My remarks at this afternoon's Fordham session on corporate inversions

The panel today, which I mentioned in my previous blog post, was off the record, so I can't address any of the particulars of the session.  But here is the written version of my remarks there:

One of the hazards of being asked regularly to comment on things is that you start wanting to be known as a sage who has made great predictions in advance.  So you get football prognosticators who keep picking the upset special, on the view that no one will remember when they’re wrong, but that they’ll be able to crow about it when they’re finally right.

Insofar as I predicted something in this area, it definitely wasn’t the upset special.  If anything, it was more like predicting that the Mets wouldn’t make the playoffs this year.

And anyway, I didn’t specifically say that we’d be back in the inversion soup so soon after Congress addressed the issue in 2004 (if ten years later is indeed soon).  What I said, with a kind of confirmation from the current inversion controversy, is that a really crucial attribute, in assessing what sort of international tax regime the U.S. should have, is what I call the effective degree of our system’s corporate residence electivity.  If we attach potentially adverse tax consequences to being a U.S. company, then it is important to know how avoidable that status is, or isn’t.

There are multiple margins at which you need to think about corporate residence electivity.  One involves new incorporations, and the extent to which tax considerations affect their occurring in the U.S. rather than abroad.  A second margin involves existing companies, both U.S. & foreign, and the question of which of them are the ones to issue new equity and/or make overseas investments.  And inversions involve a third margin: changing the corporate residence of the company at the top of an existing multinational group, as when a U.S. multinational becomes a foreign one.

When I was doing research for an NYU Tillinghast Lecture discussing corporate residence electivity that I delivered in 2010, I was surprised to hear from leading New York practitioners that, even just for new incorporations, effective electivity appeared to be lower than I had expected.  That is, while they typically told their clients to incorporate abroad for tax reasons, they often didn’t win these arguments.  Data about new incorporations actually seem to bear this out (there’s a paper, for example, by Eric Allen and Susan Morse).  But I thought that corporate residence electivity was likely to rise over time, with adverse long-term implications for the extent to which we can benefit from following policies that seek to impose distinctive tax burdens on U.S., as compared to foreign, multinationals.

At the time of my Tillinghast lecture, the pre-2004 inversion fever had abated, because those deals were generally self-inversions with zero economic substance, making them easy to address legislatively.  What we have now are deals with some economic substance, although often very strong tax planning considerations as well, making the design of rules that will block at least some of them, if that’s what you want to do, more challenging than it had been in 2004.

There are several ways we could address inversions like the ones that we are seeing today, involving actual mergers between foreign and U.S. companies that are not pure cases of a minnow swallowing a whale.  One is just to let them happen.  Another is to change the rules by requiring somewhat more economic substance than we do under current law.  A third, emphasized by the Treasury in recently issued regulations, is to reduce the expected tax advantages of these deals.  And a fourth is more generally to address the differences in U.S. tax treatment of U.S.-headed, as compared to non-U.S.-headed, multinationals.

Before saying more about that, I want to address two half-truths that purport to explain why U.S. companies may engage in these deals.

According to the first half-truth: “U.S. companies want to invert because the U.S. tax rate is just too high.” 

Now, it’s true that the U.S. corporate tax has a 35 percent statutory rate, even disregarding state-level corporate income taxes, and that peer countries have lower statutory rates.  But first, the average or effective tax rate matters more for many taxpayer decisions than the statutory rate applying at the margin, and U.S. companies’ overall effective rates do not appear to be out-of-line with those that foreign companies pay.

Second, the U.S. source income of foreign as well as U.S. companies is, at least on its face, generally taxable by us at 35 percent.  If that rate is too high, this goes more to the domestic corporate tax rate question than to inversion issues.

So why isn’t it wholly false to say “U.S. companies want to invert because the rate is too high,” instead of the clearly true statement: “Companies will be more interested in shifting their investments and claimed profits abroad if our rate is high, than if it is low”?  The reason the first statement isn’t wholly false is that there actually is a practical link between inversion and the effective domestic tax rate.

A major reason why U.S. companies want to invert is the hope that this will make it easier for them to reduce reported U.S. source taxable income, even if their true economic activities around the world remain the same.  This reflects what I’d call existing anti-base erosion features of the U.S. international tax rules – involving, for example, interest allocation and subpart F.  These rules, at least when they’re working effectively, can make it harder for U.S. companies than foreign ones to lower their U.S. tax bills through such planning steps as assigning lots of debt, including intercompany debt, to the U.S. affiliates in a global group. 

The second half-truth about inversions goes as follows: “U.S. companies want to invert because we, unlike most other countries, tax our resident companies’ foreign source income.”  Well, perhaps this is even a two-thirds truth.  But it does require amplification and correction, potentially changing its apparent implications a bit, if we actually want to understand it.

Now it’s formally true that we have a “worldwide” system, in which U.S. companies’ foreign source income, even if earned through foreign subsidiaries, is eventually supposed to be taxable here.  Most of our peer countries have territorial systems, in which at least active business income that’s earned abroad is domestically exempt, albeit potentially subject to the reach of anti-tax haven rules.

For three particular reasons, however, the statement can misleading if one doesn’t say a bit more about it.

First, we don’t do a great job of taxing U.S. companies’ officially reported foreign source income.  More than $2 trillion of that income is currently reported for accounting purposes as “permanently reinvested abroad” – which means that the companies have successfully argued to their auditors that they will NEVER have to pay the U.S. repatriation tax.  The reason those companies may be interested in inverting is to make it easier for themselves to access the funds that they have stashed abroad, without as much concern about triggering a taxable U.S. repatriation.  This can reduce their tax planning costs even if they would never have paid the U.S. tax anyway.  Now, this is potentially a pro-taxpayer point, since no one wins except for the lawyers when the companies incur extra tax planning costs, but it does show that we’re not overtaxing as such.  The conclusion might be, not that we are taxing U.S. companies’ foreign source income too much, but that we are doing it the wrong way.

Second, a lot of the foreign source income on which U.S. companies want to avoid paying U.S. tax may actually, as an economic matter, have been earned here.  Again, this goes to the U.S. base erosion and profit-shifting opportunities that are greater here for foreign than U.S. multinationals.  Now, this does mean that the U.S. companies can truthfully say that they are trying to put themselves on more of a par with their foreign rivals, although the issue here is actually U.S. rather than foreign investment.  But we may not be entirely happy about it in either case.

Third, some of the motivation for inversions relates to the past, not the future.  Suppose you are a company with $10 billion of foreign earnings.  If you repatriated the funds today, you would pay $3.5 billion of U.S. tax on this income, minus the amount of any foreign tax credits (which may be trivial if you have stashed most of the profits in tax havens).  The only reason the U.S. doesn’t make you pay that tax is that we have deferral, permitting you to postpone the payment until you actually repatriate the funds.  Deferral is a realization rule.

In theory, deferral – unlike realization in some other cases – doesn’t reduce the present value of your U.S. tax liability.  After all, the amount that’s waiting to be repatriated presumably is growing annually at your after-foreign tax rate of return.  Thus, in terms of my earlier example, in theory you’ll eventually pay $3.5 billion plus interest on earnings of $10 billion plus interest, eliminating the present value benefit of deferral.  So, again in theory, allowing deferral to U.S. companies is like granting them a loan – and not an interest-free loan, but a true loan with a floating market rate that automatically depends on actual rates of return.

As soon as you invert, however, this may change.  Even if the U.S. company’s prior foreign subsidiaries remain below it on the ownership chain, with the new foreign parent standing above both, it may now become much easier in practice to avoid ever paying the U.S. repatriation tax.  You may have more ways than you had pre-inversion to actually access the funds while you sit and wait for the next corporate tax rate cut, or foreign dividend tax holiday, or the enactment by Congress of a territorial system, all of which might potentially reduce or even eliminate the deferred tax bill.

So allowing U.S. companies to invert without triggering realization of the deferred gain is a bit like allowing them to increase the likelihood of default on a loan.  This is why there has been some talk of an exit tax – a deemed taxable repatriation – when U.S. companies invert, even if the U.S. company’s foreign subsidiaries still stand below it in the ownership chain.

“Exit tax” is an ugly-sounding term.  It brings to mind Soviet-era harassment of dissidents.  So let me propose a term that sounds better and yet is metaphorically accurate: loan repayment acceleration.  When you own your home subject to a mortgage, and you sell the house and buy a new one, they generally make you repay the loan.  I think we should consider applying such an approach to deferral, via deemed repatriations when U.S. companies expatriate, on the view that the loan’s “credit risk” – i.e., the chance that it will never be repaid, has likely increased.  This doesn’t mean that the special tax rate here should be as high as 35 percent, even in the absence of foreign tax credits – but perhaps a zero tax rate on deemed repatriations when you invert, by reason of not deeming them at all, is too low.

Now, companies that invert are typically looking forward as well as back.  They want to ease profit-shifting and their access to foreign earnings for the future, not just retroactively for the earnings that already are stashed abroad.  So the tax motivations for a given deal are likely to go beyond easing the company’s full access to permanently reinvested earnings.

Given that issue, I would like to see us move in the direction of adopting what I call more residence-neutral rules for determining the source of income – and in substance, not just formally, although this is tricky when the methods used to address base erosion include treating resident companies’ claimed foreign source income as currently taxable, rather than re-defining it as actually U.S. source.

I also agree that we have to accept that we are living in a world in which corporate residence electivity, genuine capital mobility, and inevitable source tax reporting flexibility mean that it’s going to be growing ever harder to hold the line.  Indeed, some retreat from relying on entity-level corporate income taxes, and income taxes more generally, is surely in order – perhaps even a large retreat, depending on what else is on the tax reform table.  But that requires a much bigger conversation, and in the interim I believe that we should take some steps to hold the line a bit longer, both on the corporate inversions front and with regard to base erosion and profit-shifting generally.

Even if we are in retreat with regard to taxing corporate income at the entity level, there is a difference between an orderly withdrawal and a rout.  Making it too easy to escape the U.S. tax net, especially when that means that you can get a kind of retroactive windfall gain from reducing the expected tax burden on foreign earnings that you accumulated in the past, would in my view make the retreat too much of a rout.

Yet another upcoming event at which I'll be a speaker

On Thursday, October 30, from 6:30 to 8:30 pm, NYU Law School will be hosting a book event for Ed Kleinbard's We Are Better Than This: How Government should Spend Our Money.  At this session, Ed will speak for a while, then Linda Sugin and I will both offer, say, 10 minutes each of commentary, followed by open discussion in the room.  A link for the event that includes a further registration link is available here.

The book is great - important, convincing, highly informative, entertaining, both erudite and sure-footed on a wide range of topics, and a major public service.  I'll make more particular comments at the session, and then post something about them here.

Roundtable discussion on corporate inversions

This Thursday, October 23, from 12 to 2 pm at the Fordham School of Law, I will be participating in a roundtable discussion on tax inversions.  Details are available here, and you can register for free on-line.

The other panelists will be David Shakow (a fellow academic, although he is also in practice), John Samuels (from General Electic), Paul Oosterhuis (from Skadden Arps), and Harry Grubert (from the Treasury Department).  These individuals are all aptly described as heavy hitters, with plenty of Washington connections and Treasury or Capital Hill experience in addition to field knowledge.

I might possibly be one of the more pro-government and anti-inversion of the panelists (so far as allowing the deals to have full intended effects is concerned), but I am certainly not doctrinaire, and it's possible that others will say things I'm not expecting.

I'll post something here afterwards, perhaps including a rough version or outline of my remarks.

New project

I've been reluctant to mention this here, for fear of jinxing a still inchoate new thing, but I appear to be moving towards (and into) a new book project, inspired by one of the small sidelights in the Piketty article that I coauthored with Joe Bankman (and that we will soon be posting on SSRN).

There's a short section of that article, representing one of my parts of this true joint project, in which we discuss Piketty's much-noted discussion of literature to help illuminate past rentier societies that he believes may tell us something about the future.  In particular, he discusses Austen and Balzac.  We quibble with his use of Balzac (who describes not just rentier society but more particularly the struggles of would-be arrivistes), and then briefly note other 19th and 20th century literature that is also about adventurers and arrivistes, before briefly commenting on Wodehouse's Bertie Wooster, who is the true comic embodiment of rentiers' decline amid the mid-20th century Great Easing.

This may, I am hoping, end up inspiring a book that, if it meets its objectives, will be fun both to write and to read, discussing the wealthy and the arrivistes, along with underlying social attitudes about both and their evolution over time, in fiction of my choice over the last two-plus centuries (e.g., Austen, Balzac, and Wodehouse, among others).  I'll be looking at the fictional worlds in these books, not in any close detail at the actual contemporaneous societies, and with no presumption that the books I choose to write about are the "right" ones in any sense other than that I personally find them fun and interesting (and usually, though not always, of high literary merit).

More travel and recent travel

I will be reprising my talk on the Piketty book in a talk at the University of British Columbia Law School in Vancouver on Monday, October 27.  Details here.

Good session in Charlottesville last Thursday when I last presented this paper, although the air travel aspect was not as much fun.  (Five-hour delay heading out, including a flight that returned to NYC after many minutes in the air, due to mechanical problems; one-hour delay heading back.)

The main comments I got in Virginia concerned the likely virtues of spelling out, a bit more thoroughly than the current draft does, the implications for tax instrument design of (a) different normative concerns about rising high-end inequality, and (b) different sources of rising wage inequality that one might to address, if one modifies Piketty's assumption that r > g is doing most of the work.

I also got an interesting sidebar comment on my blog, generally praising it but saying that, when I discuss politics, I am (a) too ungenerous to Republicans, (b) at least implicitly too generous to Democrats who often are equally in bed with plutocracy (I say "implicitly" because I don't actually praise them much here), and (c) insufficiently mindful of the sharp divides within the Republican camp - as shown by the populist and anti-rent-seeking passions that helped to retire Eric Cantor to a life where he will have to accept multimillion-dollar paychecks in lieu of being an inside player.  Point taken; I will try to do better.

Bill Gates on Piketty

As promised in an earlier post, here are some thoughts on Bill Gates' recent blog post on Piketty.

By the way, I would see no reason to take notice of this just because he's Bill Gates.  That does indeed in a way automatically make it of interest, because it's a famous multi-billionaire's response to a book about rising high-end inequality.  But I have too many conflicting demands on my time to bother noticing it here based on that fact alone.

Rather, the reason I comment on it here is that, in addition to that, the post actually is intelligent and interesting.

Early on, Gates says: "I very much agree with Piketty that:

o        High levels of inequality are a problem—messing up economic incentives, tilting democracies in favor of powerful interests, and undercutting the ideal that all people are created equal.

o        Capitalism does not self-correct toward greater equality—that is, excess wealth concentration can have a snowball effect if left unchecked.

o        Governments can play a constructive role in offsetting the snowballing tendencies if and when they choose to do so.

"To be clear, when I say that high levels of inequality are a problem, I don’t want to imply that the world is getting worse. In fact, thanks to the rise of the middle class in countries like China, Mexico, Colombia, Brazil, and Thailand, the world as a whole is actually becoming more egalitarian, and that positive global trend is likely to continue.

"But extreme inequality should not be ignored—or worse, celebrated as a sign that we have a high-performing economy and healthy society. Yes, some level of inequality is built in to capitalism. As Piketty argues, it is inherent to the system. The question is, what level of inequality is acceptable? And when does inequality start doing more harm than good? That’s something we should have a public discussion about, and it’s great that Piketty helped advance that discussion in such a serious way."

While I wholly agree with this, admittedly what it makes it especially noteworthy is that Gates is saying it.  How many others whose economic success approaches his would?

Gates then makes the following points, to each of which I respond after noting it:

1) Other economists have questioned the central importance that Piketty attaches to "r > g" in explaining rising high-end inequality.  That is certainly true.

2) Do "different types of capital" have "different social utility"?  For example, if A uses his capital to build his business, B gives all of her capital away to charity, and C uses his for high-end consumer goods, such as a yacht and a private plane, then the first two are delivering greater value to the society than the third.

No surprise that Gates should want to value charitable giving.  My understanding of his charitable activity is that it actually does, at least very frequently, have great social value.  But I wonder how widely applicable the conclusion he draws is.  Super-rich people who choose to add their money to Harvard's $36 billion endowment might as well throw it in the ocean instead, unless we see general merit to investing money in hedge funds. 

His distinction between saving and consuming could also be questioned.  The issue is really one of net positive externalities, if any, from the one choice as compared to the other.

3) Wealth accumulation decays as well as rises.  Half of the people on the Forbes 400 list of the wealthiest Americans made it to the top themselves.  We aren't dominated by people who bought huge land parcels and have been collecting rents ever since.  You get savers but also wastrels, and also wrenching economic change that creates new fortunes that outstrip old ones.

Here again I agree, but the topic raised requires more discussion than Piketty, Gates, or for that matter Bankman and I in our recent article have given it.  The question here, a subpart of what if anything is wrong with high-end inequality, concerns the relevance of turnover as to the particular families that are extremely rich.  In a simple optimal income tax model, it doesn't matter, but in the real world it might.  I think there is major room for work on how to think about the impact of high-end inequality under different circumstances.

4) Piketty has over-focused on wealth and income data relative to consumption.  Gates also notes that income data can be misleading for lifecycle reasons, e.g., if one is a medical student with low income and high loans but one expects a million-dollar surgeon in a few years.  Gates argues that "consumption data may be even more important [than wealth and income data] for understanding human welfare.  At a minimum it shows a different - and generally rosier - picture from the one Piketty paints."

Yes, I agree that income data can be misleading for lifecycle reasons.  Note that, for wealth data, the related problem is simply our inability to measure human capital and include it as wealth (which at least in many senses it is).  But the problem with consumption data is that it ignores unspent wealth that one can consume whenever one likes.  Suppose I have $1 billion but spend "only" $1 million on consumption this year.  I am better off than someone who spends $1 million and has nothing left.  In addition, given the choice I made, presumably reflecting my preferences, I am presumably better-off in a long-term sense than if I had consumed the entire $1 billion this year.  

A consumption measure misses this. By the way, that does NOT establish that a consumption tax fails to measure wellbeing on an appropriate basis.  After all, while it only taxes me this year on the $1 million that I actually spend, the present value of the deferred liability on the rest of the $1 billion is the same as if I had spent it this year (assuming constant perpetual consumption tax rates, etc.).  So the consumption tax doesn't get it wrong, at least in the trivial sense that seems indicated by looking just at current year liability, because one has to consider the deferred tax.  But if one is looking at current year consumption totals to judge how well off people are, it is not obvious how one could similarly be taking into account the deferred consumption.

5) Gates favors moving to a progressive consumption tax plus an estate tax.  Here I may be fairly substantially in accord with him.  I have written in the past about the case for progressive consumption taxation, and while I've increasingly grown concerned that it wouldn't in practice do enough about high-end wealth accumulation, I have been coming to think that, in principle - ignoring political economy problems! - taxing inter vivos donative transfers to other individuals plus bequests could take care of the rest.

6) Finally, Gates puts in a last word in favor of philanthropy, and notes that he and his wife are keen on its benefits while uneasy about the transmission of dynastic wealth.  Here I'd say that it depends on what sort of philanthropy is going on.  Private foundations in which the dynasts retain control probably are not adequate here, although admittedly this is not a subject that I know much about.  But also, when very rich people decide where the money should go, this is not always for the best.  You get, for example, charities for the rich (Harvard, the Metropolitan Opera, etc.) that may not be worth anything near the implicit budgetary cost of excusing application of the high tax rate on bequests that Gates suggests should otherwise be levied.

Overall, I'm quite impressed by this contribution to the debate even though I don't agree with all of it.

Slides for my talk at the U Va Law School concerning Piketty

Yesterday at the Law and Economics Colloquium at University of Virginia Law School, I presented the article on Piketty, coauthored with Joe Bankman, that we earlier had presented at the NYU-UCLA Symposium.  This time around, as a solo act, I revised the slides, which you can see here, and talked extemporaneously rather than having prepared remarks like those which I had previously posted here.

On Slide 3, standing at the far right, you can see the alter ego or stand-in for Joe and myself, as we thought of it when writing the paper.

Tax Notes article on the Boston College conference on reforming entity taxation

In my last post, I linked to Amy Elliott's Tax Notes article from this past Monday, entitled "Academics Dismiss Corporate Tax Reform Consensus as Superficial."  But for some readers it may behind a paywall.  So here are the parts most pertinent to the topic highlighted in the article title:

"Bipartisan talk of corporate tax reform is easy to come by in the halls of Congress, but it's merely talk, agreed a group of academics gathered in Newton, Massachusetts, on October 10.

"'The big consensus about corporate tax reform is really a superficial consensus,' said Daniel N. Shaviro of the New York University School of Law, speaking at a conference on entity taxation hosted by Boston College Law School and cosponsored by Tax Analysts. 'There's no obviously good way of doing it and that means that any proposal you put forth, . . . even if it would be an improvement, is going to have serious objections.'

"Harvard Law School professor Stephen E. Shay indicated he has lost hope for major tax reform in the near term. 'I don't view fundamental tax reform or any major piece of reform as remotely plausible for the next couple of years -- at least until some event-changing election,' he said. 'Any tax reform has to win a majority. The practical problem that we face today is we have -- unlike in [1986] -- a vastly more disparate set of objectives with respect to tax.'

"Shay added that the consensus that really needs to be built is between House and Senate Republicans. The party that controls the Senate 'is actually much less important for this issue than some people put credence on,' he said, adding that Congress is still struggling with the core structural problem presented by corporate tax reform: how to ameliorate its negative effect on owners of passthroughs.

….

"Brian Galle of Boston College Law School said he's not convinced that the passthrough model is the right way to tax corporate income. He said he thinks the U.S. tax system should increase the number of available rate structures and the nuance within those structures, providing for different rates for different kinds of business income.

"'The elasticity of salary can be very different from the elasticity of business income, [and] within business income, you can have very different elasticities between old-and-cold businesses,' entrepreneurial businesses, domestic versus foreign-owned businesses, and real-property-heavy businesses, Galle said.

Revenue-neutral tax reform 'is just another form of tax holiday,' Galle said, adding, 'It's locking in the fairly light burden that's resulting right now from a system that's been severely undermined by fairly abusive behavior in some cases.' He said that if Congress were to sign on to another revenue-neutral reform plan, 'it just tells industry that if they can undermine the next system and riddle that next system with holes, then they can clamor for another revenue-neutral deal.'"

A couple of quick comments in response to Galle's interesting points, which I didn't get a chance to say anything about at the session.  His first point about the elasticities of different types of income I agree with, except that it doesn't necessarily weigh against thinking that the passthrough model would be best if (counterfactually) it were feasible.  Rather, to me it suggests that, even when you are taxing individuals directly, the tax rate you want to apply may depend both on who it is and on what type of income it is.

His second point is a great one, and I think especially applicable to international taxation, in which the multinationals that have greatly reduced their tax burdens through aggressive planning might now be happy to lock in the end result by a different mechanism.  There is a legitimate issue of whether and how much their tax burdens, depending in part on elasticity, U.S. market power (or ability to coordinate effectively with other countries if this increases the collective market power that the cooperating governments can deploy).  But the fact that they have succeeded in lowering it so much does not establish that the right level is so low.  This is a problem for proponents of "burden-neutral" international tax reform, as much as for Congress if it wants to put on a 1986-style tax reform hat for the international area in particular.

Odds and ends

Today I head to Charlottesville, in order to present (tomorrow) the article on Piketty's Capital in the 21st Century that I recently coauthored with Joe Bankman, at the U Va Law School's law and economics seminar.  Joe and l will probably post the article on SSRN soon.  Later this week, when I'm back in NYC, I'll post my slides for the talk.

Bill Gates - yes, him - has posted a short piece responding to Piketty that, whether one agrees with it or not, is actually interesting and worth reading.  I may respond to it briefly on this blog when I get the chance.

Also,. Tax Notes published a short piece on Monday describing the conference at Boston College that I attended, addressing tax reform and entity taxation.  The piece's title, "Academics Dismiss Corporate Tax Reform Consensus as Superficial," accurately conveys not the point of view in my paper but what appeared to me to be a broader consensus in the room.  More on that to come, shortly as well.

Slides for my talk at the Boston College - Tax Analysts Conference on Reforming Entity Taxation

Last Friday, at the conference in Boston that I mentioned in my prior post, I presented a short (just under 10,000 words) paper entitled "Not So Fast? Evaluating the Case for 1986-Style Corporate Tax Reform."

Along with other papers from the conference, it should be appearing in Tax Notes within the next few weeks.  But you can click here to view a PDF version of the slides I used in presenting the paper.

Frontiers of quasi-tax fraud

Pleasant day at the Boston College - Tax Analysts conference yesterday; I'll post the slides from my talk in a couple of days, and perhaps post the paper on SSRN not long after that.  One nice thing about the "biz" is that you keep periodically seeing old friends and making new ones on the talks & conference circuit.

The conference had 3 sections.  The first, at which I spoke, was on corporate tax reform.  My paper expresses great skepticism about (though a hair short of outright opposition to) the mania among DC policymaker types these days for 1986-style corporate tax reform, via a cut in the rates that's financed by broadening the base but without otherwise significantly changing the existing US federal income tax system.  Although nothing like this view appears to be heard within the DC policymaker echo chambers, plenty of people at the conference were quite inclined to take a similar view.  It would be nice to think that I talked them into it, but in fact I got the sense that they already felt similarly about it.

The second session was on partnership taxation, and the third on international taxation.  Because I am so much more familiar with the latter, I found the former more eye-opening.

Talks and papers by Karen Burke, Andrea Monroe, and Greg Polsky suggested something that I gather is well-known in partnership tax circles, and that I must admit to finding a bit shocking.  Because (a) partnership tax rules are so complex that only a handful of people really understand them - perhaps a thousand across the entire country? - and (b) people at the IRS generally don't understand them, and (c) the audit rate for partnership tax returns is below 1%, compliance with partnership tax rules that are meant to block abusive tax planning that contradicts the actual tenor of the rules has pretty much completely collapsed.  Wildly unsupportable tax return positions, backed by the issuance of dishonest tax opinions or no tax opinions, are taken routinely, costing the US government billions of dollars per year.  These mainly involve (a) claiming capital gains treatment for what is clearly ordinary income under the existing rules (even taking as given the capital gains character of certain "carried interests" under existing law, (b) trumping up and specially allocating losses, without regard to economic substance type rules regarding transactions and allocations, and (c) similar game-playing to avoid income or gain recognition and/or assign it to the wrong people, including tax-indifferent parties.

The basic problem is that you have esoteric, complicated rules, understood by few and verging on never being audited, so that the lack of transparency means one can give dishonest and clearly false opinions that meet the standard of a "reporting position."  This is all taxpayers need if they are not publicly traded companies (which may need to meet "more likely than not" for accounting reasons).  And if you are a partnership expert, even if you understand the dishonesty of the opinions you are writing and signing, (a) there's no risk, (b) you wreck your career if you won't write these opinions and get large billings if you do, (c) everyone else is doing it, (d) the IRS isn't enforcing the rules anyway, so maybe you can persuade yourself that the rules don't actually mean what they clearly say?, and (e) even though the positions you endorse, at least to the "reporting position" level, are clearly wrong, they are not so wrong that you'd go to jail for tax fraud if it came to light.

Someone compared this to the Son-of-BOSS style scam tax shelter opinions of 10+ years ago, and said this means not much has really changed, despite people's congratulating themselves that the abusive tax shelter era is over.  So why couldn't people go to jail for this, as they did in Son-of-BOSS?  The answer is that, in Son-of-BOSS, they went to jail for fraudulently backdating documents, providing false information to the IRS, etc.  They didn't go to jail for the opinions themselves, which were ludicrously erroneous (I have read some, and even critiqued them as an expert witness in an administrative proceeding), because bad though the opinions were the author could pretend to just be stupid, wrong-headed, or dense - they weren't quite wrong enough to lead to a jail term, even if wrong enough (as many courts found) to suggest that clients could not in good faith rely on them.

This is certainly an area where a lot can be done.  And one of the panelists suggested that, whereas the IRS typically makes $10 in underpaid taxes per $1 spent on audits, here the yield would be far higher.  But it would take IRS resources, and might also risk complaint from members of Congress on behalf of well-connected taxpayers who have benefited from the quasi-fraud.

Another week, another conference

Later today I am flying to Boston to participate in a Boston College Law School - Tax Analysts conference (to be held tomorrow) on reforming entity taxation.  I will present a short (about 9,000 words) paper entitled "Not So Fast?  Evaluating the Case for 1986-Style Corporate Tax Reform," in which I argue that, essentially because the corporate tax is such a multifaceted mess, it's not incredibly clear how much we would improve things via the apparent consensus package in which the corporate rate would be lowered, and the revenue cost offset through income tax-style base-broadening, without significant broader tax reform.

I have slides for the talk that I will probably post early next week.  My article, along with all the rest for the conference, should be appearing in Tax Notes, perhaps some time in November.  I will also post the article on SSRN pre-publication, absent any objection from the conference organizers and Tax Analysts folks.

Next week I go to the University of Virginia Law School to present my paper (coauthored with Joe Bankman) responding to Piketty.  I'll post the slides afterwards - they and my remarks are different than those for the conference we just had at NYU Law School, although the paper is the same.

I'll also be presenting the Piketty paper in Vancouver at the end of October and again at USC in late November, and my paper on behavioral economics and retirement saving at the National Tax Association conference in Santa Fe in mid-November.

Article and video for last week's Piketty symposium at NYU

The NYU Law School website now has an article here describing last week's Piketty symposium.

It also contains video of all of the sessions. Scroll about three-quarters of the way down, and you can find the video for the talk that Joe Bankman and I gave.  Piketty's response to Wojciech Kopszuk and us is right below.

A couple of quotes from the article:

Stanford’s Joseph Bankman and NYU’s Daniel Shaviro were the day’s oxymoron: a comedic duo of welfarist tax scholars. But they were serious about their topic, praising Piketty’s critique of the undue moralizing of “ability” as an explanation for high-end wealth concentration and exploring the constitutionality of a national wealth tax in the United States. (Piketty’s response to the latter: “I realize that this is unconstitutional, but constitutions have been changed throughout history. That shouldn’t be the end of the discussion.”)

Later on Piketty is quoted, from a post-event interview with the article's writer, saying the following:

“By and large, the problem you run into when economists or law professors study inequality is that they’ve benefited from rising inequality. They’re not in the top 1 percent, but they’re surely in the top 2 or 3 percent. I’m not going to say that determines their entire view, but you can’t say it has no impact. That makes them generally positive about the US economy, how it rewards talent, and what they think of wages.”

Now now, not very nice of him, eh?  Actually, it's fine.  Indeed, I very much agree with what he says here, and so indicated in my talk.  Joe and I also make a similar point in our article.

UPDATE: Having watched the video of my remarks (listed under "Bankman," but I go first), I can only say: my gawd but I talk fast.  It's kind of different when you're doing it, rather than watching it.  But I think it can be followed aurally, and it's reasonably coherent because I wrote it out in advance.

Piketty's response to the Bankman-Shaviro paper

Points that he made in his comments included the following:

--While Bankman and I discuss the seeming gap between the book's approach and that of tax policy literatures such as optimal income taxation, his 2013 article, co-authored with Emmanuel Saez, addresses optimal capital taxation in light of the inequality issues.  But he sees only so much value in these sorts of mathematical workings out of underlying objectives.

--He sees a wealth tax as not a very radical idea given the widespread use, including by U.S. state and local governments, of real property taxes.  He doesn't see those taxes as meaningfully related to local amenities.  A real property tax becomes a wealth tax if you broaden it to all property and make it a tax on net rather than gross wealth.  But he seemed to agree that, given these differences, existing real property taxes are a very different instrument than wealth taxes.

--He favors moderate use of lots of different tax instruments, rather than primary reliance on just one.  E.g., given the shortcomings in practice of capital income taxes, inheritance taxes, and wealth taxes, why not have some of each rather than just one.  (David Gamage, who gave an NYU Tax Policy Colloquium paper this past year taking such a stance will no doubt be pleased to hear this.)

--As effectively a Rawlsian, his main normative concern is with the worst-off individuals, so he might not greatly object to extreme high-end inequality per se, except for its leading to capture of the political system by the wealthy, with the result that popular control is undermined and policy just serves their interests.

My remarks at the Piketty symposium today

This is a hard paper to present.  I’m tempted to say: Why don’t you all just spend 20 minutes looking through it yourself, and then we’d be happy to take questions.  But instead Joe [Bankman] and I will offer a few highlights.

The paper’s motivation is that we were struck by the large intellectual gap between Capital in the 21^st Century and a bunch of literatures that influence our work – for example, those on optimal income taxation, fundamental tax reform, and a lot of mainstream public economics.  Obviously, Thomas knows this literature well.  But he has written a popular book, and one that’s engaged in a very different sort of project than most of the literature.  Plus, he objects to certain of the literature’s standards and practices.

We were both bothered and stimulated by the disconnect.  We aim to adjudicate it to a degree, and to examine how each undermines or enriches the other.  But this makes the paper hard to present.  Just discussing any one aspect among many – say, the theory of lifecycle saving, or “ability” in the optimal income tax literature – could take 20 minutes all by itself.

So, what’s the bottom line?  Let’s start with the tax policy literature.  Logically and analytically, it does fine, at least granting assumptions that are useful and reasonable within particular realms.  And that’s important.

You know the old joke, told about Ford’s Theater in April 1865.  “Other than that, Mrs. Lincoln, how did you like the play?”  Well, I for one actually care a lot about the play.

But the book suggests that often important things have been missed, and simplifying assumptions treated as if they were entirely true.  For example, if you over-focus on lifecycle saving relative to bequests, or if you model utility as purely a function of own consumption – leaving declining marginal utility as the only welfare-based motivation for concern about inequality – then you may miss important things.

And suppose the book is correct in attributing rising high-end inequality mainly to the excess of r over g.  If it’s correct, high saving and/or high returns to saving and/or bequests have negative distributional externalities that are important yet have been ignored.

Word choice can tell you a lot.  Consider the terms “saving” as compared to “capital.”  The tax policy literature tends to talk about “saving,” which is a verbal noun, denoting the aftermath of a choice.  It uses “capital” mainly as an adjective – as in capital income, capital asset, or capital gains, though with the all-too-telling exception of “human capital.”  Thomas’ book, of course, is about “capital,” specifically other than human capital, which he objects to amalgamating with the rest.  And the book treats capital not just as a thing, but also as the marker for a social group, as in “capital versus labor.”  In the tax policy literature, by contrast, we typically discuss “high-earners versus low-earners.”

The savings literature is fundamentally ex ante and about individuals’ preferences and decisions.  Such a perspective is important, but it can lead to missing the forest for the trees, and also to unconscious normative identification with savers’ particular interests.  This is not a surprise, perhaps – prominent academics are often pretty well-heeled, even if not all the way at the top.

Capital in the 21^st Century, by contrast, is fundamentally ex post, emphasizing the measurement of realized outcomes.  But risk, among other underlying components, is hiding behind the scenes.  Thus, while the years 1815 to 1900 were a lot better for capital than 1914 to 1970, who knows how it would turn out in the “What If?” scenario where you could turn back the clock and let history unfold again.

An ex post approach is also valuable, but can result in amalgamating things that are distinct, and in ignoring important nuances that are relevant to choices between policy instruments.  Consider the tax policy literature’s decomposition of r into multiple elements, including the “normal” risk-free return that surely is below g, even if it’s more than, say, the 3-month rate for U.S. government bonds.  There’s also the risk element, including both the expected risk premium, if any, and the actual risky outcome.

Ex ante risk can affect tax incidence, since investors can adjust it in light of the tax regime.  In particular, the impact of a capital income tax on risk can be addressed by choosing investment positions in light of the tax treatment of gains and losses.  In effect, you can undo at least some of the automatic insurance that results from taxing winners more than losers.

Now consider the tax policy literature on gifts.  Henry Simons famously endorsed double-taxing them, based on their commonly representing consumption by both the donor and the donee.  The logic is strong, in terms of measuring individual welfare, whether or not you accept the conclusion.  Louis Kaplow helps explain why we might want to subsidize gifts, relative to Simons’ baseline, given the altruistic externality when a donor makes double consumption possible.  But you may want a high tax on gifts and bequests if they have big negative distributional externalities, and if you don’t assign much weight to high-end altruistic externalities.

I realize I’m being very summary and cursory here, especially for the students in the audience.  But again, the paper offers a fuller discussion.

One last set of points before I pass the baton to Joe.  At least in the U.S., as the book agrees, the main driver of rising high-end inequality in recent years has not been the relationship between r and g.  Instead, it has been rising wage inequality, suggesting a central role for human capital, or what we call “ability” with deliberate scare quotes.

Now, even in the 19^th Century literature that the book so delightfully deploys, we see evidence of ability’s important role.  Is Pere Goriot about a rentier society?  Well, certainly yes to a degree.  But it’s also one of many classic 19^th century novels that focuses on an adventurer or arriviste who aims at the highest social heights despite starting out with very little.  Yes, Rastignac accepts Vautrin’s advice against wasting his time with law studies – you see, law firm hiring was really bad back then – but that’s just because the real action was in the salons and opera houses.

I wish I could discuss at length our paper’s twentieth century updating of the rentiers versus adventurers literature to include P.G. Wodehouse and Bertie Wooster.  Bertie, of course, is the rentier par excellence, turned object of mockery, from the period of the Great Easing.  Surely his tribulations are more evocative than any economic study in showing what had and hadn’t happened to rentiers since the turn of the century.  But I suppose I should move on.

We like the book’s critique of self-satisfied moralizing about “ability.”  High-earners often like to think that it means IQ or character or honest toil or helping humanity.  But the ability to generate high earnings is purely about the relationship between a given individual and the environment in which she happens to find herself.  If enough of the people in a society are vicious racists, then having white skin may increase one’s potential earnings.  Math skills help more in some environments, resistance to dysentery in others.

There’s an analogy to evolution.  No set of genes is fit in the abstract – it depends on the environment.  And to moralize evolution’s winners would be silly.  Now, it’s true that economic competition with perfect markets and the invisible hand is somewhat more benign than nature red in tooth and claw.  But that merely supports an efficiency argument against too much downward redistribution.  And even that argument depends on the relationship between high-end wages and marginal social productivity.

We agree with Thomas that high-end wages often don’t reflect marginal social productivity.  But while the book attributes this mainly to corporate governance problems, the really huge salaries of recent years have often been earned at arm’s length – whether we’re talking about hedge fund managers, or other entrepreneurial free agents in the financial sector, or the founders of a wildly successful new business venture.  The gap between high-end wages and social value created is often less about corporate governance problems than about the distinction between marginal private productivity and marginal social productivity, as in the case of rent-seeking and heads-we-win, tails-you-lose bets in the financial sector.

Okay, over to Joe.

Day-long workshop with Thomas Piketty at NYU

Just an hour ago here at NYU, we completed this year's NYU-UCLA tax policy symposium, featuring Thomas Piketty and his best-selling book Capital in the Twenty-First Century.  It felt like a success, in keeping with our high expectations.

All five of the papers, and a response by Piketty, will be featured in the Tax Law Review next year.  The first, by Wojciech Kopczuk, raised issues that have been prominent in economists’ responses to Piketty, regarding such issues as the uncertainty of whether wealth inequality has increased as much as income inequality and the difficulty of projecting future trends.

My paper, with Joe Bankman, discussed what we see as the gap between the standard tax policy literature (ranging from optimal income taxation, to welfare economics, to the fundamental tax literature, to various sectors of public economics) and the analysis in the book, and what light this gap might shed on each.  I will post my portion of our joint talk shortly, since I wrote it out in advance.

Next came a paper by Gregory Davis, discussing English data from as far back as the 1200s (!) that seem to conflict with the inheritance story that Piketty tells.  Then, a political science paper by Suzanne Mettler discussing why the U.S. political system has responded so disparately over time to redistributive policy aims.  Last, a paper by Liam Murphy discussing alternative philosophical grounds for objecting (or not) to high-end inequality, and grouping Piketty with Rawls and Dworkin, the latter for his embrace of meritocracy to the extent of thinking that people who freely choose well “deserve” to do better than those who freely choose poorly. (Hence a view of rentiers as less deserving than the self-made rich, a distinction that I wouldn't personally embrace absent consequentialist reasons for the distinction.)

Large and distinguished audience even in the afternoon, broad-based participation, full engagement from a very well-known author who chose to spend the day with us, truly inter-disciplinary dialogue.  So the thing went well.

Three interesting but totally different articles in today's Times

An article on the decision not to bail out Lehman Brothers (suggesting that it was in some ways arbitrary, ill-thought-out, deceptively presented, and quite political) builds on recent pieces discussing AIG et al (with no haircut whatsoever for Goldman Sachs) that bring to mind the dual nature of the 2008 rescues.  On the one hand, the Fed's interventions were necessary to prevent true global macroeconomic calamity, well beyond the plenty-bad-enough consequences that we nonetheless experienced, and yet they were politically attacked in a way that could make doing the right thing harder in the future.  (Then again, perhaps the political costs of rescue do help to ease, if only slightly, the moral hazard problems caused by knowing that one is too big or central to fail.)  But on the other hand, they reinforce my sense that in some ways the rescuers' choices really can't withstand much scrutiny, given how they arbitrarily played favorites and reflected the undue political influence of players such as Goldman.

On  a totally separate theme, an article on the European Commission's preliminary finding that Ireland gave Apple tax advantages that amounted to illegal state aid, and may be ordered to collect billions of dollars in back taxes that the Irish government, with an eye to future freedom of action in making deals with companies, may not even want.

Finally, for comic relief, Mitt Romney keeps bringing to mind the song, "How Can I Miss You if You Won't Go Away?"

Book review for Fixing U.S. International Taxation

Christiana Panayi of the Queen Mary University in London has written a book review of my recently published book Fixing U.S. International Taxation.  It should be appearing shortly in the British Tax Review.  The text of the review goes something like this:

"Professor Daniel Shaviro is a well-known and widely published professor of international taxation at New York University. As the title suggests, in this book Shaviro advances several proposals aimed at improving US international tax law. Broadly, his main proposal is to set the average effective rate on foreign-source income of US multinationals somewhere below the statutory corporate rate and above zero. He also proposes to eliminate deferral advantages and to abolish the foreign tax credit, replacing it with a deduction for foreign taxes.

"Shaviro’s writing is clear and highly thought-provoking. In spite of the complexities of the issues in place, the author manages to offer a concise and comprehensible overview of the problems plaguing the current discourse on reform of US international tax law.

"There are six chapters in this 200 page book.

"Chapter one is an introductory chapter. Here, Shaviro identifies the problems with the current rules of US international tax law, and reviews the academic debate on these problems. He sets out “the core dilemmas in international tax policy” and “the defects in prevailing modes of analysis”, before laying down the parameters for his proposals and the main policy implications.

"All of these issues are examined in greater detail in the following chapters.

"Chapters two and three delve into the basics of the US international tax regime. The author focuses on what he considers to be the main building blocks of this regime, namely the rules for determining corporate residence, some source rules such as transfer pricing, the rules on foreign tax credits and the rules on deferral and Subpart F. Chapter three revisits these building blocks, but the focus is on the main incentives and tax planning opportunities that the existing rules create and the possible impact of marginal changes to these rules.

"Chapter four explores the global welfare perspective on US international tax policy. The author reaches the conclusion that global welfare analysis plays a small role, notwithstanding its normative appeal. In fact, in Shaviro’s view, prevailing international tax practices are not greatly influenced by global welfare considerations. In any case, the author argues that the potential gains that are available through global cooperation are much more limited than in the field of international trade. In this chapter, the author goes on to reject what he calls the global “alphabet

soup” and the single-bullet approach of achieving global welfare. The alphabet soup is a reference to the acronyms used for capital export neutrality (CEN), capital import neutrality (CIN), national neutrality (NN), and, more recently, capital ownership neutrality (CON), national ownership neutrality (NON) and global portfolio neutrality (GPN). All of these concepts are analysed at some length. Shaviro concludes that  “[w]hile global welfare considerations may be important when unilateral cooperation is sufficiently feasible, in the main countries must and will make international tax policy choices in a largely unilateral setting”.

"This idea, which he describes as the unilateral national welfare perspective, is further elaborated in Chapter five, wherein the basic elements of this perspective are analysed. Shaviro argues that foreign-sourced income should be subject to a lower rate than is currently the case, but the base should be broadened. Both deferral and foreign tax credits should be eliminated.

"On the basis of these conclusions, Shaviro sets out in Chapter six the practical steps that should be taken to improve US international tax policy. In addition to the above proposals, Shaviro makes further interesting suggestions. Inter alia, he argues that the concept of US corporate residence should include companies that are incorporated abroad but have US headquarters. He also argues for the application of formulary approach to allocating interest expenses.

"Interestingly, though rather briefly, at the end of this chapter, Shaviro touches on the topic of transfer pricing versus formulary apportionment, and emphasises the importance of 'think[ing] about the proper choice of factors' under formulary apportionment. He suggests the use of all three traditional factors (sales, employees and assets), but would give extra weight to the sales factor.

"This book offers an excellent analysis of the topic and it is especially helpful to non-US tax lawyers. One of its main strengths is that while it shows a wealth of knowledge of public finance, the writing is plain and understandable to those not well versed with public economics. Apart from the bold—but practical—suggestions made for reform, the book also identifies issues that need further examination. It provides an excellent benchmark for further research to be undertaken.

"Rather humbly, Shaviro closes the book 'with the hope that you, at least—the current reader—have found new ideas here that will stimulate further reflection'. Most open-minded readers will certainly do so."

NYU-UCLA conference on Piketty's Capital in the Twenty-First Century

The conference is this Friday, 9 am - 4 pm, alas by invitation only due to space limitations (but we might be able to fit in a few more people), at NYU Law School.  Papers by Liam Murphy (philosophy), Suzanne Mettler (political science), Gregory Clark (economic history), Wojciech Kopsczuk (economics), and myself with Joe Bankman (law).  Piketty to respond verbally to all papers.

Papers are or will be available to those registered for the conference, but not to be posted just yet.  I am reasonably happy with Joe's and my paper, but obviously we will see how others respond.

A short comment on baseball

A now-mediocre player, on a now-mediocre team, gets a walk-off hit at home (apparently, his first such in 7 years) in a meaningless game. Fans go crazy. But living in the past turns sour at some point (as we Met fans well know)..

Another long silence ...

While on sabbatical, I've been traveling again, mixed personal and work.  Recent locales: Paris, Giverny, Vienna, Budapest, now Vienna again, all fantastic places in very different ways.  I'll be back in NYC on Wednesday.

While away, I've noticed a disagreement about U.S. corporate inversions among 2 friends, Ed Kleinbard at USC Law School and Kim Blanchard at Weil Gotschal.  Ed's views on inversions are well-known, and I generally agree with them (although his approach and mine to U.S. international tax issues certainly differ in some respects - e.g., I am more hostile to the foreign tax credit and more leery about how far we can push residence-based WW taxation of U.S. companies even in the short run).

Kim had a recent letter to Tax Notes disagreeing with Ed (who no doubt will be responding very soon).  I read her piece (from afar) as suggesting that Ed views the new wave of inversions as essentially sham transactions that are purely motivated by tax avoidance, whereas clearly some of them may have significant non-tax effects that may even be sought-after and intended independently of the tax benefits.  E.g., if a big U.S. company merges with a big non-U.S. company, then even if they put the latter company on top for tax reasons, and even if the tax benefits of ceasing to have a U.S. company at the very top are appealing, then the deal may be far from a pure paper-shuffling sham.

I don't think that one needs sham transactions to have the concerns about inversions that Ed has been expressing.  The need to have a real and not wholly insignificant merger, in order to get the tax benefits of an inversion, does indeed provide a potential friction that can reduce the frequency of inversions relative to the scenario where it's purely a paper play, but that doesn't prevent one from having concerns about the effects on the U.S. tax base of permitting them to go forward in the face of their often having significant tax benefits that will increase their frequency.

I would tend to favor treating even economically significant inversions as triggering an automatic deemed repatriation ending deferral (at least for a significant % of foreign earnings) for the U.S. company's CFCs (even if they remain such), possibly with deferred payment that bears an interest rate for the deferral.  I also think we need to find our way towards what I call more residence-neutral rules for determining the source of income earned by companies that are active in the U.S. as well as abroad, i.e., addressing the extra opportunities to strip income out of the U.S. that may arise for foreign-headed multinationals.  But in the interim I'd regard inversions as a problem even when they are "real" transactions with significant non-tax effects.

Allergies

... are the body's version of McCarthyism.  The immune system can't find enough real enemies, so it invents fake ones and makes everything worse.

Explaining August's nearly unbroken radio silence

Another month almost gone - the last in my favorite three-month stretch of the year (aka the true, as opposed to purely astronomical or even meteorological, summer) - and I have scarcely posted lately.  Thus, for example, I have yet to mention here the Burger King inversion story, although over the last couple of days I have been discussing it with members of the press.

I've been traveling for much of the month, first on vacation and then, as a parent, to help deliver a rising freshman to his college in southern California.  Two side benefits that I got from the latter trip were as follows.

First, I was able to fit in a trip to the Nixon Museum in Yorba Linda.  As a long-time Nixon aficionado, this was a treat indeed.  (I realize that no one under 50 can truly appreciate Nixon's astounding comic, dramatic, and literary greatness as a better-than-fictional character.)

Nixon's memoirs begin with the line "I was born in the house my father built."  Speak of great openings, although I never tried to read the rest as I gather it falls short of his most personally revealing work, "Six Crises."  But the house his father built is actually there at the library, at its original site, and I got to step inside.  Also at the Nixon Library is the famous helicopter from which he did his characteristic V-for-Victory pose before boarding to fly away from the White House after he resigned.  Other features include his and Pat's graves, a reconstruction of the White House East Room, and a fairly balanced review of his career.  (The National Archives now runs the place, helping to account for the balance.)

Rather a melancholic site, however, especially in light of Nixon's grandiose ambitions, along with the certainty that he must have felt, even as late as March 1973, that he had fully achieved them.  His ultimate disgrace not only is recounted there, but affects everything about the site.  Not for him the giant Pharaonic monument that I am sure he wanted.  For one thing, the money evidently wasn't there post-disgrace.  Instead, it is quite modest.  Presumably to help make ends meet, they have to rent out the place for weddings, real estate seminars, and the like.  You don't see that sort of thing in Napoleon's Invalides.

Biggest surprise: We got there just after it opened, and the parking lot was completely full, requiring us to park in the Quaker church lot (I think it was) across the street.  I had been joking all the way there about the giant lines we would face, and then was startled to see this evidently confirmed.  But not so fast.  It turned out that the reason for the full parking lot was a seminar offering pointers to real estate salesman.

Best comment: Standing just outside the main building during a tour, my wife and I saw a little field mouse race down a corner of the sidewalk and disappear into a small hole on the lawn.  She noted that seeing a rat on the grounds would have been more appropriate still.

On to the second side benefit of the trip.  It gave me a chance to read Balzac's Pere Goriot, discussed extensively by Thomas Piketty in Capital in the Twenty-First Century and to feature as well in the review that I am co-authoring with Joe Bankman for the NYU-UCLA Tax Policy Symposium on (and with) Piketty that will take place at NYU on October 3.  (Side-comment: We realized that this was Yom Kippur Eve when we scheduled the event, but it was the only mutually convenient date available).

I had previously read Pere Goriot and several other works by Balzac, back in the 1970s, when it in particular had made a strong impression although I didn't entirely like it, but hadn't been through it since.  Lots of boiling melodrama, long declamatory speeches, etc.  "What will Paris say?"  I must admit that I continue to strongly prefer two roughly contemporary French novels that I regard as similar in genre (i.e., bildungsroman featuring an upwardly mobile adventurer): Stendhal's The Red and the Black, which was published five years earlier, and Flaubert's Sentimental Education, which came out more than 30 years later.  But Balzac certainly has a rude and highly theatrical gusto, and if unfashionably unjaded he is certainly plenty cynical.

In our NYU-UCLA commentary, we will be quibbling a bit with how Piketty interprets Pere Goriot as a social document. But I'll save that for later - with luck we may reach the stage of posting the full piece on SSRN within a couple of weeks or even less.

The Obama Administration's move towards greater unilateral executive action

Today's New York Times notes "Mr. Obama's increasingly expansive appetite for the use of unilateral action on issues including immigration, tax policy, and gay rights," which it says has "emboldened activists and businesses to flock to the administration with their policy wish lists."

Esteemed colleagues at other law schools have been playing a prominent role in urging unilateral executive action to address significant tax policy issues that typically, in the past, would have been handled through legislation.  For example,  Steve Shay has written about what the Administration can do unilaterally through its regulatory levers about corporate inversions. Victor Fleischer argues that the Treasury's regulatory authority would permit it to address unilaterally, not just inversions (as to which he says "[t]here is no question that Professor Shay gets the law right" concerning the Treasury's regulatory powers), but also the carried interest loophole for hedge fund managers.

As I was quoted as saying in Fleischer's carried interest write-up, it should be no surprise that the Treasury is thinking in these terms, even though traditionally it would not have acted to change policies that customary practice assigns to the legislative process.  "[W]hen the legislative process is as broken as it has become today ... 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."

Would it be better if the Obama Administration were more circumspect, even assuming (in keeping with my own views) that Shay and Fleischer are right in tax policy terms?  Definitely yes in a better, but counter-factual, state of the world.  But when the legislative process has so completely broken down, the question changes to that of whether one is sufficiently incrementally worsening things at the institutional level to outweigh the policy benefits.

In other words, suppose the Obama Administration changes policies in these two areas but then the next Republican Administration reverses both sets of regulatory changes, and also pushes through lots of stuff that either comity or blind acceptance of then-prevailing practice discouraged the Bush Administration from doing.  Then the next Democratic Administration flips things back the other way, and so on.  Meanwhile, as the Times article notes, special deals and favors start being meted out through regulatory changes, without even the admittedly limited scrutiny that such things get when done legislatively.

This does not sound like a great state of the world.  But I think it is where we are headed in any event, and under administrations from both parties.  So again, I see the principled question for the Obama Administration as whether it is significantly aggravating / speeding up this process if it takes an aggressive stand during its last 2-plus years in office.

I tend to think not, on the ground that we are headed there with all due speed anyway, and that the next Republican Administration will not be greatly discouraged from doing such things, where it wants to, by Obama Administration forbearance.  Think of filibusters, which minorities always had the power to do, but generally accepted as subject to limitations of convention that have by now almost wholly eroded.  In that type of environment, honoring conventional limitations on the exercise of one's legal rights or powers makes a lot less sense than otherwise.  It's a prisoner's dilemma scenario in which everyone else is defecting anyway.

UPDATE: Jonathan Chait provides a well-chosen hypothetical for critiquing the view that I take above.  In response to discretionary non-enforcement of legal rules - as distinct from issuing new regulations - he argues that, if President Obama can, say, decide not to enforce particular immigration laws, then what is to prevent, say, a President Romney from announcing that he would stop all enforcement actions against the non-payment of estate taxes?

The example is not legally on point for my discussion above, since discretionary non-enforcement of a law on the books is distinct from revising administrative regulations that permissibly define applicable law.  But the same concern about escalating breakdown of accepted norms that we rely on in practice is surely germane.  And the conclusion might either be that one should tread a bit lightly after all, or that we are in big trouble whether one side unilaterally does so or not, given the accelerating breakdown of norms that, as Chait notes, are no less crucial than our express constitutional and legal structure to "secur[ing] our republic."

Forthcoming conference at NYU Law School on Piketty's Capital in the Twenty-First Century

Here is the text of an announcement that has just been sent out.  The event has been in the works for some months now, but I didn't think I should mention it here until it officially went public.

I will mention further details in due course.

Fourth Annual NYU/UCLA Tax Policy Symposium:

Thomas Piketty’s Capital in the Twenty-First Century

NYU School of Law

Greenberg Lounge (40 Washington Square South)

Friday, October 3, 2014, 9:00 AM to 4:00 PM

On Friday, October 3^rd, at NYU School of Law, the Fourth Annual NYU/UCLA Tax Policy Symposium will address Thomas Piketty’s groundbreaking and best-selling book, Capital in the Twenty-First Century.  The day-long event will consist of five panels featuring leading scholars who will analyze the book from economic, legal, historical, political science and philosophical perspectives.  Thomas Piketty will participate in the discussion and deliver responses to each of the papers presented.

Confirmed panels and paper presentations are:

·         Wojciech Kopczuk, Columbia University; moderated by David Kamin, NYU School of Law

·         Joseph Bankman, Stanford Law School, and Daniel Shaviro, NYU School of Law; moderated by Eric Zolt, UCLA School of Law

·         Gregory Clark, UC-Davis; moderated by Joshua Blank, NYU School of Law

·         Suzanne Mettler, Cornell; moderated by Jason Oh, UCLA School of Law

·         Liam Murphy, NYU School of Law; moderated by Kirk Stark, UCLA School of Law

All papers will be published in the Tax Law Review in 2015.

Due to the anticipated high interest in this event, participation will be limited to NYU Law and UCLA School of Law faculty, students and invited guests.  An invitation and registration information will be e-mailed shortly.

The NYU/UCLA Tax Policy Symposium hosted by NYU School of Law and UCLA School of Law is a joint annual conference focusing on tax policy issues from both a legal and economic perspective.  It provides a forum in which leading scholars, policymakers, and practitioners can analyze complex tax policy questions and options for reform, and brings together members of both NYU Law’s tax law faculty and UCLA Law’s business law and policy program.  It builds on tax policy symposia that have historically been hosted by the Tax Law Review, the premier law school journal for tax policy scholarship, and the UCLA Colloquium on Tax Policy and Public Finance, started in 2004.  Financial support for this conference is provided by NYU School of Law and the Lowell Milken Institute of Business Law and Policy, UCLA School of Law.

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.