International tax policy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

NYU presentation of my new paper

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

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

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

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

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

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

Evil scam

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

This one is ostensibly from "service@irs.gov" and reads as follows:

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

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

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

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

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

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

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

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

Indirect defense of Obama

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

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

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

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

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

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

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

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

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

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

Lyndon Johnson to the rescue

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

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

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

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

Comedy special of the day

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

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

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

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

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

Obama tax plan

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

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

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

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

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

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

A few comments from me:

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

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

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

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

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

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

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

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

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

NYU carried interests event

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

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

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

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

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

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

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

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

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

TIAA-CREF is absolutely the worst, bar none

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

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

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

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

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

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

Finally

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

Carried interest panel in D.C. last Friday

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

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

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

Proof that the surge is working

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

A bit of snark

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

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

D.C. appearance later this week

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

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

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

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

Retired from squash

Upon reflection, I think I'm genuinely done with squash. Tennis is just much easier on my various joints and limbs.

"It's okay, Dad - you've had a great career, but you just have to stop now," is how one of my kids put it to me before I finally decided. Ah, the impressionability of youth.

On a related theme, we all went to the U.S. Open yesterday. My wife and I have been going annually, with only one exception we can recall, since moving to NYC in 1995. But this is the first time we took our kids. This actually was double the fun, although we had to shorten the day somewhat. Most controversial moment involved translating for their benefit some of the mouthing we heard from Sebastian Grosjean when he got mad at himself during the course of his (eventually successful) match with the towering Max Mirnyi. Mauvais-this-or-that was no big deal, but I also felt compelled to enlighten them when he said something-or-other putain.

Sunlight in Vermont

The title of this post is a Captain Beefheart reference - let's see who's the first to identify it.

I spent most of the last 4 days in Woodstock, Vermont (not THAT Woodstock), attending a conference that has been run by Al Warren of the Harvard Law School for many years (approaching twenty), and that is genuinely an important institution in the tax legal academy. This both in the sense that it can have important effects on people's stature and reputation in what I like to call the biz, and in that numerous subsequent publications may be strongly influenced by it. E.g., my forthcoming article in the Stanford Law Review, which I have previously linked here, changed significantly, reflecting the input of Jeff Strnad (my discussant last year) in particular.

The Woodstock proceedings are confidential to the participants (unlike my colloquium, which is open to the public). If I published inside details about it here, I not only would be in hot water, but would deserve to be. But if I may throw in another far-fetched cultural reference, it's a bit like a much less racy version of the movie Brief Encounter. Many of the same people get together every year, and the thing evolves over time. Indeed, to a serial attendee the way it has evolved over the years is genuinely sociologically interesting.

It's in part a generational story, featuring three distinctive age cohorts, my own being the one in the middle. Needless to say, in my version we're the heroes. Other versions may differ. And it's also a story about various pairs who have had fights over the years, but who at some point couldn't quite keep a straight face about it any more. From drama to schtick, which certainly qualifies as a benign evolution.

Throw in two and a half hours of outdoor tennis, an hour on the elliptical machine made tolerable by Squeeze's "Cool for Cats," and numerous desserts steadfastly avoided, and the only downside was that I missed my family.

Gonzalez resignation

Who will be named to replace Gonzalez? A friend e-mailed the suggestion that perhaps it will be Harriet Miers. But I have an even better idea - Lewis Libby.

The surge is working!!!

Not in Iraq, of course. But it's doing really well in Washington.

The great escape

Narrowly skirting disaster can be exhilarating.

Okay, let's be a bit less hyperbolic here. Narrowly skirting major inconvenience, annoyance, discomfort, and waste of time can leave one with a feeling of relief and release.

Yesterday afternoon I headed to LaGuardia Airport to take the 5 pm shuttle to Washington DC, where I was planning to attend a meeting early this morning. Economists at the National Bureau of Economic Research (NBER) are doing a whole lot of interesting research projects that are funded by the Social Security Administration, so they have a meeting where outside commentators, including several prominent law profs who share my interest in Social Security, give their thoughts and suggestions about the list of new research proposals that are being funded. Many on the list were quite interesting - e.g., Kent Smetters has a very intriguing one on the political economy of Social Security privatization and pre-funding around the world (not to suggest that the other proposals are less interesting).

Anyway, I was supposed to be at the outside commentators' meeting early this morning, but when I got to the airport last night, I realized that I was looking at many, many hours of delay. Best estimate was that we would board an hour late, sit on the runway for 2-3 hours waiting in line, and then POSSIBLY actually fly to D.C., which I gather was racked by storms.

I was discussing this with an English bloke who was waiting for the same flight but had heard more about what was happening, and who was unhappy because it looked like he was going to miss a Squeeze concert (I saw Squeeze in NYC last Friday but haven't posted about it). "You're screwed," he said amiably, but I realized I actually wasn't. I could simply go home.

How often, when you run into one of those awful travel days at the airport that any regular traveler has from time to time, can you simply check out? As in, not wait at the airport, not try to get to the train station, not try to find a hotel, but simply declare defeat (or victory) and leave. Never when you're on the road, and usually not even when you are trying to leave home. The stakes are often higher, e.g., a meeting you really have to be at, or a conference where you're presenting a paper. But this time I could simply say that I wasn't going to be there - others would anyway, and I could still participate in the meeting by phone.

So I had a pleasant evening at home with The Fam, did the meeting by phone early this morning, and am now idly wondering, as I type at my desk, what exactly I would be going through if at this moment I were trying to return from DC to NYC on the shuttle. In New York it's been raining all morning.

It's all a matter of your baseline. A pointless roundtrip to the airport may seem costly compared to not going in the first place. But it means one got off lightly indeed, compared to going through one (or perhaps more likely two) of those horrible, endless travel days spent sitting at the airport or in a parked plane.

Now that I've learned how to pick the cheery baseline, perhaps I should be making long-term federal budget projections.

Better than the alternative

The heading to this post is what my father always used to say is the great thing about aging - it sure beats the alternative. A good thing for me to keep in mind today.

I've played tennis twice since returning from Asia, but today was my first time playing squash in 5 or more weeks. I was a bit worried about my sprained knee - I couldn't do all the exercises, without my heavy gear, while traveling, and it definitely is still subpar. Even with a strong brace, my knee particularly dislikes, and sometimes complains about, the sudden changes in direction you can need to demand of it while playng squash, and I didn't want to injure it again.

No need even to mentiion here that I still sometimes dive for balls. That doesn't actually seem to be the problem.

I needn't have worried about my knee. Early in the second game, expecting a deep ball but then wrenching forward suddenly to fetch a drop shot, I threw out my back and had to quit. I have been stiff and in a fair amount of pain ever since.

Maybe my body is trying to tell me something? I am prepared to be rational about this, but perhaps with stretching and patience, after I've healed a bit, I can still go.

Fantastic news

Word has just come out of Washington that Ed Kleinbard has been named the new Chief of Staff of the Joint Committee on Taxation. In the interest of full disclosure, I should note that Ed is a personal friend, which naturally colors my views. But our being friends reflects, among other factors, my admiration for the abilities that he will bring to the job. So I don't think it should induce any skepticism about my endorsement.

JCT chief is unquestionably a very challenging role. Friends with inside-the-Beltway knowledge about tax politics have gone so far as to call it the single worst job in America. Hyperbole perhaps, but they have a point. I hope I'm not breaching confidences if I say that I am among the people who was asked about possible interest in seeking the job. I rapidly, indeed instantaneously, concluded that I did not, even though the suggestion was flattering to one with my background as a former JCT staffer, due to what I know about the position and (perhaps more importantly) what I know about myself. This would not have been the right job for me, particularly in terms of my temperament but also my skill set, even if I otherwise wanted it.

Some people who know Ed are not convinced that he has the right temperament for it either. In the NYC practice world, he is not famous for genially tolerating stupidity or sloppy thinking, both of which one can expect to encounter frequently around Capital Hill. But he has spent more than thirty years working with clients, colleagues in the Bar, and government officials, among others, all with great success. His charisma and charm will carry him through so far as the world is concerned - I'd be more worried that his high standards will affect his enjoyment of the job than his success and effectiveness.

A couple of downsides to the job these days. First, JCT has been all but wiped out as a real player in recent years. This reflects a host of factors, including the growth of other tax staffs, more rapid turnover on the Hill with consequent loss of institutional memory and commitment, and the fact that lobbyists have such enormous power these days and have gotten so far inside the process. (As I'm currently reading Harry Potter 7, this brings to mind Voldemort's penetration of the Ministry.) The only recent JCT chief who could really overcome this was Ken Kies, but that reflected his personal connections and influence, much more than anything institutionally rooted. Second, this is not a propitious time for significant tax legislation, given the gridlock arising from the Democrats' thin majority (and Republican obstructionism of substantive measures in all areas) plus the character of (or should I say in) the White House. But perhaps 2009 will be a propitious time - there certainly will be plenty to do (whether or not Congress is able to do it), what with expiring provisions and the rising threat of the fiscal gap. Hard to tell what to expect before the 2008 elections.

On the positive side, I can't see why Senator Baucus and Congressman Rangel would have named Ed to the job, rather than someone blander and safer, unless they wanted to make use of his energy and knowledge. There certainly is room for an energetically run JCT to take the lead in analyzing issues, identifying legislative options, and so forth. Take the carried interest debate. Under Ed, I could well imagine the JCT having taken the lead in offering a comprehensive analysis of the issues and competing views, developing and evaluating proposals, etcetera. Not playing a partisan role but teeing up the issue properly so it can be better discussed and understood, and so that realistic options of all sorts will be on the table. Obviously, no JCT chief can do this, even assuming adequate staffing levels and time, if the committee chairs don't want it done. But their picking Ed strikes me as hopeful evidence that perhaps they do want it done. Again, why pick him otherwise.

So I'm very glad about this appointment from the standpoint of the public interest, and more guardedly glad about it from the standpoint of a friend and fellow member of the NYC tax policy community (which will have to do without Ed for a while).

One nice thing about returning to NYC

Our cats, although well cared for while we were away, appear to have missed us terribly. I infer this because, ever since our reunion with them, they have been expressing their burning love for us (to the extent consistent with the feline temperament). They also have made it clear that they keenly remember all the details of their daily feeding rituals.

Hedge funds / carried interests

During my month out of the country, I was sufficiently in touch via the Internet & e-mail to realize how dominant the hedge funds / carried interests issue has remained in Washington tax policy thinking. This bemused me a bit, on the view that, of all the important things in our society that tax policy can affect, this doesn't necessarily rise to the top as Issue # 1. As always happens when an issue takes off politically, symbolism is clearly an important part, here relating to the general trend of rising inequality in the U.S., in particular or at least at the very top, and the policymaking trend in recent years of doing less to address inequality rather than more. The hedge fund managers with their multi-million dollar paydays and deferred 15 percent tax rate are just one piece of the larger picture, but are naturally felt to stand for the whole thing.

Not to deny that there is significant money at stake here. And the transactionally related issue of the Blackstone IPO slicing a big hole in the previously prevailing rule that publicly traded entities are taxed as C corporations adds to the importance of what's going on with the hedge funds, as that could conceivably reshape the choice of entities landscape a bit. So the issues certainly merit attention, even if their comparative prominence is a bit peculiar.

While I feel strongly impelled to comment on publicly prominent tax issues like this one, I do have an "art for art's sake" side that prefers issues to be intellectually interesting rather than publicly prominent (albeit that actual social importance counts heavily in my metric as well). But I am starting to think that the issues here are indeed pretty interesting for their own sake, on the conceptual as well as the practical design level.

One seemingly under-appreciated issue in debate so far concerns the significance of the corporate tax to how we think about the hedge fund managers who pay little tax on huge compensation deals. Suppose the manager gets $100 million, is taxed only at the 15 percent capital gains rate, perhaps a couple of years down the road, and that the other partners are tax-exempt so that their not deducting the fee is irrelevant. There is still one more level to consider, if what the partnership does is invest in C corporations. What about the corporate-level tax on those corporations? Does it matter to the analysis?

Let's start outside the hedge fund realm with Bill Gates. He builds a hugely profitable company (and suppose for simplicity that he owns 100%), but suppose further that he pays himself no salary or dividends and profits purely from stock appreciation. We then have a rising billionaire who appears to be paying no tax.

Suppose, however, that Microsoft is being taxed on its annual economic income at the full statutory rate. This would seem to make the problem go away (leaving aside the question of whether the rate structure is progressive enough). After all, if we taxed Microsoft under a flow-through approach like that used for partnerships, we would think of Gates as reporting all its income and paying tax on it. Likewise if we had an integrated corporate tax with shareholder-level credits for corporate-level tax paid, assuming the corporate rate and his were the same. So the only reason Bill Gates appears to be getting away with murder, under actual law, is that he does not bear the nominal incidence of the corporate tax since Microsoft is treated as a separate taxpayer. (Questions of the economic incidence of the corporate tax would be unchanged by placing the nominal incidence of the tax on him as in the flow-through or corporate integration scenarios.)

Obviously, this view places heavy emphasis on Microsoft's being fully taxed. Corporate-level tax planning might defeat this result. Also, it assumes that we have no reason to like a two-level corporate tax.

How does it apply to hedge funds and carried interests? I am still learning (from Victor Fleischer and others) about what's really happening on the ground in this area, and I note Victor's comment, from his widely-circulated "Two and Twenty" draft, that a hedge fund is a "compensation scheme masquerading as an asset class." But let's consider for now four categories of business activity that fairly commonly use this structure. Two that have been less commented on are oil and gas activities and real estate activities, on which it is enough for now to note that these activities often receive highly preferential tax treatment - weakening the argument that corporate-level taxation does the trick, although arguably converting the nature of the problem from inequity to inefficiency.

The other two categories that have been widely mentioned are (1) the classic hedge funds that try, a la Long-Term Capital Management, to exploit market inefficiencies in stock pricing to generate profits for the investors, and (2) private equity funds that take ownership positions in under-performing companies, raise the stock value, and then flip the stock. In distinguishing these two, I don't mean to imply either that everyone is a clean case of one or the other, or that statutory rules could be drafted that conveniently and accurately sliced the world into these two categories - only that they are conceptually different.

In both cases, the carried interest rule may mean that the manager, who has the market power vis-a-vis his investors to extract most of the economic return, conceptually has labor income on his efforts that is taxed at only the 15 percent capital gains rate. But does the corporate-level tax on the companies that issued the underlying stocks make up for this?

I'm still just starting to think about this, and reader feedback is welcome. But the private equity fund case strikes me as pretty close to the Bill Gates example. The restructuring generates extra corporate-level income that is taxed if the corporate tax is well-functioning. If this is fine when you continue to hold the stock, selling it and paying tax at 15 percent while the corporate-level tax continues certainly doesn't make things worse.

But the hedge fund manager who outsmarts the market by anticipating in advance where value is headed looks to me a bit different. He (or she) hasn't increased corporate profitability, but merely discerned it faster. This may have social benefits, as it is part of having an efficient marketplace in which people can get the portfolios they want and in which money moves around to track true value, but the private gain from being one second faster than anyone else (and thereby generating a huge profit) substantially exceeds the social gain. Lots of it is simply an externality, via the shift of profits from those who discern value a bit more slowly to those who discern it a bit faster. And this analysis doesn't apply to the private equity fund case unless we view that as a tournament-style competition to be the one who gets to add the value.

One way of looking at it is that the private equity fund manager's efforts really are taxed by the corporate tax system (again, assuming its effectiveness), while the hedge fund trader's efforts aren't taxed in this sense. But, since we could easily start splitting hairs about whether it matters that the values discerned by the hedge fund manager are after-tax values (since this is what investors presumably care about), perhaps it's clearer to say instead that there is an incentive to over-invest in what the hedge fund manager does, but not necessarily in what the private equity manager does, so we should want to tax the former at a higher rate than the latter. Once again, of course, I have transmuted the distributional issue into one of efficiency, reflecting that, when activities are lightly taxed, they attract extra input that may bid down the pre-tax return.

Final point for now: the point about inequity being converted into inefficiency depends on efficient markets. But is this entirely the right assumption here? Capital markets do strange things that the standard Chicago-style ECMH (efficient capital markets hypothesis) cannot easily explain. The hedge fund managers, of course, are directly posited to be exploiting market inefficiencies. Or else perhaps they are being paid in some cases on the fiction that they can do better than monkeys throwing darts at the wall to determine investment choice. In general, how competitive is this market, with its arguably strangely uniform structure for arranging compensation? I don't want to argue here against using conventional economic tools to understand what is going on here, but the possibility of big anomalies should not be prematurely ruled out.

Back in NYC

Yesterday I returned from a month in Singapore & SE Asia (with spouse & kids), responsible for the paucity of recent posts. Definitely an interesting experience.

Singapore, where we spent the first 2 weeks, is better as a place to live than touristically. But there are a few good sites there. Most memorable, perhaps, was a feature at their aquarium that my kids were not alone in liking. The Singapore aquarium has a petting tank (!) with various small sharks and rays, including sting rays (presumably juveniles from their size) that have had their stingers removed.

The sharks pretty much just sit there on the bottom of the tank - these apparently don't have to keep moving in order to breathe - and let you feel their skin, which feels a bit like that of a snake. But the rays, which feel amazingly silky and smooth, keep surfacing and butting their heads against you in the hope of being fed small bits of fish. Quite a novel experience.

The other activity in Singapore that I enjoyed most was going to neighborhoods such as Chinatown, Little India, and Arab Street to wander around & then dine in small restaurants with very good and authentic food.

The class I was teaching in Singapore ended up being a great experience. It made me a lot more anxious than teaching usually does, because I was going solo for 3-1/4 hours a day, 4 days in a row on successive weeks, trying to teach very complex economic and tax policy ideas to a class of 17 or so students who were very good, and also very engaged, but who had next to no background either in tax law & policy or in public economics. This made it feel, the evening before each class, like I was going to be high-diving without a net. Would I be able to explain things well? Would the class run too fast or slow? Definitely an intense experience, but one that worked out really well. I felt that I was in reasonably good form on 7 of the 8 days, with a couple going really well. And on the day that I thought went badly, it was clear that I was unhappy about this & not blaming them, establishing a bit of credit for good faith.

After that stage we flew to Ho Chi Minh City, aka Saigon. For an American who grew up during the Vietnam War, definitely a notable experience to be there. It's a hectic and chaotic place. Crossing the street is a bit like playing a video game, only lots more dangerous. Continual hubbub with cars and millions of motorbikes. No one yields more than an inch short of collision. Touristically not that great from the standpoint of individually memorable sites, although the War Remembrance Museum was interesting. But my wife and I have always liked the aspect of traveling where you are trying to navigate in a foreign city, e.g., just trying to find a travel agent's office, and thus dealing with the map, crossing the streets, seeing the life there, going to markets, etc. So from that standpoint it was quite good for us though not for our kids.

Our big mistake on the trip was falling between two stools, the one that would have worked for my wife & me and the one that was best for our kids. E.g., if you go Ho Chi Minh or Hanoi (which we did later, see below), a central touristic focus should be getting out of town to some interesting sites nearby. From HCM, the obvious place to go is the Mekong Delta. From Hanoi, Sapa (mountains and hill tribes) and Halong Bay (limestone caves). But these side trips didn't seem feasible from the kids' standpoint, so we ended up just going to HCM and Hanoi.

Anyway, from HCM we proceeded to Siem Reap, Cambodia, the access point for Angkor Wat. We saw lots of amazing temples in different states of preservation. We also had a riverboat tour, seeing very poor people who live on the river or near it. Cambodia is a desperately poor country, beyond anything we'd seen apart from hill tribes in Thailand some years ago, and our guide was telling us about the corruption there, which has led him to be a tour guide even though he has a law degree. Highly recommended as a travel site.

Hanoi was less ramshackle than Saigon, a bit more appealing aesthetically (e.g., it has a nice lake in the center of town, maybe a mile walk to circumnavigate). Crossing the street here is even harder than in Saigon, however. One memorable bit involved the marketplace where they sell roast dog. Think of a skinned & barbecued whole pig if you've seen that, only it's definitely a dog, the whole body, which they slice with a giant cleaver if someone just wants part ... Our kids declined to go see this, and I can't say I blamed them, but I myself wouldn't have missed it.

Our final stage, definitely chosen for the kids though we enjoyed it too, was a beach resort in Phuket. The place we went, Le Meridien Phuket, has a private beach, so you can avoid the insane hubbub that makes most of Phuket so unpleasant, although for dinner you pretty much have to deal with it. One high point, I suppose, was taking second place in the resort's weekly ping pong championship. 15-year old Abdul of Bahrain, a tall, gangly kid who had a devastating forehand slam and seemingly a 20-foot wingspan, was the winner, although I had two match points against him. Good PR for America that I lost?

It is a bit awkward to be an American abroad in the age of Bush. I kept introducing myself as from New York City, to which they would answer "Oh, you're American." I realized that hardly anyone out there would understand the cultural distinction that I meant to draw by identifying myself as a New Yorker, rather than as an American, but I kept on trying anyway.

The Libby pardon

A clear obstruction of justice and act of monstrous if utterly unsurprising hypocrisy. I believe it is literally impossible to support this act unless you do not believe in the rule of law. Then again, that covers about 80 percent of the D.C. policy elite, such as the pathetic David Brooks, who has already fired up a yes-sir column.

You're only as good as your last class

One funny thing about teaching, even after 20 years, is how each class goes differently. So you never quite entirely get past the highs and lows. I've been doing this intensive-schedule tax policy class at Singapore, where you go for 3-1/4 hours (with only short breaks) 4 days in a row. Then, after a long weekend, four more days in a row.

I thought my first two classes went well. Fired up for the first one, sluggish start then strong recovery for the second. But today, for the third class, which (like the others) started at 12 pm local time, I decided at about 8 this morning that I didn't like my layout for the first third of the class. So I spent what should have been my usual morning prep time revising that portion. Bad idea. I showed up for class not having done adequate day-of-class review of the last two-thirds. Result, even though I know the material quite well: much harder to explain things coherently and clearly, and to keep in mind what sorts of threads to pick up and which to avoid.

Oh well. Tomorrow is another day.

UPDATE: Well, I feel it's been going better recently.

Singapore

Five days ago, I arrived with my family in Singapore, after a very long flight (more than 24 hours, door to door). We're now acclimated, to the extent of having a temporary subscription to the Singapore version of netflix.com, and have been wandering the very humid city seeing the sights. I think I want to go into the import business, so that U.S. people can sample dragonfruit, a very strange-looking and aptly named import from Vietnam that, once cut open, tastes something like a crisper, tarter version of a kiwi.

Amazing construction boom in Singapore - it's radically transformed since my one other visit here, back in 1990. Without intending any sort of endorsement of anything, it's amazing, as a U.S. citizen, to be in a place that actually appears to be well-governed. Not exactly what I am used to these days.

Yesterday I taught my first session of an intensive 26-hours-over-8-class-days plunge through Tax Policy, and felt pretty good about it - excellent students, from all over the world. I don't know if it's something I said, probably not, but when I was explaining welfarism I got a question to the effect of: Why would anyone believe that anything other than people's subjective wellbeing is important? Hard for me to answer as that's the way I look at it as well.

If J.K. Rowling weren't alive and read this, she'd be spinning in her grave

My kids and I decided to try to think of the dumbest possible ending to the Harry Potter series. Although there are many possibilities, here's our favorite so far:

Right at the peak of Harry's climactic showdown with Voldemort, he wakes up in his plush bedroom with the Dursleys and realizes that - it was all a dream! Even the Dursleys being mean to him!

"Oh, Aunt Petunia, I've had the strangest dream!" And he tried to tell her about it, but the words failed, although he managed to express how sad a lot of it had been, and how mean his loving family.

"Well, it's all over now, Harrykins," said his beaming aunt, smothering him with kisses. "Would you like some extra porridge? Dudley insisted on leaving it for you."

Fade to black.

Abu Ghraib

An article by Seymour Hersh in this week's New Yorker makes it clear that the military engaged in a massive cover-up regarding higher-level involvement in and knowledge about the torture at Abu Ghraib and elsewhere. By higher-up, I mean it's clear to the forcibly retired General Taguba that Bush and Rumsfeld were likely involved in ordering torture, deliberately ignoring the evidence that their wishes were being all too fully carried out, and then squelching the investigation so that it would only reach the low-level grunts.

I've said it before in this blog. We often hear about torture as a means, as in the ticking time-bomb scenario. But to these people, torture is the end, not a means to some other end.

Why? Mainly just to establish that they can, because if you can do this then you can do anything.

Any other reasons? Well, one might ask why Bush as a tweener or adolescent dynamited frogs, as he apparently did. The child is father of the man.

Hedge fund managers again

Funny how issues arise in Washington and become all-consuming for their designated 15 minutes. Right now, it's hedge fund managers, along with the Blackstone deal that somehow cleverly avoids corporate status under federal income tax law for what is effectively a publicly traded firm. (I'm not up to speed at this point on just how they manage this.)

Back on the hedge fund point, which I blogged on recently, I got an invitation from wsj.com to participate in an on-line two-person blog forum this week discussing the merits of the proposed legislation that would get rid of the managers' ability to take most of their compensation at a 15% marginal rate. They said I could blog pro or con, and the whole thing would be wrapped up within a few days. Tempting, and I definitely would have liked to do it (I would have blogged pro the legislation) so long as the opposing debater was a responsible grown-up not a Norquistian freak.

But I had to pass as I will be on the road, flying to Singapore to teach Tax Policy at the NYU @ National University of Singapore program, at the time when the exchange is supposed to take place.

One point I would have made is that, under a properly designed consumption tax, the hedge fund managers would definitely be taxable at the full statutory rate, whether directly or indirectly. Say it's a consumed income tax with yield-exempt savings accounts allowed only for "arm's length," i.e., third party market transactions. The managers would have to expense, and would pay a positive tax, upon consumption, on their more than market interest rate of return (assuming they're good enough to add value through their labor). A properly designed X-tax or flat tax would likewise avoid providing the benefit of the low rate, although exactly how this would work out as a practical matter, in light of these rules' generally disregarding financial instruments and eliminating double taxation of corporate equity-financed income, would take a bit more figuring out than I have time for pre-trip. E.g., we might have to think of it as operating via the corporate-level tax on the underlying equities. But clearly a 15% tax rate on substantially positive real returns that conceptually are labor income would not be the fruit of any well-designed and properly operating progressive consumption tax.

I am starting to think this issue requires a bit more thought than I have time for right now. But that's the great thing about blogging as opposed to scholarship and even journalism - tentative first drafts are allowed, as I see it.

Tell a vision

Today's pre-Father's Day treat for me was an afternoon in Central Park seeing what was billed as the last concert ever by the great late-70s NYC rock band, Television. If you're not familiar with them, imagine a punk rock (for lack of a better word) version of Derek & the Dominoes, only a thousand times more original and interesting.

They were preceded by the Dragons of Zynth, best described as venturesome & imaginative but not all that compelling, and the Apples in Stereo, reasonably fun candy-coated Beach Boys-influenced indie pop. The day started warm and sunny but then rained steadily through the Apples' show, notwithstanding that (or perhaps because?) most of their songs have lyrics about how the sun is shining.

Then a long wait, the sun came back, and finally Television came on. I have waited to see them for thirty years, so a half-hour of roadie set-up wasn't too bad. I did see Tom Verlaine, the group's leader, with a back-up band in DC some time in the early 1980s, but it wasn't the same.

Worse news, the group's second lead guitarist, Richard Lloyd, wasn't there - apparently in the hospital; hope he's okay. That kills the whole point, I thought initially - one of Television's amazing features is the tradeoff between two guitarists who play very different lead styles. And indeed the replacement did nothing but strum rhythm and play fills, so there was something missing, but still it was one of the best concerts I've seen.

Verlaine plays in his own head, more than to the audience. Kept tuning and re-tuning his guitar at first, and complained about the lack of a sound check and that the City's sound system was "crap." Though this came out as good-humored, not petulant, and he did seem to like having a large and appreciative crowd that knew many of the songs. Great rhythm section, melodic and distinctive lead playing, he gets just amazing sounds in the high ranges, memorable riffs, the songs have an architecture, and even if ten minutes long they are always going somewhere. The songs and playing do what the group's name promises.

UPDATE: For those who are interested, Richard Lloyd's website reports: "I am sorry to report that Richard is currently unwell. He has been in hospital Intensive Care for 8 days with pneumonia as a primary medical problem. This has responded to treatment and he has shown some improvement and is now free of the breathing apparatus."

Two excellent CDs I've been listening to lately

The first is the Unicorns' Who Will Cut Our Hair When We're Gone, which I bought some time back and played a lot for a while but have recently taken out again. Despite an at times almost too high whimsy level, one of the handful of best new releases of the last several years.

The other is Ray Davies' Other People's Lives, which I didn't play much the first time around. It's really quite good although the playing (his vocals aside) is, if solid, a bit generic. Still standing as one of the finest songwriters of the rock era, and I'd rate this outing above any other release of the last ten years by any of the old war horses with the exception of Dylan's Modern Times.

The most important story of our generation (at least until tomorrow)

I admit it to my shame, while preparing lecture notes for summer teaching I have been checking in periodically on the Paris Hilton news. So far, it turns out that she was handcuffed and has been crying, and that 96% of those responding to a CNN poll are agin her. No word yet on what the judge is going to do. Give her credit for one thing, she is helping to bring us together.

About the summer teaching: I will be doing a course on Tax Policy in Singapore, at a newly established NYU @ National University of Singapore program there, starting in a couple of weeks. 3-plus hours a day, Monday through Thursday for two weeks, then two weeks' vacation with family in Vietnam and Cambodia, perhaps with a resort in Thailand thrown in as well. This may affect blogging, though I will have internet access most of the time.

The class will be an interesting challenge, given the packed-in intensity of doing it in so short a time period, plus the fact that I don't as yet know what to expect from the students. I want to spend the time discussing & explaining a bunch of things that I think are really interesting and important, but there isn't always suitable reading that covers what I'd like. The subjects for the 8 days are (1) public economics background, (2) horizontal equity, (3) progressivity, (4) income versus consumption tax, (5) corporate taxation, (6) corporate tax shelters, (7) international taxation, and (8) deficits / long-term budget measures and issues.

The complexities of trying to plan open-endedly for varying possibilities in class dynamics make it all the harder to resist checking periodically for new Paris updates.

I have learned to purr

At least, that's how Ursula, our small brown tabby, appears to interpret the sound of my electric shaver. When she hears it in the morning, she runs upstairs and jumps up onto the bed, ready for a lovefest.

I knew it

This morning at breakfast I saw the NY Times headline, "Bush Proposes Goals on New Greenhouse Emissions," and I said to my wife: "You know, I bet this is fake." I figured that it must actually be an attempt to take some of the heat off Bush on his foot-dragging regarding global warming, while at the same time actually doing more deliberate foot-dragging.

It turns out that I was right, not that I feel I should get much credit for insight here; it was pretty obvious. Bush is actually calling for a new round of meetings, to make sure nothing can get done yet, in pursuit of "aspirational goals," i.e., no actual adoption of any policies that would have any effect.

It's a strange thing, and people who have read my past words on Bush will simply have to take this on faith, but I was actually hoping I was wrong about Bush this time. I still get this atavistic impulse occasionally - indeed, frequently - where I find myself wishing for a moment that just this one time he'll surprise me positively. But the rule remains - everything he does is bad, and everything he does is in bad faith. I can't think of any other U.S. President of whom this was more than, say, 50 to 60 percent true, but for him it's verging on 100 percent.

One exception, actually - whatever one thinks in the end about his immigration policy, it doesn't seem entirely to fit the simple formula. But I am at a loss to think of any other exception.

Political economy of FASB decisions

I haven't as yet tried to use this site as a research tool, but perhaps I should, so here goes.

In the article I'm working on concerning tax and accounting measures of income, an important issue is the political economy of how the two income bases are set. I certainly feel up to speed on the general issue of Congress and tax policy decisions, but the manner in which GAAP standards are set for financial accounting is more opaque to me. Yes, I can easily learn more about exactly how the Financial Accounting Standards Board (FASB) operates, and I know a bit about the broader political setting - e.g., threatened Congressional interventions from the 1990s on concerning the treatment for financial accounting purposes of managerial stock options.

What I want, and am not at the moment entirely clear on how best to get, is a better feel for the real politics of the FASB process. For example, literature that I have seen gives me the overall sense that people think the process is better insulated from crass political intervention, e.g., by particular interest groups, than the process of determining taxable income. Of course, that sets the bar pretty low. I have also heard the view expressed that the accounting profession is pretty responsive, through FASB just as in client work, to the interests of managers as a group, leading to the kind of industry capture scenario that one would of course fear relative to the optimistic scenario where FASB responds more to official professional ideals by seeking unstintingly to serve investors and the cause of capital market transparency.

Any guidance that readers could offer me, be it anecdotal or systematic, informal or scholarly, would be most welcome, whether offered in the comments section here or off-line (my e-mail address is easy to find). Thanks.

Rutles anniversary

Yes, it was only 40 years ago today that the Rutles released "Sergeant Rutter's Only Darts Club Band," which remains a millstone in pop music history.

As you may recall, their first album was made in twenty minutes; their second took even longer.

The Rutles will be remembered long after Beethoven is forgotten - but not until.

My talk last week at the International Tax Policy Forum

Last Friday, I gave a talk on my worldwide welfare paper at the International Tax Policy Forum. This is a group, organized and funded by U.S. multinationals, that sponsors and disseminates research on international tax policy issues. Needless to say, there is a particular point of view that they strongly prefer, not entirely unrelated to the interests of the funders. But they are a high-brow group that takes an interest in good quality research, rather than hackery. Making this easier is a belief that the empirics, properly understood, genuinely favor them.

When I present a paper there that they don't agree with, as happened this time, the aim is to influence the author to think differently, not to attack. Certainly a savvy strategy, and I have to admit not entirely unsuccessful this time. Perhaps all the more successful here because my paper has the structure, in my mind, of "If A, then B," whereas they are arguing not A, and hence not challenging the paper's argument, which rests on saying: Let's assume A for present purposes, as it is a widespread and potentially plausible view, and see where it leads.

A, in this case, is the traditional view of international tax policy, dating back at least to Peggy Musgrave's work more than 40 years ago, in which the normative guideposts are:

(1) national neutrality (a country acting unilaterally benefits from merely allowing deductions for foreign taxes paid, and should address double taxation of cross-border investment only if other countries are willing to do so as well), and

(2) possible mutual welfare gains from cooperating to address double taxation, via the efficiency enhancements achieved by promoting capital export neutrality or capital import neutrality, which unfortunately counsel very different policies in particular settings.

Given this structure, my paper discusses how the choice between (1) and (2) involves a prisoner's dilemma, and what implications this has. Normally, prisoner's dilemmas require that the players can't witness each other's behavior, but I argue that it applies to setting international tax policy even though it takes place in broad daylight.

This is unambiguously the right way to look at the issues, I would argue, if we had a worldwide residence-based tax on individuals who were fairly immobile. But once you have entity-level taxation that turns on the fiction of corporate residence, the argument I was getting at ITPF was that the normative framework may radically shift. I agree with the logic of these arguments, and again one could view them as orthogonal to my paper except that, if universally and unambiguously true enough in practice, the logic discussed in my paper might not even be worth exploring. This is something I mean to take up more in the future.

A core empirical question, we agreed, is whether outbound investments by resident taxpayers that the home country is considering how to tax are substitutes or complements for investing at home. In the (counter-factual) case of a worldwide residence-based tax on individuals, they have to be substitutes. I have $X to invest, and unless I respond by saving more (which is probably not to be much expected in this setting), then every dollar I invest abroad is thereby not invested at home.

By contrast, a U.S. multinational that is trying to raise funds from people who can invest it anywhere and with anyone may well be in the world of complements not substitutes. A good cross-border investment opportunity may simply mean that they can raise more capital to play with. If the country in which the company is deemed a resident increases the tax, those who are ultimately the sources of the capital may simply respond by investing via another company in another country. And this in turn may affect the next move made by whichever company got the investment dollar. So the complementarity scenario becomes a plausible alternative to the substitution scenario.

These guys at ITPF are good. They've got me thinking. Or rather, since I was already familiar with the general intellectual landscape here, they've got me thinking a bit more.

Why do people become teachers?

This is not a question about academics such as myself. We're a different kettle of fish, as stuff happening outside the classroom, in particular scholarly and other writing, is so central to our career choice.

Rather, I'm ruminating here about K through 12 teachers, only slicing off the upper and lower ends. Those who work with very young children are also a distinctive group, while high school teachers remain as yet outside my experience as a parent.

For those who remain in the grouping, I have noticed three basic types. The first are the people who actually want to be teachers. Motivations may vary, but sometimes I discern a sense of "I'm going to be the sort of person I wish had been there for me, but wasn't." Obviously, this is the type one wants one's children to have. There are plenty of them, but they are unfortunately not as common as one would like - certainly below 50 percent, in my experience as a parent.

Those in Type 2 want a white-collar job, no hard physical labor, that sounds good when you tell people you're doing it. And they want something that doesn't take too much hard-core professional training, and that doesn't require specialized skills of a kind that are too easy to test for objectively. Their chief goal professionally is advancement with as little challenge and trouble as possible.

Type 3 wants inferiors, in size, age, and knowledge, from whom to demand admiration. This type is potentially even worse than Type 2.

Needless to say, Types 2 and 3 attempt to masquerade as Type 1. The best diagnostic I know is that Types 2 and 3 are generally humorless.

Ruminations of an anti-Yankee fan

In all of sports, my anti-Yankee sentiments are second only, and barely, to my pro-Mets sentiments. The two are of course tightly linked, and go back to 1964, when a pint-sized version of the person now typing this was the only Mets fan on his Bronx block. So the sentiments are pretty foundational; even the Mule from Asimov's Foundation series might have a hard time modifying them now.

The Yankees have certainly had some bad luck this year. Do I feel sorry for them? Well, first of all, they need at least 10 or 15 more years of luck this bad before I will say it's evened out. Second, they've ended up on top too many times for me to be convinced they are really scotched for this year. In fact, for all I know they may win their next ten. Third, as of this April their payroll stood at $195M, versus $143M for the Red Sox and $117M for the Mets. They have since added Roger Clemons, which even with his late start should add $20M or so. So they are more than $70M ahead of the Red Sox in spending, and nearly $100M ahead of the Mets. To put it another way, there are more than 20 teams whose payrolls, added to the Mets', are still less than theirs. One certainly ought to be able to buy a bit of insurance that way. So no, I am considerably short of feeling sorry for the Yankees.

Nixon Frost

Last night I saw Nixon Frost, the play about the famous interviews, starring Frank Langella as the Trickster (updating his performance as Dracula?). Most enjoyable; Nixon is the gift that just keeps giving, and I feel sorry for those too young to have experienced him. The current parallels are of course unavoidable, e.g., the scandals and the view of Presidential power, but one can't stop thinking about how vile, stupid, uncomplicated, uninteresting, and unworthy current pretenders to the Nixon throne are compared to the man himself. Nixon had a lot in him, and some of it (like some of his presidency) was actually quite good. The rest may have been bad but was fascinating. None of this is true today, when we have venomous little scorpions instead of Macbeth.

Despite the innate appeal, I thought the playwright's recent movie, The Queen was in some ways more illuminating. Nixon is of course one of the all-time great real world characters, and has been taken in all sorts of directions involving varying degrees of poetic license. Here it was a bit linear, and the payoff was the famous moment in the Frost-Nixon interview on Watergate where he breaks down a bit into an on-camera catharsis, which the play suggests he at least half-wanted to do. This verged on being a bit too much of a typical final-scene chew-the-scenery Big Moment, although Langella did it well and I gather it actually happened. (I saw the interviews back when, but would have to see the big scene again to evaluate whether or not the play over-milked Nixon's emotional level here.)

Not to sound too harsh, though, and highly recommended, at a minimum to all Nixon fans.

Tax break for managers of private investment funds

There's been much controversy lately about the tax break for managers of private investment funds that is currently under review by the Senate Finance Committee. The basics, first brought to general public attention (and certainly mine) by U of Illinois law prof Victor Fleischer, who presented his paper on the subject at the 2006 NYU Tax Policy Colloquium, are as follows. Managers of these funds typically get a standard return equaling 2% annually of the money they are managing plus 20% of the capital gain they eventually generate. The former is taxed as ordinary income, but the latter is taxed as capital gain. As Victor pointed out, this means that much of the managers' labor income is being taxed at 15% rather than 35%, even though these are some of the highest-paid people in the U.S. today.

Economically speaking, the managers' 20% return is a mix of labor income and a risky return to saving. The reason they get compensated so richly for playing with other people's money is that they are at least believed to have the ability to make big bucks, such that the investors are happy even after giving away the "2 and 20." It would be pure labor income if the managers could lock in and be paid the expected value of the 20% interest right up front. (This is of course unfeasible on measurement and liquidity grounds along with its incentive effects on what the manager does.) But even for the true investment component keep in mind that they are getting the tax benefit of deferral until sale.

What are these funds doing, exactly? While I know nothing first-hand, I gather that they run the gamut from (a) the straight hedge fund that figures out clever strategies to exploit market inefficiencies and generate above-market risk-adjusted returns to (b) takeover firms that find under-performing companies and restructure them to be more profitable, and thus rapidly salable for a big turnover profit.

Economically speaking, (b) is generally more valuable to the economy than (a). While (a) may increase market efficiency, the private return from figuring out how to beat out other investors by buying and selling at just the right time exceeds the social return. Not that I have any problem with such activity, but it definitely doesn't need to be subsidized.

By contrast, (b) may have some broader social payoffs, although the question here, from the standpoint of incentives, is whether there are positive externalities - i.e., gain beyond that captured by the entrepeneurs who sell for a big turnover profit. Note also that one would be less bullish about this activity if the improved performance came, say, from improved tax planning strategies or the one-shot gain from implicitly reneging on deferred compensation arrangements with rank and file workers, rather than from, say, rationalizing production and marketing processes.

I raise these broader issues of the social value associated with particular types of economic activity, although often one can and should ignore such issues in setting tax policy, because incentive arguments are important to the debate concerning the taxation of the 20% carried interest. The incentive case for giving managers a low tax rate is limited to some portion of the activity in category (b), although even for the best case scenario it is unclear why we should expect substantial positive externalities, i.e., social returns that aren't captured by the remake artists who make so much money for having done such a good job. I'd certainly like to think that I create value when I publish or teach. And lots of other workers in our economy can say the same. But presumably I'm paid for the value I create, and I am sadly unconvinced that I can make a powerful case for applying a lower tax rate to myself than the one that everyone else bears.

A week or two ago, the Wall Street Journal published an editorial, unless it was an op-ed (what's the difference most of the time in the WSJ these days?) arguing against making the managers pay the ordinary 35% rate. What a surprise. No comment needed. But today the Los Angeles Times published an editorial to the same effect. I figure that this is a bit more noteworthy since it wasn't as crushingly obvious that the Times would take this tack. Hence, worth a response.

I did not find the editorial very persuasive. After inaccurately describing the tax break as for takeover firms, rather than for the broader category of private investment firms, it rolls out the usual hardware about enterpeneurship and risk-taking and creating jobs and how crucial all this is to the health of the economy. The main problem with this argument, other than the poor fit between the affected firms and the claimed external social benefit, is the poor fit between the capital gains preference and the aim of addressing risk-taking.

A flat rate tax system with full loss refundability at the generally applicable marginal rate would not discourage risk-taking. Even the positive expected tax on the risk premium could be offset by investing on a riskier pre-tax basis in order to get where one wants after-tax. Since we don't have such a system, the tax system actually does discourage risk-taking, which is unfortunate, even without an externalities story, as it imposes deadweight loss beyond that implicit in taxing productive economic activity. For the big-time entrepeneurs, graduated marginal rates, although they discourage risk-taking, are not very important. These guys are way into the top bracket anyway. What matters a lot more is loss nonrefundability, in particular at the business (as opposed to the investor) level. That is, companies pay tax on profits, but do not get any tax benefit from net losses if they don't at some point have sufficient profits from other operations. A recent paper by Alan Auerbach, presented at the 2007 NYU Tax Policy Colloquium (see here) suggests that this problem is growing increasingly important.

The obvious solution to that problem is greater loss refundability. But this involves a dilemma. The one good reason for nonrefundability is to limit the tax benefit from phony tax losses. But if you can't measure income accurately, then distinguishing between the real losses that we want to allow and the phony ones that we still want to limit is tricky indeed. So, while we may not be at the optimum today, especially if (as Auerbach's paper suggests) the problem of real losses is growing more important due to a change in business dynamics, it's unclear exactly where we ought to go.

But a special capital gains rate for some set of investment fund managers is very poorly focused indeed on this underlying problem.

The L.A. Times op-ed admits that the effectiveness of using capital gains rates to encourage socially valuable entrepeneurship is "open to some debate." However, the only response it deems appropriate is "a simpler tax code that defines clearly the behavior it is trying to encourage." Big internal contradiction here. A simpler tax code would not result from trying to define the true value-creating entrepeneurs, e.g., those who are enough by way of making companies more profitable rather than merely outguessing the market by five minutes. That would undoubtedly be a complicated rule, inevitably drawing various objective bright lines about control percentage, ownership period, etc., that would further distort economic behavior and benefit mainly the accountants and lawyers who were in charge of making sure that particular investments qualified for the low rate. Almost certainly a bad idea.

There actually is one good rationale for the capital gains preference. It relates to lock-in, or the tax discouragement of selling appreciated capital assets, given that one can avoid the current tax by continuing to hold them. In view of this problem, a capital gains preference can actually raise revenue relative to full taxation, although I gather (from my memory of disputes and dueling revenue estimates from the time of the Bush I Administration) that the revenue-maximizing rate is more likely to be in the range of about 30% rather than 15%. (Although note that the optimal rate is likely to be lower than the revenue-maximizing rate.)

Anyway, this rationale seems singularly inapplicable to the investment fund managers if the stuff their firms hold is generally likely, in keeping with their business model, to be turned over quickly in any event, and if the investors in the funds, who get the remaining 80% of the turnover profits, are indeed getting the capital gains rate.

Bottom line: the Senate Finance Committee should press ahead with some version of its proposal, although I suppose Bush will just veto it anyway.

Nobody likes a whiner

The above is a quote from Bill Murray's character in the delightful, though I gather little-known, "Quick Change."

Brought to mind by the release of the new Wilco album. Jeff Tweedy can indeed be a whiner. But worse, based on the admittedly limited evidence of 30-second samples on iTunes, his new release sounds downright boring. Which is just as pitchforkmedia.com, though not popmatters.com, would have it. It's hard to tell this way, but 30 seconds a song was enough to sell me on Yankee Hotel Foxtrot, back in the day.

By contrast, the new Elliott Smith release, New Moon, is excellent even though one would ordinarily be suspicious of multiple posthumous offerings.

These guys are good

That didn't take long. Today, the day after my 50th birthday, I got a letter from AARP, with membership card already printed in my name and dues card ready to go. What, they couldn't get it to me yesterday?

They bring to mind the Chinese restaurant a couple of blocks away. Order from them and the doorbill rings almost as soon as you hang up the phone. One wonders if they wiretap their customers' homes so they can have the orders ready.

If I do join AARP, which is unlikely at the moment, I wonder how much extra it would cost to get them to send the AARP Magazine in a plain brown paper bag. Don't want the neighbors seeing it & such.

Some random TV notes

Now that the summer has truly come in the main sense that matters to an academic - graduation was earlier today - I am plugging away on my tax & accounting article, which I feel is going well, but one needs to just do it for a while before stepping back and applying perspective. Between sections, or when a new part is thrashing around a bit before taking its proper shape, distractions, including self-created ones if nothing else comes up, are always welcome. So herewith a couple of notes prompted by TV viewing last night.

First, it's just amazing what the Pistons did to the Bulls in game 3 of their second round series. Detroit started the series with two unexpected blowouts, then the Bulls seemed to be making a counter-statement by pushing to a 19 point lead early in the third quarter, and it just didn't matter. The Detroit team of the last few years, along with the one that won two championships before Michael Jordan's breakthrough, is the best basketball team I've ever seen with no superstars. Or, they're the best I've ever seen at overcoming long stretches where they are pitifully unable to score. Somehow it just doesn't matter when they start to clamp down.

Second note pertains to Survivor, still the only network TV series that I have watched regularly in the past twenty-five years. My wife and I would have quit a few years back except that our kids wanted to keep watching, so it became a family thing to do. But after several years in the doldrums, it's actually taken on new life, whether or not anyone has noticed. The producers have made the tactical elements more complicated and tricky, for example by adding a hidden immunity item that one has to decide whether to play before knowing whether one needs to or not, and this has paid off dramatically at least twice this season. They've also managed to induce more fluid, less stable alliances. And the cultural norms of the contestants have evolved to accept greater opportunism towards alliance partners. Finally, the last two seasons have had greater racial and ethinc diversity in the cast, and this as well has paid off in terms of the range of interesting characters. So, while it's too late for this season if you're not already watching, and while who knows if next season will be any good, the current one (ending Sunday) has actually been one of the best ever.

Major landmark

Tomorrow I turn, ahem, 50 years old. This is a pretty big landmark, reached by most individuals no more than once. It's strange to have been young all one's life, strongly conditioning one's self-image, and then increasingly to find that one is no longer so. That being said, I weigh the same and am in better aerobic shape than when I was a college or law student. I also would make short work of my past self if we played, say, racquet sports against each other. But alas, all this requires eating a lot less and exercising a lot more. I also increasingly get all sorts of aches and pains that I didn't know as well back then. Some days you just don't feel that good, once you reach this stage. I now have to do regular exercise and stretching routines for nearly every body part that is potentially injurable in sporting activities. I also need reading glasses unless the print is large and/or the lighting great. And dessert now often inspires something of the same mute horror that I assume mice bring to thinking about cats.

"Youth is wasted on the young" may be trite, but that doesn't mean it's true. (It's not.) Certainly it would have helped me, back in the past, to know some of the things I know now, but then again my tolerances have changed so as to remain age-appropriate. (Being a student was okay back then, but I'd hate to relive it now.) I'd say I'm a lot more contented now, albeit more careworn because I have more responsibilities. At and to this point, various life issues (personal and career) that were unpredictable thirty years ago have gone in what I feel were good directions. Who knows if this would still be true if one could turn back the clock and play it out again. If offered that deal, I would definitely say no and keep what I have.

I was lucky not to experience much death among people I was close to, for a very long time. Lately, not so lucky, as is inevitable when you keep going. Still, I'm hoping for a respite, and also for a very long time before my own decay gets too advanced. And with that cheerful thought, accompanied by a lot of genuine gratitude for so much of the past and present, I will close these reflections.

Finally

Yesterday afternoon, at about 2 pm, I finally got the chance to start my summer research & writing. No exams to grade, as I spent a good part of the semester grading weekly papers in my colloquium, but lots of underbrush that I had to clear before finally getting started.

My first project for the summer & fall (when I'll be on sabbatical but in residence here at NYU) concerns the issue of book-tax differences, permitting publicly traded companies to report low taxable income and high accounting income, in each case potentially through dubious manipulation. Many have proposed requiring book-tax conformity, a notion that has some real problems despite its appeal. Rather than just taking a particular stance, I am hoping to bring a bit more analytical depth to the issues that are raised.

Other topics on my agenda include penalties for taking ex post erroneous tax positions (I have an SSRN-posted paper on this, but hope to dig deeper), possibly something on the estate or inheritance tax/generation-skipping tax set of issues, and possibly something on generational equity, a topic on which I've heretofore focused on measurement issues while putting off consideration of the philosophical merits. That might even turn out to be a book, but then again it might not even end up being an article. On vera.

But all this may have to wait a bit. I'm off today to Chicago, where tomorrow at a tax practice-related conference (at Chicago Kent Law School) I will be discussing the economic substance doctrine in tax law, in terms likely to be more encouraging to the IRS people in attendance than to some of the Chicago practitioners, who I recall as a bit Wild West-style and anti-government compared to the New York practitioners.