Altera amicus brief

I've previously blogged about the appalling decision by the Tax Court in Altera v. Commissioner. This decision permitted U.S. IP companies that execute fake cost-sharing arrangements with their wholly owned tax haven affiliates - fake in the sense of existing only on paper, via the circular flow of funds - to avoid even having to "cost-share" (i.e., reduce allowable U.S. deductions) with respect to the incentive compensation that they pay their U.S. employees.

The decision invalidated Treasury regulations on the subject, based on the Tax Court's apparent misunderstanding, not just of administrative law, but even of basic transfer pricing principles relating to what one actually learns and doesn't learn, with regard to the economics of related party arrangements, by dint of looking at true arm's length deals.  The relevant legal doctrine holds that the latter may illuminate the former, insofar as the circumstances were comparable.  The Tax Court appears to misapprehend, in a really fundamental way, what comparability (and taking account of relevant differences) actually means.

Altera therefore was not a  specialist court's finest moment.  One could understand some perplexity regarding the relevant administrative law doctrines, which have been in flux in the tax area recently, but the Tax Court's transfer pricing analysis should have reflected a higher level of understanding than it did. Worse still, Altera undermines, not just the tax treatment of myriad other cost-sharing arrangements - the revenue consequences of which could reach the billions of dollars - but also transfer pricing generally, and indeed Treasury regulations generally.

A number of us (by whom I mean legal academics) therefore felt it was important to add our voices to the appellate process.  Otherwise, the Ninth Circuit might lend more credence to the Tax Court's analysis of the transfer pricing issues than that analysis actually deserves.  We also realize that a whole lot of money has been flowing into challenging Treasury regulations - in Altera, the legal challenge appears to have been carefully planned and years in the making - and that no one with money to spend has an incentive to support the government's side.

Hence, at least two amicus briefs were filed this week,with 25 total signatories, explaining why the Ninth Circuit should reverse the Tax Court's decision in Altera.  This brief, of which Clint Wallace was the primary author (and I am among the signatories) mainly addresses the "commensurate with income" standard in section 482 (mistakenly dismissed by the Tax Court as irrelevant).  This brief, of which Susan Morse was the primary author, mainly addresses the arm's length standard.

Convincing the Ninth Circuit to reverse a 15-0 Tax Court decision on a relatively esoteric topic (from the non-specialist's perspective) is certainly a steep uphill climb.  But I hope readers of these two briefs will agree that they make an intellectually overwhelming case for doing so.

Cleaned-up version of my remarks at AEI on June 17 concerning corporate integration

As noted in earlier posts, just under three weeks ago I participated in a panel discussion at the American Enterprise Institute of the corporate tax reform plan recently disseminated by Eric Toder and Alan Viard.  You can find a video of the session here, and view my slides for the talk here.

AEI subsequently posted a transcript of the event.  Here is a significantly cleaned-up version of my remarks as transcribed:

Thank you for inviting me, and for coming up with a very interesting plan. Why don’t I start by clarifying that the title or my talk [“Tower of Babel or Smorgasbord?: Comments on Toder-Viard 2016]  is not a characterization of the plan itself, but rather of something broader.

The Toder-Viard plan has a lot of very interesting details one could delve into.  For today, however, I thought it would be more interesting to put it into the context of other tax reform plans. So my title refers to the corporate tax reform field generally.

When you look at fundamental tax reform relating to individuals, there is a surprisingly high level of consensus. Now, it’s true that Diamond and Saez argue for a top individual rate as high as 70 percent. Most people in Washington don’t subscribe to that, so there’s an area of disagreement. There also is a longstanding debate (such as that between income tax and consumption tax advocates), concerning how one should tax the “normal” rate of return of saving.

Apart from these issues, however, there is considerable agreement regarding what the tax system for individuals ought to look like.  But in corporate and other business tax reform, it almost seems as if everyone has his or her own plan.  Here are just a few examples from the last thirty-plus years:

--William Andrews’s ALI plan, involving dividend exemption,

--Alvin Warren’s ALI plan, involving imputation credits.

--the comprehensive business income tax (CBIT) plan, basically an entity-level income tax,

--Edward Kleinbard’s dual business enterprise income tax (dual BEIT),

--Alan Auerbach’s modern corporate tax,

--Michael Graetz’s recent proposals,

--the recent corporate tax reform plan by Harry Grubert and Rosanne Altshuler.

So there are just a lot of plans out there.  Indeed, the main reason I don’t have my own plan is that I am still holding out.  I will issue it as soon as Congress promises to enact it immediately with no changes – an offer that no one has made to me just yet.

Now, even if all experts agreed about how to do corporate or broader business tax reform – that is, even if we didn’t have this Tower of Babel where everyone has his or her own plan - it’s still not clear Congress would listen. Experts really don’t have that sort of clout here. But since it might conceivably help, it’s worth asking: Why do so many eminent, intelligent, leading academics and think- tank people have such different plans for corporate and broader business tax reform?

The reason, I think, is that there’s really no perfect answer to the issues presented.  Thus, reform turns into a game of pick your poison, about which there is naturally disagreement.

Lewis Carroll’s Red Queen said that she could believe six impossible things before breakfast.  It was just a matter of practice. For corporate tax reform to have a single slam-dunk, clearly-best answer, one would need to believe just two impossible things.

The first impossible thing one would have to believe is that perfect flow-through of corporate income to the shareholders or other owners is feasible. I say owners, by the way, because there are different types of financial instruments with varyingly stock-like economics.

The second impossible thing one would have to believe is that taxing owners indirectly at the entity level rather than directly at the owner level, isn’t going to make any difference, even for administrative or political economy reasons.

If just those two impossible things were true, corporate tax reform would be easy. You’d just figure out how much corporate income pertained to each owner, and then you would tax that person or not tax that person exactly as you wished.

But of course it’s not so easy in practice. The first problem pertains to perfect flow-through.  Toder and Viard have a mechanism that would do this for publicly traded stock.  But in all other cases, it’s problematic.  You may have valuation difficulties.  Then there are non-pro rata deals among the owners.  Finally, when you have taxable income at the entity level that isn’t equal to economic income (for example, due to realization issues or deliberate tax preferences), it’s just very hard to come up with a good answer as to how the divergences should be allocated among the owners.

This is why partnership taxation is such a nightmare, both in the U.S. and elsewhere. Once economic income doesn’t equal taxable income, and even if you perfectly understand the deal between the owners, there’s no good answer to the question of who should get the tax benefits, especially in the face of some effort to limit the extent to which they are effectively  tradable.

Now consider tax-exempts and foreigners.  It seems clear that the extent to which we’re going to tax either Harvard University, a pension fund, or foreigners on income that any of them earned through a corporate entity has a very good chance of being affected in practice by whether we are imposing taxation at the entity level or at the owner level.  Taxing these persons indirectly, at the entity level, via a tax on companies in which they own shares, is at a minimum optically different than imposing the same tax, say, on corporate distributions to these persons.

This can motivate wanting to retain some degree of entity-level taxation. But once you do that, a number of design problems may emerge. One is that the entity rate doesn’t always equal the owner rate. A second is that, if you’re taxing on a residence basis, then U.S. entities that are subject to the U.S. corporate tax are not equivalent to U.S. individuals. There is cross-border shareholding.

Then, of course, you have the problem that all of these plans deal with in different ways: if you’re imposing tax at both the entity level and the owner level, how are you going to coordinate those two taxes in order to get the right overall answer, while also minimizing the various distortions that may be created?

I’m not saying that these challenges are unsolvable. Various plans address them in different ways.  But it’s going to be difficult in any event, and there are bound to be tradeoffs and imperfections, leading to different design preferences among corporate and business tax reform advocates.

Let’s just briefly ask, how do we want to tax foreigners who invest in or through companies that are subject to U.S. federal income taxation?  Under present law, we are clearly taxing them to some extent (whether or not they ultimately bear the incidence of this tax) when they own stock in U.S. or other companies that pay tax here.

Suppose we think of the U.S. tax system as aiming to maximize national welfare for U.S. citizens or residents (however we might choose to define the “us” that we distinguish from the rest of the world’s “them”).  This would imply that we might want to revenue-maximize with regard to foreigners — getting as much money from them as we could – subject to a few caveats.  The first is, of course we’re concerned with economic incidence, not nominal incidence . It may not be that easy to make foreigners bear a U.S. tax, given that they can invest elsewhere.  So this depends on our having market power of some kind, such as by reason of their earning location-specific rents here.

Second, one needs to take into account any adverse effects that taxing them might have on us. For example, if their investing here makes us richer (such as by reason of its raising labor productivity and thus wages), then that’s an indirect effect that you have to think about.

Finally, there are issues of comity and feasibility. There’s a Monty Python episode in which a man in a bowler hat says: “I think we should tax foreigners living abroad.”  That’s the perfect plan for any country that both can actually do it and does not need worry about retaliation of any kind.  In practice, however, it may not be so easy.

The result is that we have a very complex situation, with regard to how much we should try to tax foreigners.  There’s no simple formula that gives us the right answer.

Tax-exempts add another layer of complication. Consider tax subsidies for charities. It’s not clear how big these subsidies should be. Nor is there a consensus in the charitable field regarding how we should treat the entities’ intertemporal choices.  Then consider retirement savings vehicles.  Even some of the people who favor income taxation may view their reasons for having this policy preference as consistent with allowing individuals who save for retirement to exempt the normal rate of return on at least some of this saving.  But for extra-normal returns we may reach a different conclusion.

In sum, it’s quite reasonable to think that, even insofar as we have reasons for reducing entity-level corporate income taxation, that doesn’t necessarily mean that we want to lighten the tax burdens currently borne with respect to corporate income by tax-exempts and foreigners.  Instead, a ceasefire-in-place approach might make sense until such time as those distinct policy questions are separately examined.

OK, I just want to briefly mention the latest twist on corporate tax reform. An earlier speaker mentioned the Hatch plan, which would make dividends deductible but subject to withholding tax.  This could end up being the same as imputation, because in effect it ends up substituting the shareholder’s marginal tax rate for that of the entity.

Under the Hatch plan as I understand it, suppose a U.S. company repatriated $1 billion from tax havens.  Under current law, this might cost the company $350 million of U.S. tax, a price that the company may not be willing to pay.  In effect, the Hatch plan says, so long as you pay the entire intra-company dividend to shareholders, who will get it tax free, we’ll relabel the $350 million of tax that you must pay as a withholding tax on them, rather than as an entity-level tax on you. Therefore, the financial accountants won’t make you deduct the $350 million tax cost from financial accounting income.

The implicit claim is that this relabeling would make the company willing to bring the money home, on the view that its managers only cared about accounting income and earnings per share, not about shareholder welfare.  Mere relabeling of the $350 million remitted to the Treasury by the company therefore ends up making an enormous difference.

The Hatch plan would be a real acid test of that view, so I don’t know whether or not the proponents’ apparent expectation regarding managerial behavior would actually end up being borne out.  But it’s certainly bold and interesting, not to mention cynical.

Okay, turning to the Toder-Viard plan in particular, the 2014 version clearly was true corporate integration.  But Eric and Alan realized that it raised some issues requiring further thought.  One was the distinction between publicly traded and other businesses.  Another was the overall revenue loss, and a third (related to the second) was the big gains effectively offered to foreigners and tax exempts.

They’ve made some big changes in Toder-Viard 2016. The entity-level corporate tax rate is 15 percent, rather than zero.  This gives rise to a credit. The 15 percent withholding tax for interest paid to tax exempts is a feature that I like, for the reasons they give for it.  However, while I agree that these changes needed to be made, in some ways it’s less pure a corporate (and business) tax reform plan than it was in the 2014 version. Thus, admittedly arbitrarily, I’m going to reclassify it a bit.

There can often be a surprising degree of overlap between (A) “corporate integration” plans and (B) other “corporate tax reform” proposals that may be either broader or narrower in scope.  Suppose we put Toder-Viard 2016 in Group B, rather than in Group A, even though it could really be put in either. 

In any plan that lowers the entity-level corporate rate, one faces the question of whether, and if so how, to try to pay for it.  If one pays for it on the tax side, one needs to determine the source of the offsetting revenues.  This can be from either inside or outside the broader category of corporate and business taxation generally.

“Inside” funding models include Toder-Viard, Grubert-Altshuler, and 1986-style corporate tax reform, in which you lower the rate and broaden the base. “Outside” funding models might rely on, say, enactment of either a VAT or a carbon tax.

Let’s narrow the field a bit. I don’t think 1986-style corporate tax reform is the answer here. I had a piece in Tax Notes a couple of years ago called “1986-Style Tax Reform: A Good Idea Whose Times Has Passed.”  When you’re looking at corporate tax reform in particular, however, the case for this type of approach is especially weak.  There’s really not enough potential base-broadening to pay for much of a cut in the entity-level corporate rate.  Also, you may end up benefiting old investment, relative to new investment, unless you put in transition rules that are theoretically feasible but probably wouldn’t happen as a practical matter.  Plus, you face the question of whether the base-broadening applies (but without a rate cut) to non-corporate businesses. Also, if the corporate rate is lower, you have the problem of owner-employees underpaying themselves so that their labor income will be taxed at the lower entity rate, rather than the higher individual rate.  While that can be addressed, such as by enacting a Scandinavian-style dual income tax, it often hasn’t been in 1986-style proposals.

I’m also skeptical about the outside funding proposals that rely on enacting a VAT or a carbon tax. The problem is that, even if we should and do enact one or both of these taxes, the revenues will have rival claimants.  If I am designing my own corporate integration or rate reduction proposal, it’s tempting for me to say: I want those revenues for my plan. But other people with their own proposals of any kind (whether tax-related or not), along with people who are concerned about the long-term U.S. fiscal gap, might reply: Great, but what about us?  We would like to claim those revenues, too.

So I have two in-category finalists of credible inside-funding proposals: Toder-Viard and Grubert-Altshuler.  Both involve lowering the corporate rate, but financing it within the broader system of corporate and business taxation.

There’s a lot to like in Toder-Viard 2016. For example, I like the fact that you’re collecting the tax annually, but also with the averaging proposal that they describe.  In addition, they’re doing something about debt versus equity, including through their proposal with regard to tax-exempts.  But I remain concerned that the plan may discourage going public, although they offer a transition rule that may help to a significant degree with regard to people’s timing in going public.  And relatedly, I do still worry about the publicly traded versus non-publicly traded divide. I think that’s clearly the core problem.

With regard to narrowing that divide, they emphasize realization at death, which would be desirable even absent their proposal, but arguably becomes more urgent with it. Politically, however, realization at death is a hard sell that hasn’t happened yet, and that possibly never will.

Turning to Grubert-Altshuler, I like that plan too, and I’m not here to adjudicate which of the two plans is better.  But there I worry about the deferred tax.  As they concede, their interest charge doesn’t compleetly solve the lock-in issue, because of the problem when you get a big value jump in one year, followed by expected reversion to the normal rate of return.  Their point is that they would nonetheless significantly reduce lock-in relative to present law, a point that is certainly correct.

The big problem with their averaging / interest charge proposal is that of so-called sticker shock. Say Mark Zuckerberg had an enormous early value jump with respect to Facebook, after which his stock reverted to earning just a normal annual rate of return, and that he continued holding the stock until he died. The tax that was due at this time (what with interest on deemed past years’ accruals) could be a hard sell politically. Also, suppose the deferred tax is just out there, waiting. You would have people lobbying Congress to urge that it be eased or eliminated.  So I worry about the deferred tax collection as a potential major sticking point in practice, even though in principle, the plan is a good one.

One last final note on which I’ll close: One of the great tragedies of popular music history was that the Beach Boys’ “Smile” album never came out in 1967.  The version that finally came out in 2003 proved it to be a brilliant song cycle. At the time, however, the Beach Boys just put out a 29-minute micro-version, called “Smiley Smile,” that was pretty much garbage. One of the Beach Boys commented at the time: “We settled for a bunt, instead of trying to hit a grand slam.”

Now, the Beach Boys really blew it.  But corporate tax reform is different. Sometimes it’s better to settle for a bunt than to try to hit a grand slam.  So, while there are multiple ambitious plans out there, including Toder-Viard and Grubert-Altshuler, whose enactment I would welcome, skepticism about the political prospects might motivate trying to proceed more modestly.

One could simply ask: What are the worst problems we face in corporate and business taxation today, and how might these problems be addressed more narrowly?

My big three might be, first, problems with debt – including, not just debt versus equity, but also the use of interest deductions in base erosion and profit-shifting.  Second, disguised labor income of owner-employees if we significantly lower the corporate rate.  Third, international tax policy, which almost everyone agrees is an enormous mess.

So my narrow or “bunt” option might involve the following.  First, stronger thin capitalization rules or other limits on interest deductions.  Second, something addressing the distinction between normal returns and extra-normal returns, and taxing the latter at a higher effective rate than the former.  And, finally, international tax reform, although I won’t further abuse my time limit here by saying anything particular about that.

In sum, there are a lot of good corporate tax reform plans out there.  I’d prefer most of them to present law.  And perhaps we should think of the existing cacophony as offering Congress an empowering smorgasbord, rather than a dissuading Tower of Babel.  But it might conceivably be more promising to proceed more narrowly.  Even narrower changes, if well-chosen, could leave the overall system in considerably better shape than it is today.

Short paper posted on SRRN

I have just now posted here on SSRN my short paper, or rather talk, Ten Observations Concerning International Tax Policy, that appeared in Tax Notes on June 20, at 151 Tax Notes 1705-1710.  Among other topics, it discusses why there is so little scholarly consensus regarding international tax policy, and what we learn from the recent wave of U.S. corporate inversions.

Very interesting graph

I am a fan of Branko Milanovic's work on global income inequality, including his most recent book, about which I've written a short piece that will be appearing on Tax Jotwell at some point soon.  (It was supposed to appear in June, but they have a publishing backlog, as lots of tax folk have agreed to contribute annual short features.)

Anyway, here is a very interesting graph that Milanovic recently posted.  It's called "Cumulative real income growth between 1988 and 2008 at various percentiles of the global income distribution." As you can see, it gives insight into relative, as well as absolute, changes over the covered period at different points in the overall global distribution.  A key reason why the 10th to 70% percentiles beat the mean rate of growth is that many of the world's poorer (if not poorest) countries, circa 1988, have done so well.  (Absolute gain even at the very bottom, but much less than for people somewhat above that range.) Also much faster than average growth at the top, due to what one might call the "Piketty story."  And much worse results for the 70th through 90th percentiles globally, indeed with not all levels having experienced net positive growth at all, reflecting the other big part of the "Piketty story."

From the annals of Trump University

For the last week or so, I've been getting daily (or more) blast emails from the Trump campaign, even though I'm not a member of a foreign parliament.  Today's was the strangest yet - it verges on being threatening, starting with its title line: "Fwd: Mr. Trump is reviewing our records." The body of the email then goes like this:
_________________________________________________________________________________

**MR. TRUMP IS COUNTING ON YOU – PLEASE CLICK TO RESPOND**

Time is running short Friend, so I'll get right to the point.

Earlier today, Mr. Trump sent you a message regarding the urgent need to get you on board with the campaign at this critical time (if you missed it, you can read it below).

Mr. Trump pays close attention to campaign data and he's looking for at least 2,300 additional donors before Midnight. 

Friend, reviewing our records I noticed you haven't responded yet.

Can you chip in just $3 to help us meet this goal before MIDNIGHT TONIGHT? 

CHIP IN $3

I know you don't want to see Hillary Clinton elected to the White House. She won't just carry on Barack Obama's radical agenda if elected – she'll be even worse. 

As Mr. Trump has said, she's a disaster . . . and the American people have already suffered long enough under the inept and corrupt career politicians. 

So please, join us and stand with Mr. Trump today with a $3 contribution. 

Every additional donor tonight will make a difference in our fight to Make America Great Again. 

Thank you.

Sincerely, 

Brad Parscale
Digital Director, Trump for President
_________________________________________________________________________
This verges on saying: We're personally checking on  you - indeed, "Mr. Trump" might be doing so - and you'd best get with the program.

Plus, I like the classic "midnight deadline" pressure sales tactic (albeit, related to the FEC filing deadline for the next report).

Earlier emails said that Trump would match each contribution up to $2M total.  But, while matching donations is an old fundraising technique, as applied to self-donations it's a bit odd.  What's the threat - not to give himself as much money?

Also, given the apparent untruth (at least so far) of the Trump campaign's statement the other day that they had already filed an FEC document forgiving his loans to the campaign, it's possible that the actual plan here is an anti-match - use of any funds that he receives during this period to pay down those loans.

UPDATE: There's an old saying that honey catches more flies  than vinegar.  Perhaps for that reason, the latest Trump fundraising email to come across my transom offers me a free hat ("Make America great again,: of course) if I contribute enough.

Kleinbard on the Senate Finance deliberations regarding corporate integration

There's been a moderate to-do in the press recently regarding plans by Senator Hatch, the chair of the Senate Finance Committee, to release a corporate integration plan. Here, for example, is a May 18 BNA article, "Hatch Pushes Corporate Integration Despite Revenue Concerns," and more recently Tax Notes reported that Hatch is just waiting now for the Joint Committee on Taxation revenue score.

An interesting article, just posted on SSRN by Ed Kleinbard, provides some useful analysis and background.  As the title suggests - "The Trojan Horse of Corporate Integration" - it is fair to say that Kleinbard is skeptical of the plan, which he notes represents a surprising shift in direction for DC policymakers, who had not recently been focusing on corporate integration.

Rather than repeat his analysis, which is well worth an independent look from all interested readers, let me just throw a gloss on a couple of aspects, as to which I'll emphasize different aspects than he does.

Suppose the plan, although its full details have not yet been publicly announced, takes the following form.  Corporations get a full dividends-paid deduction, although, like deductions generally, it would not be refundable to the extent in excess of taxable income.  But the amount of the dividends-paid deduction will also give rise to a withholding tax liability that the corporation will remit to the U.S. Treasury on behalf of shareholders that receive the dividends.

For simplicity, let's just focus on the current year, leaving aside the details that the plan will no doubt have regarding the treatment of excess distributions (i.e., dividends in excess of taxable income), carryovers between taxable years, etc. The main points of interest to me here emerge out of the basic one-year model where dividends DON'T exceed other taxable income.

To illustrate in the simplest way possible: Suppose that Acme Products has $10 million of taxable income.  Assuming for simplicity a flat 35% corporate rate, if it did nothing further, it would pay $3.5 million of corporate tax.  But instead, it pays $10 million of dividends to its shareholders.  This zeroes out taxable income, so it pays the Treasury zero on its own behalf that is denominated an entity-level corporate tax.  BUT - if the withholding tax rate is 35%, it pays $3.5 million just as if there had been no dividend payout, only this is now denominated a withholding tax on the shareholders.  So they get $6.5 million, not $10 million - just as they would have if there were no dividends-paid deduction and the company had nonetheless decided to pay out all of its after-tax earnings as an immediate dividend.

What's happened so far at the entity level, by reason of the proposal, is purely a re-labeling.  The company still remitted $3.5 million of tax, just as it would have in the absence of a dividends-paid deduction (or if it paid no dividends).  But the taxes it paid are now deemed to be a shareholder-level tax, rather than an entity-level tax.  Thus, as I further discuss below, it's plausible that the accountants, in their wisdom, would decide that paying the dividends (and hence the withholding tax) caused Acme's financial accounting income for the year to be $10 million, rather than $6.5 million.  So the company has more reported earnings by reason of a labeling convention!

What happens at the shareholder level?  This depends on further details of the proposal once announced.  Under present law, obviously, the dividends would be taxable if the shareholder was. (But, as recent work by Steven Rosenthal and Lydia Austin shows, in practice about 75% faces no shareholder-level tax.)  Under the proposal, the shareholder-level effect would depend upon (a) the relationship between the shareholder-level rate and the withholding tax rate and (b) the question of whether, and if so when, the withholding tax was refundable when in excess of the shareholder-level tax.  I gather that a key part of the plan is to deny refundability to various or all tax-exempts, thus sticking them with the full 35% rate, which of course merely perpetuates the fact that they effectively get stuck with the entity-level tax under present law.

As Michael Graetz and Al Warren have noted in their work on the subject, this can be the same as having an imputation credit system of corporate integration.  Nonrefundability (or refundability, as the case may be) can be made a feature under either system. But calling it a withholding tax, instead of using the usual framing, would presumably increase reported financial statement income.

At the risk of unduly repeating the example from above, let's start with Case A, involving standard imputation framing.  Again, Acme earns $10M, remits $3.5M to the U.S. Treasury, shareholders get $6.5M (subject to whatever else happens at the SH level).  But as there was formally an entity-level corporate tax, financial statement income is $6.5M.

Case B, dividend deduction plus withholding tax.  In economic substance, everything is exactly the same (keeping in mind that SH-level tax effects can be made the same under both proposals).  That is, we still have Acme earning $10M, remitting $3.5M to the Treasury, and SHs getting $6.5M.  But now financial statement income is reported as $10M, because Acme merely remitted a tax that was formally defined as someone else's (i.e., the shareholders') obligation.

Here is another way to do the same thing.  Congress passes an imputation proposal, rather than a dividend deduction proposal.  But it commands the FASB to command accountants who are applying GAAP not to deduct entity-level corporate taxes from reported earnings insofar as any dividends generating imputation credits are paid out. So long as all the details are conformed properly, it can come out exactly the same. (Hence Kleinbard's question in his write-up: "Financial Accounting - How Stupid Are We?")

Suppose that I, unlike Kleinbard, wanted to argue in favor of the plan. What would I say?  Probably I'd say that the point is as follows.  Suppose that you like imputation but have observed that it isn't going anywhere, and that you think the third approach that I described above (commanding FASB to mandate non-deductibility from reported earnings of what are formally entity-level taxes) is optically unfeasible, By doing the proposal instead of imputation, you grease the wheels for its passage by giving corporate managers a big financial accounting benefit that - if (in Kleinbard's terms) we are indeed stupid enough - will make them big supporters.  (BTW, whom should we think of as the relevant "we" in practice?  Marginal investors? Big players? Someone else?)

Kleinbard doesn't buy this line of argument, partly because he's skeptical that "we" are that stupid, and partly because he notes that the most sophisticated thinking about capital income taxation has moved on from corporate integration that focuses on dividend payouts to more fundamentally addressing the taxation of capital income in general.

So let's throw another potential argument for the proposal onto the hopper.  It's thought by some that this will have a positive impact on the "trapped earnings" problem for U.S. companies that have massively shifted their profits into tax havens, and also declared much of these profits to be "permanently reinvested earnings" (PRE),  The PRE designation, if accepted by the accountants, permits one to score the deferred U.S. taxes at zero for financial accounting purposes, rather than at full value without regard to deferral (and to the prospect that they might never become payable at the currently applicable U.S. repatriation tax rate).

So let's go back to Acme.  Suppose that Acme has zero U.S. taxable income, because all its earnings are through foreign tax haven subsidiaries.  Say that it has $10M of PRE that faced zero in foreign taxes, and that it's unwilling to bring this money home, even though it wants to pay dividends to its shareholders, because then it would pay $3.5M in U.S. taxes that would come as a negative adjustment to earnings given the PRE designation.

Now the thinking is as follows. If we enact the Hatch plan, its $10M in taxable income from the repatriation is perfectly offset by a $10M dividends paid deduction.  It still remits $3.5M of tax, and the shareholders still only get $6.5M due to the withholding tax, but now Acme avoids the negative earnings hit because the accountants now believe that this tax was merely remitted on behalf of someone else (i.e., the shareholders). No negative adjustment to PRE, so Acme is happy.

In this scenario, the Treasury also ostensibly is happy.  After all, even under current law with the two levels of tax (subject to the Rosenthal-Austin point), how much in tax revenues did they actually expect to get?  Zero in the current period, if Acme wouldn't have repatriated.  And even in the long run, who knows - given, for example, the possibility that Congress will enact another repatriation holiday (a la 2004) at some point.

So, is everyone better off?  Well, possibly not the shareholders.  After all, given the chance of a future holiday, etc., they may have stood an excellent chance of, at some point, getting their hands on MORE than $6.5M (in present value) out of the $10M that Acme has squirreled away in the tax haven.  Indeed, the boon to the Treasury, if it materializes, would appear to reflect managerial focus on maximizing reported earnings, as distinct from actually doing what's best for the shareholders.  So perhaps the best argument for the proposal in the end (which Kleinbard acknowledges), is that it leverages managerial indifference to shareholder welfare into a mechanism for benefiting the public fisc.

If one believes that "we" really are as "stupid" as this argument for the proposal posits, does this potentially tip the balance in its favor? After all, if the managers are indifferent to shareholder welfare in various respects, why not have the fisc take advantage?  Kleinbard does, however, offer various counter-arguments. I'll leave final bottom-line judgments to the readers.

Trump on waterboarding

Per Vox: "I like it a lot. I don't think it's tough enough. Can you imagine them sitting around the table or wherever they're eating their dinner, talking about the Americans don't do waterboarding and yet we chop off heads? They probably think we're weak, we're stupid, we don't know what we're doing, we have no leadership. You know, you have to fight fire with fire."

This does not appear to be a prudential rationale for torture.  It's to impress "them" by showing that "we" are as "tough" and "smart" as "they" are.  Otherwise, presumably, "they" will laugh at us.

Redemption of a lazy cliche?

When Americans talk about the U.K., or for that matter about the U.S., there is generally no lazier, tireder, more meretricious cliche than the Churchill Invocation, in which it's always 1938 and always about Munich.  Of course, whereas Churchill was bravely and farsightedly urging a benighted, unready country to stand tall against a brutal, ravening bully, in the U.S. it's generally invoked to support beating up on smaller, weaker, countries or for that matter civilian groups that, even if not as friendly as we might wish, are also not irredeemably hostile (unless and until we make them so).

And of course U.K. people, compared to those in the U.S., are likelier to know Churchill's full political history, which  had low points in addition to the world-historic high point that we always have in mind (even when it's wholly off-point) on this side of the Pond.

But in the U.K., where the winning pro-Brexit forces were too cynical to have any plan, and the government decided not to make any plans, and where there is currently neither a functioning government nor an organized opposition, it's time to think about Churchill 1938, albeit at a greater level of abstraction.

Although I'm non-UK and obviously don't know the politics, I am getting the sense that Brexit is likely to happen, even though it still requires a set of deliberate political acts by people who already well know (or will soon find out) both (a) that it is unwise, and (b) that the public didn't choose it knowingly (as opposed to voting symbolically so as to "send a message," or else under the influence of false information).  Plus, for that matter, the wrong public voted - to match voice with consequences, young people and future generations should have counted for more here than they did in the actual balloting.

But the reasons it seems likely to happen are (a) politicians in both of the major parties who know better are playing it safe or thinking small or treating it as "politics as usual," and (b) those with a large enough voice to do something individually, such as the U.K.'s own U.S.-born version of Trump, might prefer to see terrible things happen (even if they couldn't dodge the blame) than have to admit what a sham they've been playing out in public.

So if "being like Churchill" means being brave, and taking the long view, and not worrying about whether it's to one's current political advantage, or about who else will go along, or about whether it's good for one's current image, and if "being like Churchill" has no necessary connection to the particulars of the canonical 1938 Munich showdown, then at last it's time for it now.  But takers seem likely to be in short supply.

Brexit / international tax policy follow-up

I was a bit soft-spoken about Brexit in my prior post ("I'm inclined to think that Brexit will predominantly have bad effects") as I didn't want to rant or screech, especially in a very preliminary response before getting a chance to read more about it.

But here's the odd thing, clarifying a point that was implicit in the post but that I hadn't as yet thought through as clearly.  Damaging (or even calamitous) as Brexit may be for the English on the whole if it actually goes through (and I say "the English," not "the UK" or "the British" advisedly), it may actually increase their flexibility in international tax policymaking, which (all else equal) would potentially be a good thing.  But, alas for them, "all else equal" is not a good operating assumption.

If the English value their own international tax policymaking flexibility, they can actually use it in a number of different ways post-Brexit that would not have been as feasible before.  Removing European Commission and European Court of Justice oversight increases their freedom of action whether they want to use it towards (a) cracking down more on their own multinationals, without having to worry about such ECJ decisions such as Cadbury Schweppes, (b) becoming even more of a tax haven, such as by doing state aid without facing oversight by the EC, or (c) reviving corporate integration via shareholder imputation, without having to credit other EU countries' corporate taxes or to offer refunds to other EU countries' residents.

What does this leave out?  Well, here are a few things:

(1) how Brexit's terms are negotiated - e.g., it could conceivably involve agreeing to limits on international tax policymaking flexibility,

(2) how remaining EU countries change their tax policy towards the English (e.g., the gain in flexibility is reciprocal - other EU countries would now presumably be able to treat English companies and taxes less favorably than before), and

(3) everything else that could happen to the English by reason of Brexit if it actually goes through (i.e., if they don't do the smart thing by never actually triggering Article 50).

Brexit and tax policy

I'm inclined to think that Brexit will predominantly have bad effects, on both sides of the English Channel and on both sides of the Atlantic Ocean.  But it all depends on what people do next.  Although it's a strategic trade-off, I think the EU folks would be far wiser to play this in a "nice" way than a "mean" way.  I don't think their overall position is strong enough for "mean" to pay off.

Interesting tax policy, among other, implications for the UK.  (Or should I say, the English? - suppose Scotland, Northern Ireland, and even Wales were to leave and rejoin the EU.)

Some years ago, the European Court of Justice (ECJ) seemed to be actively obstructing UK efforts to have strong CFC rules that would protect the UK tax base against sheltering activity that took advantage of EU tax havens.  This may have been one reason that the UK switched strategies and decided to set up business as itself somewhat of a tax haven.

Without the ECJ, the UK may be free, if it likes, to go back to the previous strategy.  But the thing is, I suspect they've made their choice and are unlikely to revisit it.  (This reflects that there are competing strategic arguments for both types of approaches.)  I note that the UK apparently was opposed to stronger CFC rules within the OECD-BEPS process, a stance that was not ECJ-constrained.

Of course, with Cameron resigning, we don't know for sure who will be controlling UK tax and other policy in either the short or long term.

Leaving the EU would also presumably free the UK to engage in "state aid" of the sort that the EU has been barring when it comes from the likes of Ireland or Luxembourg.  So they could now double down on the tax haven strategy if they like.

I suspect that it is actually, or at least technically, possible for Brexit to end up not mattering all that much. If the two sides sufficiently agree to cooperate, e.g., as a condition of mutually favorable trade arrangements, life could go on with surprisingly little change.  But the political dynamics may be wrong for that to happen.

One final small tax policy point: Michael Graetz and Al Warren have argued in the U.S.tax policy debate that the ECJ caused the UK to abandon corporate integration via imputation.  Another view holds that the UK was trending in that direction anyway.  We now have a test case for the Graetz-Warren claim, unless they can establish a credible "path dependence" explanation for why the UK wouldn't revive imputation, similar to my point above regarding CFC rules et al.  (Except, my point relies on the existence of imponderable tradeoffs, whereas they may be more inclined to see imputation as a huge and clearcut policy improvement.)

I guess he really is desperate

Today I got a fundraising email from one Donald J. Trump,who says:

"This is the first fundraising email I have ever sent on behalf of my campaign.  That's right.  THE FIRST ONE.

"And I'm going to help make it the most successful first introductory fundraising email in modern political history by personally matching every dollar that comes in WITHIN THE NEXT 48 HOURS, up to $2 million!"

While matching donations is a well-known fund-raising gambit, it's a bit of an odd twist that the donations he says he'll be matching would be to himself.

Are we to assume that Trump WON'T give himself the full $2 million if the targets don't pony up enough?

But on the other hand, should we assume that he WILL have sufficient funds to give himself the full $2 million even if they do?

UPDATE: Talking Points Memo, which has reproduced the email on-line, points out that it doesn't definitively say whether Trump's $2 million match will be a true contribution or a loan.

The fact that the Trump campaign owes Trump $50 million for past loans, and has been paying 20% of its outlays to Trump organizations, is not exactly catnip to the prospective donor.

Short publication

As promised or threatened, Tax Notes has indeed today published the lunch remarks I gave at the National Tax Association Spring Symposium on May 12. The cite is Shaviro, 10 Observations Concerning International Tax Policy, 151 Tax Notes 1705-1710 (June 20, 2016).

Perhaps because it's in their "Current and Quotable" section, it doesn't appear to be in today's online version of Tax Notes for subscribers.  (Nor is John Samuels' "The Joint Committee Staff - From the Outside Looking In," also in "Current and Quotable.")  But I'm permitted to post it on SSRN two weeks after its appearance in Tax Notes, and thus I will do so in early July.

UPDATE: The talk is available here, but probably requires a Tax Notes subscription to access.

Tax Notes article on AEI corporate tax reform panel

In today's Tax Notes, Andrew Velarde describes the proceedings at AEI last Friday (I'd post, the link, but presumably it's subscribers only).  He accurately summarizes the main gist of my comments as follows:

"Daniel N. Shaviro of New York University School of Law lauded the plan's move away from its old pure integration model, saying that 'there's a lot to like' in the new plan. He called the annual tax collection and the addressing of debt-equity positions of tax-exempts positive points to the proposal, but he still worried that companies may be discouraged from going public, even with the transition rules, and that the divide between publicly traded and nonpublicly traded companies still remained. Shaviro also expressed some skepticism that corporate tax reform could be accomplished in such sweeping measures.

"Shaviro said that one possible solution would be to address the biggest problems of the U.S. corporate tax system more narrowly, arguing for stronger thin capitalization rules and debt limits, rules on normal versus extra-normal returns, and international tax changes. 'There's a time for a bunt, instead of a grand slam,' he said.

AEI corporate tax reform panel

I'm back in NYC from appearing at AEI in Washington this morning, where I offered comments on the Toder-Viard corporate tax reform proposal.

A video for the event is here.  My remarks begin at about the 33-minute mark.

You can view the slides for my talk here.

Rather than addressing the plan's very thoughtfully designed features item-by-item, I sought to locate it conceptually within the universe of corporate tax reform and entity-level corporate rate reduction proposals, and to explain what I think are the broader conceptual challenges in the field, as well as their relationship to the various alternative plans' particular merits.  I also briefly addressed the "dividend deduction plus withholding tax" plan that I gather Senator Hatch and the Senate Finance Committee staff are currently working on.

Upcoming

Tomorrow morning I'll be in Washington, commenting on the Toder-Viard corporate tax reform plan (and on corporate tax reform more generally) at this AEI event.  Slides to be posted here on Monday.  Also on Monday, a written-out version of my NTA spring symposium lunch talk from May 12 will be appearing in Tax Notes.

Universal basic income

The idea of offering lump sum payments to all citizens or residents, often called "universal basic income" or "demogrants" or the "negative income tax," has been cycling back into public consciousness recently, although it was just rejected in Switzerland by a vote of 77% to 23% (!), and although I can't imagine it happening in the U.S., at least explicitly, at any time in the foreseeable future.

Still, the UBI and related concepts combine (a) genuine policy merits with both (b) being frequently misunderstood and (c) having an unusual mix of support on both the left and the right (e.g., James Tobin and Milton Friedman; George McGovern and Richard Nixon; Martin Luther King and Friedrich Hayek).

Ben Leff has recently posted a blog entry regarding UBI (see also his prior post here) in which he was kind enough to post a link to an article that I wrote, more than 15 years ago (egad), touching on this topic.

I hope my readers will forgive me for being unable to resist noting here that Leff says my article "figuratively blew my mind when I first read it .... When I told my wife that Shaviro's article had blown my mind, she said, 'Compare it to Carlos Castaneda, and I said 'More! It blew my mind more than Castaneda.'"  He then offers a crisp account of several of the main points I made in that article.

UBI is an extremely rich topic, touching in multiple ways not just on economics, but also on political science, distributive justice, administrative law, and poverty program mechanics.  It's thus well worth writing about.  Even if an express UBI is politically unattainable, the discussion can have not just theoretical but perhaps even practical benefits, by reason of its improving our understanding of the relevant issues and design trade-offs.

A photo from Amsterdam - but I don't think it was at my talk

I hope this photo wasn't taken at my talk - the subject looks entirely too skeptical for my taste.

It was indeed taken in Amsterdam, however, during a break from all the art museums, windmills, rijsttafel dinners, etc.

Enough teasing already, here's my talk concerning the U.S. response to OECD-BEPS and the EU state aid cases

Although my talk at the Amsterdam conference really was intended as a talk, not a formal paper, I've published on SSRN a very modestly expanded and formalized version of it - available here.

Just a teaser

Here are the slides for my talk at last Wednesday's conference in Amsterdam concerning the U.S. response to OECD-BEPS and the EU state aid cases.

The sense in which it's just a teaser is that the slides are fairly skeletal, taking the form of a very general outline of the points I covered.  But, as noted previously, I am planning to post a very slightly expanded version of my remarks, perhaps as soon as tomorrow.

Back from Amsterdam

Got back mid-day today after a week in Amsterdam, including one day at the NYU-Amsterdam Center for Tax Law Conference on EU anti-profit-shifting efforts, including those in OECD-BEPS.

My talk, "The U.S. Response to OECD-BEPS and the EU State Aid Cases," looked at both the U.S. climate of discussion regarding these two initiatives, and at what one might guess U.S. policymakers might do in 2017 and thereafter.  This naturally required looking briefly at U.S. politics, e.g., at what a Clinton or Trump White House might be expected to do.  The latter topic, naturally, is one of particular interest to non-U.S. audiences.

I'll post my talk here and/or on SSRN (I believe it's a hair north of 2,000 words) early next week, although I don't anticipate submitting it for formal publication anywhere.