NYU Tax Policy Colloquium, 2014 schedule

My prior post gave the list of speakers for the 2014 NYU Tax Policy Colloquium, which I'll be co-leading with Alan Auerbach, but here is the actual schedule with dates:

1.  January 21 - Saul Levmore, University of Chicago Law School.
2.  January 28 - Fadi Shaheen, Rutgers-Newark School of Law.
3.  February 4 - Nancy Staudt, USC Law School, and Victor Fleischer, University of San Diego Law School.
4.  February 11 - Thomas J. Brennan, Northwestern University School of Law.
5.  February 25 - Chris Sanchirico, University of Pennsylvania Law School.
6.  March 4 - James R. Hines, University of Michigan Economics Department and Law School.
7.  March 11 - Stephanie Sikes, Wharton School Accounting Department, University of Pennsylvania.
8.  March 25 - Matthew Weinzierl, Harvard Business School.
9.  April 1 - Andrew Biggs, American Enterprise Institute.
10.  April 8 - Susannah Camic Tahk, University of Wisconsin Law School.
11.  April 15 - Nirupama Rao, NYU Wagner School.
12.  April 22 - Kimberly Clausing, Reed College Economics Department
13.  April 29 - David Gamage, Berkeley Law School.
14.  May 6 - Mitchell Kane, NYU Law School.

NYU Tax Policy Colloquium, spring 2014 speakers list

Next "spring," as we optimistically call the second semester of the NYU academic year although it starts in January, I will be co-convening the NYU Tax Policy Colloquium for the nineteenth (!) time.  Alan Auerbach will be my co-convenor.  We will meet on Tuesdays, from 4 to 6 pm, starting on January 21 and running through May 6 (though not on February 18 or March 18).

Our speakers list is now complete, although we haven't yet worked out the week-by-week scheduling.  As Elvis Presley would say, it goes something like this:

1. Andrew Biggs, American Enterprise Institute

1. Thomas J. Brennan, Northwestern University School of Law

3. Kimberly Clausing, Reed College Economics Department

4. David Gamage, Berkeley Law School

5. James R. Hines, University of Michigan Economics Department and Law School

6. Mitchell Kane, NYU Law School

7. Saul Levmore, University of Chicago Law School

8. Nirupama Rao, NYU Wagner School

9. Chris Sanchirico, University of Pennsylvania Law School

10. Fadi Shaheen, Rutgers School of Law

11. Stephanie Sikes, Wharton School Accounting Department, University of Pennsylvania

12. Nancy Staudt, USC Law School

13. Susannah Camic Tahk, University of Wisconsin Law School

14. Matthew C. Weinzierl, Harvard Business School

Partial transcript of my Bloomberg TV appearance

The Bloomberg TV website where you can find the videotape of my appearance with Pimm Fox and Mark Everson (available here) also has a transcript, which of course is not word-for-word or 100% accurate.  But for what it's worth, here is most of what I said at the chat (slightly corrected): 

[With regard to why President Obama is discussing corporate tax reform:]

"I can't talk about what the political strategy is, but everyone realizes the system is a terrible mess and the proposal at least purports to address some of those problems, but we could debate whether it's the right way or not."

[With regard to whether there are good prospects for fundamental tax reform:]

"I personally don't think it is going to get anywhere anyway.

"There are too many differences of opinion.

"People say that because it happened in 1986 that it can happen again, but that's like saying because you won the lottery one day, you can play the lottery thirty years later and win it again."

....

"We have a high nominal [corporate] rate of 35%, but not many [companies] pay that.

"If you look at groups like Apple, they are paying almost nothing at all.

"We really need to address that."

[With regard to whether corporate tax reform could happen]

"Frankly, the people paying very little taxes are powerful on both sides of the aisle.

"Making them pay more is a hard bipartisan proposal to run up the flagpole."

[With regard to why it could easily backfire to do do corporate tax reform without individual tax reform] 

"Say you have a big-time business idea, you form a corporation and get taxed at 25% and never pay yourself a salary. 

"Why should you?

"That's an example of a garden-variety problem when you push corporate and individual rates apart too far apart."

[With regard to the prospects for tax simplification;]

"No one ever gave money to Congress to make the Code simpler.   They make speeches about it, but that’s about it.

"A lot of people like complexity.

"We have the whole situation with interest groups that leads to complexity, and you have a bunch of hard problems.

"For example, the question of where Apple earned its money is not an easy problem to solve.

"If you have simple rules, they had better be well drafted because otherwise people will beat them to death."

Let's go to the videotape

As per the preceding post, today at 5 pm I was a guest, along with former IRS Commissioner Mark Everson, on Pimm Fox's Bloomberg TV show, Taking Stock. We discussed the Obama Administration corporate tax reform proposal from earlier today, for a bit over 5 minutes.  I felt it went pretty well, apart from the fact that (like many people) I don't like hearing my own voice from the outside.

Video of the session is available here.

The Administration's corporate tax reform proposal

The Obama Administration has announced a new corporate tax reform proposal that they describe as part of a proposed "grand bargain."

Today on Bloomberg TV, I will be discussing the proposal, I believe live, on the show "Taking Stock with Pimm Fox," which airs starting at 5 pm.  But the following offers far more detail than I am likely to be able to squeeze in on-air.

The basic idea is to lower the corporate rate from 35% to 28% - and to 25% for domestic manufacturers - but to raise revenue overall.  The net revenue increase would be used to pay for a new "growth and jobs" package involving infrastructure outlays and job training.

The Republicans, of course, have already rejected the plan.  Now, while this is simply what they always do with White House proposals - even those that are 99.5% based on Republican rather than Democratic ideas - this time around they actually have a point.  The plan really isn't much of a compromise as a policy matter.  Enacting a net tax increase on business, in order to pay for infrastructure and job training, is not much of a nod towards current Republican policy preferences, even though they'd get the corporate rate cut.  But then again, as there's no chance they would have considered accepting an actual compromise," one can hardly be surprised about this.  At some point you need a track record of bargaining in good faith, in order to induce others to bargain with you in good faith.

Cribbing from a recent Jane Gravelle paper, I'll go back of the envelope here and guesstimate a more than $1 trillion revenue loss over 10 years just from the proposed rate cuts, if enacted without base broadening. But a package that raises net revenue, at least over the next 5 to 10 years, and in great enough amounts to finance the infrastructure and job training, clearly is possible here.

The proposal remains sketchy, at least so far as anything that I have been able to find on-line is concerned.  It's probably meant to remain that way at least for now, both to avoid being pinned down and to leave open hypothetical room for negotiation over the details.  But the big revenue-raisers that might be contemplated appear to include at least the following (each followed by a brief comment):

--Reduce depreciation deductions.  OK, I don't like accelerated depreciation in the current Code insofar as (a) it creates inter-asset biases, since not all assets get the same treatment, and (b) it can create better-than-expensing results when paired with interest deductibility.  But lowering the rate plus scaling back depreciation combines a windfall gain for old investment (which got accelerated depreciation deductions at the higher pre-enactment rate) with reducing the impetus for new investment.

--Scale back interest deductions for companies.  Here we'd need more detail, but interest deductibility does indeed create big problems, such as its creating tax bias in favor of debt over equity.  This bias may have contributed to the severity of the 2008 financial crisis.

--Enact a 25% minimum tax on US companies' global income.  While I certainly like the idea of aggressively addressing base erosion and profit-shifting to tax havens, this is a very flawed way of doing it.  The problem is that one can wholly avoid paying tax to the US under this proposal, by simply paying it to other countries instead.  We don't really benefit from encouraging US companies to plan their way down to a global tax rate of exactly 25%, out of which we may get zero or close to it.

--Enact a one-time "transition tax" on US companies' unrepatriated foreign earnings.  I may have been the first person to argue in writing for doing this.  (See here.)  But note that, if we are using this proposal to pay for a rate cut, based on revenue estimates over a limited time window, one may actually be losing revenue over the long run.  Outside the estimating window, revenue loss from the rate cut continues out into the future, while the one-time pay-for is done and gone.

What about the proposed corporate rate cut itself?  At present, our statutory tax rate (the official 35% rate in the Internal Revenue Code) is very high by global standards.  Peer countries' rates are mostly below 30% and in many cases below 25%.  But we are much more middle of the road in terms of EFFECTIVE tax rates - that is, in the percentage of income our companies actually pay to us in taxes.  Here a typical figure, both for us and peer countries, is in the range of 20 to 25% (again, cribbing from the Gravelle paper).  Now, there is of course often a good case for lowering the rate and broadening the base.  But even apart from the question of whether one is actually fully financing it over the long-run when it has one-time pay-fors, here are a few issues to keep in mind:

--Lowering the corporate rate, while keeping the individual rate in place, can make the use of corporations a tax shelter for high-income owner-employees.  The basic trick is to have one's highly profitable incorporated business pay one a very low salary, which doesn't matter economically if one own enough of the stock.  The corporation in effect pays tax on the underpaid salary by proxy, if it isn't otherwise tax-sheltering, since it doesn't get the salary deductions, but this only happens at the low corporate rate.  Then, at death, one's kids inherit the stock with a stepped-up basis, and thus they will never have to pay tax on the stock appreciation during one's lifetime.  So the tax benefit is permanent.

--At least some of the base broadeners would presumably apply to unincorporated businesses, which wouldn't be getting the benefit of the rate cut.  So they get a pure tax increase, which could be a political problem even if one is fine with it substantively.

--Two giveaways in the proposed package that I don't like are (a) the 25% domestic manufacturing rate - why this fetish about "manufacturing"?, and (b) a proposal of small business tax cuts.  These might address the base-broadening point directly above, but the targeting wouldn't necessarily be a great match.  On the other hand, a proposal to make permanent the research and development tax credit would at least end the farce (and campaign fund-raising bonanza for members of the Congressional tax committees) of repeatedly extending the credit for just a couple of years at a time. On the merits, I am somewhat agnostic about the R&D credit because, while one can make positive-externality arguments about some activity that we might label "R&D" in an economic model, it's not clear how great a match we get in practice.

New article publication (relevant to tax reform design)

The Canadian Tax Journal has just published my short article, "The Bucket and Buffett Approaches to Raising Taxes on High-Income U.S. Individuals," at volume 61, pages 425-434 (2013).  A PDF is available here.

It's in a "Policy Forum on Recent Developments in U.S. Tax Policy" that also features an article by Andrew Samwick on long-term fiscal policy challenges that the U.S. faces.

My abstract for the piece, which I wrote for SSRN rather than for the publication as such, can be slightly revised to go something like this:

"In the aftermath of the 2012 U.S. presidential election, while it was agreed to increase high-income individuals’ taxes, there was and is considerable disagreement about how this might best be done. In particular, while some favor raising upper-bracket marginal income tax rates, others prefer an approach that I call distributionally selective base-broadening. Here the idea is to restrict or deny the benefit of various tax preferences in such a way as to target the impact of the base-broadening on high-income individuals who have such items. An inevitable byproduct of such an approach is that different individuals will in effect face different tax bases.


"This brief article, prepared for a forthcoming tax policy forum in the Canadian Tax Journal, assesses two such approaches that have received recent attention. The first is a "'bucket' approach to limiting the use of particular tax preferences, endorsed by the 2012 Romney campaign. The second is the so-called ''Buffett tax,' endorsed by the Obama Administration. I argue that, while either might conceivably be better than politically feasible alternatives, they have significant defects that should be kept in mind as well, and in some respects bring to mind the much-reviled alternative minimum tax."

While I wrote the article against the backdrop of the then-pending fiscal cliff negotiations, I think it has ongoing relevance to discussions about how to raise high-income individuals' taxes, if this ends up being done.  Distributionally selective limitations on tax benefits, such as those that these two approaches would employ, have in my view gotten better press than they deserve, relative to the alternative of more straightforwardly broadening the base and/or raising high-end rates.  So these issues may well arise again.

What is a "tax expenditure" and when does this matter?

Not to return to a periodic gripe of mine - but then again, why not indulge myself by engaging in it after all - but it is sometimes frustrating to see people writing about "tax expenditures" without any notion of whether this is a coherent category, if so what is it about, etc.

What makes it a gripe, on my part, is that I have actually solved the problem. Or more specifically, I have (ahem, if I do say so myself) developed the most coherent way to think about a concept that, in the end, is not entirely coherent.  The underlying problem is that it says that certain "tax" rules are actually "spending" rules, whereas these two categories are not well-defined to begin with.  I have explained, however, that in context what it often means is an "allocative" rule that has been smuggled into a mainly "distributional" instrument, such as the U.S. federal income tax, which discourages earning income but is not actually designed to do so (the aim, rather, is distributional, with income being used as an imperfect metric for "ability" or "ability to pay" or "low marginal utility of a dollar" or some such thing.)

Anyway, you can see a version of my paper on the subject, "Rethinking Tax Expenditures and Fiscal Language," here.  The publication cite is 57 Tax Law Review 187 (2004).  A shortened version appears as chapter 8 of my book on fiscal language, which is available here.  But to quote the hilarious Will Ferrell character from Zoolander: "Doesn't anyone notice this?  I feel like I'm taking crazy pills."

Does it always matter?  No. Suppose we are considering which "tax expenditures" to repeal, and it simply means we have a list of items in front of us, such as those officially listed by the Joint Committee on Taxation as tax expenditures, such as in their 2013 estimates, available here.  Then it's just a list of items.  The rationale for assembling this particular list doesn't necessarily matter, so long as we look at each item on its merits and are willing to look at items that aren't on the list.

But there is a persistent delusion, which use of the lists in this way may unduly eccourage, that the tax expenditure concept as traditionally used has more of a coherent core than it actually does.  And even very good economists may be subject to this problem.

Case in point, a very interesting (and otherwise meritorious) paper just posted by Raj Chetty, Nathaniel Hendren, Patrick Kline, and Emmanuel Saez, entitled "The Economic Impacts of Tax Expenditures: Evidence from Spatial Variation Across the U.S.," and available here.

As per its abstract, the paper "stud[ies] the effects of tax expenditures on intergenerational mobility, using spatial variation in tax expenditures across the United States."

Chetty et al take "tax expenditures" as given, such as from the JCT lists, but do appear to be convinced that it's a coherent category as to which one can reach general conclusions about tradeoffs, costs and benefits, etcetera.  They study three in particular:: deductions for state and local income taxes, home mortgage interest deductions, and the earned income tax credit. For all three, they find "consistent and fairly robust relationships between higher local tax expenditures and lower intergenerational elasticity (IGE), i.e. higher economic mobility."

OK, that's an interesting result concerning these items that doesn't necessarily turn on broader generalizations about a "tax expenditure" concept. But what is the concept?  All they say, in the first paragraph of the article, that tax expenditures are "spending" despite their placement in the tax code.

OK, fair enough with regard to home mortgage interest deductions, which are naturally thought of as allocative subsidies delivered through the tax code.  (Although more precisely, the subsidy is excluding imputed rent from income, and home mortgage interest deductions merely preserve the net exclusion for people with mortgages.)

On deducting state and local income taxes, it's a little trickier.  You could get exactly the same end result, without "spending," by adjusting state and local income tax rates to reflect directly the impact that we currently get from the federal deduction, accompanied by an intergovernmental transfer so that each government unit comes out the same.  (But is that "spending?"  What if we integrated the units of government but they were all doing exactly the same thing?  By analogy, the Defense Department spends lots of money, but we don't have a second tier of "spending" when the Treasury sends over money that the Defense Department can use to pay its bills.)

Then we get to the earned income tax credit.  Is this "spending"?  All it actually does is adjust net income tax rates that apply to labor income in certain ranges for certain taxpayers.  That isn't "spending" unless the rate structure is generally an aspect of "spending," which is not how traditional tax expenditure analysis is done.

These are certainly good enough economists that it would be nice if they were more aware of what the "tax expenditure" category can and cannot be coherently used to mean.  Again, the results about these items that they reach are good contributions to our state of knowledge.  But generalizing about "tax expenditures" should be done with a bit more care.

Goldman Sachs aluminum scam?

Today's NY Times has an interesting article about an apparent scam that Goldman Sachs is pulling, we are told at consumers' expense, involving lots of aluminum that is moved desultorily around between lots of warehouses.  But the one thing the article doesn't do is explain how the scam actually works, as an economic matter.

Matt Yglesias asks exactly the same question I had:

"[The article] seems to allege that Goldman Sachs uses its control of aluminum warehouses to increase prices to end-users by billions of dollars.  And yet having read the piece twice, I don't understand how the scam works. The basic idea seems to be that by shuffling aluminum around rather than delivering it promptly, Goldman can charge more rent and boost its profits.

"But this (a) doesn't appear to have anything in particular to do with Goldman Sachs' well-known investment banking activities and (b) sounds like far too ridiculous a scam to actually work. It amounts to saying that Goldman's amazing business strategy is to deliberately provide terrible customer service (shipping delays) and high prices (charging extra rent to cover the delays). If it were that easy to make billions of dollars, we'd all be doing it. The story is entirely missing a clear explanation of why this doesn't just lead someone else to open aluminum warehouses and undercut them."

OK, let's go back to the beginning.  Apparently there's a regulation that limits the time you can spend just holding aluminum in a given warehouse.  Goldman dodges the regulation through economically pointless activity in the form of just shipping aluminum endlessly back and forth again in a circle.  I get how that dodges the regulation, but I don't understand the rationale for this regulation any more than the underlying profit scheme.  (Does the former combat the latter somehow?)

A hint somewhere else in the article appears to suggest that it all has something to do with Goldman's playing games with regulations that control aluminum spot prices.  Playing games with pricing regs, so that Goldman can reap large profits from pure arbitrage transactions, not only might be plausible economically if the right sorts of regulations exist, but is exactly the sort of thing one might imagine Goldman being good at.  But again, if that's the story, I'm hoping someone will come forward and explain it to all of us.

The article also suggests a connection between Goldman's profits and the idea that aluminum speculators enjoy getting to bet on price movements (and might pay Goldman for this privilege).  But you shouldn't need actual aluminum in warehouses to bet on aluminum price movements - why not just use derivative financial instruments, such as notional principal contract?

Anyway, there seems to be enough smoke here that I really do suspect there is a fire.  (Why would Goldman be moving aluminum back and forth otherwise?)   But we do need to learn more about it.

UPDATE: A reader suggests that the regulation against keeping aluminum in the warehouse aims to prevent speculators from artificially suppressing demand by taking it out of circulation and driving up the price.  A la, the Hunt brothers' play with silver a few decades back.  Surely that is indeed the reason for the regulation about keeping aluminum in the warehouse, and Goldman is clearly making a farce of the reg by shipping aluminum back and forth between warehouses.

But the mystery remains re. what they are actually doing.  Pulling a Hunt brothers-type squeeze is very risky because others have every reason to step in and satisfy the shortfall.  Indeed, the Hunt brothers lost more than a billion dollars trying to corner the silver market.  It also doesn't sound like the type of thing Goldman would want to pull, unless it was very pre-wired to work.  So while we have a plausible explanation for that regulation, and for how Goldman gets around it, we still need to explain how they are making money.  Something other than cornering the aluminum market has got to be playing a large role here (even if they might be trying a bit of that on the side), and my guess (from the Times article) is that it has something to do with spot prices, some bit of regulatory arcana that I don't know about, etcetera.

FURTHER UPDATE: Izabella Kaminska explains what has actually been going on.  A large part of the story is not entirely bad from an economic efficiency standpoint.  The 2008 meltdown created pricing anomalies that Goldman could make money from eliminating, both on its own behalf and to help customers who wanted to do it without overly encumbering their balance sheets.  (While going off-balance sheet is often a recipe for trouble, here things appear to have been reasonably secure given possession of the underlying aluminum.)

Kaminska's bottom line:

"The end result: the mass encumbrance of physical commodities for the purpose of collateralising implied future demand from retail and pension funds — which would otherwise take the shape of a much less tangible and uncollateralised futures investment.

"And there’s nothing wrong with that apart from the fact that:

"1.The process creates the means by which speculation does end up driving and influencing physical prices (rather than being priced off physical realities).  [NOTE: One could say the same thing about, say, rampant stock market day-trading 10 years ago.]

"2.There is a fiduciary issue because banks have an incentive to maintain the illusion of physical scarcity to mislead investors....  [Ah, the Goldman we know and love.]

"3.The dark inventory hoards can be used to the trading advantage of the banks."  Here the point is that Goldman can manipulate publicly known inventory size, and thus win short-term pricing bets the easy way, by driving price changes through its own out-of-view manipulations of the available information that the market has.

My own bottom line on this is that it does indeed significantly strengthen the case for reinstating the Fed's one-time ban on banks trading in physical commodity markets - although admittedly I am far outside my core expertise here.  More broadly, it offers one more anecdotal illustration of the extent to which profitable financial sector activity, while having elements of both societal wealth enhancement and mere rent extraction, is so heavily flavored by the latter that the net contribution to economic efficiency may be negative even before you start thinking about socially externalized default risk.

Article publication

My article from earlier this year, "Should Social Security and Medicare Be More Market-Based?" has now appeared in print - at least, I have gotten a stack of reprints - in Volume 21, Number 1 (2013) of the Elder Law Journal, where it appears at pages 87-148.

My working paper version is available here. It should soon be available on-line from the Elder Law Journal here, although as of this moment their last posting is for the articles in the preceding issue, Volume 20, Number 2.

National Tax Association, fall 2013 meetings

One of the things that has been keeping me busy in recent weeks is a whole lot of organizing work with regard to the National Tax Association's 106th Annual Meeting, which will take place between November 21 and 23 of this year in Tampa.  Tracy Gordon and I are the program co-chairs, and our tasks include deciding which submitted papers and proposed sessions to accept for the conference, and which to reject.

It's baked into the cards or dealt into the cake (whichever deliberately mixed metaphor you prefer) that we have to reject a whole lot of papers, because the conference has limited capacity.  You can only have 3 or 4 papers per session, and there are only so many sessions that we are able to schedule.  Only so many time slots, and only so many rooms available per time slot.  But we have tried to err on the side of being inclusive, even though there are downsides to this (e.g., less time to discuss each paper in a session if we have 4 papers rather than 3, audiences more spread-out if we have as many as 7 simultaneous sessions).  In some cases, people with multiple interesting paper submissions may find that we accepted only one, although the others looked just as good, because of our budget constraint and our eagerness to let more people participate.

We had aimed to get the word out to everyone by June 30, but this proved impossible for several reasons.  For one, even once we had a preliminary list of papers that we wanted to accept, they have to be organized into panels, and sometimes shoehorning a bunch of things into the same panel when they are on totally distinct topics is rather difficult.  We wanted the sessions to be as coherent as possible, but on the other hand we didn't want to ding particular authors, or interesting papers, just because it was hard to fit them in.  We also had to call in the cavalry, which came through for us but this took time, to see if we could get a couple of more rooms for extra panels, thus slightly relaxing our budget constraint.

Anyway, the bottom line, at least for now, is that we should be sending out all of our accept / reject emails later today.  If you had at least one paper accepted, you get the "Accept" email even if we had to reject the others.  Email recipients will be invited to log on to the website (which they had to do upfront in order to submit their papers) in order to see which paper or papers were accepted and what sessions they are on.

The sessions, by the way, don't have time slots yet - that will be among the next stages in our three-dimensional cooperative chess game as program chairs.

Another of our upcoming tasks is to recruit discussants for the accepted papers.  While we'll be doing outreach on this, potentially interested individuals should let either or both of us know.

Anyway, I just wanted to let any readers of this blog who are waiting for the submission outcome know that we are just about there, so you should know within the next few hours unless the task of sending out all the emails takes longer than we are anticipating.

UPDATE: Conceivably, at least some of the emails may not go out until Monday.   Not only is it a big task, but we're trying to make sure there are no mistakes or oversights in dealing with a large list of papers.

Everyone's a critic

Wouldn't it be boring if everyone agreed about everything all the time?  Two recent emails that I've received from readers of this blog raise interesting points in response to each of my two blog posts from yesterday.

The first relates to this commentary about particular investors paying a steep premium to Thomson Reuters so that they could get the results of an economic survey that it was publishing, two seconds before everyone else, thereby giving them a large enough time window to reap huge trading profits.  A correspondent notes that the investors were in effect funding the survey, since Thomson Reuters had paid the University of Michigan for the publication rights, presumably with an eye to its own bottom line.  Hence, the investors were financing the provision of information to everyone else, although to be sure this wasn't out of generosity - the information's special value to them rested on its being communicated so that it would move prices, rather than on its informing them along with everyone else about the state of the economy.  But still, one could therefore view the transaction as merely price discrimination on Thomson Reuters' part, in the course of providing an informational service that has social as well as market value.

Fair enough.  And I didn't take a position on whether, say, the transaction, and Thomson Reuters in particular, deserved the legal scrutiny that they apparently were receiving from the New York State Attorney General's office.  I was using it as an illustration of how financial firms can and often do get rich via rent-seeking, rather than socially productive activity, and I'll stand by that as a general proposition even if in this case one can point to a positive spillover.

Second, with regard to this commentary concerning Larry Summers' recent op-ed on international tax policy, a correspondent suspects that the op-ed relates to an Obama Administration goal of proposing what would effectively be a territorial system, though with a  required 15% minimum worldwide rate on foreign source income, for U.S. companies.  One might get there as follows.  Summers proposes a worldwide tax on U.S. companies, with no deferral but only a 15% U.S. tax rate on foreign source income, and with full allowance of foreign tax credits against this liability.  This is equivalent to saying that we will exempt the companies' foreign source income so long as they pay at least 15% in the aggregate abroad.

Whatever the relationship or non-relationship between the Summers op-ed and current Administration thinking, I do think that this equivalence helps to show why getting rid of foreign tax credits is such an important part of well-designed international tax reform, and also why such a "minimum tax" system for foreign source income would be ill-chosen.  There would be little point to enacting a system that made U.S. companies pay a bit more abroad but that didn't raise any revenue for us (because the companies made sure to stop their overseas tax planning - albeit, not necessarily their profit-shifting out of the U.S. - once they had lowered the overall foreign rate, which is itself a manipulable concept, to 15%).  Yet this may be what the Administration is thinking of proposing, although I hope not.

In any event, it would be surprising if Summers, who for all his impressive abilities and knowledge is not an international tax specialist, is fully apprised of the problems that result from foreign tax creditability.  This in turn reflects the defects in the existing literature, which for the most part turns a completely blind eye to these problems apart from decrying the less than fully coherent category of foreign tax credit "abuse."  One of my forthcoming book's main aims is to address and correct this defect in both the literature and prevailing public policy debate.

Jotwell posting on Benn Steil's The Battle of Bretton Woods

A few months ago, I wrote a short piece for Jotwell, the "Journal of Things That We Like (Lots)."  I was supposed to write something about a recent tax book or article that I had enjoyed, but I decided to interpret my mandate broadly and write about a book that's more in the realm of economic and diplomatic history, finance, trade, and monetary policy - Benn Steil's "The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order."

My duly laudatory review (reflecting how much I enjoyed the book) has just come out, and you can read it here.

Some have interpreted Steil's book as pursuing an ideological agenda with which I happen to disagree, such as by trashing Keynes and asserting that Harry Dexter White, a high Treasury official and the chief U.S. negotiator at Bretton Woods, as well as a Soviet spy, "caused U.S. intervention in World War II," and indeed did so as a Soviet tool.  Whether or not that's a fair reading of the book, I don't think it's a necessary one.  And while Steil's apparent hostility to Keynesianism, on grounds that I disagree with, may raise questions about whether his historical account is balanced (I don't have enough first-hand knowledge of the area to judge this), I would still conclude that, for the lay reader (such as myself in this setting), all that this calls for is a due-caution warning.

A really great example of highly profitable, but socially destructive, financial sector activity

Today's New York Times has the latest on a recent story that grabbed my attention because it is such a perfect exemplar of how the rise of the financial sector over the last twenty years has involved vast profits that often have no social utility whatsoever - and indeed that can make the country as a whole worse off.

"Over the last several years, an exclusive group of investors has paid a steep premium to receive the results of a closely watched economic survey a full two seconds before its broader release. Those two seconds can mean millions of dollars in profits for the investors, who practice a computer-driven strategy called high-frequency trading.

"On Monday, the company providing these investors with that lucrative edge, Thomson Reuters, is expected to announce that it will suspend the practice, yielding to pressure from the New York attorney general, according to a person with direct knowledge of the matter."

Needless to say, these profits have come at the expense of other investors.  It's pure rent-seeking.  (OK, I'm leaving aside the fact that financial markets get to incorporate the new information into prices two seconds faster.   But if that's a good thing, why not let everyone else have the information two seconds sooner still, and so on back to the first moment that anyone knows anything about the economic survey's results.)

Rent-seeking is socially neutral insofar as some people win and others - the suckers who don't get the early head's up - lose.  But it directly wastes the resources that people devote to engaging in it, and in addition can create a pervasive sense of a rigged game that can be very destructive to the proper functioning of financial markets.  And actually doing things that are valuable - but hence inevitably riskier and requiring greater skill - can end up being crowded out at the top by the returns to playing these silly games.

Then of course the people who get rich this way tell themselves (and everyone else) that they are the "makers" who are leading us all to greater prosperity.

Okay, this is just one unusually raw example of non-productive but highly profitable financial sector activity.  But if you look closely at activity in the sector, a lot of it is really no better.  Think of keeping financial products opaque so customers won't understand or be able to price them well.  Or playing games with LIBOR.  In the corporate takeover realm, think of cases where the profits come, not from economic rationalization (improving business operations and shutting down bad ones) but from added interest deductions, reneging on implicit long-term labor contracts, defaulting on pension obligations, and finding bank officers with badly structured incentive compensation who are willing to make sketchy loans.

Larry Summers' view of U.S. international taxation is similar to mine, except for one thing

Larry Summers has an op-ed in today's Washington Post in which he takes a view of international tax policy that is similar to mine, with one significant exception.

"As a very general rule, improvement is possible anytime tax rules are experienced by taxpayers as a substantial burden without generating substantial revenue for the government. Having taxpayers be burdened less and pay more can make them better off and help the fiscal situation. The United States should eliminate the distinction between repatriated and unrepatriated foreign corporate profits for U.S. companies and tax all foreign income (after allowances for taxes paid to other governments) at a fixed rate well below its current corporate rate, perhaps in the range of 15 percent.

"A similar tax should be imposed on past accumulated profits held abroad.

"Such a proposal could easily be designed to raise revenue relative to the current baseline, encourage the repatriation of funds and reduce the competitive disadvantage faced by U.S. multinationals operating abroad. It is about as close to a free lunch as tax reformers will ever get."

The one exception is that he still favors foreign tax creditability - wheher because he hasn't sufficiently thought through the issues that it raises, or because he assumes it is a built-in constraint, or because the proposal would then get too complicated to explain in a 750-word op-ed.

But the same line of argument that he relies on for his proposal would support making foreign taxes merely deductible in revenue-neutral exchange for a lower rate on foreign source income - leaving aside the additional complication that one might want to impose a higher U.S. rate on tax haven income than other foreign source income, so long as one stops short of making U.S. taxpayers indifferent to their foreign tax liabilities (as the foreign tax credit does, by providing 100% reimbursement).

Book update with added commercial plug

I guess I can now say, my book Fixing U.S. International Taxation will be published by the Oxford University Press.  The anticipated publication date, at this point, is January 2014, although a sooner date, before the end of this year, is not impossible.

The book is suitable, by the way (if I may be so crass) for 2014 spring semester course adoption - for example, in (a) tax policy classes in law schools that include an international focus, (b) international tax law classes, where it might serve as recommended additional reading. and (c) courses touching on international taxation in economics departments, accounting departments, business schools, and public policy schools.

One who was thinking about it in that regard might compare it to my 2009 book, Decoding the U.S. Corporate Tax, which it greatly resembles in structure, although the big difference is that Decoding sought to explicate existing literature rather than to move things forward.  But in both cases, I have sought to combine broad accessibility and clarity with addressing issues in ways that experts would find interesting.

Tax Prof Blog link to the Jerusalem book symposium

This Tax Prof Blog post includes a book description that I cobbled together (perhaps too quickly) by condensing some text from my introduction.

Book symposium at Hebrew University

Yesterday (Friday, June 21), Hebrew University held a book symposium concerning my forthcoming book, Fixing U.S. International Taxation.  As I've mentioned before, I appear to have a publisher lined up (a leading university press), but as we haven’t executed the contract yet I’ll wait to name it.

The commentators were Steve Shay, Yariv Brauner, and Fadi Shaheen.  Plus a lot of the leading Israeli tax academics were in the room, and participated in the discussion that followed the three presentations and my response.

I must say, I was really pleased with how the session went.  In addition to its being constructive and interesting, I felt there was general acceptance of the view, which I have been carrying around with me like a two hundred pound weight slung over my shoulder,  to the effect that the book is (OK, I’ll say it) a major step forward in the field.

More on the book's main themes in due course.  But I do think it's the best thing I've written, leaving aside my novel on non-commensurability grounds.

Ending two weeks' radio silence

Now that I am back in the U.S., I am happy to end my more than 2 weeks without a blog post.  I’ve been in Israel, as mentioned in previous posts, and when I was in my hotel and on-line (which required being in the lobby) I was having some technical difficulties signing in.  I probably could have figured out how to solve the problem, but I was fairly busy running around anyway.

I was staying up in the Mount Scopus area, near Hebrew University’s law school, at which I had a teaching gig.  I was supposed to have 5 classes over the two week period, meeting for 2 hours & 20 minutes each, but on the third day the students pitched to me the idea of lengthening classes 3 and 4 so that I could cancel class 5 without loss of overall class time.  A half hour was all that I could add to class 3, given the amount of material I had prepared and the fact that some of the students (I had about 14 in all) needed to leave, but I agreed to make class 4 a marathon, running for 4 hours total though with 2 short breaks.  (So it was three consecutive sessions of about 1 hour and 15 minutes each over a four-hour period.)  I told them that, while this would be pretty tough for me, it would be even tougher for them, as listening to someone for 4 hours can be harder than talking for that length of time.  But I think we got through it OK. 

The topic of the lectures (with some questions and discussion) was U.S. corporate and international taxation, emphasizing aspects of the U.S. system that are widespread rather than idiosyncratic, and trying to blend discussion of real world practice and planning issues with applied economic theory.  Most of the students had only had a basic class in individual income taxation, but I aimed to adjust for that, and I thought it went OK.  Early in a teaching career you learn not to under-prepare.  Later on, you learn not to over-prepare, so that you can respond more flexibly to the students and to what is happening in front of you.

Classes met in the afternoon, generally at either 2 or 4 pm.  So even on class days, I could do other things early in the day.  Generally on class days, as well as open days when I didn’t have a more long-range travel plan, I would walk down from Mount Scopus to the Old City of Jerusalem – about 2 to 3 miles down.  While going back up was obviously the same length, it felt much longer, what with the climb and mid-afternoon heat.  Wailing Wall, Dome on the Rock, City of David, the markets inside the walls, etc.

Usually I’d be pretty tired by the end of the day, but at least I was getting some exercise.  And I wouldn't complain, even to myself, about the heat and the Sun (which could be pretty rough if I was trudging steeply uphill at 2 pm), given how much more I would have disliked the cool and rainy weather that I gather New York has had much of the time.

In addition to seeing a lot of the Old City, the main markets, and the main tourist sites around Jerusalem (including the Zoo and the Israel Museum, which has a great Herod show right now, as his tomb was recently found), I also spent a couple of days in Tel Aviv, and went on visits to Jericho, Bethlehem, and Herodion (the site of Herod’s tomb).  There are quite a few more great tourist sites in Israel, but many of them I had seen already in earlier visits.  And since Jericho et al are in the Palestinian Territories, I got to see the wall, cars and workers passing through it, etcetera.

My final event of the two-week stay, earlier today (Friday as I write this), was a symposium at Hebrew University concerning my international tax book.  But I will save that for a separate blog post.

Current activities

I am hoping my international tax book will soon be under contract with a particular publisher.  More on this when there is concrete news to report.  I received some readers' reports, which I viewed as quite favorable and also as having some helpful suggestions, and I have gone through the text making responsive changes.  Ready to go final after a symposium session discussing the book at Hebrew University Law School in Jerusalem, scheduled for June 21 (with Steve Shay, Fadi Shaheen, and Yariv Brauner as the commenters), and subject also to a final read-through.

As I will also be teaching a 10-hour course at Hebrew University on corporate tax law and policy, I depart for Israel tomorrow (Friday June 7), and will be there for two weeks.

Meanwhile, in addition to preparing for the Hebrew U. class and dealing with prehab and surgical choices for my busted knee, I have gotten back to work on a new article, tentatively called Nudges, Shoves, Bans, and Retirement Policy, that uses the Chetty et al Denmark retirement study as a jumping-off point for broader ruminations about such topics as behavioral economics, retirement policy, nudges, libertarian paternalism, and adding Social Security to the pension default vs. savings incentives debate.

I anticipate that it will be a bit more focused than my choice here of the word "ruminations" may make it sound, but I do plan to cover a fairly wide spectrum of implications rather than having a narrow focus.  Another somewhat new direction for me, albeit drawing on my writings about Social Security and retirement policy.

Ambiguous empirical factors

OK, it's one thing to lack data or significant studies on point (I gather there isn't much out there) regarding my assertion, in my forthcoming international tax book, that the U.S. rules create high deadweight loss relative to the revenue being raised.  Everyone appears to agree with this anyway.

It's another matter entirely to have tough personal choices depend on probabilistic estimates that would require better empirical data than one has.  (Even apart from the challenging task of assigning welfare weights to the key aspects of various alternative scenarios.)

So yes, as a consumer though not producer of empirical literature, I would like to have better information than I have regarding the merits of alternative courses of action with regard to the torn, and hence now effectively non-existent, anterior cruciate ligament (ACL) in my right knee.

ACL is an odd injury.  If you're a sports fan, you read about Derrick Rose, Iman Shumpert, Mariano Rivera, etcetera, tearing their ACLs, having corrective surgery, and taking nine months to a year or longer before they are back in action - but generally, with full restoration of prior function.  But one thing I've learned already about my month-old injury is how startlingly high-functioning, for some but not other purposes, one can be without an ACL.  The swelling is mostly gone and I'm doing rehab. But at this point I can easily walk 5-10 miles, handle stairs but not irregular climbing, am working back towards my pre-injury capacity on elliptical machines, and pretty much never feel significant pain.  On the other hand, I can't run, feel significant instability in the knee, and if I tried any activity such as basketball or tennis I would likely be carted off on a stretcher within the first 5 minutes.  The real danger is knee buckling (I've had two major instances since the injury) that can involve tearing cartilage, increased likelihood of arthritis down the road, etc.

So should I have the surgery?  I've met with three surgeons, and the one I thought best (e.g., for being the most evidence-based of them) said that, even putting tennis entirely to one side, it would be "very reasonable" to have the surgery.  Part of the reason it's no more than that is age.  Restorative surgery (using either one's own ligament scrapings or, ahem, a cadaver) is considered entirely standard for people under age 40, but once you get beyond that it's a closer call (and at one time SOP said not to do it).

Arguably, if I do the surgery, I'll be playing tennis for 20 to 30 more years, albeit shifting at some point to doubles.  But I have a history as an injury magnet.  Imagine doing all the work to restore my knee and then having something else go out.

Closer at hand, there's the issue of my risk of developing arthritis.  A weakened knee that keeps buckling and suffering additional cartilage tears is  truly a prime candidate for debilitating arthritis, which can only at best be managed, not cured.  But the evidence isn't clear regarding how much I actually help myself with the surgery, which can itself promote onset if it doesn't go entirely well.  Or take the question of whether I should expect further buckling incidents if it isn't fixed, and how likely these are to involve significant cartilage tearing.  (At the moment, my kneecap has some damage but the menisci apparently are fine.)  Very hard to gauge.  Even with more and better data, the particularities of my case would undermine relying on it.

Such studies as there are often prove frustratingly unclear about where the odds lie, as to questions ranging from the whether to the when to the how.  And one problem is that there are multiple groups that need to be disaggregated.  E.g., younger vs older, professional versus recreational athletes, people who are more cautious and diligent versus those who are less so, people who follow different recovery timetables, people who are in better vs. worse shape when they go in and thus might face different probabilities of facing serious atrophy & rehab problems with associated muscles (such as the quadriceps).

Anyway, I've picked my surgeon, assuming I do it, and answered a couple of the how questions.  The big remaining question is when - although this includes the "if" question, since one time I could do it is never.  As I am going to Israel for two weeks this Friday, and as I love the summer and don't want to ruin it for myself entirely, the "sooner" option right now probably means the end of July, so I will be sufficiently recovered to teach my first fall semester class (even if I'm still on crutches) at the end of August.

"Later" means early December, right after my last class.  That's a much better time of year for me to deal with the rehab, in multiple dimensions.  But it would mean that I got started on recovery 4 months later, and it would be unwise if I spent the interim making things worse such as through incremental cartilage tears.  On the other hand if I spent it getting into really great shape, the recovery might go faster.  Plus if I go that long and have more function restored than I am currently expecting (e.g., suppose I can actually run again, at least in a straight line), then the "if" question becomes harder again.

Almost done in Stockholm

Tomorrow (Sunday) morning, we fly back to the U.S., where by Monday (although it's Memorial Day) I will need to get back in the swing of all the regular TCB.  [Aretha Franklin / Respect reference.]

Stockholm really grew on me in the course of almost a week here.  It is a truly beautiful city, set in a scenic archipelago and composed of numerous bridge-linked islands.  Of course, it helps that at this time of year it has about 20 hours of daylight (I don't like to think about January here), and that we had mostly very nice weather.

While here, I gave two 2-hour lectures to international tax students, who in U.S. terms are undergraduates who have chosen to major in law.  I also gave a talk, mainly to legal academics, concerning my Henry Simons paper, enjoyed exceptional hospitality from the people who had invited me here, walked all around town (and two islands in the surrounding archipelago) on my two knees with their sum total of one intact ACL, and saw lots of museums.  Cultural highlights included the work of Henri Cartier-Bresson, Anna Claren, and Ruud van Empel at the Photography Museum, and that of Hilma af Klint and Nikki de Saint Phaal at the Modern Art Museum.

Next, I have to get ready for my upcoming trip to Israel, decide on whether to have knee surgery and if so when and by whom, continue advancing the publication process for my international tax book (which I am hoping will come out in 2014), and get seriously to work in re. helping to set up the schedule for the National Tax Association Annual meeting in Tampa this November.  Plus, whenever I get the chance, return to writing my new article on behavioral economics, savings behavior, and retirement policy.

Somehow it feels like the clock on this summer is already running much too fast.

Sweden and the Supreme Court's PPL decision (not meant to imply, however, that these two are in any way linked)

I am now nearing the end of my second day in Stockholm, and I appear to have conquered the jet lag (subject to sleeping tonight) by dint of staying up on the first day.  I've tramped around town a lot, busted knee or not, and have seen various museums, islands, the Zoo, the Royal Palace, and shops, in addition to teaching an international tax class (more or less an impromptu tour of various interesting features of the U.S. system).  Stockholm is a relatively relaxed major city, definitely not on the adrenaline pulse a la New York, London, Vienna, etc.

Today the U.S. Supreme Court decided the PPL case, its first decision concerning foreign tax credits for 75 years (and it would certainly be fine if they don't decide another one for 75 years).  The taxpayer won, in one of those 9-0 opinions which reads like a brief for one side.  Any sophisticated reader, even knowing nothing about the issue, will recognize upon reading it that the issues can't possibly be as simple, straightforward, and clear as the opinion would have it, or else there would have been no need for the Supreme Court to take the case.

Hope for the future (if the Supreme Court takes enough tax cases for it to matter): the case is decided on economic substance grounds.  This is usually a good thing for the sound development of the tax law, relative to the Court's deciding to be rigid and formalistic.  Of course, one wonders if the fact that it was a corporate taxpayer, in this instance benefited by "economic substance," made at least the opinion's author (Justice Thomas) so eager to embrace economic substance this time around.

The government clearly blundered, given the role that economic substance generally plays in the tax cases, in claiming that this was a case in which formalities should control.  But (as I have discussed the case in earlier posts), it was reacting to the fact that the UK government made the "mistake," in terms of making foreign tax credit claims easier for US taxpayers, of describing the tax as something other than a (creditable) income tax, thus requiring the taxpayer to show that, in the main, it was economically equivalent to an income tax.

The problem, which I've discussed in earlier posts, is that creditable income taxes are, at least in the main, economically equivalent to non-creditable non-income taxes.  (For example, if property earns 5% a year, then a 40% income tax is a whole lot like a 2% property tax.)  Hence the government's formalistic argument, to the effect that you have to call it an income tax in order for it to be creditable as one - a point that might actually be reasonably consistent with the arguable "intent" of the enactors (notwithstanding that they of course never thought of this issue).

Also of concern is the fact that the creditable tax was in effect retroactive.  Now, I have written a book about retroactivity in taxation, and I am not exactly knee-jerk about how terrible it supposedly is.  But if another country can pass an effectively retroactive tax that is creditable, then potentially they can dig a scoop into the US Treasury, by hitting US companies with a levy that the companies won't mind insofar as it's creditable (i.e., reimbursable).

But this issue, which ought to have been clear, appears to have gone well over the head (or under the feet) of the Court's opinion in PPL.  So if it becomes a problem, the Treasury will have to try to deal with it on the fly next time.

Upcoming trip

Torn ACL or not, the show must go on.  (And anyway I have been cleared to walk and travel.)

So on Sunday night I will be flying to Stockholm, Sweden, in order to spend a week there, during which I will guest-lecture at two Stockholm University Law School classes on international taxation, as well as giving a talk based on my Henry Simons paper to Stockholm University faculty.  I also plan on enjoying my first-ever visit to a Scandinavian country.

Advance birthday present!

Tomorrow is my birthday - I won't say what number, though it is a matter of public record.  But today I got a delightful birthday present, a day in advance.  And yes, my saying so is just snark.

Ten days ago I experienced an unpleasant knee injury while playing tennis.  It appeared to have been on the outside of my right knee, where (I determined from about 30 seconds of on-line research) the lateral collateral ligament (LCL) is located. 

I couldn't get in to see my sports doctor (yes, at my age those of us who are still playing sports tend to have sports doctors, whom we have seen multiple times) until this past Monday.  And I couldn't get an MRI for the knee until today.

He said on Monday that he thought the LCL was fine.  But there was a lot of swelling, possible meniscus (cartilage) damage, and possible anterior cruciate ligament (ACL) damage.

I was skeptical on the ACL front, since my understanding is that it's in the back of the knee, and I had thought the trauma was on the side.  I was also really hoping that it wouldn't be the ACL.  Say ACL and I think: Derrick Rose, Iman Shumpert, major setback, surgery, arduous one year rehab.  In a word, ouch.

Well, you can probably guess the punchline.  Today I had my MRI, and within an hour my sports doctor called to say I have a complete ACL tear.   I guess this confirms once again that actual doctors, equipped with actual information, can do a better diagnostic job than lay people who are looking things up on Google.

The good news is that I can still walk, and don't need immediate surgery. My upcoming trips, to Stockholm later this month and Jerusalem next month, appear to be safe.  But it does look like I will be having surgery and rehab starting later this summer, since otherwise my knee stability and lateral movement capacity would be too low for me ever again to play sports such as tennis.

Further good news, relative to the torn-ACL baseline that I had in mind,  is that I gather I should be walking in less than a week after the surgery, and back on the tennis court within 3 months.

The difference in this regard between a casual athlete like me, and a professional like Rose or Shumpert, is as follows.  All of us are projected to be 80% recovered after three months, 90% after six months, and 95% after a year.  But  I can play tennis at 80%, whereas if you are driving to the basket and/or defending against the likes of LeBron James, you had better reach at least 95% before you even think about it.

Tax policy colloquium, week 14: Raj Chetty's "Active vs. Passive Decisions and Crowd-Out in Retirement Savings Accounts: Evidence from Denmark"

Earlier this week we completed the 18th (!) annual edition of the NYU Tax Policy Colloquium.  Thanks to my colleague for the semester, Bill Gale, for being great to work with both in general and with our constituencies, the students and the PM attendees.  I have now co-led the Colloquium with David Bradford, Alan Auerbach, Mihir Desai, Rosanne Altshuler, and Kevin Hassett, in addition to Bill.  I look forward to co-leading it again next year with Alan.

Our final speaker of the semester was Raj Chetty, presenting the above-titled paper, which has already (deservedly) received enormous attention, both within the field and from policymakers, even though it hasn't been officially published yet.  (Of course, it's not as if all that many people, at least in the field, really do read much in the way of published versions of papers, since the working paper versions may appear years earlier.)

Chetty's paper takes advantage of some stunningly complete data from Denmark, providing information about people's income, savings within retirement accounts, and overall wealth-holdings (at least of financial assets), and extending over a long period when Danish policy changes created the equivalent of large-scale natural experiments.  The idea is to test the effects on people's overall financial wealth - not just that which they hold in employers' retirement savings accounts - when the rules for the accounts change in either of two respects.  The first is either (i) requiring mandatory contributions to the accounts or (ii) changing the amount that one invests through them, out of one's paycheck, as a default (i.e., unless one specifically opts to change the contribution amount).  The second is changing the amount of any tax incentives for investing in the accounts.

A couple of preliminary notes: First, mandating contributions can be a lot more like merely defaulting them in than one might initially think.  If you are required to contribute more, thus reducing your currently available cash flow and increasing your retirement savings, then, so long as you are not in a corner, you can respond by reducing your outside saving.  In such cases, the only real difference between a mandate and a default is that reversing out the latter may be easier (as well as more precise, if the mandated saving has different characteristics than the outside saving you can reduce).

Second, when we say that retirement saving through employer accounts is tax-subsidized, we are describing it relative to an income tax framework.  From a consumption tax perspective, exempting returns to saving (or the equivalent thereto) is "normal" treatment, not a tax subsidy.  This can be important for certain purposes when we are thinking about the significance of the Chetty paper's findings - something that I may be writing about this summer, although I will not address it here and now.

A theoretical apparatus that the paper uses to make predictions about the data, which then are strongly confirmed, posits that there are two types of savers: "active" savers and "passive" savers.  The former act like neoclassical utility maximizers.  In other words, they have some sort of preference for the split between current consumption and saving, and if you change where they stand through mandates or defaults they will simply steer back towards where they wanted to be to begin with.  If you give them tax incentives for retirement saving, a key response will be simply to redirect saving that they were already doing to the tax-favored accounts.  They will only respond by saving more insofar as the incentive sufficiently affects the relative payoffs to create a slight change in the overall balance.

Passive savers, by contrast, are inattentive and easily steered.  There actually are several different explanations of what they might be doing and why, and the paper doesn't try to choose between these explanations, although for some purposes it is quite important.  They are posited not to respond to tax incentives because they aren't paying attention.  They also don't deliberately offset any changes in retirement saving from their facing mandates or a change in the default.

It is theoretically indeterminate, in the paper's model, whether mandates and defaults will actually cause them to save more.  Suppose that they start getting smaller paychecks due to larger contributions to their employer retirement accounts.  Possibility (a) is that they go on consuming just as much as before, only they run their bank balances lower, perhaps have to borrow more, etc.  So there is no change in their net saving, not because they are deliberately undoing the induced saving, but because their behavior is so entirely fixed.  Possibility (b) is that they consume less in response to having smaller paychecks.  E.g., suppose they are rule of thumb consumers who don't just go blindly on with the same consumption activities no matter what, but rather they treat their current checking account balances as telling them how much they have to spend for the month.

The Denmark data finds that the population was about 15% active savers and 85% passive savers.  The latter used possibility (b) above - that is, they did reduce consumption when mandatory or default saving reduced the size of their paychecks.  Unsurprisingly, the active savers tended to be people who are wealthier, older, save more in general, etc.

The paper finds that each dollar of increased tax incentives for saving produced only about 1 cent (!) of additional saving.  This reflected the passive savers' inattentiveness and the active savers' mainly shifting saving from outside to tax-favored accounts.

The paper also funds that each dollar of increased mandated or default saving produced about 90 cents of additional saving.  This reflected the predominance of passive savers in the population.

Lots more to say about this in due course.  But for now I'll just say that it's interesting and has important implications for both theory and policy.  (Not just this paper, of course, but also others in the same literature that reach similar findings albeit generally less far-reaching and conclusive ones because the U.S. data, say, simply isn't as rich.)

Department of stupid ideas, part 3,267,889,145

The debt ceiling will be expiring again soon, and reportedly Congressional Republicans are once again considering how best they could try to extract compensation for allowing it to increase. The latest idea, apparently, is to require fundamental tax reform as the price for raising the debt ceiling.  (This may not be a stand-alone price, however, but may be demanded in addition to the enactment of massive spending cuts in the middle of a longstanding but still severe unemployment crisis.)

What does "fundamental tax reform" mean here?  I suppose it could mean anything or close to nothing.  But, as I recently discussed here, for several decades it has meant 1986-style tax reform, in which one lowers the rate and broadens the base, with the aim of achieving overall budget neutrality, and in some versions also maintaining distributional neutrality against prior law.

So here's the idea: the U.S. will have to default unless we enact massive tax changes that have no net budgetary impact.  That makes a lot of sense, in relation to the debt limit problem.

I should note that Republicans and Democrats not only don't agree with each other regarding what fundamental tax reform should look like, but they don't even agree with themselves.  Neither side has, or could easily develop, a budget-neutral fundamental tax reform plan that its own people would generally support.  And few on either side have been willing to specify sufficient base-broadening to make such a plan budget-neutral (let alone distribution-neutral, which is probably impossible today for a significant 1986-style package for individuals).

Perhaps the Congressional Republicans should instead demand something that is more feasible, albeit equally unrelated to achieving long-term fiscal sustainability.  For example, they could demand de-extinction through cloning of the woolly mammoth, a goal that may soon be feasible and that - unlike 1986-style tax reform - I fervently support.

Tax policy colloquium, week 13: Itai Grinberg's "Emerging Countries and the Taxation of Offshore Accounts"

On Tuesday, we had our penultimate session of the year, featuring Itai Grinberg's follow-up to his UCLA Law Review piece, The Battle Over Taxing Offshore Accounts.  In "Battle," Grinberg discusses the global response to "offshoring" (a truly U.S. term that reflects our distinctive geography) of financial holdings by wealthy individuals around the world.  Many of these people are likely committing tax fraud.  Others are hedging against domestic political instability and expropriation or exile risks, hiding their wealth from potential kidnappers, etcetera.

The U.S. share of this problem is relatively small, since a far lower percentage of U.S. wealth is held offshore than that from most other countries.  Note that U.S. individuals generally cannot lawfully avoid U.S. tax by holding their portfolio assets offshore.  The income from foreign bank accounts, stock trading accounts, etceteram is currently taxable, and even if you do your portfolio investment through a company that you incorporate abroad it is likely to face current U.S. tax (or worse-than-equivalent treatment to current taxation) under the passive foreign investment company or PFIC rules.

But there are of course some U.S. individuals who commit tax fraud through the use of secret overseas accounts.  Moreover, the problem can extend past investment income to labor or active business income, as in the scenario where a fraudster tells people to pay for his services (say, as a contractor) via deposits in the secret accounts.  This leaves only the problem of getting spending money out of the accounts, such as via overseas trips or the use of credit cards.  And then the IRS, unless it can trace the cash or find the accounts, can only use "lifestyle audits" to prove that the fraud is occurring.

As further background to all this, in 2010 Congress passed FATCA (the Foreign Account Tax Compliance Act), almost overnight and without advance notice but leading to huge controversy ever since even though it is not scheduled to take effect until 2014.  FATCA seeks to require foreign financial institutions around the world to identify their U.S. account holders and report on them to the IRS.  (For convenience, I'll call them "foreign banks" although they can be other types of financial entities as well.)  Foreign banks that don't cooperate may face huge withholding taxes that are meant to be a punitive rather than an indirect collection mechanism.

Foreign banks and their U.S. allies or representatives have been screaming bloody murder ever since FATCA passed, and they make several good points.  One is that it may be very difficult for them to determine who are their U.S. account-holders, since U.S. individuals may invest in them via foreign entities.  (E.g., I incorporate in Bermuda, and my Bermuda company invests through a Luxembourg bank.)  Another problem is that complying with FATCA may require one to break home country laws aimed at protecting confidentiality, and on the same ground may violate contracts with one's clients and customers.

A sophisticated defense of FATCA would hold that it was simply a device to require foreign banks and other countries to start negotiating with the U.S. with regard to the offshore wealth problem - which again, is in comparative terms a far worse problem for many other countries than for us.  And indeed there has been significant movement along those lines since FATCA was enacted, which likely would not have taken place otherwise.

Grinberg's UCLA article takes stock of all this, and makes a couple of main points.  One is that there has been enormous movement towards global acceptance of the proposition, which would have been thought absurd pre-FATCA, that financial institutions acound the world should serve as "tax intermediaries" that act on behalf of the home country taxing authorities, just as U.S. banks do domestically by issuing Form 1099s to account-holders and the IRS.  But he describes the battle between two competing models: that of information reporting to the home country authorities, and that of anonymously collecting a withholding tax (with respect to dividends, interest, etc.) that is paid over to such authorities in lieu of any reporting.

The second of these two options appears to have been the brainchild of some very clever Swiss banks that figured they could push back against the pressures for full reporting by making selective withholding tax deals with a couple of influential countries (the U.K. and Germany).  Grinberg argues in the UCLA piece that the reporting approach is better than the withholding approach - a view that has considerable merit if withholding is sufficiently feasible.  The basic point is that only information reporting can lead to fully effective home country worldwide taxation of individuals' passive income, which clearly is how one would like to go if the home country has an income tax that it wants to apply effectively.  Reporting also can address, as withholding taxes on interest and dividends cannot, the fraud problem of not reporting one's earnings or business receipts to the home country authorities by reason of having them secretly paid abroad.

One objection to universal information reporting, assuming it to be feasible, concerns bad people getting information about resident individuals' foreign holdings, in settings where it is not simply a matter of anodyne tax enforcement.  Consider Putin wanting as much information as possible about people who might oppose him, or corrupt officials who would sell the foreign wealth information they procure to prospective kidnappers who want to know whom they should victimize and how much they should demand.  But certainly the system has great appeal, if feasible, not just for countries like the U.S. and those in the EU, but also for what Grinberg calls "emerging countries" that have decent governance.  Indeed, those countries might actually benefit the most, so FATCA, if it plays out as Grinberg hopes, might actually be seen as a generous act that leverages U.S. financial market power in favor of a global cause that has bigger winners than us.

Before we start getting all choked up about U.S. generosity, however, it is worth noting that FATCA, at least on its face, is mainly unilateralist.  The idea is that other countries should tell us what we want to know, whereas we don't necessarily want to tell them anything.  The U.S. is indeed a kind of tax and reporting haven that wealthy people in other countries use to escape the scrutiny of home country authorities.  I gather that Miami, for example, is an offshore global financial haven (or heaven) for wealthy people in Central America and South America.  Miamians who are getting rich off this business are not exceptionally eager to face FATCA-type obligations towards foreign governments.  So FATCA can play out in the direction of U.S. hypocrisy, rather than of providing the benign global leadership that Grinberg favors.

"Emerging Countries and the Taxation of Offshore Accounts," Grinberg's follow-up paper for the colloquium, tries to take stock of fast-moving current developments, which in the last month have been unremitting (e.g., at G-20 meetings).  It argues that we are in a "punctuated equilibrium" type moment in which a system that might persist for decades is still fluid and being set up.  Moreover, it discerns grounds for optimism that there are enough players with common interests for the information reporting model to really take hold.  The two detours that the paper argues against are withholding in lieu of information reporting, and narrow special deals between just a few countries (with everyone else left out) in lieu of broader and more widely applicable deals.  The main reasons offered for optimism are (a) lots of countries would benefit - this is not a rich country versus poor country issue, although it is a "countries with substantial resources versus tax haven countries" issue, and (b) financial institutions might prefer a single and consistent system of global reporting than having to comply with 50 different rules from countries that are going it alone.

On the first of these two points, one would have to rely on the ability of the non-haven countries to pressure all (or enough) of the haven countries - there can be no Pareto improvement here that would make everyone eager to cooperate.  Providing accommodation services for foreign wealth is a nice business model for a small country that is sufficiently well-governed.  On the second point, it's clear that uniform global financial reporting would not be the banks' first choice, so getting them to play ball (including in the sense of not opposing it politically) depends on their assessment of the likely alternatives.

If Grinberg is right about the timing, we will know within a couple of years how it all came out.