New paper posted on SSRN

I have just posted on SSRN my draft paper, Taxing Potential Community Members' Foreign Source Income, which I wrote for a conference on citizenship and taxation that will be held at the University of Michigan Law School on October 9 of this year.  The paper is available for download here.

The abstract goes as follows:

Recent years have witnessed rising debate, on both sides of the Atlantic, regarding how to define the category of individuals whom a given country classifies as domestic taxpayers, and who thus may be taxable on their foreign source income (FSI) even if they live abroad.  While the United States rules focus distinctively on citizenship, the broader issue is better viewed as pertaining to the taxation of “potential community members” (PCMs) – that is, all those who plausibly might be viewed as members of the home community.

This paper makes two main points regarding the taxation of PCMs on their FSI.  First, the issues turn in large part on drawing a distinction between “us” and “them” – that is, between people whom we classify as members of the home community, and thus whose welfare we care about, and those whom we classify as normatively irrelevant (or less relevant) outsiders.  While such a distinction is inevitable in a world with separate national governments, conventional tax policy and public economics tools shed little direct light on how one might operationalize it.

Second, for PCMs whom a given country classifies as domestic taxpayers, past debate has over-focused on issues of mitigating “double taxation” through exemption or foreign tax credits.  It should instead focus distinctly on the questions of (a) how heavily or lightly one should tax domestic taxpayers’ FSI in particular cases, and (b) how foreign taxes paid should affect domestic liability.  Refocusing the analysis not only helps to inform one’s understanding of the choice between the two standard tools, but also may suggest considering blended approaches that might avoid the worst features of each.

Back from Oxford

I've just returned from the UK, where last week I attended the 9th annual symposium at the Oxford University Centre for Business Taxation.  I gave a talk on my recently SSRN-posted paper, "The Crossroads Versus the Seesaw: Getting a 'Fix' on Recent International Tax Policy Developments."

I won't link to the paper, since I am planning to revise it, and would just as soon have prospective downloaders wait until I have posted the revision.  But the slides for my talk are available here.

After the conference was over, I enjoyed going to the Cotswolds for 3 days of hiking through the countryside.  The paths lead through woods, fields both with and without livestock, and scenic small towns.  Then I was in the charming city of Bath for a couple of days.

One highlight in Bath was getting to meet this individual, who was not actually trying to carry me away to a distant aerie for eating at his pleasure - rather, he is willing, under controlled circumstances, to accept bits of chicken from strangers.

Alex Rodriguez

When I go to the health club, which I do at least 5 times a week when my schedule permits, I like to listen to music while watching sports without sound on my TV screen. But I switch the channel if they're showing a Yankees win - although I am usually willing to see highlights of a Mets loss.

Today, I was vexed to find that all sports networks had basically gone to full-time, wall-to-wall A-Rod coverage in honor of his 3,000th hit, making all of them unwatchable for me because it was associated with a Yankees win. The Mets network was part of this as well - they appear to cover the Yankees almost coequally with the Mets (and they used to run lots of Jeter ads), whereas I have the impression that the Yankees network not only covers nothing but the Yankees, but verges on covering only Yankees wins - if they lost yesterday or it's the offseason, they show past Yankees wins.

Why am I really not particularly anti-A-Rod?  Well, it's true that he's an admitted cheater, but consider lots of other baseball and football superstars. He also appears not to be an enormously nice person, but again think about other superstars in all the major sports.  Being a jerk may both help one to become a great player, and then is encouraged by the treatment one gets from everyone.

Perhaps I like the fact that A-Rod is so NOT a "true Yankee."  First, in 2000, he wanted to come to the Mets.  But they were too stupid to want a 25 year old superstar, who had a realistic chance at that point to be the greatest player in baseball history, and who perfectly fit their needs. They preferred, not only to refuse even to negotiate with him, but also to insult him gratuitously.

Then he wanted to play for the Red Sox, but the players union wouldn't let him.  The deal would have required a modest salary giveback, which he was willing to accept, but the union, fearing the "precedent," preferred to make sure that only the Yankees would be interested.

Finally he went to the Yankees, where Jeter selfishly made him to switch to third base even though, at that time, A-Rod was a vastly superior defensive shortstop.  But Jeter didn't care about the team's welfare, as his own ego was evidently more important.  He of course has always gotten a free pass for this.  Glad though I was to see the Yankees weakening their defense (relative to what they could have done) for no good reason, I felt a bit bad for A-Rod about this, as he might otherwise have ranked either just with Honus Wagner, or else all alone, as clearly the greatest shortstop of all time.

Anyway, here's hoping that the Yankees lose the next game at which he reaches a milestone, if I am going to the health club the next day.

On the road again

I'm flying to the UK tomorrow for the 9th annual symposium of the Oxford University Centre for Business Taxation.  Next Tuesday, I'll be presenting this paper on international business taxation.  I'll post my slides when I get back to NYC the following week, or sooner if I can link to them via the symposium's website.

Should the cats get teaching credits?

The NYU Law homepage has an article about first-year reading groups, which we did at the law school for the first time last year. Two of my stealth teaching assistants are mentioned at the front of the article. Seymour would like everyone to know that only Buddy is interested in people's food. Gary and Sylvester were too shy of strangers to participate.

As the article mentions, last year my first-year reading group slogged through Piketty. This coming year, I am considering opting for a rather different approach, in which we would watch episodes of The Paper Chase (the TV series, not the movie).

I had never seen the TV show, although the movie was standard fare on college and law school campuses back in the day. But after watching the pilot episode, I can report that, while (mercifully) it's extremely dated, this potentially adds interest, and it could certainly feed discussion concerning teacher-student interactions, law as an intellectual topic, law as a profession, class, and gender. (Race, too?  I believe the pilot was all-white.)

New frontiers in fiscal language

I've long pointed out - to say I've long "argued" would suggest that there's some possible doubt, when in fact, as a matter of pure logic, there isn't - that the terms "taxes" and "spending" are not actually meaningful, at least in the ways that people often think.

The classic example was David Bradford's pretend "Weapons Supplier Tax Credit."  He explained it something like this.  Suppose Congress wants to raise income tax revenues by $10 billion, but doesn't want to "raise taxes."  This could reflect the Grover Norquist tax pledge, or anything else.

So they do the following 3-step: raise income tax revenues by $10 billion, zero out a $10 billion weapons contract with a military supplier, and enact a $10 billion "weapons supplier tax credit" (WSTC) that said company can use in return for its supplying the very same weapons, effectively for the very same price.

The combination of zeroing out the weapons contract and enacting the WSTC makes a difference of exactly zero.  The US government gets the same weapons at the same net budgetary cost, the company is in exactly the same position as it would have been otherwise, etc.  No one gains or loses a penny from doing it the new way, rather than the old way (leaving aside administrative, etc. issues). But, as a matter of formal budgetary accounting, it converts a $10 billion "tax increase" into a $10 billion "spending cut."

Louisiana Governor Bobby Jindal, with the permission of Pope Norquist, who apparently issued a ruling under his authority to interpret the no-new-taxes pledge, has done exactly this, except for a minor twist.  The WSTC equivalent is being used to convert "taxes" into "fees," rather than into "spending cuts."

Here's what apparently happened, according to the New York Times and a Louisiana paper, the News Star: Louisiana is raising taxes, in the conventional sense of the term, by $700 million, most of it from temporary (3-year) repeal of various business tax credits and exemptions, and the rest of it from permanently raising the cigarette tax from 36 cents to 86 cents a pack.

Of this amount (if one chooses to think about it this way, although money is fungible), about $350 million is going to LSU and other public educational institutions - relative to what would have happened otherwise, that is.  The funding avoids cuts, rather than increasing overall education financing.

Apparently, using "tax increases" to pay for education spending is Norquist-verboten under the no new taxes pledge.  As a result, to get Norquist's approval, Jindal needed a WSTC-style device to "cut taxes," notionally speaking, by just $350 million, rather than the full $700 million.  (There may be something missing here from the press accounts.)

Anyway, here's what these bright fellas came up with: a $350 million phantom tuition increase that would be offset, penny for penny, by WSTC-style tax credits.  Per the NYT, the legislation includes "an 'assessment' of around $1,600, called SAVE - 'Student Assessment for a Valuable Education' - on the state's public college students.  Nobody would actually pay this assessment because a student would also be granted a tax credit [presumably refundable when needed?] against that assessment.  The student's tax credit, in turn, would be transferred to the state Board of Regents, the body that runs higher education.  The board would then use the credit to draw money from the Department of Revenue.

"Under the plan [i.e., just the SAVE part of it?], no one's current tax burden would go up or down a cent.  [This can't be quite right if describing the bill as a whole - there are cigarette and corporate taxpayers versus the phantom tax credit for students.  I suspect the actual point is that no student's combined tax plus tuition bill changes by a cent.]  But the Jindal administration said the arrangement would constitute an offset to [$350 billion of?] the new tax revenue that was raised this term, and would thus keep his administration on the right side of its tax pledge.

"Lawmakers have called the provision everything from 'money laundering' to 'stupid,' and that was just the Republicans. A Democratic state senator proposed an amendment to change the name of the credit from SAVE to DUMB, for 'Don't Understand Meaning of Bill.'  (He later withdrew the amendment.)"

If this invariably "works" to turn net tax increases into fee increases, then literally all bets could be off. Perhaps Congress could pass a $1 trillion tax increase on billionaires, and offset it with a $1 trillion [something-or-other: national defense? clean air? use of the roads?) fee for billionaires that was offset by a $1 trillion Federal Fee Tax Credit.  (OK, there might be an issue with just charging the billionaires for whatever.)

But, as Oliver Wendell Holmes  once said: "Not ... while this court sits."  The court here is Grover Norquist, and just because Jindal gets a special ruling doesn't mean anyone else will unless Grover likes the applicant and/or the facts.

Joe Stiglitz, "New Theoretical Perspectives on the Distribution of Income and Wealth"

Tax Prof Blog offers a link to new work by Joe Stiglitz that is potentially significant, and that tax law profs who are interested in high-end inequality should certainly give a look.  For now I've just seen the abstracts, but I will be reading the four (I suspect short) papers when I get the chance.

It overlaps with things that I've heard Stiglitz say, e.g., at NTA last year, relating to his rejection of Piketty's theoretical explanation for rising inequality.  Piketty, of course, attributes it to r > g, whereas I am more inclined (as a U.S. observer) to think in terms of rising wage inequality, and also to say that you have to decompose r, as well as to distinguish between life cycle saving and inheritance (see here).  Stiglitz says some related things, and also has been pushing the importance of land values vs. productive capital, and of rents, both of which he thinks Piketty gives too little weight.

A few of Stiglitz's main points / claims / arguments here:

1) One needs to distinguish "wealth" from "capital."  The former I presume he defines as things with value to the holders, the latter as limited to inputs to economic production.  Stiglitz sees the run-up in land values, especially housing stock, as wealth but not capital, and hence in recent practice as increasing inequality without creating capital gluts that would be expected, from normal supply and demand, to drive down r.

2) Rents, not ordinary r, are at the heart of rising inequality in recent decades.  Land rents, intellectual property, etc., are the key elements here.

3) In his model, taxing capital, i.e., ordinary r, may get shifted entirely back to labor, and hence do nothing to address inequality (leaving aside the question of how the tax revenues are spent, which could make a difference at the low end of the wealth and income distribution).

4) Focusing on r versus g also misses the point that r is endogenous - it's part of what needs to be explained, not a cause of what happens.

5) A Henry George land tax would have the desired distributional effects - not getting passed on because the supply is close enough to fixed, and under the empirics can make a large practical difference in high-end inequality, without adversely affecting incentives.

6) Given life cycle saving, we shouldn't distinguish between labor and capital (David Bradford would definitely agree with this part), but rather between capitalists and workers.  He uses the term "capitalist" to mean people who make bequests, whereas workers just do life cycle saving.  So it's actually bequesters vs. life cycle savers that we need to think about.  (Though without the benefit of his model, Joe Bankman and I said something similar here.)

7) Stiglitz also draws a big distinction between what he calls debt and equity.  In a simple version of his model, workers just hold debt, capitalists hold equity.  (When I see the actual paper, I'll be looking to see if buying a diversified stock portfolio through your mutual fund is really what he means by "equity," or if it's special opportunities, start-ups, etc., as opposed to what they sell on the market once the extraordinary profit has been realized and only normal returns remain.)  Anyway, this has the result in his model that lowering interest rates enriches the capitalists at the expense of the workers, raising them goes the other way.  Thus, if we think of r as the Federal bond rate and all the other bank, etc., rates that travel with it, then raising r, not lowering it, reduces inequality.

Anyway, however all this plays out in intellectual debate among economists, it's important and I would urge tax law profs to take notice, and in particular to start thinking about how they might assess it and what its implications might be.  I may take that tack myself, but there's plenty of room in the water, and anyway my dance card is a bit full at present.

A step back (or else forward) in the orderly retreat

The aging process, I am now old enough to be qualified to say, is an exercise in orderly retreat, dragged on for as long as possible (at least until things get really bad) and fighting every inch of the way.  You can't help its happening, but you want to retreat as slowly as possible, and never to face a rout until it's forced on you.  Diet and exercise are of course key components in keeping the retreat as slow and as orderly as possible.

Every now and then, however, one must execute swift tactical withdrawals from exposed positions that it has become too costly to defend.  I seem to have reached one of those moments recently.

I played sports growing up, both because I enjoyed it and because, in my neighborhood's social structure or at least for the boys' subgroup, sports activities were coin of the realm so far as one's standing was concerned, especially if one was guilty of the faux pas of doing too well in school.  When I reached law school age, I transitioned from team sports, such as baseball, touch football, and basketball, to individual racquet sports.  First was squash, then I eventually got moderately serious about tennis.

Although always aerobically fit, first due to youth and then by reason of working at it, I was also always injury-prone.  The key problem, apart perhaps from coordination issues (although I always had decent eye-hand), was that I apparently was too loose-limbed.  So I kept spraining my left ankle, although not generally from playing racquet sports.  I also suffered a significant recurring shoulder injury when I was only 20.  It seems to have come from pitching a stickball game against a good friend.  I figured out later that I must have thrown 150 to 200 pitches, generally as hard as I could and without having trained for this at all.  Initially misdiagnosed (sports medicine was not as good back then as it has become more recently), the injury, which turned out to be rotator cuff instability and impingement, periodically plagued me until medical advances permitted me to fix it, albeit not quite to the 100% level, through arthroscopic surgery about 15 years ago.

Meanwhile, as I got older, loose-limbedness gave way to various body parts losing flexibility and becoming all too willing to strain or tear.  So I got back spasms, pulled hamstrings, and then tennis elbow when I tried to play without my legs under me properly due to the hamstring problem.  My solution to all this was periodic layoffs plus physical therapy - intensive during the recovery period, but then continuing afterwards for maintenance.  So the price of my continuing to play racquet sports - requiring "explosive" muscle and joint use, although it doesn't seem that way when you are younger - was a long list of home exercises, all of which I had to do a few times a week.  This grew increasingly boring over time, but if I wanted to keep playing I had no choice.

Eventually I quit squash because it was just too explosive - various body parts got angry from the sudden changes in direction that you need if your partner wrong-foots you.  But tennis seemed to be going OK, for the most part and subject to my keeping up the exercise regimen, until 2 years ago when I tore the ACL in one of my knees.

At that point I was icily determined not to let it stop me.  I was strongly leaning towards the elective surgery for ACL replacement, even though it is a truly horrible process.  The problem is that the newly inserted replacement ligament (taken from one's own patella or else from a cadaver) has to integrate fully with the body parts in place.  Tommy John surgery for baseball players is similar, but your leg is more foundational than your arm, since without it you can't even get out of bed.

I had to wait before deciding on the surgery, since I didn't want to ruin my summer and then I couldn't do it while teaching.  But by the time I could have had the surgery, I was already back on the tennis court, wearing a bulky knee brace.  After a bit, I was actually moving about as well as I did before the injury (and mobility was always my #1 asset), although I could clearly tell in some other settings that the injured knee is far from 100%.  Carrying a heavy suitcase upstairs, for example, makes my knee get angry and start to threaten me.

One thing that playing tennis without an ACL requires, however, is serious ongoing commitment to the exercise program.  I did what I had to, but it came at the expense of my being willing to put in the time for all my other injury maintenance exercises.  So a couple of months ago I suffered another nasty hamstring pull (in the leg that still has an intact ACL).

Getting over that, and back onto the tennis court, would have been a far easier matter than overcoming a torn ACL.  But this time around, I found that I had simply lost the will to do it.  Too many years of rehab and home exercise programs.  Too much time out of my day - and on the subway, on NYC's least reliable line, the F train - in order to play indoors in New York City on a Hartru court (concrete is far too wearing for multiple body parts).  Too much frustration when I'd play below the level I expected of myself, by reason of being too busy, and traveling too much, to play enough to maintain that level.  So I decided, at least for now: Forget it.

I must say, I've been greatly enjoying NOT doing my home exercise program, NOT riding on the F train, NOT losing 3 hours out of my day twice a week (the minimum to maintain a decent playing level), and NOT experiencing the frustration of playing badly.  So I have no current inclination to go back.  And while this conceivably could change someday, especially if I find myself in a warm-weather climate, I'd have to be super-careful about ramping up again first through a renewed set of strengthening exercises for multiple body parts that at present seem to be applauding my choice not to play, through their compliant and complaisant silence.

Summer research to date

I have just finished a first draft of an article entitled "Taxing Potential Community Members' Foreign Source Income," which I will be presenting at a Citizenship and Taxation Symposium, to be held at the University of Michigan Law School on October 9.  Not quite ready to post it on SSRN, however.

Oddly, it is the same length in pages (46) as my recently posted article on international business taxation, entitled "The Crossroads Versus the Seesaw: Getting a 'Fix' on Recent International Tax Policy Developments."  This one is posted on SSRN, and I will be presenting it in less than two weeks (on June 23) at the 9th Annual Symposium at the Oxford University Centre for Business Taxation.

Next up, I am going to be writing a short piece (supposed to be in the ballpark of 10,000 words) for a forthcoming book that colleagues elsewhere are organizing on the timing of legislation.  I've previously written at length about issues of legal transition, which would be a good fit here, but as those isuess don't currently grab me I'll be writing instead about conceptual problems associated with defining "constant policy" across time.  Most of us would agree that, say, inflation indexing of income tax rate brackets and Social Security benefits increases policy constancy between years, compared to keeping dollar amounts nominally fixed when price levels are changing.  But that's an easy case, and there are plenty of harder ones out there.

After that, I plan to return to my book-in-progress on high-end inequality as viewed through the lens of literature.

Jotwell post on work by Knoll, Mason, and Viard on discrimination against interstate commerce

Jotwell, or "the journal of things we like lots," is a website that seeks to "fill[] a telling gap in legal scholarship by creating a space where legal academics can go to identify, celebrate, and discuss the best new scholarship relevant to the law."  The gap, of course, exists primarily because so many of us are mainly engaged in doing our own work, and secondarily because there often is stronger motivation to attack, than gratuitously praise, other work.  (Just as chimps shriek and wave branches around when they see rival troupes, rather than inviting them to come in.)

I've agreed to write a Jotwell "jot" annually.  Two years ago, I wrote something about Benn Steil's book about Bretton Woods. Last year, I addressed Piketty.

This time around I have written a piece, just posted here, lauding recent scholarship by Michael Knoll, Ruth Mason, and Alan Viard that addresses the legal definition of discrimination against interstate commerce, and that appears to have completely persuaded the Supreme Court majority in the recent state income tax law case, Comptroller v. Wynne.  I'm glad to give these individuals (all admittedly friends) some well-deserved praise, and I also briefly address the direction of legal scholarship and offer an overview of the underlying issue and their arguments.

The discerning and well-informed reader may note that I share these authors' lack of enthusiasm for "double taxation" as a useful analytic frame, as you can see, for example, here. My work to this effect addresses issues in international, rather than state and local, taxation, but there is something in common (pertaining to an instinct for substance over formalism) as between the two sets of issues.

Law and Society Association conference in Seattle

We're now about halfway through the 3rd out of 4 days of the Law and Society Association annual meeting in Seattle.  As readers of the Tax Prof Blog will know, for some years Neil Buchanan has very successfully organized what is essentially a separate tax conference within the broader LSA conference.  The tax sub-conference has a total of 15 panels, generally with 3 or 4 papers each, and you can do the math to figure out about how many tax profs this means are in town.  (Not all stay for the whole thing, of course, but many are attending many sessions.)  At least 6 were at the Mariners-Indians game last night.

The paper topics are quite heterogeneous and don't necessarily have a particularly "law and society" flavor, although some do.  Definitely a good experience, although tiring after a while if you go to just about everything.  I find these types of events stimulating; they both are fun and can expand my imagination and contacts.

There is some overlap with people who attend, say, the National Tax Association annual meetings, but also some people whom I had not recently, or otherwise, or as yet, met.  On balance, attendance is tilted a bit towards juniors, which makes sense strategically, but for someone like me that can actually add to the interest and value, since, while it's fun to see old friends (which has happened here), it's also good to get to know more people, and more about the people, as well as seeing what they're working on or consider interesting.

I have twice previously attended the LSA annual meeting, but this was back in the 1990s, before there was any significant tax sub-conference.  Next year, the LSA meeting, will be in New Orleans (which I like, but have been to quite a lot over the years).  In 2017, it will be in Mexico City, which would be a new location for me and certainly a draw.

Definitely recommended (along with the NTA) for tax law juniors (both U.S. and non-U.S.) who want to break into the academic conference circuit for both social and intellectual reasons.  Also possibly a good venue for tax people in fields outside law, but touching on either the "law" or the "society" angle (one is enough; it doesn't have to be both).  Note also that, unlike the NTA, you don't have to get through the paper acceptance gauntlet at LSA - although, when I co-ran the NTA annual meeting in 2013, we tried to be very inclusive, and I believe that is still the case.  (Plus, they are eager at NTA to attract more lawyers to the fall annual meetings.)

Time is money, of course, especially during the summer, but I tend to find this "money" well spent.

Empirical question: I get the sense that people who get out a lot on the conference circuit often do broader and more interesting work than those of comparable reputational rank who don't.  The hard question is, which way does the causal arrow run, or for that matter do distinct personal characteristics (not otherwise directly observed) lie behind both of these results?

Amy Rigby concert

Last night, at the Hifi Bar in the East Village, I got to see a great Amy Rigby concert, sitting about 10 feet from the stage.  The first photo shows her with husband Wreckless Eric on bass, the second with audience special guests Lenny Kaye and Syd Straw.

Other NYC rock scene fabulosos were also there in the crowd, e.g., Yo La Tengo's Ira Kaplan and Georgia Hubley, as well as rock critic Robert Christgau, plus quite a few more who seemed vaguely familiar, though perhaps it was just because they had that look.  (One of them, sitting next to me, was explaining to Ira Kaplan before the show why Keith Hernandez had mentioned him, i.e., the speaker not Ira, on a recent Mets broadcast.)  Though everyone was nice, it gave me a bit of that feeling that you have when you go to a party where all the people know each other, but you have never met any of them.  But this only mattered in terms of hanging around (or rather not) after the concert had ended.

This was certainly the oldest audience I've ever seen at a rock concert.  I would say that the average age exceeded mine, and that the average number of years since first rock concert attended was probably north of 35.

Rigby is a great songwriter.  While not stylistically path-breaking, her influences generally fit my taste.  They include Chuck Berry, the Beatles, Bob Dylan, other 1960s pop, country music, folk, and singer-songwriter ballads.  But her songs are far more than just tuneful & catchy - they're also literate, witty, observational, and very willing to go for the jugular (hers and others).

She's about my age, left Pittsburgh for New York in the late 1970s when she realized what was happening there musically (e.g., Patti Smith and then CBGB), married the DBs' drummer but then got divorced and was left with a small child to raise on her own and very grim economic prospects.  She spearheaded a couple of groups that became known in the local scene, but not commercially or to me (although I had followed the great NYC punk and new wave bands of the late 1970s).

Finally in 1996, she went solo with "Diary of a Mod Housewife," followed by "Middlescence" and then three more albums, all of consistently high quality, with a theme that remains somewhat unique in the youth-oriented world of pop music. She decided to write about being a thirty-something single working mom with bad prospects, meeting mostly bad men, and struggling with her own issues and limitations as well.  The songs vary from expressing humor to anger to resignation to irony to cynicism to sentiment.  And they're not just words strung together - each one tends to be like a short story, or to develop thematically some feeling or situation.

As tends to happen with this sort of artist, her critical acclaim has exceeded her sales, but she does have followers, fans, and friends, and she has been able to keep on recording music and playing shows. She's an artist / craftsperson of a sort that I could imagine myself having been in an alternative universe (e.g., if my upbringing and skill set were different than in the actual universe, but my taste and mentality remained the same).

Great high-energy show in a small venue, with just a guitar, bass, and drums reverberating through one's bones without being deafening.

She'll be back at the HiFi Bar in the East Village one more time (next Thursday, May 28), and I would have planned to attend again if not for the fact that I will be in Seattle at the Law and Society Association's annual meeting, presenting a paper on high-end inequality and the social science literature.

Just as a sample of her live work, try this solo performance on youtube.

New international tax paper posted on SSRN

I've just posted on SSRN a recently-completed paper on international taxation, entitled "The Crossroads Versus the Seesaw: Getting a 'Fix' on Recent International Tax Policy Developments."

It should be downloadable here.  Somewhat on the short side by law professor standards (46 pages), but fairly densely packed with content although, I hope, highly readable for those with knowledge of the field.

I'll be presenting it at the 9th annual symposium at the Oxford University Centre for Business Taxation, in late June, and also at the National Tax Association Annual Meeting in Boston this November.

You can find the abstract at the download site, but as it strikes me at the moment as a bit too long, I'll just say that the main idea is to discuss 4 recent developments in international tax policy, emergent since the manuscript went final for my book, Fixing U.S. International Taxation, which came out in early 2014.  In particular, I use a kind of two-way arrow: how does the analysis in the book help us to understand those developments, and what retrospective light do those developments cast on the analytical structure in the book?

The four events that I isolate for attention are (1) the new wave of U.S. corporate inversions, (2) the OECD's BEPS project, and in particular its focus on "hybrid structures," (3) enactment of the U.K. diverted profits tax, popularly known as the "Google tax," and (4) recent U.S. international tax policy proposals, by the Baucus Staff and the Obama Administration in its 2016 budget, that appear to make use of my ideas (but in ways that I had not specifically anticipated).

Bentham House conference on the Philosophical Foundations of Tax Law

Yesterday I returned from my short sojourn in London, where I attended the Third Annual Bentham House Conference: Philosophical Foundations of Tax Law, held at the University College London.  This was a very enjoyable and stimulating two-day event in which legal academics from a number of different fields (not just tax) interacted regarding a range of topics.  Murphy and Nagel's The Myth of Ownership came up a lot, as did the work of Dworkin, Rawls, and Nozick, although one of my favorite quotes from the entire session started with the words: "If you are a fan of Aquinas - and who isn't? ..."  Substantive topics included such fare as alternative tax bases (e.g., income, consumption, inheritance, endowment, and wealth), and the ethical issues associated with tax evasion, tax avoidance, and aggressive tax planning.

I presented The Mapmaker's Dilemma in Evaluating High-End Inequality, based on chapter 2 of my book-in-progress, Enviers, Rentiers, Arrivistes, and the Point-One Percent: What Literature Can Tell Us About High-End Inequality.  The slides for my talk are available here.

The sessions reminded me once again of how happily unlike this horrific account my experiences in attending conferences generally are.  In tax, and I think other specialty fields in legal academics, as well as in public economics, just to name the areas best known to me, often people actually do present interesting ideas (without just droning through notes), and then have genuine interactions in the course of discussing them.  The UCL conference was a nice exemplar of the small-meeting manifestation of this, in which there is just one session at a time featuring a smallish group over a couple of days.  A good big-meeting version is the National Tax Association's Annual Conference on Taxation, featuring a cast of hundreds and six to seven sessions at a time.

The small-conference version tends to work best, in my experience, when, like this one, it isn't just a bunch of people who already know each other well, but also features international or interdisciplinary cross-pollination.  You actually form a small society for a couple of days, pleasant itself and hopefully with lasting residue.

Other highlights of the trip, for me, included finding paradise shortly after my jet-lagged arrival in London, at the London Review of Books bookshop and affiliated teashop/cakeshop, and then staggering across the street to the British Museum, where I found a very amusing temporary show, Bonaparte and the British: Prints and Propaganda in the Age of Napoleon.  Here is a photo I took of a postcard reproduction of one of the more amusing prints there.  It shows a charming fella who apparently recognizes the infant Napoleon Bonaparte's future upside potential.

Off to London, or should I say on to London

Having just finished the NYU Tax Policy Colloquium, Year 20 - classes and grading both (although I have no technical means of officially posting the grades yet) - I am off to London tonight.  On Friday and Saturday, I will be attending the Third Annual Bentham House Conference, at the UCL Faculty of Laws (which is part of the University College of London).  This year's conference title is "The Philosophical Foundations of Tax Law."  Basic info about the conference is available here, and the conference program is here.  The papers themselves are only for log-in by participants and attendees.

During a panel that meets on Saturday starting at 10 am, London time, I will be presenting "The Mapmaker's Dilemma in Evaluating High-End Inequality," extracted from chapter 2 of my book-in-progress, "Enviers, Rentiers, Arrivistes, and the Point-One Percent: What Literature Can Tell Us About High-End Inequality."  This paper or chapter mainly presents a large part of the argument as to why the standard public economics and broader social science literatures can't do as much as one might have liked towards helping one to evaluate the normative ramifications of high-end inequality.  Later parts of chapter 2, not yet written but probably not belonging in the stand-alone paper anyway, will address why literature might be of interest here, and what I hope to accomplish via all of the later planned chapters discussing particular works.

While I'm not as yet ready to post "Mapmaker's Dilemma" on SSRN (nor have I decided whether or not to actually, not just virtually, publish it separately), I will probably post the slides for my talk here.  Perhaps, subject to jet lag, as soon as next Monday.

I will also be presenting the paper, presumably with similar slides, at the Law and Society Conference in Seattle at the end of this month.

Tax policy colloquium, week 14: Gregg Polsky's "A Compendium of Private Equity Tax Games"

Here is a picture of a place on Route 23 in Northern New Jersey that is reported to have excellent kielbasa, pierogis, etc.  I'm definitely hoping to try it sometime.

Yesterday, at the last session of the 20th annual NYU Tax Policy Colloquium, we instead had "Polsky Smack" - an illuminating smackdown by Gregg Polsky of current or at least recent practices in the private equity realm.

One could call this our third installment, over the years (I hope I am not forgetting one) of significant contributions to the private equity / "2 & 20" debate.


A long time back, Vic Fleischer presented the initial "2 & 20" piece at our colloquium.  This was before he published it, and thus before it became a huge story.  We then, a few years later, had Chris Sanchirico's piece, in which he discussed the counterparty implications and the fact that one has to look at the transaction as a whole.  (BTW, Chris will be co-teaching the NYU Tax Policy Colloquium with me in January-May 2016, when we will once again meet on Tuesdays from 4 to 6 pm.)

What Polsky's paper brings to the party is a detailed account of current practice, which has some eye-opening elements.  Here's a little hypothetical that can help to convey it here.

Suppose a PE hotshot (aka the Manager) gets tax-exempt investors, such as from pension funds and university endowments, to pony up $100 million ($100M) to buy stock in a public company, meant to be turned over for a large profit in fairly short order.  Despite the difficulties of outsmarting the capital markets, this effort actually succeeds.  In just over a year, the stock is sold for $200M.  (Rather a flattering example, don't you think?  I rather doubt that this is par for the course, and hesitate to reinforce genius-PE mythologies, but it makes for nice round numbers.)  The only other flow of funds in the interim, other than between the players in this little drama, is $1M spent out of pocket by the Manager.

They make a standard "2 and 20" deal, under which the Manager will get 2% of the funds under management (i.e. $2M) and 20% of the capital gain (i.e., $20M, as it turns out, given the $100M profit).  But the Manager is also supposed to kick in $1M so he has "skin in the game."  He therefore ends up with a net of $20M (i.e., -1 + 2 + 20 -1).

Economically, we may think of this as labor income.  But it's plausible that he will get to treat the entire $20M as capital gain (CG), taxable at only a 20% rate.  With taxable investors, this would be a detriment to them, but since they are tax-exempt they don't care.

How does he manage this?  The paper identifies 4 strategies, 2 of which it agrees are legal under present law, but 2 of which it says are not under typical deal terms.

Strategy 1: This is the classic CG treatment for the 20% "carry," first identified in academic circles by Fleischer, and reflecting the standard rule of partnership tax law that the entity-level characterization of income (capital gain from selling a capital asset) works through to the partner level.  Despite a recent case on ERISA law, Sun Capital, which arguably supports viewing the PE as in business, and thus as selling a business asset, rather than a capital asset, yielding ordinary income, Polsky believes that this classification is likely to be safe unless Congress enacts a statute changing it. Such an enactment strikes me as unlikely, despite public sentiment which probably (insofar as the public has a view) would strongly support it, unless Congress needs a pay-for to help fund something bigger, in which case it might start to become affirmatively likely.

All this was well-known before.  But what about the +2M, which is ordinary income, and the two -1Ms?

Strategy 2: Through bogus paper-shuffling that lacks any economic substance - as we are told in the paper, based on familiarity with real-world examples - the parties pretend to do a deal in which the manager waives $1M of his $2M in exchange for boosting his capital interest from 20% to 21%.  Hence, with these numbers, he loses $1M in ordinary income fees, but gets an extra $1M of back-end capital gain.  In effect, they purport to change the deal from "2 and 20" to "1 and 21," but highly tailored arrangements are used to make sure that absolutely nothing will actually change.

A point to note here is that, if the parties actually did agree to "1 and 21" instead of "2 and 20," then unambiguously there would be only $1M of ordinary income and $21M of capital gain (ignoring for now the $2M in outlays).  But the parties apparently didn't want to do this upfront, since the Manager likes getting a $2M guarantee.  So they wait until they know the outcome and then purport to change it, without actually doing anything to subject the Manager to the entrepreneurial risk that he had been eager to limit to the 20%.  Thus, suppose the law was being enforced properly, and the parties responded by keeping the deal at "2 and 20."  This would be an example of the Manager's risk aversion operating as a friction that constrained tax optimization,  There is really no other reason for us to care whether he bears more risk or less.

Getting to the paper's elements of "Polsky smack," the paper argues that, under actual deal terms that are standard, and in light of such provisions as IRC section 707(a)(2(A), which deals with disguising payments for services as other partnership transactions, the chance that this strategy actually "works" as reported is so low as to invite comparison between any tax lawyers who give the thumb's up here and those who were marketing corporate tax shelters 15 years ago.  This is not a characterization that the lawyers working on these deals are likely to embrace.  As it happens, I gather that the elite law firms that often do the transaction work here pointedly do not opine, nor are they asked to, that the strategy actually works.  But the IRS hasn't issued express guidance to the contrary, and the audit rate here (so far as we know) is effectively zero.

Strategy 3: OK, so now we're down to $1M ordinary income and $21M CG, leaving aside the offsets.  Suppose the remaining $1M management fee is used to fund the "skin," which is unproblematic (after all, it is still first reported as gross income).  That provides an actual $1M basis for the capital interest that yields the $21M gross return, so we are down to $20M CG, which is fine taking everything else here as given.  But what about the $1M that the Manager spends out-of-pocket?  Since he is spending it in order to earn $1M ordinary income and $20M capital gain, arguably it should be allocated between the two, and perhaps 95.2% to the latter if one adopts a pro rata approach in the absence of anything better.  But because of the so-called INDOPCO regulations (perhaps better termed the anti-INDOPCO regulations, since they involved the Treasury's deciding to retreat comprehensively from a Supreme Court victory on capitalization vs. expensing issues in the eponymous case), the entire amount is allowed to be expensed.  Thus, it reduces the Manager's ordinary income to zero, while his CG remains at $20M.

Here, like Strategy 1, we have something that the paper agrees is legal under current law, although arguably inappropriate on policy grounds.  BTW, note that, if I can decide to spend additional amounts, deductible against ordinary income that is taxed at, say, a 39.6% marginal rate, in order to generate additional CG that will be taxed at only a 20% rate, I may profit after-tax even if each extra dollar that I spend generates less than a dollar of extra CG.

Strategy 4: Here we are back in the realm of Polsky smack, i.e., the calling out of taxpayers and their tax advisers for doing things that may be unsupportable under present law, and thus reliant on the audit lottery for their payoff.  (Although it's not really even a "lottery" if the audit rate is effectively zero.)  The investors can't use the deduction for the $1M gross fee that remains after purporting to convert half of the original $2M into more "carry."  So they push down the deductions to the portfolio company - i.e., they cause it, rather than the partnership with all the investors in it, to be the party that actually pays this amount to the Manager.  There may even be a 1-to-1 offset - i.e., each penny paid by the company reduces by a penny the amount to be paid by the investors through the fund partnership.  This is done in a non-arm's length fashion, and without regard to any services actually offered to the company by the Manager, given that it doesn't matter economically which level pays.  It would be looting of the company if there were minority shareholders outside the partnership, but since there aren't, it is instead (the paper argues) a disguised dividend.

One point of possible interest here: Even if this push-down of the fee deduction has no economic substance whatsoever, it is possible that the Manager is actually doing things for which the company would be willing to pay, in an arm's-length set of arrangements between distinct parties.  In relation to this point, let's return to the basic question: How is it that they bought a $100M company, and just a year later sold it for $200M?  I see 3 basic possibilities, which differ in 3 dimensions.  First, would the company pay for it in an arm's length transaction?  Second, does it create income that the corporate tax reaches?  Third, does it have social value commensurate with its private value?  The first point relates to evaluating Strategy 4 if the parties did it properly from the start, while the second and third relate to my next topic here: evaluating the tax results normatively.

1) Stock-picking - To put it in terms of a polar case although in practice there might be a bit of each scenario, suppose the Manager does nothing whatsoever to the company. He is merely a stock-picker, who believes that it is undervalued and will soon go up.  At the termination date he is proved correct, although of course it might have been just luck rather than skill.

Here the company basically wouldn't pay anything for someone simply deciding to bet that its stock is going to go up.  Its operations and profitability aren't improved in any way.  Also, here the corporate tax doesn't reach the trading gain, which effectively is a betting transaction between winners and losers in the Great Casino on the side, and the private gain greatly exceeds the social gain (since the money is just going from other investors' pockets to those of the lucky ones in this deal).

2) Business strategy - Suppose the Manager does stuff to the company's operations, so that they become more profitable.  The company would pay for this at arm's length, the corporate tax will reach these added profits if it is otherwise operating effectively, and the private gain may at a first approximation equal the social gain,

3) Tax strategy - Suppose the Manager improves the company's tax planning, so that it pays a lot less tax on the same "true" profits as previously.  For example, this might involve levering up the company with lots more debt.  (But given the stock appreciation, apparently the market hadn't already been assuming that this would be done.)  The company would pay for this at arm's length, the corporate tax will not reach the added after-tax profits - it isn't taxed on paying less tax - and the private gain at a first approximation greatly exceeds the social gain.

OK, onto the bottom line: What if anything is wrong with all this in substance?  (Leaving aside the paper's central focus, which is on taxpayers not complying with the law on the books, and the IRS's failing to enforce that law.)  More specifically, is $20M in capital gain, rather than ordinary income, to a high-income Manager who is economically earning labor income as bad as it looks?

On the whole, I would say yes.  But two points that are at least quibbles, and potentially more than that, need to be addressed.

1) What about the counterparties? - If there were taxable, rather than tax-indifferent, counter-parties (i.e., the investors), the net tax benefit from arranging things so that the Manager gets CG instead of ordinary income would be reduced.  Indeed, if the net tax benefit were eliminated, I would say the problem was entirely eliminated, other than as a matter of optics.  But I gather that the investors really are generally tax-exempts.

Might a counter-party analysis still incline one to a more favorable view of the tax results here than otherwise?  This amounts to asking whether the tax-exempts ought to be able, in effect, to sell tax benefits that they can't use, in particular from the CG label for gross income that a transaction produces, and from investor-level deductions that they can't use.  Although this would require a longer discussion than I feel I should include here, my conclusion is No, but it's a fair topic for debate.

2) What about the entity-level corporate tax on the portfolio company? - Insofar as what's going on, beneath the surface of this little story, is that the Manager made the company more profitable via the choice of a new business strategy - and insofar as the corporate tax is actually functioning well enough to reach the resulting increase in corporate income - there really is no problem here.  Indeed, one might even conclude that taxing shareholder-level CG, including that pocketed by the Manager, results in inefficiently over-taxing corporate income relative to other income.  But this is not the case insofar as the $100M CG in this little story reflects either stock-picking, or the Manager's improving tax minimization at the corporate level.

Strange but true

Last night, while walking down 6th Avenue en route to dinner, I saw this delightful image on a poster for the new Poltergeist movie.  Overnight, for some reason, this creature seems to have inspired a dream in which he or it was the star of a comedy called "Undercover Klown" (as it was definitely spelled in the dream).  I woke up with a strong sense of how hilarious (and lighthearted) this comedy was, in my dream, but with absolutely no memory of how or why.

A misunderstanding

Yesterday, on my way home, a bit after 6 pm, I poked my head into a new restaurant nearby and asked the proprietor: "Are you open for lunch?"

I was thinking about the lunches with speakers that we have at our Tax Policy Colloquium.

He said no, but with an odd tone, as if he resented or disliked the question.  So when I got home, I checked the restaurant's website, and it turned out that they are open daily from 11 am on.

I think he may have interpreted my question differently than I meant it.

NYU Tax Policy Colloquium, week 13: David Schizer's Energy Tax Expenditures: Worthy Goals, Competing Priorities, and Flawed Institutional Design

Yesterday David Schizer presented the currently above-titled paper at our penultimate session.  The title has changed since he last presented it at another school, and probably will again, as it really isn't on tax expenditures in particular.  Definitely one of the more Graetzean subtitles that I've seen in anything not actually written by Michael Graetz.

While the paper offers a general overview and framework for thinking about the taxation of energy in light of multiple considerations (global and more local environmental concerns, national security, distributional effects, instrument design, etc.), I will emphasize one particular aspect here.  Schizer notes that it might be highly desirable to raise the gasoline tax in the U.S., perhaps significantly.  Even apart from the positive effects on highway funding given our fiscal mechanisms, this might have both national security and environmental benefits.  At present, however, this faces what appear to be, at least in the short run, insurmountable political barriers.  (Plus, he has previously written about the gas tax.)  So what might we do instead?

Here is an idea that the paper sketches out - somewhat preliminarily, as it is an early draft.  Suppose the big political obstacle to increasing the gas tax is that people just don't like being charged for their driving - national security, environmental, and other negative externalities be damned.  In the words of Mary Poppins, just a spoonful of sugar helps the medicine go down.  So if we stapled the gasoline tax to a lump sum transfer, it would look like it was merely reducing a positive amount, rather than creating a liability.

Thus, suppose Congress enacted a $400 "gas-savers' credit."  This would basically be a uniform demogrant going to each household, or individual over the age of 18, or taxpaying unit, or whatever.  (Separate set of questions, obviously, regarding how to define the recipient unit.)  But the credit you would get at the end of the year would be reduced by a charge per gallon of gas purchased or used or deemed purchased or used.  Suppose the average tax charge for the year was about $200.  Then, on average, the recipients would get $200.  If you don't have a car, you presumably end up with $400 - leaving aside questions of how we handle business use, e.g., in the case where I ride on a taxi or bus.

Given the demogrant, the thing would function at the margin as a gasoline tax.  Only, the hope is, people would code it as merely reducing the pat on the back for virtue, rather than as a nasty ol' penalty.

Suppose it is indeed a $400 demogrant per adult, on average $200 net.  Assuming that low-income tax-filers manage to get it (and, note of course, that if netted on income tax returns it would increase "47%" style claims about takers), its cost would depend on the current U.S. population of people over age 18.  This currently stands at about 250 million.  So we are talking an annual budgetary outlay of $50 billion (under this admittedly back-of-the-envelope analysis), enacted so that we can overcome the political unfeasibility of raising the gas tax.

One conceded design flaw is that, once you get to $400 in gas taxes, as high-mileage drivers presumably will, it disappears and there is no net tax at the margin.  (One could of course change that feature, but it would undermine the "spoonful of sugar" presentation.)  To minimize this problem, one has to set the demogrant much higher than the average gas tax that people incur.  Just how much higher presumably depends in part on variance in driving levels within the U.S. population.  But with significant variance, a high net budgetary cost becomes more necessary.

Another design issue is that it requires somehow tracking how much each person drives.  This would be tough to do at the pump.  Other possibilities that I have heard mentioned (i.e., I am not myself advocating them) include using GPS technology, looking at people's odometers when they have mandated inspections, and piggybacking off car insurance companies that use mileage-related fee structures.

Business use would appear to be another big issue.  One doesn't want cab drivers, or for that matter Uber drivers, to get to $400 and then be able to pay no tax.  What about truck drivers and other people driving long distances for business.  What if I have two cars, perhaps one of them in a family member's name, and so forth.

I have to admit, I don't really see this as likely to help sufficiently.  Even leaving aside all the implementation issues, stapling the gasoline tax to what might be in the neighborhood of a new $50 billion net outlay is not where I would look first, or second, in terms of making the gasoline tax more politically feasible.

I also think that political opposition to the gas tax is not quite innate, even within the distinctive DNA of U.S. tax culture.  After all, there are high gas taxes in many other countries.  And it has bipartisan support in the intellectual class.  (Martin Feldstein, for example, favors it with his own proposed spoonful of sugar.)  I get the sense that many responsible Republicans back it, as well as Democrats.  It's just something that can't quite happen just now, but that could happen if the logjam broke sufficiently for proposed alternatives, such as those suggested by Schizer and Feldstein, to be themselves feasible.

Substantively, if we assume political and administrative feasibility, I like the Schizer plan for a reason of my own, which is that I like the $400 demogrant.  Forget the pairing and its optical purposes: insofar as it's workable, this really is the equivalent of separately enacting a $400 demogrant and a gas tax that's capped at $400 per (person or whatever).  I would likely favor the demogrant without the gas tax, just as I would favor the gas tax (though preferably with no per-person ceiling) without the demogrant.  So putting them together isn't inherently bad from my standpoint.  Only, to accept my reason for liking it, you, too, have to like the demogrant, which not everyone will.

If you don't like the demogrant but you do like the gas tax, then, assuming both that the thing works and that you otherwise can't get the gas tax, you have to decide whether you like the package on balance.

While this is a fairly novel proposal (at least so far as I know), it bears a relationship to other ideas that have been posed before.  In the general setting of gas taxes, carbon taxes, and other such instruments, it's sometimes said, for political economy reasons, that we ought to get the incentives right, by having the tax, but avoiding affecting the government's net budgetary position (on the view that this is a separate issue, on which people's political preferences differ) by giving the money back to all the taxpayers in a lump sum, uniform per-person manner.  When you do this, on average everyone pays zero net, but at the margin everyone is paying the tax on extra usage of the polluting commodities, thus satisfying the Pigovian efficiency criterion.

The Schizer proposal, by doing the lump sum payout upfront instead of at the back end, requires overpaying (thus creating a net transfer) if it needs a cushion so that the tax won't disappear at the margin too frequently.  Again, this could either be a feature or a bug, depending on how you like demogrants.  But even in the standard version, only political economy considerations could support choosing that particular payout.  A more general and rational approach would be to set Pigovian taxes as you like without specifying uses of particular tax revenues, and then to figure out the rest of the tax system based on all of the standard considerations, embracing all the usual distributional and efficiency issues.  There is no particular reason, other than making political deals easier to reach, to specify particular outlays with reference to particular revenues.  Money is fungible.

New article draft on international tax policy, perhaps to be available soon

I have just now - and I literally mean, within the last hour - completed a draft of a shortish-by-legal-standards international tax article (just over 16,000 words), tentatively entitled "The Crossroads Versus the Seesaw: Getting a 'Fix' on Recent International Tax Policy Developments."

The basic idea is to establish a kind of cross-interrogation or dialogue between two things.  The first is the main analytical points that I made in my February 2014 book, Fixing U.S. International Taxation.  The second is four prominent developments in international tax policy since the manuscript went final. These are the new wave of U.S. inversions, the progress made since then in the OECD's BEPS project, the U.K.'s recently implemented diverted profits tax (aka "Google tax"), and the introduction of recent U.S. international tax reform proposals that could be viewed as offering suggestions regarding how to implement some of my ideas.

I find that the cross-interrogation or dialogue goes both ways.  I believe that the analysis in the book helps one to understand those developments, but also that those developments have helped me, at least, to think more clearly about some of the issues that I discuss in the book.

My immediate impetus for writing the article was to present it at the ninth annual academic symposium of the Oxford University Center for Business Taxation (at Oxford's Said Business School), which will be taking place this June 22-25.  I also hope or plan to present it at this year's National Tax Association Annual Meeting, which will be taking place in Boston on November 19-21.  And I will presumably aim eventually to publish it somewhere as well.

Forthcoming on SSRN, I suppose, but for now I will sit on it while I turn to other urgent triage items on my short-term to-do list.

NYU Tax Policy Colloquium, week 12: David Albouy's Should We Be Taxed Out of Our Homes?: The Optimal Taxation of Housing Consumption

Yesterday at the colloquium, David Albouy presented the above article, applying optimal tax theory to the question of how consumption via home occupancy should be taxed.  This was welcome diversification of the balance in our overall portfolio of articles for the semester.

I also got an update that I shouldn’t have needed (i.e., I ought already to have been up-to-date) regarding how Albouy has, in prior work (The Unequal Geographic Burden of Federal Taxation), modified or corrected the view taken by Louis Kaplow (in Regional Cost of Living Adjustments in Tax/Transfer Schemes, Tax Law Review, 1995) and Michael Knoll with Thomas Griffith (in Taxing Sunny Days: Adjusting Taxes for Regional Cost of Living Adjustments, Harvard Law Review, 2003) who concluded that generally the income tax system ought not to take into account regional cost of living differences.

By taking a fuller view of how a national labor market with regional wage and price differences operates, in the presence of a tax system that hits wages but not amenities that are accepted in lieu of wages, Albouy finds that “workers in cities offering above-average wages— cities with high productivity, low quality of life, or inefficient housing sectors—pay 27 percent more in federal taxes than otherwise identical workers in cities offering below-average wages. According to simulation results, taxes lower long-run employment levels in high-wage areas by 13 percent and land and housing prices by 21 and 5 percent, causing locational inefficiencies costing 0.23 percent of income, or $28 billion in 2008. Employment is shifted from north to south and from urban to rural areas. Tax deductions [that take account of regional cost-of-living differences] index taxes partially to local cost of living, improving locational efficiency.”

Thus, without impugning the logic employed by Kaplow, Knoll, and Griffith under their assumptions, it may be that one should adopt an opposite conclusion regarding the bottom line question of whether the tax system ought to address regional wage and price differences.  Arguably, the better view is that it should so adjust, due to the distortion that results from taxing wages while not taxing the imputed income (in a broad sense) that a low-wage region may offer at equilibrium in lieu of cash.

 Anyway, on to the current article, which is closely related to the earlier one in focusing on the regional distortions that result from taxing cash wages but not their in-kind substitutes such as good weather.  Here is an expanded version of my own thoughts about the article.  It addresses 3 topics: (1) housing and the work-leisure choice, (2) other inputs to how we should tax housing, and (3) political economy and fiscal federalism considerations.

(1) Housing and the work-leisure choice

Since income (and other related) taxes hit work but not leisure, it’s theoretically agreed that, while we should generally tax all commodities equally, this is subject to the proviso that we should tax those that are leisure complements at a higher rate, and those that are work complements at a lower rate, in cases where we can identify such commodities.  This has the efficiency benefit of somewhat offsetting the tax system’s underlying discouragement of work relative to leisure.

Less well-settled is the question of whether there is much to gain practically by looking for leisure complements and work complements.  But housing is a very important element of overall consumption that clearly might have systematic relationships to this question.  So not looking there would be foolish, yet little has been done on this question in previous work.

As background to this inquiry, the current federal income tax system heavily favors home ownership.  But, on the other hand, state and local real property taxes tend to burden home consumption relative to other consumption.  The net balance is probably pro-home consumption, but one should keep both pieces in mind.

The article identifies several dimensions to locational choices that might affect how we might like to tax home consumption, in view of its interaction with the work-leisure relationship.

(a) “Hawaii versus Manhattan” – To typify this distinction simplistically for clarity’s sake, Hawaii offers nice weather and beach access, which are nontaxable amenities albeit built into housing prices.  Manhattan instead offers two distinct kinds of taxable amenities that are also built into housing prices.  The first (earning amenities) is that you may be able earn a lot more if you live in Manhattan than in Hawaii.  The second (consumer spending amenities) is that you may be better situated to buy nice things for daily consumption if you live in Manhattan than in Hawaii.  For example, consider all our restaurants.

(b) “Westchester versus Manhattan” – Second, even if you work in a high-wage area with low nontaxable amenities, you can either live near work, or else some distance from which you commute.  As I’ll discuss in section (2), there are several reasons outside the simple optimal tax model why we might take an interest in commuting.  But even just within the basic model, the paper offers evidence suggesting that long commutes tend to crowd out marginal work, more than marginal leisure.

The basic argument is to tax Hawaii housing because its nontaxable amenities are a leisure complement and a work substitute, along (perhaps more contingently) with Westchester housing because the commuting also operates at the margin as a work substitute, while subsidizing Manhattan housing because its two types of amenities are work complements / leisure substitutes.  You earn more instead of choosing nice weather and the beach due to the earning amenities, and you use restaurants instead of cooking due to the consumer spending amenities.

This argument makes good sense to me – perhaps no surprise, given that I am a Manhattanite – and of course it dovetails nicely with Albouy’s earlier work concerning the unequal geographic burden of federal taxation.  One point I might add, however, is that Manhattan may differ from Hawaii and Westchester with respect to the marginal effect on work versus leisure of increasing one’s house size, given that one lives in a given location.  In Manhattan, all you need is a roof over your head to have a shot at realizing the earning amenities.  But once you actually have a kitchen, along with enough space to restrain the urge to go out all the time, you may start substituting away from the consumer spending amenities.  So possibly the basic optimal subsidy for the Manhattan housing location should be supplemented by a larger marginal rate of tax on increasing house size in Manhattan than in the other two locations.

(2) Other inputs to how we should tax housing

The paper notes 4 main inputs to how we might want to tax housing, other than those involving the work versus leisure choice.

(a) Positive externalities to urban agglomeration – These might also support a Manhattan subsidy.

(b) Henry George case for a land tax on site value – The famous Henry George argument for taxing site value (as distinct from improvements), because land is relatively fixed and yet taxing it tends to be progressive, is one of those things that is potentially important, generally accepted theoretically, and yet generally ignored.  It’s more important than ever in a Piketty era – especially when it’s been argued that a lot of Piketty’s finding reflect real estate value hikes, rather than a generalized r > g.  Even taxing site value plus the value of improvements (i.e., housing) may retain some of the lump sum tax elements of the pure Henry George land tax, despite its discouraging the improvements.

(c Other commuting issues – One may also want tax housing that is associated with commuting if commuting imposes other social costs that for some reason cannot be taxed more directly.  For example, if we fail to adopt proper Pigovian taxes on the pollution associated with car travel, and also don’t adopt proper congestion pricing for rush hour traffic, taxing the housing in communities associated with such travel may be better than nothing.

In this regard, it’s worth noting that the U.S. income tax system actually does discourage commuting a bit.  We don’t allow commuting costs for going to one’s primary place of work, whereas some other countries (e.g, Germany do).  Purely from the standpoint of measuring income, neither approach is fully correct.

To illustrate, suppose Person A has a job and is choosing between two places to live, one of them downtown with higher rent and lower commuting costs, and the other in the suburbs with lower rent and higher commuting costs.  In this scenario, the U.S. income tax system properly disallows commuting costs as, in effect, rent substitutes.

But suppose Person B has a fixed home and is choosing between two jobs, one near home with a lower wager and lower commuting costs, and the other some distance away with a higher wage and higher commuting costs.  In this scenario, the German system, rather than the U.S. one, rightly frames the taxpayer’s presumed marginal choice.

While I suspect that the U.S. approach is empirically better on balance from an income measurement perspective, the fact that the Person B scenario sometimes exists suggests that we are “inefficiently” (all else equal) disfavoring commuting a bit, as compared to getting it right all the time.  But this may be a good feature, rather than a bug, if we also independently have grounds for tax-disfavoring commuting.

(d) Housing consumption by the poor – There is probably little or no good reason for generally favoring home consumption relative to other consumption. But if homelessness has negative externalities (in addition to being very bad for those who face it), we may want to subsidize housing consumption by the poor, in lieu of just giving them enough aid to fend off homelessness.

(3) Political economy / fiscal federalism

The issues that the paper presents regarding how to tax housing in Manhattan versus Hawaii versus Westchester are singularly those of interest to a national-level decision-maker – not one who is setting tax policy (even optimally from the standpoint of residents) for any of those localities.  This is of especial interest given that the relevant tax instruments include real property taxes that are set at the state and local levels.  Obviously, these issues belong in a wholly different paper, but given the Albouy paper they are worth noting.

Sign of the times

Last year my wife and I went to the Tribeca Film Festival for the first time, saw an absolutely stunning, wrenchingly sad, film called Gabriel, plus a documentary that was just OK.

This year, we're headed back for 4 bites at the apple, no pun intended.  The first two, Bleeding Heart and The Wannabe, were both pretty good - much more interesting than most commercial films, and of the two Bleeding Heart felt more authentic and less genre, but Wannabe was arguably better-done / more professional.  We split 50-50 on which we preferred.

One thing that's getting tiresome is the half-hour sitting in the theater before the show starts (you have to get there early), watching all the sponsors flit by on-screen.  The ads for a Lincoln car, which we've now seen multiple times at both of the pre-shows, truly overload on the 21-tens wannabe billionaire lifestyle cliches.

Let's see: "meticulously curated," "incredibly personal," crafted for "impact plus subtlety," you not only get a personal interview to buy the car but a "dedicated" personal interview.

If they left anything out, I can't think what.

Someone thinks we're stupid

The House of Representatives just voted to repeal the estate tax, while also preserving the tax-free step-up in basis at death for appreciated assets.

As others have said, one couldn't ask for a clearer illustration of House Republican priorities than this unfunded $269 billion tax cut (over the next ten years) for the richest 0.2 percent of households.

But do they also have to insult everyone's intelligence?  Paul Ryan explains that he is trying to help "family farmers ... [and] small and minority business owners."  He claims that, the estate tax is "absolutely devastating" to family farms - even though there has literally never been a single substantiated case where this folk tale (selling the family farm to pay the estate tax) actually took place.

He also claims that repeal would remove "an additional layer of taxation" from assets that have already been taxed.  This despite preserving the tax-free step-up in basis at death for appreciated assets.

Ryan can do what he likes, but it's a shame that he feels free to say things that so clearly are untrue.

Why don't people respond much to marriage penalties and bonuses (insofar as they don't)?

Just a couple of more thoughts about marriage penalties and bonuses in the U.S. federal income tax law, prompted by discussing the issues that were raised by this week's colloquium regarding Larry Zelenak's paper.

First, insofar as marriage rates are observed not to respond much to marriage penalties and bonuses, even in an age when unmarried cohabitation has become far more socially permissible than it used to be, what would be the reason? 

Maybe this sounds a bit too obvious.  It's a big personal life decision, etcetera.  Plus, people often don't know what the marital stakes are, although websites such as fivethirtyeight.com try to fill the gap by offering primers.  But a big piece of it may be the following.  Even the members of tightly-knit couples cannot be entirely unmindful of the statements that they may implicitly make towards each other through their words and actions.  Thus, for either prospective spouse to say “No, let’s not get married as it would cost us $4,000 a year,” may unavoidably risk signaling something about his or her personal level of commitment.  That makes it different from, say, mutually agreeing to live where rents are $4,000 a year lower.

Second, as a kind of pedagogical note, as this came up in discussions during the day, one shouldn't necessarily think that a low behavioral response at the marital margin to marriage penalties means that they are an efficient way of raising revenue.  There is still the question of taxable income elasticity given one's marital status.  Thus, even if secondary earners aren't deterred from marriage by marriage penalties, they may be deterred from working by the marginal effect that this has on them.

One also shouldn't be too swift to conclude that net marriage penalties or bonuses at a particular income level must be affecting vertical distribution.  Suppose "the rich" will pay the same overall taxes either way, and that marriage penalties and bonuses only affect the distribution of the burden among them (what I'd call a "horizontal" distribution question).  Then it's just an issue of how to tax the rich, and whom to define as how rich, rather than affecting things vertically overall.  But admittedly, even if this is true in the long run, the short run can be different, as in the recent case where marriage penalties were pretty much ignored in the course of restoring the 39.6% top bracket.

Marriage or joint filing penalty in student loan repayment plans

I heard about something interesting this week, from students in my Tax Policy Colloquium and brought to their minds by Larry Zelenak's paper on marriage penalties and bonuses.  It was news to me, but apparently is common and perhaps well-known in the demographic of near-graduates from college or professional school who have huge student loans to pay and are making use of the federal income-conditioned repayment program.

Under this program, of course, the more one earns after graduating, the more one may have to pay annually.  Obviously this functions like a marginal tax on earning more, but what I hadn't known about was the interaction with marriage and filing status.

Apparently, the program relies on adjusted gross income (AGI) from borrowers' tax returns to determine how much one needs to pay in a given year.  First point, don't get married and file a joint return, so far as the program's incentives are concerned, if, say, you are both going to be lawyers earning junior attorney salaries.  (Actually, the examples I heard about may have concerned a student borrower marrying someone else, as opposed to two student borrowers getting married.)

Second point, you can get married after all, so long as you use the "married filing separately" category.  Since the program looks at AGI, doing this keeps your spouse's earnings out of the AGI on your tax return.  And apparently the loan repayment benefits from doing this may significantly outweigh the general disadvantageousness, within the income tax, of married-filing-separately status.

But apparently that comes at a further tax cost, since I am told (though I have not independently checked this) that those who select the married-filing-separately status are barred from taking advantage of special income tax deductions, subject to an income phase-out, for student loan interest.  To beat that as well as the loan program, you have to not get married.

It's obviously preposterous to have the application of the student loan repayment program turn on whether married individuals select "married filing jointly" or "married filing separately."  But is the question of how the loan repayment program operates, with respect to household or marital status, any different from that regarding tax and transfer rules generally?

One difference might be that, depending on the numbers and also on responsiveness in the affected population, marriage penalties here may simply be "too large," even if one is not wholly averse to them in all circumstances given the broader issues raised by household status.

A second difference is that we might need to think more about the purposes being served by the income-conditioned loan repayment program.  Suppose that it is rationalized, not just as tailoring loan repayments to ability to pay (and thus generally offering income insurance to participants), but also as specifically addressing the payoff that the borrower has derived from the education that triggered all those student loans.  The idea might be: We're sharing the risk by making you pay more if the educational loans really pay off big-time (at least, ignoring the point that correlation needn't imply causation - I may not make it big BECAUSE what I learned or my degree helped me so much).

Insofar as that is the rationale, one might conclude that purely individual rather than household "taxation" should apply here.

Nice job, CEOs

Due to pigheadedness, at least 50 percent of it mine, we've had a scheduling conflict at NYU the last couple of years, with both the Tax Policy Colloquium and the Law and Economics Colloquium meeting on Tuesdays in the spring semester.  This unfortunately will continue next year, as no one has blinked.

Just as a matter of topic, not all of the L & E papers interest me, and the same of course is true in the other direction as well, but there are cases running both ways in which the organizers of one would have liked to attend the other.

Good example next Tuesday, when we will have a very interesting paper on the optimal taxation of housing consumption by David Albouy.  Meanwhile, the Law & Economics Colloquium will have a paper by Rob Daines (formerly NYU, now Stanford) on options and executive compensation.

Here's the abstract:

"In the wake of the backdating scandal, many firms began awarding options at scheduled times each year. Scheduling option grants eliminates backdating, but creates other agency problems. CEOs that know the dates of upcoming scheduled option grants have an incentive to temporarily depress stock prices before the grant dates to obtain options with lower strike prices. We provide evidence that in recent years some CEOs manipulate stock prices to increase option compensation. We document negative abnormal returns before scheduled option grants and positive abnormal returns after the grants. These returns are explained by measures of a CEO's incentive and ability to influence stock price. We document several mechanisms CEOs use to lower the strike price, including changing the substance and timing of the firm’s disclosures."

Nice stuff, huh?  I am glad these CEOs are working so hard; it's just too bad for whom they're working.

Vastly easier and less painful tax filing

Nice article in today's Times about Joe Bankman's longstanding advocacy of less painful tax filing.  The story of how Intuit has been "ferocious" (the Times reporter's word) in opposing this otherwise almost universally win-win reform, spending millions of dollars on lobbying to oppose it, is one more dark chapter among many in how interest group politics distorts public policy.  Intuit would evidently rather sell us things than have us get them far more cheaply and efficiently.