Thursday, September 28, 2017

The international part of the "Framework"

The bit on international in the "framework" is worth quoting in full:

"The framework transforms our existing 'offshoring' model to an American model. It ends the perverse incentive to keep foreign profits offshore by exempting them when they are repatriated to the United States. It will replace the existing, outdated worldwide tax system with a 100% exemption for dividends from foreign subsidiaries (in which the U.S. parent owns at least a 10% stake).
To transition to this new system, the framework treats foreign earnings that have accumulated overseas under the old system as repatriated. Accumulated foreign earnings held in illiquid assets will be subject to a lower tax rate than foreign earnings held in cash or cash equivalents. Payment of the tax liability will be spread out over several years.
"To prevent companies from shifting profits to tax havens, the framework includes rules to protect the U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations. The committees will incorporate rules to level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies."

Let me see if I can make any sense of this. They say it's a territorial system. But they also say that they will be "taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations." This can formally be reconciled, in the sense that what they literally say up top is that they will offer dividend exemption.  Of course, a full worldwide system in which deferral (for the foreign profits of foreign subsidiaries) was repealed would also have dividend exemption. Bringing the foreign profits home would have no tax consequences, since those profits would already have been taxed.

Is that what they are saying, albeit with a reduced rate for foreign source income? Seemingly yes, but then how is it a "territorial" system? And if they are taxing U.S. companies' foreign source income, how do they propose to "level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies"?

The repatriation tax is of course a welcome feature of switching to territorial, but the rate imposed is all important here.  I'm guessing it will end up being very low.  The dual feature, as between cash equivalents and illiquid assets, has a rationale but is likely to be messy at best in practice.

Neither tax reform nor a plan

I often feel impelled to quote that famous line about how the Holy Roman Empire was neither holy, Roman, nor an empire. The supposed tax reform plan that the "Big Six" have just released gets two-thirds of the way there. It is about taxes, but it's not reform - just massive, unfunded tax cuts - and it's not a plan - just rough ideas, sketched in crayon, that a Tax I law student could have done (better) in 24 hours or less.

It's really an insult to have to focus on so sketchy and poorly conceived an issuance.  I have better things to do with my time, and there are more thoughtful people around, on the right as well as the left, with whom it would be more fruitful to interact intellectually.

Just two quick things, as I'm saving international for a follow-up post:

--Why raise the bottom rate from 10% to 12%? I can see no good reason for this apart from malicious class warfare.  It can't be about revenue, given everything else in the plan.

--The 25% rate for business income of pass-throughs may take the prize as the worst new tax policy idea of the past thirty years. They say they'll have rules to prevent conversion of "personal income" into business income - but that just states (a part of) the problem, rather than offering any suggestion that it could be handled with any success or without massive and idiotic complexity. And why should "business income" get a lower tax rate than "personal income" - such as wages - anyway? Do they hate employment, as opposed to being self-employed? If so, why not simply fine people who take jobs working for someone else? That is essentially what they are proposing to do.

Wednesday, September 27, 2017

Back from Amsterdam

Back in Berlin after 3 days in Amsterdam, where I participated in a KPMG conference meant to enlighten corporate tax directors and such on what to expect and prepare for. I played the role of American expert (as did Danielle Rolfes) and of house pessimist.   The two are strangely linked these days.

Back in Berlin, where I've been writing a new international tax article on the treatment of foreign taxes by the U.S. and other tax systems and how this might related to what I call unilateral and strategic tax policy approaches. This piece pushes forward on some ideas that I've covered more cursorily in the past, and is a nice change of pace for me before returning to my literature & high-end inequality book. Among other things, it's easier to write.

Tuesday, September 19, 2017

The view from my window at NYU Berlin

Nice to see this corvid right outside my window at NYU Berlin, where at the moment I am working on a new international tax article (as a brief change of pace from my literature book).  I am a fan, or more like a distant admirer, of corvids as a group.

Corvids, due to their strikingly high intelligence, have been called "flying monkeys" by knowledgeable bird experts.  I gather that they need the brains (which are definitely not "bird brains" in the colloquial sense) both for social reasons and to navigate a complex environment. E.g., given that they are willing and able to eat just about anything, they both need to make good choices, and may try to access things that require some work and cleverness.

But, alas, it doesn't seem practical (and might not be prudent) to try to make a new friend here.

I am confident that my cats, if they were on the scene, also wouldn't deem it prudent to seek a closer association, even if they could get through the closed window. This bird is too big for them.

Friday, September 15, 2017

Precise targeting to increase high-end inequality?

I haven't yet read this recently posted article, but I plan to, as it seems to be important (and is by good researchers). But here is the key finding from its abstract:

"Using administrative data linking 10 million firms to their owners, this paper shows that private business owners who actively manage their firms are key for top-income inequality. Private business income accounts for most of the rise of top incomes since 2000 and the majority of top-earners receive private business income - most of which accrues to active owner-managers of mid-market firms in relatively skill-intensive and unconcentrated industries."

This would appear to suggest that the proposed lower tax rates for business owners of pass-throughs are almost precisely targeted to increase high-end inequality as much as possible, in exchange for as little efficiency payoff as possible. These probably tend to be people with low labor supply elasticity and/or who are in effect reaping rents.

What could Trump / Mnuchin mean when they claim taxes won't decline for the wealthy?

Not just Trump but also Mnuchin have been claiming that taxes won't decline for the high-income in the supposedly soon-emerging tax "reform" plan. The fact that Mnuchin is saying it, too, makes one think that maybe it isn't just impulsive lying or oblivious salesmanship, but reflects a view about what they will be able to claim about the ultimate package. Yet this is a deal that they are working on with Paul Ryan, not with Ron Wyden or Chuck Schumer.

So what might they be thinking, if we make the assumption (not 100% certain to be correct) that they actually are thinking strategically about the next stage? The following four things occur to me:

1) The fact that a corporate rate cut is likely to be at centerstage in the package may help them. Their argument that this doesn't help rich people can be both formalistic (corporations are separate taxpayers) and substantive (claims about the incidence of the corporate tax). Two points they will have to ignore, however, are (1) the transition incidence of cutting the corporate rate, which benefits existing shareholders if it wasn't fully anticipated, e.g., due to political uncertainty, and (2) the tax planning opportunities that a low corporate rate may give to high-income owner-employees.

2) They will be trying desperately to ignore the effects on high-income taxpayers of lowering the tax rate on amounts that business owners earn through pass-through entities. This is where the really big distributional action will be, if they go ahead with their reported plans to require people whom the tax system classifies as employees to pay significantly higher tax rates than those whom the tax system classifies as business owners. They'll call this a "small business" tax cut, but the point will be made in response that this a misportrayal of where the bulk of the benefit actually goes.

3) They anticipate announcing a package that takes away state and local tax deductions, and perhaps that also does something to home mortgage interest deductions. But these provisions seem highly unlikely to get through the Senate even if they are in the package and pass the House. Indeed, it's possible that they're being over-optimistic about the prospects even for unified "Big Six" endorsement of this.

4) Might they be planning not to propose repealing what is left of estate and gift taxes? Leaving that out of the package would certainly make it easier to claim that taxes aren't declining for the wealthy. But if I had to guess, they'll just try to brazen through the awkward tension between proposing estate and gift tax repeal and dressing up the package as no tax cut for the rich.

Plus ça change, plus c'est la même chose

After last night's game, the New York Mets' team ERA climbed to 5.02.

In 1962, the Mets' team ERA was 5.04.

Very different eras, but just sayin'.

Thursday, September 14, 2017

Tax "reform" update

According to this account in Politico, the so-called Big Six disagree fundamentally about what their tax "reform" legislation should look like.

Speaker Ryan wants to enact expensing, but "Senate Republicans believe it won't fly in their chamber."

Ryan also wants to eliminate (net?) corporate interest deductions, but "the break is important to many companies, and other negotiators [Senate? Administration?] want only to reduce it."

Ryan wants to repeal state and local tax deductions for individuals, "but some are concerned over what that means for upper-middle class people."

Meanwhile, Senator Hatch favors a corporate integration proposal that presumably is dividend deductibility, but "the idea has not gotten much traction with House Republicans."

These are some pretty fundamental disagreements. Indeed, other than cutting rates and exempting things, which as a standalone cannot plausibly be called "reform" and would of course raise budget issues, there's nothing of comparable importance left. (Home mortgage interest deductions are presumably even a bigger political lift than state and local tax deductions.)

Tuesday, September 12, 2017

Tough question?

Two weeks from today, I'll be speaking at a KPMG-run conference in Amsterdam entitled "EMA Tax Summit 2017: A Year of Disruption and Rapid Change."  It would be rather a long trip to undertake from the U.S., but as it happens I'll be by then in Berlin, amid a three-week stay at NYU Berlin, where I'll be doing some work on my literature book. (The work isn't site-specific, except insofar as I suppose that getting away can help one's focus.) So I thought it was reasonable to engage in the side-trip.

Since the conference deals with what tax planners should expect in both the US and the EU, I wouldn't be surprised if they asked me whether it's realistic to expect Congress to enact comprehensive tax reform - say, by the end of this year or so.

Hmmm, that's a tough one. I will have to think about it.

Sunday, September 10, 2017

Why is Exile on Main Street so much better than Let It Bleed and Sticky Fingers?

More ruminations here from my resurrecting stuff via Spotify that I hadn't listened to for a while, to help get me through my elliptical machine sessions at the health club:

The canonical view of the Rolling Stones' career, for those in my approximate taste sector, goes something like this. In the 1960s, they were the best and most important white rock or pop musicians, with the exception of the Beatles and Dylan, plus in retrospect perhaps the Velvet Underground. But they were mainly just a great singles band (plus other outstanding tracks - e.g., Sitting on a Fence, What to Do, She Smiled Sweetly, and Ride On Baby, to name four that come right to mind), whose albums generally fell short of showing them consistently at their best. Then came the mistake of Satanic Majesties, after which they pulled themselves together by starting their mature period with Beggars Banquet, followed by the 3 classics - Let It Bleed, Sticky Fingers, and Exile on Main Street - after which they got bored and mostly dull for a few albums (albeit, still with a few great tracks). Then they woke up one last time for Some Girls, the fading echoes of which somewhat enlivened the next two albums (Emotional Rescue and Tattoo You). But after that, while perhaps there's a good track here or there, their recordings are generally best forgotten.

Canonical or not, this basically matches my view of their career, except that I would make one big revision that I know is not canonical. Of the "3 classics," I find Let It Bleed and Sticky Fingers overrated and at times boring, although of course they have a number of essential tracks. But Exile on Main Street truly is their pinnacle.

I would put Some Girls second and Between the Buttons, released in January 1967 as their version of Revolver, third. Each of my favorite 3 Stones albums has a distinctive internal creative dynamic. Exile on Main Street is basically a Richards album with Jagger just along for the ride. Some Girls is basically a Jagger album with Richards just along for the ride. And Between the Buttons gets a lot of its punch from Brian Jones' playing a different odd instrument to flavor the sound on almost every track. (It thus makes their much later work sound incredibly monochromatic and boring.)

Anyway, so what makes Exile on Main Street so much better (in my view at least) than Let It Bleed and Sticky Fingers? Again, the latter two have a number of incredible tracks. But there's a whole lot of not that interesting macho posturing going on, along with rock-blues stuff that sounds a bit generic although I realize of course that this is partly from its being imitated so much afterwards (but then again, they were imitating earlier black artists when they did it). Take Honky Tonk Women and Brown Sugar, even leaving to one side their racial and sexual political incorrectness, which were deliberate, pursuant to their outlaw image in a more retrograde era than ours today. Although these tracks are extremely catchy, dynamic, and fun, they can't be at or near the artistic and expressive pinnacle of popular music from the rock era, unless that pinnacle was considerably lower than some of us would like to believe.

But Exile on Main Street is not just rich, full, and beautiful in its sound (despite its famously murky mix) - it makes fantastic use of all the great extra musicians and singers they had on hand - but soulful, wistful, elegiac, and hurt.  (Just one great example among many is Torn and Frayed.) Macho preening isn't its thing; instead it's about staring into an abyss of one's own creation. A suitable mood, perhaps, for the United States these days.

Tuesday, September 05, 2017

Not wonky enough?

Matt Yglesias, in a generally excellent column about the sorts of federal income tax changes that the Administration and Republican Congressional leadership may seek in the next couple of months, rightly notes that tax reform, in common usage, means “reducing tax rates without massively reducing federal tax revenue because the losses from the rate cuts are offset by closing loopholes and eliminating or curbing deductions.”  He also rightly notes that the Republicans are unlikely actually to attempt this, since base-broadening sufficient to offset the revenue loss is no fun politically. He then asks why, on policy grounds, one might favor bona fide tax reform:

“What’s good about tax reform?

“The official wonky case for tax reform stems from a divergence in the way that a normal person thinks about taxes from the way that an economist [does] ....

“To a normal person, taxes are a necessary evil. The evil thing about them is that after you pay taxes you have less money than you had before. Most people like money, so they like the idea of getting a tax cut, and they don’t like the idea of getting a tax hike, primarily because they are focused on the impact of tax changes on their after-tax income. If Congress changed the law to cut my taxes by $500, I’d be pretty happy about that. And I wouldn’t care whether they did that by tweaking the individual exemption, tweaking the dependent exemption for my 2-year-old, making his preschool tuition tax-deductible, or cutting my marginal income tax rate. At the end of the day, the point would be to get the $500.

“But from a supply-side viewpoint, these are very different policies. Making the individual exemption a little bit bigger puts $500 in my pocket but it doesn’t give me any new incentives to work harder and earn more money. If anything, by making me a little more economically comfortable it reduces my incentive to work harder and earn more money. By contrast, cutting my marginal income tax rate doesn’t just put $500 in my pocket. It makes it more worth my while to try to go out and hustle up some paid speaking appearances or otherwise find ways to earn a bit more.

“Tax reform is good, on this view, because it’s a way to greatly improve incentives without costing the government much in the way of revenue. The 1986 tax reform bill, for example, eliminated enough loopholes to pay for a cut in the top marginal income tax rate from 50 percent all the way down to 33 percent — drastically increasing the incentive of rich people to go out and try to become even richer.”

In the above text, Yglesias offers a generally useful explanation. However, he may overstate (or, at least, slightly misstate) the main character of the economist’s case for tax reform.  To show this, let’s make two tweaks to his illustration.  First, let’s suppose that I’d get $500 via Congress’s newly making preschool tuition tax-deductible, rather than by its either (a) raising personal or dependent exemptions or (b) lowering marginal tax rates.  Second, let’s suppose that I would decide to work and earn more if I were sending my child to a costly preschool than if I were keeping the child at home.

Now, with the tax treatment of preschool tuition tax being an input to my labor supply choice, it lines up more the marginal tax rate change, and less with changing the individual and/or dependent exemption. So, if we already had preschool tuition tax-deductibility as a feature of current tax law, and we were thinking of repealing it to fund a lower marginal tax rate, the “tax reform” might end up, at a first approximation, not increasing my incentive to earn. E.g., suppose that, when I was thinking of working more so I could send my child to preschool, the combination of (a) an increased after-tax return from my work and (b) an increased after-tax cost to the preschool, left me in the same place as I was before.

To make this a more plausible revision of the hypothetical, suppose that both decisions are scalable. E.g., I can work just a little bit more or a lot more; I can send my child to a cheaper preschool or a more expensive one. The bottom line may still be a lot less change than might otherwise have been expected to my labor supply incentives. I work to earn money to spend on things I want, and the base-broadening makes it costlier than it was before to buy the things I happen to most want.

Why point this out? In the 1986 tax reform, at least some studies found afterwards that work incentives hadn’t really changed much, by reason of the base-broadening. E.g., suppose I previously hadn’t minded the 50% top rate because tax shelters would prevent me from actually having to pay it. Now the rate was lower but the tax shelters were gone, so I would actually have to pay the headline rate. This may have been a good policy change for other reasons that I’ll get to in a moment. But it could mean that my incentive to earn more $$ wouldn’t actually have increased.

Now let’s turn to contemporary thought experiments in which, say, state and local tax deductions, home mortgage interest deductions, and/or 401(k) deductions are repealed to fund lower rates.  (In the 401(k) example, even if the current deduction is replaced by a future exclusion that’s slated to apply when I withdraw the money, suppose that I’m either myopic or else don’t trust future Congresses to retain the exclusion.) If I’m paying about as much tax on balance as I was before, it’s plausible, depending on the details and on my level of understanding, that my view of my after-tax incentive to work will also remain about where it was before, given the changes to the tax treatment of some of my earnings’ possible uses.

With that in mind, let’s re-ask Yglesias’s question: “What’s good about tax reform?” The answer, if any, is that, even if we haven’t substantially changed my incentive to work and earn, we have done so with respect to how I spend my earnings.

In terms of the 1986 example, it’s presumably good that I’m no longer investing in tax shelters (assuming that their tax benefits were socially undesirable), since I will now seek opportunities that offer greater expected pretax profitability. But it’s my inter-asset choices that are now less tax-distorted than previously, rather than my incentive to work and earn.

Likewise, for the 2017 scenario, suppose we see no relevant social difference between my spending my $$ on (a) preschool tuition or (b) fancy vacations. Then eliminating the distortion to my choice that resulted from the hypothetical tuition deduction is a good thing here, albeit by express stipulation. But if we don’t think the deduction was bad, e.g., because we see positive externalities to people’s sending their kids to preschool instead of spending the $$ on own consumption, then so much the worse for the case for “tax reform” here.

I myself tend to like the inter-asset efficiency consequences of a revenue-neutral tax rate cut plus reduction to the home mortgage interest deduction. But that’s because I don’t like the deduction, or more precisely what I take to be its main effects. The state and local tax deduction example is potentially quite different. So is the 401(k) deduction repeal, although there we would need to specify a lot more about what people expect, how they make savings choices, how we should think about socially optimal savings choices, etcetera.

Returning to Yglesias’s main point about tax reform, we’ve now both (a) made the economist’s argument wonkier still – by relating it to distortions in asset or activity or consumption choice, rather than to labor supply as such, and (b) shown that it needs to be evaluated case-by-case, in terms of the arguments for a particular tax benefit that would be eliminated to pay for tax reform.

Of course, as I agreed with Yglesias at the start, the Republicans appear unlikely to attempt bona fide “tax reform” (with significant base-broadening) anyway. But just in case anyone should ever attempt it in the future, I hope it’s useful to clarify the nature of the main argument for it.