Thursday, January 30, 2014
Front row seat
Sometimes Gary watches the ball (since it's small and moving), other times the players running up and down the court.
Wednesday, January 29, 2014
AEI session on corporate tax reform
It's been a tiring, or should I say taxing, 24 hours. Last night at about this time (just after 6 pm as I type these words) a small group of us was heading to a really good local restaurant, Po on Cornelia Street in Greenwich Village, for our customary post-colloquium small group dinner. By 8:15 I was cabbing to Penn Station, in order to take the 9:05 pm Acela to Washington, DC, so that I'd be there for the American Enterprise Institute session on corporate tax reform that will soon become the topic of this post.
Bad evening on Amtrak, however. A two-hour train delay, poorly explained as it was ongoing, meant that I didn't get to my hotel room in DC until 2 in the morning. Then my train home today was cancelled, though I was able to scramble and get back in a timely fashion anyway.
But anyway, about the session. Entitleed "Corporate Tax Reform: Where to From Here?," it provided a platform for Laura D'Andrea Tyson, Martin Sullivan, and me to say where (if anywhere) we think things might be headed on this front, and why.
You can see the entire video of the event here. I believe it was reasonably lively. In addition, you can see the Power Point slides for my talk here.
Sullivan and I were comparably pessimistic, not just about the politics, but also about the overall merits of the types of corporate tax reform plans that are being floated today. Bad though the current system may be (and indeed is), it's such a tangled kind of a mess that efforts to take a couple of steps in one direction or another tend to have really serious drawbacks. It's a bit like Pin the Tail on the Donkey, when you've been spun around so many times that all you can do is stagger blindly in a circle, except that, in that game, there actually is a clear right direction, if only the dizzy and blindfolded participant could find it.
While we mainly discussed domestic corporate tax reform issues, we also spent some time on the international aspect, given how closely entangled those two strands are these days. Sullivan was kind enough to bring my international tax book to the session, and to several times hold it up and recommend it, with very kind accompanying remarks that I would certainly not, for my part, be inclined to quarrel with.
Bad evening on Amtrak, however. A two-hour train delay, poorly explained as it was ongoing, meant that I didn't get to my hotel room in DC until 2 in the morning. Then my train home today was cancelled, though I was able to scramble and get back in a timely fashion anyway.
But anyway, about the session. Entitleed "Corporate Tax Reform: Where to From Here?," it provided a platform for Laura D'Andrea Tyson, Martin Sullivan, and me to say where (if anywhere) we think things might be headed on this front, and why.
You can see the entire video of the event here. I believe it was reasonably lively. In addition, you can see the Power Point slides for my talk here.
Sullivan and I were comparably pessimistic, not just about the politics, but also about the overall merits of the types of corporate tax reform plans that are being floated today. Bad though the current system may be (and indeed is), it's such a tangled kind of a mess that efforts to take a couple of steps in one direction or another tend to have really serious drawbacks. It's a bit like Pin the Tail on the Donkey, when you've been spun around so many times that all you can do is stagger blindly in a circle, except that, in that game, there actually is a clear right direction, if only the dizzy and blindfolded participant could find it.
While we mainly discussed domestic corporate tax reform issues, we also spent some time on the international aspect, given how closely entangled those two strands are these days. Sullivan was kind enough to bring my international tax book to the session, and to several times hold it up and recommend it, with very kind accompanying remarks that I would certainly not, for my part, be inclined to quarrel with.
Shaheen's colloquium paper on the repatriation tax and lockout, part 2
OK, at the end of my last post I had laid out the new view and noted Shaheen's reliance instead on managerial accounting incentives to explain lockout in the international realm. Managers of publicly traded companies love to have high financial accounting income, even at the expense of favorable economics, so I suppose they do all they can (bake cookies, issue firing threats) to persuade their accountants that particular foreign source income of their overseas subsidiaries has been permanently reinvested abroad. This causes the deduction from financial accounting income for the deferred U.S. repatriation tax to flip on a dime to 100% of what it would be if incurred today, to zero. Sounds really stupid as a matter of rule design, but I am not an accountant.
Anyway, once they declare PRE (permanently reinvested earnings) they can't bring it home without both (a) taking an earnings hit from the repatriation tax, if any, and (b) making the accountants feel disrespected and hence more skeptical about other PRE claims. So Shaheen posits that it's fruitful to think of the PRE as if it simply cannot come home.
Note, by the way, how bad for the shareholders this is. The PRE designation doesn't make actual taxes lower - it just causes the possible future repatriation tax, if any, to be reported differently. But once we build in a constraint on managerial behavior to the effect that the funds now can't come home, we are in the scenario where the company may keep funds abroad even if (a) the new view holds sufficiently that they in fact can't reduce the expected repatriation tax via optionality by deferring it, and also (b) they are earning less by reason of keeping the funds in broad. In short, the value of optionality aside, the PRE designation may induce managers to make shareholders worse-off - from the company's being genuinely less profitable after-tax over the long haul - simply due to their mania for high reported earnings and/or their being subject to a binding PRE constraint once they have voluntarily subjected themselves to it.
The paper explores the possibility that the firm would benefit from investing locked-out earnings in passive assets, even if they earn a lower after-tax rate of return than available active-business investment opportunities that are available to the form. The idea is that, because the passive income is taxed currently and thus can't become PRE (there are no deferred taxes to claim you will be permanently avoiding), the firm is now free to invest properly from the shareholders' standpoint, including by bringing the money home if the best opportunities are here. At the same time, the paper concedes that managers may not feel inclined to do this, given that they like to defer the current repatriation tax (even if they are not reducing its expected value) so that reported earnings can be boosted via the PRE route.
Same point holds for active income earned abroad that the managers are able to resist giving PRE status. A key broader conclusion from the paper is that it highlights some of the costs of the deferral regime once the new view either doesn't hold or is being ignored for accounting reasons. Hence my view, discussed at some length in my book, that it is important to try to delink intellectually the questions (a) what should be the domestic tax burden on foreign source income from (b) what do we think of deferral and the foreign tax credit, which are two singularly awful ways of lowering that tax burden other than by expressly applying a lower statutory rate to it.
Anyway, once they declare PRE (permanently reinvested earnings) they can't bring it home without both (a) taking an earnings hit from the repatriation tax, if any, and (b) making the accountants feel disrespected and hence more skeptical about other PRE claims. So Shaheen posits that it's fruitful to think of the PRE as if it simply cannot come home.
Note, by the way, how bad for the shareholders this is. The PRE designation doesn't make actual taxes lower - it just causes the possible future repatriation tax, if any, to be reported differently. But once we build in a constraint on managerial behavior to the effect that the funds now can't come home, we are in the scenario where the company may keep funds abroad even if (a) the new view holds sufficiently that they in fact can't reduce the expected repatriation tax via optionality by deferring it, and also (b) they are earning less by reason of keeping the funds in broad. In short, the value of optionality aside, the PRE designation may induce managers to make shareholders worse-off - from the company's being genuinely less profitable after-tax over the long haul - simply due to their mania for high reported earnings and/or their being subject to a binding PRE constraint once they have voluntarily subjected themselves to it.
The paper explores the possibility that the firm would benefit from investing locked-out earnings in passive assets, even if they earn a lower after-tax rate of return than available active-business investment opportunities that are available to the form. The idea is that, because the passive income is taxed currently and thus can't become PRE (there are no deferred taxes to claim you will be permanently avoiding), the firm is now free to invest properly from the shareholders' standpoint, including by bringing the money home if the best opportunities are here. At the same time, the paper concedes that managers may not feel inclined to do this, given that they like to defer the current repatriation tax (even if they are not reducing its expected value) so that reported earnings can be boosted via the PRE route.
Same point holds for active income earned abroad that the managers are able to resist giving PRE status. A key broader conclusion from the paper is that it highlights some of the costs of the deferral regime once the new view either doesn't hold or is being ignored for accounting reasons. Hence my view, discussed at some length in my book, that it is important to try to delink intellectually the questions (a) what should be the domestic tax burden on foreign source income from (b) what do we think of deferral and the foreign tax credit, which are two singularly awful ways of lowering that tax burden other than by expressly applying a lower statutory rate to it.
NYU Tax Policy Colloquium, week 2: Fadi Shaheen's "The GAAP Lock-Out Effect and the Investment Behavior of Multinational Firms"
Yesterday at the colloquium, we discussed Fadi Shaheen's above-titled paper, which is available here.
As background to the paper, the "new view" of dividend repatriations demonstrates that, if the U.S. repatriation tax for multinationals' earnings through foreign subsidiaries remains in place indefinitely at a fixed rate, and if repatriation at some point, at this fixed rate, is inevitable, then there is no lockout so far as shareholder-level economic incentives are concerned.
Thus, suppose for simplicity that there is only a U.S. tax, with no source-based foreign tax. Let's call the U.S. repatriation tax rate t, the per-period after-tax rate of return r (let's also make things simpler by assuming that you get the same after-source-tax return everywhere), and the amount of foreign source income that is at issue X. If the U.S. parent repatriates X immediately, it ends up with X(1 - t), and then at the end of the period it has X(1 - t)(1 + r). By contrast, if it repatriates at the end of the period, it has X(1 + r) to repatriate, and doing so leaves it with X(1 + r)(1 - t). Obviously (and it's a good thing too), we don't need advanced math skills to conclude that X(1 - t)(1 + r) = X(1 + r)(1 - t).
While you can kill the strict equivalence with different after-source tax rates of return as between home and abroad, all that shows is that it's desirable to keep X where it earns more, rather than less - not that the repatriation tax is discouraging repatriation. What makes the equivalence work is the fact that deferring the repatriation tax takes today's prospective liability and both discounts it at r (since it's better to pay a fixed sum later rather than now) and causes it to grow at r (since the amount to be repatriated keeps growing).
While this is an important conceptual marker that improves one understanding of the relevant incentives, the bottom-line conclusion - no lockout - is not true, because the underlying assumptions are not true. In particular, keeping they money abroad has option value, since you can simply wait for the repatriation tax rate to drop. This is especially significant when we don't just have an expectation of random walk changes in the future history of repatriation tax rates, but rather there is a very real chance that it will go down by reason of a tax holiday, corporate tax rate cut, or the enactment of another tax holiday like that in 2004.
Hence there's significant lock-out, contrary to the new view model, because only the fools among corporate CEOs and CFO's would believe that the repatriation tax rate is fixed. And whether or not these individuals are as brilliant as their paychecks are fat, they are certainly smart enough to realize that. (Further point: It's not clear that a taxable repatriation is inevitable even if we are comfortable with viewing all wealth as ultimately consumed. If capital markets work well enough, the FSI could effectively be repatriated, put in shareholders' pockets, and consumed by them without there every being a taxable repatriation.)
In the paper, howevcr, Shaheen explores the possibility of lockout if the new view is actually correct, rather than merely being an important explanatory tool. (But just one last comment on the new view - saying it's "false" in practice is no more a criticism than saying the Coase Theorem doesn't hold because there are transaction costs. That's actually, at least arguably, the point - to show us where the relevant bodies are buried.)
The paper discusses an alternative, and indeed complementary rather than contradictory explanation for lockout, which is that publicly traded firms tend to have corporate governance problems, which cause the managers to care about current or near-term financial accounting income, at the expense of actually maximizing present value. Accordingly, they seek the accounting status of "permanently reinvested earnings" (PRE) which they have persuaded their accountants will never come home. Once PRE status is attained, the deferred repatriation tax, rather than being charged against earnings as a current expense (without regard to the fact that it hasn't been paid yet), is completely ignored - valued at zero, since supposedly it is irrelevant once the managers swear on a tall enough stack of bibles that they will never repatriate particular funds.
This entry is already rather long, so I will post it now and resume in a follow-up.
As background to the paper, the "new view" of dividend repatriations demonstrates that, if the U.S. repatriation tax for multinationals' earnings through foreign subsidiaries remains in place indefinitely at a fixed rate, and if repatriation at some point, at this fixed rate, is inevitable, then there is no lockout so far as shareholder-level economic incentives are concerned.
Thus, suppose for simplicity that there is only a U.S. tax, with no source-based foreign tax. Let's call the U.S. repatriation tax rate t, the per-period after-tax rate of return r (let's also make things simpler by assuming that you get the same after-source-tax return everywhere), and the amount of foreign source income that is at issue X. If the U.S. parent repatriates X immediately, it ends up with X(1 - t), and then at the end of the period it has X(1 - t)(1 + r). By contrast, if it repatriates at the end of the period, it has X(1 + r) to repatriate, and doing so leaves it with X(1 + r)(1 - t). Obviously (and it's a good thing too), we don't need advanced math skills to conclude that X(1 - t)(1 + r) = X(1 + r)(1 - t).
While you can kill the strict equivalence with different after-source tax rates of return as between home and abroad, all that shows is that it's desirable to keep X where it earns more, rather than less - not that the repatriation tax is discouraging repatriation. What makes the equivalence work is the fact that deferring the repatriation tax takes today's prospective liability and both discounts it at r (since it's better to pay a fixed sum later rather than now) and causes it to grow at r (since the amount to be repatriated keeps growing).
While this is an important conceptual marker that improves one understanding of the relevant incentives, the bottom-line conclusion - no lockout - is not true, because the underlying assumptions are not true. In particular, keeping they money abroad has option value, since you can simply wait for the repatriation tax rate to drop. This is especially significant when we don't just have an expectation of random walk changes in the future history of repatriation tax rates, but rather there is a very real chance that it will go down by reason of a tax holiday, corporate tax rate cut, or the enactment of another tax holiday like that in 2004.
Hence there's significant lock-out, contrary to the new view model, because only the fools among corporate CEOs and CFO's would believe that the repatriation tax rate is fixed. And whether or not these individuals are as brilliant as their paychecks are fat, they are certainly smart enough to realize that. (Further point: It's not clear that a taxable repatriation is inevitable even if we are comfortable with viewing all wealth as ultimately consumed. If capital markets work well enough, the FSI could effectively be repatriated, put in shareholders' pockets, and consumed by them without there every being a taxable repatriation.)
In the paper, howevcr, Shaheen explores the possibility of lockout if the new view is actually correct, rather than merely being an important explanatory tool. (But just one last comment on the new view - saying it's "false" in practice is no more a criticism than saying the Coase Theorem doesn't hold because there are transaction costs. That's actually, at least arguably, the point - to show us where the relevant bodies are buried.)
The paper discusses an alternative, and indeed complementary rather than contradictory explanation for lockout, which is that publicly traded firms tend to have corporate governance problems, which cause the managers to care about current or near-term financial accounting income, at the expense of actually maximizing present value. Accordingly, they seek the accounting status of "permanently reinvested earnings" (PRE) which they have persuaded their accountants will never come home. Once PRE status is attained, the deferred repatriation tax, rather than being charged against earnings as a current expense (without regard to the fact that it hasn't been paid yet), is completely ignored - valued at zero, since supposedly it is irrelevant once the managers swear on a tall enough stack of bibles that they will never repatriate particular funds.
This entry is already rather long, so I will post it now and resume in a follow-up.
Monday, January 27, 2014
Maybe this time it will work
Since last spring, I've been interested in writing about behavioral economics and retirement policy. In particular, I've had in mind the "nudge" literature - for example, Raj Chetty's important study along with a number of others that reach similar findings, Richard Thaler's and Cass Sunstein's book on nudges, and their related article on libertarian paternalism. These seemed to me to offer fertile and timely ground if interacted (so to speak) with both my older and my more recent work on Social Security.
But as you can perhaps see already from the way I have stated the underlying motivation, this project has been far more a bunch of thoughts and ideas in search of an overall framework, than a crisply structured project. So I was having a lot of trouble with this article idea last summer, although I did reach 30 pages or so in a fourth try that I then had to shelve for 5 months due to a host of other commitments.
By the time I had gotten my nose close enough to the water's surface to think about how I should proceed upon resuming the project, it had become clear to me that the current structure (such as it was, and if one even call call it that) was unsound. My next idea was to break it into two pieces, one about savings "incentives" (from an income tax perspective) vs. default rules vs. expanding Social Security benefits, and the other about libertarian paternalism. But this pair of projects didn't quite feel right either.
Today I am hoping - although still far from 100 percent certain - that I have finally gotten my hands around the project in a constructive way. The current plan has the tentative title "Multiple Myopias, Multiple Selves, and the Under-Saving Problem." If it does work out - which I won't really know until I've invested more hours in it - and if my schedule over the next few months proves kind to me, then perhaps I might even have it done by May.
If the current plan does indeed work out, it will have illustrated once again how much better people (I don't think I'm unusual in this regard) sometimes are at working "off-line." That is, when you're vexed by a problem, sometimes the best thing to do is get good and frustrated, then spend a couple of days not thinking about it. Always a great feeling if / when the off-line mental functions, operating beyond or beneath one's consciousness, turn out to have been studiously beavering away, such that when your conscious mind re-engages you soon find out that you have a solution.
Of course, I hope I'm not jinxing the process by implying prematurely that I have indeed found the path at last this time around.
But as you can perhaps see already from the way I have stated the underlying motivation, this project has been far more a bunch of thoughts and ideas in search of an overall framework, than a crisply structured project. So I was having a lot of trouble with this article idea last summer, although I did reach 30 pages or so in a fourth try that I then had to shelve for 5 months due to a host of other commitments.
By the time I had gotten my nose close enough to the water's surface to think about how I should proceed upon resuming the project, it had become clear to me that the current structure (such as it was, and if one even call call it that) was unsound. My next idea was to break it into two pieces, one about savings "incentives" (from an income tax perspective) vs. default rules vs. expanding Social Security benefits, and the other about libertarian paternalism. But this pair of projects didn't quite feel right either.
Today I am hoping - although still far from 100 percent certain - that I have finally gotten my hands around the project in a constructive way. The current plan has the tentative title "Multiple Myopias, Multiple Selves, and the Under-Saving Problem." If it does work out - which I won't really know until I've invested more hours in it - and if my schedule over the next few months proves kind to me, then perhaps I might even have it done by May.
If the current plan does indeed work out, it will have illustrated once again how much better people (I don't think I'm unusual in this regard) sometimes are at working "off-line." That is, when you're vexed by a problem, sometimes the best thing to do is get good and frustrated, then spend a couple of days not thinking about it. Always a great feeling if / when the off-line mental functions, operating beyond or beneath one's consciousness, turn out to have been studiously beavering away, such that when your conscious mind re-engages you soon find out that you have a solution.
Of course, I hope I'm not jinxing the process by implying prematurely that I have indeed found the path at last this time around.
Wednesday, January 22, 2014
When is a class not a class?
Depending on how you define your terms, yesterday either did or didn't witness the semester's first PM meeting of the NYU Tax Policy Colloquium, in its nineteenth year of operations.
The introductory AM class, which is private (i.e., just for the enrolled students) went off fine despite the approach of threatening weather. But the public PM session, scheduled to meet at 4 pm, ran into a bit of a hitch when it was decided, at about 3 pm, to cancel all NYU Law School classes for the day that were scheduled to begin at 4 pm or later.
This was an entirely reasonable, and indeed probably necessary, decision given the steadily falling snow, severe temperatures, and threat of travel disruptions for people not living in the immediate area. But when you have your speaker at hand from out-of-town, have prepared extensively for the discussion, and have separately met earlier in the day both with the students and with the author to lay the groundwork for a good session, it's less than entirely welcome. We ended up holding a voluntary session (i.e., not an official class at which student attendance was expected) and had a good discussion notwithstanding.
Yesterday's author was Saul Levmore, discussing two short papers (available here and here) concerning internalities and regulation. Consider mandated saving (such as under Social Security) or cigarette taxes and smoking bans. The papers contrast the "old view," in which the underlying regulatory aims sound in externalities or paternalism, with a "new view" in which they instead aim to address people's self-control problems.
At the risk of headlining mere semantics, I don't view these alternatives as "old view" versus "new view." Usually, when we contrast such things, the two views actually contradict each other. The "old view" of corporate dividends holds that the shareholder-level tax discourages paying them. The "new view" shows that there is no such discouragement under specified circumstances. The "old view" of transition relief holds that, when there is a legal change (such as repealing the income tax exemption for municipal bonds) relief such as grandfathering should be granted, in order to protect reliance interests. The "new view" instead emphasizes incentive effects from anticipation, and thus in many circumstances favors not granting transition relief.
But in the internalities / regulatory setting we instead get related and somewhat overlapping rationales for approximately the same policies. For example, one can favor forced saving via Social Security both so the elderly won't need public support by reason of indigence and to help them optimize, if we fear they might otherwise save too little from the standpoint of their own long-term self-interest, although it is true that the two alternative rationales may have different implications for program design. (E.g., the fiscal externality would suggest requiring just enough saving to avoid public support, and indeed would suggest nothing if public support were repealed.)
I also would quibble with the papers' definition of an internality, which they extended to cover collective action problems in which each individual is acting rationally and time-consistently. An example that the papers discuss is helmet regulation. In many places that don't require motorcycle helmets, nobody wears them. Arguably, the riders have some desire to wear the helmets for safety but don't want to out themselves as nerds by doing so. But once a helmet is legally mandated, you can get the safety without causing people to view you as a nerd.
This example (probably in truth, but certainly under the stipulated facts) is a benign example of regulation working well, but I wouldn't say that it addresses an internality problem. After all, it's entirely rational not to want look like a nerd. (As Hume famously said, reason is merely the slave of the passions, and most of us have "passions" that extend to caring about how people perceive us.) There is no time-inconsistency or self-control failure in this story. Rather, it's an externality issue - if I don't wear a helmet, I affect the social meaning when someone else does - that may be difficult to solve privately due to collective action problems.
More generally, I don't have the sense that internalities transform the regulatory analysis as much as the papers suggest. Within neoclassical economics, allowing for internalities is a radical step because it challenges the basic rationality assumption, as well as greatly muddying the effort to discern preferences and utility from behavior. But once you allow yourself to take this step, the analysis goes forward in largely familiar ways. (Not entirely so, because the potentially missing "transaction" is between present and future selves, rather than different people.) The papers have some interesting things to say about how interest group politics and information problems in discerning the proper policy can be big issues in a regulatory setting where internalities are important. But this is also the case if one just has externalities to deal with.
Although I don't here comment on the sessions themselves, in order to preserve their being off-the-record, I will note that Levmore is always good value as a speaker and guest, which is one reason we scheduled him for Week 1, and also helps to explain why I did not want to lose the session.
The introductory AM class, which is private (i.e., just for the enrolled students) went off fine despite the approach of threatening weather. But the public PM session, scheduled to meet at 4 pm, ran into a bit of a hitch when it was decided, at about 3 pm, to cancel all NYU Law School classes for the day that were scheduled to begin at 4 pm or later.
This was an entirely reasonable, and indeed probably necessary, decision given the steadily falling snow, severe temperatures, and threat of travel disruptions for people not living in the immediate area. But when you have your speaker at hand from out-of-town, have prepared extensively for the discussion, and have separately met earlier in the day both with the students and with the author to lay the groundwork for a good session, it's less than entirely welcome. We ended up holding a voluntary session (i.e., not an official class at which student attendance was expected) and had a good discussion notwithstanding.
Yesterday's author was Saul Levmore, discussing two short papers (available here and here) concerning internalities and regulation. Consider mandated saving (such as under Social Security) or cigarette taxes and smoking bans. The papers contrast the "old view," in which the underlying regulatory aims sound in externalities or paternalism, with a "new view" in which they instead aim to address people's self-control problems.
At the risk of headlining mere semantics, I don't view these alternatives as "old view" versus "new view." Usually, when we contrast such things, the two views actually contradict each other. The "old view" of corporate dividends holds that the shareholder-level tax discourages paying them. The "new view" shows that there is no such discouragement under specified circumstances. The "old view" of transition relief holds that, when there is a legal change (such as repealing the income tax exemption for municipal bonds) relief such as grandfathering should be granted, in order to protect reliance interests. The "new view" instead emphasizes incentive effects from anticipation, and thus in many circumstances favors not granting transition relief.
But in the internalities / regulatory setting we instead get related and somewhat overlapping rationales for approximately the same policies. For example, one can favor forced saving via Social Security both so the elderly won't need public support by reason of indigence and to help them optimize, if we fear they might otherwise save too little from the standpoint of their own long-term self-interest, although it is true that the two alternative rationales may have different implications for program design. (E.g., the fiscal externality would suggest requiring just enough saving to avoid public support, and indeed would suggest nothing if public support were repealed.)
I also would quibble with the papers' definition of an internality, which they extended to cover collective action problems in which each individual is acting rationally and time-consistently. An example that the papers discuss is helmet regulation. In many places that don't require motorcycle helmets, nobody wears them. Arguably, the riders have some desire to wear the helmets for safety but don't want to out themselves as nerds by doing so. But once a helmet is legally mandated, you can get the safety without causing people to view you as a nerd.
This example (probably in truth, but certainly under the stipulated facts) is a benign example of regulation working well, but I wouldn't say that it addresses an internality problem. After all, it's entirely rational not to want look like a nerd. (As Hume famously said, reason is merely the slave of the passions, and most of us have "passions" that extend to caring about how people perceive us.) There is no time-inconsistency or self-control failure in this story. Rather, it's an externality issue - if I don't wear a helmet, I affect the social meaning when someone else does - that may be difficult to solve privately due to collective action problems.
More generally, I don't have the sense that internalities transform the regulatory analysis as much as the papers suggest. Within neoclassical economics, allowing for internalities is a radical step because it challenges the basic rationality assumption, as well as greatly muddying the effort to discern preferences and utility from behavior. But once you allow yourself to take this step, the analysis goes forward in largely familiar ways. (Not entirely so, because the potentially missing "transaction" is between present and future selves, rather than different people.) The papers have some interesting things to say about how interest group politics and information problems in discerning the proper policy can be big issues in a regulatory setting where internalities are important. But this is also the case if one just has externalities to deal with.
Although I don't here comment on the sessions themselves, in order to preserve their being off-the-record, I will note that Levmore is always good value as a speaker and guest, which is one reason we scheduled him for Week 1, and also helps to explain why I did not want to lose the session.
Saturday, January 18, 2014
Ads I'd like to see (or perhaps not really)
"New product launch a failure? Not a problem! Just call Creative Accounting Solutions™!"
"Bad third quarter? Didn't meet your sales targets? Don't just sit there! Call Creative Accounting Solutions™!"
"Bad third quarter? Didn't meet your sales targets? Don't just sit there! Call Creative Accounting Solutions™!"
Friday, January 17, 2014
New article posted on SSRN
I have just posted on SSRN a new article, entitled "The Economics of Tax Law." Despite the scope implied by the title, it's just 30 pages / 9500 words.
The abstract is as follows: "This working paper is a forthcoming chapter in the Oxford Handbook of Law and Economics, edited by Francesco Parisi. It provides a brief overview of economic issues in tax law, including distribution and efficiency in general, the role of administrative and political economy concerns in an income tax, the choice between income and consumption taxation, the significance of entity-level taxation of corporations, and the issues raised by base-broadening tax reform."
I am considering adding a short section addressing the basics of tax incidence, an issue which at present I only mention a few times in passing. The problem is that I am only 500 words shy of my overall word limit.
The article is available for download here.
I am hoping that it has some potential to serve as a useful overview/intro paper, such as for law students in tax and tax policy classes.
The abstract is as follows: "This working paper is a forthcoming chapter in the Oxford Handbook of Law and Economics, edited by Francesco Parisi. It provides a brief overview of economic issues in tax law, including distribution and efficiency in general, the role of administrative and political economy concerns in an income tax, the choice between income and consumption taxation, the significance of entity-level taxation of corporations, and the issues raised by base-broadening tax reform."
I am considering adding a short section addressing the basics of tax incidence, an issue which at present I only mention a few times in passing. The problem is that I am only 500 words shy of my overall word limit.
The article is available for download here.
I am hoping that it has some potential to serve as a useful overview/intro paper, such as for law students in tax and tax policy classes.
Wednesday, January 15, 2014
D.C. corporate tax event
On Wednesday, January 29, from 9 to 10:30 am, the American Enterprise Institute will be hosting an event called "Corporate Tax Reform: Where to From Here?" Alan Viard will be the moderator, and I am one of the three speakers, along with Marty Sullivan and Laura D'Andrea Tyson.
The event description reads as follows: "Economists often condemn the inefficiency and complexity of the US corporate income tax, and politicians on both sides of the aisle advocate reform. Yet the US corporate tax code has remained largely unchanged for decades. Has the time come for reform? What would an ideal corporate income tax look like?"
This is meant to be open-ended, however, and I will talk more about the muddle of the existing system and the dilemmas that it confronts us with. I've prepared PowerPoint slides, entitled "Stand-Alone Corporate Tax Reform?," that I plan to post after the event.
The event description reads as follows: "Economists often condemn the inefficiency and complexity of the US corporate income tax, and politicians on both sides of the aisle advocate reform. Yet the US corporate tax code has remained largely unchanged for decades. Has the time come for reform? What would an ideal corporate income tax look like?"
This is meant to be open-ended, however, and I will talk more about the muddle of the existing system and the dilemmas that it confronts us with. I've prepared PowerPoint slides, entitled "Stand-Alone Corporate Tax Reform?," that I plan to post after the event.
Sunday, January 12, 2014
Profiles in courage
Sylvester defends the home front against an invader. Note the ears back, tense posture, and fluffed tail. He was also caterwauling throughout the showdown.
Tuesday, January 07, 2014
Act now while supplies last
The Amazon website appears to indicate that my new book, Fixing U.S. International Taxation, is currently available for immediate ordering. See here. I have received my advance copies, but the official pub date is not until February 5. Barnes & Noble is listing it, but just for pre-ordering. On the Amazon website, you can actually click on "Look Inside" and see a fairly significant portion of the text.
If anyone finds that it's not currently available except as a pre-order, please let me know.
If anyone finds that it's not currently available except as a pre-order, please let me know.
Monday, January 06, 2014
What is the "corporate income tax"?
Today's New York Times has an op-ed by Laurence Kotlikoff advocating abolition of the U.S. corporate income tax. To make this revenue-neutral, he'd accompany it with increasing personal income tax rates.
Kotlikoff claims that "eliminating the United States' corporate income tax produces rapid and dramatic increases in American investment, output, and real wages, making the tax cut self-financing to a significant extent." Ostensibly the "potential economic and welfare gains are stunningly large," even with an accompanying increase in personal income tax rates.
I looked quickly at the underlying paper by Kotlikoff and several coauthors, which is available here, and had the following concerns:
1) What exactly is the "corporate income tax" that we are repealing in his model? While this is not entirely clear in the paper, perhaps he means the tax on income from capital that is invested in the U.S. But this is a very different proposition indeed from the "U.S. corporate income tax." At present, lots of domestic capital income is earned outside of corporate solution, and not just for tax reasons.. Also, lots of labor income, in an economic sense, can show up as corporate income because owner-employees don't have to pay themselves arm's length salaries. Kotlikoff may view all this as merely a bunch of second order implementation details, but others might disagree.
More generally, it would be a huge mistake to think of repealing the existing corporate income tax as closely analogous in practice, even just in the steady state without regard to transition issues, to repealing the income tax and replacing it with a well-functioning progressive consumption tax. The institutional details are just too different and consequential. But once one recognizes this, one is stuck in the morass of niggling institutional details that make it harder to draw firm conclusions about anything relating to the corporate tax, especially from a very general and abstract model. See my book, Decoding the U.S. Corporate Income Tax (paperback here, Kindle here), for discussion and explication of the existing corporate income tax system's lack of a coherent economic core. This of course is not a defense of the existing system, but shows that it's harder than Kotlikoff may realize to determine what repeal of the system actually means.
2) The paper appears to contemplate consumption and/or wage tax financing to replace the lost corporate income tax revenues. By contrast, the op-ed speaks of higher personal income tax rates.
3) In the paper, the very large estimates of increased U.S. capital investment and welfare that are cited in the op-ed expressly depend on the lack of matching corporate tax reductions in other countries. This appears quite unrealistic, especially if the behavioral response is as huge as the paper's results suggest. The paper deals with the issue of matching corporate tax reductions around the world, which it unsurprisingly finds would significantly reduce the U.S. welfare gain. Perhaps the op-ed should have acknowledged this point.
4) The paper and model appear to assume that the incidence of the U.S. corporate income tax falls almost entirely on labor, presumably because capital is highly mobile and labor far less so. To the extent that this bottom line conclusion remains controversial, however, then to some extent the paper has risked assuming its conclusions. (Not much of a surprise if U.S. workers were to gain from eliminating a tax that is assumed to fall substantially or entirely on them due to the effects of cross-border capital flows.)
Economic models with greater institutional detail than that by Kotlikoff et al do not invariably find this bottom line result to be clear. (More precisely, some do, but others don't.) For example, consider this paper, which finds, for state-level corporate income taxes, that "firm owners bear roughly 40% of the incidence, while workers and land owners bear 35% and 25%, respectively." States are even more by way of being small open economies than the U.S. as a whole, although admittedly labor mobility might be higher, not just absolutely but also relative to capital mobility, within the U.S. than across national borders.
Kotlikoff claims that "eliminating the United States' corporate income tax produces rapid and dramatic increases in American investment, output, and real wages, making the tax cut self-financing to a significant extent." Ostensibly the "potential economic and welfare gains are stunningly large," even with an accompanying increase in personal income tax rates.
I looked quickly at the underlying paper by Kotlikoff and several coauthors, which is available here, and had the following concerns:
1) What exactly is the "corporate income tax" that we are repealing in his model? While this is not entirely clear in the paper, perhaps he means the tax on income from capital that is invested in the U.S. But this is a very different proposition indeed from the "U.S. corporate income tax." At present, lots of domestic capital income is earned outside of corporate solution, and not just for tax reasons.. Also, lots of labor income, in an economic sense, can show up as corporate income because owner-employees don't have to pay themselves arm's length salaries. Kotlikoff may view all this as merely a bunch of second order implementation details, but others might disagree.
More generally, it would be a huge mistake to think of repealing the existing corporate income tax as closely analogous in practice, even just in the steady state without regard to transition issues, to repealing the income tax and replacing it with a well-functioning progressive consumption tax. The institutional details are just too different and consequential. But once one recognizes this, one is stuck in the morass of niggling institutional details that make it harder to draw firm conclusions about anything relating to the corporate tax, especially from a very general and abstract model. See my book, Decoding the U.S. Corporate Income Tax (paperback here, Kindle here), for discussion and explication of the existing corporate income tax system's lack of a coherent economic core. This of course is not a defense of the existing system, but shows that it's harder than Kotlikoff may realize to determine what repeal of the system actually means.
2) The paper appears to contemplate consumption and/or wage tax financing to replace the lost corporate income tax revenues. By contrast, the op-ed speaks of higher personal income tax rates.
4) The paper and model appear to assume that the incidence of the U.S. corporate income tax falls almost entirely on labor, presumably because capital is highly mobile and labor far less so. To the extent that this bottom line conclusion remains controversial, however, then to some extent the paper has risked assuming its conclusions. (Not much of a surprise if U.S. workers were to gain from eliminating a tax that is assumed to fall substantially or entirely on them due to the effects of cross-border capital flows.)
Economic models with greater institutional detail than that by Kotlikoff et al do not invariably find this bottom line result to be clear. (More precisely, some do, but others don't.) For example, consider this paper, which finds, for state-level corporate income taxes, that "firm owners bear roughly 40% of the incidence, while workers and land owners bear 35% and 25%, respectively." States are even more by way of being small open economies than the U.S. as a whole, although admittedly labor mobility might be higher, not just absolutely but also relative to capital mobility, within the U.S. than across national borders.
Tuesday, December 17, 2013
First draft of short review article
I have completed a first draft, except for the conclusion, of a brief article entitled "The Economics of Tax Law" that was commissioned from me (with said title attached) as a chapter in the forthcoming Oxford Handbook of Law and Economics. It's a good thing that I have already gotten this far, since I understand January 15 to be the preferred due date. (My contract says June 15, but that may just be the non-negotiable drop-dead date when the editors would give up and move on.)
Also making it good that I have only the conclusion left are considerations of length. I'm at 8,728 words, including footnotes and bibliography, and am enjoined not to exceed 10,000.
Obviously, the economics of tax law is a rather large topic to cover in so little space. The piece accordingly is a rather high-altitude tour, ranging from optimal income taxation, to why and when tax neutrality promotes efficiency, to the nature of the problems posed for the income tax system by the realization requirement, to the income versus consumption tax debate, to why we may feel enjoined to tax corporate income at the entity level (and what adverse consequences this has), to briefly discussng the perennial, though generally non-actionable, popularity of 1986-style tax reform.
I suppose I will post in on SSRN early in the new year. While it certainly doesn't break new ground (nor should it), I am hoping to feel good about it as a swift overview.
Also making it good that I have only the conclusion left are considerations of length. I'm at 8,728 words, including footnotes and bibliography, and am enjoined not to exceed 10,000.
Obviously, the economics of tax law is a rather large topic to cover in so little space. The piece accordingly is a rather high-altitude tour, ranging from optimal income taxation, to why and when tax neutrality promotes efficiency, to the nature of the problems posed for the income tax system by the realization requirement, to the income versus consumption tax debate, to why we may feel enjoined to tax corporate income at the entity level (and what adverse consequences this has), to briefly discussng the perennial, though generally non-actionable, popularity of 1986-style tax reform.
I suppose I will post in on SSRN early in the new year. While it certainly doesn't break new ground (nor should it), I am hoping to feel good about it as a swift overview.
Tuesday, December 10, 2013
A sense of relief
Last Thursday I taught my last class of the semester. I won't be back in the classroom until Tuesday, January 21, when Alan Auerbach and I will be doing the first session of the 2014 NYU Tax Policy Colloquium.
That makes this week the very week when I would have had ACL surgery, if I had decided to go under the knife for purposes of fixing my right knee. The timing idea, had I gone ahead, was to finish fall classes, and then maximize the recovery time before I am next scheduled to teach a class. I was told that I'd need at least four weeks to get back in the classroom, but the more the better. I could also expect six grueling months before I'd be largely recovered as a matter of light daily activity, and probably twelve months before I could try anything as rigorous as tennis.
I suffered the injury at the tail end of April. My first thought was that I definitely wanted the surgery, so I could be physically whole and (among other things) get back on the tennis court. This was accompanied, however, by a queasy sense that getting surgery at my age just to play tennis (if that's how one thought of it) might be unwise. Anyway, I'd need to finish my semester first and then do prehab.
I already had a couple of trips planned for the early summer, to Stockholm in May and Israel in June. These, I determined, were still feasible, meaning that I couldn't have surgery until the end of June. But one thing I absolutely did not want to do was ruin my summer, when I so vastly prefer it to winter. There was simply no way that I wanted to spend my favorite months of the year lying in bed and then hobbling around on crutches, rather than enjoying the outdoors. But once it was September, I'd need to wait for fall classes to end, hence the target date of sometime this week.
I met with three surgeons, decided which one I preferred, and started rehab (or at the time, apparently prehab). But I hadn't definitely decided what to do. I'm usually decisive about choices that I face, but this time I kept wavering, not that it mattered immediately, as the "go" decision still lay several months down the road.
By late July, my physical therapist was telling me that I was close to being able to go back on the tennis court. But I didn't feel ready until late August. My first time out, hitting with a pro, I felt as if I was a million years from ever actually playing tennis again. All I could do was hit the ball if it was drilled right at me.
By late September I was actually playing matches, which I now have survived for more than two months, pretty much at my old level (as to both good days and bad). I even run down a lot of balls - I'm almost as mobile as I used to be, if I'm on my toes and leaning the right way, though less able to change directions or manage a cold start. I try to be careful in a couple of ways (including how often I play), but so far, mostly so good. I also can rush to cross streets when the light is turning, as I always used to. I simply don't do red lights, if I can help it, but early on this caused knee buckling if I even dared to try.
Meanwhile, I've been living my regular life, apart from the nuisance of having to keep up the regimen of daily knee exercise. My current project (due January 15, but triaged until now behind other, more pressing obligations) is writing a short chapter called "The Economics of Taxation" (not my choice of title) for a forthcoming Oxford U. Press volume, the Oxford Handbook of Law and Economics. Not as much fun for me, perhaps, as writing a more creative and original paper, but incomparably preferable to lying on my back with painkillers and an ice machine.
UPDATE: Great article about ACL tears, including why they happen. I'd been noticing that, in the NFL, there seem to be a few every week, while in the NBA point guards have been falling from ACL tears like flies. Also exactly my experience that it's a "mind-body" issue - ACL tears happen because you're surprised (which requires that you be playing with an opponent, even if there's no physical contact) - you change what you're doing at the last second and thus are awkwardly misaligned at the moment of injury. Then you feel the pop, and it's welcome to the world of diminished performance and (at least initially) pain. The one difference between my experience and that described in the article is that, as merely an amateur / weekend athlete, I could get back to an adequate physical performance level without the surgery - obviously not possible for an NFL or NBA player.
UPDATE: Great article about ACL tears, including why they happen. I'd been noticing that, in the NFL, there seem to be a few every week, while in the NBA point guards have been falling from ACL tears like flies. Also exactly my experience that it's a "mind-body" issue - ACL tears happen because you're surprised (which requires that you be playing with an opponent, even if there's no physical contact) - you change what you're doing at the last second and thus are awkwardly misaligned at the moment of injury. Then you feel the pop, and it's welcome to the world of diminished performance and (at least initially) pain. The one difference between my experience and that described in the article is that, as merely an amateur / weekend athlete, I could get back to an adequate physical performance level without the surgery - obviously not possible for an NFL or NBA player.
Monday, December 09, 2013
Martin Sullivan on the Baucus international tax discussion draft and my work on foreign tax credits
In today's Tax Notes (12/9/13, 141 Tax Notes 1007-1012), Martin Sullivan is kind enough to offer an analysis of the Senate Finance Committee discussion draft that "draws heavily from the work of professor Daniel Shaviro of New York University School of Law," in particular my articles on foreign tax credits. I gather that Sullivan has not seen my (still-unpublished) book on international tax policy, which offers a comprehensive broader framework, based in part on those articles.
Wednesday, December 04, 2013
"I have supped full with horrors"
The title of this post is a quote from Macbeth - appropriately enough, since Macbeth is known to Bertie Wooster as the "cat chap" - reflecting that Jeeves had quoted to him the line where Lady Macbeth refers to "letting 'I dare not' wait upon 'I would,' like the poor cat in the adage." The horrors of which I write here do indeed relate to a cat.For the last 15 months, our household has been brightened by these two adorable little fellows, littermates whom we adopted in September 2012 at the age of somewhere between 6 and 8 weeks. In the picture, Sylvester is the one on the left, and Gary is on the right. Among the rituals that they eagerly endorse (besides knocking things onto the floor, following us around the house if something fascinating, such as watering plants, is afoot, swatting at loose yarn, and playing vigorous rounds of Friskabout) is coming downstairs for breakfast, after having starved all night once their food from the evening was gone.
But yesterday, no Gary at breakfast or thereafter. We didn't see or hear him, and couldn't find him anywhere. We then recollected that we hadn't seen him the previous evening (which can happen with a cat - it's that air of mystery which they never entirely shed), and that there had been people in our house the previous day doing repairs, which the kittens hate (both the noise aspect and the strangers aspect).
Sherlock Holmes says somewhere that, when you have eliminated the impossible, whatever remains, however improbable, must be the truth. We were struggling to apply this precept, the problem being that we couldn't distinguish the impossible from the merely highly unlikely. Could he have gotten out of the house? It didn't seem possible, but then again cats can have ways. Had he found a hole somewhere (a radiator seemed to have one) and disappeared into the wall? Were there human fist-sized openings and passageways behind the walls, which he might be able to navigate and then perhaps get lost or stuck? Did he get sick or injured and hide? If he was still in the house and conscious, why wasn't he scratching and meowing?
This went on all day, and it would be an understatement to say that there were long faces in the Shaviro et al household. But then at around midnight, a family member heard some scratching and meowing sounds. It turned out that he was in one of the drawers of a little-used dresser. He is now out and about, and evidently none the worse for having spent perhaps as much as 30 hours there. We, by contrast, remain a bit the worse for wear, our immense relief notwithstanding.
Remaining mysteries, which I don't imagine we will be able to solve, include (1) how did he get into the drawer, which one would have thought was closed, (2) how did it re-close once he was inside, and (3) why didn't he announce his presence sooner, especially once the workers had left.
But after spending a full day thinking we might never see him again, or that perhaps in a month we would detect a skeleton stuck behind the wall, we are not complaining.
Wednesday, November 27, 2013
The joke with three punchlines
It recently occurred to me that, in the last three weeks alone, I have attended two public sessions devoted to discussing fundamental tax reform. And these are hardly the only two such sessions that I have attended in 2013 alone, or even since the start of the school year alone.
Fundamental tax reform remains a favorite topic even though, as I once remarked in the opening paragraph of some paper or other, "while frequently in the air, it is rarely to be spotted on the ground." Indeed, I am admittedly a multiple offender in writing about the topic, which is why I can't remember offhand in which paper it was that I said that.
After a while, however, the topic grows sufficiently over-familiar that I am reminded of the joke (itself perhaps over-familiar by now) in which a bunch of comedians are gathered in a room. One of them stands up and shouts "39!" Everyone laughs. Another one stands up and says "17!" Everyone laughs. A newcomer who has heard this going on for a few minutes asks the person next to him what they're doing, and is told that all the jokes are so familiar that each has a number, eliminating the need to recite the entire thing..
So the newcomer stands up and shouts "28!" Dead silence. Mortified, he asks the person next to him what he did wrong. And here's the best thing about the joke, its own over-familiarity notwithstanding. It has three alternative punchlines, and perhaps not everyone who is reading this blog entry has already heard all three of them:
(1) "You didn't tell it right."
(2) "They heard that one already."
(3) "They don't know that one."
Heard all three punchlines already? Sorry about that, but perhaps this makes it all the more postmodern (over-familiar joke about over-familiar jokes).
Monday, November 25, 2013
Senate Finance Committee international "Option Z" follow-up
In an earlier post on the Senate Finance Committee's international tax staff discussion draft, I said that Option Z, in which certain foreign source income (FSI) would be 60% taxed at the full U.S. rate but with foreign tax credits for 60% of foreign taxes paid, and 40% treated as exempt but with the remaining 40% of foreign taxes paid being ignored, may be a "treaty-compatible version of what I discuss in my book. To wit, the U.S. taxes FSI at a rate that is somewhere between 0% and the full U.S. rate, and foreign taxes are deductible-plus, but not fully creditable, thus retaining a degree of foreign tax cost-consciousness." I attributed the possible treaty compatibility to the argument that "you don't literally 'double-tax' any given dollar of foreign income, by virtue of breaking it into two distinct pieces, each of which is formally 'taxed once.'"
Idiotically formalistic though this might be, I viewed it as just deserts for the formalistic legal norm that income must be taxed only once, a norm under which being taxed ten times at a 1% rate each time would be a horrid injustice, whereas being taxed once at 35% would be unobjectionable.
However, Fadi Shaheen, in a message that he has authorized me to quote (I don't otherwise spill the beans here on private communications), says the following:
"2. Couldn't one make the argument that if under a
substance over form approach two proposals (Option Z and yours) could
effectively be the same and one is treaty-compatible, then the other would be
too? I understand the formalities involved, but I really don't see much
difference in substance."
Some quick responses: On Point 1, agreed that the arcane complexity of the foreign tax credit regime would still be on the books if we adopted Option Z, as distinct from simply making foreign taxes deductible (or deductible-plus in some fashion, but short of 100 percent reimbursement). I was only thinking about the marginal incentive effects on paying higher rather than lower foreign taxes when I wrote the blog entry. But on the other hand, with the marginal reimbursement rate on foreign taxes effectively reduced from 100% (in the scenario where deferral has been repealed and foreign tax credit limits do not apply), maybe one could ease up on the existing FTC rules a bit, as their attempted rigor responds to the total lack of cost-consciousness re. foreign taxes that a 100% credit can induce.
On Point 2, agreed as well. When you have a formalistic rule, evaluating wholly formalistic questions of when it is or isn't being breached is not going to be a very intellectually edifying (or stimulating) exercise. Hard to say how this would play out in practice. The underlying question is whether U.S. treaty partners would get upset or not, and what role formal legal arguments would play in making them more tolerant of the end result. I was speculating that creating a decent formal argument that there is no "double tax" might help ease the way to limiting controversy, even though it means that equivalent systems get classified differently.
The one bit of substance that avoiding "double taxation" via the Option Z DOES have is that it requires equivalence between (a) the ratio between the "true" statutory tax rate for a full dollar of FSI and that for domestic source income, and (b) the marginal reimbursement rate for foreign taxes. It's hard to see why the foreigners, in deciding whether to be outraged or not by U.S. adoption of Option Z, should care about this equivalence one way or the other. But, then again, formalistic legal exercises have this way of making distinctions that matter little for their own sake potentially dispositive.
Idiotically formalistic though this might be, I viewed it as just deserts for the formalistic legal norm that income must be taxed only once, a norm under which being taxed ten times at a 1% rate each time would be a horrid injustice, whereas being taxed once at 35% would be unobjectionable.
However, Fadi Shaheen, in a message that he has authorized me to quote (I don't otherwise spill the beans here on private communications), says the following:
"1. Wouldn't Option Z keep, if not increase, the
complexity the FTC has been causing, which would be better addressed by
deductibility? I thought that was the main advantage of deductibility over
partial creditability ...
Some quick responses: On Point 1, agreed that the arcane complexity of the foreign tax credit regime would still be on the books if we adopted Option Z, as distinct from simply making foreign taxes deductible (or deductible-plus in some fashion, but short of 100 percent reimbursement). I was only thinking about the marginal incentive effects on paying higher rather than lower foreign taxes when I wrote the blog entry. But on the other hand, with the marginal reimbursement rate on foreign taxes effectively reduced from 100% (in the scenario where deferral has been repealed and foreign tax credit limits do not apply), maybe one could ease up on the existing FTC rules a bit, as their attempted rigor responds to the total lack of cost-consciousness re. foreign taxes that a 100% credit can induce.
On Point 2, agreed as well. When you have a formalistic rule, evaluating wholly formalistic questions of when it is or isn't being breached is not going to be a very intellectually edifying (or stimulating) exercise. Hard to say how this would play out in practice. The underlying question is whether U.S. treaty partners would get upset or not, and what role formal legal arguments would play in making them more tolerant of the end result. I was speculating that creating a decent formal argument that there is no "double tax" might help ease the way to limiting controversy, even though it means that equivalent systems get classified differently.
The one bit of substance that avoiding "double taxation" via the Option Z DOES have is that it requires equivalence between (a) the ratio between the "true" statutory tax rate for a full dollar of FSI and that for domestic source income, and (b) the marginal reimbursement rate for foreign taxes. It's hard to see why the foreigners, in deciding whether to be outraged or not by U.S. adoption of Option Z, should care about this equivalence one way or the other. But, then again, formalistic legal exercises have this way of making distinctions that matter little for their own sake potentially dispositive.
Saturday, November 23, 2013
Lunch talks at the 2013 NTA Annual Meeting
Every year at the NTA Annual Meeting, we have two "General Session" lunches, usually with hundreds of people in the audience, with an invited speaker to give a talk. One problem you face, as a Program Chair, is that lots of the people you might have considered inviting already did an NTA lunch recently. Great minds (in this case, past and current program chairs) think alike, and thus the pool of prospects keeps thinning unless the replenishment rate can keep pace. I am not sure that it does.
Nonetheless, this year we we were able to do pretty well. Thursday's lunch featured Peter Orszag, and Friday's Raj Chetty. Each had substance and broad interest (if not that many jokes), so I felt good from the standpoint of an organizer who has attended mostly good NTA lunches but also a couple that were less successful and/or substantive.
Orszag gave a talk about where healthcare in the U.S. appears to be headed - a matter of huge interest for U.S. federal budgetary purposes, not to mention otherwise as well. He offered good news for everyone except for the people (and there are many of them in budgetary politics) who prefer bad news. Time will tell if he is right or not, but the viewpoint certainly ought to be more widely known.
Here, for starters, is the part that's absolutely clear. The rate of growth in annual per capital healthcare expenditure has declined very sharply in the last few years. If this decline in annual growth rate is sustained, then the long-term fiscal picture is much better than people have been assuming for many years. The official estimates still don't assume that it will be sustained, since it still looks a bit like an outlier. But, to assess whether it is a fluke or the new normal, the key question to ask is what's been causing it.
Orszag convincingly rebutted the view that the last few years' economic slowdown is responsible for the reduced growth rate. A key piece of evidence is that healthcare for people on Medicare who are largely insulated from the state of the economy (especially if they have Medigap plans to deal with their copayments) has been slowing like all the rest.
The slowdown is from the quantity services being rendered, not because healthcare prices are no longer rising. Orszag attributes it, admittedly tentatively, to changes in financial incentives for healthcare providers. Medicare is now much less a fee for service system (which encourages rising service intensity). Instead, it tends to base payments on the medical condition, and where not doing so yet is apparently expected by many to start doing it shortly (so they are preparing). This means that the hospital or other provider is the one bearing marginal costs of extra patient care. Similar things are happening, he says, in private healthcare plans.
In effect, he says, there is a transition going on that resembles that in private annuity plans, which switched over the last couple of decades from "defined benefit' (where what you will get at retirement is specified) to "defined contribution" (where the pay-in is specified, and the market determines what it yields). That shifted risk onto the employees. Here, to a degree it's the healthcare providers that are facing the shifted risk, and this in effect makes them insurance companies (on behalf of the consumers) even if they are hospitals or doctor groups. This in turn may have problems of its own, including issues of care being denied or of them mismanaging risk or being forced to band together in huge organizations that have the scale needed for insurance. But it does potentially bend the cost curve, indicating (if Orszag is right, and he admitted that this is merely his speculation at this point) that our long-term fiscal situation under current policy may be far less dire than most people, including me, have been assuming.
Hard to say when the political system will take note of this, even if one is wholly convinced that it's correct. After all, falling budget deficits in the last few years have gone almost completely unnoticed by the general public and also the Washington political class.
Chetty's talk was based on the landmark pension savings study, using Denmark data, that he presented at my colloquium earlier this year and that I am actually writing about (in an article that I had to put on the shelf a couple of months ago, and won't be getting back to for a couple months more at the least). So I won't say anything particular about it here. The subject was taxpayer inattention, and the implications for being defaulted into retirement savings plans versus getting "incentives" (from an income tax standpoint) for greater contributions. As you'd expect from Chetty, sober and fair, no undue claims, and careful noting of all the problems in deciding what to make of the research findings for policymaking purposes.
Nonetheless, this year we we were able to do pretty well. Thursday's lunch featured Peter Orszag, and Friday's Raj Chetty. Each had substance and broad interest (if not that many jokes), so I felt good from the standpoint of an organizer who has attended mostly good NTA lunches but also a couple that were less successful and/or substantive.
Orszag gave a talk about where healthcare in the U.S. appears to be headed - a matter of huge interest for U.S. federal budgetary purposes, not to mention otherwise as well. He offered good news for everyone except for the people (and there are many of them in budgetary politics) who prefer bad news. Time will tell if he is right or not, but the viewpoint certainly ought to be more widely known.
Here, for starters, is the part that's absolutely clear. The rate of growth in annual per capital healthcare expenditure has declined very sharply in the last few years. If this decline in annual growth rate is sustained, then the long-term fiscal picture is much better than people have been assuming for many years. The official estimates still don't assume that it will be sustained, since it still looks a bit like an outlier. But, to assess whether it is a fluke or the new normal, the key question to ask is what's been causing it.
Orszag convincingly rebutted the view that the last few years' economic slowdown is responsible for the reduced growth rate. A key piece of evidence is that healthcare for people on Medicare who are largely insulated from the state of the economy (especially if they have Medigap plans to deal with their copayments) has been slowing like all the rest.
The slowdown is from the quantity services being rendered, not because healthcare prices are no longer rising. Orszag attributes it, admittedly tentatively, to changes in financial incentives for healthcare providers. Medicare is now much less a fee for service system (which encourages rising service intensity). Instead, it tends to base payments on the medical condition, and where not doing so yet is apparently expected by many to start doing it shortly (so they are preparing). This means that the hospital or other provider is the one bearing marginal costs of extra patient care. Similar things are happening, he says, in private healthcare plans.
In effect, he says, there is a transition going on that resembles that in private annuity plans, which switched over the last couple of decades from "defined benefit' (where what you will get at retirement is specified) to "defined contribution" (where the pay-in is specified, and the market determines what it yields). That shifted risk onto the employees. Here, to a degree it's the healthcare providers that are facing the shifted risk, and this in effect makes them insurance companies (on behalf of the consumers) even if they are hospitals or doctor groups. This in turn may have problems of its own, including issues of care being denied or of them mismanaging risk or being forced to band together in huge organizations that have the scale needed for insurance. But it does potentially bend the cost curve, indicating (if Orszag is right, and he admitted that this is merely his speculation at this point) that our long-term fiscal situation under current policy may be far less dire than most people, including me, have been assuming.
Hard to say when the political system will take note of this, even if one is wholly convinced that it's correct. After all, falling budget deficits in the last few years have gone almost completely unnoticed by the general public and also the Washington political class.
Chetty's talk was based on the landmark pension savings study, using Denmark data, that he presented at my colloquium earlier this year and that I am actually writing about (in an article that I had to put on the shelf a couple of months ago, and won't be getting back to for a couple months more at the least). So I won't say anything particular about it here. The subject was taxpayer inattention, and the implications for being defaulted into retirement savings plans versus getting "incentives" (from an income tax standpoint) for greater contributions. As you'd expect from Chetty, sober and fair, no undue claims, and careful noting of all the problems in deciding what to make of the research findings for policymaking purposes.
2013 National Tax Association Annual Meeting
The NTA Annual Meeting ended a few hours ago, and (as per my last blog post) I am stranded in my hotel lobby, because that is better than being stranded in the airport. My flight is just over two hours away, but no need to leave yet. We are so close to the airport that, when playing tennis on the hard courts here - as it turned out, without injuring my ACL-deficient right knee, although there is always next time to worry about - I could almost have imagined I was playing at the U.S. Open. All those giant jets taking off and landing right next to you. Circling birds of prey as well. I was hoping that they didn't know something about me that I didn't.
Economists with NTA-related interests presumably already tend to know about the Annual Meeting. In addition, many of them know about the advantages of going, especially if one is junior. You get exposure for your own work, feedback on it, you get to meet and talk with other people in the field, etcetera. But tax law professors, and tax practitioners with broad policy interests, don't participate at the levels that the NTA wants. (That said, there were at least twenty law profs here this year.) Equally or more importantly, lots of junior tax people in the law schools may not be aware of the extent to which they may benefit from attending NTA annual meetings. One of the great things about the NTA, especially for lawyers given the predominance here of economists, is the inter-disciplinary element. Lots of panels are deliberately designed to include both groups. But there is also a sufficiently large cadre of tax law professors who already come to the NTA with some frequency that you get to see plenty of your kind, which is good as well (networking, feedback, exchange of ideas, etcetera).
Anyway, the conference appears to have been a big success. At least, this was my own sense of it, and people kept telling me so, in connection with my role as co-Program Chair (with Tracy Gordon). Our main strategy was to be inclusive and accept as many of the submitted papers and panels as we could. This has a downside, since 4-paper sessions are potentially more jumbled and scattered than those with just 3, and since having lots of parallel sessions at the same time risks thinning out the audience. But it also means that more people attend, more people get to present, that attendees have more choices, and we thought it would create a richer conference experience. Inclusive is good. Plus we just hated having to say No any more than we had to. (Unfortunately, resource constraints meant that we'd be saying this to dozens of people in any event - but no reason to make it even worse.)
Economists with NTA-related interests presumably already tend to know about the Annual Meeting. In addition, many of them know about the advantages of going, especially if one is junior. You get exposure for your own work, feedback on it, you get to meet and talk with other people in the field, etcetera. But tax law professors, and tax practitioners with broad policy interests, don't participate at the levels that the NTA wants. (That said, there were at least twenty law profs here this year.) Equally or more importantly, lots of junior tax people in the law schools may not be aware of the extent to which they may benefit from attending NTA annual meetings. One of the great things about the NTA, especially for lawyers given the predominance here of economists, is the inter-disciplinary element. Lots of panels are deliberately designed to include both groups. But there is also a sufficiently large cadre of tax law professors who already come to the NTA with some frequency that you get to see plenty of your kind, which is good as well (networking, feedback, exchange of ideas, etcetera).
The next NTA Annual Meeting will be held in Santa Fe, at some point in November 2014. Certainly a nice town in which to spend a few days, by all reports. But here are a few practical tips regarding how to get a paper accepted, based on my experience this year as a program chair.
Tip #1 - Start thinking about it before the Call for Papers goes out next year. When it does go out, by the way, then even if you have not already joined the NTA (though why wouldn't you do that, especially if reimbursable as a professional expense), you ought to be able to get word, e.g., via the Tax Prof Blog.
Tip #2 - If possible, form the entire panel for a proposed session. This would consist of either three or four papers, a couple of discussants, and a moderator or organizer (presumably, one of the authors or discussants). This year, we accepted all of the proposed sessions. I can't speak for next year's program chairs, but for a couple of reasons forming an entire panel gives you a leg up. One, we hated to turn down people who had done this much work and put that degree of thought into it. Two, it made our lives easier, since otherwise we had to accept individual papers and then start grouping into multi-paper sessions, where fit was important but not always easy to provide (and it took a LOT of time).
Tip #3 - Only if you have enough live prospects on your desktop, submit several papers, not just one. I personally hated turning down ALL of someone's multiple submissions, plus there is a diversification advantage. If one paper didn't seem like a great NTA fit to us, then maybe another one seemed better suited. So don't submit sheer dogs, if you have just one good paper at hand and nothing else that's really suitable, but if you do have more than one live prospect, then by all means submit them all rather than choosing. (Easy for me to say, of course, given that I won't be the one who has to read all of the submissions next year.)
Time for the airport - I will try to post, once I'm there or shortly afterwards, on one of the highlights (unless one calls it two of the highlights): the lunch talks at this year's NTA meeting, which were given by Peter Orszag and Raj Chetty. (Perhaps with a mention as well of the session honoring Michael Graetz, who was this year's Holland Medal winner at the NTA, this award being one that is granted for lifetime achievement.)
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