NYU Tax Policy Colloquium, week 6: Jennifer Blouin's Does Tax Planning Affect Organizational Complexity: Evidence from Check-the-Box: part 1

 Yesterday at the colloquium, Jennifer Blouin presented the above-titled paper (coauthored by Linda Krull). Unfortunately, I can't post a link to it here, as there are issues relating to data use permission that I hope will be cleared up soon. But the broad contours that I can discuss may nonetheless be of interest.

This blogpost will purely focus on the legal background to the paper's empirical analysis, which I will discuss in a separate blogpost, part 2, which will follow shortly.

At the end of 1996, the US Treasury issued the by now infamous check-the-box (CTB) regulations, allowing taxpayers simply to elect, for specified legal entities both in the US and abroad, whether such entities would be treated for US federal income tax purposes as corporations or flow-throughs. In the domestic realm, this was a completely uncontroversial simplification. The prior legal regime for classifying, say, limited liability companies (LLCs) under state law had grown to combine tedious burden creation with near-electivity as an effective matter, plus an almost complete lack for the government to try to police the boundary (given, for example, publicly traded partnerships were being taxed as C corporations anyway).

The tricky part that may have reflected a Treasury stumble occurred in the international realm. US companies, by checking the box "open" for specified foreign entities that had only a single owner created "hybridity" of an extremely convenient sort for foreign entities that could be used in overseas tax planning. Previously, one couldn't do this without some effort to tailor things just right, often leaving residual uncertainty about whether one would succeed in getting the desired effects. But now it was easy and automatic.

A bit of further background before noting how the hybridity worked: The main play related to subpart F, aka the US controlled foreign corporation (CFC) rules. Subpart F can make certain foreign source income (FSI) that is earned abroad by US companies' CFCs currently taxable to the US companies, via treatment as a presumed dividend back to the US parent that is then deemed to have been reinvested abroad. The subpart F income therefore ceases to be either deferred to the US parent under pre-2017 US law, or exempt subject to GILTI under 2018-and-on US law.

Conceptually speaking, subpart F has two parts. First, by taxing to the US parent the passive income (such as portfolio interest and dividends) that it has earned through its CFCs, it prevents US companies from earning such income tax-free by the simple expedient of earning it offshore (i.e., as FSI of its CFCs).

Subpart F's second part (conceptually speaking) is deterrence of profit-shifting abroad. For example, what are called the base company sales rules provide that one will have subpart F income if one, say, routes sales to one's operating CFCs in high-tax countries in such a way as to cause the taxable income to arise in a shell CFC that is located in a low-tax country. This might, for example, involve the use of transfer pricing games to ensure that the shell CFC, rather than the operating CFCs, ends up with a significant piece of the taxable profit despite its doing little or nothing. 

In effect, subpart F's second conceptual part discourages certain foreign-to-foreign tax planning. In the above scenario, for example, the taxpayer might have been using, say, a Luxembourg CFC to drain off foreign profits that would otherwise have accrued to its German, French, and UK CFCs. Such foreign tax minimization may be pointless, however, if it draws US taxes under subpart F that eliminate the worldwide tax saving. Two possible outcomes are that (a) the US company does all this anyway, saving foreign taxes but increasing its US tax liability due to subpart F, and (b) the US company decides against doing it, in which case there is no subpart F income but it is paying the higher taxes in Germany, France, and the UK that it would otherwise have avoided.

Obviously, there is a big question as to why the US would seek to deter this tax planning. We don't get the revenues, insofar as they accrue to Germany, France, or the UK rather than to us. But not all of the rationales for doing it are founded on cooperation or reciprocity or altruism. The anti-foreign-tax-planning piece of subpart F may also indirectly increase US tax revenues, by reducing the payoff to companies of replacing US source income with FSI (since the latter may be much easier to on-shift to a tax haven).

With all this in background, consider intra-group interest flows. Suppose, for example, that a Caymans affiliate of the US parent lends $$ to a German affiliate, and the latter then pays interest to the former.  This reduces the German CFC's taxes (assuming Germany allows the interest deductions despite, e.g., its thin capitalization rules), without any Caymans offset given that it's a tax haven. But it leads to subpart F income, which looks like Type 1 (passive income -> subpart F income) but is actually Type 2 (foreign tax planning triggers US tax liability, even though the group's net interest income from the transaction is zero).

And here is where we circle back to CTB. Because it treats a single-owner checked-open foreign entity as transparent (i.e., as merely a branch with no separate tax existence) for US tax purposes, US multinationals can play a fun "hybridity" game to get the best possible tax results in the above transaction. In the above example, Germany allows the interest deductions, but the US does not apply subpart F to the interest flows to the Caymans entity, because there has been no transaction. The US regards the German and Caymans affiliates as the same entity, and you can't, for tax purposes, pay interest to yourself.

In effect, CTB therefore amount to the partial indirect repeal of subpart F. What I call its "part 1" application to tax gross passive income earned abroad through CFCs remained intact. But what I call its "part 2" application to deter foreign-to-foreign tax planning was effectively repealed for all US companies that went to the trouble (and it wasn't much) of inserting transparent entities into its structure as needed to prevent subpart F from observing the cash flows that this tax planning involved.

One last bit of background on all this: In 2005, Congress enacted Code section 954(c)(6), which has always had an expiration date but has continually been extended (at present, through 2026). Without running through all the details here, this effectively replicates CTB's effective repeal of what I call part 2 of subpart F without requiring transparency of the entities that are being used to do it. But it still does require one to do the things (involving the use of entities in both tax haven and non-haven foreign jurisdictions) that subpart F would otherwise have discouraged.

Okay, back to the Blouin-Krull paper. It aims to illuminate certain effects of the adoption of CTB (and perhaps later section 954(c)(6)) in the international realm. These are of two kinds: effects on US firms' organizational complexity, and on the firms' US and worldwide tax liability with respect to their US source and foreign source income. But I will use a separate blogpost for that discussion.

Part 2 re. yesterday's NYU Tax Policy Colloquium discussing Daniel Hemel's Law and the New Dynamic Public Finance

 The immediately preceding blogpost offers part 1 of my reflections concerning the paper by Daniel Hemel that we discussed at the NYU Tax Policy Colloquium yesterday. Herewith part 2, discussing just three of the particular issues that the paper raises. (There are actually lots more, if you wish to take a look.)

Relevance of age differences; age-dependent tax rates - Whether you are looking at the same person at different life stages, or the average individuals at given age levels at a particular point in time, immense age-dependent differences become apparent. People at different ages generally differ in their average income and wealth levels (and degrees of dispersion), labor supply elasticity, and it is plausible to say utility functions. This has recently prompted a large economics literature on age-dependent taxation, including age-varying tax rates. This literature may be identified with NDPF, although much of it self-labels as OIT. Moreover, while it deals with how people change over time, to some extent the changes are predictable in advance, whereas NDPF often is focused on stochastic change.

As the Hemel paper notes, people might be expected to want more insurance via the tax system against "ability risk" in their 50s and 60s than in their 20s. Also, current labor supply elasticity is probably higher in the earlier period, given not just "gap years" and such but also schooling that aims to increase future earnings at the expense of current earnings. Then of course people tend to become more interested in retirement, and perhaps less able to earn current income or to have hopes of doing so in their future, as they enter their 60s and beyond.

There is nonetheless a widespread intuition or feeling that age-dependent tax rates are inappropriate. Their use therefore tends to congregate in particular side-realms. Examples include the earned income tax credit's being limited to people between the ages of 25 to 64, and the Social Security rule (for many years) under which benefit payouts would be reduced if one had current wages.

This topic is rich for further exploration. One area that comes to mind is income averaging, which existed in the federal income tax from 1964 to 1986 but then was generally eliminated. While the use of income averaging is not inherently age-related, those rules were designed to cover up-and-down swings in how much people earned in a given year (although, to benefit, you needed to have the low-income years first). They were intended and designed (albeit imperfectly) not to cover the case where, say, you were a currently impoverished law or medical student whose income then shot up, not due to volatility but because you had newly entered your high-wage years. But it's actually not obvious that they should be so limited.

For example, consider two individuals who enjoy the same lifetime earnings in present value. But A has expensive schooling until age 28, whereas B enters the workforce at age 22 and earns less per year but the same in PV due to the 6 extra years. Insofar as we think that lifetime income is the proper gauge, they ought to pay the same lifetime taxes in PV, but A might end up paying more due to graduated rates. Indeed, A might even be worse off in a lifetime sense if she has to backload her consumption due to the difficulty of borrowing against "great expectations." (We also have to think about the total and marginal welfare implications of A's six extra years slaving away in law or medical school rather than entering the paid workforce immediately.)

Now suppose we change the facts so that A simply postponed working, in order to have fun traveling the world, knowing that she could earn more once she started. Here it seems that she is actually better-off than B in a lifetime sense, given that in her voluntary non-working years she got to enjoy herself rather than slave away in school. But it's not clear that the possible impact of graduated rates to the concentration of the same PV earnings into future years gets us quite to the right place. 

Anyway, age-dependent taxation is bound to be part of the analysis here, however it might come out.

History-dependence in unemployment insurance (UI) and Social Security disability insurance (SSDI) - The paper also discusses certain history-dependent rules that apply in UI, SSDI, and also in such areas such as tort compensation for injury. If you lose your job or become disabled, the amount that you are entitled to collect depends on lost wages, which are discerned by looking at past wages. Therefore, if you and I both become entitled to collect UI or SSDI, or to receive tort compensation for lost wages, the one who used to earn more is presumably going to get a large payout. The paper notes that this might be viewed as peculiar since it provides what one might deem regressive payouts. For example, if A is a high-low (i.e., one with low current earnings but high past earnings), whereas B is a low-low, we might think A better-off overall, as she presumably is in a lifetime earnings sense, yet we give A more $$ than B. The paper discusses NDPF-derived reasons why this might increase the tax system's incentive compatibility (by offering a positive expected payoff, otherwise reduced by the tax system, to being high-wage in Period 1).

Focusing for convenience just on UI, I have tended to think that it makes sense as a government program despite its regressivity compared to offering all people who lose their jobs the same payoff. Suppose that people are averse to the risk of losing their jobs - and not just to being involuntarily unemployed in the current period - because it is costly to suffer a sudden and unexpected negative shock to their earnings. This might result, not just from psychological habituation to a given wage level, but also from having pre-committed to a spending path that presumed wage stability. (E.g., consider buying a home with a high mortgage or else paying a high monthly rental, and sending your kids to an expensive school.) Aversion to a downward shock would suggest buying insurance against it, but suppose that moral hazard and adverse selection prevent this insurance from being available at reasonable terms. But suppose the government can better address the adverse selection problem than private insurers would be able to. This  can create a straightforward case for the government's offering and indeed mandating the insurance on actuarially fair terms, on efficiency grounds and even without regard to distribution.

Traditional versus Roth IRAs - In a traditional IRA, you deduct the contribution and then are taxed on the distribution. By contrast, under a Roth IRA, there is neither deduction nor inclusion.

It's well-known that these two methods are present-value equivalent, assuming a fixed rate of return and constant tax rates. For example, say the money held in the IRA will exactly double during the multi-year savings period no matter how great or small it might be, and that the relevant tax rate at all times is 33.3%.

Under a traditional IRA, you contribute $150 as this costs you only $100 after-tax, and then withdraw $300 that the distributions tax reduces to $200.

Under a Roth IRA, you contribute $100, this costs you $100 after-tax, and you withdraw and keep $200.

Nonetheless, in real world scenarios the two can play out quite differently. Tax rates may change between the contribution year and the distribution year. Also, the scaled-up traditional IRA would earn a lower overall rate of return if, say, you had a special opportunity to earn more than the normal rate of return but it ran out once you had invested $100 in it. (To show why this is plausible in real world scenarios, suppose that the scaling-up issue, outside the IRA context but resulting from tax rules that operate to similar effect, would require Jeff Bezos to in effect create 1-1/2 Amazons, rather than just 1, in order to maintain his extraordinary rate of return on a nominally larger pre-tax investment.)

The Hemel paper notes that, under traditional IRAs, the tax rate when one contributes is often higher than that when one receives distributions, reflecting retirement's downward influence on one's marginal tax rate. Certain NDPF-style considerations suggest that this is effectively backwards. This therefore might suggest policymakers' favoring Roth over traditional IRAs, all else equal.

Hemel has also offered interesting arguments elsewhere that there are distinct grounds for policymakers to prefer Roth to traditional IRAs. Here, for example, he notes that management firms such as Black Rock may prefer the traditional structure, because they get to earn a fee on the scaled-up assets under management. In effect, they are charging the government their standard fee for earning the $$ that it will claim when the funds are distributed, but we might be highly skeptical that paying this fee is worth it economically to the government in terms of ultimately enhanced returns to it.

I read this portion of the article against the background of a prior view that Roth IRAs are often worse from a policy standpoint for two reasons. The first is that, in Bezos-type cases, taxpayers earn scarce extra-normal returns through Roth IRAs that result in their avoiding any tax on the rents (whereas they would have to pay tax on the rents under a traditional IRA structure). The second is that fixed-period (such as 10-year) Congressional budget rules cause Roths unduly to look cheaper for the government than traditional IRAs, because the revenue loss (from excluding distributions) is largely pushed outside the estimating period.

Without purporting to resolve the traditional versus Roth issue based on any one issue alone, I would note that, at least in principle (and subject to policy change risk for rules that have a deferred application), one need not base the traditional IRA deduction and inclusion rules on the taxpayer's contemporaneous marginal tax rate. Suppose, for example, that one wanted a net positive tax but was concerned that taxpayers' marginal tax rates would decline between the two periods due to retirement. Then one could mandate, say, a 20% credit for the contribution and a 30% tax on the distribution - or, for that matter, equal percentage credits if one wanted the PV of the net tax to be zero. In short, the question of when one provides partial reimbursement (such as via deductions), and when one imposes positive tax liability (such as via the inclusion of distributions) is not indissolubly tied to the taxpayer's income tax MTR in the relevant year. Subject again to the question of political risk, this actually might leave one with more scope than otherwise to apply NDPF-style analysis to the question of how the overall set of transactions ought to be taxed.

NYU Tax Policy Colloquium, week 4: Daniel Hemel's Law and the New Dynamic Public Finance, Part 1

 Yesterday at the colloquium, Daniel Hemel presented the above-named article. We have now settled into our every-other-week, hybrid format, and numerous friends from outside NYC dropped by via Zoom, although most of them didn't stay all the way through. I hope the audio is good enough that they can hear speakers from around the room during the discussion, although they can't see them on the video feed. I probably wouldn't stay all the way through under those conditions either, but it would certainly be great to hear from them if they have comments.

Anyway, on to the paper. My thoughts about the issues it raises can be grouped into two main headings: how tax lawyers should or do use economic theory, and particular issues discussed in the paper. While Part 1 appears directly below, I will reserve Part 2 for a separate blog entry.

1) Lawyers and Economic Theory

The paper focuses on the existence of a new(ish) economic literature out there, commonly called the New Dynamic Public Finance (NDPF), that has been flourishing for a couple of decades in the economics journals, while almost never being cited in the law reviews. (Okay, the one prominent exception to this, as it notes up front, is Daniel Shaviro, "Beyond the Pro-Consumption Tax Consensus," 60 Stanford Law Review 745 (2007).)

The paper's central message is that tax (and other) lawyers with academic or policy interests should read and use the NDPF literature, although it is not super user-friendly in form (e.g., highly technical models with lots of math), due to the important insights they can derive from it.

But here is an alternative framing of the same central message: In evaluating tax and other legal policy issues, it's important to think about such things as:

1) the fact that people's opportunities to earn $$ in the market can change unpredictability,

2) the effects that people's expectations regarding future government policy can have on their  behavior, and

3) the information that policymakers can derive from the year-to-year details of people's earnings flows, consumption, and saving or dissaving.

The NDPF framing is catchier and more salient. However, its effect on a legal audience's reception of the message may be complicated by a widely-known (if little-discussed) sociological fact about the tax policy world: that is, the fact, that economists as a group have more prestige within it than lawyers as a group.

By reason of this fact, lawyers who are eager to emulate economists at all costs will be excited to hear about this literature. But from others, such as lawyers who are uneasy or insecure about the economists' reign, it might provoke hostility or resistance. These folks might therefore miss the intellectual payoff that the article actually offers them.

With either framing, a key takeaway is that a prominent branch of the public economics literature that has deeply influenced academic tax lawyers (and perhaps policymakers) for decades - the optimal income tax (OIT) literature that was founded by James Mirrlees' classic 1971 article - has been revised or even (in its earliest forms) refuted in certain key respects, with the consequence that certain familiar conclusions that commonly are derived from it turn to be mistaken.

As a result, here is a misapprehension that prospective readers could derive from the article's chosen framing: Rather than saying: "Lawyers must follow abstruse economic models in order to better grasp important policy issues," it is actually saying: "Lawyers should free themselves from too narrowly and literalistically following economic models that inevitably are stripped-down and simplified relative to the reality that they seek to represent. Instead, they should embrace more complex and multifaceted, albeit inevitably open-ended and ambiguous, ways of thinking about various important issues."

Going back to the three points that I listed above in the alternative framing, one should not think of them as being only in the NDPF literature and nowhere else. For examples from the pre- or non-NDPF OIT literature, and/or relevant legal literature, of considering their importance, consider the following:

--In the OIT literature, there is a thread (which I associate with an article by Hal Varian) that looks at the income tax (i.e., wage tax) as offering risk insurance for under-diversified human capital, which is subject to stochastic shocks. This is the point about earnings opportunities changing unpredictably, although this branch of the OIT literature does not (to my knowledge) look at the information to be gleaned from year-to-year earnings changes, a factor that is emphasized in some NDPF literature.

--The classic time consistency problem in tax and other policy was well-known in prior literature E.g., in principle there are huge efficiency gains to be derived from encouraging people to invest, then expropriating their holdings and promising never to do it again. But this can utterly break down not, just because ex post the promise may prove less than credible, but also because ex ante people may anticipate its being done. NDPF merely adds to this a richer and more varied inquiry into how expectations regarding possible future policies might play out.

--There is a huge legal and economic tax policy literature, to which I along with many others have contributed, concerning the effects of tax deferral as creating both uncertainty and optionality, if the tax rate in the year of realization might be different from that applying today. If all of us were therefore doing NDPF without realizing it, then I am reminded of the line in Moliere about the character who is thrilled to learn that he has been speaking prose all his life.

--Again, the paper kindly cites my 2007 Stanford article that actually mentions NDPF. But, as it happens, in writing that article I had already found my way to my main conclusions before learning about NDPF, and adding it to the article's back end, from feedback at a conference where I presented an early draft.

That article sought to show, and then engage with, the point that certain simple OIT models that were in widespread use among lawyers and economists led straightforwardly, and indeed ineluctably, to the linked conclusions that (1) the tax system should employ lifetime income averaging, and (2) a consumption tax is superior to an income tax. Under these models, your welfare and marginal utility depend purely on the present value of your lifetime earnings, which, with the aid of perfect rationality and complete capital markets, you are presumed to deploy such that you choose the lifetime consumption stream that has the greatest subjective value to you (and presumably, equalized marginal utility for the last bit of consumption in each period).

In short, that article first sought to explain why an "ideal consumption tax" is such a slam-dunk intellectual winner over an "ideal income tax" within the standard OIT model's contours. But then it moved on to (a) why the model's simplifying departures from reality should not be forgotten, and (b) how a fuller and more realistic view ends up defeating the presumed takeaways (or at least their certainty) regarding both lifetime income averaging and the ostensible superiority of consumption tax over income taxation.

(BTW, this heresy drew a stern, albeit amiable, written response from two friends and colleagues in the biz, also appearing in Stanford, to the effect that I was all wrong in backing off as I did the standard OIT conclusions. I believe, although I suppose I would, that, when one looks back at 2007 from the perspective of 2021, my side of the debate comes off pretty well, and indeed has been decidedly favored by the movement of the field since then.)

Anyway, back to the point after this perhaps self-indulgent detour. In that paper, I got where I was going initially without NDPF. I focused mainly on such issues as incomplete capital markets - which impede, for example, borrowing against one's reasonable expected future earnings - and limited rationality. NDPF, when I found out about it, was icing on the cake, but I had already gotten the most of the way there without it. This arguably weighs against viewing NDPF as such as being vital to the Hemel paper's main takeaways, although it weighs in favor of viewing the 3 big issues (as noted above) that the paper foregrounds as really important.

Whatever the framing, Hemel's paper and NDPF are above all about the relevance of time. Mirrlees' classic 1971 set-up for balancing efficiency against distributional considerations in the structure of an optimal income tax expressly leaves time out. It's about policy choice in a snapshot moment where people's utility functions, capacity to earn $$ through labor supply, and labor supply elasticity are fixed. You don't develop your "ability" in that model - it's just there, as a random draw from the box - nor can you save given that there's no other period.

Subsequent work in the classic OIT tradition then added time to the framework. For example, in Atkinson-Stiglitz (as applied to present vs. future consumption) and Chamley-Judd - often both commonly cited in the income vs. consumption tax debate - time is there all right, and it plays a central analytical role. But time is effectively uniform or flat. All periods are presumptively the same; they just come one after another. Thus, long-term or even infinite-horizon present value comparisons are king.

For example, it simply may not matter when within  your lifespan given $$ were earned (except insofar as this affects present value) or when you or your heirs choose to consume it. Perfect capital markets shift $$ as needed between periods. And the infinite horizon perspective means that there is no difference between the government's being committed to pay, say, $1 today or its present value equivalent in 5,000 years.

What NDPF and similarly minded work add is what one might call differentiated, rather than flat or continuous, time.

By ignoring per-period information, classic OIT effectively throws out valuable information. This made perfect sense as it was developing, as a strategy to simplify the issues being considered so that they would be more analytically tractable at a first cut. But to stick to that model even once its insights have been developed and duly absorbed, and to rule out the sorts of issues and information that NDPF emphasizes, is to handicap oneself for no good reason. And again, it can lead to one's asserting dubious conclusions with undue self-confidence.

In sum, NDPF doesn't tell lawyers: The economists used to be saying A, B, and C, but now they're saying D, E, and F. Rather, it offers them a more complicated picture (or choice between alternative pictures) in which the issues are more interesting and indeterminate than they had seemed to be before. This may make things more challenging, but it is also liberating.

The revolving door at Treasury

Today's NYT story by Jesse Drucker and Danny Hakim, concerning the revolving door between the big accounting firms and  the Treasury Department (as well as the IRS and Capital Hill tax staffs), offers a case study in the difference between "shocking" (which it is) and "surprising" (which it isn't, to those who are familiar with how Washington works).

The people discussed in the article are generally not quite in my world, but close to it (e.g., potentially co-panelists at certain types of conferences), with whom I happen to value having cordial relations. But perhaps if those who did the sorts of things described in the article were a little more afraid of grand jury investigations and the like - although nothing improper will ever be provable - they would act with a bit more discretion. They are creating at least the appearance of impropriety, and embracing systemic, even if one chooses not to say personal, corruption.

The theory behind allowing this is that the government ostensibly benefits from getting talented and knowledgeable tax people to work for it for a few years, despite paying them far below a market salary. But it's rare to get something for nothing in this world, and the article raises the question of whether it's worth renting the technical skills and issue familiarity at the cost of outsourcing policy choices, in a classic case of regulatory capture by the directly regulated at the expense of the general public.

I have personal experience with an earlier stage of the revolving door, that struck me as less corrupt than what we see happening today. I wonder if there are any lessons to be learned from it, or if it simply reflects a prior state of the world in which current trends had not yet as fully developed.

I entered law practice in 1981. After 3 years at a DC tax specialty firm, I jumped to the Joint Committee on Taxation, despite not realizing that the process leading to the Tax Reform Act of 1986 was about to start, because I thought it would be more fun, exciting, and educational than staying in practice, which I had come to realize was probably not for me. I definitely had tax academics in mind as the next step down the road, although I don't think that I clearly saw my way there yet.

I got to know a lot of similarly junior staffers (who nonetheless had significant responsibilities, as did I) at both JCT and Treasury who had very similar profiles to mine, apart from the fact that almost none of them were similarly interested in academics. Like me, most of them planned to, and did, stay for only 3 years or so, after which they generally returned to private practice. This was mostly at law firms - accounting firms weren't as big a player back then in the tax lawyer market as they subsequently became.

But here's the thing. Most of us entered the government without really having strongly developed specialties (beyond, say, a field as general as corporate, international, or pensions) or as yet our own clients. We generally were associates, too junior to be up for partner in the next couple of years. The great majority who were not aspiring academics anticipated that, on their return to the private sector, they would go back in with partnership being at worst a year or two down the road and presumed to be on offer unless things really didn't work out. But it generally wouldn't be at the same law firm.

My own sense of things was as follows. I was definitely performing before an audience of expert tax lawyers who were evaluating me. (There was generally no reason for them to know that I planned to go into academics, rather than back into private practice.) They'd come into meet with me if I was working on something in their area and they didn't have the muscle to see someone more senior with greater clout. They were evaluating me to ask themselves such questions as: was I smart, was I technically competent, and also was I fair-minded, i.e., not too reflexively hostile. But they also didn't want a pushover (at least in the evaluative sense - obviously they would have liked  to get everything  they were asking for!), because in that case they wouldn't have respected me.

So my incentive, had I been planning to return to private practice, would have been to show them that I was the type of person they'd like on their team - not that I was already on their team.

That strikes me as a bit different than the process that Drucker and Hakim portray in their article. Why the change? I think it's partly about the growth and professionalization (in a bad sense) of the whole process, along with the rising role of the big accounting firms. But I think it's also about the seniority level of the people who are joining the government for 3-year stints. These more senior people know way more than we did upon coming in. (I knew very little, as my practice experience had focused significantly on a couple of very fun and interesting but fact-specific cases.) But we were ready, willing, and able to learn, and we generally lacked the sorts of standing commitments that our successors today, especially at the Treasury Department, evidently often have.

I think tougher anti-revolving-door rules are needed, perhaps forbidding going back too fast to the same employer (broadly defined, to cover both one's prior employer and one's clients through that employer). But I wonder if also a change in hiring practices, to focus on more junior people who are just two or three years out of law school, might help as well. Or has the world changed sufficiently to make that merely naive?

2021 NYU Tax Policy Colloquium Week 1: Brooks and Gamage on drafting a constitutional wealth tax, Part 2

 My prior post discussed the apportionment issues in the very interesting Brooks-Gamage paper that we discussed at the NYU Tax Policy Colloquium this past Tuesday. Herewith "everything else"- or rather, a few comments on just some of the many issues discussed elsewhere in the paper.

2.  SOME ISSUES DISCUSSED IN THE PAPER OTHER THAN APPORTIONMENT

What I will do here is simply summarize several of the main arguments in the paper, and then offer brief response to them.

1) The paper's "Indirect Tax Canon" - The main route that Pollock found to invalidating the US federal income tax as a "direct tax," in violation of the Constitution's requirement that direct taxes be apportioned between the states, went something like this? A property tax (or at least a real property tax) is widely agreed to be an example of a direct tax. Taxing the income from property is tantamount to taxing the property itself. Hence, an income tax that includes the income from property is really just a property tax, at least in sufficient part to allow 1895's 5 right-wing ideologues (who were 5 in number) to strike the whole thing down.

The paper agrees with the 5 right-wingers from 1895 that there is an equivalence here. Modern scholarship has similarly talked a lot about the similarity between an income tax and a wealth tax, in terms such as the following: Say I have $100 of wealth that earns $5/year. A 20% income tax on the $5 annual flow, and a 1% wealth tax on the value that reflects the present value of all expected annual flows, not only raise $1/year each (at least, under the stated facts), but are simply very similar and to a degree interchangeable.

But here's the problem: If A is the same as B, then B is also the same as A. Is any seemingly indirect tax that could be stated as a direct tax thereby forbidden without apportionment? What about the fact that, equivalently, the direct tax version could be restated as an indirect tax? Why must everything that MIGHT be put in the form of a direct tax therefore qualify as such, rather than going the other way around (which is far more supportable based on pre-Pollock precedent)? The paper therefore sets forth the Indirect Tax Canon, which holds that, whenever Congress reasonably characterizes a tax as indirect, it should be so construed, even if one could also have stated it as a direct tax. They argue that (i) the pre- and post-Pollock precedents, (ii) the apparent original purpose of the apportionment clause and the Framers' broader intention regarding empowerment of the federal tax authorities, and (iii) common sense and workability all support the proposed canon.

Comment: This makes sense to me. But I believe that the current Supreme Court has shown signs of following what I would dub the "Modified Direct Tax Canon." This holds that, whenever a tax could be formally stated as either direct or indirect, they will choose whichever characterization permits them to get the policy result they want.

The PPL case from 2013 arguably foreshadows this approach. In that case, the Supreme Court determined that a UK tax was an income tax, rather than a wealth tax, and hence could qualify for foreign tax credits when paid by US multinationals. There were dueling amicus briefs by reputable academics, both pro and con creditability, and both sides noted that the UK tax could equivalently be stated and  thought of as either one. Each then gave nuanced rationales for following one characterization rather than the other.

For Justice Thomas on behalf of the Court, this was a super-easy case. Because it COULD be an income tax (this being one of the two equivalent forms), it WAS an income tax. Why? Apparently because Justice Thomas hated the UK "Labour Government" that had enacted  the tax. I have never seen any other US court case in which the political party of a foreign government that happened to have enacted a law raising US legal issues has been so emphasized, for absolutely no discernible reason behind unstated personal animus.

The funny thing about it is that Thomas didn't hurt the Labour Government by upholding creditability. Indeed, surely it was good for them because it meant the US Treasury, rather than companies that might have ongoing business in the UK, would be bearing the tax to the extent that credits were available. But he wasn't trying to hurt the Labour Government - he was trying to express contempt for them.

I view PPL, not as precedent here, but as evidence that right wingers on the Supreme Court will use the equivalence of direct and indirect taxes in order to make sure that they can always get the result they like.

2. Pollock was a rogue case, that did not merit respect and has not received it. In addition to being clearly wrong based on prior precedent, when it was decided, it was poorly reasoned, reflected clear political bias rather than proper judicial behavior, and was confused and incoherent. I should note, the paper doesn't so much lay all this out in detail, as it has other fish to fry, as offer some supportive evidence and allow one to infer the rest.

Comment: I'll just add one thing here: a quotation from it that shows what sort of exercise it was. Here goes: "The present assault upon capital is but the beginning. It will be but the stepping stone to others, larger and more sweeping, till our political contests will become a war of the poor against the rich - a war constantly growing in intensity and bitterness. If the court sanctions ... [this tax], it will mark the hour when the sure decadence of our present government will commence."

All this for a 2%tax on income above a given threshold! 

Let me rephrase the Court's argument: "HELP! The commies are coming! The commies are coming!" This sort of rabid (and as it proved empirically false), nakedly political, exercise does not make for a precedent that one should be eager to respect.

3) Pollock has subsequently been substantially overruled, not just by subsequent cases but also bt the 16th Amendment, which authorized the income tax.

Comment: I don't have the time or space here to address this very interesting set of arguments, but a point that other tax law scholars should notice and think about pertains to the paper's view of the famous words in the 16th Amendment - income "from whatever source derived" - as not just allowing income to be defined broadly, but also as very specifically rebutting the line of argument that Pollock used to say that a tax on property income is really a property tax - because the income is "derived" from the property, hence making it a direct tax even if it initially seems to be indirect.

Although there is lots more, I think I will stop here. But a final note I will add is that, if my pessimism about the current Supreme Court is justified - if they are as lawless, willful, and politically / ideologically driven, at the expense of honest legal reasoning, as I believe - this has implications for how folks on the other side from the Court should go about things.

The rule of law is an instrument for opposing sides agreeing to regulate their political competition by agreeing to some basic rules of the game, to mutual advantage if both sufficiently comply. Even if it has always been true that both liberal and conservative justices tend to come out in favor of their own views a surprisingly high percentage of the time, when they are committed to reasonably honest and good faith legal reasoning - an aspect of the rule of law there is both a selfish detriment and a selfish benefit. The selfish detriment is that you accept that sometimes you won't be able to get the result you want, because the legal reasoning exercise couldn't reasonably get you there. The selfish benefit is that sometimes this same constraint applies to the folks on the other side. Both sides may benefit overall from the mutual constraint, which adds to predictability, limits gyrations, etcetera.

If both sides were doing this in secret, this would be a prisoner's dilemma. But since they can to a degree observe each other (ex post rationalizations notwithstanding), they can work their way to a decent equilibrium in which methods such as tit-for-tat, or the loss of respect from more neutral third-party observers, supply the motivation to act at least moderately honestly and honorably.

But what if one side simply rejects any notion of limiting themselves by plausible and good faith legal reasoning? The other side really just cannot keep on playing the same old game if they are the only ones still honoring it. That leads straight to systematic exploitation of the good actors by the bad ones. It's not sustainable if the bad actors are set in their ways.

Welcome to the United States in 2021.

2021 NYU Tax Policy Colloquium Week 1: Brooks and Gamage on drafting a constitutional wealth tax, Part 1

 This past Tuesday (on September 14), Jake Brooks and David Gamage jointly appeared at the colloquium (Gamage by Zoom) for a discussion of their paper, The Indirect Tax Canon, Apportionment, and Drafting a Constitutional Wealth Tax. 

This was the first of our seven public colloquium sessions for the year (the other 6 meetings are just with the enrolled students, and generally serve to gear us all up for the public session). It was the first time we've had a "hybrid, " live plus Zoom colloquium, although last year we were all-Zoom. I thought the hybrid aspect went decently well, although Zoom participants could only see the stage (with Jake Brooks and myself), rather than all of the speakers. I gather that the acoustics were also mainly okay, although the fact that all live participants were wearing masks surely did not help in this regard. [Footnote: I hate masks, necessary though I agree that they are.]

I look forward to our having more remote attendees in the future, including perhaps from even faraway time zones. (We had a few Zoom attendees from well outside NYC on Tuesday, although technically I think they were all in EST.)

We conducted the discussion on Tuesday in two distinct segments. The first was the paper's discussion of using apportionment to render a wealth tax constitutional after all if the Supreme Court were to hold that it was a "direct tax" and thus unconstitutional otherwise. The second topic was "everything else."

Apportionment logically comes second as a discussion topic, and indeed that is how the paper is organized. But the novelty of the paper's approach to this issue, which I think the authors would agree is its most important new contribution, supports putting it first for our purposes.

1. APPORTIONMENT

Two points have generally attracted near-consensus in the literature discussing the possible enactment of a federal wealth tax. The first is that, if  the infamous 1895 Supreme Court case, Pollock v. Farmers' Loan & Trust Co., is binding precedent, then a federal wealth tax is a "direct tax" under the Constitution, making it unconstitutional unless duly apportioned between the states. The second is that so apportioning a federal wealth tax is impossible and unacceptable, with the consequence that applying Pollock would be a death knell for such an enactment.

On the first of these two standard claims, the paper adds context and background regarding Pollock's status (well-known to the cognoscenti) as a truly rogue case by a blatantly political Supreme Court that did not care about precedent, history, or the basics of coherent legal reasoning. It also argues that Pollock has been subsequently overruled in large part, not just by subsequent cases but also (beyond just the boundaries of the income tax, they argue) by the Sixteenth Amendment. But I will return to this in Part 2 of this discussion.

More notably, the paper also rejects the second of the above claims. It argues not only that apportionment between the states has frequently been done before - albeit, not for some time - but also that it can politically, practically, and reasonably be done today, with regard to the wealth tax or even certain expansions to the income tax that the current right-wing Supreme Court might strike down.

Apportionment is a bit of an intricate thing, so a simple hypothetical may help to present clearly what we are talking about here.

Apportionment hypothetical: Suppose there are just 2 states, New York (NY) and Alabama (AL). Each has a population of 10 people. Congress enacts a 10% wealth tax on wealth above a statutory threshold, yielding the following toy example:

                        Population     People Subject to WealthTax            $$ Subject to Wealth Tax

NY                       10                                3                                                 $500

AL                        10                                2                                                 $300

Unapportioned Wealth Tax: Absent apportionment, this 10% tax on wealth above threshold would raise $50 from New York and $30 from Alabama, for a total of $80.

Apportioned Wealth Tax: If the Supreme Court held that this was a direct tax requiring apportionment, then,the two states' equal populations would mean that equal $$ had to come from each. Thus,  assuming it was still raising $80 of total revenue, both NY and AL taxpayers would need to supply $40.

Solution: The standard response would be to say: In that case, the wealth tax rate must be 8% in NY and 13.3% in AL, thus raising $40 from each. But this is assumed to be crazy. A higher tax rate in the state that, at least only counting $$ above  the threshold, is poorer??

Drawing on 19th century precedents, the paper suggests instead doing something like the following:

(a) 8% wealth tax in both jurisdictions, raising $40 in NY and $24 in AL.

(b) To make up AL's shortfall, raise an additional $16 there through, say, a federal tax on AL's real property base, using AL valuations, and perhaps exempting, say, the bottom 5 (or whatever) of AL's taxpayers, based on their personal income or wealth,

(c) What's unfair here, they argue, is not AL's taxpayers paying higher rates on something as such - given federalism, taxpayers in different states pay different net state and local tax rates all the time - but rather, AL's not getting the money from this extra $16 federal tax. This does indeed relate to the apparent reasons for the apportionment rule, which related to the feds using tax bases that applied unevenly in practice, such that some states ended up contributing excessively (in relative terms) to the common federal purse. So they say, all we need to do is give Alabama $16 (or so back), in a manner that is sufficiently independent of and unlinked to the $16 levy here that the Supreme Court will not in good faith be able to group this return of the $$ with the extra $16 levy and disregard the latter as a sham.

The solution they propose, therefore, is that Congress also enact a fiscal equalization program between states like that which countries, with federal systems, that are more civilized than the US already have. AL, as the poorer state, would be losing in a certain sense relative to NY under the apportioned wealth tax, but winning under fiscal equalization, so overall it would be doing fine. And, we should take the fiscal equalization into account in deciding whether things are fair and just, but the Supreme Court must ignore it because they have no authority in this sort of context to look at EVERYTHING in the federal fiscal system - just at the particular tax instrument that is being tested under an apportionment requirement.

This might be done by enacting the straight-up wealth tax, but with back-up provisions implementing this thing instead if the Supreme Court, as expected given its right-wing political slant, upholds the applicability of Pollock to a modern federal wealth tax. Or maybe a tricky way of doing it is to enact the back-up proposal first - and then, a week later, enact the federal wealth tax, saying that it repeals the apportioned version, but conditional on its not being itself held a direct tax. This might have formal or technical advantages under Byrd Rule angles that I don't personally know much about.

We had an interesting discussion about all this on Tuesday, which even continued to a degree by emails between some of the participants afterwards. But, for present purposes, I will settle for offering the following discrete comments. (I am hoping that this blogpost will help the paper's analysis enter the broader dialogue for consideration by lots of people outside this particular space.) Anyway, here with the comments:

1) What with the lack of an explicit link (or one at the margin) to fiscal equalization, this might still be a hard sell politically. Also, if we did fiscal equalization just right but then added this, we would in effect now be giving AL, as the poorer state, too little. But then again, the US has no explicit fiscal equalization program today (although it does of course effectively transfer $$ between states).

2) While the best shouldn't be the enemy of the good, it is possible that this proposal, as it ended up operating, would be less to the taste of wealth tax proponents than the program that they preferred. A key feature is getting the make-up revenues from people below the top threshold where the wealth tax would otherwise have exclusively applied.

3) In this example, AL is by hypothesis both the poorer state and the one that gets socked with the extra $16 under apportionment. But a state that, in a pure wealth tax, would pay "too little" and thus get hit up for extra would not necessarily win under fiscal equalization that went from richer states to poor states. Suppose Minnesota (MN) is richer than Louisiana (LA) per capital because it has more middle class folks and fewer oppressed poor. But suppose as well that LA has more super-rich people (its oppressing plutocrats), or more precisely more $$ per capital held by rich people that is subject to the wealth tax. In short, while LA is richer at the top, MN is more affluent overall. Then MN would have to pay the supplemental tax under apportionment, AND fiscal equalization transfers might be expected to flow from MN to LA.

4) The paper also discusses doing this for income tax enactments that a right-wing Supreme Court might strike down under the authority (such as it is) of Eisner v. Macomber, with its ludicrously constitutionalized realization requirement. Suppose Senator Wyden's proposal to tax people above a certain threshold on a mark-to-market basis were struck down by the current Supreme Court - as they would no doubt be slavering to do, and I note that (ever since Barrett joined the Court as right-winger #6) their reluctance to do whatever they want has certainly declined. Applying apportionment here might be trickier, as the rest of the income tax would still presumably be valid. But that is not to say that it would be impossible, e..g, based on "stacking" the income from this provision on top of everything else in the tax code in order to determine its marginal revenue yield that then needed to be equalized relative to population.

5) More on this in Part 2 (which will be a separate blog post), but a Supreme Court that was acting in bad faith, as I for one certainly believe that the current majority does, would surely find a way - or perhaps, many ways - to strike it down, simply because they don't like it. The paths they might use, if so minded, might include at least the following:

a) Despite the clear precedents in favor of amalgamating the separate pieces of a given enactment - as here, where NY pays "too much" under the wealth tax proper and AL pays "too much" under the property tax add-on - they'd look at each part separately and ruled that both, albeit in opposite directions, violated apportionment. Why would they do this? A better question might be: Why wouldn't they do this?

b) They could call the extra piece a sham given fiscal equalization, even if the offset was imprecise and the two were not actually linked at the margin,

c) They could say that the interstate competitive pressure on AL to rebate fiscal equalization $$ about equal to the extra property tax placed them under an improper constraint, analogous to the reasons for the Court's holding that states must be allowed to reject free Medicaid $$ under the ACA.

d) No matter how the residual tax to even up the pure wealth tax part worked, they could say: Sorry, but you didn't do it just right, so the whole thing is invalid! Again, why wouldn't they do this?

In my next blogpost, Part 2 on the Brooks-Gamage paper, I will address selected aspects of "everything else" in the paper apart from apportionment.

Let me just say, however, that people who are interested in the prospects for a federal wealth tax - if not this year, than under a future Congress that has not loosed the shackles of a runaway right-wing Supreme Court - should definitely read the article for themselves.

New short video

Here you can watch my cat Gary steal the show as I discuss a recent tax paper of mine with Leandra Lederman and Allison Christians on their new short video series, Break Into Tax.

New book forthcoming next year

I've signed a contract with Anthem Press for the publication of my most recent book, currently titled Bonfires of the American Dream in American Rhetoric, Literature, and Film. Anthem also published Literature and Inequality. Currently scheduled to come out in May 2022.

The book includes 3 main case studies. The first discusses Russell Conwell's Acres of Diamonds speech and the John Galt speech near the end of Ayn Rand's Atlas Shrugged. The second discusses The Great Gatsby, with reference not just to the text itself but also its changing reception across the decades. The third discusses the films It's a Wonderful Life and The Wolf of Wall Street.

The new book is only half as long as Literature and Inequality, and more tightly focused. L & I not only had a much broader canvas but also was engaged in making the methodological case for such studies. Here much of the focus is on what features of our national culture across time could have brought us to where we are now.

Recent short explainers

 I have recently posted a couple of sort "explainer" pieces on websites that cover ongoing issues.

First, on the Just Security website run by my NYU colleague Ryan Goodman, I posted this piece on the Weisselberg indictment, aiming to correct misperceptions in the press that this was merely a technical or politically motivated "fringe benefits" case, rather than an assertion of rampant fraud that no responsible prosecutor could reasonably decline to file. This one got much broader coverage than reflections I post on this blog, so it probably isn't news to most of my readers here.

Second, last night Econofact.org posted a short solicited piece of mine entitled "Taxing Multinational Corporations." Here the question of interest is as follows:

"In debates regarding higher versus lower corporate income taxes, an important issue is the impact that changes in either direction would have on the level of domestic investment, and consequently on economic growth, the strength of the labor market, and government revenues.... What do economic reasoning and recent experience teach us about the effects of corporate tax rates on investment and economic growth in a global environment?"

This one dovetails nicely with an article in progress, entitled "The Economics, Law, and Politics of Increased Taxation of Multinationals" that I presented this past Friday at the Indiana-Leeds Summer Zoom Tax Workshop Series. I will probably post a draft of this on SSRN soon, but thought that I would advance it closer to a final draft first. That is the piece I will most likely be workshopping this fall at places such as the National Tax Association (although it might conceivably be superseded in some settings by other stuff that I'm working on now). It's fairly crisp, short, and I hope readable, and I might aim to publish it in Tax Notes, although it's not impossible that I might aim instead for a tax law review, especially one with decently quick turnaround.

Remote attendance at the 2021 NYU Tax Policy Colloquium

This coming fall, I will be doing the NYU Tax Policy Colloquium solo, and hence cutting it back from a 4-credit to a 2-credit course. This means that, rather than meeting twice each week - first with the students, and then in a public session with the author(s), I'll meet with the students one week to discuss the upcoming paper, and then in public the next week. Hence, the public sessions will only be biweekly, or if you prefer fortnightly. However, since we're having a 13-week semester, I've decided to have the extra session be a public one.

The public sessions will be hybrid, meaning that they are both live and on Zoom. I already knew that the authors can attend remotely via Zoom if they wish, although I am hoping to see them live. But now it's been confirmed that, for the public sessions, I can offer remote Zoom attendance to any and all who are interested, apart from the enrolled students, who - like me - are required to be there in person. Hence, I am hoping that, without too much cannibalizing of our live audience, we will get remote attendees from different places, time zones, and indeed continents.

So mark your virtual calendar if you are potentially interested. The live sessions, all meeting from 2:15 to 4:15 pm EST, will feature the following speakers and their papers:

1) Tuesday, September 14 - Jake Brooks and David Gamage

2) Tuesday, September 28 - Daniel Hemel

3) Tuesday, October 12 - Jennifer Blouin

4) Tuesday, October 26 - Manoj Viswanathan

5) Tuesday, November 9 - Ruth Mason and Michael Knoll

6) Tuesday, November 23 - Mindy Herzfeld

7) Tuesday, November 30 - Alan Auerbach.

There might also be small group dinners after the sessions - only for live attendees! (although I suppose one could attend via Zoom and then join the live dinner). But obviously that depends on pandemic developments, including both NYU's rules as they evolve or not over the course of  the year, and my own (along with potential attendees') degrees of comfort with doing this by the fall. Also, I would think we won't do a dinner in any week when the author is Zooming in.

New Jotwell post on Isabel Wilkerson's CASTE

 At Jotwell (aka "The Journal of Things We Like Lots"), I have posted here a short review of Isabel Wilkerson's recent book Caste.  It also mentions Dorothy Brown's recent book, The Whiteness of Wealth, although I don't review that book as such, as another Jotwell contributor had already stepped up to do that.

My piece also discusses broader issues of race and class in tax scholarship, albeit briefly as these are very short pieces.

G7 Finance Ministers Communique re. international tax policy

The G7 Finance Ministers' Communique from this past weekend included the following discussion of international tax policy:

"We strongly support the efforts underway through the G20/OECD Inclusive Framework to address the tax challenges arising from globalisation and the digitalisation of the economy and to adopt a global minimum tax. We commit to reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises. We will provide for appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes, and other relevant similar measures, on all companies. We also commit to a global minimum tax of at least 15% on a country by country basis. We agree on the importance of progressing agreement in parallel on both Pillars and look forward to reaching an agreement at the July meeting of G20 Finance Ministers and Central Bank Governors."

Here are a few comments on this paragraph:

1) The proposed allocation to market countries raises a few questions. For one, what is the relevant "profit"? By definition, this term requires comparing specified gross revenues to specified expenses and other deductible outlays. Are these to be determined by using standard income tax source rules? I would think not, as this would make the proposed allocation wildly ineffective. For example, the UK may consider itself the market country with respect to the revenues that Facebook earns from the use of its digital platform by UK residents. This probably has more in common with how gross revenues are defined in its digital services tax (DST) than with anything in its income tax. 

2) Note also that this rule will ostensibly apply to all of the "largest and most profitable multinational enterprises," without apparent limitation to those that are subject to DSTs. And it is also supposed to apply in countries that don't have DSTs. Moreover, even those that do have DSTs may define relevant revenues (as well as companies subject to the DST) quite distinctively.

3) Next and relatedly, what about the outlay/deduction side? This is needed not only to define profit, but also to determine the profit that exceeds a 10% margin.

4) To identify the "largest and most profitable multinational enterprises," one needs a measure of global income. How is this to be computed?

5) What if a country wants to retain its DST? The G7 statement says only that it will "provide for appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes, and other relevant similar measures, on all companies."

6) Obviously, the 15% global minimum tax has lots of design work ahead (to put it mildly). It is presumably to be applied by the multinationals' residence countries - requiring a uniform definition of corporate residence? - and presumably with (100%?) foreign tax credits for source-based taxes. While the foreign tax credits would make it a residual tax, applying only insofar as the source-based taxes don't get there, this might leave plenty of scope for it, if source countries restrict themselves to 20% of profits above the 10% level (especially given the likelihood that there will be plenty of flex in how those profits are being defined).

7) How are countries are likely to respond in practice? While there is certainly room for pessimism, I don't think the standard view of how countries pursue their self-interest (like profit-seeking individuals in a simple neoclassical model) necessarily applies very strongly. Countries are collective entities that make political choices based on multiple actors who themselves may have narrow, not national, goals in mind. These may also be symbolic goals reflecting internal political dynamics. Consider the "self-interest" of the United States. Even in academic debate among knowledgeable people who are debating things in good faith, there is absolutely no consensus as to what is in the national self-interest in the international tax policy realm. Indeed, even only counting people whom I consider good personal friends, there is extreme dissensus.

8) When we start thinking in terms of a Biden Administration versus a Trump Administration, things get even less determinate, insofar as predicting the settings of the national policymaking compass is concerned. Even if we accept both administrations as trying to act in what they deem to be the national interest (which I don't think accurately describes the corrupt and treasonous Trump White House), they evidently define it radically differently. Suppose that all of the G7 countries had either (a) center-left to progressive regimes, or alternatively (b) right-wing "nationalist," plutocratic, pseudo-populist regimes. These two scenarios would lead to very different sets of policies being followed.

Upcoming summer Zoom talks

 Can you be in two places at once? With Zoom, the answer is yes. Thus, towards the end of this week I will be attending and participating in two conferences during the same stretch of days, although if not for the pandemic they would have been held live in distinct locations. I will also be an active participant in one session of each.

This Friday (May 28), at the Fifth Annual Public Finance Consortium at Indiana University (normally held in Bloomington, IN), from 10 to 10:40 am EST, I will be the discussant when David Gamage and Jake Brooks present their work-in-progress, "Tax Now or Tax Never: Political Optionality and the Case for Current-Assessment Reform."

Then this Sunday (May 30) at the Law and Society Association's 2021 Annual Meeting, which in the ordinary course would have been held in Chicago, from 10 to 11:45 am EST, I will participate in an "Author Meets Readers" session regarding my book Literature and Inequality. Tracey Roberts will be the session's moderator, and I very much look forward to the comments that will be offered by Diane Klein, Shu-Yi Oei, and Luisa Scarcella (plus members of the virtual audience).

Somewhat further down the road, on July 9, from 11:30 am to 1 pm EST, I will present my work-in-progress, "The Economics, Law, and National Politics of Seeking Increased Taxation of Multinationals" at the Indiana/Leeds Summer Tax Workshop Series, hosted by Leandra Lederman and Leopoldo Parada. I will also be presenting this paper later in the year, e.g., most likely at both the National Tax Association's Annual Meeting and in Vienna, Austria towards the end of the year.

I also anticipate attending a conference in USC Law School on November 5, honoring Ed Kleinbard, at which Joe Bankman and I are planning to present (after we have written it) a paper discussing Ed's work and contributions to the field.

Meanwhile I will be hosting the Tax Policy Colloquium at NYU this fall, although with what mix between live and Zoom is not yet clear. I am hoping for live public (as well as class) sessions, but it would be better still if the former accommodated remote attendees by Zoom. We will see.

Scholarship update

Now that my teaching for the 2020-21 academic year is actually done - leaving aside an exam next week - I've been able to turn back to writing as a fairly full-time activity. I'm sometimes able to write during the semester, but that hadn't been so this year - what with teaching on Zoom, wanting to rethink things even if I've taught them many times before, and having care issues relating to senior family members.

Finding topics, or at least fresh takes that I am interested in writing up, is also more challenging than it used to be. Let's face it, I've written about quite a lot of things since entering academia in 1987. So many things within the general realm of what I might write about are no longer fresh or new to me. And though I will return to a theme if I have reason to do so, I get bored too readily to make a regular practice of it.

On the other hand, if I can find an angle that excites or at least intrigues me, I feel I can bring more to the table in some ways than I could earlier in my career. There are certainly some advantages to my having a broader frame of reference, along with more knowledge and experience, than I did when I was younger.

That being so, I now have a pretty decent agenda of things to write about that will take me quite a while. The current list, leaving aside casebook updates, my annual Jotwell piece, and the like, stands as follows:

1) I've just started a piece with the working title The Economics, Law, and Politics of Seeking Increased Taxation of Multinationals. It discusses why and how understandings and main policy goals seem to have changed a bit recently in the international tax field. I previewed some of the thinking that underlies it here.

2) I've agreed to write a book chapter on inequality and redistribution in a forthcoming edited volume concerning new directions for tax policy research more generally. Among the main topics will be the state of the play and where to go next, as I see it, with regard to issues not just of class but also of race.

3) I've agreed to co-author (with a good friend whom I have co-authored with previously) a piece discussing Ed Kleinbard's scholarship for a tribute symposium. The aim here is not just to offer well-deserved praise, but also to place his work in context and discuss its relationship to the complementary roles played by different types of scholarship.

4) With Stanley Surrey's memoirs finally appearing in print shortly, I am planning to write an article about Surrey's distinct scholarly role and contributions. This, too, will have an element of looking at the underlying enterprise, and the "scientist vs. moralist" choice (as William F. Buckley, of all people, put it while interrogating Surrey) that one may face.

5) In my literature / inequality / sociology vein, I've long wanted to write something about P. G. Wodehouse, whose delightful work is far more interesting than he might have meant it to be with regard to changing early twentieth century notions of class. I had been unable to find an angle that quite worked for me, and "literature and inequality" didn't seem to be quite the right frame (albeit related to it), but I am hopeful that I may now have found an approach that might yield fruit. Where I'd publish the darned thing is another question - it wouldn't be either a book or a law review article.

I'm also now engaged in looking to publish my main work of the last year-plus, covering the era of the pandemic (and the first thing I have ever written entirely at home). It's a completed shortish book manuscript (45,000 words) - I believe quite lively and readable, and with things to say about where we are today as a country - that is currently entitled Bonfires of the American Dream in American Rhetoric, Literature, and Film. 

Tentative NYU Tax Policy Colloquium Plans for Fall 2021

I have been making plans for the fall 2021 NYU Tax Policy Colloquium, against the backdrop of continued pandemic-related uncertainty. Also, my co-convenor for the last three years, Lily Batchelder, may be moving up to better things for the next couple of years. I also have concluded that inviting another co-convenor is more than a bit tricky, given that said person would need to agree to be in NYC for live teaching if things do indeed proceed sufficiently well, pandemic-wise.

Speakers, by contrast, can be (and have been) invited on the basis that they will be able to participate via Zoom even if we are otherwise meeting live. An institutional commitment by NYU to live appearances by those who are teaching a given class (again, assuming that the pandemic sufficiently ends) apparently would not apply to guest speakers. And "hybrid" technologies for live plus Zoom have been in development for the last year.

However, while speakers can participate by Zoom, I simply don't know at this stage whether, in the event that we aren't all-Zoom due to the persistence of the pandemic, we would be able to accommodate Zoom attendees in the audience. In last fall's sessions, much though I missed having live sessions, I was delighted by our ability to draw participants who were many time zones away from us, and who could not have come in person, even absent the pandemic.

So there are a lot of open questions still. But I have decided that, if I'm going to be teaching the colloquium solo, I need to cut it back a bit. A fresh paper every week, with two hours meeting with the students plus a two-hour public session, is simply too grueling - far more effort, for example, than teaching a four-hour lecture class. So I will be cutting it back to one paper and one meeting a week, generally with each paper having a class meeting one week and a public session the next.

As the 2021 fall semester will be 13 rather than the usual 14 weeks, I decided  to schedule 7 public sessions, vs. 6 private ones. But of course we need to start in week 1 with a class session, so that we can start getting to know each other. Thus, the public sessions will be held in weeks 2, 4, 6, 8, 10, 12, and 13.

Another thing I don't know yet is when the sessions will take place. I am hoping that the public sessions will be at 4 pm EST or thereabouts. But they were earlier in the afternoon last fall, reflecting both our Zoom-adjusted schedule and the aim of allowing people to attend from European time zones. In any event, I'm pretty sure that all of the sessions will be held on Tuesdays.

Will we have our traditional small-group dinners after live public sessions? I am hoping so, but it is obviously too early to tell.

I have now scheduled all our speakers. Again, I am hoping that all will appear live and in person. But any of them may and will use Zoom instead if needed. Our public sessions will be as follows:

September 14 - Jake Brooks and David Gamage

September 28 - Daniel Hemel

October 12  Jennifer Blouin

October 26 - Manoj Viswanathan

November 9 - Ruth Mason and Michael Knoll

November 23 - Mindy Herzfeld

November 30 - Alan Auerbach

Link to Ed Kleinbard book event at USC

 I recently posted here about a Zoom book event that was held at USC on March 31, concerning the late Ed Kleinbard's great book, What's Luck Got To Do With It?

The event is now viewable here. Suzanne Greenberg, Ed McCaffery, and Greg Keating all offer excellent comments, after which there is audience discussion. My question (or rather, more of a comment) can be viewed at around 57:27. For some reason I am rocking back and forth a bit as I speak, which I usually have the sense not to do on Zoom (not sure why it happened this time), but the audio is okay even if I half-wish that bit of video could be (or had been) turned off.

Ten quick observations on the Made in America Tax Plan

 The Treasury Department has just released a short document, The Made in America Tax Plan, explaining and describing the main features in President Biden's proposed tax plan that, as I understand it, would be part of the budget reconciliation infrastructure bill.

As I seem to like lists of ten (as shown both here and here), here are ten quick preliminary reactions to what the report says and, in a few cases, doesn't as yet say.

1) The New Progressive Consensus - The report and its proposals are extensively grounded in recent cutting-edge academic research. (Perhaps this should be no surprise, given the list of experts who have joined the Biden Treasury Department - even if I have personal reasons for dissenting from Paul Krugman's statement that "it's hard to find a tax expert who hasn't joined the Biden team"!).

Let me dare to propose here a label for the underlying research. I think of it as the "new progressive consensus" regarding business and corporate taxation. To be clear, I don't mean to assert that there's a new consensus, generally shared among experts and researchers all the way across all methodological and ideological spectra, that happens to be progressive. Rather, among those who are more on the progressive side I discern this broader emerging consensus, which also has broader influence although it is by no means uncontested by those with different intellectual or ideological commitments. (Yes, despite the ideal of empirical economics as a "science," political preferences do indeed tend to correlate with empirical beliefs, and even those of us who are looking at the empirics entirely in good faith may have unconscious biases. There is also reason to think that, insofar as empirical beliefs and policy preferences are correlated, the causal arrow does not run just from the former to the latter.)

Perhaps the core element of the new progressive consensus that the Treasury document relies upon (with extensive research citations) is that, in substantial degree, the corporate income tax falls on excess profits, not normal returns. To that degree, corporate profits can be taxed efficiently and without reducing investment, the incidence of the tax will be borne predominantly by shareholders (and, over the longer term, wealthy holders of capital more generally), and the corporate income tax is a vital tool for achieving vertical distributive justice.

Once one is looking at rents, monopoly profits, and other sources of extra-normal returns, rather than at normal returns (e.g., the pure risk-free return to waiting), policy conclusion after policy conclusion can pretty much take a 180-degree turn. 

A second key element in the new progressive consensus is  that the artificiality of the legal concepts that are used in corporate income taxation - for example, the notion of income as having a geographical source - means that companies often respond to tax rate differences and changes far more through formalistic profit-shifting than through real changes in where they are actually doing particular things. Losing actual domestic "investment" that might have had positive spillovers is different from losing tax revenue due to the "games they play" - especially when the success of the latter is endogenous to the legal rules' particular details.

2) Labor, Capital, and "Capital" - A central policy aim of the report is to reverse the dramatic shift over many decades of tax burdens from labor to capital. I would note, however, that capital here includes "capital" - i.e., that which is reported as capital, for example because it takes the form of stock appreciation that the founders and other owner-employees chose not to pay out to themselves as explicit salary. In conventional speech, labor vs. capital used to denote different groups of people: the workers versus the owners. This then all got muddied, actually at least in part for good intellectual reasons, due to rising appreciation of the facts that workers have human capital and capitalists often work on their own behalf. But the old usage may be returning, for the good reason that it helps one to distinguish between groups whose income is predominantly reported as labor income versus capital income. That can make "labor vs. capital" a good proxy for "the poor and middle versus the top 1 or 0.1 percent," even if much of what we really mean is low-wage versus high-wage.

3) The Corporate Sector Versus the Broader Business Sector - The Treasury document focuses almost exclusively on the corporate income tax, although (as it notes) the US business sector has an unusually large non-corporate component. It notes that this difference does not explain away the fact that US corporate tax revenues, as a percentage of GDP, are exceptionally low by OECD standards. (The OECD norm is about 3%, as compared to, in the US, 2% pre-TCJA and 1% post-TCJA.) While obviously the relative size of the US non-corporate business sector affects these computations, relative to the case where all US business was corporate in form, it is very far from being the whole story, especially given how high US corporate profits have been over the last 15 years.

Still, the non-corporate part of the US business sector is important, too. While presumably this was beyond the report's assigned scope, and might also complicate the politics of enacting desired tax changes, it would certainly be a move in the right direction to supplement the document's proposals with repeal of the egregious section 199A passthrough deduction.

4) Importance of cross-crediting - Turning from broad generalities to the Biden plan's particulars, it advocates switching in GILTI from the allowance of cross-crediting, as between income earned in high-tax versus low-tax countries, to the use of a country-by-country regime. I have in recent work argued that cross-crediting has structurally undesirable tax planning effects even if one holds constant (through the use of other changes) a given regime's overall rigor or burden imposed. The Treasury document emphasizes instead the important point that, with cross-crediting, profit-shifting from the US even to high-tax foreign countries can have a substantial tax avoidance payoff, because seemingly high-tax foreign source income, unlike what is reported as US source income, can be shielded from US tax via cross-crediting.

5) Proposed changes to GILTI - There are three of particular importance here:

(a) raising GILTI's global minimum tax rate from 10.5% to 21% (through a reduction of the GILTI exclusion from 50% to 25%, while the corporate tax rate increases from 21% to 28%), 

(b) eliminating the current rules' exclusion of a deemed 10% return on foreign tangible assets, and

(c) as noted above, shifting from a worldwide to a per-country application of GILTI's 80% foreign tax credit. 

For reasons that I have discussed elsewhere, the latter two changes are significant structural improvements, even leaving aside their effect on the overall tax burden that GILTI imposes. There are also very good reasons to increase the tax rate on US companies foreign source income, pertaining (for example) to profit-shifting and overall US revenue needs.

The other side of the coin, obviously, is the question of whether the tax burdens that this imposes (via taxation of foreign source income) on US companies, relative to foreign companies, could redound to our national disadvantage. The Treasury responds to this concern mainly by (a) noting data and arguments that suggest limited real responses, (b) proposing to strengthen anti-inversion rules, and (c) as the question is not so much foreign source income for its own sake as the use of profit-shifting to avoid the US tax on US activity, proposing to strengthen anti-profit-shifting rules as they apply to foreign multinationals, outside the realm of GILTI. (This pertains in particular to the proposed BEAT replacement that I discuss below.)

A further possible response that may need to be considered as time goes on is expanding the definition of US corporate tax residence. As is well-known, we mainly determine US corporate residence on the basis of US incorporation, whereas most other countries rely on where management or headquarters or a large portion of operations are located. Our approach, though on its face quite formalistic, has actually proved more resilient (even with respect to new companies)than one might have expected, in part due to American incorporation's appeal, e.g., to Americans who are starting new companies and don't yet know if they will succeed in creating wildly successful global brands.

But, the more weight one places on US corporate residence, such as by making GILTI more effective, the stronger the case for considering a broader approach to corporate residence - e.g., extending it in the alternative to companies that are either incorporated OR headquartered here, perhaps with some provision for better coordinating our corporate residence rules with those of peer countries. The Treasury document sticks a toe in these waters, but only insofar as it would extend the anti-inversion rules to certain transactions in which the foreign acquirer is managed and controlled in the US.

6) Replacing the BEAT with "SHIELD" - The Treasury document notes the BEAT rules' poor design and frequent avoidability, leading to their ineffectiveness in curtailing profit-shifting to low-tax jurisdictions. I agree that the BEAT is a failure and ought to be repealed (or else, at the least, be unrecognizably transformed), subject to the point that profit-shifting through the making of US-deductible payments to foreign affiliates in low-tax jurisdictions still needs to be addressed.

The SHIELD proposal that the document sketches out as a replacement certainly sounds worthy of further development. In brief, it would deny US tax deductions for payments to foreign affiliates that are subject, in their own jurisdictions, to a low effective rate of tax. Pending a multilateral agreement between countries to lay this out, the default rate trigger would be the GILTI rate (i.e., 21%).

My scholarship has raised the question of to what extent a country (such as the US) actually benefits unilaterally when it thus disfavors the payment (by a company whose owners include resident individuals) of low, rather than high, foreign taxes. These objections may diminish substantially, however, in the case of cooperative multilateral effort to discourage profit-shifting - which the proposal, in this respect among others, aims to enhance and expand.

7) Buh-bye to FDII - The proposal would repeal FDII, our ill-designed (and probably illegal) export subsidy that can actually encourage outbound profit-shifting and asset-shifting. Given the length of this blogpost already, I will simply say: Hear, hear, and good riddance to bad rubbish.

8) Minimum tax on book income - The proposal retains, but scales back, the Biden campaign's proposal to impose a minimum tax on highly profitable companies' financial accounting income (aka book income). As modified, the minimum tax would apply at a 15% rate to US companies with more than $2 billion of reported profits for a given year. Certain tax credits, including foreign tax credits, would be allowed to reduce this minimum tax liability (which, as a minimum tax, would be payable only to the extent that it exceeded the company's regular corporate tax liability).

As I have discussed elsewhere, I am a bit skeptical about the use of a minimum tax structure here. Also, financial accounting experts, who know a lot more about book income than I do, tend to be resoundingly hostile to giving book income any sort of tax implications. I'm inclined to be respectful of their views on a subject that they know so much about, although I wonder every now and then about whether there might be a bit of a NIMBY aspect to their thinking. (In fairness, tax policy experts are subject to exactly the same thing.)

Even if one concludes that they are wrong, or at least that their concerns are overstated - but equally, if one agrees with them but takes it as given that some such provision is going to be enacted - a lot of hard design work needs to be done to make a minimum tax on book income the best overall instrument that it can be. For example, one issue posed by an annual exemption amount is year-by-year fluctuations in the relationship between annual book income and that amount. This concern extends, of course, to companies that report a financial accounting loss in a particular year, and huge profits in other years. There are also such questions as whether divergences between book income and taxable income that appear entirely "innocent" - i.e., as not actually suggestive (once properly understood) of either tax avoidance or financial reporting manipulation - should be backed out of the computation. But once one allows any of that, what about the danger of further empowering lobbyists to take aim either at financial accounting rules themselves or at their modified use in the book income minimum tax?

One obvious question about the proposal - which the Treasury document describes only in very general terms - is whether there is a notch problem here. For example, does the proposal (a) wholly exempt a company with $1.999 billion of book income in a given year, yet (b) potentially impose a tax liability of just over $300 million on a company with $2.001 billion of book income?

I would presume that the answer is No, and that, as good design sense would suggest, $2 billion is an exemption amount, with the result that only book income above the threshold would face the 15% minimum tax. But the document as written does not (at least to me) make this entirely clear.

9) The broader aim of calling off the race to the bottom and curtailing tax competition - Among the document's key responses to concern that the US would suffer competitive loss, relative to peer countries as well as tax havens, if it raised the effective rate both on US source income and on the foreign source income of US companies, is its advocacy of greater global tax cooperation. It's easy to be skeptical about the prospects of achieving such an aim. But the US has surprised skeptics on this front before, such as in the aftermath of FATCA's enactment. OECD BEPS-related global cooperation has also perhaps, on balance, exceeded the more pessimistic expectations that many (including me) may have had at the time. 

The SHIELD proposal is the document's most direct response to these concerns. As in the case of FATCA, the US would be deploying its global economic clout towards rewarding cooperation relative to noncooperation. Plus, as was the case with FATCA, other countries have something to gain as well, if cooperation in discouraging profit-shifting becomes sufficiently widespread. And it simply is not the case that, say, a lone holdout necessarily undermines the whole thing.

Suppose, for example, that a given tax haven holds out, while everyone else cooperates. It's a matter of OUR law, not the tax haven's, whether we afford legal respect for tax purposes to its determinations that a given company is its resident or that certain global income arose there. Moreover, only so much actual economic activity (if any) can shift to the haven, and what remains in our country - whether it involves production, consumption, residence, or anything else that it is costly to shift - can have its tax consequences depend on what we discern about the company's entire range of global activities.

10) The broader issue of "competitiveness" - There is surely no buzzword more commonly found in discussions of tax, trade, and global economic activity in general than that of "competitiveness." Unsurprisingly, the words "competitive" and "competitiveness" appear in the Treasury document no fewer than ten times.

Reflecting the terms' multifacetedness and ambiguity, the usages vary. For example, the document notes that making the US more productive, such as through well-designed infrastructure investment, would increase the appeal of investing and operating in the US, and employing US workers. Of course, making US people and assets more productive would be desirable (all else equal) even in the absence of global competitive concerns. But it is certainly fair play to invoke competitiveness rhetoric in favor of something that is more broadly desirable.

Otherwise, the document's main uses of "competitiveness" rhetoric are twofold. First, existing tax incentives to offshore investment actually make the US less competitive in the standard use of the term. Second, the competitive pressures in the global race to the bottom can be countered, at least to a significant degree, due both to the market power that the US has, and to the prospects for inducing greater multilateral cooperation.

Edward Kleinbard's What's Luck Got to Do With It?

 I have been meaning for some time to write an appreciative note here concerning the late Edward Kleinbard's outstanding new book - completed by him last year, just in time from a medical standpoint - What's Luck Got To Do With It?

The book is an important contribution, laser-focused on a key aspect of America's greatest current ills, involving the demise of anything approaching equal opportunity, as runaway high-end wealth inequality raises the ladders to be ever more distant from the ground floor.

Shock fact that the book mentions: the government does more to subsidize college education by children from rich families than poor or middle class ones (!). Only in America. This comes on top of the rich families' spending ever more in comparative as well as absolute terms than those below them in the economic scale.

The book follows up on Ed's previous book, We Are Better Than This: How Government Should Spend Our Money in pivoting from a primary tax focus to one of looking at the fiscal system as a whole, with emphasis on expanding opportunity by recognizing how superior peer countries' fiscal policies typically are to ours, with their greater provision of healthcare, education, and other basics.

One key topic of emphasis in the new book is how the ideology that Ed called market triumphalism, and I have similarly labeled as "market meritocracy," poisons the well by creating the false belief that both success and failure in one's career and economic enterprises are wholly deserved. Even if we falsely believed that people had reasonably equal starting points, the new book adduces powerful evidence regarding the dominant role of luck in determining who succeeds or fails, even with unequal "ability" levels on top of seemingly equal starting points.

The book convincingly ties the false downplaying of luck's role to underlying psychological factors. But - I suspect, out of diplomacy, because Ed was seeking to persuade, not alienate, American readers and especially those with potential policy influence - it does not place as much emphasis on how American ideology makes this an especially toxic line of  thinking in our popular culture and politics. This is a topic that I address in my as yet unplaced book manuscript, Bonfires of the American Dream (a kind of follow-up to Literature and Inequality).

One especially interesting aspect of What's Luck Got To Do With It? is its philosophical focus. At a USC Law School Zoom book talk yesterday - the video from which may soon be posted - this topic came up, especially in remarks by Ed's USC colleague Gregory Keating. In general, Ed's philosophical alignment in the new book has some common ground with that of "liberal egalitarianism," as espoused most prominently by Ronald Dworkin. Yet it is to the "right" of Dworkin in one sense, and to the "left" in another sense. (I put the terms "right" and "left" in scare quotes to clarify that I do not mean to link this too closely to the debased state of current U.S. politics, on the increasingly fascist right especially.)

The book is seemingly to the "right" of Dworkin in positing that people should be deemed to have a right to retain the "brute luck" associated with innate ability differences as a matter of birth, and that only brute luck differences from differential environments are fair game for redistribution.

But it is both seemingly and actually to the "left" of Dworkin in positing that option luck differences - from the playout of deliberate choices that we make - should be on the redistributive table as well.

I would disagree with Ed on the first of these two points - considering differences in innate ability an aspect of brute luck that is fair game for redistributive attention - if I were convinced that he were asserting it as a foundational moral principle. But I think the book makes it clear that he is offering this as a concession to win wider acceptance. For example, it describes as "unfair" the fact that taller people have higher average earnings than shorter ones, although it disclaims any effort to address this disparity. The view appears to be that, even with innate ability differences taken off the table - a move that not only comports with some intuitions that we all have, but that may help to encourage people to view themselves as responsible to do the best they can - there is still plenty of scope to make our society vastly more just than it currently is.

By contrast, the sense in which the book is to the "left" of Dworkin is critically important. Dworkin's framework can be used, whether or not he would have done so himself, to justify radically unequal outcomes that reflect, for example, Jeff Bezos' or Mark Zuckerberg's having won winner-take-all contests with huge payoffs, in part because they were simply a bit luckier than their rival contestants. With luck being as important to people's outcomes as the book shows that it is, meaningful egalitarianism of the scope that it had for Ed requires addressing ex post inequality (albeit, still with an eye to incentives) without allowing it to be ruled out of bounds simply because some won and others lost in competitive markets where they all deliberately played.