Thursday, June 29, 2017

Some photos and an odd fact

From a Liverpool Beatles tour that I did today, in between yesterday's end of the Oxford academic symposium and tomorrow's one-day Oxford summer conference:

1) Here's where Julia Lennon was killed in July 1958 by a bus, moments after saying goodbye to John at the Mendips house where he was living with his Aunt Mimi.

2) On a more cheerful note, this is Strawberry Fields. And here's an odd fact: according to my guide, when Mimi would tell John that he'd get in trouble for climbing over the wall to spend time here (which he did around the back, not at the front gate), he'd reply: "They won't hang me for it, you know." The guide suggests that this is (part of?) what he had in mind when he wrote the line "Nothing to get hung about."
3) And here's the Penny Lane roundabout. There's also a barber shop and bank nearby, both apparently the same storefronts but extensively remodeled since back in the day.

Wednesday, June 28, 2017

Working in the same garden?

Courtesy of the Tax Prog Blog, I note that my old friend Mihir Desai, with whom I co-taught the Tax Policy Colloquium a few times, has published a book entitled "The Wisdom of Finance: Discovering Humanity in the World of Risk and Return."

From the description, it appears to be quite different from my literature project, but there is a commonality to our both engaging with the broader liberal arts, etc.  Plus, we have at least one text in common. To quote from what I take to be Mihir's opening:

"... This book is about how the philosopher Charles Sanders Peirce and the poet Wallace Stevens are insightful guides to the ideas of risk and insurance, and how Lizzie Bennet of Pride and Prejudice and Violet Effingham of Phineas Finn are masterful risk managers...."

Excuse me here while I break in for a moment  What's this "Lizzie Bennet"? It's ELIZABETH Bennet. Mihir doesn't know her well enough to call her that. I don't know her well enough to call her that. Quite improper, unless one is one of her intimates. Miss Bennet would be most displeased if she knew.

Monday, June 26, 2017

Comments on Kleinbard's "The Right Tax at the Right Time" (discussing his Dual BEIT proposal)

Today, at the Oxford University Centre for Business Taxation's 2017 Academic Symposium, I was the discussant for a paper by Ed Kleinbard that discusses his business tax reform proposal, the dual BEIT (dual for using the dual income tax to separate capital income from labor income; BEIT for business enterprise income tax).

The slides for my comments are available here. Two quick bottom lines might be (1) I think this proposal deserves to be on the agenda when people discuss business tax reform, and (2) for all of the various proposals out there, it's analytically useful to decompose them a bit into their multiple components.

Two acronyms in the slides that I didn't explain because I knew they would be covered in Ed's presentation are (1) COCA = cost of capital allowance (allowed to businesses on their assets inline of any actual interest deductions, and (2) PCO = participating controlling owner (who the proposal taxes on suspected labor income that has been retained at the entity level rather than being paid out as salary).

Wednesday, June 21, 2017

"Tax Scholarship, Illustrative Examples" panel at LSA

Today at the Law and Society Association's Annual Meeting, in Mexico City, I participated in a very interesting panel entitled "Tax Scholarship, Illustrative Examples."  Thanks to Neil Buchanan and Jennifer Bird-Pollan for arranging it.

My co-panelists were Leandra Lederman, Aja Mehrotra, and Lisa Philipps, and each of us had an entirely distinct topic. Leandra's was the relationship between tax enforcement and voluntary compliance, Ajay's was the rise of the VAT and why the US doesn't have one (with comparison to Japan, which didn't have one until 1989), and Lisa's was the relationship between  tax expenditure analysis and that of budget policy's effects on gender issues. The unifying theme, in part for more junior scholars in our informal LSA tax group, was looking at different directions that scholarship can take and the lessons for people who are in the earlier stages and still figuring out what sorts of things they want to and/or should do.

My talk was based on my literature and high-end inequality project, with particular reference to my Jane Austen chapter "Why Aren't Things Better Than This? Class Relations Within the Top One Percent in Jane Austen's Pride and Prejudice." But I also touched on the broader panel themes of deciding what sort of scholarship to do, etc.

The slides for my talk are available here.

Monday, June 19, 2017

Video of the Tax Reform panel at NYU last week

Here is the video of the tax reform panel at NYU last week. I speak from about 6:20 to 19:15.

Friday, June 16, 2017

Slight revision to my DBCFT slides

In case it's of interest, I've slightly revised my slides on the DBCFT. They are available here.

The only non-trivial change is the newly inserted Slide 11, which questions whether we all should continue focusing, to the degree we have been, on the DBCFT as  a leading tax reform instrument.

Thursday, June 15, 2017

VAT follow-up

At yesterday's ABA-Tax Analysts Tax Reform Panel, someone from the audience made the suggestion that, if Congress actually enacted a VAT, whether straightforwardly or via a disguise such as the DBCFT, it surely wouldn't be a pure-looking broad-based one. Rather, there would presumably be lots of special rules for particular industries, etc.

I actually once wrote and published a commissioned article about this very topic, for a conference on tax reform.  The piece is more than 10 years old, so the political discussion might be a tad out of date, but the more general points may still hold. It's available here.

Wednesday, June 14, 2017

ABA-Tax Analysts Tax Reform Panel

Today at NYU I participated in a panel, sponsored by the ABA and Tax Analysts, regarding the current prospects for tax reform (be it so-called or actual). My fellow panelists were Ajay Mehrotra, Peter Merrill, Ray Beeman, and Lee Sheppard. Here's a photo (courtesy of the Tax Analysts Twitter site). I'm second from the left, and the others are in the order in which I named them above.
Here's more or less what I said during my speaking slot near the start of the session (much of it based on the content of these slides):

There's an old joke in which a proud mother, watching her son march with the high school band, says: "Will you look at that! Everyone's out of step but my Johnny."

The U.S. federal tax system invariably brings this joke to my mind, at discussions of tax reform, because of how it differs from everyone else's.  All peer countries have a VAT, a lower statutory corporate rate than we do, and less relative reliance in their tax systems on income tax revenues.

It's not just due to the wisdom of crowds that we might reasonably suspect that we have it wrong. Our distinctiveness also contributes to the facts that (a) our tax system is more progressive than the norm, but (b) our overall fiscal system is considerably less progressive than the norm, plus (c) we have worse problems of tax competition and tax inefficiency than we would have if we conformed to standard global practice.

All that being said, tax reform is easy.  All that we need to do is: (1) enact a VAT, (2) lower our statutory corporate tax and overall reliance on income tax revenues, plus (3) take care of THE REST - i.e., make all other changes that are needed to get to an overall tax and fiscal system that we like.

Obviously, I'm kidding when I say that tax reform is easy. Even leaving aside the political issues, which I'll turn to shortly, the big problem lies in properly defining "THE REST." It includes deciding on: revenue levels going forward, spending levels going forward, and achieving desired distributional goals - which relate to people on both the top and the bottom of the wealth/income spectrum.

But the thing is, properly handling "THE REST" should mean that one can get a better fiscal system, by one's lights, whether one is on the left or the right politically, or anywhere in between.  Indeed, it even should mean in principle that there potentially are "Pareto deals" available from the standpoint of people on the left and the right. If they could negotiate in good faith towards creating a stable new fiscal system that included a VAT, there ought to be available options, with regard to "THE REST," that would leave both sides happier than they are now. For example, the left could get a bit more funding for social spending, the right a bit less capital income taxation, and if there is increased efficiency and inbound investment there ought to be a source of surplus available for them to split to mutual advantage.

But there are two problems that impede our getting to this happy state: (1) our broken politics, which would prevent us from either negotiating the Pareto deal or keeping it in place afterwards, and (2) the apparently unshakable political constraint against our having an explicit VAT.

Why can't we have an acknowledged VAT? Part of the problem is historical (1970s tax revolt, defeat of Al Ullman in the 1980 election after he advocated a VAT, Reagan "revolution," etc.). But it's more than just historical - after all, decades have passed since then, and it still seems to be true.

To my mind, the key to why we can't have a VAT lies partly in the old Larry Summers joke that's frequently quoted but rarely analyzed. Larry reportedly said: "We don't have a VAT because conservatives view it as a money machine, and liberals view it as a tax on the poor. But we'll get it when liberals figure out that it's a money machine, and conservatives see that it's a tax on the poor."

People usually just mention this joke and move on. But there are two odd things about it. First, it's paradoxical. Why should liberals and conservatives be so myopic in opposite ways? Even if it's true, it doesn't make sense without further explanation. Second, it seems to make a prediction ("we'll get it once..."), but the prediction doesn't seem to be coming true.

So how can we explain these two odd aspects? I see two main points. First, even outside the US it's politically hard to introduce a new tax such as the VAT. In many countries, it got help from, say, its replacing rightly disliked gross receipts taxes, or being a precondition of joining the EU, or responding to a fiscal crisis. Without something like that, it's a hard political sell even without crazy US politics.

Second, US political dissensus, and both sides' risk aversion, stands in the way of a deal. While it's true that a tax system with a VAT can be superior to what we now have, from either a liberal or conservative standpoint, so long as "THE REST" is properly specified, it's also true that a VAT would permit either side (if it had control) to make the system worse, from the other side's standpoint (for the reasons that the Summers joke identifies). So the players are angsty about a VAT unless they are confident enough about what "THE REST" will look like, not just today but also in the future.

The end result is that one can only introduce a VAT by camouflaging it. And as it happens, for a structural reason only Republicans can currently do this. They can sub it in for the existing corporate income tax, and not admit that it's a VAT, thus avoiding both the label and the creation of a new tax instrument. But the Democrats can't do this, given that they generally want to retain the corporate income tax, unless they can identify something else to replace it with. (Here the payroll tax comes to mind, but the problem is that one can't turn it into a VAT and claim that it's still the payroll tax - whereas one can convert the corporate income tax into a VAT and pretend it's still a corporate income tax.)

Examples of a disguised VAT that would replace the existing corporate income tax include (1) Ted Cruz's "business flat tax" from the 2016 campaign, which Marco Rubio correctly, if inelegantly, called a "VAT tax" (i.e., a value-added tax tax), and (2) the destination-based cash flow tax (DBCFT) from this year's Ryan plan.

The DBCFT appears to be politically dead, but the episode was nonetheless politically illuminating. The public didn't understand it, and I thought at times that tax policy experts got a  bit confounded by it as well. Now, experts individually and collectively did a really outstanding job of analyzing, for example, its trade effects, the currency issue, possible legal problems under the WTO and tax treaties, etc. But where I thought they sometimes went wrong is in thinking of it as  really a thing - like, say, the Bradford X-tax is a comprehensive thing - rather than as an assemblage of distinct proposals that is incomplete unless one specifies the rest of the fiscal system.

Conceptually, the DBCFT has 3 main parts. First, it creates a VAT - clearly, in my view, a good thing if "THE REST" is suitably tailored. Second, it lowers the origin-based corporate income tax to zero. There are reasonable arguments for doing this, but in my own view (shared, for example, by business tax reform plan authors such as Toder & Viard, Altshuler & Grubert, and Kleinbard) zero is too low here unless one sufficiently fixes a bunch of other things as well. Third, it has its own "everything else," - including, in particular, a wage deduction. But (a) one can't really assess the wage deduction without looking at how wages are treated overall by the tax and fiscal system, and (b) we still haven't really fully specified the rest, so it's hard to tell without more if the sum total is good or bad. Also, putting the wage deduction into the same tax instrument as the VAT, instead of adjusting the overall treatment of wages somewhere else in the tax or fiscal system, appears to have huge downsides - pertaining, for example, to WTO and tax treaty issues, along with the refundability problem for exporters that would always have "losses" by reason of paying wages.

The apparently politically adverse fate of the DBCFT may tell us that disguising the VAT doesn't sufficiently address the political obstacles to adopting it. And I am not optimistic regarding the merits of what Congress might do this year instead. If they vastly increase the fiscal gap and also fail to achieve bipartisan buy-in, they will just be making things worse (and more unstable) and setting the stage for more and more lurching "tax reforms."

Wednesday, June 07, 2017

There is little reason for anyone outside the U.S. to be thinking about the DBCFT as such

The destination-based cash flow tax has been attracting excitement from all over the place, dim though its current U.S. legislative prospects appear to be. In the EU, for example, I'm going to at least 2 events later this year at which it will be extensively discussed, and I am sure there are plenty more such events.

I don't think the DBCFT merits all this discussion - not because it's bad (depending on the broader context and myriad design/implementation details, it might even be good), but because it's not really a thing in the sense that people think it is.

What is the DBCFT, basically? As per the slides I recently posted, what it would amount to, in the U.S., is (1) enactment of a VAT, plus (2) elimination of the origin-based corporate income tax, plus (3) a wage deduction, plus (4) various other details - e.g., interest generally included and deducted, but no net interest deduction.  Let's go through these features, one at a time.

(1) Enactment of a VAT - Nearly all other countries already have one. The key reason for talking about the DBCFT is entirely U.S.-specific. It's about enacting a VAT without having to call it that.

Now, it's true that the policy options other countries might want to consider could include raising their VAT rates and using the extra revenues to help fund eliminating their origin-based corporate income taxes. But if so, why not put it that way? Who needs all the rigmarole about a "DBCFT" to describe and evaluate such a policy move?

(2) Eliminating the origin-based corporate income tax - Other countries tend to have lower-rate origin-based corporate income taxes than ours. But all such taxes, including ours, face serious problems in a world of global tax competition. So there is a case for eliminating origin-based corporate income taxes.

There might also, however, be reasons for keeping them. E.g., in order to tax rents earned by domestic producers on exports (a particularly important issue for the U.S., what with its West Coast IP mega-firms). And/or, to back up the income tax on individuals. Due to such issues, a number of recent U.S. business tax reform proposals have proposed NOT zeroing out the origin-based, entity-level corporate income tax. E.g., Altshuler-Grubert, Kleinbard, Toder-Viard.

The debate here - should origin-based corporate income taxes be eliminated? - is an important one, in which there are significant arguments on both sides. But I think this debate is murked up and mystified, not clarified, by posing the question as "should we shift to destination basis." Yes, there's a good case for having a destination-based consumption tax (i.e., a VAT) in one's tax instrument toolkit. But it isn't either-or - again, the question is whether we should ALSO keep something of the origin-based corporate income tax.

(3) Wage deduction - This is an important feature of the U.S. DBCFT as proposed. In the particular U.S. context, it might cause replacing existing business income taxation with the DBCFT to be more progressive than replacing it with a VAT that raised the same revenue.

But as a more general or abstract matter, one can't have an intelligent or coherent discussion of the wage deduction without looking at the overall treatment of wages in a given fiscal system. So the right question is how should we treat wages overall, not whether taxes that were collected from business entities should have a wage deduction.

The original X-tax proposal by David Bradford (building on the Hall-Rabushka flat tax) was a coherent and comprehensive package. It took a VAT (be it origin-basis, as it was at the end for Bradford, or destination basis) and packaged it not just with the wage deduction, but also with worker-level taxation of wages at graduated rates in the context of also replacing the individual income tax. That was a comprehensive overall plan that one could evaluate coherently.

But, in the DBCFT as such, the rest of the package isn't specified, so we don't know what we're doing overall or why. Now, in the specific U.S. context in which it was originally proposed, this arguably made sense. Alan Auerbach's rationale for the DBCFT, as I understand it, was that, even if non-business income taxation remained largely unchanged due to underlying disagreements, inertia, etcetera, it might still be possible to improve taxation on the business side. That's perfectly reasonable, as an incremental reform idea in the U.S. context. But it doesn't change the point that the fundamental system features to think about aren't "DBCFT or not," but VAT or not, origin-based corporate income tax or not, and how should wages be taxed given the business tax instrument PLUS everything else.

(4) Various other details - In many other ways, the "DBCFT" label or packaging convention has the potential to make things worse. E.g., VATs typically ignore interest income and deductions; the DBCFT would tax interest income, while allowing interest deductions up to the amount of the interest income. But this seems to be proposed less for its own sake than as a consequence of tweaking the existing corporate income tax without having to admit that one is enacting a VAT.

Similarly, combining a wage deduction with the VAT potentially makes business-level refundability problems much worse. So, why not handle wages wholly outside the VAT, such as by adjusting positive tax rates on them directly in the tax instruments that we use to tax wages? Then we wouldn't have to worry as much about refundability, providing interest on net losses, etcetera. The placement of wage deductions inside the DBCFT appears to be a byproduct of subbing it for the corporate income tax without overtly having a VAT (and to make it more progressive than just adopting a VAT while everything else remains the same as a political constraint), rather than of any direct instrumental design rationale.

In sum, let's all (in the academic world, at least - politics may have its own packaging rationales) try to be less excited about the "DBCFT," whether said excitement is favorable or hostile. Instead, let's think more clearly about destination-based VATs, about the retention or not of origin-based income taxes on business activity, about the overall tax treatment of wages, and about the treatment of financial flows and, for that matter, financial firms - all of which might be conceptualized more clearly if we were less transfixed by the shiny new label.

Back from the EU

After a whirlwind European tour I'm back in the U.S,, and at the moment quite tired but I hope to recover swiftly as I'm off again in less than two weeks.

In some ways, this was the "If this is Tuesday, it must be Belgium" tour. I slept in my own bed on May 26, on the airplane on May 27, in Zurich on May 28-29, in Luxembourg on May 30, in Haikko Borga, Finland on May 31, in Warsaw near the airport on June 1, in Lodz, Poland on June 2, in Helsinki on June 3, in Tallinn, Estonia on June 4, and in Helsinki again on June 5-6.

That's a lot of moving around, but in addition to giving 3 talks I did get to see a lot of nice things. My travel strategy is to hit a new city, get oriented, walk around all day (for as long as I'm there) checking out museums, churches, neighborhoods, parks, restaurants, food courts, shops off the main tourist track, etc., etc., and after a couple of days you really do get a feel of having seen something of a place. And all the travel was flawless - no delays, and the planning (which took some effort) all worked out.

I'm off to Mexico City followed by Oxford in a couple of weeks, and in September will have a very different sort of trip (3 weeks in Berlin with only very limited side travel).

I consistently find that I quite like Europe, although I regret being so limited to just speaking English.

State aid cases and my Luxembourg slides from last week

Here are the slides from my talk regarding the state aid cases at a conference in Luxembourg University last week. (I couldn't post them while abroad due to an error that I needed to fix from back home.)

I'll be discussing the state aid cases again later this month, at an Oxford Centre for Business Taxation annual conference, to be held on June 30. The conference, entitled "Escalating Uncertainty and Competition in Business Taxation, will follow immediately on the heels of their 2017 Academic Symposium, at which I'll be a discussant (re. an Ed Kleinbard paper discussing his business tax reform plan). But the Oxford state aid slides will be quite different from the ones I've just posted, reflecting the different setting.

Monday, June 05, 2017

Bill Andrews

I'm very sad to hear about the death of William Andrews, a great scholar and a lovely man who was also, as it happens, my second-ever Tax Policy Colloquium speaker, and an amazing example of what a clear and deep-thinking legal scholar can contribute to the field.

Vacation reading

I wanted to keep it relatively light and fun for my travels (which currently have me on a ferry back to Helsinki after a day in Tallinn). So I started with Carl Hiaasen's Razor Girl, fun but a bit trashy and not his best. Now, Don Winslow's The Cartel, fiction about Mexican drug cartels (and the U.S. and Mexican governments) amid the drug war down there. Harrowing (with apologies for the cliche); brings to mind The Wire in some ways. Great but not quite keeping it light.

Its precursor volume, The Power of the Dog, which is similarly good, brings to mind another book I read at about the same time that is completely unrelated despite having the same title. Thomas Savage's The Power of the Dog, published in 1967 and set among Montana ranchers in the 1920s, is exceptionally good. It's been compared to John Williams' brilliant classic Stoner, and both are among the handful of best books that I read for the first time, not having previously heard of them, in the last 10-15 years.

Saturday, June 03, 2017

DBCFT slides posted on SSRN

I've posted the slides from my June 1 talk, "The Rise and Fall of the Destination-Based Cash Flow Tax: What Was That All About?," on SSRN. They're available here.

Friday, June 02, 2017

European Association of Tax Law Professors, 2017 Congress

Today I spoke at the European Association of Tax Law Professors' 2017 Congress, in Lodz, Poland. (My first time in Poland - I flew into Warsaw last night, then took the train to Lodz this morning.) The event has certainly grown since I was last there 7 years ago (at a Congress in Leuven, Belgium). The conference's topic this year was corporate residence, a natural for me as I have written about it in the past.

Some thoughts (unrelated to my actual remarks) that I, yes, I admit I tweeted during the sessions, as they were brought to mind by the presentations, were as follows:

1) Should we in principle have a DBCFT? Not a well-posed question unless one specifies the rest of the fiscal system.


2) DBCFT = VAT + 0% origin-based corporate/business income tax + ??. Wage deduction not meaningful w/o specifying how other taxes treat wages.

My remarks about "the future of corporate residence - a U.S. perspective" are generally summarized by these slides.

Thursday, June 01, 2017

"The Rise and Fall of the Destination-Based Cash Flow Tax: What Was That All About?"

This morning, I was the keynote speaker at the annual conference of the Nordic Tax Research Council, meeting this year in Haikko Borga, Finland (outside Helsinki). I was unable to stay for the rest of the conference, as I am flying to Warsaw later this afternoon en route to Warsaw, from whence I will proceed to Lodz (pronounced "Wooch," I'm told), Poland in order to participate in the annual meeting of the European Tax Law Professors' Association, where I will discuss the future of the corporate residence concept.

As per the title of this blogpost, my talk was entitled "The Rise and Fall of the Destination-Based Cash Flow Tax: What Was That All About?" Perhaps I am presuming a bit, as it isn't officially dead yet. But even apart from its seeming to be dead so far as I can tell, those with more inside knowledge than I have assure me that it is indeed dead, at least for this year. (Speaker Ryan may not have gotten the news yet, however, and appears to be a bit stubborn about it.)

Apart from giving a Nordic audience some background that will be familiar to American tax policy folk, I try in the talk to take a broader look at the U.S. politics around VAT enactment, or rather non-enactment. The key to me is not just stopping with the old Larry Summers joke, but rather asking why the joke's punchline hasn't come true yet and shows no immediate prospect of doing so.

The joke (if that's what it is) goes something like this: "The U.S. doesn't have a VAT because conservatives view it as a money machine, and liberals view it as a tax on the poor. But we'll get the VAT once conservatives realize that it's a tax on the poor, and liberals realize that it's a money machine."

People in the biz always repeat the Summers observation, which through no fault of its own (or rather because of its pertinence) has become a cliche, but they never ask why it might be so. I suggest in the talk that there are rational underlying reasons for it, pertaining to both conservatives and liberals.

The slides for the talk are available here.