I think this argument is wrong, because we are trying to balance distortions at multiple margins, not reduce them to zero at some arbitrarily chosen margins while they remain high at other margins.  But I will go so far as to agree with Desai and Hines that it may support a lower U.S. tax rate on resident companies’ foreign source income than that on all companies’ U.S. source income.

Does this argument apply to foreign earned income of U.S. individuals?  I suspect that the extent to which it applies is greater than zero, albeit less than 100 percent.  Americans who work abroad may indeed often leave slots that get filled by someone else, including a foreigner.  (There may also be a positive spillover if the result is to increase other Americans’ domestic earnings by reason of the slot I left open for the year.)  So there may be an argument for taxing foreign earned income of U.S. individuals at a lower rate than their U.S. earned income, even wholly leaving aside the issue of how to treat foreign taxes.

There may also be positive externalities when U.S. individuals work abroad.  One hopes that they are effective ambassadors, spreading goodwill abroad towards those of our ilk, rather than being the stereotypical “ugly Americans.”  Plus, if they learn about life abroad and then return here, the things they learn may enrich life for other Americans.  One of the absolutely greatest things about our country is the extent to which we’ve been a global melting pot, not only because people come here from abroad and are accepted, but also because it makes us (at least on the coasts) more cosmopolitan and international, to our great hedonic benefit.  Or at least that’s how I view it.

(10) Exit tax
Code section 877A generally requires tax expatriates to pay tax on a deemed sale of their assets for fair market value.  The tax only applies to net gain in excess of $600,000.  This exit tax makes up for the fact that, once you’re gone, the built-in gain from the period when you were still a U.S. citizen is unlikely ever to be taxed here.  So one could view it as anti-windfall gain, rather than as aiming to be punitive.

That characterization of the provision would be more solid and beyond dispute if we taxed net asset appreciation at death, rather than allowing a tax-free step-up in basis at that time.  But, for what it’s worth, the provision can indeed reduce lock-in on the part of individuals who are considering expatriating.

Here is a further issue that might be worth thinking about.  Suppose someone who might owe estate tax liability at death expatriates before that point.  Proponents of the estate tax might support treating expatriation as a triggering event for levying the tax.  Not just because "You're dead to us now," but to avoid creating the incentive to expatriate for that reason.