Tax policy colloquium, week 2: Clinton Wallace's Democratic Justice in Tax Policy Making

 Yesterday at the colloquium, old friend (and former NYU Visiting Assistant Professor) Clinton Wallace presented his paper, Democratic Justice in Tax Policymaking.  

The article explores how to make tax policymaking more “democratically legitimate.” It notes critically that “various scholars and policy makers have sought to channel tax policy making away from democratic input and towards prescribed outcomes…. [T]hese moves are grounded in strands of public choice theory that are expressly critical of democratic decision making.” It favors instead empowering the normal majoritarian legislative process, while increasing its transparency and the information that is available to voters. Further details are available in the 3-paragraph abstract that you can find right at the front of the above link.

 

I give the article kudos for interrogating “our” elitism, i.e., that of tax policy experts who often believe (and I plead guilty) that their sense of what the tax system ought to look like is normatively preferable to what Congress is likely to do. However well-meaning we might be, we need to be healthily self-interrogating regarding our biases and inclinations.

 

I also wish to acknowledge upfront a possible criticism of my response to the paper. I wish I had a nickel for each comment I’ve ever gotten, on one of my papers, that took the form of “Why did you write the paper you were interested in writing, rather than the wholly different one that I (the speaker) was interested in reading?” This is usually a stupid form of comment, because both of those two papers might be worth writing, and one is entitled to follow one’s own fancy. So I hope I am not doing too much of that here.

 

1) Democratic legitimacy, democratic deficit

 

While the paper at this stage does not entirely define “democratic legitimacy,” I would think that this does or should have a whole lot to do, in present circumstances especially, with what is often called the democratic deficit. That, in turn, can be defined as an insufficient level of democracy in political institutions and procedures, in comparison with the theoretical ideal of democratic government.

 

That ideal, in turn, is of course is not self-defining. Indeed, one could read (or write) an entire library about it, and many have. But it brings to mind such concerns as the following:

 

(a) the relative political power held by different types of people and groups, which it suggests should not be too unequal. This is part of why vote suppression is so vicious and evil – no milder words will do – even leaving aside its effects on electoral outcomes. But one person, one vote is not enough to satisfy the theoretical ideal of not-too-unequal political power.

 

(b) whether majorities’ subjective preferences are being sufficiently honored (insofar as consistent with minority rights),

 

(c) whether the members of such majorities are getting what they would want with accurate empirical information. Fooling people into supporting self-harm, which they are then able to get because their candidate wins the election and then sets about robbing and immiserating them, does not meet democratic government’s theoretical ideal.

 

In my view, the democratic deficit is currently a seventy-alarm fire with multiple components. But one of them, predating Trump, is the empirical evidence adduced by the likes of Larry Bartels and Martin Gilens to the effect that the policy views of the bottom 99% have no discernible impact on most areas of public policy.

 

This is a key sense in which the focus on democratic legitimacy led me to expect a different paper. Removing delegations to experts and other means of limiting legislative majoritarianism, even when accompanied by offering voters more extensive information regarding, e.g., how their current year tax bills would change under proposed legislation (and who sponsored each provision in such legislation) doesn't strongly address what I consider the main sources of today’s gaping democratic deficit, even if one favors those changes. But perhaps this is just a labeling issue.

 

2) The “undemocratic impulse” among tax policy experts

 

In what I think is one of its signal contributions (whether or not one fully agrees), the paper criticizes what it calls the “undemocratic impulse” among experts to dictate outcomes that are (in their view) the best. This is a very useful phrase, given the need among even the most benevolently minded experts in a given area to be properly self-aware and self-interrogating. However, the paper attributes the “undemocratic impulse” to public choice theory, which I would question on 2 grounds: actual causation, and what public choice theory is / does. I would say instead that those who are subject to the “undemocratic impulse” may invoke public choice theory as an ideological tool. However, it can also be used to criticize actual democratic and majoritarian institutions from the standpoint of democratic government’s theoretical ideals.

 

(a) “Undemocratic impulse” (if that’s what it is) without public choice theory – Stanley Surrey, the famous Harvard law professor who invented the tax expenditure concept and served in JFK’s and LBJ’s Treasury Department, on his way to becoming the most influential tax academic in US history, notoriously favored delegating tax law details to experts, such as the Treasury Department staff. He was a firm critic of legislative majoritarianism in tax policymaking, as in his classic 1957(!) article, "The Congress and the Tax Lobbyist: How Special Tax Provisions Get Enacted."

 

Surrey notes here how interest group capture of the legislative process gives rise to sacrifice of the public interest, by reason of logrolling between different business interests and the disproportionate power of higher-income taxpayers. It’s almost pure Mancur Olson interest group theory, but without the theoretical apparatus and based on years of personal observation rather than any sort of a theoretical model (public choice theory or otherwise). Surrey’s view epitomized how idealistic experts very often view the legislative process, based in part on empirical knowledge that gets slighted in that process, albeit not from a purely “neutral” perspective as no such thing exists. Less clear, however, is whether this viewpoint is actually “anti-democratic,” or is based instead on observing how democratic institutions fail in practice to satisfy the dictates of democratic theory. Maybe some of each.

 

(b) Public choice theory – While it’s true that public choice theory can be used as an ideological tool by one who is hostile to public control over policymaking, it also (i) has aspects of science or logic, not just ideology, and (ii) can be used from a pro-democratic standpoint to identify flaws in how majoritarian institutions work in a mass society.

 

Consider Arrow’s theorem, which the paper groups among public choice theory’s “indictments of and attacks on democratic decision-making.” The theorem is simply logically true within its terms, like it or not, although what to make of it is of course another matter. But it does not “predict” that in practice there will be a lot of cycling between outcomes (indeed, its literature explores what might produce stability and/or particular outcomes). It also does not support viewing voters’ and legislators’ preferences (especially if we are thinking cardinally, not just ordinally) as normatively irrelevant.

 

Likewise, a democrat should be no less interested than an anti-democrat in the observations about interest group politics that Olson theorized and Surrey observed. The reign of narrow, concentrated interests over broad and diffuse ones is potentially invidious to satisfaction both of the majority’s interests and of its preferences.

 

3) Concrete proposals

 

In addition to favoring more legislative majoritarianism and less delegation to experts / insulation of policymaking from control by elected politicians – on which my preferences are more case-by-case than a priori, although I admit to having frequent sympathy for delegation where I feel it might work decently – the paper also favors a number of measures to strengthen Congress’s accountability by better informing the public. This is an aim I generally favor, although there is much to debate in the paper’s particular proposals. Indeed, one need not believe that measures of this kind can greatly increase democratic legitimacy and shrink the democratic deficit – given where we are these days – in order to view them as good things. One also need not favor more legislative majoritarianism, rather than less, in order to agree that, when elected politicians are directly controlling policy, transparency is vital even if less effectual than one might have wished. But given the length of this post, along with the clarity with which the paper presents these proposals, I will leave them to readers to examine on their own.

New Jotwell post on Boushey et al, Recession-Ready

 For a while I've been publishing annual very short pieces in Tax Jotwell, aka "The Journal of Things We Like (Lots)," which is a forum for bringing to broader attention recently published pieces that one especially likes. 

My 2020 entry has just been published, and you can find it here. It discusses a book that was recently published by the Hamilton Project, edited by Heather Boushey, Ryan Nunn, and Jay Shambaugh, and entitled Recession-Ready: Fiscal Policies to Stabilize the American Economy. You can actually download the book for free here.

If the Democrats control both houses and the presidency in 2021, it's vital, among other urgent priorities, that they enact policies like those discussed here in order to stave off the next effort at fiscal sabotage (like that which slowed the recovery in the early Obama years).

Tax Policy Colloquium, week 1: Steven Dean's A Constitutional Moment in Cross-Border Taxation

Oscar Wilde famously said that the only thing worse in life than being talked about is not being talked about. In yesterday's NYU Tax Policy Colloquium, our first of the year (in our 26th year) and the first ever on Zoom, I had a somewhat different experience. I found that the only thing better than being needed is not being needed. 

To explain: I was the lead commentator, so I offered introductory remarks, which my co-convenor Lily Batchelder then supplemented, and to which our author, Steven Dean, then responded. But towards the end of Steven’s comments, the Internet in my house crashed, taking me off the session entirely. Luckily, Lily ably kept the ship afloat by running the queue. I eventually got back into the meeting by downloading Zoom on my phone and rejoining that way, but phone Zoom has much worse functionality (plus I’m unfamiliar with it).

 

This meant that I missed a lot of the discussion, from what was probably our largest ever colloquium audience (I think we topped out at about 68 people). This was so much the worse for me, but I hope no problem for everyone else. (Back in the past when we had smaller audiences, I used to participate actively throughout the sessions, but in recent years, people in the audience have had enough to say that it’s generally best for me to pipe down after my opening comments.)

 

I suspect I am not the first ever person teaching a class on Zoom to have the system crash. Fun! Obviously, with a regular lecture or seminar class and no co-teacher, this would be pretty bad.

 

Anyway, the title of the paper is A Constitutional Moment in Cross-Border Taxation. Here is an overview of what I raised, with additional context added as well.

 

The paper is part of a book project that Steven plans to pursue when (so much the worse for us at NYU) he has returned to Brooklyn Law School rather than running our tax program. The project’s main aims, as the paper makes clear, are normative. Dean (I’ll switch to the last name from now on, for convenience) wants international tax rules around the world better to promote social justice, both within a given country (progressivity) and between countries (the global South and marginalized, low-income countries, versus the global North and powerful, high-income countries).

 

This paper, however, is mainly descriptive. Its chief premises, as I read it, are as follows:

 

1) International tax law around the world is dominated by what one could call (slightly modifying the paper’s terminology) a “classification and assignment regime.”

 

2) This is substantively a “constitutional” regime, even if not formally so. (The paper combines these two points by discussing a “classification and assignment constitution,” but I find it useful to separate the two pieces.)

 

3) This constitutional regime is subject to informal but effective amendment at what Bruce Ackerman called “constitutional moments.”

 

4) The world may currently be at such a moment.

 

And finally, back to the normative:

 

5) Multinational companies (MNCs) should pay more tax on their profits, and marginalized / low-income countries should both get more of the revenue, and have more say regarding rule design, than they now do.

 

I’ll turn now to specifying more fully what these claims mean in the paper, and then commenting briefly on them.

 

1) The classification and assignment regime –

 

This term refers to tax systems’ first “classifying” income (e.g., as belonging to a cubbyhole such as interest, dividends, royalties, active business income, etc.), then “assigning” it for tax purposes to a given country or else to the given affiliate of a multinational company (henceforth, MNC) that the MNC most likely exclusively uses in that country, if it has a permanent establishment (PE) there.

 

In particular, however, it rests on the importance to tax planning of separate entity accounting within an MNC’s affiliated group of companies, accompanied by the use of transfer pricing and includability/deductibility for intra-group cash flows (such as interest and royalties) to determine each affiliate’s share of the overall group income. This regime leads naturally to the easy creation of stateless income, along with the enhancement of tax competition between countries.

 

What isn’t or wouldn’t be part of the classification and assignment regime? Examples include the following:

 

a) Unitary taxation of the entire worldwide corporate group, with some method such as sales-based formulary apportionment (FA) being used to determine what group income arises where.

 

b) Possibly, although this is debatable (as I discuss further below), such prominent recent features of the international tax landscape as the enactment of digital service taxes (DSTs), the EU state aid cases such as that between the European Commission & Ireland with respect to its arrangement with Apple back in the day, and ongoing OECD-BEPS initiatives.

 

c) Depending on how one ends up deciding to use the term, deemed dividend rules might be viewed as inconsistent with the CAA regime. Once you have deemed dividends, as under controlled foreign corporation (CFC) rules such as the US’s subpart F, or likewise under the US’s GILTI rules, then in effect you have taken a step towards unitary taxation. E.g., if ALL of the CFCs’ profits are treated as deemed dividends to the parent, then the prior steps of applying CAA have been pretty much overridden. As it happens, the existing deemed dividend rules are more limited than that in their scope.

 

In terms of the semantic answer to the question of whether existing deemed dividend rules are part of CAA, I think the answer is Yes if you are using CAA to refer to the existing regime, but it’s No if you’re asking whether a CAA methodology is being used in full. The deemed dividend rules still have Classification, but they override the formalism of Assignment.

 

2) It’s a Classification and Assignment Constitution, not just Regime

 

For the point that is being made here, we can start with Reuven Avi-Yonah’s prominent argument, first made a number of years back, that there is such a thing as the “international tax system.” The cynics had tended to say: “No, there isn’t. All we have is a whole bunch of countries with their own rules.” But Reuven argued, with analogies (for example) to customary international law, that there is a coherent whole with continuities and consistent principles. David Rosenbloom prominently disagreed, and I’ll discuss further below the context in which they had this debate, and why they agreed that it mattered.

 

I read the Dean paper as saying, yes, there’s a coherent system, and not only that but it’s materially a constitutional system even though there is no formal or written global international tax “constitution” as such, nor are there courts enforcing it.

 

To give an example of what I think the paper has mind by way of a constitution, consider the possibility that Congress will enact a wealth tax in 2021. (Just a hypothetical; I’m not expecting this to happen.) It would be litigated straight up to the Supreme Court, where it’s a pretty good bet that the 5 committed Republican justices (yes, that’s how I view them) would vote together to find it unconstitutional. 

 

We would then have learned ex post that Congress could not implement a wealth tax (at least, without apportionment between the states), because the relevant actors within the system relied on the Constitution to strike it down.

 

In positing a constitutional system in international tax, the paper posits that there are similar constraints in place here, albeit not enforced in the same manner as US constitutional limitations on the domestic taxing power.

 

3) Constitutional moments

 

Bruce Ackerman famously posited that the US Constitution can effectively be amended, without formal resort to the Article 5 process, at what he called “constitutional moments.” The basic idea is that, at a period when there is great public focus and debate on what the Constitution permits, one of the parties (say) endorses legislation that would be unconstitutional under the current understanding, wins the requisite elections, implements, the other party eventually assents, etc.

 

In illustration, suppose we know from the history of Supreme Court jurisprudence that minimum wage laws were unconstitutional in 1920 but constitutional in 1950. Without Ackerman’s constitutional moments idea, it would seem that one or the other of these pronouncements must have been wrong. But under the Ackerman theory they could both have been correct when decided, with the reversal reflecting informal but nonetheless legally effective amendment of what the Constitution means in the 1930s.

 

Key examples he has in mind include the New Deal and the Civil Rights Era. I seem to recall that Ackerman pronounced the “Reagan Revolution” to have been a failed constitutional moment.

 

In the paper, Dean cites a couple of examples of his own. He views Justice Marshall, in the 1803 Marbury v. Madison decision, as having effectively amended the Constitution, in an analogous way, by proclaiming judicial review (which, at a minimum, had not previously been universally accepted). And in the international realm, he views the US enactment of subpart F in 1962 as having perhaps been effectively a constitutional moment, amending the Classification and Assignment Constitution as it had existed previously, by providing that one could modify or depart from it by taxing deemed dividends. This one took, just like New Deal legislation in the aftermath of the famous “switch in time that saved 9,” in that other countries not only accepted subpart F but enacted their own CFC rules.

 

Next, here are some of my main thoughts in response to the paper’s analysis:

 

1) Do we have a classification and assignment regime?

 

Again, deemed dividend rules for CFCs, such as subpart F and GILTI, appear to be inconsistent with it. Also, if FA is inconsistent with it, note that transfer pricing rules often have a formulary component. And one could certainly argue that DSTs, the EU state aid approach of the European Commission, and OECD-BEPS are all consistent with CAA, and merely apply it differently.

 

Avi-Yonah, when he argued that there is an “international tax system” (albeit, he didn’t say “constitution”), was making a normative argument for US “anti-hybrid” legislation that he argued was in the spirit of the existing regime. (Taxpayers exploit hybridity by structuring their affairs so that different countries’ rules apply inconsistently as to the same concept, e.g., Affiliate A’s cash payment to Affiliate B is deductible interest in A’s country, but isn’t includable interest in B’s country). So he was saying: There’s a coherent regime, it’s a good one on balance, hybridity violates it, and therefore, as a normative matter, we should voluntarily enact new legislation that helps preserve its intended functioning.

 

The paper, by contrast, is saying that the regime exists as a descriptive matter, and that, because of its “constitutional” status, countries are disempowered (whether we're glad of this or not) from violating it.

 

2) Is this regime a “constitutional” one?

 

This raises the questions of what the enforcement mechanisms are. Not a higher court, so presumably the difficulty of enacting a rule that departs from the norm without running into ineffectiveness and pushback.

 

Would convergence and imitation, creating similar rules in different countries and sustaining the similarity as rules change first here then there, be enough for this to be a “constitutional’ matter? And what is at stake when we address this question? How does it affect the analysis? These questions will, I’m sure, be further addressed in the book manuscript.

 

3) Constitutional moments

 

Ackerman’s descriptive claim is not only obvious, but meant to be. We knew before reading his work that, yes, the minimum wage was unconstitutional according to the Supreme Court in 1920, and constitutional in 1950. And he counts on our knowing this. The novel claim that he is making is normative: he’s saying that this reflected, not correct vs. incorrect constitutional interpretation, but the fact that the Constitution had been amended in between.

 

One question one might ask here is whether this interpretation risks tautology or non-falsifiability. A country proposes something that’s rather novel. Then it either retreats, showing that it faced a constitutional barrier, or it sticks to its guns & shows that the CAA has been amended.

 

Are there simply livelier and duller moments in the evolutionary process for the international tax regime, such as it is? And again, does it matter for the analysis whether there are constitutional moments, rather than just periods when the observed regularities are changing fast rather than slowly?

 

4) Back to the normative side: advancing social justice

 

Again, the central concern motivating the paper is with social justice, defined both in terms of progressivity within a given country, and the interests of the global South as distinct from those of the global North.

 

The paper’s analysis arguably suggests that what it considers the injustices rife in the current system are mainly a legal problem, and hence also political in the sense of the political factors that drive legal and constitutional outcomes. (E.g., by analogy, the US Supreme Court would be making a legal claim if it struck down a wealth tax, and its so deciding would reflect the politics of Supreme Court appointment and confirmation.)

 

As one who is somewhat of an economist fellow traveler, albeit a law professor rather than an economist, I have been inclined to view the distributional characteristics of the existing international tax state of the play as reflecting economic forces, along with countries’ incentives when they have limited jurisdiction and are “selfish” (i.e., concerned mainly with the welfare of inside players).

 

From that perhaps more cynical perspective, why would we ever expect “marginalized” countries to get much sway? One might think they deserve it, without expecting them to get it.

 

Also, are many of the aspects that the paper suggests are non- or anti-CAA regime actually more orthogonal to the global north vs. south debate than directly relevant to it? E.g., a lot of those items (DST, EU state aid cases, much of OECD-BEPS) are arguably about the competing interests of “producer” and “consumer” states (with respect to highly profitable MNC activity) within the global North. And while those efforts are often hostile to a third set of countries, tax havens, the tax haven countries are far from being coterminous with or identical to the global South.

POSTSCRIPT: As an aside, I am glad for Steven, but very sad for NYU and myself, that he will be leaving us at the end of the year (he has been the director of our tax program) to return to Brooklyn Law School. I'll miss him, although hopefully still see him frequently, at least via Zoom. One of the reasons I so value him, not just as a friend but as a member of our tax community, is that he brings what in our environs is a unique, albeit badly needed, perspective on international tax policy matters. It's so hard around here to escape from just getting US perspectives on things. Through international travel and connections, at least before the pandemic, I was able to encounter and learn from UK and EU perspectives, and to a lesser degree those from certain leading Asian countries. But Steve adds a global South perspective that is really an important part of having a balanced, or at least less parochial, viewpoint.

Kleinbard tribute

A tribute to Ed Kleinbard that Joe Bankman and I co-authored for the ABA Tax Times is now viewable here.

Back to life a bit

 This blog has recently been less active than it used to be, but a regular source of weekly posts is about to resume. With the NYU Tax Policy Colloquium resuming this Tuesday (you can see the schedule here), I will resume posting weekly ruminations, if that's the best word, regarding that week's paper.

A few points about this exercise:

1) Since our sessions are off the record to allow for frank discussion, I don't comment on the discussions themselves, although they may help to shape the thoughts about the paper that I end up posting here.

2) For multiple reasons, I do not trash or criticize the papers, which would be (a) unkind and unfair given my platform here, (b) bad for business in multiple ways, and (c) bad for personal relationships in what I have found on the whole to be (at least 90 percent of the time) a very amicable field in which people generally interact constructively. This is not to eliminate the possibility of one's reading between the lines regarding how persuasive or helpful I found a given paper's analysis. But then again, when I look back at my own past writings I may feel today that I was sometimes closer to the mark than other times.

3) My main interest in these posts, and also to a large degree in the sessions as well, is not does the paper succeed, or even how can it be made better (although I am happy to explore that with any interested author), but rather what we all together can learn about how best to understand the issues that the paper raises.

Forthcoming article

The article I wrote earlier this year, What Are Minimum Taxes, and Why Might One Favor or Disfavor Them?, will be appearing in the fall 2020 Virginia Tax Review.

In the past, I've typically published specialty tax articles (i.e., those less directed at a general law review audience) in NYU's own Tax Law Review. But we are making an effort these days to save space for newer, younger, and more diverse voices.

Revised (and close to final) schedule for the 2020 NYU Tax Policy Colloquium

Things might still change a hair, but here is the latest news on the schedule for the 2020 NYU Tax Policy Colloquium. Since we will be doing the entire thing on Zoom, anyone who wants to attend virtually is welcome to do so. Just (a) let me know that you want to be on our weekly email distribution list, and (b) respond to my assistant saying that you'd like to attend, in any week when that is so, in order to get the Zoom link. Anyway, here it is:

SCHEDULE FOR FALL 2020 NYU TAX POLICY COLLOQUIUM

(All sessions are on Tuesdays, meeting online from 2:00 to 3:50 pm EST)

 

1.     Tuesday, August 25 – Steven Dean, NYU Law School. “A Constitutional Moment in Cross-Border Taxation.”

2.     Tuesday, September 1 – Clinton Wallace, University of South Carolina School of Law. “Democratic Justice in Tax Policymaking.”

3.     Tuesday, September 8 – Natasha Sarin, University of Pennsylvania Law School. “Understanding the Revenue Potential of Tax Compliance Investments.”

4.     Tuesday, September 15 – Adam Kern, Princeton Politics Department and NYU Law School. “Illusions of Justice in International Taxation.”

 

5.     Tuesday, September 22 – Henrik Kleven, Princeton Economics Department. “The EITC and the Extensive Margin: A Reappraisal.”

6.     Tuesday, September 29 – Leandra Lederman, Indiana University Maurer School of Law. “Of Risks and Remedies: Best Practices in Tax Rulings Transparency.”

7.     Tuesday, October 6 – Daniel Shaviro, NYU Law School. “What Are Minimum Taxes, and Why Might One Favor or Disfavor Them?”

8.     Tuesday, October 13 – Steve Rosenthal, Urban-Brookings Tax Policy Center. “Tax Implications of the Shifting Ownership of U.S. Stock.”

9.     Tuesday, October 20 – Michelle Layser, University of Illinois College of Law. “How Place-Based Tax Incentives Can Reduce Economic Inequality.”

 

10.  Tuesday, October 27 – Michelle Hanlon, MIT Sloan School of Management. [Paper on taxpayer responses to the 2017 tax act, using survey data.]

11.  Tuesday, November 10 – Owen Zidar, Princeton Economics Department. “The Tax Elasticity of Capital Gains and Revenue-Maximizing Rates.”

12.  Tuesday, November 17 – Abdoulaye Ndiaye, NYU Stern Business School. “Redistribution With Performance Pay.”

13.  Tuesday, November 24 – Lilian Faulhaber, Georgetown Law School. “Searching for Coherence: The Overuse of Excess Returns and Excess Profits.”

14.  Tuesday, December 1 – Erin Scharff, Arizona State Sandra Day O’Connor College of Law. “Revisiting Local Income Taxes.”

From the pages of the Yale Law School alumni magazine

Today's Supreme Court decisions on Trump's taxes

Trump won both decisions in one sense - due to his continuing opportunity to force delay, vital information that could shed light on his criminality and worse will remain secret, even from the New York DA, until after the November election. 

But he lost both decisions in terms of the legal issues. This shouldn't be surprising, of course, since his legal position is so many light years beyond the pale of US constitutional norms. As the Supreme Court rightly put it, he is in effect claiming to be a King, despite two centuries of legal and political history to the contrary.

Given the egregiousness of his likely crimes and the already compelling evidence of them, it seems clear that the House of Representatives should be able to make a case for extensive discovery that no reasonable court, acting in good faith, could credibly rebut. (Which is not to say that no judges or justices will try.) But the time frame for this is long enough that it might not matter. If he stays in the White House post-election, it is not clear to what extent normal legal norms will matter. If he is out, this might be the least of his problems.

One odd feature of Trump v. Mazars that caught my attention is the following passage, which I have taken from the up-front syllabus of the decision:

"Historically, disputes over congressional demands for presidential documents have been resolved by the political branches through negotiation and compromise without involving this Court. The Court recognizes that this dispute is the first of its kind to reach the Court; that such disputes can raise important issues concerning relations between the branches; that similar disputes recur on a regular basis, including in the context of deeply partisan controversy; and that Congress and the Executive have nonetheless managed for over two centuries to resolve these disputes among themselves without Su- preme Court guidance. Such longstanding practice ' ‘is a consideration of great weight’ ' in cases concerning 'the allocation of power between [the] two elected branches of Government,' and it imposes on the Court a duty of care to ensure that it does not needlessly disturb 'the compromises and working arrangements' reached by those branches.'"

This is an extraordinarily, perhaps even willfully, blind thing to say when you have an administration that has, as its position, allowing no Congressional discovery whatsoever. In context, the rogue nature of the current administration is something that should be judicially cognizable. You can't reasonably defer to the political branches working things out when one of them has decided to act in bad faith and without regard to the Constitution, the principle of separation of powers, or 200 years of previously undisputed practice. The current administration makes no secret of, and leaves no possible ground for doubt concerning, its wholesale rejection of "compromises and working arrangements" that reflect the existence of coequal executive and legislative branches.

The new baseball rule for extra innings

When the 2020 baseball season finally starts (i.e., if the pandemic doesn't stop it), there will be a new rule at the major league level, under which, for extra innings, each team will start with a runner at second base. The idea is to make scoring more likely, hence shortening the games that burn out teams' pitching staffs while also asking too much of the fans. (I certainly can't follow Mets' night games for very long, if at all.)

I'm not inherently against the new rule either on tradition grounds or because it's so arbitrary. To me, it's an empirical question of how it affects the fan experience of following the games. But in that regard, I wonder if it will backfire. We'll see.

One possibly interesting strategic element follows from the fact that the runner who starts out on second base is the one who made the last out in the previous inning. (Or his lineup replacement.) Suppose the Mets had a speedy outfielder batting in the ninth, with two outs, no one on base, and Wilson Ramos on deck. Would the other team consider walking the outfielder to pitch to Ramos, just so he could make the last out? He is said to be the slowest runner in baseball, so the idea would be to handicap the Mets if the game went to extra innings, unless they were willing to sub him out.

But on to the big problem. What worries me about the rule is that it might lead to boring one-run strategies. That is, have the extra inning's first batter bunt the free baserunner over to third, with the next one bunting him home. That would be little fun to watch if it happened too frequently. And when it did succeed, there would be two outs and no one on base, limiting further scoring and excitement.

Suppose the visiting team fails to score in the top of the inning, or scores exactly one run.  That would put a huge premium on one-run strategies in the bottom of the inning, such as bunt-bunt with the runner on second.

But if you think about it recursively, then in the top of the inning the visiting manager is going to be anticipating what the home manager might do in the bottom of the inning. Scoring zero runs in the top, as a consequence of seeking to maximize expected runs but falling short, leaves one open to the home team manager's getting the relatively easy run, in the bottom of the inning, by following the boring strategy.

To put it differently, a visiting manager with a runner on second base and no outs becomes more likely to follow a one-run strategy once he knows that the home manager will also start out with a runner on second base.

Again, it's an empirical question whether the new rule will backfire in this way. Good idea to try it out in a 60-game season, so it can be discarded or tweaked if it malfunctions.

Zoom link to my session at the Critical Tax Conference regarding my minimum tax paper

I recently posted a link to the sessions that 11 of us (i.e., US tax law professors) held recently at a Critical Tax Conference that took place via Zoom (rather than in Gainesville, FL) once the pandemic got in the way. But now, courtesy of the Tax Prof blog, I can offer links just to my session (here), or to each of the 11, now available separately (here).

My minimum tax paper, which I discussed at the session, is available here.

Past laurels

I've listened a few times to the new Bob Dylan album, and I do think it's quite nice in its mellow way. But today, while we were out for a drive, we were just a couple of minutes from our destination when it ended, so I put on "All I Really Want to Do" (written in 1964 and released on Another Side of Bob Dylan in 1965).

My gawd, what a difference. That song, one of his really great ones, is so cracklingly alive - funny and sarcastic and sincere and ambiguous and powerful. He playfully gives this astonishing catalog of all the things you shouldn't do with or to a romantic partner, including playing multiple types of head games. It's jokey and rhymey, but at the same time a brilliantly assembled and variant list.

Then the classic ending about not wanting to make her to "see like me, feel like me, or be like me" - which of course is also so right. But he laughs, which has always conveyed to me his sense of the utter weirdness of anyone being like Bob Dylan. But throughout, the sarcasm and sincerity are so inextricably mixed, including the obviously suspicious come-on inherent in "All I really want to do, is, baby, be friends with you." Yeah right. The ambiguity is a large part of what makes it so great. (Missing, of course, in the Byrds' pretty and tuneful but shallow version.)

It is too bad for other artists, in a way, that we listen to Dylan today because he did such great things more than 50 years ago.

Another, much briefer, Ed Kleinbard tribute

Today at a Zoom conference I was asked to offer brief words about Ed Kleinbard. Not wanting to repeat myself entirely, I said approximately the following:

Ed was a great personal friend, but today I want to emphasize the professional side.

He became the most respected and admired practicing tax lawyer in America – but that wasn’t enough for him. He saw how much of the tax law is arbitrary and formalistic. But instead of concluding “Ah, it’s just a game,” he decided to change his career at age 55, which is incredibly brave, and not at all easy. It brings to mind Michael Jordan going to play baseball, except Ed succeeded.

He combined an incredible understanding of capital income taxation, including its international components, with a zeal for doing good in the world, through the use of logic and rigor. He was brilliant and boundlessly energetic, and made a number of major contributions. Just to name two: his work in bringing “stateless income” to wide public attention. And, his grossly under-appreciated work on the business enterprise income tax or BEIT, paired with dual income taxation.

He also has a book coming out next year with the Oxford University Press, called “What’s Luck Got to Do With It?” It’s about fairness, opportunity, and the importance of luck, but of course with a specific policy focus as well. I and others aim to make sure that it does come out as scheduled, although, given the projected publication date, it may not yet have been copy-edited.

As a mutual lawyer friend noted to me yesterday, Ed “didn’t suffer fools and mountebanks well.” Of course, you didn’t have to be one to get into a policy argument with him! (As a number of our mutual academic friends can testify.)

He also does not seem to have liked it when people’s work was sloppy or careless. This reflected his belief that people should care about doing things well.

We can all learn from Ed – certainly I can – that what we’re doing in tax scholarship isn’t just art for art’s sake, although that matters too, but is also moral, both because it affects people and because it’s right to try to do things well, not poorly.

I’ll miss him, and so will our field.

Zoom talks online

You can now see online the Zoom paper presentations that 11 tax scholars, including me, gave at the Critical Tax Conference a couple of months back. With closed captioning, no less. I discussed my minimum tax paper, which I also discussed today via Zoom at the Oxford Tax Policy Centre's annual symposium.

The link for the 11 Critical Tax Zoom talks is here. I'm the eighth one down.

In memory of Ed Kleinbard

I wanted to express my very great grief, both personally and professionally, regarding the death of Ed Kleinbard, who succumbed last night to a vicious cancer that he had been fiercely, bravely, and creatively battling for many years.

 

I'll start by repeating some words written by Joe Bankman. Then I'll switch to a personal note.

 ; 

From Joe: “Ed spent the first 25 years of his career in practice, where he helped shape the tax treatment of derivatives and wrote academic and practical articles on tax reform.  He served as Chief of Staff to the Joint Committee on Taxation from 2007-2009, and then accepted a full-time appointment at USC in 2009.

 

“In the next ten years, Ed wrote over a hundred pieces, ranging from books, to book chapters, long law review articles, and op-eds.    He was one of the two or three most widely-read, and influential, tax scholars in the country.

 

“He is perhaps best known for his work on corporate tax avoidance.  He coined the phrase ‘stateless income’ to describe the ability of multinationals to site their worldwide income to tax-haven countries with zero rates of tax.  Most of his writing is on distributive justice.

 

“Ed was a friend and co-author.  He was funny, loyal, passionate, and acerbic.”

 

On my own personal note: I heard about Ed long before I first met him. He was a legend in the NYC and national tax bars – among people who don’t take easily to viewing others as legends. But in his case one had no choice - he stood out like a star among planets.

 

The first time I ever met him was at an NYU Tax Policy Colloquium. He arrived 5 minutes late, hence didn’t introduce himself at the start. As it happened, at that session, I kept praising what I called important work by a man named Ed Kleinbard. (It concerned a piece he had written on “tax cubbyholes” that did an extraordinary job of explaining how tax law converts the multidimensional continua of real world financial instruments into discrete, manipulable, discontinuously treated categories. This was a novel point when Ed first made it.)

Meanwhile, Ed had a lot to say at the session, and a couple of other NYC tax practitioners in the room kept calling him “Eddie” (a form of address that I don’t think he preferred). Finally I asked him who he was, he said “Ed Kleinbard,” and everyone laughed because of how I had been praising his work. Someone told me afterwards that, if I had known who he was all along & been playing dumb in this way, it would have proved I was a natural Dean candidate. (But of course no such bad luck.)

 

I soon became good friends with Ed, who by this point was close to his career change (Joint Committee of Taxation chief of staff, then law teaching & scholarship). Indeed, I wanted to recruit him to the NYU law faculty, although this did not end up happening. I always learned from him, and always found him delightful. A true polymath, among other things.

 

Because the academic world, like so many other realms, is at times a social club, some of his work did not receive as much respectful attention as it deserved. I have here particularly in mind his work on reforming the corporate tax (and capital income taxation more generally), such as through the business enterprise income tax (BEIT) and dual income taxation. Far worse ideas than his - which is a very good one - have gotten far more attention than the BEIT ever did.

 

Ed is the second great friend of mine in academics to die tragically before his time. The first was David Bradford. (I’d also count Walter Blum, but at least he got to live into his 70s before succumbing, also prematurely, to cancer.) Each one’s death leaves me feeling bereft – not that it is about me. I would so like have dinner with each of them again, and discuss things of mutual interest, both personal and professional.

 

The last time I saw Ed was at USC last December, where I flew out to give a talk. As it happened, the day before I flew out there, I had a terrifying health scare, which turned out NOT to materialize. (I.e., a preliminary test raised the possibility of something very bad, but a follow-up test that I had the next week showed that I was actually okay.)

 

With that potential bad news haunting me, I stepped into a restaurant in downtown LA to meet Ed for dinner, the night before my USC talk. Almost his first words upon seeing me were that I didn’t look so good. We talked it out, and he was incredibly encouraging, as well as empathetic and enlightening given his own  health issues. He also offered great advice in the event that things should turn out badly, in the follow-up test, rather than well. I almost felt as if I had let him down by turning out to be okay.

 

I remember thinking afterwards that there wasn’t anyone in the world, leaving aside immediate family, who could have been so supportive and encouraging, as well as concretely helpful, as Ed was in that conversation. (Knock on wood re. my escape: and, for ALL of us, any such reprieves are only temporary.)

 

I am sure I am not the only one who wants to think about how best to honor Ed. One or more public events honoring both him and his work should certainly be a part of this, even if it has to be held via Zoom. Something ought also to be published as a part of this, with many people’s contributions. I hope to be able to hear &/or say more about this in the days to come.

NYC Tax Policy Colloquium - time finally set

In my earlier post about this year's Zoom-only Tax Policy Colloquium, I noted that the time for our PM sessions had not been set. After internally discussions we've now been able to put it at 2 to 3:50 PM, EST, on fall semester Tuesdays.

One advantage of this time, we hope, is that people from California to Europe will find it feasible. Probably a tougher sell in, say, Australia, but one can always hope.

As noted earlier, we're planning a cocktail or tea time after the session, for a small group by Zoom. Given the time of the sessions, these probably won't happen right afterwards, but perhaps at 5 or so EST, varying with the presenting authors' preferences. (And we'd probably skip a given session if the author opted out.)

Finally, here again is our schedule for the fall semester:

1.                         Tuesday, August 25 – Steven Dean, NYU Law School

2.                         Tuesday, September 1 – Clinton Wallace, University of South Carolina School of Law

3.                         Tuesday, September 8  – Natasha Sarin, University of Pennsylvania Law School

4.                         Tuesday, September 15 – Adam Kern, Princeton Politics Depa't and NYU Law School

5.                         Tuesday, September 22 – Henrik Kleven, Princeton Economics Department

6.                         Tuesday, September 29 – Leandra Lederman, Indiana University Maurer School of Law

7.                         Tuesday, October 6 – Michelle Hanlon, MIT Sloan School of Management

8.                         Tuesday, October 13 – Steve Rosenthal, Urban-Brookings Tax Policy Center

9.                         Tuesday, October 20 –Michelle Layser, University of Illinois College of Law

10.                      Tuesday, October 27 – Daniel Shaviro, NYU Law School

11.                      Tuesday, November 10 – Owen Zidar, Princeton Economics Department

12.                      Tuesday, November 17 – Abdoulaye Ndiaye, NYU Stern Business School

13.                      Tuesday, November 24 – Lilian Faulhaber, Georgetown Law School

14.                      Tuesday, December 1 – Erin Scharff, Arizona State Sandra Day O’Connor College of Law

The Supreme Court denies cert in Altera

Yay, the Altera case is finally over, as the Supreme Court denied the taxpayer's petition for a writ of certiorari.

Given how the 2017 tax act changed the relevant law going forward, this case really was not cert-worthy. Plus, in my view and that of many of my colleagues in the international tax policy community, the taxpayer's case was extremely weak, even though it somehow won (unanimously!) at the Tax Court level. The view taken in Treasury regulations, to the effect that taxpayers could not (still further) game the cost-sharing regulations between themselves and tax haven subsidiaries by disregarding incentive compensation, was clearly correct on the merits, and had ample support within relevant existing law.

Plus, the taxpayer's challenge to the adequacy of the Treasury / IRS response to their (in my view) feeble arguments at the Notice & Comment stage not only was itself feeble, but threatened to undermine Treasury preambles as a useful document for taxpayers, by converting them from an explanation that tries to be helpful into a pre-litigation document.

Had the Supreme Court granted cert here, it would probably have betokened either confusion on their part, or a breathless eagerness to find cudgels to throw at the IRS and Treasury (or perhaps regulatory discretion more generally).

Insofar as there are still open disputes on the Altera issue winding their way either through the audit process or the courts, one hopes that all parties will have the good sense simply to settle them without much further ado - perhaps on IRS-friendly terms given the case's 9th Circuit outcome.