Kotlikoff versus Baker and Krugman

This past Thursday, Laurence Kotlikoff had a NY Times op-ed with two main points.  First, the infinite horizon U.S. fiscal gap is huge, and ought to be reported.  It stands at $210 trillion, and eliminating it would require an immediate, permanent 59% increase in federal revenues, or else an immediate, permanent 38% reduction in federal spending.  Second, we must immediately start raising taxes and/or cutting benefits in order to address it.  Indeed, "this is not just an economics problem.  It's a moral issue" - which he frames in terms of policy transparency, but surely with an underlying premise that it would be immoral to leave the full burden of policy adjustment to be borne by the members of future generations.

As unsurprising as Kotlikoff's column (if you know his views) are Dean Baker's and Paul Krugman's responses (if you know theirs).

First, Baker: all we learn from this is "why we should not use infinite horizon budget accounting.  Kotlikoff showed how this accounting could be used to scare people to promote a political agenda, while providing no information whatsoever."  E.g., if we just go out 75 years the fiscal gap is far more manageable.   And we could tame it by bringing healthcare costs per capita into line with those in other economically advanced countries, so why cut benefits? And Kotlikoff could / should have pointed out that the unfunded infinite horizon Social Security liability of $25 trillion, which he gives significant emphasis in the Times op-ed, equals just 1.4% of future income  (i.e., the present value of GDP in the infinite horizon forecast).

It seems to me that Baker is showing a different point than he thinks - that we can actually have reasoned debate about the numbers Kotlikoff wants to emphasize, rather than that we shouldn't use them because they will be misunderstood.  But moving on to Krugman, he agrees that the fiscal gap suggests that current policy is unsustainable and will have to change at some point.  "But why, exactly, is that something that must be done immediately?  If you state the supposed logic, it seems to be that to avoid future benefit cuts, we must cut future benefits.  I've asked for further clarification many times, and never gotten it."

But Krugman then answers his own question: "You can argue that it's better to avoid abrupt changes - to put things on a glide path to sustainability.  But that's a much weaker point than you might expect given all the cries of bankruptcy and crisis."

Fair enough.  But there's more to this point than Krugman says here.  In a 2006 book that has the admittedly Kotlikoffian-sounding title "Taxes, Spending, and the U.S. Government's March Towards Bankruptcy," I make a "smoothing" argument that goes beyond just avoiding abrupt changes.  Subject to other considerations such as macroeconomic policy and the aim of benefiting poorer relative to richer age cohorts, and leaving aside political economy issues, I argue that one should generally want to both announce and start implementing indefinitely sustainable policies ASAP.  Credible early announcement can provide greater certainty, and sharing the pain of course correction between all years can have "smoothing" benefits.  For example, suppose that your future healthcare benefits were going to be cut.  If all years are expected to be similar, and if "fat" tends to get eliminated before "bone," you'd probably prefer a 5% cut for all future years to no cut in some years and a 10% cut in others.

Let me add a word about that title, by the way, given that, even by 2006, I had moved further from the Kotlikoff camp and closer to the Baker-Krugman camp than I had been, say, in the late 1990s (although I remain fully in neither camp).  My preferred title was "The Use and Abuse of Fiscal Language."  My publisher, no doubt correctly, felt that this would not serve the book's prospects very well.  And while I discerned a "march towards bankruptcy," this was not nearly so much based on the types of numbers that Kotlikoff likes to cite (and which I agree should be included in public debate) as on pessimism about the capacity of the U.S. political system to handle tough policy choices of almost any serious or difficult kind.  Surely that pessimism remains as plausible as ever, whether or not government bankruptcy is the particular disaster that it's most likely to cause.

Conversation with Givewell about tax reform

As Wikipedia explains, "GiveWell is an American non-profit charity evaluator created in 2007 by two former Bridgewater Associates investment analysts, Holden Karnofsky and Elie Hassenfeld."   Their main mission is to identify good causes that might then receive substantial funding.

One of the topics they've identified as a possible cause to consider funding is design work on fundamental tax reform.  So they have been interviewing various people in the field, most recently me.  You can find a file memo regarding their conversation with me here.

I was not as bullish as I would like to have been about charitable funding to develop new tax reform ideas, because of the great respect I have for the various plans that are already out there (e.g., X-tax, Graetz plan, income tax base-broadening), along with my view that the main obstacles are political rather than technical.

Understanding and responding to corporate inversions

[This post has been corrected since it was initially posted.]

The last few days have seen a flurry of discussion about corporate inversions.  Examples include this Washington Post op-ed by Treasury Secretary Jacob Lew, and today’s NYT op-ed by Paul Krugman.

Corporate inversions are transactions in which a U.S. multinational transmutes itself into a foreign multinational by arranging to convert the U.S. entity into a mere subsidiary, rather than the company at the top of the chain.  Once this has been done, there is still a U.S. company conducting U.S. operations.  But there are two big changes on the ground.

First, unrepatriated foreign earnings of the U.S. company's remaining foreign subsidiaries are easier than previously to redeploy without a taxable repatriation.  Once there is a parent that isn't under the U.S. affiliate, they can simply loan their trapped cash to that company, or use it to buy the company's stock.  Even if this generates interest or dividend income of the foreign sub that is taxable under subpart F (and low-dividend stock can be attractive in minimizing this problem), the inversion has usually yielded plenty of interest deductions from loan financing that was used in making the deal.  Apparently the term of art for this, as Edward Kleinbard notes in a Wall Street Journal op-ed, is "hopscotch transactions," since one skips over the U.S. parent in directing one's funds where one likes.

By the way, the importance that companies attach to keeping deferral going shows how unrealistic it is to analyze the value of deferral on the assumption that repatriation is inevitable at some point at the currently applicable repatriation tax rate.  It's well-known in the literature that deferral does nothing to reduce the present value of the expected repatriation tax if it is certain to be incurred eventually and if the U.S. repatriation tax rate will always be the same.  Are companies too stupid to know this?  I don't think so.  I will say more below on why they evidently value continuing deferral despite its not reducing the present value of the deferred liability under the above assumptions.  

Second, inversion makes it vastly easier to reduce taxes on one’s U.S operations.  For example, the use of both intra-company and third-party debt to strip earnings out of the U.S. and make sure they will show up elsewhere instead can be a highly effective tax planning strategy post-inversion.  The key is simply that they use affiliates that are not subsidiaries of the U.S. company.  That prevents both the creation of subpart F income when the U.S. company pays interest to foreign affiliates (since only its subsidiaries can give rise to subpart F income) and the application of the interest allocation rules to treat interest deductions as reducing foreign source income (which would potentially lead to foreign tax credit disallowance).  For fuller accounts, see Kleinbard's op-ed and Stephen Shay’s article in Monday’s Tax Notes.

An earlier flurry of inversions was shut down by the 2004 enactment of an anti-inversion statute in 2004 that basically prevents pure paper-shuffling transactions from working, as in the case where a U.S. company creates a Caymans affiliate that emerges at the end of the day as the parent on top even though nothing substantive has actually happened.  But the rules are now being beaten by transactions that have just enough economic substance to work - e.g., where there is an actual acquisition or merger of some kind, with an actual company located in a country where the U.S. group had some prior activity, but the whole thing is still in fact highly tax-influenced.  So the Obama Administration has been calling for legislation to address these transactions and prevent them from being tax-effective.

On Sunday I was on Arise TV, an Africa-based international news and entertainment station, to discuss inversions for a few minutes on a news show.  The host wanted to address whether inversions are immoral.  My response was, that’s not a very useful way to think about the problem.  Companies are going to do what they do (although it’s true that I myself would feel bad about spending my time doing this sort of deal), and the important thing is that we have rules in place that lead to the results we want.  More on what I mean by that in a moment.

But inevitably, moralistic vocabulary is going to be a part of these discussions.  In 2004 there was talk of “corporate Benedict Arnolds,” and President Obama has been speaking of “corporate deserters.”  This is pretty much how discussion needs to proceed in general public debate if one accepts – as I do – the bottom line conclusion that allowing the transactions to be tax-effective is undesirable.

As summarized by Treasury Secretary Lew, the proposed legislation would cause inversions to be ineffective for tax purposes if the multinational company “is still managed and controlled in the United States, does a significant amount of its business here and does not do a significant amount of its business in the country it claims as its new home ….  [In addition, t]o make sure the merged company is not merely masquerading as a non-U.S. company, shareholders of the foreign company [that ostensibly acquired the U.S. company] would have to own at least 50 percent of the newly merged company – the current legal standard requires only 20 percent.”

I support this legislation because I see no reason why we should let it so be easy for U.S. companies to avoid the repatriation tax that ostensibly has merely been deferred, and because I also see no reason to make it easier for them to strip away U.S. earnings.  But the fact that these are the two problems has four broader implications worth noting here.

First, as Kleinbard has noted, anti-hopscotch rules, making the loan to the new foreign parent subpart F income, could be deployed to address the sidestepping of repatriation taxes that the transactions faciliate.

Second, as a tougher alternative to merely addressing "hopscotch," Congress could consider enacting an “exit tax” when U.S. companies with unrepatriated foreign earnings cease to be U.S. companies – even in deals that would pass muster under the new proposed legislation.  The exit tax could be based on the amount of U.S. tax that the company would have paid had it repatriated all of its earnings just before the change in legal status occurred.  Under the simplest version, the tax due would be the amount of unrepatriated foreign earnings times the U.S. corporate tax, minus the amount of tax reduction that would have resulted from claiming foreign tax credits.  But one could also consider other approaches, such as providing “rough justice” in the form of a lower tax rate in lieu of counting up all the credits.  Obviously, if this were done, subsequent repatriations to the U.S. company by foreign affiliates that had kept their status as such would not be duplicatively taxable all over again.

Third, so far as stripping income out of the U.S. tax base is concerned, it would be desirable to move towards having “residence-neutral” rules that applied similarly to U.S. and foreign multinationals.  In particular, there ought to be ongoing multilateral discussion (such as through the OECD) of causing information from the entire global corporate group to be available to countries that merely host subsidiaries, rather than the parents.  This, for example, would permit the U.S. to apply interest allocation rules neutrally as between U.S. and foreign multinationals, for purposes of measuring U.S. source income.

Fourth, in the tax policy literature, we ought to be operating from realistic, rather than unrealistic, assumptions.  I noted above that deferral does nothing to reduce the present value of the expected repatriation tax if it is certain to be incurred eventually and if the U.S. repatriation tax rate will always be the same.  The reason is that, with further standard assumptions, the amount of tax ultimately due grows at the discount rate, so its present value stays the same.

It’s important for people who are working in the field to understand this point, which often is called the “new view” of dividend repatriations but is in fact a provable theorem (aka a tautology) under the requisite assumptions.  But what they should NOT do is assume that the assumptions are true.  Inversions raise the issue of the deferred tax simply disappearing.  But consider as well the fact that the U.S. could change the repatriation tax rate – for example, by lowering it to zero through the adoption of a territorial system without enactment of a transition tax, or through the enactment of further tax holidays.  (I say “further” because a dividend tax holiday was enacted in 2004, and there has been lots of discussion of doing it again.)

A better way of framing one’s understanding of deferral is to say that it has option value.  By deferring, one gets the option to benefit from future disappearance of the repatriation tax and/or from a reduction in the repatriation tax rate.  This would be economically valuable even if that rate were as likely to go up as down – which almost surely is not the case, especially given that the company will generally control the timing of repatriations.

A recent article by Al Warren did a nice job of explaining the logic behind the new view if one assumes (as he expressly does) not only that repatriation at some point is inevitable, but that the current tax rate on it is fixed.  But from a broader perspective, if one wants to inform current policy debate, what Warren did was assume away the most interesting and important aspects of the real world problem that he addresses (i.e., how to think about deferral when different possible models of international tax reform are on the table).

Cable TV appearance this Sunday

This Sunday (July 27), I'll be interviewed live, at 4 pm EST or so, on an international TV channel called Arise TV that is viewable domestically on-line (www.arise.tv), on Time Warner Cable, and on Verizon Fios (481).  The subject will be corporate inversions to eliminate U.S. resident status, and President Obama's recent call for legislation combating them.

New article draft posted on SSRN

I have just posted a recently completed article draft on SSRN, entitled "Multiple Myopias, Multiple Selves, and the Under-Saving Problem."  It's available here.

It will be appearing in 2015 in volume 47 of the Connecticut Law Review, as the lead article in a special Commentary Issue.  (It will thus be accompanied by two or three papers by people in the field offering comments.)

The abstract goes something like this:

In both public policy debate and the academic literature, there is widespread, though not universal, agreement that millions of Americans are saving too little for their own retirements.  If this is true, we could potentially increase such individuals’ welfare through the adoption of policies that resulted in their saving more.  A key dilemma, however, is that, unless one understands why people are under-saving, it is hard to evaluate the likely responses to or merits of a given policy.

Possible explanations for systematic under-saving include at least the following: (1) naïve myopia, (2) sophisticated or self-aware myopia, (3) procrastination, or putting off any active decision because deciding is difficult or stressful, (4) mistake aversion, or not wanting to risk regret of an “active” decision that turns out poorly, and (5) acting as if one had multiple selves with distinct utility functions, causing decisions to depend on which is dominant at a given time.

These causal accounts differ predictively, with regard to how they suggest people subject to them would respond to a given policy.  They also differ diagnostically, with regard to whether the increased saving induced would be by the “right” people (i.e., those whom we believe are under-saving).  Yet they can be hard to tell apart in practice.  What is more, the same individual may be subject to several at once, or to alternative ones at different times.

The alternative explanations for systematic under-saving can have very differing implications for such issues in U.S. public policy debate as the following:

1) Should income tax benefits for retirement saving be reduced or even repealed?

2) Should the U.S. federal income tax be partly or fully replaced by a consumption tax?

3) Should “nudges” such as automatic enrollment be used to increase employee participation in employer-run retirement savings plans?

4) Should Social Security retirement benefits be scaled back for long-term fiscal plans, or alternatively expanded?

5) Should the design of Social Security be changed, such as by making the relationship between payroll taxes paid and benefits received both actually and optically clearer?

            The paper’s aim is not to offer definite answers to any of these questions, but simply to improve understanding of the likely relationship between leading theoretical explanations for under-saving and the above issues.

Jotwell post on Piketty book

I have published a very brief essay on Jotwell concerning Thomas Piketty's Capital in the Twenty-First Century.  You  can find it here.

As you can perhaps see from reading it, it's less of an actual response to or full assessment of Piketty's book (unlike, say, Neil Buchanan's Jotwell piece on Piketty, which you can find here), than a preliminary statement of what I actually do want to write about at greater length.  This reflects that I will actually be doing so.  Further details to be available shortly.

What I'm doing on my summer vacation

Gad, but I love the summer.  First of all there's the weather.  So long as the AC in my house doesn't break, I say bring on the heat.  I like a real summer, and we've had bits of it although at times it's been too cool and wet.  The only thing I really don't like about this time of year is mosquitoes.

The horrible winter and early spring are still exacting their price re. one my favorite parts of the summer - fresh produce at the Union Square Farmers' Market.  Generally you get strawberries by mid-May, then by the start of June it goes full Technicolor.  Blueberries, red and black raspberries, apricots, soon after that peaches and blackberries, etcetera.  This year is different.  Blueberries and red raspberries were both 2 + weeks late, no black raspberries yet, and apricots and peaches may simply not happen in the Northeast this year.  That's a shame as they're way better than the stuff that gets shipped here from far away.  So I am still waiting for full Technicolor, and may have to wait until June 2015 (assuming the next winter is less awful).

OK, back to the summer positives. Weeks that aren't jammed full with appointments are one nice feature - even leaving aside classes, my calendar is never so open during the rest of the year.  And as it happens my summer travel (in the school calendar sense) has been scheduled just for May and August, so open time yawns in front of me.  But that's a good thing, and I wish there were more.

On the work front, I've just finished a draft of an article entitled "Multiple Myopia, Multiple Selves, and the Under-Saving Problem."  The piece will end up being the headline piece in a spring 2015 "Commentary Issue" of the Connecticut Law Review, where there will also be invited commentators.  I will post a draft of the article in SSRN at some point well before that, but I want to sit on it at least briefly first.  After all, while there are second bites at the apple (aka revisions before publishing), I suspect that the first SSRN draft is the one that gets read by the greatest number of people.

I've now started work on a piece that I will be co-authoring with a friend that addresses Piketty's Capital in the Twenty-First Century.  More on that in due course, including on the underlying event at which we'll be presenting the paper.

In the fall, I'll be writing a short Tax Notes piece for a conference to which I've been invited concerning certain of the perennial tax reform issues that are always on the table.  More on that in due course, after that event has been publicly announced.

And after that, I guess I'll have to see, though there are several possible candidates.  But I don't think I'll be writing much in international tax in the immediate future (as I like doing new things and changing my focus as needed to feel fresh).

Alternative (or complementary) theory to CEO narcissism

In an earlier post, I noted recent corporate governance literature suggesting that narcissist CEOs, who are identified by criteria that include their pay relative to that of other company officials, tend to perform worse in various ways, such as by reason of their taking undue risks.

There's also a recent paper suggesting that high-paid CEOs tend to perform worse than other CEOs through an entirely different mechanism.  According to the abstract:

"CEO pay is negatively related to future stock returns for periods up to three years after sorting on pay.  For example, firms that pay their CEOs in the top ten percent of excess pay earn negative abnormal returns over the next three years of approximately -8%.  The effect is stronger for CEOs who receive higher incentive pay relative to their peers.  Our results appear to be driven by high-pay induced CEO overconfidence that leads to shareholder wealth losses from activities such as over-investment and value-destroying mergers and acquisitions."

Some are born narcissistic, others achieve narcissism, and yet others have narcissism thrust upon them.  And no doubt, to paraphrase Joseph Heller's line in Catch-22 about Major Major Major and mediocrity, for some CEOs it is all three.

I let him go right afterwards

Let's hope he's still out there, happily catching mosquitoes.

Henry Simons article again

The Tax Prof blog has just posted a link to the recently published "100 years of the income tax" symposium issue of the FSU Law Review, which includes my piece, "The Forgotten Henry Simons."

As I like this piece and enjoyed writing it, even though it's in a sense between chairs - not quite either historical or analytical - and as some people have been kind enough to tell me that they enjoyed reading it - a response that I had indeed fairly centrally aimed for when writing it - I will treat this as an occasion to re-post a link to the piece, here.

Academic literature on CEO narcissism

This link on the TaxProf blog to a newly posted article called "The Effect of CEO Narcissism on Corporate Tax Policies" alerted me to the fact that there apparently is a broader literature, previously unknown to me, associating narcissistic personality traits of CEOs with the companies' playing more aggressive tax and accounting games, building larger empires through acquisitions, taking risks that lead to volatile economic outcomes, etcetera.  See, for example, this article and this one.

As it's accepted in this literature that the best measure of CEO narcissism - getting CEOs to fill out psychological surveys, presumably in a spirit of honest self-disclosure - is not realistically available, the papers use what (drawing on preexisting psychology literature) they call "unobtrusive indicators" of this personality profile.  These may include, for example, "the prominence of the CEO’s photograph in the company’s annual report; the CEO’s prominence in the company’s press releases; the length of the CEO’s Who’s Who entry; the CEO’s use of first person singular pronouns in interviews; the CEO’s cash compensation divided by that of the second-highest paid executive in the firm; and the CEO’s non-cash compensation divided by that of the second- highest paid executive in the firm." [From Chatterjee and Hambrick, which is the second of the three articles linked above.]

Certainly an interesting literature that I plan to look at some more when I have the chance.

Capital levies talk published in International Tax Notes

As noted in earlier posts, on May 15 I gave a "Distinguished Lecture" at Luxembourg University entitled "Capital Levies: A Solution for the Sovereign Debt Problem?"  The talk addresses recent discussion in the EU of having countries enact putatively one-time wealth taxes in order to reduce public debt levels.

The talk has been published in today's International Tax Notes (June 16, 2014; 74 Tax Notes International 1027-1031), and its full text is available here.

Definitely written as a talk not an article - e.g., no footnotes, and the main literary references are to Aesop's Who Will Bell the Cat? and Piketty's Capital in the Twenty-First Century.  In brief, I'm skeptical about the EU capital levy proposals despite sympathy with their underlying goals.

2015 NYU Tax Policy Colloquium, this time with dates

Unless I have messed up in converting people's expressed preferences (or tolerances) into a consistent set of dates, next spring's NYU Tax Policy Colloquium schedule is currently set to go as follows:

1.  January 20 – Brigitte Madrian, Harvard Kennedy School.

2.  January 27 – David Kamin, NYU Law School.

3.  February 3 – Kimberly Blanchard, Weil, Gotshal & Manges.

4.  February 10 – Linda Sugin, Fordham Law School.

5.  February 24 – Eric Toder, Urban Institute.

6.  March 3 – Ruth Mason, University of Virginia Law School.

7.  March 10 – George Yin, University of Virginia Law School

8.  March 24 – Leigh Osofsky, University of Miami School of Law.

9.  March 31 – Shu-Yi Oei, Tulane Law School

10.  April 7 – Lillian Mills, University of Texas Business School.

11.  April 14 – Lawrence Zelenak, Duke University School of Law.

12.  April 21 – David Albouy, University of Illinois Economics Department.

13.  April 28 – David Schizer, Columbia Law School.

14.  May 5 – Gregg Polsky, University of North Carolina School Law.

Treasury regulatory authority and the carried interest rule for investment fund managers

Victor Fleischer has a short piece in today's NY Times Dealbook suggesting that the Treasury Department, at the behest of the Obama Administration, could simply flex its regulatory muscles and eliminate the current practice whereby investment fund managers commonly treat compensation that takes the form of "carried interest"  as yielding long-term capital gain that is taxed at only a 20 percent rate, rather than ordinary income that typically would face a 39.6 percent rate.

This change has of course received legislative consideration in recent years but gotten nowhere, in part due to opposition from Republicans - apart from departing Ways and Means Chairman Dave Camp, who would have eliminated the carried interest tax break as part of his ambitious tax reform plan.  (It's only fair to note, however, that not all Congressional Democrats are wildly enthusiastic about the change either.)

Vic argues that, as a matter of regulatory authority, there is "plenty of room" for the Treasury to issue regulations making this change.  He closes by noting that, while doing so might be contrary to common tax regulatory practice in recent decades, which has tended to defer to Congress when hot-button changes are on the table, perhaps we are in a new era:

"Out of deference to Congress, the Treasury Department has traditionally avoided making policy in areas where the legislative branch may act.  'But when the legislative process is as broken as it has become today,' said Daniel N. Shaviro, a law professor at New York University, 'it's simply inevitable that Administrations will care less about such comity, and be more willing to advance their policy views in controversial areas through the unilateral exercise of regulatory authority.'"

Better price for e-version of Fixing U.S. International Taxation

While Amazon is charging $39.19 for the Kindle version of my international tax book - not much of a price difference from the hardcover version - Barnes & Noble is charging significantly less for the Nook version.  $27.99, to be precise.

Yes, I recognize that Nook devices are not quite as numerous out there as Kindle readers.  But the Nook app is generally available, at least for iPads, iPhones, and the like.

UPDATE: I sent Amazon an email noting that the Nook price is lower - and, lo and behold, Amazon has now lowered the Kindle price for Fixing U.S. International Taxation to the same $27.99.   See the link here.

That's definitely a hurrah, from my standpoint.  Though this is up to you not me, I am hoping that it prompts some sales.

Next year's NYU Tax Policy Colloquium schedule

Next year, the NYU Tax Policy Colloquium will again take place on Tuesdays, from January 20 through May 5 but not on February 17 or March 17.  My co-convenor will be Alan Viard of the American Enterprise Institute, whom I am happy to welcome as a first-time collaborator on this gig.

Our presenters, listed for convenience in alphabetical order, will be as follows:

(1)   David Albouy, University of Illinois Economics Department

(2)   Kimberly Blanchard, Weil, Gotshal & Manges

(3)   David Kamin, NYU Law School

(4)   Brigitte Madrian, Harvard Kennedy School

(5)   Ruth Mason, University of Virginia Law School

(6)   Lillian Mills, University of Texas Business School

(7)   Shu-Yi Oei, Tulane Law School

(8)   Leigh Osofsky, University of Miami School of Law

(9)   Gregg Polsky, University of North Carolina School of Law

(10)  David Schizer, Columbia Law School

(11)   Linda Sugin, Fordham Law School

(12)  Eric Toder, Urban Institute

(13)  George Yin, University of Virginia Law School

(14)  Lawrence Zelenak, Duke University School of Law

As a whole, our speaker list for next year, as compared to this past year, is weighted a little bit more on the "law" as opposed to the "economics" side of the interdisciplinary spectrum.  This is partly a byproduct of the vagaries of rotating through various people whom I have wanted to invite, but it is also partly deliberate, in terms of what I think is the best fit for our students and audience.

I should have the actual schedule, with speakers assigned to particular dates, available shortly.

Rising tax competition

In Fixing U.S. International Taxation, I emphasize the question of what countries should do about their international tax rules if acting unilaterally - that is, in the absence of strategic interactions with other countries ranging from cooperation to retaliation (as under a tit-for-tat strategy).  This reflects my considering the unilateral scenario as very important, and as not having previously been either given enough attention or adequately analyzed.  But I hold no definite brief against either the feasibility or the desirability of cooperation.

Meanwhile the OECD's BEPS project has been going on, reflecting efforts at the achievement of broad multilateral cooperation that, as I am careful to say in the book, both (a) can change the relevant policy calculus and (b) is great if it can be pulled off.  But I do admittedly express a bit of mild skepticism on the latter score.

Today's Reuters has an article by Tom Bergin that throws a bit of cold water on cooperative hopes, at least in one particular setting.  Bergin notes that the UK's recent shift towards engaging in tax competition, and perhaps even towards competing with Ireland for popularity with US companies as an appealing tax haven, has not gone unnoticed by those companies.

As a small country, the UK certainly has good reason to consider approaching international tax policy in this way.  And the US, if inclined to complain, does not have entirely clean hands itself.  (Thus, consider how our check-the-box rules have helped US companies reduce their tax liabilities in EU countries, leading to a bit of finger-pointing by people in the EU but accompanying US reluctance to do anything about it.)  But the UK's taking this approach is certainly not great for the US, in particular if we want to rein in tax planning by our multinationals on either a unilateral or a multilateral basis, given that the UK is one of the best substitutes out there for US legal activity (common language, similar legal systems, geographically closer to us than most countries outside of the Americas, etc.).

Semantics and substance

Al Warren has published a piece in SSRN that evidently was inspired by my work on how international tax rules can affect resident multinationals’ incentive to minimize their foreign tax liabilities.  As readers acquainted with the field may know, I have emphasized the importance of considering the marginal reimbursement rates (MRRs) that companies face in particular circumstances.  For example, if paying $1 of foreign tax would reduce the present value of a given U.S. company’s expected U.S. tax liability by 60 cents, that company faces a 60 percent MRR.

Warren has added a useful semantic point to my analysis.  It has occurred to him that with, say, a 35 percent U.S. corporate tax rate, permitting taxpayers to claim as a foreign tax credit 35 percent of the foreign taxes they pay would create the same MRR as a normal deduction, while a roughly 285% deduction (i.e., deducting just over $2.85 if one paid a dollar in foreign tax) would create the same MRR as a normal foreign tax credit.

Oddly, Warren’s piece could be read as implying that I focus on the labels of deduction versus credit, rather than on rules’ actual effects.  But that of course cannot be so, as the entire purpose of my MRR concept is to look past labels to measure the effective U.S. tax benefit that resident companies obtain from paying foreign taxes.  Consider, for example, the following passage from my book, Fixing U.S. International Taxation:

“[I]t would be a considerable surprise if the unilaterally optimal solution involved having, at any given margin, a company’s U.S. taxes increase by a dollar when it reduced its foreign taxes by a full dollar (i.e., the creditability result, whether or not it formally reflects offering foreign tax credits). Instead, the optimal solution might involve companies reaping a worse-than-deductibility, albeit better-than-creditability, marginal result from reporting profits in tax havens.”

Despite any possible confusion, I am glad that Warren was able to learn and benefit from my work, and that he has offered an interesting extension.

Fixing U.S. International Taxation available on Kindle

My international tax book is now available on the Amazon website, on Kindle.  Link is here.  I do wish the price were a bit lower.  But then again, I'd probably have been willing to sell it for a dollar, and then waive the dollar upon request; which perhaps helps to show why authors don't get to set prices when using commercial publishers that have expenses.

I gather that the book should also be showing up soon on other platforms for electronic download.

Pending publications

The June 9 edition of International Tax Notes will be publishing the text of my recent lecture at Luxembourg University, entitled "Capital Levies: A Solution to the Sovereign Debt Problem?," in its "Current and Quotable" section.

In addition, Jotwell should, within a couple of weeks, be publishing a short teaser that I've written on the subject of Thomas Piketty's "Capital in the Twenty-First Century."  I call it a "teaser" because I'll be working on a much more substantial piece on this topic over the summer.

These are both micro-pieces - about 4,400 words for the capital levy talk and 1,200 for the Jotwell bit.  More in due course on the larger-scale pieces that I will be writing this summer and in the fall (when I am on sabbatical but will mainly be in residence at NYU).

UPDATE: It turns out that my capital levies piece will appear in International Tax Notes on June 16, not June 9.

Also, a Kindle version of Fixing U.S. International Taxation should be up in Amazon within the next day.  I'll feature this exciting (?) fact in a new blog post shortly.

My slides from the BEPS conference

The slides that I used at the Bocconi University BEPS conference this past Wednesday are available here.

A one-paragraph summary of my intended content, which I largely followed in writing up the slides, went as follows:

The US and EU have both some ability to address multinationals' base erosion and profit-shifting unilaterally, and good reason to want to do so.  Even if they might reasonably choose to allow profit-shifting up to a point, on the view that multinational investment and residence are highly mobile, at present things appear to have gone too far.  The two main tools for unilaterally addressing profit-shifting are (a) rules that address the reported source of net income, including transfer pricing / formulary apportionment and the treatment of interest expense, and (b) subpart F-style anti-tax haven rules, including those in territorial countries that limit the scope of exemption for resident companies' foreign source income.  These two sets of rules have different strengths and weaknesses, although it is notable that the latter can't help with respect to non-resident multinationals.  A more formulary approach to source may be unilaterally sustainable, and indeed might potentially induce other countries to follow suit.

An idea worth noting that I added to the slides after writing the above paragraph was that, against the background of U.S. concern about Pfizer / AstraZenica-style inversion transactions, we might want to consider an exit tax with respect to the unrepatriated foreign earnings of U.S. companies that expatriate.

Note, by the way, that in the absence of such an exit tax, the opportunity to repatriate is one more reason why "new view" assumptions - under which U.S. companies can't reduce the present value of the repatriation tax by keeping their foreign earnings abroad - may not hold.  Other reasons include the option value of waiting (e.g., lest the U.S. enact exemption in the future or else offer further repatriation tax holidays), and the possibility that one need never repatriate if doing so is merely an adverse paper-shuffling election, not needed to have all needed practical access to the funds and not just the firm level but even the shareholder level.

BEPS conference at Bocconi University in Milan

While for technical reasons I can't post my slides from the conference today until I am back in NYC, here are a few quick thoughts inspired by the session, which featured academics, government officials, and practitioners from various countries:

1) Many Europeans take a view of the U.S. check-the-box rules, which permit U.S. multinationals to avoid tax abroad on foreign-to-foreign income-shifting that otherwise would give them U.S. tax liability under subpart F, that is quite different from what one mostly hears in the U.S.  (If I do say so myself, however, I anticipate it in my international tax book.)  To the Europeans, the check-the-box rules, rather than being some dastardly scheme that the U.S. multinationals have managed to put over on the U.S. Treasury due to an inadvertent error in the regulatory process 15 years ago, are a deliberate device in the field of ongoing tax competition that the U.S. uses to benefit its multinationals, by permitting them to avoid foreign countries' taxes more easily.  The parallel they like to cite is the UK's engaging in headquarters tax competition by lowering its corporate tax rate, scaling back its CFC rules, and enacting a low-tax "patent box" regime.

2) For this and other reasons, U.S. willingness to cooperate with EU countries, in the BEPS project and otherwise, is held to be in some doubt.  Along these lines, someone asked the Americans at the conference if we saw any chance that the U.S. would cooperate with ongoing multi-jurisdictional efforts to address VAT evasion cooperatively.  We were skeptical that this would happen, given that the U.S. doesn't have its own VAT.

3) The International Monetary Fund staff has been preparing a report on BEPS-type issues, with particular focus on the issues faced by developing countries, that will probably be publicly available within a few weeks.  This sounds like it is likely to be a very useful and informative document.

4) Speakers from private industry at the sessions emphasized the extent to which managers' efforts at tax reduction, in publicly traded companies, are driven by the objective of not having a higher worldwide effective tax rate than one's peer companies.

5) Milan is currently having a taxi strike that, as I noted in an earlier post, added a touch of adventure to my arrival.  (It may also complicate my departure tomorrow morning.)  The cause, apparently, is that the Uber app, permitting one to arrange car transport services on-line outside of the official medallion system has recently been introduced here, leading to disgruntlement among Milan's taxi drivers, who paid very large amounts for their medallions.  One of the speakers compared the taxi drivers' dilemma to that of countries that still are hoping they can levy significant source-based or residence-based corporate taxes.

European travels

After five days in Luxembourg, I have just this evening arrived in Milan.

In Luxembourg, as planned and previously noted I taught two classes (one on income taxation / consumption taxation, one on tax expenditures and allocative / distributional government policy through the tax system and otherwise).  Plus I gave a public talk on recent EU discussion of capital levies, and participated in a panel discussion of my international tax book.  People appear to agree that the book has some original ideas, whether or not they subscribe to them 100 percent.  (As it's written from more or less a big-country perspective, even if not exclusively that of the U.S., no surprise to encounter some disagreement in a country like Luxembourg that occupies quite a different niche in the international tax community.)

I may find a vehicle for publishing my capital levies talk, which I had initially thought I would simply post here.  More on that soon.

Here in Milan, also as previously noted I will be attending a conference on the OECD's BEPS project (addressing base erosion and profit-shifting).  I was able to use a stint in the airport to prepare slides that I will indeed post here.

Luxembourg City is quite nice, an old European city that happens to be situated amid picturesque mountains and valleys.  More French than German, contrary to what I had expected.  Like Jerusalem, its location evidently reflects the site's defensive potential as a fortress, rather than, say, exceptional access to rivers and harbors.

Keeping in mind what all work and no play did to poor Jack Torrance, I also managed to fit in a couple of weekend day trips, seeing the beautiful nearby German city of Trier on the first day, and then hiking in the woods from Beaufort to Echternach in the Mullerthal region of eastern Luxembourg on the second day.

Here in Milan, the excitement of managing my transport from Malpensa Airport to my hotel was certainly increased a bit by the fact that there is a taxi strike here today.  That could potentially be quite an obstacle for the unprepared arriving traveler.  But I had already planned on taking a train from the airport to a transit hub in town, and was then able to negotiate subway + tram + just a block on foot in order to find my hotel.

I've used Malpensa before but never seen the city, which at first glance looks huge but pleasant.

Light posting immediately ahead?

I'm about to leave on an overnight flight to Luxembourg (through Frankfurt), where this Thursday and Friday mornings (at Luxembourg University) I will teach two classes.  The first will be on income taxation / consumption taxation, and the second on tax expenditures/ fiscal language.

Also, on Thursday and Friday evenings I will give / participate in talks, the first concerning capital levy proposals in the EU recently, and the second concerning my international tax book.

I'm also planning to fit tourism / sightseeing into my schedule.  But I may conceivably post concerning public aspects of the various events.  My talk on capital levies is all written out and ready for posting, if I don't conceive of some different and inconsistent use for it.

After that I head to Milan, where on Wednesday of next week I will participate in a one-day conference concerning the OECD's BEPS project.  Then back to NYC, and it's as yet uncertain if I'll be going abroad again before this September.  I am one of those few people who actually likes the summer in New York City, conditioned only on my home AC's working properly.  No outerwear needed, everything is green, fresh fruit in farmer's markets, lots of free time professionally, etc.

Foreign tax credits

Martin Sullivan, in his review of my international tax book here, rightly notes that I "stand[] out from the rest of the international tax reform crowd" in what he (OK, fine) calls my "strident opposition to the foreign tax credit."

The reason for the difference is that I look at what the FTC is capable of doing (i.e., entirely eliminating cost-consciousness by U.S. multinationals) rather than just what it currently does (mainly not doing so, by reason of how deferral blunts the incentive effects that FTCs would have standing alone).

I'll admit that I got to my point of view by thinking about FTCs in the abstract, rather than in practice.  But the reason my perspective is important is that it shows what FTCs would do if surrounded by a different set of U.S. international tax rules - which people on various sides often propose changing without prior reflection about the interactions.

An example is the "minimum tax" idea that gets thrown about in Washington these days - possibly meaning, although it varies with the context, that US multinationals would automatically owe at least 20% of their worldwide income (computed without respect to deferral) to the US government, subject to a dollar-for-dollar offset by FTCs.  This rule change, by effectively repealing deferral up to the 20% line, would indeed cause US multinationals to be wholly indifferent to foreign taxes up to the point where they hit the 20% threshold.  So it might cost the companies money without raising significant revenue for the US government.

Another example of the broader point surfaced today in a Reuters article on the OECD's BEPS project (aimed at base erosion and profit-shifting).  The article states that IRS deputy commissioner Michael Danilack has noted that "some foreign countries are using the BEPS project as a reason to get more aggressive on [US] companies' tax audits.

"'The whole BEPS discussion has encouraged countries that felt they weren't getting their fair share to be more aggressive,' he said, warning of 'a great, big sucking sound"' of U.S. tax revenue declines.

"The United States could lose revenue under BEPS, he said, because the IRS offers foreign tax credits to U.S. companies for taxes that they have already paid to foreign governments.... [Thus, i]f a foreign government collects more taxes from U.S. companies, then the IRS might have to issue more tax credits, which could undercut U.S. corporate tax collections."

If we are dickering with foreign governments re. who gets the money if U.S. multinationals have to pay more to someone - with the companies themselves being a key, but independent, strategic player whose actions both sides must take into account - then it's not an incredibly great bargaining position to say, in effect: "We're warning you - if you grab the money, we will respond by conceding every single dollar to you, even if we simultaneously toughen up our own rules."

Kindle version of Fixing U.S. International Taxation

At present, my book is only available in hard copy.  Amazon offers it for $43.70, and used copies aren't much lower.  But I am told that a Kindle version should be available within about ten business days, presumably meaning before the end of the month.

Martin Sullivan of Tax Notes reviews my international tax book

Today in Tax Notes, Martin Sullivan was kind enough to review Fixing U.S. International Taxation.  I am pretty sure that you can read the entire review here, unless you need to be a Tax Notes subscriber.

You can see Taxprof Blog's quick summary here, including the first three and last two paragraphs of Sullivan's review.  The last two go something like this:

"In a mere 200 pages, Shaviro provides his readers with an invaluable guide through the economic and legal ideas that have framed the debate on international taxation for the last 50 years. But the literature review is ancillary. The true value comes from Shaviro's proposals and ideas. The subject matter is unavoidably complex, but he strives to boil down the material to the stuff that helps us achieve the task assigned in the title of the book. His explanations are clearly developed and rational so that readers with only a minimal background in international tax can follow even the most difficult issues. Unlike so much that is written on international tax, there is no ostensible pro- or anti-business slant and no political bias.

"Stylistically, Shaviro writes in plain language that suggests all the highfalutin talk about international tax policy may just all boil down to common sense. On top of all its other virtues, Shaviro's book is timely: If lawmakers follow through on the ideas floated by Camp and Baucus, we may be experiencing the largest changes in U.S. international taxation since the inception of the income tax. If you are striving for a true understanding of the issues involved in this historic transformation, you are lucky Shaviro wrote this book when he did."

Technology of the future?

While in a B&B on a short overnight family-related roadtrip, I started reading a copy of Evelyn Waugh's Brideshead Revisited that they had in the room,  (I'm a big Waugh fan, but tend to prefer the snark, or for that matter the harrowing Ordeal of Gilbert Penfold, to the mellow mists of memory.)  As I obviously couldn't finish it there, I was on the verge of buying it on Kindle, when it occurred to me that I might already have it at home, even though I hadn't read it previously.

So here is the scenario that occurred to me: "Siri, could you ask Sentinel™ to check on whether we have Waugh's Brideshead Revisited?  That's W-A-U-G-H, near the end of the fiction section in the library."

Perhaps Sentinel™ could also feed the cats, or at least tell us how they are doing.  I think of it as having a voice like Hal's in 2001.

NYU Tax Policy Colloquium, week 14: Mitchell Kane’s “Transfer Pricing, Integration, and Novel Intangibles: A Consensus Approach to the Arm’s Length Standard”

Our final NYU Tax Policy Colloquium of 2014 concerned the above-named paper by my colleague Mitchell Kane.  The paper addresses current OECD efforts to address the challenges for transfer pricing that are posed by intangible assets, including the synergy value of using common control and ownership for operations in multiple countries.  The following is a nice example in the paper showing one might visually depict common control synergies:

l                       l                       l                       l

a          $75      b          $50      c          $75      d       

   Country A                                Country B

                          FIGURE 1

In this example, operations in Country A would earn $75 if separately owned and operated, as would those in Country B, but the multinational that owns both of them earns an extra $50, or $200 total, due to common control synergies.

Under transfer pricing done right, Country A will get to claim at least $75 of the company’s worldwide income (i.e., ab).  Country B will likewise to claim at least $75.  But what about the other $50?  There is no obvious way to answer this question, whether through the analysis of “comparable sales” or otherwise.

Some argue that this example exposes a horrifying logical contradiction in the underlying “arm’s length” concept that underlies transfer pricing.  How can you say what the arm’s length price would be for something that the parties can only realize by acting not at arm’s length?  Others note that this can be viewed as a standard bilateral monopoly bargaining problem.  That is, if one imagined separate owners of the operations in A and B negotiating over the terms of the merger, the problem would simply amount to one of how to divide the $50 surplus.  Alas, this doesn’t help much, unless you think the “logical impossibility” matters for its own sake, since bilateral monopoly negotiating outcomes are context-dependent and notoriously hard to predict.

The paper is mainly engaged in legal analysis, in the sense of interpreting existing OECD guidelines rather than evaluating the policy issues against a blank slate.  The chief conclusions it reaches are:

(1) The OECD shouldn’t respond to the problem by creating a novel category of intangible assets (e.g., “common control synergies” with their own set of distinctive rules),

(2) In dealings with each other, OECD members and bilateral tax treaty partners should allow pure taxpayer electivity with respect to which of the two countries gets the $50 of common control synergy income included in its tax base.

I have some sympathy with conclusion # 1, but have issues with conclusion # 2.  The following is a fuller discussion of some of the main issues in the paper, including numerous points on which I agree with it, and thus am just putting my own gloss on a conclusion that it reaches as well:

1) Does the example show that multinationals with common control synergies are earning rents?

Sometimes, in international tax policy debate, common control synergies are treated as evidence that multinationals (MNEs) are earning rents.  To illustrate the apparent intuition, suppose that, in Figure 1 up top, earning $75 in Countries A and B constituted a normal rate of return, given the amount of capital that is being employed.  Then merging them and earning an extra $50 (for $200 total) would afford the MNE a rent.

I would argue, however, that, whether or not MNEs are earning rents, the existence of common control synergies has no obvious bearing on the question.  If such synergies are significant in particular areas, that merely indicates that one would expect them to be part of the production process.  Thus, in Figure 1, it’s just as natural (and perhaps more so) to assume that $200 is a normal rate of return, and that the separately operated entities would not be earning high enough separate rates of return to stay in business.

By analogy, suppose we did a chart in which we compare the amounts that multistate firms in the U.S. would earn (a) if they still used horses to ship goods, as compared to (b) given their use of trucks.  We could portray them as having special “truck use profits,” but that wouldn’t tell us that they are earning rents.

Or to put it another way, consider economic sectors in which cross-border common control by MNEs would reduce productive efficiency, and we therefore don’t observe it.  One wouldn’t say that in these cases the separately owned firms enjoy rents from a “separate ownership windfall.”

2) Two-country vs. three-country synergy

The paper argues that, in interpreting current OECD doctrine, it is legally correct, but also desirable as a policy matter, to let MNEs assign common control synergy income to whichever country they like, among the production sites that enjoy the synergy, so long as it’s reported somewhere.  In other words, full electivity is the suggested approach.

How big an advantage is this?  In Figure 1, it is plausible that Countries A and B both will have significant tax rates, since both are actual production countries.  Pure tax havens tend not to have enough productive resources to support a lot of local economic activity.  Thus, the benefit to MNEs of full electivity seemingly would be limited, albeit far from negligible.

But suppose the MNE can put a tiny amount of locally generated income in Country C, a tax haven that has tax treaties with Countries A and B, and is an OECD member.  (The paper treats this as a precondition to accessing the benefits of full electivity.)  This may open up further tax planning opportunities, as shown here:

l                       l                      l                       l

a          $70      b         $50      c          $70      d

Country A                                   Country B

                                    _____

                                      $5

                               Country C

                               FIGURE 2

Using this structure lowers pretax profits by $5.  But the business as a whole still has common control synergies that include Country C, where $5 is actually being earned.  But now, with full electivity, the MNE can report the synergy income in Country C and pay little or no tax on it.

3) How important is it to tax everything exactly once?

Suppose all countries are homogeneous, including in the tax rates they apply.  Then taxing everything exactly once promotes global efficiency.  It also means that given countries may be unalarmed by full electivity in the above scenarios, since there is no reason to think that it would systematically disfavor them.

With heterogeneity and tax rate differences, this changes.  For example, there is no reason for Country A or B to think that the scenario in Figure 2 is just fine by reason of, say, the synergy income’s paying, say, a 10 percent rate in Country C.  Even if high-tax countries may benefit from the use of tax havens to lower the effective tax rates that MNEs may earn on inbound investment – an issue that I can’t address here – it would have nothing to do with how many times a given dollar of income is being taxed at different rates.

Does the fact that the paper’s analysis is limited to OECD members and treaty partners mean that we are actually in the homogeneity scenario after all?  Consider that OECD members which have tax treaties with the U.S. include Ireland (12.5% corporate rate), Slovenia (15%), and Luxembourg (almost 30% as a statutory matter, but generally with a much lower effective rate).

4) Transfer pricing versus formulary apportionment

In Figure 1, suppose that Countries A and B tax rates differ.  This will affect decisions about where to locate economic production.  But suppose instead that we treat production locations as fixed, and ask only whether taxes will distort the decision whether particular A and B operations should be owned and managed separately, or by an MNE that exercises common control.  In this scenario, transfer pricing’s potential virtue is that, so long as it results in the assignment of at least $75 of the MNE’s income to each country, it will not distort the common control decision, even with full electivity, whereas formulary apportionment (FA) potentially will.

Does this provide a significant reason for preferring transfer pricing to FA, even under full electivity, so long as it is hitting the bottom of the target (i.e., assigning at least $75 to each country)?  Not necessarily.  For example, consider Figure 2, where it distorts location decisions because we have added to the choice set moving some operations to Country C.  In addition, suppose that the U.S. stays with transfer pricing to achieve the 2-country efficiency gain, and accepts the paper’s proposal that the entire $50 of synergy income be shifted to other countries.  Depending on the relevant ratio of revenue raised to deadweight loss incurred by U.S. individuals who own stock in MNEs, the U.S might be better off distorting the choice in exchange for getting some revenue.

5) A better solution than full electivity?

I am far more skeptical than the paper appears to be about the desirability of basing tax liability on formal entity lines, such as between corporate parents and wholly owned foreign subsidiaries.  Why give significant tax consequences to something that is likely to have little if any economic significance?

The paper sees valuable “information” here that we shouldn’t discard.  But since the entity lines are meaningless economically, the only informational content I see is that it’s predictive of how other countries will tax a given MNE, given that in practice they rely on entity lines.  This in turn reflects assigning more normative weight to avoiding “double taxation” than to limiting tax planning and the creation of potentially huge tax advantages for MNEs.

If avoiding double taxation and formal double non-taxation were all that mattered, why not advocate the “ROSE” system?  That’s my new acronym for “Registered Official Sourcing Election.”  An MNE announces to all countries where it is reporting its taxable income, and all agree to heed this.

I might lean more towards sharing the paper’s predominant concern about over-taxation if I thought that countries were strongly prone to over-reach.  For example, suppose in Figure 1 that both Country and Country B want to grab at least $125 (i.e., the local $75 plus the full $50 of synergy income), so MNEs with normal returns overall face very high worldwide tax rates.  However, I am not persuaded that this is how even high-tax countries generally act.  MNEs not only can wield interest group power but may be treated favorably due to well-grounded concerns about their mobility. 

My preferred approach, therefore, even assuming we use transfer pricing in Figure 1 with the aim of “correctly” placing at least $75 in each of the two countries, is to use something like FA for the residual $50.

Piketty, Wodehouse, and the Mid-Twentieth Century Great Easing

As has been widely reported, Thomas Piketty’s Capital in the Twenty-First Century extensively discusses the novels of Balzac and Jane Austen, as illustrations of what a rentier society looks like, with labor income mattering far less than inheriting capital or else acquiring it by marriage.

The natural question for me was: What about Wodehouse?  Not only is he on the short list of my favorite authors, but frequently his protagonists are young men who live off inherited wealth, and who are not only unemployed but verging on unemployable, owing to what (despite Piketty’s dislike for the phrase) one could only term low human capital.  Yet, in a truly shocking omission, Piketty never mentions Wodehouse.  (Perhaps Wodehouse, despite the nod to Austen, is too idiosyncratically English?)

Luckily, I think the gap is easily filled in.  Although Wodehouse started writing in the first decade of the twentieth century, or during the pre-World War I inequality peak, he found his voice as a writer in the 1920s, after the World War I shock, and then wrote throughout the Kuznets era of lesser inequality.  Perhaps, then, it is unsurprising how comic and ineffectual the young gentlemen with comfortable livings seem to be in his work, compared to their predecessors in the Austen novels.  What’s more, Wodehouse stories and novels frequently feature wealthy inventors, self-made American millionaires, and the like, who are pushing their way into English society, and who may be a bit obnoxious and threatening, but who are not truly dangerous to the stability of what Evelyn Waugh called “Mr. Wodehouse’s idyllic world.”

Wodehouse himself grew up in a family that was comfortable enough to send an older brother to university but then, due to unexpected financial reverses, couldn’t send him.  Instead, he was dispatched to London to work as a bank apprentice or clerk.  He appears to have seen himself, no doubt rightly, as verging on long-term unemployable in an office setting. Yet he quickly found his way to self-support as a writer, through extraordinary energy that considerably predated his actually being any good (although at least some trace of the mature Wodehouse’s comic sensibility was there from the start).

No doubt Wodehouse’s rapid success as a self-supporting writer - at least to the level of staying above water (although the huge successes only came later, after a lot of hard work) – helped him to take a bemused view of the fortunate few who could live off inheritances.  But surely it’s also a broader signpost of the mid-twentieth century Great Easing that rentiers in his world, while certainly having very pleasant lives, so frequently are comic and ineffectual.

"From Darcy to Bertie Wooster: [insert here your choice of subtitle]" - possible dissertation title on offer for English nineteenth to twentieth century economic and social history.

Upcoming talks in Luxembourg

I don't know how many of my readers are likely to be in Luxembourg on May 15 and 16, less than two short weeks from today.  But at 6 pm on the first of those two dates, I will be presenting a lecture at the University of Luxembourg entitled "Capital Levies: A Solution for the Sovereign Debt Problem?"  Then at 6 pm the next night, I will be participating in a discussion of my international tax book.

Further information is available here for the talk on capital levies, and here for the discussion of Fixing U.S. International Taxation. I will post the approximate text of my capital levies talk here, shortly after giving it.

Also on May 21, I will be participating in a conference at Bocconi University in Milan, entitled "Base Erosion and Profit-Shifting: Governments' Policies Versus Corporate Strategies."  See more details here.

Then it's back to the U.S. for what I am hoping will be both a warm and a productive summer.