Global Tax Conference at NYU

On Friday, October 28, from 8 am to 4:30, we'll be hosting a conference at NYU Law School (in Vanderbilt Hall, room 210) entitled Divergent Country Views of Base Erosion and Profit-Shifting. This is a follow-up to the June 1 conference on OECD-BEPS that we co-sponsored in Amsterdam with that event's hosts (and co-sponsors this time as well), the Amsterdam Centre for Tax Law.  More information, including re. how to register, is available here.

The conference will feature divergent views - the title is definitely right about that - from academics, practitioners, and business people from the U.S., the EU, and Brazil, regarding OECD-BEPS, the EU state aid cases, country-by-country reporting, and less-developed-countries' issues with treaties.  Indeed, here is the schedule:

8:15 AM – 9:45 AM:  Panel 1:  European Commission State Aid Cases

• Dan Shaviro (NYU Law) (moderator)

• Itai Grinberg (Georgetown Law Center)

• Hein Vermeulen (University of Amsterdam)

• Dennis Webber (University of Amsterdam)

9:45 AM – 10:00 AM:  Coffee Break

10:00 – 11:30 AM:  Panel 2: Predictive Value of BEPS Country-by-Country Reports

• Joshua Blank (NYU Law) (moderator)

• Steve Wrappe (KPMG)

• David Ernick (PwC)

• Reena Bhatt (Geller & Company)

11:30 AM – 1:00 PM:  Lunch Break

 Afternoon Session (Vanderbilt Hall Room 204)

1:00 PM – 2:30 PM:  Panel 3: Less Developed Countries and Tax Treaties

• Rick Reinhold (Willkie Farr & Gallagher) (moderator)

• Steve Dean (Brooklyn Law School)

• Lily Faulhaber (Georgetown Law Center)

• Michael Lennard (UN – by video)

2:30 PM – 3:00 PM: Coffee Break

3:00 PM – 4:30 PM Panel 4: US Compliance with the OECD BEPS Project

• Mitchell Kane (NYU Law) (moderator)

• Stephen Shay (Harvard Law School)

• Dennis Webber (University of Amsterdam)

• Gustavo Vettori (Fundação Getúlio Vargas)

4:30 PM:  Concluding Remarks

Nobel Laureate message for dark times

Everybody's in despair / Every girl and boy / But when Quinn the Eskimo gets here / Everybody's gonna jump for joy.

Strange days indeed

It's hard to stay focused or relaxed, what with all the insane political news exploding almost hourly.  Such a giant attention and emotion sink.

But the most satisfying things I did today, when I was able to ignore the Internet for periods here and there, were (1) figuring out how to explain a couple of international tax rules more clearly (I hope) to my class, (2) improving the opening to my E.M. Forster chapter, although I may be unable to do very much more on it for the next 2 months, and (3) quasi-following a Thai recipe for sautéed fish (flounder came out okay although the recipe rightly called for something meatier).

I will also be putting myself on Twitter at some point soon, although  more to link to this blog (and possibly news items in my field) than for anything else.  I don't plan to tweet away about the likes of presidential debates or even tax reform panels.

Video from Tax and Human Rights Conference

Video has now been posted of the sessions at the Tax and Human Rights Conference that took place at NYU on Friday, September 23.  The video from my panel is here, so you can see my talk, once I've been introduced, right at the start, and ending at about 15 minutes into the video.  Unfortunately, the powerpoint slides that I was using can't really be seen in the video, but they're separately available here.

State-level earned income tax credits

I was the discussant at the very last panel of the NYU-UCLA Tax Policy Conference.  This had the disadvantage of putting me in front of a half-empty room, as many of the participants had already fled for the airport or the LA freeways in advance of maximum rush-hour gridlock.  For this reason, I never like going last at a conference, although by definition it's bound to happen to somebody.

The upside was that at least I got to comment on an interesting paper: "Upward Mobility and State-Level EITCs," by Kim Rueben, Frank Sammartino, and Kirk Stark.  They discuss the different by which various states supplement or otherwise add to the federal income tax system's earned income tax credit for low-earners.

There are a number of different ways in which a given state can supplement the EITC. For example, a number of states simply have a straight "piggyback," adding a specified percentage to the amount provided by the federal EITC. Other states choose to target the state-level EITCs in particular fashions, e.g., by focusing on particular populations.  Thus, the District of Columbia expands the EITC for childless individuals.  California enhances it for the lowest-wage workers who are eligible for the federal EITC, and phases it out even while the federal EITC is still expanding for people in the upper regions of the federal phase-in.

Among the most interesting issues raised by the Rueben-Sammartino-Stark paper, and by the provisions that they discuss, are those pertaining to (1) why have an EITC and how it might optimally be designed in the single-government case, (2) fiscal federalism and the state versus federal question, and (3) interactions between the federal and state EITCs, and how they might be viewed from the federal perspective.  E.g., to what extent are the states expanding versus modifying versus contradicting / offsetting the policy aims of the federal EITC.

The slides for my comments, which offer some preliminary reflections on these questions, can be found here.

Putting the comment in my last post a bit less flippantly

From Josh Marshall:

"I don't think we can discuss this debate as citizens, take stock of it as a country, without noting that this is certainly the first time one candidate has openly threatened to jail the other candidate. Trump said openly that he would instruct the Justice Department to open a new investigation of Clinton and that he'd make sure it ended with her imprisonment. That's something we expect in kleptocracies and thin democracies where electoral defeat can mean exile, imprisonment, or death.

"Such a ferocious claim, one that puts our whole constitutional order on its head, is not something that can be easily undone. That's the ranting threat of a would-be strongman and dictator. The threat itself is like a bell that can't be un-rung. Through the course of what was often an ugly debate, I was thinking a lot of the destructiveness of this entire campaign, virtually all of which stems from Trump's transgressive, norm-demolishing behavior. It's a topic ... the country is going to need to wrestle with. None of this is going to disappear after November 8th. These are slashing wounds to the country's political fabric that will at best leave tremendous scar tissue we'll still see for decades."

UPDATE: Will Wilkinson of the libertarian Niskanen Center agrees.

It's just my opinion, but ...

... it's probably not a great answer to: "It's just awfully good that someone with the temperament of Donald Trump is not in charge of the law in our country," to say: "Because you'd be in jail."

NYU-UCLA Tax Policy Symposium

This Friday, I will be appearing at the Sixth Annual NYU/UCLA Tax Policy Symposium, the schedule for which you can find here.

This year's topic is "Tax Policy and Upward Mobility."  I'll be the moderator and discussant for a paper by Kim Rueben, Frank Sammartino, and Kirk Stark, entitled "Upward Mobility and State-Level EITCs: Evaluating California's Earned Income Tax Credit."

I've spent most of today preparing my slides, at the risk of putting myself a bit behind the 8-ball with regard to other upcoming responsibilities (all that TV stuff took time that I didn't entirely have, but at least I didn't accept everything that was on offer).

I'll post the slides here early next week.  I think I've found a couple of interesting things to discuss, albeit cursorily for the purposes of 10-15 minute verbal comments, and I may flesh them out a  bit later on if, as I seem to recall, I'm expected, or at least encouraged (or, short of that, at least permitted), to write them up for purposes of the Tax Law Review symposium issue that will eventually appear, containing most or all of the conference papers.

Jack Mitnick for president?

Trump campaign surrogates have been claiming that their snarling hero is a tax "genius" who has used the tax laws "brilliantly."  Trump himself claims to understand the tax laws "better than almost anyone," which ostensibly shows what a great president he would be.

But Jack Mitnick, the semi-retired 80-year-old accountant who actually prepared the 1995 tax return with the $900 million loss, reports that Trump' played no role whatsoever in preparing his own tax returns.  Indeed, as paraphrased by the Times, Mitnick reports that Trump, unlike his own father, "lacked a sophisticated understanding of the tax code, and ... rarely showed any interest in the details behind various tax strategies."  All he knew was that the people working for him "could use the tax code to protect him."

The one thing Trump apparently did do was show up annually, with his then-wife Ivana, to sign the tax forms, but even then "it was almost always Ivana who asked more questions."

The Times also quotes Mitnick as saying that Trump's "use of net operating losses was no different from that of his other wealthy clients. 'This may have had a couple extra digits compared to someone else's operation, but they all benefited in the same way.'"

Genius in the form of generating losses with "a couple extra digits" is something, perhaps, but not quite the same as what we have been hearing about from the Trump campaign.

Donald Trump and the passive loss rules

Back in 1986, when I was a Legislation Attorney at the Joint Committee on Taxation, I was a member of the staff team that worked on drafting and designing the passive loss rules, which famously dinged tax shelters in general, including those that used real estate investments.  (Shelters were more general than this, however - e.g., cattle feeding shelters were another big favorite, and I remember one which involved marketing master cassette videotapes of Vincent Price narrating passages from the Bible.)

So it's been interesting - a trip down memory lane and all that - to see the passive loss rules resurfacing in re. Trump's taxes.  But this has actually followed two distinct channels.  First, however, a bit of background.

The passive loss rules' basic aim, in very broad overview, is as follows.  At the time of enactment, people with sources of high taxable income that could not directly be tax-massaged very much (e.g., salaried professionals such as doctors, dentists, and lawyers) were buying investments that were designed to generate large tax losses, without commensurate economic losses.  These losses were used to offset the positive taxable income, hence "sheltering" it.  So the rules said: If you invest in a passive activity, i.e., one in which you do not "materially participate" or that is a rental activity (since those often require little work), you generally can't deduct any resulting passive losses against your nonpassive income.  This appears to have been quite effective in shutting down the 1980s-era tax shelter industry, although as usual there are empirical questions about what caused what.

In 1993, or six years after I had left the JCT and started my academic career,Congress enacted a special exception to the passive loss rules, permitting people who qualified as real estate professionals to avoid having their rental real estate activities treated as passive. This meant that their tax losses from these activities could indeed be deducted against other positive income.

Anyway, onto the dual Trump connection.  First, yesterday's NYT had an editorial decrying Trump's tax avoidance, and singling out the exception to the passive loss rules for real estate professionals cas case in point. The Times rightly notes that this would have permitted Trump to deduct tax losses from rental real estate against "earnings from The Apprentice and money made from selling steaks and neckties."

Fair enough. But I'll admit that I never considered the passive loss rules' impact on that type of circumstance as being really at its core, which (as noted above) had more to do with the mass-marketed tax shelter industry of that era.

Second, someone sent me the tape and transcipt of a 1991 Donald Trump CSPAN appearance, as a witness at a House hearing about real estate policy, available here.  (You have to scroll down a bit for Trump's testimony.) Interesting stuff.

An initial point is that reading this transcript increases my estimate of the probability that the Trump of today is suffering from age-related dementia.  (This is actually something that I have been wondering about.)  He is more coherent and focused - able to speak in complete sentences and pursue a single line of thought - in the 1991 tape & transcript than he appears to be today.  But what he has to say about tax policy is rather amusing.

In particular, he denounces the 1986 Tax Reform Act, and the passive activity rules in particular, as a horrible disaster for real estate. Given his line of business, he is understandably upset that the passive loss rules took passive investors out of the market, thereby (he asserts) depressing real estate prices and activity.

It does, however, feature a comical misunderstanding by Trump of how market economies operate.  He says we are now in a Soviet-style world where there are no "incentives" to invest.

But what he means by no "incentives" to invest is that the only reason to invest would be expecting an actual (and pre-tax) profit.  So, for Trump in 1991, "Soviet-style" means market-based, whereas the approach that's actually closer to being Soviet-style - having the government, through tax policy, decide where investment capital should go - is supposedly its opposite.

At least Trump in 1991 sufficiently had the courage of his convictions to say that tax rates should be much higher than they were after 1986 - not, mind you, to raise revenue or in pursuit of tax fairness, but simply to make the tax incentives (if delivered in the form of deductions) more powerful than they would otherwise be.

I know of no other case in which someone called for higher tax rates just to make tax incentives more powerful.  I recall from 1986 that the charitable community was very aware that lower tax rates would be expected to reduce charitable giving, all else equal, but the use they made of this was more to argue that something else should be done for them than to say that rates should stay high just for their convenience.

Needless to say, lower tax rates don't have to imply weaker tax incentives for particular activities.  E.g., Congress could provide percentage credits in lieu of deductions.  An example would be combining (a) reduction of the top tax rate from 50% to 28% with (b) conversion of charitable deductions into 50% credits, so that if you gave $1 to charity you got a 50-cent credit against your overall tax liability.

TV appearances, the day after

A Reuters story on which I briefly speak about Trump's $900 million loss is available here.

From an NBC Nightly News bit, I'm quoted in the article here. A clip that appeared on-air at about 6:35, on which I'm briefly on-screen, can be found here.

My MSNBC segment with Lawrence O'Donnell and David Cay Johnston can be viewed here . It's 12:52 long, and I speak briefly at about 9:35 and 12:20. One small clean-up bit: on the first soundbite, I note that Trump's extremely low "salary" on the leaked tax return might be related to avoiding the Social Security and Medicare payroll tax.  I was thinking of this in terms of a general practice of paying himself as little "salary" as possible. O'Donnell then makes a comment which might be read as implying that Trump wouldn't have been subject to the payroll tax on anything else from the NYT leak (e.g., Schedule C income), which I did not mean to suggest but couldn't address in the hurly-burly of things.

And, not a moment too soon, it's back to regular day life (teaching an International Tax class, working on the E.M. Forster chapter in my literature book, etc.).

TV night

I might be in a brief clip tonight on the NBC Nightly News, on a story that might start at 6:35 or so, and am also apparently going to be live on MSNBC's 10 pm show tonight with Lawrence O'Donnell (the other guest on this segment will be David Cay Johnston).

Mark Cuban weighs in

Another perspective on Trump's $900 million loss, from Mark Cuban:

"Cuban said voters shouldn’t rush to the conclusion that Trump’s loss is simply the result of failed casinos.

“'If Donald is taking tax shortcuts, maybe he bought an insurance company instead of doing something in real estate,' Cuban speculated, 'and he took a huge tax write-off to offset income.'

“'We’ve all heard about tax scams and tax shelters, right? What we don’t know is whether or not this is a tax shelter,' he added. 'This could be something where he got involved in currencies or insurance tax shelters, there a thousand and one tax shelters that were very aggressive and were being offered at the time.'

"Cuban recalled that in the '90s, 'there were accounting companies, accounting agencies, and tax shelter companies coming to me, offering me ways to offset my income so I didn’t have to pay taxes.'

“'We don’t know. And that’s the inherent problem,' he continued. 'There’s no transparency, and he is so ashamed of what he’s done, he’s not willing to speak up and explain to us what happened.'”

Cuban is right that these sorts of things were around in the 1990s, and were generally on offer to people such as himself and Trump. He also is right that the NYT reveal doesn't in any way rule out this being the cause.  And he's right that a shelter of those kinds certainly could have been used to create a $900 million loss.  For that matter, they could have been used to create a $900 billion loss. One of their core features was to use circular cash flows to create fake losses.  E.g., suppose I purport to pay you $X, and you purport to pay me $X, and I claim that my payment to you is currently deductible, while yours to me is not currently includable.  Then, since it's just a sham swap of offsetting notional amounts, we can make X as big as we like.

The reason I'd continue to assume that this is less likely than the real estate scenario is that the IRS did eventually get around to being fairly assertive in countering these scams, so it might not have worked. Plus, they were generally used to offset positive taxable income, not to set up huge NOLs that would be used in the future, probably for reasons centered on the hope that one wouldn't be audited (which becomes a bit tricky when one is claiming a $900 million loss).

Still, it's a possibility worth keeping in mind.

Three main takeaways from the Trump tax story: business, tax, and policymaking

An extra day's reflection helps me to see more clearly what are the three main takeaways from the NYT's Trump tax story.  Nothing new here, just a matter of suggesting the right emphasis.

1) Business - Not many people could lose $900 million like Trump did.  But we've already seen his management skills at work in the presidential campaign.  Feckless, erratic, and undisciplined are not the qualities one would want in either a business person or a president, and the fruits here are plain for all to see.

2) Tax - Here I think the big story is that, while it's likely that someone lost $900 million, it probably wasn't Trump.  The question of what happened to debts that he presumably escaped in bankruptcy looms over the loss claim here.  Now it's possible that debt cancellation later on, while not creating taxable income because the discharge occurred in bankruptcy or when he was insolvent, reduced the NOLs.  This is consistent with the known facts, which solely relate to 1995, but we can pretty much rule it out because then the Trump campaign could have pointed out that he didn't spend all the years since using NOLs for someone else's losses against his own income.

So it's plausible that he avoided reduction of the NOLs, by either a more straightforward method or a more esoteric one.  The straightforward method would involve electing, under Internal Revenue Code section 108(b)(5), to reduce the basis of depreciable property before taking a hit to his NOLs.  But the problem with this is that it would in effect reduce the NOLs, albeit slowly, via the loss of depreciation deductions over time.  Even for real property, which gets depreciated slowly, this could add up after a while.  So the more advanced method, involving dubious tax planning, would be to try to park the debt somewhere where it wasn't formally forgiven but in actual economic effect was, thereby getting to continue deducting other people's losses.

Let's try to put this more saliently. It's all very well (to tax experts if not the general public) to pay no tax for years because one's loss years plus one's gain years didn't actually add up to a net gain.  But it's not so innocuous if, in effect, he was deducting other people's losses against his income.

3) Policymaking - If that's what he did, does that, as the Trump campaign would have it. show that he's a "genius" and knows the Code better than anyone, hence can fix it?

Anyone who actually thinks that Trump knows anything about the federal income tax, please raise your hand.  This is not a man who can read more than two sentences in a row, or who appears to know much of anything about anything substantive.  The last time I checked, the best tax experts get paid a lot of money because they actually can read, think, and analyze things.  Whatever his skill set, it doesn't appear to include any of that.  But also, as many have pointed out, his latest tax plan, possibly the most detailed policy proposal that he has issued in any area (although he is trying to have it both ways on whether all business would get a 15% rate), does nothing whatsoever to eliminate any of the games that he (presumably through his advisors) played.  Instead, all it does is throw further giant tax cuts at people like himself.

Coupla Trump tax follow-ups

The Trump campaign said he "has a fiduciary responsibility to his business, his family and his employees to pay no more tax than legally required."  While that's ludicrous - one might as well say he has a fiduciary responsibility to all of them not to over-spend on personal helicopter rides - I would agree that he didn't have a responsibility of any kind to pay more than was legally required.  But as I discuss in this article, the legal defensibility of one's positions doesn't put an end to all ethical issues, especially if one is planning aggressively in "unintended" ways, relying on legal uncertainty and the audit lottery, etc.  (Yes, you can be audited every year and yet be playing the "audit lottery" - the relevant question is whether the auditors detect a questionable tax position with sufficient acuity to subject it to proper challenge based on a decent understanding of the underlying facts.)

Still, I think the bigger takeaway from this is that he's a bad businessman (other than when selling his name as a brand), and that he wanted to try to hide all this from public view, rather than getting it out early and moving on.

The revelation of likely use of NOLs to zero out tax liability helps one to refine the questions associated with the Trump Foundation diversion-of-income scam.  To the extent he still had NOLs, they would have sheltered the diverted payments, but this might have had the effect of using up the NOLs faster (depending on what was left, how fast they were expiring, his ability to "freshen them up," as it's called, etc.).

Insofar as he would have had offsetting income inclusions and charitable deductions - seemingly true for some but not all of the Trump Foundation stuff - if he was getting his income to zero anyway then he wouldn't have been able to claim the charitable deductions due to the AGI limit (30% for gifts to private foundations, 50% for most other cash gifts).  But there is also a charitable deductions carryover - generally 5 years.  Use of the carryover is itself, of course, subject to the annual percentage-of-AGI limits.

Might there be a scenario in which Trump's possibly illegal use of the Trump Foundation as a diversion of income piggybank might actually have been bad tax planning?  Not impossible, but one would need particular numbers to make this scenario work out.  Still, let's give it a try, if only for the fun (?) of it.  Say that in Year X Trump has $1 million of expiring NOLs.  He ends up with zero taxable income due to diversion of $1 million to the Foundation, so the NOLs expire unused.  Say also that the Trump Foundation uses the $1 million in a way that would have given him a charitable deduction if done directly.

Now in the non-diversion counterfactual, he has $1 million of income pre-NOLs, zero post-NOLs, and a $1 million charitable deduction that he can't use.  But he also has a $1 million charitable contributions carryforward that he can use to that value over the next 5 years (albeit, subject to the 30 percent limit annually if it would have gone to the Foundation, 50% if it would have gone directly to the relevant charity).

This is similar to "freshening up" NOLs, although the charitable contributions carryforward is less valuable than an NOL (shorter duration, AGI limit).  We know far too little about Trump's tax returns to know if this scenario would ever have applied, but he certainly seems dumb enough (and poorly advised enough, since he doesn't seem to want good but independent people working for him, plus you can't count on him to pay you) that one shouldn't rule it out.

A broader point, though, is that just because he uses an illegal scam doesn't mean it's actually helping him.  It's just the way he operates.

Trump's $900 million tax loss

People who are quoted in a Politico article say pretty much what I would have:

"Tax experts said there is nothing surprising about the writeoffs Trump may have used to avoid paying federal income taxes for nearly two decades, and that the bigger question is what generated the large losses he reported.

"Losses like the $916 million that Times said Trump claimed in 1995 could at that time be used to offset taxes in the three prior tax years and 15 years going forward. But it’s unknown at this point exactly how Trump accrued those losses, which he claimed during a ruinous financial time for his businesses, and how legitimate they were.

"Nobody thinks that’s wrong,” Howard Abrams, director of tax programs at the University of San Diego School of Law, said of the tax provisions Trump appears to have used. “The question is what generated the $900 million loss.”

“The billion-dollar NOL [net operating loss] isn't evidence of shady tax behavior per se; in fact, I'm sure the IRS audited it,” Alan Cole, an economist at the conservative-leaning Tax Foundation tweeted. “It's evidence of bad business.”

Joe Thorndike, director of the Tax History Project at Tax Analysts, said: “Obviously the optics are less than ideal from a political standpoint. But on its face, using losses to offset gains is routine and uncontroversial. In fact, it's part of what makes the income tax work as well as it does.” 

The tax advantages that the real estate industry can exploit are well known to tax experts. For instance, Abrams said, while commercial real estate historically increases in value, owners can take deductions as if it were depreciating.

“It seems that Trump may have been part of Mitt Romney's infamous ‘47 percent,’” Thorndike said. “But like many other nonpayers, his status could have been a function of deliberate tax policy decisions, not creative tax avoidance or sneaky ‘loopholes.’”

"Abrams agreed. “If the deductions are overly favorable, they need to change the law,” he said."

In sum, a few main points. Horrid business decisions (since those were good times economically) generated large economic losses.  Favorable tax rules, such as depreciation deductions for property that is actually appreciating economically (and that one can then borrow against, generating interest deductions) could have made the tax losses larger than the economic losses. One thing I do wonder about is why Trump's bankruptcies didn't require reduction of "tax attributes" such as net operating losses. E.g., if you wipe out a $100 million debt due to bankruptcy, you escape having $100 million in "cancellation of indebtedness income" in exchange for having tax attributes such as NOLs reduced by that amount. (But there are tricks that taxpayers can play to minimize that.)

The reason why using NOLs is not inherently objectionable can be explained as follows. Say Trump, being an incompetent businessman but good at "branding," loses $900 million when he actually tries to run businesses, but then makes $900 million by licensing his name. Over time his net income is actually zero.  So taxing him the same (i.e., zero) as his net equal in business savvy, the guy who makes exactly zero each year, is not inherently inappropriate.

That said, losing so much money that you don't have to pay tax for a long while upon gradually recovering it doesn't exactly show that you're "smart."  And it's clearer than ever that, without daddy's original stake, this guy would likely be washing dishes somewhere, and wishing he had saved something for his retirement.

Rational markets

Justin Wolfers speculates, based on stock price movements as Clinton's chances improved during Monday night's debate, that a Trump victory would lower stock prices by 10 to 12 percent, even though he has promised enormous corporate tax cuts that (all else equal) would raise stock prices even if they didn't help the economy as a whole.  Insofar as investors are positively pricing in his tax cut promises, this must mean "they believe that the rest of his economic program will do enough harm to more than offset the benefits [to companies] of lower taxes."

Wolfers adds that the adverse stock price reaction "might reflect concerns about Mr. Trump's unconventional approach to the Federal Reserve, worries about a possible trade war, fiscal irresponsibility, apprehension about national security, or simply the cost of greater uncertainty."

Wolfers' historical research, with fellow economists Erik Snowberg and Eric Zitzewitz, going back to 1880 (!), finds that "no [other] candidate moved the market by more than a couple of percentage points."  But of course we already knew that we were in historically unique territory here.

The Trump tax-exempt foundation story

I was among many tax people who spoke to David Farenthold as he researched his Washington Post story on diversion of income from Donald Trump to his tax-exempt foundation.  In case you haven't seen the story, the key reveal is that "companies that owed money to Trump or one of his businesses ... were instructed to pay Trump's tax-exempt foundation instead, according to people familiar with the transactions."  An example is the $400,000 appearance fee that Comedy Central reportedly paid to the foundation, rather than to him.

In some instances, what then would happen is that the foundation would make charitable or other payments on Trump's behalf to settle his business liabilities. These payments might well have been deductible by Trump himself, had he made them, whether as business expenses (where compelled to settle a dispute) or as charitable donations.

In a pure case, diversion of income is tax fraud plain and simple. Think of the characters in The Wolf of Wall Street taking suitcases full of $100 bills to Switzerland, so they could be secretly depositedd in a Swiss bank account without ever being declared as U.S. taxable income. That is an illustration of what is absolutely the canonical, core case of criminal tax evasion.  So the question is, to what extent was something similar going on here?

First point against equating the two: no net tax saving for Trump in any case where inclusion and deduction of the same amount would have occurred in the same year, but for the use of the foundation as an intermediary.

Second point against equating the two: reflecting that equivalence, there is a common practice, when people such as entertainers or politicians, want to help a charity, of their providing services for a fee or other profits (such as gate revenues) that are paid to the charity, rather than to them.  Sometimes it's legally unclear whether what they've done should be classified as (a) donating services for the charity, which is tax-free or (b) making money that they then donate to the charity, which would require express inclusion plus deduction.

The main reason it can make a difference is that charitable deductions generally are limited to 50 percent of adjusted gross income (AGI).  Thus, suppose my AGI is otherwise $1 million, but that I want to provide services that will cause the charity of my choice to earn $3 million.  If this money is deemed to have been paid directly to me, then my AGI is $4 million and I can only reduce it to $2 million via the charitable deduction.  (The extra $1 million deduction can be carried over to the next taxable year.)  But if it's outside my income altogether, then I get to report only $1 million of income, which is arithmetically equivalent to having been allowed the excess deduction after inclusion.

Though I am not an expert on tax practice in the charitable area, I have the sense that practice and enforcement can be a bit flexible and accommodating in this scenario, even though the "donation of services" rubric can be used (where what actually happened is better viewed as receipt followed by donation) as a means of evading the AGI limit on charitable deductions.  I believe that the reason is not just that the line can be hard to draw in some cases, and more reliant on careful planning than on true differences in substance or intent, but also that devising a workaround with respect to the 50 percent AGI limit is considered far less of a malum in se than classic Wolf of Wall Street-style evasion.  One isn't lining one's pocket, relative to the case of simply not providing the services, and as it happens the rationale for the 50 percent of AGI limit may not be all that strong to begin with.

A third ambiguity, raised by a Trump advisor who is quoted in the Farenthold story, pertains to a different set of facts than I have assumed so far.  Suppose I decline to be paid for something I have done, but suggest that the donor instead pay the amount to the charity of his or her choice.  Then there is authority for classifying this as a tax-effective renunciation by me of income that I would otherwise have earned. This, however, would be inapplicable to the facts that Farenthold reports unless it was the donor's idea, rather than part of the deal's terms, to donate the money to the Trump Foundation in particular.

When one puts all this together, including suggestions that some of the Trump Foundation's outlays were not just for Trump's benefit but would not have been deductible by him (e.g., paintings of himself, or a Tim Tebow helmet), then one is definitely inching closer to Wolf of Wall Street territory. But admittedly the facts are still unclear, and establishing criminal intent would require more than has yet become known.

What would the requisite criminal intent here involve? In a Wolf of Wall Street scenario, it pretty much speaks for itself. You don't really put money in suitcases (or taped to your body) that you smuggle through Customs unless you are knowingly engaged in tax evasion. But suppose it were to be established, through the testimony of people working for Trump, that he considered the Trump Foundation's money to be his, hence available to pay for anything he liked. Then telling people to pay the Trump Foundation, rather than to him personally, would become harder to explain innocently. So a finding of self-dealing by the Trump Foundation, in violation of the charitable rules, would also, in this context, tend to strengthen the case for fraudulent assignment of income upfront.

One last point: even if it was just a matter of avoiding the AGI limit on charitable deductions, rather than of using the Trump Foundation as an untaxed piggybank for personal inurement, there's every reason to believe that actual tax dollars were at stake. After all, while we haven't gotten to see Trump's tax returns, there are widespread suspicions that he regularly drove his AGI and taxable income so low that the 50 percent limitation might well have been a serious constraint, even though there is evidence suggesting (despite his frequent protestations to the contrary) that he does not actually give much to charity, other than to settle liabilities of his business organization.

UPDATE: One further aspect that I forgot to include the first time through is SECA tax liability. This is the self-employed individual's analogue to the Social Security and Medicare FICA taxes for employees.  It might be raised as an issue by the Comedy Central fee, although presumably not for the amounts that Farenthold reports Richard Ebers paid to the Trump Foundation for tickets and the like.  How large the stakes would be here depends on whether Trump already had sufficient reported income from self-employment to place out of the Social Security piece.  (This would only take about $100,000, depending on the tax year as it's indexed to inflation, but who knows how he was structuring things?)  The SECA tax rate stands at 15.3% until one gets above the Social Security ceiling, whereupon it declines to 2.9% for just Medicare.  The latter rate would amount to $11,600, if applied to a $400,000 fee (like the amount reportedly paid by Comedy Central).  Chump change for Trump? You tell me.

Also, for gifts to private foundations, the AGI limit is 30 percent, not 50 percent.

Exposed

Let's face it, there's something almost glamorous about being an existential threat to everything positive that the United States has achieved over the last two-plus centuries, such as prosperity, the rule of law, progress towards racial justice, and a respected place in the world.  But apparently ninety minutes is enough to strip off any such glamor, and show that the bearer of the threat is just a dull, angry, incoherent, ranting old bore.

An NYU Law School first?

I am wondering whether my colleague Lily Batchelder's paper, "Families Facing Tax Increases Under Trump's Latest Tax Plan," might actually be mentioned, or at least referred to, during tonight's presidential debate, whether by Hillary Clinton or even by moderator Lester Holt.

From the abstract: "Donald Trump's latest tax plan would cost more than $5 trillion over 10 years. Trump claims his plan would cut taxes for every income group, with the largest tax cuts for working- and middle-class families. But despite its enormous price tag, his plan would actually significantly raisae taxes for millions of low- and middle-income families with children with especially large tax increases for working single parents....  I conservatively estimate that Trump's plan would increase taxes for roughly 7.8 million families with minor children. These families who would pay more taxes represent roughly 20% of households with minor children and more than half of single parents. They include roughly 25 million individuals and 15 million children."

The paper notes 4 reasons for this effect: repeal of personal exemptions, repeal of head of household filing status, replacement of the 10% bracket with a 12% bracket, and relative lack of benefit to low- and middle-income caretakers from Trump's ostensible tax deduction and credit for child care (which is actually a deduction for having children, insofar as it doesn't turn on actual outlays).

Now admittedly, whenever one changes things around in ways that include some tax-increasing provisions as well as tax-reducing ones, there is a likelihood that some will lose. Thus, suppose there were 20 million affected lower-income households, half of which won and half of which lost from a set of changes. Until one knew more about who won and lost, as well as why, one couldn't easily say whether this was better or worse or neutral as a distributional matter, compared to the law it replaced. But I suspect, from the list of reasons for the adverse effects, that there is a downward skew here - i.e., the losers are often particularly worse-off than others.  After all, having (a) more children, (b) a higher percentage of one's income in the lowest bracket, and (c) only one parent in the household often would correlate with being especially economically vulnerable.

UPDATE: Sure enough, the research in Lily's paper came up at the debate.

More on the Brian Wilson concert

The Brian Wilson concert was great - astounding playlist of classic songs (and a few, mainly later in the first half, that were OK but not quite in the same league), performed with enormous skill by an extremely talented group of musicians.  I also thought the acoustics were good; I gather the Beacon has a reputation for that.  And they played for more than two hours total, even with the intermission, with unflagging energy from the ten or so musicians who accompanied Brian.

But I found it interesting to reflect about his role in it all, given how completely dispensable he was musically, and yet at the same time vital to the experience - not just to the audience, but probably also to the other musicians.  Without him there, it's just a superior cover band doing someone's hits.  Yet any other aging luminary whom one might see on the road these days - Dylan, McCartney, the Stones, Neil Young, what's left of the Who, Springsteen, Hot Tuna, Yes, what's left of the Dead, etcetera - would always be the musical focal point of the concert, even if ably helped by younger and more energetic musicians, whereas Brian's role was just to be ... there.  He plinked at his piano occasionally, although I never clearly heard him in the mix, he sang some of his old vocal parts to the extent they are still within his range (but he's really no singer any more), and he very briefly introduced most of the songs.  E.g., "Surfer Girl" is the first song he ever wrote, he considers "God Only Knows" the best song he ever wrote, and he loves the drumming on the instrumental track "Pet Sounds."

Ringo Starr in the Beatles Anthology interviews says that fans during the touring days "didn't come to hear us [obviously enough given the screaming], they came to see us."  It wasn't quite like that with the older crowd that goes to a Brian Wilson Pet Sounds concert in 2016, because we certainly did want to hear all the songs performed, with full achievement of the studio effects plus live-in-the-house sound.  Also, it wasn't quite just to see Brian, at least in the same sense as the fans who in 1965 wanted to see the Beatles.  We know that he has what's been called a "schizo-affective disorder," is out there more than a bit on the Asperger's spectrum, and doesn't actively retain the talents of his younger days.  And it was sad to see how stiff he was when he tried to bow at the close, not to mention when he shuffled off the stage near the end of each set while the band was finishing its last song.

Not that it's a huge sacrifice to go to a concert where a technically great band plays some of the best popular music of the last 55 years, but part of it - certainly for me, but I think for others as well - relates to the emotional pull of the Brian Wilson story.  This is the myth that's actually true, about the genius (with more than a touch of the idiot savant) who hears these incredible things in his head, just wants to record them, and runs into hateful, manipulative people, with their own shallow and selfish agendas, who destroy him.  (Unfair to Mike Love, perhaps - he felt he had a family business to run, and here's this crazy visionary who's flipping out on drugs and doing all these things that will hurt sales, not to mention that the genius doesn't seem to want to work with Mike any more, and is getting impossibly grandiose and irrational to deal with, while all his new hangers-on keep telling him he's a genius who's being held back by his bandmates, and some of them have sinister agendas.  But still.)  Then Brian spends decades in a haze, it's a miracle he's still alive, he spendsmost of this time convinced that the last of his visions (Smile) was drug-addled garbage, and then finally, at the end of it all, he's vindicated.

So you want to be there to celebrate what he did, and his triumph, and to let him know what it means to you, even though it's not entirely clear at what level he takes this all in.  With the tug of that story, plus the music that you get to hear live, it's a great concert experience even though the star's job is just to be there, as a physical matter, up on the stage and in full view.  

The boy who lived

Brian Wilson concert at the Beacon Theatre tonight, honoring the 50th anniversary of Pet Sounds (which they played in full after the intermission).

He's almost like a stiff, old giant crustacean, seated at a piano at center stage with his white helmet hair, doing some of the singing (with varying degrees of enthusiasm) but never trying any of the high notes, which he can no longer reach (so they're done by Al Jardine's son, second from the right in the back).

While Brian is not needed on stage to create any part of the sound - they don't rely on his keyboards, and others could do all of his vocal lines, for the most part better (at this point he is only intermittently expressive or on the beat) - he is of course needed up there as the show's symbolic focal point.  By seeing him up there, we honor him for having written and arranged all that great music, for having suffered so much, and for having survived, and I think one reason for cheering is out of the hope that he'll enjoy feeling appreciated now.

Slides for my conference talk

Excellent conference, which ended just a half hour ago, on "Human Rights and Tax in an Unequal World."  Very diverse range of topics, ideas, and approaches, but it also hung together well.  Props to Philip Alston and Nikki Reisch for all their great work in bringing it to life.

While it's a bit too late on Friday afternoon, after a long day, to say anything more about it at the moment, here are the slides for my talk (with one slight addition, motivated by a tweet about one of my slides before I made the editing change).  And the paper itself is here.

"Human Rights and Tax in an Unequal World": NYU Law School conference this Thursday and Friday

Tomorrow and Friday at NYU, we will be holding our long-planned conference on Human Rights and Tax in an Unequal World.  Very good and varied speakers list, bringing together lots of interesting people who are not always seen at the same venues.  You can find a full schedule and program here.  It will take place at Lipton Hall (108 West 3rd Street).

I myself will be speaking at Session 4, which meets on Friday from 10:30 to 11:45 am.  Here again is my paper (mainly in the form of a dialogue between two fictional individuals).

Further information, including re. how to register to attend the conference, is available here.

Two birds with one stone?

An op-ed by Morris Pearl in today's NYT argues the following: "With companies engaging in high-risk tax avoidance, the investing public needs more information, clearly expressed.  Investors should, at a minimum, be given a list of all countries in which a company operates, the revenue and earnings attributed to each country, and the amount of taxes paid in each."

He argues that, otherwise, investors can't realistically evaluate tax risks, such as those in the Apple case.  I gather that neither Apple nor its peer companies had pre-2014 financial accounting reserves for what's now clearly threatened by the EU state aid cases, because their advisors blithely thought there was no risk.

There are obviously more issues to consider with regard to Pearl's proposal.  For one, would it further empower governments to challenge companies' tax positions?  That might be good for the world, but is less good for current shareholders, who benefit if the positions aren't challenged.  Note, however, that investors generally shouldn't mind, since a higher expected tax bill would presumably be built into the stock price at which they bought.  Note also that OECD-BEPS may succeed in inducing some measure of country-by-country reporting anyway.  (This ostensibly would not be public, but one would not be surprised if salient tidbits leaked out.)  What's more there are already instances in current financial reporting practice of apparently sacrificing accounting accuracy for ethical / compliance reasons (e.g., not taking into account tax savings that have a less than 50% chance, even if well above 0%, of being sustained).

Companies no doubt will also argue - I don't know how credibly, as this isn't an area of personal expertise - that publicly reporting the information would give competitive advantages to rival companies, including those not facing U.S. reporting requirements, by revealing info about the scope and direction of their operations.

But the points in favor include not only that emphasized by Pearl - that otherwise investors may be under-informed about significant tax risks - but also the point, which has come out in accounting research over the last ten-plus years, that companies which engage in aggressive tax planning often turn out  to have unexpected negative earnings shocks even if for wholly separate reasons.  A company's international tax profile genuinely is and should be relevant to investors for multiple reasons, and it doesn't appear that financial reporting to date has done all that it could have to inform investors properly.

Forthcoming colloquium on high-end inequality

As I've mentioned in prior blog posts, during the second half of the semester at NYU Law School, economist Robert Frank (generally at Cornell) and I will be co-teaching a Colloquium on High-End Inequality.  The afternoon sessions, with invited speakers, will be held at NYU Law School, 40 Washington Square South (Vanderbilt Hall), Room 202, from 4:10 to 6:00 pm on Mondays from October 24 through December 5.  They're open to the public, although non-NYU people might want to RSVP in advance (details to be available later).  We'll also be going to small-group dinners after the sessions.

I've previously mentioned the list of speakers, but I now also have the list of papers.  (Indeed, I also now have the papers, which I can send to interested parties, although we'll also be posting most of them online and sending all of them to our email distribution list.)  It's as follows:

October 24 – Robert Frank, Cornell University. 5 short pieces: (1) Why Has Inequality Been Growing?, (2) Why Luck Matters More Than You Might Think, (3) Does Inequality Matter?, (4) Why have weddings and houses gotten so ridiculously expensive? Blame inequality, and (5) The Progressive Consumption Tax.  Guest commentator: K. Anthony Appiah, NYU Philosophy Department.

October 31 – Kate Pickett, Department of Health Sciences, University of York.  (1) Income Inequality and Health: A Causal Review; (2) The Enemy Between Us: The Psychological and Social Costs of Inequality (both co-authored by Richard Wilkinson).

November 7 – Ilyana Kuziemko, Princeton University Economics Department.  Support for Redistribution in an Age of Rising Inequality: New Stylized Facts and Some Tentative Explanations (coauthored by Vivekinan Ashok and Ebonya Washington).

November 14 – Alan Viard, American Enterprise Institute.  Progressive Consumption Taxation: The X Tax Revisited (chapters 1-3) (coauthored by Robert Carroll)

November 21 – Daniel Shaviro, NYU Law School.  The Mapmaker’s Dilemma in Evaluating High-End Inequality.  Guest commentator: Liam Murphy, NYU Law School.

November 28 – Adair Morse, Haas School of Business, University of California at Berkeley.  Trickle-Down Consumption (coauthored by Marianne Bertrand).

December 5 – Daniel Markovits, Yale Law School.  Meritocracy and Its Discontents.

Never give up, never surrender

The tree in the tree pit outside our house seemed to have died, so folks from the city came and cut it down, leaving only a stump.  But it refused to go so easily, sending up an array of branches and leaves.  It was cut down again, but fought back a second time.  Although it doesn't currently look very tree-like, I'm admiring its fighting spirit and wondering if we should keep it there after all.

Interesting article on the EU state aid cases

Mindy Herzfeld has recently posted an interesting News Analysis in Tax Notes (here, although I believe it's behind a paywall), entitled "Is the EU a Country?: Creditability of State Aid."

Three points of particular interest in it are as follows:

1) "To state aid and EU law experts, the Apple decision came as no surprise. Those who study the development of EU law are well aware of the methods the commission uses to expand its authority over EU matters and how it has continually extended the scope of state aid and competition law. The Apple decision can be viewed as a logical progression along those paths. From the perspective of the evolution of EU law, the recent state aid decisions are simply the latest example of the commission's use of all its available tools to expand its authority into areas where it has not been granted specific powers under the EU treaty. State aid observers also view the extension of state aid principles to tax rulings as a necessary corollary of the state aid doctrine. Given that state aid is essential to protect the single market, restrictions on the commission's ability to apply those principles to tax benefits granted to individual companies -- including via tax rulings -- could render moot the entire doctrine as countries would seek to recharacterize direct subsidies as tax preferences."

She then notes that there is a genuine debate under EU law as to whether the EC's authority should indeed override that of national tax authorities.  But for me an important takeaway from this passage is that it strongly suggests the state aid rulings were indeed foreseeable, and that if Apple's experts (along with those of other companies facing state aid investigations) did not realize this, it was their own failure to exercise proper due diligence. Is it asking too much for the tax experts to realize that they should talk to people who have been following broader EU legal developments, including in the state aid area? There were, after all, large stakes in accurate financial reporting (even leaving aside the underlying planning).

2) Regarding the question of whether the amounts that will be paid to Ireland and other EU countries under the state aid cases (if the EC's position prevails) will qualify for foreign tax credits: "How Ireland recovers the amount from Apple is relevant for the creditability of that amount because, as mentioned, a foreign levy is creditable only if it is made under the foreign country's authority to levy taxes as determined under U.S. principles.

"Ireland will likely do everything it can to characterize the recovery amount as a tax to help Apple claim the FTC. But regardless of how Ireland characterizes the payment, the question still remains whether an amount being levied by the Irish government because it has agreed to EU competition policies, and by virtue of having signed the TFEU and made it its national law, is being levied under its taxing authority as determined under U.S. principles.

"There do not appear to be any authorities on whether a foreign country that is not levying a tax because it claims the ability to do so under its own authority, but because it is being forced to do so as a result of a treaty obligation, should be considered exercising its authority to levy taxes under U.S. principles."

I myself would bet in favor of an ultimate U.S. legal determination that the taxes are creditable, but that basically just reflects a hunch on my part that, even if the IRS contests this point (which it conceivably might not), the basic policy behind the FTC, such as it is, supports creditability so long as we are confident, as I think we can be in these cases, that the U.S. taxpayers were not paying the extra levies voluntarily or via collusion of any kind.

3) "In an article on the history of U.S. international tax rules, Michael Graetz and Michael O'Hear have described the U.S. FTC system as extraordinarily generous ("The Original Intent of U.S. International Taxation," in Follow the Money (2016)). Others have agreed and questioned whether the United States should continue to offer a dollar-for-dollar offset against foreign taxes paid.

"In 'The Case Against Foreign Tax Credits,' (3 J. Legal Analysis 65 (2011), Daniel Shaviro of New York University School of Law questioned whether the FTC is the best tool for attaining U.S. tax policy goals and suggested it might be prudent to consider an alternative. Recent developments in international tax worldwide -- including expansive assertions of the permanent establishment concept in the U.K. and Australia, and of the existence of PEs on audit in India, and encouragement from international organizations for developing countries to assert more taxing jurisdiction at source -- indicate that this is an appropriate time to consider other options. But for now at least, the administration is instead advocating for a worldwide minimum tax, which will only continue to encourage foreign countries to increase their taxes to soak up taxes that would otherwise be paid in the U.S."

Yes, we all like being cited.  But I mention this here because I agree with Herzfeld that recent developments, including the EU state aid cases, do indeed raise the issue of whether a marginal reimbursement rate of 100 percent for foreign taxes paid (as foreign tax credits offer, absent the applicability of foreign tax credit limits or the complicating effects of deferral), can create significant incentive issues for U.S. companies that ought to be of concern to U.S. policymakers.

Slides on high-end inequality from my talk yesterday at Ohio State College of Law

Here are the slides that I used yesterday for my talk at Ohio State, entitled "The Mapmaker's Dilemma in Evaluating High-End Inequality."

Talk at Ohio State Law School today

Today at Ohio State Law School, I gave a talk on a piece  that, in the form I presented it, is somewhat of a hybrid between a forthcoming U Miami Law Review article of mine and chapter 2 of my book in progress on high-end inequality.  The "long" version, which features a far more extensive discussion of Diamond & Saez's work on high-end tax rates than I will try to cram into the book, is available here.

The article is entitled "The Mapmaker's Dilemma in Assessing High-End Inequality."  My talk mainly addressed the piece itself, but also touched more generally on my book project, on which I felt I received encouragement as well as a couple of good suggestions regarding novels I might consider.  I will post slides from the talk once I am back at NYU (tomorrow) and can conveniently create a link to them on the NYU Law website.

It was nice to see a couple of former students of mine who now teach tax at OSU, and also to get a sense that people in other disciplines than law may find the project interesting.  As it happens, publishing the book is not quite as straightforward as it is for my more standard tax policy volumes - it's kind of in a unique genre or creating a genre, which makes it slower and harder work to write.  My current first choice is to find a sympathetic editor at a university press who would not just publish it, but offer helpful feedback reflecting such individual's complementary knowledge set to mine.  (I hadn't generally felt a need for that in my straight-up tax or budget or entitlements policy books.)  But a second thought could be to find an interesting non-university press that was intrigued by and right for the project.  It's a bit too high-end (like the inequality I discuss in it) for a mass audience, but there is the potential to interest a lot of readers who would not be so interested in, say, my previous book, Fixing U.S. International Taxation.

 Any thoughts on this that readers of this blog might have would be most welcome.

My article on the Treasury White Paper and EU state aid

There's no non-paywall-protected link for it yet, but today my short article "Friends Without Benefits? The Treasury and EU State Aid," ran in Tax Notes and Tax Notes International.

The abstract, appearing up front with my photo and bio, succinctly states: "In this report Shaviro identifies flaws in Treasury's White Paper condemning recent state aid investigations by the European Commission."

The paper departs from the consensus denouncing the state aid cases that seems not only to dominate Washington, but also to have significant, and at times personally surprising to me (in its shrillness and lack of balance or perspective), academic backing.  But the paper also departs in some ways from the main opposing view in U.S. academic circles, as I agree with the Treasury that the U.S. national interest might indicate favoring the scenario where U.S. companies, owned predominantly by U.S. individuals, pay less tax to other countries, rather than more.

What I object to the most is self-righteous cant in favor of the U.S. view, based on ignoring the possibility that we would want to do exactly what the EC is doing if the sides were reversed.  But it is also important to keep in mind that, even though we may have particular zero-sum interactions with our friends across the Great Pond (e.g., suppose that a given dollar of tax revenue will either go to them or to us), in the main our interactions are both friendly and positive-sum.  This ought to be kept in mind when one is deciding how aggressively to respond to disputes that arise in the zero-sum setting.

Irish TV interview

I am about to stroll over to the East Village to tape a brief interview for Irish television with economist David McWilliams.  The topic, of course, is the Apple/Ireland EU state aid case.  I don't know how or when this interview, or a piece of it, might appear on Irish television.

McWilliams, I gather, has responded to the European Commission's EU state aid decision by calling for his country to re-position itself as an "Atlantic Ireland with European links," rather than a "European Ireland with Atlantic links."  Whether this is right or not would be hard for me to judge from across the Pond, but he certainly has a point about the distinction between Irish and EU interests here (I have instead been focusing on the distinction between US and EU interests).

The tricky part of it all, as I think he recognizes, is that, as I discuss in my forthcoming Tax Notes piece, friendly or affiliated or allied countries frequently have a mix between zero-sum and positive-sum interactions, requiring delicate strategic calculation when the former are embedded in the latter.

More on this, perhaps, after I return from the interview.

UPDATE: Nice chat, and I may at some point have a link to what gets broadcast.

IRS preemptive strike?

This coming Monday, Tax Notes will be publishing my short article on the EU state aid case, which is entitled "Friends Without Benefits?: The Treasury and EU State Aid."  But here is a kind of teaser as it's on the same subject, addressing a development that came out too recently (i.e., today) for me to discuss it in the article.

The IRS has just issued Notice 2016-52, entitled “Foreign Tax Credit Guidance Under Section 909 Related to Foreign-Initiated Adjustments.”

While I don’t have time right now to parse through it technically (I’m teaching a class in about an hour), it’s pretty clear what they are doing and why.  I’m personally sympathetic to their aim here, although I’ll leave it to others to assess whether, how, and how well the approach that they announce here works technically.

Section 909 addresses foreign tax credit "splitter" transactions like that in the Guardian Industries case, in which taxpayers created what were called super-charged or turbo-charged foreign tax credits, by finding workarounds to avoid the basic requirement or assumption of US law that you can only claim credits by repatriating the associated income.  The basic trick, using transparent entities and the like, was to place the profits in Entity A and the tax liability in related Entity B, so one could bring home just Entity B’s foreign tax credits, without Entity A’s earnings and profits also being included in the repatriation, and use the credits to offset the U.S. tax on other foreign source income.

It’s easy to see why Apple, in the EU state aid setting, would no doubt love to do a version of that trick this time around, if it can.  Say it owes $14.5B of Irish taxes under the state aid adjustment that the European Commission has proposed.  Since Ireland has a 12.5% tax rate, that would imply that the EC required a $116B increase in Irish taxable income.  Suppose Apple responded by repatriating $116B from Ireland (i.e., via a $101.5B dividend, grossed up for the tax liability) in order to be able to claim the credits.  That wouldn’t be so great for Apple, since the US pre-credit tax liability on this amount, at 35% (and assuming no other foreign taxes, for simplicity) would be $40.6B, reduced by the credits to $26.1B.

Now suppose instead that Apple could gin up a way to claim the $14.5B in FTCs without actually repatriating any Irish profits.  Then it would have built-in shelter for other repatriations in the amount of $41.4B that had no associated foreign taxes (and thus that would yield $14.5B in pre-credit US tax liability).  Voila, although Apple is still unhappy about the EU state ruling, at least it got to bring home lots of money for US tax purposes without paying any US repatriation tax.

Would this actually cost the Treasury $14.5B?  In a way no, since Apple wouldn’t have done the repatriation but for having the credits hypothetically made fully available.  But it might cost Treasury money in the future – e.g., if we went to a territorial system but had a deemed repatriation on pre-enactment foreign profits. Apple would have gotten to reduce by $40B the foreign earnings to which such a hypothetical tax on deemed repatriations would have applied.

Plus, as a general matter, the Treasury has good reason to dislike “splitter” transactions, which not only encourage repatriations that might not otherwise have occurred, but also can shelter repatriations that would have occurred anyway (and hence been taxable).  The EU state aid cases present a new wrinkle, by reason of their involving the sudden emergence of lots of taxes from past years that weren’t previously being accrued by the taxpayer, a scenario which certainly would motivate tax planning activity to figure out how to get around pre-existing section 909 and regulations.

Tax Prof blog link to my "dialogue" piece

Courtesy of the Tax Prof blog, a link describing my article, in the form of a dialogue, entitled Interrogating the Relationship Between "Legally Defensible" Tax Planning and Social Justice, which I wrote for the forthcoming (September 22-23) conference at NYU, Human Rights and Tax in an Unequal World.

One might almost read the heading to the Tax Prof blog link as suggesting that Reuven Avi-Yonah and I have coauthored a paper, which we have not, although perhaps someday we should (at times we seem to reach similar conclusions via distinct modes of analysis).

Update: youtube video of my talk at St. Francis University on corporate inversions

The host for my visit to St. Francis University, Ed Timmons, kindly informs me that a youtube video is available for my early afternoon talk regarding corporate inversions in the context of corporate income taxation generally (aimed at an audience without prior tax knowledge).  You can find it here.

Talks last Friday at St. Francis University

Last Friday I was at St. Francis University in Pennsylvania, giving a couple of talks to students and faculty.  The first was a small session in which I discussed corporate inversions and also touched on the EU state aid cases.  My audience was not lawyers or tax people, so I had to start from the most basic foundational issues and work my way up (or down).  I rather enjoy doing this, however, and felt that it worked well.  (One has to start with: What might be the reasons for having an income tax?  And then what happens when you can't reach corporate income unless you impose the tax at the entity level?  And then what happens when you have international considerations?)

In the evening, I gave a talk to a larger audience, entitled "When, Why, and How Do Deficits Matter?" Here is a pdf version of my slides. The first two-thirds discuss how I think one should approach the issues conceptually, while the last third offers a quick tour through some pertinent charts from recent reports by the Congressional Budget Office.

Why not take a broader view?

Gregory Mankiw thinks taxing inheritance is unfair because it taxes the "Frugals" more than the "Profligates," where these are two high-earning couples, the former of which leaves lots of money to their kids (leading to a tax on the inheritance) whereas the latter spend it all on high living.

I guess I shouldn't be too harsh on Mankiw, as my old friend David Bradford took the same view. But even if one shares the intuition, which I think does have something to it (considered in isolation), it is a woefully incomplete way to look at the problem, making it shocking to me that anyone should seriously think the analysis can reasonably end there.

First, Mankiw is looking at "horizontal equity" (and I'll leave to one side all the issues associated with that framework) solely as to the bequestor generation. Why not also make such comparisons with respect to the next generation that gets the bequests?  Again you can have two couples, if you like, but one receives a large inheritance and the other doesn't.  So the former is better-off, and if you're into distributive desert (although that's not directly in my own framework) then you could certainly say it has a large morally arbitrary element. Plus, of course, it affects the relative marginal utility of a dollar to the two couples.

Why adopt one framework, exclusive of the other? Bradford, BTW, realized this was a problem, and I think was drawn by the intellectual aesthetics of modeling multi-generational households as unitary long-lived individuals. But he realized that doesn't capture all of the relevant aspects, and was not involved in active political advocacy to anything like the same extent as Mankiw. So he was more entitled to go, for his own private intellectual purposes, with the aesthetics.

Mankiw also, by ending the inquiry there, leaves out all of the empirical issues that might drive one towards (or, to be fair, away from) favoring taxation of inheritances. For example, suppose (as some empirical literature suggests) that people's work and saving decisions respond less to a tax that will only be levied when they die, than to one that is payable while they are still alive, by reason either of their dislike of thinking about their own deaths or of the particular reasons for their leaving bequests (which do not necessarily reduce to valuing children's utility the same as their own - "warm glow" theories, for example, can play out differently).

Or suppose that extreme high-end dynastic inequality has bad effects on a society.  Then inheritance taxation may be an important instrument for mitigating these bad effects, although one might also want to consider alternative ways of taxing transmitted capital.

There is none so blind as he who cannot see

Yes, I know the saying is supposed to go "will not see," but back in my 20s it amused me to rewrite sayings so they would be more tautological.  Another altered version that I liked was "Always a bridegroom, never a bride."

But today the saying got its revenge on me, as I went full "will not see" with a vengeance.

Here is some advice for you less experienced travelers out there.  If you print out your boarding pass in advance, based perhaps on still not 100% trusting the scannable one on your phone, here is an idea that you might try to keep in mind.  If your boarding pass says "LGA-IED" (as in, LaGuardia to Dulles) probably you shouldn't inaugurate your career as an Uber user - which itself proved baffling at first - by going from lower Manhattan to NEWARK instead, and that during the peak surge pricing period, no less.

I tried doing that today.  And while James Branch Cabell's Jurgen likes to say that he will taste any drink once, frankly this is one drink that I don't much recommend.  Even if you manage, as I apparently ultimately did, to avoid draining the very bitterest dregs.

Going back in time a few hours now that we've set the scene, this afternoon I taught my third International Tax class of the semester,  the planning for which consumed the early part of the day.  I had gotten one point backwards in my head at the previous class, and although I corrected it in time (with prompting) I didn't want this to happen again.  But what I'm trying to say in self-mitigation is, I think I might have been a bit preoccupied.

Anyway, afterwards, I had lots more time than needed to get to the airport.  I'm headed to State College, PA, as I am giving two talks tomorrow at St. Francis College, and the flights from NYC to there are thin on the ground, and nonexistent if one wants to fly direct.  (I otherwise make a point of avoiding Dulles in Washington at almost all costs, but it was the only connection that worked for me with United.)

So I took my time, and still got to Newark quite early, albeit (due to initial Uber travails and the hellacious Holland Tunnel traffic) not quite as early as I might have been.  Over to the security checkpoint, relieved to have Premium Access boarding and TSA Pre-Check, and then the guard tells me that my boarding pass doesn't scan.  Do I have one on my phone?  Yes, but that doesn't scan either.  Then I was the first to notice that my boarding pass says LGA-IED, and I was at EWR.  The guard, by the way, rebuked me for responding to this spiritedly (shall we say), even though my distress was not directed at her.

Now, at this point I might have tried to check for other flights from Newark to Dulles.  But I still had  more than 2 hours to boarding time (and verging on 3 to actual flight departure time), so I decided to take a cab to LaGuardia instead.

Almost a bad choice.  NYC metro area traffic can of course be utterly horrific around the airports and at river crossings, especially on weekday evenings at rush hour, and I had two rivers to cross, through inadequate roads with multiple lanes closed for the never-ending repair work.  It's plausible that, a week or two later, if the post-Labor Day return to normal action levels is gradual rather than instantaneous, I wouldn't have made it, or even come close.  (My cabdriver was frankly skeptical about my chances when we started out.)

Then the traffic gods decided to pump up the cheap suspense like a bad TV potboiler.  (Actually, I thought the final episode of the second season of Silicon Valley was quite guilty in this regard - pointless plot turns just to keep you hanging, too nakedly manipulative to fit the show's tone at its best.)  Traffic initially is faster than expected, so we're going to make it for sure.  But then it's slower than expected, so I'm hanging by a thread but not quite doomed yet.  My cabbie took it very much to heart - he actually asked me to call him to confirm that I had made it, and I did so.  Which gives away the ending, of course - I arrived breathless at my gate in LaGuardia, 5 minutes before boarding time, and figuring that it wasn't all bad (given the Yelp reviews of airport food options) that I lacked the time to eat properly.

BTW, absolutely no way of getting to State College in time for my first talk if I miss the flight, other than through hideous redeye options such as driving all night, or taking an overnight bus that requires walking several minutes from one stop to another at 4 in the morning.  But now, not to tempt fate, it appears that only a mishap with the Dulles to State College flight could stop me.

On the whole, I think this has been quite enough excitement for one day, especially as my flight to State College still doesn't board for 40 minutes and gets in at almost 11:30.  And hopefully, unlike Serena, who was evidently too worn out by yesterday's tight escape to bring her A game today (it's hard at age 34, and I'm a bit more than that), I will have enough game left tomorrow (despite today) both for my talk on inversions, to college students who don't know any tax law stuff (which should make explaining things from the ground level up fresh and interesting), and for that on budget deficits, at which any strong deficit hawks who are in attendance might conceivably deem my approach too conceptually neutral.

On the whole, not recommended.  Abraham Lincoln reportedly liked to mention the fellow who was tarred, feathered, and ridden out of town on a rail, and who responded by saying that, if it wasn't for the honor of the thing, he would just as soon have walked.  I myself would just as soon have headed to the correct airport the first time around.  But I suppose there's a first time for everything (I don't recall ever doing this before).

Over and out.  But next time I will try to look at my boarding pass more carefully, be it paper or on my phone, before I again arbitrarily start heading out to random airports.

New paper (in the form of a dialogue) posted on SSRN

I have just posted on SSRN a short paper that I wrote during the summer, entitled "Interrogating the Relationship Between 'Legally Defensible' Tax Planning and Social Justice."  It was really enjoyable to write, although others must judge whether it is comparably enjoyable to read.  (I am hoping that many will find that it is.)  You can download it here.

The abstract, which also provides relevant background regarding why I wrote this particular paper, is as follows:

This article, prepared for presentation on September 23, 2016 at a conference at NYU Law School, organized by the Center for Human Rights and Global Justice and entitled "Human Rights and Tax in an Unequal World," mainly takes the form of a dialogue between two fictional individuals.  The conclusions that the discussants reach (insofar as they are able to agree) can be summarized as follows:

Large-scale tax avoidance by wealthy individuals and large companies that is legally defensible under relevant national tax laws can nonetheless have major adverse effects on social justice and/or public morale.  However, its legal defensibility complicates analyzing its ethical implications, as compared to the more straightforward case of committing tax fraud.  Legal defensibility also complicates the analysis of the extent to which human rights advocates should focus on such desiderata as “good corporate tax behavior” and the ethics of tax professionals.

Much of this complexity pertains to (1) issues of ex ante legal uncertainty regarding whether a defensible position would actually be upheld if closely scrutinized, (2) the multifaceted character both of tax professionals’ ethical obligations and of their incentives, and (3) the ambiguity of people’s personal ethical obligations to act altruistically, rather than just self-interestedly.  It also is hard to judge the tactical questions associated with focusing on these issues, rather than on the tax rules’ content.  Ethical challenges may help to undermine social acceptance of current practices, but also may distract from legal reform efforts.

Fast writing versus slow writing

Twice this summer I wrote 10,000 word articles in three days.  Neither is posted yet, but they will be soon (my dialogue piece on tax planning and social justice; my piece on the Treasury White Paper on EU state aid). Each time the writing was a flow process, and I think they read well.

Not a similar process for my literature book.  Today I had my first chance in a couple of weeks to take up my chapter on E.M. Forster's Howards End.  I spent several hours reworking the first 800 words or so, which I've already labored on a bit, and I feel that the intro is finally rounding into shape - a judgment that (if sustained) implies that it will look as if it had just flowed.

This chapter still has a chance of being one of the easier ones, mainly because I'm starting to understand better just what I'm actually trying to do, plus I early on detected my through-line for Forster.  But the time to output ratio is just a tiny fraction of those for the other items, even just counting the writing process (i.e., without regard to the time spent reading and re-reading the works, and then on a significant literature review).

What with classes, talks, and other responsibilities, I'm unlikely to be spending much more time on the Forster chapter over the next few weeks (except perhaps in airports and on planes).

Heat-seeking missiles

I couldn't do it (whatever "it" might be) without all the expert help that I get.

Meanwhile, back on the campaign trail

Latest rumor: When Trump goes to Detroit, he is going to try to work up the courage to go to that congregation and ask "the blacks" to pay for the wall.

I mean, why not "the blacks" (or perhaps Isis) if Mexico declines to pay?