Wednesday, October 25, 2023

NYU Tax Policy Colloquium, Kim Clausing's Capital Taxation and Market Power

Yesterday at the colloquium, Kim Clausing presented Capital Taxation and Market Power, which focuses on the importance of extra-normal returns that are earned these days, especially by big multinational companies such as the FAANG crew (Facebook, Apple, Amazon, Netflix, Google).

Extra-normal returns are important not just to rising high-end inequality in the US and around the world, but also analytically. For example, as I discuss here, they can reverse both the efficiency and the incidence analysis of entity-level corporate income taxes. They can also reduce the need for income rather than consumption taxation at the entity level, even if one is pro-income tax as to the taxation of individuals.

I see the paper as raising 4 main types of issues, as set forth below.

1) What are extra-normal returns, and what gives rise to them?

Their most pertinent features are:

(a) at the risk of belaboring the obvious, their being by definition high, hence something to care about.

(b) their being generally non-scalable, unlike risk-bearing or making investments that merely earn the normal return. Thus, Jeff Bezos presumably could not have responded to the existence of the tax system by making 2 Amazons, rather than just one.

(c) their being potentially highly efficient to tax. But this depends on understanding what gives rise to them.

Suppose we call them rents, and think of rents as free money that falls from the sky. Then taxing them at even a 99% rate does not induce substitution and is perfectly efficient. But this may not be an entirely credible way to think about them.

Rents are also sometimes defined as amounts in excess of one's reservation price. Thus, consider LeBron James, whose salary for playing this year is nearly $50 million. If he would play for just $5 million, then the extra $45 million is a rent and could be taxed away without affecting his behavior. (Note that this perhaps unrealistically ignores the scalability of LeBron's effort level - he works very hard, all year round, to be ready to play.) But in any event it is hard to know people's reservation prices.

The paper mentions the distinction between rents and quasi-rents. The latter, like the former, are defined in the literature in multiple ways. The paper notes that observed (ex post) extra-normal returns can reflect compensation for risk, implying the possibility of a normal return (any risk premia aside) ex ante. One wouldn't judge rates of return on the New York State lottery by just looking at the winners' return on investment. Quasi-rents are also sometimes defined as being merely temporary, or as being enjoyed ex post (with no further effort being required) once they have been successfully created. And there, I think, we are on to something more general.

I think of seeming rents as generally quasi-rents that are conceptually the products of labor income. Which doesn't mean that they're generally either deserved or the products of toil and "sweat equity." But they generally involve one's having done something or made some particular choice in response to one's opportunities. This could involve something that's socially productive, or rent-seeking efforts to create and defend monopoly power, or anything in between. But good or bad, deserved or not, I'd say they're geneally not entirely free money, and therefore that, when we're taxing them, we are still in the world of comparing distortions from the use of alternative instruments.

2. Implications of taxing extra-normal returns

This is not to dispute that taxing extra-normal returns that are conceptually labor income (even if viewed by the tax system as capital income) may have efficiency as well as distributional advantages. But it's no longer a slam dunk. The issues that one might think about here include the following:

Time: How should we evaluate the appeal of taxing returns that are ex post rents? It's the familiar time consistency issue, but in a distinctive setting. As Keynes said, in the long run we're all dead, and one also might ask to what extent (and how generally) one is actually going to discourage new investment and labor effort if the setting for the ex post taxation is a distinctive one.

Elasticity of labor supply: How tax-discouragable are the would-be Jeff Bezoses of the future? I am inclined to think: not very, but admittedly this calls for empirical investigation.

Externalities: As the paper discusses, these are at least plausibly rife, on both the positive and negative sides. E.g., positive externalities (or the creation of consumer surplus) from innovation, versus inducements to rent-seeking and monopolistic behavior.

Political economy: There are theoretical reasons for positing that companies like those in the FAANG group would be prone to being overtaxed. For example, insofar as they earn non-rival, location-specific rents that are actually quasi-rents, each country might have an incentive to grab (once it is repeated everywhere) "too much." But if the companies are politically very powerful - including US companies outside the US - then the main problem may lie the other way, in terms of their securing favors that include low taxation. I am inclined to think that, in practice, the latter problem significantly outweighs the former one, but again this may be context-dependent and in need of verification.

3. Tax versus non-tax instruments

Both tax and other scholars (e.g., in antitrust and IP) are, to an undesirable degree, siloed in their own disciplines. This happens for good reasons - it's not that easy to become an expert in something - but it can have bad effects when the alternative instruments are interchangeable and interact with each other.

The paper notes that some of the problems it proposes addressing through taxation (e.g., higher taxes on those who may have monopoly power) can potentially be addressed through such alternative instruments as antitrust or IP rules. There may be both substantive and political economy differences between the alternative approaches. E.g., tax and antitrust may raise distinct political and administrative issues; tax may be more continuous and antitrust more of an on-off switch; and a tax approach to monopoly merely seizes some of the profits earned by limiting supply rather than directly preventing it. While clearly this paper could not sensibly have taken on the alternative-silo issues in any detail, they do merit being more fully addressed somehow.

4. Tax proposals in the paper

The paper notes several interesting tax law issues as to which its analysis might support changes in the rules (e.g., pertaining to tax-free reorganizations, international taxation, and the tax treatment of large pass-through entities that may be earning extra-normal returns). But the most novel one is to restore graduated rates in the corporate tax, on the view that companies with very large amounts of income may tend to have a higher proportion of extra-normal returns. This would be accompanied by rules requiring consolidation, at least for tax rate purposes, when commonly owned companies were nominally separate. While there are many possible objections to such a rule, I agree that it should be on the agenda of current debate (including for political economy reasons, if smaller companies have especial political clout in Congress).

Wednesday, October 11, 2023

NYU Tax Policy Colloquium: Jeremy Bearer-Friend's Race-Based Tax Weapons, Part 2

 My prior post offered some background regarding the 4 case studies in Jeremy Bearer-Friend's paper. This one will focus on the paper's terminology of race-based (and other, such as class-based) "tax weapons" - a proposed takeaway from the analysis, and well worth discussing although I like case studies (including these) whether or not they have specific takeaways for contemporary readers.

The paper defines a tax weapon as a provision reflecting use of the tax system to harm political rivals. A tax weapon is race-based insofar as the targets are people in particular racial or ethnic categories. (It views a yacht tax that a progressive government might impose as a class-based tax weapon.) Again, this is a proposed analytical category, rather than necessarily being grounds for condemnation. And it views the Texas poll tax and Thatcher Community Charge examples as showing that a tax weapon can be race-based even if it doesn't facially use race or ethnicity as a category. 

This is obviously so as to the Texas poll tax, given how it was deliberately used to disenfranchise Black (although also poor white) voters through the discretion applied by its local enforcers. But for the Thatcher Community Charge, I think the case is a bit more complicated.

In support of viewing the Community Charge as a race-based tax weapon, the paper adduces the following points:

(1) By massively shifting tax liabilities in a regressive direction, it greatly shifted burdens from white to nonwhite taxpayers, given underlying racial economic inequality in the UK.

(2) Other details of the tax could also be seen as reflecting implicit targeting. For example, the Community Charge was generally higher in urban jurisdictions where nonwhite individuals disproportionately lived, than in disproportionately white rural jurisdictions. And, since (although a head tax) it was collected through households, it resulted in a higher charge on nonwhite households, which on average had more adults in residence.

(3) There is evidence strongly suggesting that the sainted (in some circles) Thatcher held racist views.

In response, let's start with #2. If I correctly understand the Community Charge, 3 adults (say) would pay the same tax whether they lived in one household, two, or three. So the fact that nonwhite adults were more often found in the same household didn't make the tax worse for them - this was, rather, a product of its being a head tax rather than a property tax in which more affluent individuals would pay more (and businesses would pay, too). I'm also not sure about urban versus rural, as the former presumably spent more, too.

In terms of #3, yes I agree that the perhaps not so sainted Thatcher appears to have been a racist. This comes as no surprise, whatever virtues one might conceivably ascribe to her in other respects.

But #1 is at the heart of the matter. And here, I think, we face a tricky issue. Let's start with what the Community Charge was. Both its central point and its main effect was to shift tax liabilities massively downwards in the social scale - to make the UK fiscal system far less progressive. There was also an element of Mitt Romneyesque "47 percent" thinking. By making poorer individuals pay for community-level spending, the thought was that this "skin in the game" would cause the governments to spend and do a lot less. Part and parcel of Thatcher's efforts at the national government level to greatly shrink government's role relative to that of the private sector.

Did that promise to have large adverse effects on racial equality? Absolutely yes, given distribution in the UK (and US) both then and now. Could one in good faith support such a policy without being a racist? Also absolutely yes, although I myself would oppose it even in a society without racial inequality, and all the more strongly in a society with such inequality. Does the fact that one could in theory support it without being a racist mean that it is cleared of being a race-based tax weapon? Not necessarily, although I have not yet discussed (but will below) the broader "tax weapon" terminology.

Certainly in the United States (which I know best), but also I gather in the UK, race is so utterly central a cultural and sociological category that one simply can't ignore it. It's like the proverbial elephant in the room. Moreover, race and class are so poisonously intertwined that it verges on impossible for an American to have a view about taxes, social spending, and progressivity that doesn't have race as at least an important background factor in one's emotional responses. E.g., one important reason why the US has so much less progressive an overall fiscal system than our peer countries is that race causes a lot of policymakers and voters to think of poor people as "them" rather than as "us."

So, yes, I see the point to viewing the Community Charge in the UK, or flat tax proposals et al here, as having a racial character, and as in practice strengthening white supremacy, even though they are not just (or directly) about race and may be supported by particular individuals who are not even unconscious racists.

But as to calling them race-based tax weapons, there are also further issues around the question of whether "tax weapon," race-based or otherwise, is a useful new terminological category. Note, by the way, that the above analysis could be extended to call all progressivity-reducing measures (even just as between 2 potential tax reform proposals, neither of which is present law) race-based tax weapons. This in turn would raise questions as to how much we gain from the terminology, either analytically or politically.

The paper proposes "tax weapon" as a useful addition to the standard categories of (to quote the paper) revenue, redistribution, and regulation. Let's modify this terminology slightly to consist of revenue, distribution, and regulation. (Removing the "re" from "redistribution" so that we don't have an implicit baseline such as pretax income.) Tax weapons are distributional, so what is the distinguishing feature? Perhaps animus? I.e., wanting to harm a particular group as distinct from just not wanting to help them as much as one wants to help other groups that are more to one's taste? Or, targeting that can't be explained just on conventional broader grounds? But this in turn might work better for race than class, given that a focus on, say, ability to pay, or on the negative externalities that one attributes to economic inequality, is pretty much straight-up distribution policy.

Perhaps "tax weapon" is best viewed as an intensifier for what one deems especially odious and extreme distributional policies. For example, when it's used (as in the Texas poll tax example) to achieve massive Black disenfranchisement, or (as in the California example) to place huge tax burdens on non-voting immigrants, or (as in the Kenya example) to require multiple weeks of labor that is effectively unpaid given the underlying poll tax obligation, then we need to signal that this is not business as usual. Likewise, perhaps, when (as in the UK community charge example) one is aiming at a really large downward shift in tax burdens. But I myself don't find it enormously helpful analytically. Plus, if we imagined for a moment that academic discourse can affect public political outcomes, the effect on political rhetoric wouldn't necessarily be positive. The "weapons" rhetoric could potentially do ill as easily as harm. E.g., imagine that all efforts to increase tax liability at the top of the distribution were now subject to being pilloried as "class-based tax weapons." (Although how much difference this would make, compared to rhetoric about "class warfare" and "envy is unclear.)

Still, an interesting paper and topic, both for itself (the case studies) and for the broader reflections about tax, class, and race that it encourages.

NYU Tax Policy Colloquium: Jeremy Bearer-Friends Race-Based Tax Weapons, part 1

Yesterday at the colloquium, we discussed with Jeremy Bearer-Friend his new article, forthcoming in the UC-Irvine Law Review, entitled Race-Based Tax Weapons. This is a case study (but also drawing broader policy-relevant conclusions) of the following four twentieth century "poll taxes" imposed by Anglophone governments:

1) The poll tax that Texas imposed beginning in 1903 to prevent Blacks, and to a lesser extent poor whites, from voting. This was a uniform head tax of $1 per adult male that actually pre-dated the Civil War (at which point it was payable only by whites). Low as this may sound in terms of modern dollar values, at the beginning of the 20th century the bottom 76% of the Texas population only earned about $60 per year.  So, proportionately speaking, if you were earning $60,000 today it would be like paying $1,000.

After the Civil War and 13th Amendment, it was expanded to apply to all men aged 21-60. The big 1903 innovation was to tie it to voting - you couldn't vote if you hadn't paid it - and to make it payable at a different time and place than that of the elections themselves, with the aim of excluding disfavored voters from the ballot, rather than of collecting it from them.

2) A short-lived 1921 California poll tax of $10 (equaling the return to 30 hours of minimum wage labor) per male aged 21 to 60 who was an alien. Reflecting animus towards Chinese, Italian, and Japanese immigrants (the three most numerous immigrant groups at the time), it was struck down within a year by the state's Supreme Court.

3) A poll tax that the British Empire imposed in Kenya in 1934, to be paid solely by "natives" (defined as men who were of African, rather than European or Asian, extraction) with an eye to forcing them to work on English-owned plantations for at least 23 days in order to generate the cash that they would need to pay the tax.

4) The uniform "Community Charge" that Margaret Thatcher's UK government imposed in Scotland in 1989, then expanded after a year to England and Wales. It replaced property taxes that the local governments had previously levied to fund their outlays. It was a per-person head tax on adults, charged on a per-day basis, depending on the number of days that they spent in a given jurisdiction. Because of its extreme regressivity, as compared to property taxation, it caused mass protests in the UK that brought down the Thatcher government.

In contrast to these 4 examples, I don't think poll taxes / uniform head taxes are much on the agenda these days, which is certainly a good thing. But demogrants (i.e., uniform per-person payments to members of the eligible group) can be viewed as reverse head taxes. One might also say the same for refundable child credits, although these would only go to parents, not  everyone.

Of the 4 poll taxes in the case study, #2 and #3 are expressly targeted at particular racial groups, while #1 and #4 are facially neutral. The article argues, however, that all should be classified as "race-based tax weapons." Moreover, it points to this essential underlying similarity as demonstrating that racism and white supremacy can be advanced by formally neutral or uniform rules, no less than by those that are overtly racist.

This claim is surely correct, albeit in tension with the US Supreme Court's increasing focus on formal neutrality (for example, in school admissions) rather than on substantive effects on racial inequality. But in my next post I will address the broader analytics of identifying race-based (or other, such as class-based) tax weapons as an important new substantive category in tax policy analysis. This will include asking whether or not, and to what extent, we should group Example #4 above with the first three.

Medical deductions article

My medical deductions article, forthcoming in the Tax Law Review, has indeed gone live here.

The abstract goes as follows: 

Recent decades have seen explosive growth in the availability and efficacy of assisted reproductive technologies (ART) – for example, egg extraction and storage, egg donation, intracytoplasmic sperm injection, in vitro fertilization, and surrogacy. ART greatly enhances millions of lives – not least those of the tens of thousands of people (in the United States alone) who owe their own births to it each year – but it can be extremely costly. Moreover, ART is just one current within a broader ocean of potentially transformative but often very costly) technological advances in the provision of healthcare. However welcome the rise of these technologies may be, they present challenges regarding how their provision should be funded, other than by the prospective users themselves.

Taking on a narrow piece of this broader puzzle, this paper concludes that, under the US federal income tax, medical expense deductions for ART expenses should be available in certain situations where the IRS and the courts – possibly reflecting anti-LGBTQ bias – have recently determined otherwise. More importantly, however, it seeks to situate both the ART debate, and that concerning broader advances in healthcare technology, within an analytical framework that may aid fuller and more definitive inquiries by others.

Tuesday, October 10, 2023

New article on medical deductions in the income tax

Three weeks ago, I posted an article on SSRN entitled "Assisted Reproductive Technologies, Other New Frontiers in Medicine, and the Income Tax's Role as a Back-up Health Insurance System." It's forthcoming in the Tax Law Review.

The abstract goes like this: 

As I knew would happen, SSRN's AI bots embargoed it (nearly 3 weeks ago) on the ground that it might be offering medical advice. It isn't, but they are not very advanced or bright just yet. The article is therefore stuck indefinitely in purgatory (I know this from experience), although I hope to get it liberated therefrom when I take the time (which I don't really have) to call SSRN and discuss the situation with a live human.

This happened once before, when a paper of mine which had absolutely not the remotest connection with anything medical got embargoed because its title included the words "Ancillary Benefits," which is a term used in health insurance although I wasn't using it that way.

Despite the embargo (e.g., it's not listed as one of my papers), the link for it appears to work. So if interested you can try this.

Monday, October 09, 2023

Book (including an article of mine) on Stanley Surrey

Duke Law School's Law and Contemporary Problems journal has just published a new issue, entitled The Legacy of Stanley S. Surrey, edited by Ajay Mehrotra and Lawrence Zelenak. It responds to the recent re-surfacing of Surrey's memoirs, still in progress (but mostly complete) when Surrey died in 1984, and then published (with useful annotations) through Mehrotra's and Zelenak's efforts. Surrey remains a figure of particular interest, and was certainly the most influential U.S. tax law academic ever.

The entire issue is available online here. I won't issue shout-outs for particular chapters, as that would seemingly diminish the ones I didn't list, but there are a number of particular interest.

My chapter, entitled "Moralist" Versus "Scientist": Stanley Surrey and the Public Intellectual Practice of Tax Policy, is available here.

Sunday, October 08, 2023

Michigan conference on Friday, October 6, discussing the "International Tax Revolution"

Two days ago I spoke at an international tax conference at the University of Michigan Law School, discussing OECD-BEPS Pillars 1 and 2. The video link is supposed to be here,  but it appears not to work without permission. If you can view it, my remarks begin at 4:43:34.

The speakers in the morning session were mainly academics who had worked on OECD-BEPS during government or NGO stints, and they were mainly upbeat about its prospects (at least, Pillar 2) and merits (at least, compared to prior law).

The speakers in the afternoon session were considerably more negative. While I was one of the afternoon speakers, I was not one of the more negative ones. My remarks were more on the positive than the normative side, discussing how one might think about the underlying international tax politics that may affect the Pillars' acceptance or rejection around the world.

But I will mention two of the negative comments that were made during the afternoon session that I briefly rebutted during my remarks. I won't name the speakers (although you can find it on the video, if it's accessible), because, as they're friends, I feel I'd owe them a bit more context and description of their side of the debate before expressing my disagreement publicly.

The first of these two negative comments, pertaining to Pillar 1, went something like this. Suppose we are considering some situation such as the UK's desire to tax Facebook / Meta's profits from ads sold to reach UK users. The UK currently does this through a digital services tax, but Pillar 1 is designed to replace this. Why should the UK be able to reach these profits, the speaker asked? Its claim that "value creation" occurred in the UK is ludicrously false [a point with which I agree], as it really happened in the US, where people who live and work there created and are tending to the IP.

Here my next move would be to say: So what if there was no value creation in the UK? There is a kind of bilateral monopoly situation here, involving the profits Meta can earn in the UK that is non-rival to its simultaneously earning profits elsewhere too. It's silly to moralize about who is "entitled" to what share of bilateral monopoly profits, so why should we presume that the US should be the only party able to tax it. Rather, let us hope that the two parties find a way to work it out amicably, keeping in mind both that Meta has generally been greatly undertaxed on the quasi-rents that it earns around the world, but could potentially be over-taxed if every nation starts grabbing as much as they can of the quasi-rents based on presuming that they are actually rents.

My panel colleague, who is an economist, instead argued that, since value creation occurred in the US, as a matter of proper political incentives only the US should be allowed to tax the profits. It has an incentive not to overtax them but to do things "right," whereas source or market countries such as the UK have every reason to overtax.

The mistake my good friend makes here is practicing political science without a license. He seems to think that we have individuals from a rational behavior model acting based on self-interest. But suppose the UK faces political constraints (Meta political clout & money, fear of the US response) that push against its overtaxing the profits. And suppose the US is inclined to undertax them due to interest group politics, which may empower our multinationals. In short, it is an uncertain empirical claim that assigning the tax rights exclusively to the US will lead to better outcomes. Not to mention, if the UK wants to tax these profits (an unsurprising state of affairs, especially when it observes the US not doing so), so what if we have a political economy argument telling them to back off. What if they don't want to? Then we have a problem we need to solve, hopefully reasonably amicably and not too inefficiently, in any event.

Another panel colleague expressed extreme skepticism that moderating tax competition between countries via Pillar 2 would slow down their economic competition. Countries can simply substitute subsidies, such as via direct spending, for lower taxes. (An observation that actually underlay the European Court of Justice's battle against state aid.) So there's no point to the whole thing and it won't get us anywhere that's helpful.

Now, this observation might actually prove to be correct. We will see. But it does invite the retort: If non-tax subsidies are such a great substitute for tax subsidies, why don't we see more of them already? The rationale for seeking to moderate economic competition for MNC investment (and nominal profit allocation) by moderating tax competition is that the latter is an especially fruitful (i.e., low-perceived cost) way to do it politically. This in turn brings us to the longstanding debate regarding whether tax expenditures are used, not just out of random convenience, but because they are optically less "costly" than their direct-spending substitutes. Here I tend to believe that the answer is often to a degree somewhat Yes. Hence, it is not impossible or even implausible (although I wouldn't claim much more than that) that Pillar 2 might ease overall economic competition regarding multinationals' locational choices.