NYU Tax Policy Colloquium, week 11: Lawrence Zelenak's For Better and Worse: The Differing Income Tax Treatments of Marriage at Different Income Levels

Yesterday, Larry Zelenak to present the above paper, which reviews a familiar issue in light of the rise in recent decades of unmarried cohabitation.  In my view, the main significance for marriage tax issues that is raised by unmarried cohabitation is the following.  I view households, involving people (including couples) who in some way pool and internally allocate resources owned by different members, as an important category in distribution policy.  The rise of unmarried cohabitation reduces the tax system's ability to discern "true" couples based on looking at marriage.  This complicates using household information.

While the paper is basically consistent with this take (also addressed, for example, by Anne Alstott here), it places more relative emphasis than I might on the particular horizontal comparison between cohabiting couples that are basically the same, for purposes relevant to the fiscal system, except that some are married and others not.  That comparison matters, on both efficiency and equity grounds, but the broader couples versus non-couples comparisons are as important or even more so.

The following is adapted from an outline that I prepared for my part of the discussion at the session yesterday, fleshed out with some of my thoughts on the particular topics.

1.  The case for using household-based information
     (a) Couples status versus marital status - Same point as above; while one could certainly argue that one's being married or not is relevant to how one is treated by the fiscal system, the central point for me is that understanding people's household circumstances is important.
     (b) What are households and why do they matter? - In general, for people who are not in the same household, the control, use, or benefit from particular resources depends mainly on legal title.  If I win the lottery, then, even if I buy the gang a round of drinks (for some reason, I have here "It's Always Sunny in Philadelphia" in the back of my mind), basically the beneficiary is me, family members aside - not, say, mere roommates even if I were still in a stage of life where I had them. Even leaving aside children, parents, and other relations, there are certain relationships, typically including but not limited to married couples, in which legal title as between particular individuals may matter less than the household's norms and rules for using the collective resources.  Consider a couple with a joint bank account and/or general sharing of expenses in some way.  BTW, there does NOT have to be a claim here of equal sharing - just that legal title generally matters less than internal household processes for determining how the overall resources of members should be used.
     Grant this, and the fiscal system cannot meaningfully address my current economic circumstances, such as based on my income, without also considering (a) income of other household members, (b) consumption needs and productive capacities of other household members, including in non-market settings such as providing childcare, and (c) the intra-household incidence problem.  On this one, suppose we had separate individual filing and that this caused high-income spouses to pay more tax while their low-income partners paid less.  Would this redistribute within the household?  Not necessarily - it would depend on how the household actually "works" in allocating its after-tax resources.
     (c) What's the issue? - Not just separate versus joint returns, but using vs. not using, as well as different ways of using, household information.  For example, having joint returns in which the rate bracket dollar amounts are doubled, relative to those on separate individual returns, can be equivalent to having separate individual returns but with income-splitting (i.e., my spouse and I are each presumed to have earned half of our combined income).

2.  Limited relevance of Boris Bittker's famous "trilemma"
     a.  Overview - Bittker in 1977 famously set forth the "trilemma" - one can't simultaneously have progressive rates, equal taxation of same-income couples whether married or not, and marriage neutrality.
     Here's a simple illustration of the trilemma.  Say we have a zero rate on the first $50,000 of income, and a 50% rate above that.  Ann and Bob earn $50,000 each, whereas Carol and Dave's earnings are $100,000 / zero.  With separate returns and no other adjustments, Carol and Dave will pay $25,000 more in tax than Ann and Bob.  With joint returns, they'll pay the same amount - just how much depends on where the joint return zero bracket amount ends - but that necessarily means that there will either be a marriage penalty to Ann and Bob, a marriage bonus to Carol and Dave, or else some combination of each.
    I have great respect and admiration for Bittker, who showed his mettle once again by writing something in 1977 that people are still talking about.  But I wouldn't make it as central to the analysis today as it sometimes still is.
     b.  Is it really a trilemma? - True, you need progressive rates for the story to get off the ground.  But since we will probably decide separately whether to have progressive rates - including those, outside the income tax, that arise at the low end of the income spectrum from phasing out safety-net type benefits - it's really a dilemma, same taxation of same-income couples versus marriage neutrality, that's premised on having progressive rates. So let's consider the relevance of those two competing considerations.
     c.  Same taxation of same-income couples - Premised on household pooling and our difficulty both in observing the actual internal splits and in targeting tax incidence as between household members, this objective has some value, conditioned on one very important modification.  There is a huge difference between a one-earner couple and a two-earner couple - say, with children, to make it especially stark - that are earning the same overall income.  The one-earner couple has extra labor services available, outside the formal job market, from the one who doesn't have a market job.  That individual may have decided not to work in the labor market, as opposed to lacking opportunities.  Treating the two couples as the same both ignores the real difference in their resources and can lead to strongly discouraging secondary earner labor supply.  Hence the powerful case for, at a minimum, secondary earner deductions or credits, childcare expense deductions or credits, etc.
     d.  Marriage or couples neutrality - Even without moralizing, there can be positive externalities to these relationships, e.g., the insurance benefit if both have resources and one could thus help the other upon job loss, sickness, etc.  This may benefit them both, but is also a positive externality insofar as society would otherwise either have to give more $$ to the hard-luck member of the couple, or would regret that individual's bad luck.
     Another, perhaps more obvious, issue in the externalities realm goes to the effect on children.  While I gather the empirical literature suggests that having two parents is associated with the best outcomes for children, I don't happen to know to what extent this literature has dealt with, say, issues of correlation versus causation.  E.g., suppose the benefit wasn't from having two parents, so much as from having parents who succeeded in keeping their relationship going, reflecting their underlying "types."
    Note also that it is surely not true that all marriages, even with children, ought to be kept together.  There are some out there as to which it's best for all concerned if they end, and overly tax-discouraging this could be bad.
     e.  The missing issue: secondary earner labor supply - Discussed above, but this is a really central issue that one must keep in mind and that the trilemma or dilemma leaves out.  It's an issue of both efficiency and distribution, with lots of other important implications mixed in as well (e.g., concerning the broader evolution of gender roles and power relationships).

3.  The rise of cohabitation outside marriage raises accuracy concerns, more (in my view) than the particular fairness concerns that the paper emphasizes
    Again, a central argument of the paper is that the rise of unmarried cohabitation makes marriage penalties especially unfair, since married and unmarried cohabitants may in substance be so much alike.  I might instead view the greater avoidability of marriage penalties (since one can now more easily cohabit without incurring them) as reducing fairness concerns about marriage penalties.  This reflects my seeing the issue more in terms of the greater difficulty of correctly observing household status that I do indeed view as at least potentially normatively relevant.

4.  The paper's case for equalizing marriage penalties and bonuses
    One of the paper's main arguments is that, assuming the system otherwise remains mainly as it is today, one should try to equalize the maximum marriage penalty and marriage bonus at a particular income level.  I think there's something to this, and I'd spell it out as follows: Suppose - a crucial prerequisite - that one normatively values marriage neutrality at a given income threshold.  And suppose that rising departures from it have efficiency and/or equity costs that rise at more than a linear rate.  E.g., just for a convenient illustration that's admittedly a bit artificial, suppose that doubling a marriage penalty or bonus makes it, in some sense, four times as bad.  Then if one of the marriage penalty or bonus was $X, and the other was $3X, shifting things around so both were $2X would reduce the combined social cost of the two errors.  But again, this presupposes both using marriage neutrality as one's baseline, and not having the conclusion disrupted by other considerations.

5.  Marriage penalties versus bonuses towards the lower end of the income distribution
    The paper shows how huge, relative to income, marriage penalties can be towards the lower end of the income distribution, by reason of the phaseout of the earned income tax credit.  Surely these marriage penalties are too big, all things considered, although my preferred solution wouldn't be to shrink the EITC.  The paper further argues that, given the evidence suggesting that children do better in two-parent families, we should have if anything marriage bonuses, not penalties, in this range.
    While this argument has some force, under its premises, there is also another side to it.  Suppose that children in two-parent households fare better than those in one-parent households.  If we respond (presumably for incentive reasons) by giving the former a bonus, we have an anti-insurance system in place.  That is, we reward those who are already better-off by reason of their being better-off.
    The EITC, of course, already has this character insofar as someone who gets a job gets more money out of it than someone who tries but fails to get a job (assuming the former remains short of the cutoff).  But while improving incentives is good, so is providing insurance rather than anti-insurance.  These objectives are in conflict, necessitating tradeoffs, if we provide marriage bonuses at the low end because we believe kids do better in two-parent households.

NYU Tax Policy Colloquium, week 10: Lillian Mills' Managerial Characteristics and Corporate Taxes

Yesterday at the colloquium, Lillian Mills presented the above article (coauthored with Kelvin Law), finding that among publicly traded companies, those whose CEOs have prior military experience engage in less aggressive tax planning – e.g., involving less use of tax havens and leading them to have smaller reserves for uncertain tax benefits (most likely due to differences in tax planning, not in willingness to reserve for uncertainty).  Due to this difference, companies with former-military CEOs pay higher effective tax rates than peer companies that otherwise are similar but don’t have former-military CEOs.

If correlation is causation running from the CEO’s background to the company, this would mean that the former-military CEOs are inducing over-payment of tax – relative to that what they could actually get away with, even if it reflects super-aggressive transactions – of an estimated $1M to $2M per year.  However, there appear to be offsetting benefits to the companies, relating to what may well be behaviorally-linked less aggressive behavior in other realms.  For example, the companies with former-military CEOs are less likely to face class action lawsuits, announce financial restatements, and backdate their stock options.

The paper’s current form invites one to speculate about military culture or personality types as causal factors.  For example, does military training make one more ethical about reporting matters?  More risk-averse?  Or are people with these attributes more likely to serve in the military, even going back to the era of the U.S. military draft?  Of note, the great majority of the former-military CEOs whose tenures contributed to the data set were not, say, lifers who retired as generals and then went to high-level private sector jobs (a la Alexander Haig ending up at United Technologies), but rather people who served for a few years in their 20s, including during wartime via the draft, and then started private-sector careers that culminated in their making CEO decades later.

Here are a few of the main thoughts that I had with respect to the paper:

1) While causal questions are important and interesting for their own sake, they don’t necessarily matter much to many of the main conclusions that one would draw from the study.  Thus, consider the choice between treatment and selection to explain former-military CEOs having different values, if these are viewed as explaining the finding.  In other words, did the military change them, or did certain types of people find the military?  (This could have happened even during the draft era, given that it wasn’t wholly unavoidable and that people who enlisted voluntarily as officers may have been the chief future-CEO pool.)  Likewise, suppose we are choosing between the scenario where the CEO is the true cause, and that where Board of Directors are more likely to choose former-military CEOs when they favor the strategy (merely to be implemented by the CEO) of being less aggressive across the spectrum.

While all this is worth knowing, if one can figure it out, it might not matter enormously either for the tax policy payoff, or for what it tells about the strategic setting in which companies (whether via the Board or the CEO) might be deciding about aggressiveness across the board.

2) Again, the paper finds that companies with former-military CEOs pay higher effective tax rates (ETRs), all else equal.  The ETR is a fraction.  The numerator is taxes paid worldwide (using two alternative measures: cash taxes and GAAP taxes).  The denominator is worldwide reported earnings.  Thus, companies with former-military CEOs would not need to pay more tax than other companies in order to have higher ETRs.  Having lower reported earnings due to lesser accounting aggressiveness, while doing the same tax planning, would have this effect as well.

The finding that these companies make less use of tax havens supports concluding that the numerator is at least part of the story.  I also agree that, in context, their having lower accounting reserves for aggressive tax positions probably reflects lesser tax aggressiveness, rather than greater accounting aggressiveness in determining what is a sufficiently uncertain position to require a reserve.  But the issue of the denominator might lower the estimated tax cost associated with former-military CEOs.

3) There is prior work finding both “technological” and “cultural” explanations for correlation between aggressive tax planning and other bad stuff, such as accounting treatment that blows up or looting of the company by rogue executives.  An example of a technological explanation is the view that, once you can use tax planning as the excuse for creating a byzantine corporate structure with multiple “special purpose entities” that no one but the insiders understands, looting becomes easier.  While the evidence in this paper for a cultural explanation does not rule out the simultaneous importance of technological factors, it adds to the case for concluding that those factors can’t do the job all by themselves.  A great example, from an earlier paper by other authors that this one mentions, is evidence that, in Russia, companies whose executives paid bribes to avoid traffic tickets suffered from greater looting by insiders than randomly selected Russian companies.

4) Presumably, an across-the-board cultural trait of lesser aggressiveness, and hence greater trustworthiness where CEO or company behavior cannot be perfectly observed, might have greater value in some types of industries than others.  One thing that seems clear, from anecdotal evidence that the paper mentions, that selling to consumers isn’t the key factor.  If it were, then companies like Apple might be a lot more reluctant than they actually are to be seen as engaged in aggressive tax planning.  Suppose that Apple’s international tax machinations caused people to think: “Wow, they’re so sneaky that I bet the iPhone 6 has undisclosed defects.”  But that evidently is not the case.

5) One obvious policy implication is that government regulatory agencies – and not just the IRS – should look more broadly for evidence of aggressive behavior in deciding whom to audit or monitor the most.  Perhaps a company that cheats on OSHA is more likely to need a tax audit, and one with aggressive tax shelters is more likely to cheat on OSHA.  I suppose the IRS might also incorporate former-military CEOs into its thinking about where to target its marginal auditing efforts, but subject (obviously) to the concern that companies would pick former-military CEOs for this reason when they were planning to get more aggressive.

The paper has no direct or first-order bearing on the question of what we should think about the social effects or the moral defensibility of more aggressive versus less aggressive tax planning.  The point, rather, is that aggressive tax planning may be associated in practice with other types of aggressiveness that may have downsides for the companies engaging in them, in particular by reason of agency costs.

But here is a small, second-order point.  Suppose a company is choosing at the margin between Strategy A (greater aggressiveness that reduces tax liability but imposes other costs) and Strategy B (lesser aggressiveness that results in tax “over-payment” relative to the maximally aggressive scenario, but that has collateral benefits).  Socially speaking, we may want to push companies towards Strategy B.  After all, taxes paid are socially a transfer between pockets, but other aggressiveness may involve broader social costs.  This might marginally induce one to favor more intensive auditing of aggressive companies than would have been optimal (given that auditing is costly) in the absence of collateral effects on other aggressiveness.

Maybe it's time to let it go

This post contains the story of a grievance that I forgot for 40 years, but that recently has recurred to me, even without the help of a madeleine.  It's funny to me now, like something out of a novel involving a character who is remote from my present self, but I can also relive the feelings that I had at the time.

As background, I have recently completed a first draft of an article ("The Mapmaker's Dilemma in Assessing High-End Inequality") which I'll be presenting at a couple of conferences in May.  It's adapted and extracted from chapter 2 of my book-in-progress (when I have the time, which won't be for a couple of months), which currently bears the working title: "Enviers, Rentiers, and Arrivistes: What Literature Can Tell Us About High-End Inequality."  Not sure if I'll publish the Mapmaker piece separately.  I rather like it at the moment, and thus perhaps I should.  But I find its merits as a freestanding piece harder to judge than those of more standard work.  Also, I'm not sure where it ought to go, other than as part of a book chapter - it's not a conventional law review (or tax) article.

Anyway, it discusses a couple of philosophical issues, because one of the questions I'm asking is how well one can understand the issues posed by high-end wealth inequality if one is equipped only with a version of welfarism that in effect assumes we have "utilometers," the only acknowledged inputs to which are utility from own consumption of market goods plus leisure.  Big hint: I don't think this framework is even close to adequate in this particular setting, although it may work well enough in some other settings.

But on to the Proustian madeleine.  The point that, to get at these issues meaningfully, one must have at least in the back of one's mind some basic philosophical questions has served as a bit of a time machine for me, sending me back to my freshman year at Princeton in 1974.  I took a moral philosophy class that first semester, and we read the likes of Kant and Mill.  I recall hating Mill's Utilitarianism - the book not the philosophy - for such poorly reasoned passages as that on Socrates vs. the pig and the higher versus lower pleasures.  I actually discuss this a bit in Mapmaker, although I have mellowed and am more forgiving of Mill now than I was, say, in law school (when I wrote a scathing student paper about this).

But this brought back memories of another experience that I had in that philosophy class.  It involved the precept instructor who graded my first paper for that class, which was also the second paper I ever wrote as a college student.

OK, more background.  I come from an arts and academic family in which everyone, when I was growing up, was graded on how "smart" they were.  Even pets.  This made it high-stakes for me to feel as if I was excelling all the time.

I had thrived well enough in the Bronx High School of Science, although it was a true shark tank in the honors classes, and this had predisposed me to want to see how I matched up academically at Princeton.  I immediately thought: pretty darned well, which was good to know since, socially, I could acutely feel the disadvantages of being just 17 (and from a somewhat sheltered background) when almost every other freshman was at least 18.  My neighborhood schools had encouraged letting kids skip grades if they were doing well academically.  I might even have gone to college at age 16 (as had one girl in a family I knew) if my parents hadn't had the good sense to veto this.

Anyway, newly arrived at college, and with academic aspirations (I was planning to go into history), I decided to take a bunch of courses that required writing papers every two or three weeks.  My very first paper, while I don't recall what it was, got an A.  So that was reassuring.  (I don't claim to have been very mature or measured, or even in the least bit Zen, at age 17.)

Next up came a paper for the philosophy class, concerning Kant and the categorical imperative.  The professor was the great Thomas Scanlon.  But at Princeton the lecture classes are broken into smaller units that meet once a week, called precepts.  My precept instructor (and thus grader) was a graduate student in philosophy named M--- Hunt.  I probably shouldn't give the first name here, although a recent Google search for this individual proved unsuccessful.

I had what I thought was an interesting idea about the categorical imperative - and keep in mind, this is a freshman in week 3 or so of the fall semester, who has not to that point read any philosophy except for the assigned reading so far.  It occurred to me: There has to be a "level of generality" issue here (although I suspect I didn't have it labeled that crisply).  Kant says, the maxim you act on must be susceptible to being generalized without contradiction.  Suppose I am planning to go to the Burger King at 12 pm tomorrow.  If everyone went there at this exact time, it would be overcrowded.  So there's a contradiction.  But surely that's not what the categorical imperative really means.  It doesn't refute the idea: it shows that you have to think it through at the next level.

My intuition was: Silly though the Burger King hypothetical may be, there might actually be a fundamental issue here.  How generally must something be stated?  Might this be really important for figuring out what the categorical imperative could actually mean?

To this day, I think that's not bad for a 17 year old freshman, reading his first-ever philosophy texts in week 3 of the semester.  But when I got the paper back, Hunt had given it a C+.  My second college paper grade ever, and to my overheated young mind this wasn't much different from getting an F.

The scribbled explanation for the bad grade came maybe halfway down on page 1 of the paper (which was probably only 3 to 5 pages, at the most).  I had said something to the effect of, Surely the categorical imperative must have some at least implicit requirement of finding the appropriate level of generalization, whatever that might turn out to be.

But M --- Hunt scribbled in the margin, something to the effect of: No, there is no such thing as a principle of generalization in the categorical imperative.  And apparently if you're wrong, you get a C+.  This then remained the worst grade I ever got on an assignment in college or law school.

Being as young and unsure of myself as I still was, I was shaken by this grade.  My confidence wobbled a bit, but I was also angry, and I felt wronged.  The grade seemed unjust, and the ground on which it was given, mindless and dismissive.  But, at age 17, I didn't even consider going to talk to Hunt, or for that matter to Scanlon.

I decided I had to prove myself, to myself, academically.  This didn't mean working round the clock - I also wanted to have a social life, even though I was pretty much the only freshman out of 1,000 at Princeton who couldn't yet legally drink.  After all, my competitiveness applied to the social realm, too.   But in addition to taking papers seriously, I also went manga (as kids now would say) on my fall semester final exams, preparing with incredible thoughtfulness, and rigor, and yellow pads full of notes.  I got an A+ on two of my fall 1974 final exams (in history and political science - philosophy probably didn't have a final).

As it happens, the political scientist who gave me an A+ had one great theoretical contribution at that point in his career (although he later had more).  This was his claim that Lebanon's parliamentary structure for power-sharing was responsible for the wonderful peace prevailing there among all the competing ethnic and religious groups.  Oops (Lebanon blew up in 1975). So perhaps I had learned something well that wasn't all that well worth learning.  But no matter.

That was my peak as a student - fall of my freshman year.  After that, I was never as motivated again, either by grades or by pleasing the professors.  While I always did well academically, I tended to follow my own beats, so to speak, rather than trying to figure out what the professor wanted.  The impact on my grades was discernible but, as they were plenty good enough for my purposes, I didn't care.  From the standpoint of external validation, the twin A+'s had given me all the proof I felt I needed.

After the end of the fall 1974 semester, I didn't think about M--- Hunt for years.  But in writing my book chapter over the last couple of months, because I was back on ground covered in that class (albeit not Kant), the episode has recurred in my mind.  I still feel it was unjust, and I still hate M--- Hunt, although at least it's all quasi-funny to me now.

UPDATE: Okay, I admit it.  I don't really hate her anymore.  That just felt like a good ending when I was writing this piece.

New York Times op-ed on the tax code and artists

In today's NYT, New York-based writer Amy Sohn has an op-ed entitled "How the Tax Code Hurts Artists."  She notes in particular that the alternative minimum tax (AMT) "hits a disproportionate number of actors, screenwriters, and directors" because it denies deductions for employee business expenses and state and local taxes:

"Most unionized entertainment professionals receive their income as wages, which means that on paper, they're employees.  But unlike most other groups of workers, entertainers must pay a hefty chunk of their income (around 30 percent) to obtain and negotiate work.  This is in the form of commissions to agents (10 percent), managers (10 to 20 percent) and lawyers (5 percent); job-seeking travel; office or rehearsal-studio rental; business meals; union dues; coaching and classes; advertising and publicity; and research materials.

"Because of where their work is concentrated, entertainment workers also tend to live in high-tax states like New York, Illinois, and California."

I know a bit about this issue, as I worked on it (as a junior Congressional staffer) when the AMT in its current form was created, as part of the Tax Reform Act of 1986.  Not only is Sohn right that it makes no sense to deny significant employee business deductions under the AMT, but we on the staff  heard about it at the time,  We specifically met with people representing actors et al who complained about this very problem.

We were sympathetic, but we couldn't do anything about it (given that we were just staffers executing someone else's policy calls), I would say for the following four reasons:

(1) It would have cost revenue, and every last nickel from the AMT was being counted on to make the overall revenue estimates work.

(2) The more skeletal prior version of the AMT didn't provide such deductions, and it was being made "tougher," not loosened,

(3) The Treasury and Congress had been targeting penny-ante employee business and miscellaneous itemized deductions, on the view that a lot of bogus junk was being claimed, plus the view that eliminating such items was desirable simplification even if claiming a nickel here or a dime there was substantively meritorious.  But this was not responsive to actors and such, who, as we were told at the time, often had very high expenses in this category, reflecting that their work was quite differently structured than that of most other "employees."

(4) Whichever Congressman or Senator raised the issue - and I believe someone from New York, Illinois, or California did - either didn't have enough marginal clout to get this addressed, or exercised such clout as he or she had at different margins instead of this one.  You can't get everything you want if you are, say, a junior coalition member.

The state and local tax deductibility issue, of course, is normatively more complicated.  And, though presumably not distinctively an issue for actors in particular, the AMT also errs in not offering personal exemptions for dependents - clearly an important input to what, for want of a better term, one might follow convention and call "ability to pay."

Glad to see this issue getting attention in the NYT, as it is a meritorious one.

NYU Tax Policy Colloquium, week 9: Shu-Yi Oei's Can Sharing Be Taxed? (co-authored by Diane Ring)

1) “Sharing” or cash money?

 Oei’s and Ring’s Can Sharing Be Taxed? does a great job of offering a thorough background regarding the tax issues associated with the rise of the so-called “sharing” economy – involving Internet-based businesses such as Uber, AirBnB, TaskRabbit, and all of their competitors in the fields of lateral or peer-to-peer provision of rides, cars, lodging, specialized handyman work, etcetera.  It thereby offers a valuable foundation for follow-up work that is more normatively focused, and which I gather the authors themselves plan to write.

Someone should write an article on this topic called “Thanks for Sharing!”  But “sharing” – apparently the industry’s term for itself – is a misnomer.  The sharing economy is about being paid cash money for services and/or the use of property, not about “sharing” like people on a hippie commune in the 1960s.  So there is a bit of cant in the name that the industry has given itself.

That said, the emergence of the so-called sharing economy is surely a good thing.  In completely standard economic terms, declining transaction costs have permitted the occurrence of more deals for mutual benefit, and thus the realization of more social surplus.  “Sharing” thus involves an expansion of markets – capitalism on the march – albeit, at least in the early stages, in a refreshingly decentralizing way.

This could support two pro-“sharing” narratives.  The first is that they in fact create a lot of surplus.  The second is that taxing “sharing” activities would risk eliminating this surplus.

Only, these two narratives are in tension.  The greater the surplus, the more you can tax it without causing it to disappear.

Now, the so-called sharing economy does more than just create new surplus by taking advantage of reductions in transaction costs.  A second theme is its undermining certain regulatory regimes.  This, too, might be a good thing if one happens to dislike those regimes.

What about the sharing economy and tax?  Frank Easterbrook once compared mid-1990s scholarship about “Internet law” to what he called the “law of the horse.”  Money quote: “Lots of cases deal with sales of horses; others deal with people kicked by horses; still more deal with the licensing and racing of horses, or with the care veterinarians give to horses, or with prizes at horse shows. Any effort to collect these strands into a course on 'The Law of the Horse' is doomed to be shallow and to miss unifying principles.”

Whether or not Easterbrook was correct back then on that topic (Larry Lessig disagreed), Oei and Ring refreshingly, and I think correctly, take the same view here, arguing that the tax issues posed by “sharing” businesses are readily amalgamated with those we already know.  A few new rules and approaches might be needed, and there are compliance / burden-managing challenges to consider, but no new paradigms to puzzle about.

2) Are all of the major types of sharing businesses relevantly the same?

 Possibly not.  Indeed, they may differ in ways that are relevant to how tax and other regulatory systems should address them.  Let me take 3 examples: Uber, AirBnB, and TaskRabbit.  I don’t know enough about them to say definitively that they are relevantly different – but the possibility that they might be merits further attention.

a) Uber, along with similar businesses such as Lyft and Sidecar, addresses thin markets where you can’t hail a cab.  Sure, they are frequently to be seen on the streets of Manhattan (other than right at 5 o’clock when the shifts change), but try the outer boroughs or Los Angeles and you could stand there all night.  Even insofar as you could have scheduled a car service in advance, Uber can offer far greater last-minute flexibility.  And then there’s the surge pricing option, controversial (as such things tend to be) but potentially a life-saver in some circumstances.

But there’s something else going on too.  Uber et al undermine taxi medallions, by offering competition that the holders did not expect, e.g., when they purchased the medallions.  (I was almost stranded in Milan, at a rail station several miles from my hotel, which I had no way of finding, due to a one-day cab strike protesting Uber.)

This might be a good thing if one dislikes the medallion system’s restraint of competition, subject to what one thinks about the transition issue when medallions unexpectedly lose value because competition has been allowed to emerge.  But it adds an extra issue to the story.

There is arguably a public goods character to having cabs you can hail, with pre-set prices that you know about before you go somewhere that will require hailing a cab to get home.  One could perhaps argue for subsidizing this service, but artificially maintaining medallions’ value is probably not a good way to go about this.

b) AirBnB, along with similar businesses such as Roomorama, expand a spot market that existed beforehand, but perhaps increase the convenience of using it.  However, it’s been suggested, although I lack personal knowledge on this score, that these “sharing” websites provide less added value than Uber et al, in terms of expanding what one can find.  For example, people use Facebook, Craigslist, etcetera to do the same thing, which they couldn’t really do in lieu of using Uber et al.  This suggests that placing, say, information reporting burdens on home-sharing businesses might lead to greater opt-out than doing the same thing for ride-sharing businesses.  At the least, this possibility merits further scrutiny.

AirBnB is not, however, just about the folks with a spare room or a sofa, or who are leaving town for the weekend.  Apparently some of its not-so-secret sharers are in effect in the hotel businesses, holding multiple establishments for this very purpose.

There is also a regulatory avoidance issue here, pertaining to hotel occupancy taxes (which AirBnB had not been collecting, but now concedes in some jurisdictions that it should).  As it happens, these arguably are not great tax instruments.  While there would be a clear theoretical case for a Pigovian hotel occupancy tax that charged for negative externalities, these are unlikely (even if they outweigh positive externalities) to be well-measured by the actual tax instruments.  The main reason for charging hotel occupancy taxes may be attempted tax exportation – trying to make non-voters pay – but if the jurisdiction lacks significant market power, the incidence will mainly be borne by local property-owners, and the tax’s main effect may be reduce the efficiency of local real estate usage.

Of course, even if one dislikes hotel occupancy taxes, undermining them via the sharing economy might not be the best way to proceed.  Note, however, that even if one can make AirBnB play nice, the same presumably won’t hold for Craigslist, so one faces the question of how the market will react in practice.

c) TaskRabbit – Here it seems to be clearest that what’s going on is expanding markets, without the same regulatory overlap (unless, say, people are avoiding licensing requirements such as those for plumbers and electricians).  Here, too, one has the Craigslist et al set of options, which might reduce the tax authorities’ gain from making TaskRabbit play ball, but suppose TaskRabbit adds more value than AirBnB (not that I know it does).  Then enlisting it to help, say, with information reporting would be potentially more promising.

3) In theory, should we tax sharing arrangements “neutrally” vs. other business activity?

 To income tax folk, as distinct from “sharing” enthusiasts, the answer may seem to be clearly Yes.  After all, the people who “share” their services or property are being paid money.  Nonetheless, at least 3 types of arguments to the contrary could be made:

The first would be that taxing them less, at least in the formative stages, would permit valuable “infant industries” to emerge, or reward innovation that the market does not fully reward given imitation, or respond to regulatory cartelization by existing businesses.  I’m certainly not endorsing this line of argument; just noting it.

Second, suppose sharing activity is more tax-elastic than other business activity, because it tends to substitute “down” to untaxed substitutes such as leisure and non-taxable barter, rather than “up” to more conventionally organized business activity.  This would support a Ramsey / inverse elasticity type of argument for taxing it at a lower rate.  But again, one would have to establish the factual predicate.

Third, suppose taxing sharing activity is costlier, per dollar of revenue that would rightly be collected, than taxing other business activity.  This might, at a minimum, support “rough justice” approaches that sacrificed accuracy for getting it, on average, approximately right (e.g., taxing gross income rather than net income, if the costs are hard to establish, but at a reduced rate).  But it also might conceivably support accepting lower taxation of the sector in practice

4) “Tax opportunism”

 The paper notes that prominent sharing businesses, especially initially, were often a bit aggressive in claiming favorable tax treatment – for example, by denying that they faced obligations under existing law to issue 1099s, collect hotel occupancy taxes, etcetera, where at least arguably such obligations existed.  It calls this “tax opportunism.”

Not a huge surprise, of course, to find businesses aggressively using legal ambiguity in their favor.  Perhaps the main conceptual distinction here – whether or not it matters normatively – is that, at least to date, the main source appears to have been “found” ambiguity that exists by reason of the new business model, as distinct from “made” ambiguity, as in the case of a company that, say, engineers hybrid financial instruments in order to achieve favorable tax and accounting treatment.

The paper notes “regulatory arbitrage,” a useful category for describing made ambiguity that Vic Fleischer has written about.  Such planning often involves what I have called “semantic arbitrage,” e.g., claiming that the same instrument is “debt” under a given EU country’s tax law, yet “equity” under U.S. tax law, or “debt” for tax purposes yet “equity” for accounting purposes.  This is not actually “arbitrage” in the finance sense, but the term is useful and there may often be reasons why we dislike the end result.

For income taxation of sharing activity, the question of whether the actual service providers are employees or independent contractors may importantly affect the character of the intermediary’s reporting, and even potentially withholding, obligations.  But I am not convinced that analysis either of whether, say, Uber drivers are employees or independent contractors under existing income tax law, or of how they would be classified, say, for purposes of tort law, will greatly advance our understanding of what reporting or withholding obligations ought to be imposed on Uber.

5) Compliance problem 1: Information reporting

Information reporting can be a very powerful tool that increases compliance.  Intermediaries in the sharing industry appear to be generally well-situated to do it.  The main argument against making them do it pertains to the possibility that this will distort the development in the market in some way, e.g., via exit to Craigslist and beyond.  Someone should do empirical work on these issues.

6) Compliance Problem 2: mixed-use assets

When small-time players use personal assets such as their homes or cars in a sharing business, thus creating mixed-use assets, the reporting and compliance issues may grow bad enough to raise the question: Is the game worth the candle?  An alternative is to consider not just simplified reporting (e.g,. fixed mileage charges), but even elective low-rate inclusions, with dollar ceilings, that are based on gross rather than net income.

TV ad for TaskRabbit?

Since tomorrow, at the colloquium, we will have a paper that discusses taxation of the sharing economy (Uber, AirBnB, TaskRabbit, etc.), I couldn't resist sharing my idea for a TaskRabbit TV ad.

A young woman in medieval garb is sitting weeping in a room that has bars on the windows and a giant spinning wheel, and that is filled with straw.  Suddenly a nasty-looking, diminutive imp (clearly Rumpelstiltskin) pops up in front of her.  He asks what's wrong.  She explains that the King has told her she will be executed in the morning unless she has spun all of the straw in the room into gold.

"No problem," he says, "I can do it for you."

"What's it going to cost?"

"No necklace?  No ring?  Why don't we just say, oh ... your first-born."

"No way!" she says, smiling suddenly.  "I can just use TaskRabbit."

She takes out her phone, starts punching at it with her thumbs, and in no time at all is looking at options and placing a call.

Enraged, the little imp stomps his right foot into the ground so hard that he sinks in up to his waist. He is on the verge of grabbing his left foot and tearing himself in half, while she, oblivious, is smilingly talking on her phone, when the TaskRabbit logo replaces them on screen.

"TaskRabbit!  Live smarter!  Just tell us what you need, choose a tasker, and then sit back and relax!"

Cut back to the room, where there is a giant hole in the floor and no Rumpelstiltskin, the young woman is sitting cross-legged on the floor in the corner texting, and either a crone or a Brooklyn hipster has already converted half of the straw to spun gold and is working diligently on the rest.

Overheard on the street

Walking home at the end of the workday, I passed by a couple of guys, and over-heard the following monologue from one of them, which seemed script-worthy, so I kept it in mind and wrote it down as soon as I got home:

"I was immediately head over heels, and I was like, oh no, this is going to disrupt my sleep.  But luckily, I didn't have to pursue her, she pursued me.  I met her on Friday.  She texted me on Saturday. I texted her back on Sunday.  On Monday ... "

But at this point I was too far past them to hear whatever came next.  Anyway, it's Wednesday.

NYU Tax Policy Colloquium, week 8: Leigh Osofsky's The Case for Categorical Nonenforcement

Yesterday we continued our theme this semester of branching from tax towards other law, rather than towards public economics, by discussing the above paper.  "Categorical non-enforcement" is a label that one might, subject to dispute, extend to the Obama Administration's currently contested immigration plan, but there are also various tax applications of the concept.  More on this momentarily.

Despite the paper's title suggesting that it is "for" the allowability of categorical non-enforcement, it's probably better viewed as anti-anti-categorical non-enforcement, in the sense of questioning standard arguments against it from con law, which it argues rest on drawing exaggerated or unpersuasive distinctions.

As an initial aside, however, one of the things we happened to look at in the course of the day was excerpts from the Obama Administration's Office of Legal Counsel (OLC) memo explaining why the immigration plan is within the President's power to faithfully execute" the laws.  I was a bit disappointed by the OLC's reasoning, finding it a bit thinner than I would have liked, given that as a matter of policy I am highly sympathetic to what the Administration is trying to do.  For example, it relies on the claim that the "categorical" policy of suspending deportation within certain categories is actually case-by-case, since they could actually override it for unstated reasons in any particular instance, which they don't appear actually to be planning to do.  This is arguably a bit formalistic, rather than substantive.  And it relies on the fact that Congressional legislation deliberately extended other benefits to the groups that get favorable treatment here, ostensibly showing consistency with Congressional intent.  But that might be a bit like saying that, if the bank gives me a toaster when I open a new savings account, the underlying intent supports also separately giving me a clock radio.

None of which is to say that a 5-4 Supreme Court vote striking down the immigration plan would merit much of a presumption that it had been reached through good-faith legal reasoning, rather than on political grounds.  Too much water under the bridge at this point (even before we get to see what they do in King v. Burwell).

But anyway - back to the paper.  It does a nice job of showing that it's hard to draw lines between permissible and impermissible exercises of executive discretion regarding how to enforce the tax laws in the face of limited resources and diverse underlying objectives on the part of Executive Branch officials.  Here are a few examples, all raised in the paper, but arguably very different from each other.

1) President Romney in 2013, or present Bush-Walker-Whomever in 2017, announces categorical non-enforcement of the estate tax.  "I will not allow a single IRS auditor to review any Death Tax issue whatsoever.  It's time for us to drive a stake through this heart of this unfair, job-destroying, family-farm-endangering monstrosity."  The OLC memo in support notes that Congress repealed the estate tax for 2010, then raised the exemption amount, and left substantial scope for avoiding it through tax planning even though the "loopholes" were well-known.  It also claims that estate tax audits may be considered after all on a case-by-case basis, under criteria that it declines to explain and in seeming tension with the President's sweeping statement.

Whether or not this hypothetical executive quasi-repeal of the estate tax would be justiciable, I would call it clearly illegitimate.  But I would agree that the Romney, Bush, Walker, or Whomever Administration could shift some audit resources from the estate tax to other areas that it cared more about (e.g., EITC enforcement).  I would probably disagree with this shift as a matter of policy, but presumably up to a point this is what elections are about.  After all, it seems unlikely that the Executive Branch is required to set audit rates purely on the basis of an objective of maximizing correctly-determined tax revenue, even though that objective should presumably be an important input to the allocation of auditing and other such resources.

2) Frequent flyer miles appear clearly to be taxable under section 61 of the Internal Revenue Code, in cases where one accumulates through business use (deductible or reimbursed) and then uses them for personal travel.  True, there are some valuation and timing issues, but there basic taxability seems clear.  Nonetheless, the IRS has announced that it will not assert income tax deficiencies by reason of people's using such frequent flyer miles.  In other words, it's effectively acting as if there were an unenacted exclusion for the value of such items.

This is certainly categorical non-enforcement of a kind.  But note the likely motivation for it: Any attempt to enforce would lead to a huge outcry, almost certainly followed by the prompt bipartisan enactment of legislation blocking enforcement or expressly excluding at least standard-case frequent flyer miles.  So the IRS commissioner who directed a shift to enforcement would merely get the Congress mad at him or her without actually accomplishing anything.

Arguably there is a kind of "rule of law" violation here.  If Congress wants frequent flyer miles excluded, they should say so through legislation.  But the IRS is not really to blame here, e.g., in the sense of showing a proclivity to over-reach.  It is just declining to fall on its sword and get another black eye with Congressional leaders in exchange for no benefit (other than to the rule of law in general).  I certainly can't blame the IRS for not being so noble as to want to take a bullet for abstract reasons here.

3) It has recently come out that the IRS audit rate for large and complex partnerships is about 0.8 percent, despite the fact that there appears to be a lot of suspect or outright bogus tax planning going on this sector.  (More on this on May 5, when Gregg Polsky will be presenting a paper on this topic at the colloquium.)  The reason the audit rate is so low, even though the IRS is thereby leaving a whole lot of lawful tax revenue on the table, is that it simply lacks the staffing and expertise, especially in light of extremely complicated audit requirements that Congress imposed with respect to large and complex partnerships in the 1980s.  It therefore is fair to say that the low audit rate here represents a shocking and costly misallocation of auditing resources, albeit one reflecting constraints that the IRS faces rather than its own preference for any such misallocation.

The paper argues: Why not go to full-out non-enforcement here, so that what's going on even at 0.8% will be more transparent?  Might this help induce Congress to address the problem?  (It's presumably not unaware of the problem today, but, even apart from political gridlock and Republican hostility to high-end enforcement, there is the fact that high-income partners who are benefiting from the aggressive tax planning have friends in both parties.)

I'm not entirely sympathetic with this argument.  In effect, the IRS commissioner, Secretary of the Treasury, or some other such individual should start shouting, jumping up and down, waving his or her hands in the air, etc.  But going all the way to zero enforcement isn't quite the point (and might further backfire if it effectively invited others to join the party).

4) The paper discusses a well-known partnership tax case called Diamond v. Commissioner, in which the IRS succeeded in requiring a taxpayer to treat the receipt of a profits interest in exchange for services as a taxable event.  The IRS quickly, it appears, came to agree with commentators who viewed the decision in Diamond as anomalous.  The holding not only departed from standard practice, but raised valuation issues, and arguably was in tension with generally taxing labor income on a realization basis.  The IRS decided not to follow up, or use Diamond in audit disputes, but for a long time failed to explain its position publicly, presumably in part because it was still figuring things out.

Was this categorical non-enforcement of Diamond?  I would view it instead as IRS determination of what it thought the law actually was in this area.  At worst, the IRS might have been a bit slow to announce (as it eventually did) how it actually viewed and would be proceeding in this area, but it wasn't declining to enforce Diamond if it didn't agree that this decision (in just one circuit) offered a reliable general guide to how the receipt of profits interests in exchange for services generally should be taxed.

Deep thought for the day

People like cats for reciprocating their feelings but just a bit less; people like dogs for reciprocating their feelings but just a bit more.

Since I haven't had any cat posts for a while ...

Yogurt-drinker deploys highly sophisticated lapping technology.  Arguably more impressive than the first-generation iWatch.  Then again, cats and their forerunners have been working on it for millions of years.

NYU Tax Policy Colloquium, week 7: George Yin's Protecting Taxpayers from Congressional Lawbreaking

Last year at the Tax Policy Colloquium, I thought that the balance had perhaps tipped a bit too far towards economics rather than tax law, from the standpoint of best serving our students and much of our audience.  This year, partly due to deliberate adjustment but also due to the papers we happen to have drawn, it's been more "legal," and often less focused on tax law in particular than, say, constitutional and administrative law, than ever previously in the 20 years I've been doing this.  I wonder if there is any broader trend here at work, regarding shifting interests in tax academic scholarship, or if it is just idiosyncratic.

A couple of weeks ago, we had Linda Sugin's paper on standing in tax cases.  On March 24 (which is  our next session, as March 17 falls during our spring break), Leigh Osofsky will have a paper on "categorical non-enforcement" -  the scenario where an agency announces it will not be doing anything to enforce Rule X.  That is basically an administrative law question with a strong constitutional overlay, although the paper's inquiry is situated in tax.  And yesterday, George Yin's paper had us thinking about statutory interpretation and the Speech and Debate Clause of the U.S. Constitution (which protects federal legislators from being "questioned in any other place" regarding certain legislative acts).

"Protecting Taxpayers from Congressional Lawbreaking" is mainly an intensive case study.  In 2014, the House Ways and Means Committee, during Dave Camp's chairmanship, publicly released confidential tax return information that pertained to 51 taxpayers in the tax-exempt sector.  This related to publication of a referral letter to the Department of Justice regarding claims of criminal misconduct by Lois Lerner regarding audits of organizations, including in particular Tea Party entities, that were seeking tax-exempt status under Code section 501(c)(4), but would not qualify if, among other relevant aspects, they exceeded limits on permissible political activity.

As an aside, I feel justified in using scare quotes when referring to the IRS "scandal" in this matter.  BTW, if the Tax Prof Blog keeps on counting off the days, Day 1,000 of the "scandal" is less than a year away now, and Day 10,000 - if I have counted correctly - will fall on August 16, 2040.

Why the scare quotes?  There's a real issue here, which a Republican Congressional majority has wholly legitimate reasons to pursue in the face of a Democratic executive branch.  Suppose, as would not surprise me at all, that there are plenty of 501(c)(4)s on both sides of the political divide that are violating, or at least closely skirting, the provision's limits on political campaign activity.  Then this is a logical subject for administrative enforcement, subject to discretionary determinations about competing priorities in the face of limited resources.  But it would be illegitimate, and potentially criminal, to target the groups on one side of the political divide more than those on the other side - or, for that matter, to target more "extreme" relative to more "mainstream" groups, in the eyes of the IRS beholder, even if left and right get equivalent treatment,

The problem, as in the endless Benghazi investigations, is that the desire to find some sort of a scandal vastly exceeds what has actually been found, and that the investigation arguably is not being conducted entirely in good faith.  The Yin paper notes that, in the 1970s when the Ways and Means Committee investigated charges of political bias by the Nixonized IRS, it specifically looked for departures from neutral treatment of differing groups overall.  This time around, there appear not to have been similar efforts to test for this in a fair and reasonable way, as opposed to hunting for hunks of red meat to toss to the base. (And often red meat out of context, so to speak.)

I suspect, by the way, that from the standpoint of Chairman Camp, engaging in tendentious grandstanding on this issue was a service worth rendering to the Congressional leadership, helping to preserve his discretion to pursue tax reform proposals that have won widespread admiration (if zero political traction, but that isn't his fault) without having the party leadership on his throat.  This is the sort of tradeoff that people in real political situations often have to make.  Camp may actually have made the right call, from the standpoint of what he could do that would have the greatest overall net public value.  You have to pick your spots.  And the need for such tradeoffs is a good example of why I personally would never want to be in politics, even as an appointee to the type of position that tax law academics sometimes can get.

But I digress.  Returning to the topic of the Yin paper, the referral letter to the Department of Justice concerned supposed perjury by Lois Lerner.  Before the time when she had admitted in testimony to being aware of Tea Party groups, she had been involved in email correspondence identifying some such groups, along with other groups (e.g., the World Wildlife Foundation, Miss America Foundation, and an organization that was directed aid to victims of the Boston Marathon bombing) that might merit auditing.  But the Committee chose to make public, not just the referral letter, but confidential tax return information from the associated attachments, despite having the issue clearly raised.  Indeed, the Committee met and, on a party line vote, agreed to let the whole shebang be published, including confidential information pertaining to all these taxpayers.

Seemingly none of these needed to be published in terms of the political aims being served, other than perhaps confidential info pertaining to the Karl Rove-affiliated Crossroads GPS, as to which the Committee probably could have gotten the group's consent.  So why did they publish the whole thing, when it was urged that they shouldn't?  Importantly from my standpoint, there doesn't seem to have been any particular malice towards the groups whose privacy rights at least formally suffered. A reasonable guess, as per the paper, might hold that the committee simply wanted to avoid any appearance of doctoring or limiting the public record, working closely with Crossroads GPS, etc.

The Yin paper agrees that no significant harm was done to anyone, and that probably no one even particularly cared (among the groups whose confidential info went public).  But it takes the view that the precedent is potentially very dangerous, since the next time around a tax committee on the Hill could decide to publish other people's or entities' tax information out of pure malice or at least indifference.  So it discusses at the end possible measures to discourage this, e.g., by giving the Joint Committee on Taxation a measure of gatekeeper discretion to try to keep the Members away from stuff that they don't need to see.

Much of the paper, however, focuses on legal analysis of whether the committee's release of the information was a felony under federal criminal law (more specifically, Internal Revenue Code section 6103).  It concludes that the action WAS a felony, although not punishable in court due to the legal immunity that is provided by the Speech and Debate Clause.

Given the conclusion, which I agree with, that the Speech and Debate Clause would prevent prosecution of the dissemination even if it was a felony, the inquiry is a bit academic, so to speak.  My go-to literary reference for such issues ("Would this be a crime if we could prosecute it, which we can't?") is the argument in Catch-22, between two atheists, regarding what God would be like - benign or malicious - if He actually existed, which they both agree He doesn't.  But it would matter at least in a hortatory sense - one presumably shouldn't commit felonies, even if one can't be prosecuted, and if one does then one faces criticism on that ground.  So let's take a look.

Code section 6103 criminalizes the release of confidential tax return information.  But section 6103(f)(1) affords the tax committees access to such information, and section 6103(f)(4)(A) provides that such information "may be submitted by the committee to the Senate or the House of Representatives, or both."  This in turn led, and was expected to lead, to general publication of the tax return information at issue in this case. 

Suppose we accept that "may be submitted" means "may be released to the general public," although perhaps one could poke away at the distinction.  The Yin paper argues that there is an inherent or implicit limiting clause here - the submission / release must be something akin to "reasonable," although the threshold might be lower than that (e.g., not entirely unrelated to the committee's performance of its legislative functions."

How could the release here fail to meet the unstated threshold limiting the power to cause the release of tax return information without commission of a felony?  The paper's argument is that the referral had purely to do with a claim that Lerner had been committing perjury, and the other confidential info was 100% unrelated and irrelevant to that.

I tend to question this analysis.  Again, the Ways & Means Committee was conducting a political war against the Obama Administration (but that's how our political system works), and the criminal referral on the narrow perjury claim was related to its broader argument of unfair and possibly criminal political bias by the Administration or at least the IRS.  I believe that the committee fell very far short of establishing that, and acted in an irresponsible way that did not appear to reflect a spirit of good faith inquiry.  But again, that is how our political system generally operates, and it's not only probably best, but surely the current state of U.S. constitutional and statutory law, that we give this sort of activity a very broad zone of non-criminality.  The proper sanction for what the Committee did in the IRS "scandal" generally is that, in the court of public opinion, they should be viewed as having failed to make their case, and also as having acted tendentiously and irresponsibly.  Or at least, that's my judgment.  Others may disagree, and that's what political debate is all about.  But action by the Committee that was pursuant to its side of the political war (here, presumably wanting to avoid any appearance of doctoring the public record, working hand-in-glove with a Rove group, etc.) is something that I'd be very reluctant to criminalize, even absent the Speech and Debate Clause.

What might I criminalize here, based on reading an implicit limitation of some kind into the provisions statement that tax return information "may be released."  Basically, I'd look to stuff that was malicious and not related to lawful purposes such as investigating and debating claimed executive malfeasance.  An example would be releasing confidential tax return information of people or entities that the Committee disliked, in order to embarrass or otherwise hurt them.  But again, no hint of this in the case at hand.

One more statutory interpretation issue may further, in my view though not that of the paper, undermine the argument that the Committee's action was felonious albeit protected.  For 50 years (though ending in 1976), the committee was empowered to submit "any relevant or useful information" to the Senate or House.  But the words "relevant or useful" were stricken from the statute in a 1976 technical corrections bill.

This clearly seems to lay out the legal contours, pre-1976, of what would then have made a release of tax return information by a tax committee non-felonious.  The information would have had to be "relevant or useful."  In the paper's view, that threshold was not met in the present case, because the information was completely irrelevant to the perjury claim.  (But on the other hand one could argue that it was relevant to the broader political war concerning bias.)  But again, the most obvious way to interpret deletion of the words "relevant and useful" is as indicating that the limitation no longer applies.  Post-1976, under this view, relevance and usefulness no longer need be shown.

The paper rejects this interpretation by arguing that there is no evidence that Congress meant to loosen the requirements for releasing tax return information, when they didn't indicate so anywhere, e.g., not in the legislative history, floor debate, or anything else, and when in general what the 1976 revisions did was tighten the rules governing transmission and release of tax return information, in response to the Nixon Administration scandals.  Hence, it is more inclined to view "relevant and useful" as evidencing the prior scope of limitations that remained in place or if anything were meant to be tightened.  E.g., suppose the reason for removing the words was that they unduly weakened the implicit limitation that follows from the context.

But it is hard to rule out the possibility that someone on the tax committees, during the legislative process in 1976, decided deliberately to strike those words in order to free the committees' hands a bit more, even though no mention was made of this and everyone else was getting the rules tightened.  So I might view the prior existence and 1976 removal of these words as leaning against the paper's argument that the Camp committee's release of the tax return information was a (non-prosecutable) felony.

Although I thus tend to disagree with the paper's legal conclusion, I should note how refreshingly in good faith the argument is - not always something one can take for granted when people are discussing hot-button political topics, such as this one.  Yin not only was appointed by Republicans, rather than Democrats, both times that he served on Capital Hill, but is well-known as having no political ax to grind.  In addition, Tax Notes publicly quoted him in 2014, when the issue first came up but before he had researched it, as saying he couldn't comment on the merits without knowing more about them.  Plenty of commentators on the political wars in Washington would have followed the Red Queen's lead, in Alice in Wonderland, when she says "sentence first, verdict afterwards."

A change in the weather is known to be extreme / I'm glad we're finally changing horses in midstream

It would be difficult to overstate my relief at the change in the weather that has finally hit the New York area. I certainly hope that those in New England and the upper Midwest are out of the horrors as well.  It happened at a specific moment.  This past Sunday, the brutal, horrible, and unrelenting winter that we have been suffering through for months (and yes, I realize that Boston and Detroit, to name just two places, had it much worse than us) suddenly disappeared and apparently (knock on wood) won't return before the next winter season at the end of 2015.

I am reminded of the old joke about the guy who loves going to the dentist, and having cavities filled without any anesthesia, just because it just feels so darned good when it's over.  The end of the winter is a bit like that, except that I would much sooner have skipped the whole thing.  (I only go to the dentist for pragmatic reasons.)

Death of Jerome Kurtz

Another sad passing from among the tax professoriate.  Jerry Kurtz, a former colleague of mine at NYU who is most famous for his time as IRS Commissioner, died last Friday.

Kurtz took over at the IRS not long after its low ebb during the Nixon era, involving what definitely were actual scandals involving White House malfeasance.  He both helped to restore the actual and perceived integrity of the IRS, and had strong tax policy views involving the desirability of income tax base-broadening that commissioners have not always pushed as strongly as he did.  He was a disciple of Stanley Surrey, and while I did not agree 100% either with Jerry or with Stanley (whom I never met, as he died the year before I entered academia), they were forces for good.

Kurtz also participated in the transformation of NYU Law School and our tax program into what they are today.  At an earlier stage, only the tax program, not the law school, had enjoyed an eminent national reputation.  As the law school rose, and as both legal academia and law practice were transformed, the tax program had to change in some ways, just to keep its high place.  Jerry Kurtz and the late Paul McDaniel (also a great man) were then-dean John Sexton's first two wartime consiglieres (as I jokingly called them) towards this purpose, at least starting the count from when I got here.

Jerry was a great person in all senses, and I will miss him.

Tax Policy Colloquium, week 6: Ruth Mason's "Citizenship Taxation"

Yesterday at the colloquium, Ruth Mason discussed her paper, Citizenship Taxation.  I enjoyed reading it enough to conclude that I may want to write about this topic as well.  (I generally agree with the paper, but it’s a rich topic and perhaps a fruitful area for me to deploy some of my interests and approaches.)

Here are some of the points from my notes that I thought worth discussing.

(1) The U.S. as outlier (again!).

Here we go again.  To paraphrase Ray Davies in a 1960s Kinks song, “we’re not like anybody else.”  The U.S. is the only country to impose (at least in theory) worldwide taxation on all non-resident citizens.  Other countries may tax some non-residents on a worldwide basis, via the use of standards other than just current year physical presence to determine who is really still a member of the domestic community, but no one else does it flat out based on citizenship.

Other examples: we don’t have a VAT, our statutory rate for corporations is unusually high, and in the international realm we employ deferral / foreign tax credits far more extensively than anyone else.

Now, everybody else could be wrong and we could be right.  Or our circumstances could be distinctive.  But it is natural to wonder, given, for example, the “wisdom of crowds” line of argument.

(2) Benefit tax rationales.

The literature discussing citizenship-based taxation often employs a benefit tax rationale.  On the one hand, U.S. citizens living abroad aren’t using the roads, etc.  They also generally can’t get U.S. public assistance, or use healthcare subsidies that apply within the U.S., etc.  On the other hand, in theory the U.S. Army is protecting them, plus they have the valuable option to return, which lots of other people might pay good money for if it were on sale.

All this might call perhaps for an intermediate U.S. tax burden on U.S. citizens living abroad - which we actually have, given section 911(b), which permits excluding about $100,000 of earned income, and the allowance of foreign tax credits.  But benefit tax rationales are not widely accepted these days, as compared to ability to pay, which of course raises the core question here: Whose ability to pay?

Suppose that, by reason of my living abroad, the U.S. government saved a marginal $10,000 that it would otherwise have spent giving me services.  Even without any normative attachment to benefit taxation, it might make sense to reduce the U.S. tax bill I would otherwise have incurred by $10,000, as this properly aligns my incentive regarding where to live, from the fiscal standpoint and assuming that there are no other relevant considerations.  But not much of what the U.S. government does on my behalf invites this sort of marginal cost analysis.

 (3) Defining “us” versus “them.”

Here is the nub of the issue.  From a utilitarian standpoint, everyone in the world matters equally.  Numerous other philosophical approaches agree that everyone counts the same in the relevant sense, although they have other ways of implementing the idea that everyone matters equally.

But just as individuals, rather than being perfect altruists, generally act for their own benefit and that of loved ones, so it is generally accepted that countries can care primarily just about “us” (the members of the national community), as opposed to “them” (everyone else).  Indeed, just like a buyer and seller in a market negotiation, it is widely considered fine if everyone would like to extract as much money from each other as possible, albeit subject to rules of honesty and fair dealing, not doing bad things, and acting altruistically in extreme cases (e.g., rescue when you see someone drowning, seeking to prevent genocide abroad).

Let’s just take it as given that this personal, family, or community-based selfishness can be justified philosophically.   Many regard it as a prudentially required exception to universal morality (we don’t have to be saints, especially when everyone else isn’t being a saint).  I gather that Ronald Dworkin tried to fit it into his philosophical system more holistically, but I don’t generally find myself in agreement with his full approach.

But even taking all this as given, it is difficult to find firm normative footing for the determination of who fits into our community.  Personally, I care about the people I care about (and for close family members or other associates, there’d be an argument that I ought to care even if I didn’t).  But, in the impersonal setting of a national mass community, it is hard to establish definite guideposts re. what we are trying to do.

If I am a citizen who goes abroad for a month, I’m surely a full U.S. person for the year (not just 11/12).  Arguably the same, whether or not we choose to impose full citizenship taxation, if I go abroad for three years but always plan to return.

If I am here illegally, I definitely should count normatively, at least to a degree.  (Not to dive into the murky, for me, waters of immigration law and policy.)  This is why most of us would insist on allowing illegals to get treated in the ER when they face dire medical problems.  And we shouldn’t be happy about having a two-class society here, the Americans here and the others, whether the latter are lawful guest workers or illegals.  But I digress.  The point here is simply that residence inevitably counts – we care more about people who are right in our faces than about others – but it is not all that counts given that I can be away from what continues to be my community.

What we mean by the “us” whom we agree to care about, once we have accepted an approach that mainly limits altruism to the members of one’s own community, is most likely going to be multi-dimensional, rather than turning on a single metric such as citizenship.  Specifying a legal rule to define the members of our community (who may be subject to at least some elements of worldwide taxation, even when they are abroad) may involve the usual tradeoff between complexity and accuracy.  But as I discuss below, there may also be efficiency benefits to a multi-factor approach.

(4) What about “them”?

 For those in the “them” category, in principle we might want to revenue-maximize – that is, get as much money from them (in real economic incidence terms) as we can.  This is not diabolical; it’s just how transactional counterparties commonly deal with each other. 

This of course leads to the Monty Python Principle: “Tax all foreigners living abroad.”  So why don’t we try to do that?  Well, obviously, it would not be a great idea to try, at least without more of a hook.  We don’t have jurisdiction, we don’t have information, it would violate comity and get them really angry, they would retaliate in various ways that we wouldn’t like, etcetera.  And more generally, cooperation for mutual gain is always a good idea when it can be done.  But, when we turn to the treatment of “us,” it’s worth keeping in mind that there is a hypothetical perspective from which we might like to tax all foreigners living abroad.

(5) The basic paradox: if you’re “us” and we care about you, you lose.

Once we accept that we can’t, and generally won’t even try, to “tax all foreigners living abroad,” something that is at least facially paradoxical arises when we consider taxing at least some nonresident citizens on their foreign source income.  This tax burdens the individual who has to pay it.  So we are effectively saying: “If we care about you, we’re going to burden you.  If we don’t care about you, because we have decided not to classify you as a member of our community, then we’re not going to burden you.

Now, one thing we clearly do care about, when taxing members of our community whether they are currently residents or not, is deadweight loss that we impose on them through our rules.  We don’t necessarily care directly about deadweight loss that is imposed on non-members, since we are at least mainly excluding all “thems” from our social welfare function, but for “us” it matters.  And this is pretty much the proof that the current U.S. regime for taxing nonresident citizens is defective and needs to be revised.  It appears to impose a lot of deadweight loss, from compliance burdens and the like, relative to the revenue that is actually raised.  This results, for example, from tax filing requirements who owe little or no U.S. tax (e.g., due to the earned income exclusion plus foreign tax credits).  Now, we may gain valuable information from the filing (or, rather, we would if people actually filed), but this is still a serious concern.

A question meriting further thought: Why don’t we extend more transfers or other social welfare, safety-net style benefits to non-resident citizens?  Perhaps there are good reasons for not doing so, but at the least it requires further thought.  Presumably if we had greater tax-transfer integration, such as via a Mirrleesean demogrant / income tax system, we would at least consider giving the demogrant to non –resident “us.”  Or perhaps not, if there are particular incentive issues to keep in mind here.  But worth some thought in any event.

Circling back to “us” versus “them”: Suppose we can tax U.S. citizens living abroad, but we classify these individuals as “them” rather than “us.”  Only, suppose that, because they are arguably “us,” we can get away with it – other countries won’t start to scream, retaliate, etcetera.  Then we would have a “them”-based reason for imposing the tax (and also for withholding welfare benefits and not caring so much about deadweight loss).  In short, it could be the one case of “Tax all foreigners living abroad” that we could actually pull off.  And this would imply not caring so much about deadweight loss that we impose on nonresident citizens.  But it does strike me as a bit harsh.

(6) Two-stage analysis for immigrants: before & after they become “us”

Let’s leave aside all the issues about illegal residents, as that’s a very different topic and neither raised by Ruth’s paper nor an area of personal expertise on my part.  Instead, let’s consider people who might like to immigrate to the U.S., at least conditionally on comparing it to other places where they might choose to live, and whom we are considering admitting to our community voluntarily.  They are not here yet, and suppose they will only come here if we let them.

I bring up these people because Ruth’s paper rightly expands the scope of the inquiry to them, by noting that, when we are considering the taxation of nonresident U.S. citizens (as well as green cardholders) on their worldwide income, prospective immigrants are among those whom we should have in mind.  Suppose, for example, that immigrants whom we would like to attract would take note of the U.S. worldwide tax system for citizens and green cardholders, when they are deciding where to go.

Since prospective immigrants are not “us” yet, we might want to maximize the sum of (1) the present value of the money we could get by admitting them, plus (2) the positive externalities that their presence would generate for us.

In terms of (1), you can be crude about it, if you like, and charge an upfront fee for a passport.  Malta and Cyprus do this, and can charge extra-high fees because they can offer EU passports.  Several Caribbean countries also sell passports, albeit for less as they can’t offer an EU passport.  The closest the U.S. comes to charging an upfront fee is via our EB-5 immigrant investor program.

For the most part, however, we are a bit more decorous about exchanging money for admission to our community, in that we allow immigrants – once admitted – to pay under the installment plan, rather than up-front.  That is, immigrants generally can be expected to generate positive tax revenues for the U.S. by reason of paying income and other taxes once here.

We probably should admit more of these people than we do, especially if positive externalities are significant too (as I suspect they are).  But from the standpoint of efficient pricing, telling prospective green cardholders in particular that at some point they would be getting taxed on their worldwide income even if they weren’t living in the U.S. might not be an optimal way to structure the “fee.”  We’re telling them, “It’s going to cost you even if and when you don’t find yourself living in the U.S., which might be the scenario in which they would value it the least.  I have heard it said that well-heeled foreigners who are thinking of spending significant time in the U.S., and who have access to temporary admission under various of our categories, often are advised against seeking a green card.

(7) Relevance of multiple margins (citizenship & residence)

As David Gamage notes in a paper that he presented at our colloquium last year, it is often preferable to have many small distortions, rather than a few large ones.  Citizenship-based taxation may induce people to renounce U.S. citizenship.  Residence-based taxation can encourage them to make sure they are out of the country for at least the requisite time each year.  A rule based on domicile may discourage having one here.  And so forth.  But a standard that relies on several different factors may end up, with proper design, inducing less tax-motivated distortion overall.  Obviously, the fiend or goblin (to avoid saying “devil,” as that’s become such a cliché) is in the details.

(8) Foreign taxes

I’ve written extensively (such as here, here, and here) against the desirability of providing full and immediate foreign tax credits in the setting of business taxation.  My main argument is that foreign taxes are a cost from the unilateral domestic standpoint, hence we should want domestic taxpayers to be foreign tax cost-conscious.  Indeed, straightforward deductibility for foreign taxes (so they will be treated as equivalent to other outlays or forgone inflows)  is the way to go, from a unilateral national welfare standpoint, unless there is more to think about here.  As it happens, I agree that there actually is more to think about in the setting of corporate income taxation, e.g., because if profits show up in a tax haven that may be a “tag” for discerning profit-shifting away from home, whence my conclusion that, for U.S. companies, we might favor a better-than-deductibility, worse-than-creditability bottom line effect.  Well-designed anti-tax haven rules can have this effect.

Exemption is an implicit deductibility system.  Of course, if you limit exemption for the foreign source income of resident companies via anti-tax haven rules, you may get back into that intermediate range (or even beyond, if the rules are poorly designed)

How do these arguments apply to taxing nonresident individuals on their foreign source earned income?  While the topic may require further thought, my initial thought is that a similar basic analysis does indeed apply.  Suppose, for example, that an American is deciding whether to work abroad in lower-tax Singapore or the higher-tax UK.  It may be desirable, from a U.S. standpoint, if he or she bases the analysis on after-foreign tax income, rather than before-foreign tax income.  After all, from our standpoint those taxes are just a cost, as we don’t get the tax revenues.

While it might be the case that the use of tax havens at the expense of the domestic tax base is not as much a problem for individuals’ earned income as it is for companies’ reported profits, that would only push harder towards the deductibility, as opposed to creditability, side of the spectrum.  And even if we treated foreign taxes on U.S. individuals’ foreign earned income as effectively deductible, rather than creditable, then (assuming a treaty-compliant design, which might not be impossible) we might decide to apply a significantly lower tax rate to foreign than domestic earned income, e.g., for the reasons I will discuss next.

The exclusion under Code section 911(b) for about $100,000 of qualifying foreign earned income has the desirable effect of pushing away from effective creditability.  You can’t claim foreign tax credits with respect to foreign earned income that we don’t tax.  But that doesn’t tell us whether zero is the right rate (perhaps even without being so capped), or is too low a rate.  That depends on other considerations.

(9) Foreign earned income

Even leaving aside the treatment of foreign taxes, should we tax U.S. individuals’ foreign earned income at the full domestic rate?  An “ability to pay” perspective would suggest that the answer is yes.  But there may be an efficiency argument (from a national welfare perspective) in favor of a lower rate.  This argument is borrowed from Mihir Desai’s and Jim Hines’ analysis of “national ownership neutrality” (“NON”).

Suppose the following, as Desai and Hines do in the NON context: Each “outbound” dollar is replaced by an “inbound” dollar from a foreigner who earns income that is taxable in the U.S. by reason of the outflow.  Translating it from their context to mine, let’s take a simple case, grossly overstated by me just so one can grasp the argument.  Suppose that, if I leave NYU for a year to teach at a foreign university (which will pay me in lieu of NYU’s doing so), NYU will hire a foreigner to teach in the U.S. in my place, and pay U.S. tax on the substitute salary.  At a rough approximation, even if the U.S. gave me an incentive to visit abroad by not taxing my foreign earnings (and again, the U.S. may have no direct reason to view payments to the foreign tax authority as equivalent to paying U.S. tax), it would not have lost any domestic tax base.  U.S. salaries would be the same, and the IRS would be taxing that foreigner, who would otherwise have escaped its clutches.

Suppose we take this hypothetical to be appropriate – as Desai and Hines do in the setting of cross-border business investment.  (They of course do not make any such claim, or at least they haven’t yet, with regard my hypothetical, which they might join other readers in finding fanciful.)  They then argue that the optimal U.S. tax rate on the foreign source income is zero, so that there will be no distortion at the margin of U.S. companies deciding how much to invest abroad rather than at home.  (Again, the claim is that the lost domestic investment is actually zero, net of the inbound flows it induces that would not otherwise have occurred.)

I think this argument is wrong, because we are trying to balance distortions at multiple margins, not reduce them to zero at some arbitrarily chosen margins while they remain high at other margins.  But I will go so far as to agree with Desai and Hines that it may support a lower U.S. tax rate on resident companies’ foreign source income than that on all companies’ U.S. source income.

Does this argument apply to foreign earned income of U.S. individuals?  I suspect that the extent to which it applies is greater than zero, albeit less than 100 percent.  Americans who work abroad may indeed often leave slots that get filled by someone else, including a foreigner.  (There may also be a positive spillover if the result is to increase other Americans’ domestic earnings by reason of the slot I left open for the year.)  So there may be an argument for taxing foreign earned income of U.S. individuals at a lower rate than their U.S. earned income, even wholly leaving aside the issue of how to treat foreign taxes.

There may also be positive externalities when U.S. individuals work abroad.  One hopes that they are effective ambassadors, spreading goodwill abroad towards those of our ilk, rather than being the stereotypical “ugly Americans.”  Plus, if they learn about life abroad and then return here, the things they learn may enrich life for other Americans.  One of the absolutely greatest things about our country is the extent to which we’ve been a global melting pot, not only because people come here from abroad and are accepted, but also because it makes us (at least on the coasts) more cosmopolitan and international, to our great hedonic benefit.  Or at least that’s how I view it.

(10) Exit tax

Code section 877A generally requires tax expatriates to pay tax on a deemed sale of their assets for fair market value.  The tax only applies to net gain in excess of $600,000.  This exit tax makes up for the fact that, once you’re gone, the built-in gain from the period when you were still a U.S. citizen is unlikely ever to be taxed here.  So one could view it as anti-windfall gain, rather than as aiming to be punitive.

That characterization of the provision would be more solid and beyond dispute if we taxed net asset appreciation at death, rather than allowing a tax-free step-up in basis at that time.  But, for what it’s worth, the provision can indeed reduce lock-in on the part of individuals who are considering expatriating.

Here is a further issue that might be worth thinking about.  Suppose someone who might owe estate tax liability at death expatriates before that point.  Proponents of the estate tax might support treating expatriation as a triggering event for levying the tax.  Not just because "You're dead to us now," but to avoid creating the incentive to expatriate for that reason.