Addressing inequality from the right?

At least since the 2012 presidential campaign, when I periodically discussed the Romney candidacy, I have generally stayed away from partisan politics.  "A plague on both your houses" is my preferred stance, reflecting that I understand the imperatives of politics will lead people (even when of good faith) away from being able to consider consistently adopting analyses or policies based purely on their actual merits.

But my distress over the turn Republicans have often taken since 1994 (although I didn't really get distressed about it until about 2002) risks leading me into rants if I pay too close attention to daily politics, even though I am no more thrilled about the Democrats than, say, Bruce Bartlett is.  This not only strikes the wrong tone but can lead me astray.  I have been told, for example, that sitting here in New York (outside the Washington circle of debate, and also not knowing a whole lot of Republicans in NYC, as there aren't many) I have viewed the party as more monolithic than it actually is.  (Yes, I am aware of the Tea Party vs. the establishment, but if the establishment is Boehner, McConnell, and Ryan, that doesn't do much for me.)

It's of interest, therefore, to see the newfound discussion of inequality - both high-end and low-end, which I regard as distinct phenomena - among Republicans.  Now, when Romney or Ryan does it, I am inclined to dismiss it as just a cynical rhetorical ploy.  I assume that what Romney (like Ryan) wanted to do for the poor, had he graced us with a third presidential campaign, was simply to take away all their benefits, on the theory that this would force them to straighten up and fly right.  And I would assume that both of those individuals are not just unworried by, but fervent supporters of, rising plutocracy.

But then there's Senator Mike Lee.  I really don't know enough about him to comment knowledgeably.  And I note that he is identified with the Tea Party, which I'll admit to not regarding as a recommendation.  But I'm also aware that he recently proposed a tax reform plan that, while surely not perfect - for example, it lost a lot of revenue - offered lots more aid at the bottom and retained a 35 percent rate at the top.

And here are some quotes from Mike Lee, courtesy of a column in today's New York Times by Thomas Edsall:

"Today, the United States is beset by a crisis in inequality .... The underprivileged are trapped in poverty, sometimes for generations ....  At the top of our society, we find political and economic elites increasingly exempted and insulated by law from the rigors of competition and the consequences of their own mistakes."

Joe Stiglitz, I think, would agree.

Likewise, Edsall notes self-styled "reformicons" such as Reihan Salam, who has argued that "a well-designed safety net and high-quality public services are essential parts of making entrepreneurial capitalism work."

I am still extremely skeptical that a post-2016 Republican government (e.g., if they win the White House while keeping both branches of Congress) would follow policies outside of the Romney-Ryan playbook.  But then again, Hillary Clinton, according to Larry Summers, apparently believes that the most important thing, when addressing inequality, is to avoid embracing a "politics of envy."  When you start there, one can kind of guess where you are going to end up.

An interesting fact that became clear to me a couple of years ago, when I wrote an article on Henry Simons, is how free market viewpoints can be consistent with surprisingly egalitarian preferences - at least, when shorn of arrogant and anxious Ayn Randian chest-beating about Success and hatred of those who fail.  Simons, as I discuss in the piece, was a self-proclaimed libertarian and "extreme conservative" - and a close ally of Hayek - who endorsed "drastic progression" in income tax rates because (as I put it) he "viewed concentrated economic and political power as ugly and offensive, and... thought no group, profession, or class should be allowed too much superiority or sway in either realm."

Simons thus took a "horizontal, or even a leveling, vision of both economic and political power. He [did] not like plutocrats rising far above the peasants (even if the latter, as a formal legal matter, are entirely free), any more than he like[d] Washington bureaucrats telling private economic actors what to do."

I further asked: "Is this 'liberal' in the classical sense [and thus conservative in modern terms]? That depends on how one defines the tradition. In any event, however, emotionally no less than intellectually, it is certainly no Ayn Rand or Paul Ryan version of the laissez-faire creed. Simons does not yearn for a world in which the great are permitted to thrive, but for one in which the small do not have anyone too far above them, either politically or economically."

My aim here is not to discuss the merits of Simons' views, but simply to note the existence at one time of a self-styled libertarian, classical liberal, "extreme conservative" viewpoint that could very interestingly mix things up, both politically and ideologically, if it regained any purchase on the right.

Comments on Eugene Steuerle's new book

Today Eugene Steuerle came to the law school for a discussion of his new book, Dead Men Ruling: How to Restore Fiscal Freedom and Rescue Our Future.  I was the designated commentator.

As a long-time admirer of Steuerle, from his work on 1986 tax reform through his writings over the last few decades, I was delighted to see him, and to get to discuss his book.  I am in considerable agreement with his analysis, but more regarding what I called the "treatment" than the "diagnosis."  That is, while we have large areas of agreement regarding how the current path of taxes and spending should change, I didn't view the issue that he calls "fiscal democracy" (relating to the default path of federal taxes and spending from laws on the books) as being as important as defects in our substantive politics.

A pdf version of my Powerpoint slides is available here.

That was the week that wasn't: David Kamin article from cancelled NYU Tax Policy Colloquium

A week ago this past Tuesday, due to the blizzard-that-wasn’t, we DIDN’T hold the second session of our Tax Policy Colloquium, featuring my colleague David Kamin’s paper, In Good Times and Bad: Designing LegislationThat Responds to Fiscal Uncertainty. This was really too bad, albeit an increasingly familiar feature of January colloquium sessions, as we had a good discussion planned and expected a good audience.

As it happens, there is an interesting overlap of coverage – albeit from very different perspectives – as between the Kamin article and Eugene Steuerle’s recently published book, Dead Men Ruling: How to Restore Fiscal Freedom and Rescue Our Future, which Steuerle will be presenting at NYU Law School on Monday, February 9, at 2 pm.  I will be offering commentary on the book at this session, and will post my slides afterwards.

A key background point for both Kamin and Steuerle is that Congress passes laws that affect taxes and spending in future years, and that remain in place indefinitely, barring further legislative action, unless they have expressly been given expiration dates.  This is obviously generally true of tax rules, and it also holds for entitlements programs such as Social Security and Medicare.

Inevitably, conditions change over time.  Thus, even if it is hard to specify fully what "current policy" means as applied to future years, probably some nominal change in application is necessary  just to keep that "it," whatever it is, in some relevant sense the same.

Steuerle's take, which I will address on Monday, at the session and then here on the blog, is that the "dead hand" of the past is crowding out "fiscal democracy" because, for example, Social Security, Medicare, and Medicaid are projected to grow vastly, and indeed (it is expected) unsustainably, relative to the rest of the budget.  Kamin's take, by contrast, is that we should consider trying to put current policy on the intended course via pre-adjustments, without needing to wait for future legislation.  He is not opposed to letting future legislators do as they like, and does not expect to deter them - his aim, rather, is simply to prevent artificial crises emerging because one has steered off course in ways that, at a general level, could have been anticipated.

Income tax rate brackets provide a useful illustration.  The 1970s, by reason of featuring both unindexed rate brackets and high levels of inflation, had substantial bracket creep.  People whose incomes were fixed in real terms kept being pushed into higher marginal rate brackets because their nominal incomes were rising with inflation.  While this was fun for a while for Congress, which could keep enacting tax cuts that really (at least in part) just undid the automatic tax increases from bracket creep, Ronald Reagan in 1980 campaigned in favor of indexing the rate brackets for inflation, which Congress then did in 1981.

Clearly, indexing income tax rate brackets for inflation keeps current year policy more in place for future years than it would be if you let inflation change things.  The only good reason for not indexing would be to change the actual rate pattern over time without having to do it quite so openly.  (This, for example, might be a good political reason for not indexing the $1 million cap on home acquisition indebtedness that generates deductible mortgage interest, if one dislikes the home mortgage interest deduction but is leery of challenging it directly.)

But what about "real" bracket creep?  Over time, and despite recent stagnation below the very top, average income levels across the distribution have been rising in real terms, reflecting the real increase over time in per capita GDP.  So the rate structure is changing all by itself.  With enough growth, at some point the top income tax bracket (39.6%, disregarding various other inputs that can move it around) will be applying to a far higher percentage of taxpayers than the tiny slice subject to it today.  

So what is current or constant policy - to let this happen, or to index the 39.6% bracket for real growth, so that it applies to the same percentage of the population as previously?  The answer is: It depends on what you think of as the policy.  I could imagine two supporters of the current rate structure, both of whom want to keep "current policy" in place, who learn that one of them believes this would involve indexing the rate brackets for real growth, while the other one believes the contrary.

In familiar law and economics lingo, this is an "incomplete contracting" problem.

Anyway, we could further.  Several years ago, Len Burman, Jeff Rohaly, and Robert Shiller wrote a paper, entitled The Rising Tide Tax System: Indexing (at Least Partially) for Changes in Inequality, which Burman presented at our colloquium.  It argues for a system under which changes in measured inequality would automatically lead to tax rate changes - for example, to higher tax rates at the top, if high-end inequality kept increasing.  This keeps current policy in place if one defines it in some ways, but not if one defines it in other ways.

You could go even more general in that, in defining current policy.  Suppose our aim is to achieve a particular tradeoff between the efficiency costs of income taxation and the social welfare benefits that one attributes to reducing inequality.  Labor supply elasticity is among the inputs to this calculus.  So you could imagine in theory - though surely not in practice - providing that the rate structure will automatically change to reflect new and more current information about labor supply elasticity and/or any other input into the process.

Kamin, of course, does not propose anything like that - his focus is far more practical.  But consider Social Security.  Its benefits are indexed to inflation, and its benefit formula for age cohorts that newly reach age 60 is indexed for changes in wage levels.  It also has a long-term trigger mechanism that could apply automatically in the future: benefits may get curtailed if the Social Security Trust Fund is deemed to have run out.  One could imagine putting all sorts of other automatic adjustments into the system - e.g., indexing something or other for life expectancy changes, measures of aggregate retirement saving by the members of a given age cohort, etc.

The Kamin paper discusses, at both a general and a program-specific level, how one might want to design automatic adjustments, triggers, alarm bells, etc., generally with the aim of benignly updating current policy without creating needless policy drift that Congress would have to address.  (He rejects the idea that we should want to set off random policy drift, even though some might laud it as a way of refocusing Congress's attention.)

In general, the greater the degree of preexisting policy consensus, the easier this may be to do.  But the proponents of given legislation may want to do all they can to keep current policy, on course without requiring further legislative action, even if the other side dislikes the whole policy.  Nothing wrong with that, I would say.  Once one recognizes that, say, there is no inherent reason not to index for inflation (and that nominal fixity is not a meaningful or attractive baseline), the rest is presumably up for grabs, or fair game, or whichever standard expression one happens to like best here. 

NYU Tax Policy Colloquium, week 3: Kimberly Blanchard

Yesterday, we had our Week 3 session at the Colloquium, featuring Kim Blanchard's 's The Tax Significance of Legal Personality.  This came after we were forced to cancel our Week 2 session, concerning David Kamin's In Good Times and Bad: Designing Legislation That Responds to FiscalUncertainty.  The Kamin session was a casualty of last week's NYC Blizzard That Wasn't, which led to NYU's being closed for the day.  I will blog here about that paper shortly.

Blanchard is at Weil Gotshal, and is a prominent leader in the NYC tax bar. We frequently have had practitioner papers at the colloquium, although not for the last couple of years, and it was good to get back to this practice. 

I see the paper as making both a narrow argument and a broad argument.

The narrow argument is that the question of whether a legal entity, such as a corporation or partnership, is treated by a given country as having “legal personality” should not affect its tax treatment.  (While the U.S. doesn’t even have a “legal personality” concept to speak of, in many countries this concept not only plays a general doctrinal role, but may influence the resolution of various tax issues – e.g., whether the entity is “opaque” and taxed at the entity level, or “transparent” with income tax being imposed directly on its owners.)

The paper argues that legal personality, as used in other countries, tends either to be meaningless and circular, or to focus on formal legal attributes, such as the entity’s capacity to sue or be sued, that should not affect the tax analysis.  This struck me as a highly persuasive argument, subject only to the question of what people who are more familiar than I am with non-U.S. legal and tax systems would say in response.

The broad argument involves what one might call the ‘enry ‘iggins issue.

In My Fair Lady, Henry Higgins (known to posterity as ‘enry ‘iggins) has a show-stopping song in which he asks: “Why can’t a woman be more like a man?”  Whereas the paper asks: “Why can’t a European, Canadian, etc. be more like an American?”

In My Fair Lady, of course, the joke is that the woman (Eliza Doolittle) whom he is castigating as crazy, irrational, upsetting, etc., is in fact much saner, wiser, kinder, more mature, more considerate, more tolerant, and more generous than he is.

The paper argues that U.S. tax law is generally better than that of the other countries surveyed.  Better, in that it focuses more on economic substance and less on formalistic legal details.  This, the paper argues, makes U.S. tax law not just less manipulable by sophisticated taxpayers, but also more predictable.  For example, if a foreign court is basing the availability of treaty benefits on an empty formal concept, who knows how they will come out.  Whereas, in the U.S. setting, even if line-drawing issues create uncertainty, at least we know what the issues are.

As a fellow American, who am I to judge whether the critique is fairer of foreign tax systems than ‘enry’s would-be critique of Eliza.  But a number of U.S. tax practitioners do indeed report that, when discussing foreign tax law in transactional settings, they frequently are told that one can easily get away things that, in the U.S., would be far more dubious because our rules make some effort to look at underlying economic substance.

The paper also argues that the U.S. check-the-box rules have been over-blamed for “hybridity” in U.S. vs. foreign entity classification.  (Hybridity permits, for example, a U.S. company to strip income out of a French or German affiliate into a tax haven without encountering U.S. tax liability under subpart F.)  I agree with it that the conceptual causes of hybridity lie deeper than just our adopting check-the-box, but its adoption – with transparent single-owner entities being wholly disregarded (to non-international tax experts: sorry for the jargon here) – was indeed empirically a key trigger for the explosion of post-1997 foreign tax planning by U.S. companies.  Whether this mainly hurt countries such as France or Germany that were having their income stripped out, or the U.S. itself, if more taxable income first traveled from here to those countries now that it could be trans-shipped yet further, remains an open empirical question.

In addition, the paper argues that a key reason why the U.S., in deciding which entities should be treated as tax-opaque, pays less heed than most peer countries to commercial law factors, is that we have federal income tax law and state-level commercial law.  (For example, one incorporates under the law of a state, not any sort of federal incorporation statute.)  While this is plausible, my own explanatory account would focus more on the particular history of Treasury and IRS efforts to curb effective electivity with respect to entity classification, which collapsed under its own weight due to some early mistakes (leading ultimately to check-the-box) and which in 1987 led to a brand-new approach, requiring publicly traded partnerships to be treated as corporations.

In response to the paper’s main subject matter of opaque versus transparent, I agree that using formal concepts of “legal personality” to distinguish between entities that should be taxed at the entity level, like U.S. C corporations, or at the owner level, like U.S. partnerships, is likely to be unhelpful.  But I’d limit any defense of current U.S. law by making the observation that one could argue we get it close to backwards, in deciding which entities should be taxed each way.

There are several reasons why it matters which way one does things.  Often the key point at issue, under current U.S. law, is that corporate income is at least theoretically double-taxed.  This makes little direct sense, although one could view it as responding indirectly to the failure of the entity-level tax, or as not worth eliminating in mid-stream given transition and revenue issues.

But leaving aside double taxation (which is not a necessary consequences of imposing an entity-level tax), it’s generally preferable to levy taxes at the owner level, not the entity level, if one can do that well enough.  In cases where an owner-level tax is sufficiently feasible, the main thing one achieves by imposing tax at the entity level is (a) applying the wrong marginal tax rates, relative to those of the owners, and (b) making the taxpayer’s residence more tax-elastic.  This can reduce both efficiency, by distorting entity choice, and distributional objectives, by creating failures to impose the desired marginal tax rate (or any positive tax rate).

So, the basic way I’d divide up the baby is by using entity-level taxation only in circumstances where it is too hard to make owner-level taxation work properly.

When is it relatively easy to make owner-level taxation work properly?  I would say, (a) when ownership interests in entities are publicly traded, causing them to have observable market prices, and (b) when all of the ownership interests are pro rata, rather than there being a complex deal in which there are multiple classes of equity, or some hold more of an upside or downside for X asset or activity than Y asset or activity, and so forth.

This offers support for applying owner-level taxation to publicly-traded entities – the exact opposite of the U.S. approach, under which public trading means that you are taxed as a C corporation.  Obviously, there are other issues here (e.g., Reuven Avi-Yonah argues for taxation at the entity level given managerial / governance issues).  But among those who have argued for replacing the entity-level corporate tax with an owner-level mark to market tax are Eric Toder & Alan Viard, Joe Bankman, Joe Dodge, Michael Knoll, and Victor Thuronyi.  Plus, David Miller would impose mark-to-market taxation more broadly and use some of the revenues to lower greatly the entity-level corporate rate.  (I hope I am not leaving anyone out.)  So right or wrong in the end, the view I suggest here is surely not an eccentric one.

Next, pro rata versus non-pro rata deals.  Even without public trading, if an entity’s owners have a pro rata deal, it may be pretty simple to do entity-level income computations and then flow everything through.  So why bother with the entity-level tax, which may impose the wrong marginal tax rates, unless for some reason it is hard to find and/or tax all of the owners.  But as soon as you have a non-pro rata deal, and a gap between taxable income and economic income, you will face a giant mess in trying to get the owner-level allocation right.  In such cases, there is no good answer to the question of whom a tax item really pertains to.

U.S. partnership tax law provides for special allocations of items to particular taxpayers.  This represents an effort to get the computation logically “right” under crazy, counterfactual assumptions (e.g., that it’s as if the entity was being liquidated today, with taxable income proving to equal economic income, and with eyes closed to, say, the use of nonrecourse financing that may transfer downside risk from owners to lenders).  It has led U.S. partnership tax law into a horrendous morass of excess complexity and widespread noncompliance (I am told), the latter from a combination of less sophisticated taxpayers throwing up their hands and more sophisticated ones relying on audacious legal opinions.  And its apparent aim of restricting manipulability has certainly not fared well.

Suppose one got rid of special allocations, requiring either pro rata tax allocation (as I gather some countries do) or entity-level imposition of the tax plus an owner-level integration method.  Given that there actually are non-pro rata economic deals, this would still get things wrong, and I certainly can’t say with any confidence or personal knowledge that the end result would be less manipulable than U.S. partnership tax law (although the fact that the devil I know is such a mess almost inclines me to believe it might be).

Anyway, put these two together, and you could say that current U.S. tax law gets it close to backwards.  Suppose we had owner-level mark-to-market taxation of publicly traded entities, owner-level flow-through taxation of “simple” entities with sufficiently pro rata deals, and integrated entity-level taxation of “complex” entities, such as those with non-pro rata deals.  That would be largely the reverse of current U.S. law (although not entirely, since we do apply owner-level flow-through taxation both to simple partnerships, and to electing S corporations, which must have only one class of stock).  So, even if we are wise to ignore “legal personality” as a classification factor, it is not clear how much better we are actually doing. 

Obama Administration international tax reform proposals - part 2: 14% one-time transition tax on previously untaxed foreign income

My prior post discussed the Obama Administration's proposal, in its 2016 budget, to replace the current US tax regime for US companies' foreign earnings (involving deferral, foreign tax credits, and nominal imposition of the full domestic rate).  The proposal would replace all this with a 19% "minimum tax" on foreign earnings - in effect, a worldwide system without deferral, but with something rather like nonrefundable, 85% per-country foreign tax credits.

Whatever else the proposal would or wouldn't do, it would prospectively eliminate the tax on repatriating foreign earnings.  US companies would now be able to bring home as much of their foreign earnings as they liked, without thereby incurring further US tax liability.  But since the 19% minimum tax would only apply to new earnings - not to earnings generated in the past that were benefiting from deferral - it would confer a gigantic windfall gain on US companies if it were enacted without a one-time transitional adjustment for elimination of the previously deferred tax.

The foreign earnings that would benefit from the windfall gain, absent an adjustment, are currently believed to exceed $2 trillion.  Ignoring foreign tax credits, the deferred tax at the current 35% corporate rate would currently stand at $700 billion, and this amount would in effect be growing annually at the rate by which those foreign earnings were growing.

Despite the fact that companies may not anticipate ever paying anything close to the full amount (i.e., $700 billion minus foreign tax credits), it makes sense not to just give the revenue away.  Among other adverse effects, companies' reluctance to repatriate would be even greater than it already is if they figured out the repatriation tax might simply go away some day without any transitional adjustment.

The Administration has therefore proposed a one-time, 14% transition tax on previously untaxed foreign income.  A foreign tax credit would be allowed for "the amount of foreign taxes associated with such earnings multiplied by the ratio of the one-time tax rate to the maximum US corporate tax rate for 2015."  To illustrate what that means, note that a 14% one-time transition tax rate is 40% of the current maximum US corporate tax rate of 35%.  This would result in 40 cents of transition tax reduction for every dollar of associated foreign tax credits.

There is big money here.  For example, the proposal reportedly would cost such companies as Apple, Microsoft, Pfizer, and probably also General Electric, more than $10 billion each.  Somehow I doubt that the companies would much like this, and they do not entirely lack friends on Capital Hill.  Thus, while Congressman Camp also had a transition tax (at a lower rate) in his international tax reform proposal, the political prospects for enactment would seem to depend on Congress's being sufficiently desperate for the money, such as to offset other revenue losses in a corporate or international tax reform plan that lowered corporate rates in addition to eliminating the repatriation tax.

The Administration wants to use the transition tax revenues as a source of increased funding for highway and other infrastructure projects.  In my view, the US badly needs more such spending.  Of course, money is fungible, and purported earmarking can therefore lack any bottom-line substantive significance unless political actors actually treat it as meaningful (which here I suppose they might).  But the linkage is presumably meant, not just to associate the proposal with public support for higher infrastructure spending, but also to stand as an alternative to the revenues simply being used to fund other business tax cuts.

Obama Administration international tax reform proposals - part 1: 19% minimum tax

Today the Obama Administration released a Greenbook explanation of the revenue proposals in its 2016 budget.  As has usually been the case with Presidential budgets for decades, the proposals are presumably DOA so far as their short-term enactment prospects are concerned.  But they may enter The Conversation (so to speak) as items that might be taken off the shelf at some time in the future, or at the least may influence future thinking by policymakers.

The Greenbook as a whole is more than 300 single-spaced pages long.  So I will just focus on two items that are attracting a lot of attention in the area of international taxation.  The first is the 19% minimum tax, while the second is the one-time (or transitional) 14% tax on previously untaxed foreign earnings.

Both proposals are significant, and in my view would significantly improve current law.  If I were the Legislative Tax Czar for five minutes (counting on gridlock to give my decisions a chance to survive for a while), I might significantly modify the first proposal, but I would definitely adopt the second one.  I'll discuss the 19% minimum tax in this blog post, and the one-time 14% tax in a follow-up

19% Minimum Tax - The first proposal is to repeal the current US international tax rule under which foreign earnings of US companies through their foreign subsidiaries ("CFCs") (a) generally benefit from deferral, and thus do not generate any US tax liability for the US parent until repatriation occurs (e.g.,via an actual or deemed dividend), but (b) are indeed taxable upon repatriation, subject to the allowance of foreign tax credits.  The Administration would make US companies' repatriations of their foreign earnings newly tax-free.  But, in place of the current deferral regime, it would impose a 19% "minimum tax" on a US parent's foreign earnings through its foreign subsidiaries (or its foreign branches).

The minimum tax is a bit tricky to explain, especially after spending just a short time with the inevitably terse Greenbook explanation.  But let's do it in stages.  Please note: the steps below are NOT computational steps that a US taxpayer would actually take - rather, they are meant to help one (including me) understand what the proposal does.

Step 1: Suppose initially that the US simply repealed deferral and applied a 19% tax rate to all foreign source income (FSI) of US companies, without allowing foreign tax credits.  A US company, Engulf and Devour, Inc. ("ED-Co") earns $100 in the Caymans on which it pays no foreign tax, and $100 in the UK on which it pays $14 of UK tax (I pick this amount since the UK has a 21% corporate tax rate, but also offers tax benefits such as its "patent box" regime that may reduce the amount of tax a given company owes).   Since the UK taxes reduce earnings, ED-Co would have $186 of FSI, and at a 19% rate would owe $35.34 of US tax at the 19% rate,

Step 2: Ah, but the proposal does indeed do something rather like allowing foreign tax credits.  For now, suppose that what it did was literally to allow them, subject (as under present law)  to an overall foreign tax credit limitation that prevented one from reducing one's US tax liability on FSI to below zero (as would happen under some facts if foreign tax credits were refundable).  Now the result would be that ED-Co has $200 of FSI (since the UK taxes paid are creditable rather than deductible).  On this, its US tax liability would be $24 (i.e., $38 pre-credit liability at the 19% rate, minus $14 of credits).

Step 3: As I have been pointing out in my writing about international tax policy, foreign tax credits without deferral can induce the companies that are incurring them to have zero cost-consciousness with respect to their foreign tax liabilities.  For example, ED-Co, under the hypothetical proposal that I describe in Step 2, would pay overall taxes of $38 ($14 to the UK and $24 to the US).  It might figure: why not make life simpler by getting rid of the tax planning games that permit it to pretend it is earning $100 in the Caymans.  Say it decides to shift that entire $100 to the UK, where the full 21% rate will apply.  (After all, why bother looking for further UK tax benefits when it doesn't affect the bottom line.)  Suppose that ED-Co also allows its UK tax liability on the $100 that was already there to grow from $14 to $17, once again to economize on tax planning costs.  Now, by express hypothesis, ED-Co has $200 of pretax earnings in the UK, on which it is paying $38 of UK tax,  So it owes the US $38 pre-credit, minus $38 of foreign tax credits, with the result that it actually pays the US zero.

In this scenario, what has the 19% minimum tax accomplished?  Not much, from a US standpoint.  We are still getting zero in tax from ED-Co, but it is now paying foreign taxes of $38 instead of $14.  So its shareholders, many of whom may be American, are effectively $24 poorer, and the US Treasury hasn't gotten anything.  Conclusion: foreign tax credits are intolerably generous, from a US national welfare standpoint, once deferral is no longer blunting US companies' sensitivity to their foreign tax costs.  Hence, a minimum tax proponent may want to think about modifying the proposal to prevent companies from being wholly indifferent to their foreign tax costs.  The Administration evidently understood this concern, so it did something somewhat different than this to preserve non-zero foreign tax sensitivity on the part of US companies such as ED-Co.

Step 4: Suppose one made foreign taxes only 85% creditable, so that each dollar of foreign tax paid reduced one's US tax liability by only 85 cents.  Then each dollar of added foreign taxes that ED-Co paid would cost it 15 cents,after considering the US tax consequences.  Accordingly, ED-Co would not reduce its foreign tax planning in the manner that I described under Step 3, except insofar as the benefits to it from such reduction exceeded the marginal US tax cost.  But doing it this way might raise treaty concerns, since our bilateral tax treaties with dozens of foreign countries say that we must generally either exempt or offer foreign tax credits to the FSI earned by our companies in the other country.

Step 5: In addition to being potentially controversial on treaty grounds, the "85% credit" idea that I described in Step 4 might also be disliked by US policymakers given its susceptibility to cross-crediting.  Suppose that another company, NED-Co (Northern Engulf & Devour, Inc.) earned $100 in Assyria, on which it paid $45 of foreign tax, and $100 in Babylonia, on which it paid zero foreign tax.  Pairing the high-tax country with the low-tax country would enable NED-Co to pay zero to the US under my hypothetical 85% plan, since 85% of $45 is $38.25 (sufficient to wipe out the $38 of pre-credit US liability at a 19% rate on $200 of FSI).  But arguably NED-Co "should" have paid $19 on its untaxed Babylonian income.  If one takes this view, one may want to apply per-country foreign tax credit limits (whether it's a full credit or an 85% credit).  With per-country limits, NED-Co would pay zero US tax on its Assyrian income, but it would pay $19 on its Babylonian income.

Step 6: At last we are getting within hailing distance of the actual Administration proposal.  OK, it is a minimum tax that is applied on a per-country basis.  Let's go back to ED-Co, in the scenario where it earned $100 in the Caymans on which it paid zero tax, and $100 in the UK on which it paid $14 of tax.  With 85% credits and a per-country limitation on credits, ED-Co would pay $19 of US tax on its Caymans income, and $7.10 of US tax on its UK income.  (This comes from taking $19 of pre-credit US liability on the UK income, and then subtracting a foreign tax credit equal to $11.90, i.e., 85% of $14).  But again, this might run into treaty problems with the UK, as we are neither exempting nor fully (or even quite close-to-fully) crediting ED-Co's UK taxes.

Step 7: Instead of providing that the 19% minimum tax would be offset by an 85% per-country foreign tax credit, the Administration proposal says that the US tax due on FSI equals "19 percent less 85 percent of the per-country foreign effective tax rate."  The latter amount - the per-country foreign effective tax rate - is computed by looking 60 months back at the end of each tax year, and figuring out just how much tax the US company actually paid in the country at issue, as a percentage of the income that it earned in that country during that period.

To make things really simple, let's suppose that ED-Co always pays tax at the UK at a 14% annual effective rate.  (You can see the point of not giving full credit for the 21% UK statutory rate, given the concessions such as patent boxes that may often prevent it from fully applying.)  Then we indeed get the above result: Ed-Co pays $7.10 of US tax on its $100 of pre-tax UK income.  And it still of course pays $19 of US tax on its $100 of Caymans income.

Suppose ED-Co also earned $100 in a higher-tax country, such as my fictional Assyria.  So long as a US company is paying at least 22.35% (as an effective rate) in a given country, it owes zero US tax with respect to its earnings in that country. (85% of roughly 22.35% equals 19%.)  Assyria in my example, at least as applied to NED-Co, is way above that figure.  So there is no US tax on the Assyrian income, but also no US cross-crediting-equivalent benefits from paying so much tax there.

I will leave it to experts on our bilateral tax treaties to assess whether there is any plausible treaty challenge to the proposed mechanism for implementing something that, in its bottom line effects, is rather like offering 85% foreign tax credits with per-country limitations.

A few further details: (1) Under the per-country approach, how does one decide where a US company's FSI actually arose?  So far as I understand it, the proposal does this by determining the country in which each CFC is resident - under actual foreign rules, nor our own.  Companies that are resident nowhere, under the relevant foreign countries' residence rules, get hit with the full 19% rate.  There are a bunch of further details to handle multi-country residents, various tax planning games such as those using  various"hybrid" structures, etc.

(2) In at least one respect, the proposal is more generous to US companies than the explanation so far might suggest.  It offers an allowance for corporate equity (ACE) to the extent that one actually has equity in a given country invested in active assets in that country.  Thus, in all of my UK examples, suppose that ED-Co had $500 of equity in its UK subsidiary, and that the subsidiary had $300 of "active" assets, such as factories, in the UK.  For purposes of determining the amount of income that is subject to the 19% minimum tax, ED-Co would be permitted to deduct a risk-free return on that $300.  Suppose the risk-free rate of return was 2%.  Then Ed-Co's UK income, for purposes of the 19% minimum tax, would be reduced by $6 to $94.

(3) US companies would probably pay more taxes on royalties that they earn abroad under the proposal than they do under present law.  At present, royalty inflows are in theory fully taxable at the 35% US corporate rate.  But in fact they often generate very little if any US tax liability, because companies can take steps to shelter their royalty income from US tax via cross-crediting.  This would no longer happen under the proposal, so the present law full US tax rate on such income (35%) would now actually apply.  [I ignore for purposes of this discussion possible changes to the general US statutory rate.]

OK, what do I think of all this?  I am glad to see deferral eliminated and the foreign tax credit in effect scaled back.  So it is in the ballpark of what I'd like to see, although I worry about the workability of the per-country rules.

It is also generally in the ballpark of the the "Camp proposals," made when Dave Camp was the Ways and Means chair.  On the face of things, he set forth the possible design of a "territorial" system which contained anti-tax haven rules, while this is a "worldwide" system, albeit with a lower tax rate for FSI than for domestic source income, and with something like 85% per-country foreign tax credits.  But the difference in substance may be a lot less than the difference in form.  For example, both approaches exempt FSI earned in countries where the effective rate is at least 22.35%, and both aim to impose US tax liability on FSI that shows up in tax havens.

Does this mean that the Administration proposal might actually get a hearing from Congressional Republicans?  I am skeptical, given not only the state of tax and budgetary politics in Washington but also the fact that remaining Republican Congressional leaders did not appear to be wildly enthused about the Camp proposals.

Ronald Coase tribute

As I am a former University of Chicago Law School professor, who overlapped with Ronald Coase during my eight-year stay there, I was asked a couple of years ago if I would like to join a group of people who would be writing short tributes to Coase, for a volume to be published by the U of C Law School, via the Coase-Sandor Institute for Law and Economics.  Now that the volume has come out, here is my little snippet.

The Coase Theorem and the Two Fundamental Theorems of Welfare Economics

                                                                                                Daniel Shaviro*

Both the Coase Theorem and the two Fundamental Theorems of Welfare Economics are well-known.  Less widely recognized, however, is their close intellectual relationship, which helps us to understand the nature of one of Ronald Coase’s main contributions.

The First Fundamental Theorem of Welfare Economics holds that a competitive equilibrium, where supply equals demand, maximizes social efficiency.[1]  The Second Fundamental Theorem of Welfare Economics holds that society can attain any efficient outcome by suitably redistributing resources among individuals and allowing them to freely trade.[2]

Two different ways of stating the Coase Theorem help to make clear its relationship to each of these propositions.  First, suppose we state it as follows: “When there are well-defined property rights and costless bargaining, the negotiations between the party creating the externality and the party affected by the externality can bring about the socially optimal market quantity.”[3]  This is basically the First Fundamental Theorem, supplemented by the point that all a market requires is well-defined property rights that can cheaply be transferred.

Now suppose we state it as follows: “The efficient solution to an externality does not depend on which party is assigned the property rights, so long as someone is assigned those rights.”[4]  This is basically the Second Fundamental Theorem, again with the added point that distributable “resources” can include property rights with respect to the creation of externalities.

The two Fundamental Theorems of Welfare Economics predate the Coase Theorem by many decades,[5] and surely were well-known to the “room full of skeptical Chicago economists – including future Nobel laureates Milton Friedman and George Stigler”[6] who debated it with Coase on that famous evening when he first presented his reasoning.  What, then, was actually novel about the Coase Theorem?

The answer, I believe, lies in its extending the Welfare Theorems’ range of application.  Rather than applying just to readily observable markets for consumer goods in the field of organized economic production, they can apply wherever their basic underlying assumptions hold.[7]  Coase understood that the right either to engage in or to block polluting activity could be just like ownership of a widget.  And a “market” could be understood as any setting where people have well-defined property rights that they can transfer through low-cost transactions.[8]

Coase was thus a prominent early mover in one of the major developments of the last fifty-odd years in law and related social sciences: the steady expansion of the realm of neoclassical economic reasoning. To be sure, even before Coase, pollution was well-understood to involve “economic activity” that called for an “economic analysis” of government policy responses.  Later decades would see economists ranging considerably further out of their ancestral realm of studying organized economic production.  Consider, for example, Gary Becker’s Treatise on the Family,[9] applying neoclassical economic reasoning to study of the household, or Richard Posner’s The Economics of Justice,[10] taking “an economic approach to issues – including the meaning of justice, the origin of the state, primitive law, retribution, the right of privacy, defamation, racial discrimination, and affirmative action – that are not generally considered economic.”[11]  But Coase was an early mover, important not just for how he advanced the economic analysis of externalities, but also as a pioneer and harbinger of economic reasoning’s broader future.

---

* Wayne Perry Professor of Taxation, NYU Law School.

[1] See, e.g., Jonathan Gruber, Public Finance and Public Policy 50 (4^th ed. 2013).

[2] Id. at 53.

[3] Id. at 130.

[4] Id. at 131.

[5] They were first set forth by Pareto in 1894.  See John S. Chipman, The Fundamental Theorems of Welfare Economics (2002), available on-line at http://www.econ.umn.edu/~jchipman/econ4960/ftwe2_all.pdf .

[6] Sarah Galer, Ronald Coase Still Stirs Debate at 101 (2012), available on-line at http://www.uchicago.edu/features/20120423_coase/.

[7] For example, “[t]o establish the First Theorem, we need to sketch a general equilibrium model of an economy.  Assume all individuals are price takers: none is big enough, or motivated enough, to act like a monopolist.  Assume each individual chooses his consumption bundle to maximize his utility, subject to his budget constraint.  Assume each firm chooses its production vector, or input-output vector, to maximize its profits subject to some production constraint.  Note the presumption of [rationally pursued] self-interest.  An individual cares only about his own utility, which depends on his own consumption.  A firm cares only about its profits.”  Allan M. Feldman, Welfare Economics, in John Eatwell, Murray Milgate, and Peter Newman (eds.), The New Palgrave Dictionary of Economics, 4: 889 (1987).

[8] Coase’s notion of transaction cost can be viewed as underlying the existence of a well-functioning market.

[9] Gary S. Becker, A Treatise on the Family (1981).

[10] Richard A. Posner, The Economics of Justice (1981).

[11] Id. at 1.

NYU Tax Policy Colloquium - another cancellation due to winter weather!

Tomorrow's Tax Policy Colloquium sessions, featuring my colleague David Kamin's paper "In Good Times and Bad: Designing Legislation That Responds to Fiscal Uncertainty," has been cancelled due to the blizzard that is already hitting NYC and thereabouts.

We also had a session cancelled last year due to a winter storm, and a second session was hampered because the author understandably wanted to head back to the airport early - in the middle of the 4 pm session - before yet another another storm might have trapped her in NYC for up to 48 hours.  And we also had a cancellation due to the weather a couple of years before that.

In the first 15-plus years of the NYU Tax Policy Colloquium, we not only never had a weather-based cancellation, but it was never even close.  There may have been about two storms during that whole period that would have been a problem had they hit on the wrong day of the week.

Then there are the two hurricanes we had in NYC in recent years, one of which knocked out electrical power in downtown Manhattan for 6 whole days.  The other one might have done similar damage, except that luckily it peaked at low tide, rather than high tide.

Anecdotal though this may be, I certainly get the impression that climate change is starting to have a personal impact here.

NYU Tax Policy Colloquium, week 1: paper by Brigitte Madrian

Yesterday we had the first session of the 2015 NYU Tax Policy Colloquium.  This is the 20^th time (in 20 straight spring semesters) that I have done the colloquium.  This year, I am happy to be co-leading it with Alan Viard.  (The full roster of people I’ve co-led it with in the past, ranked by how many weeks or years they’ve done it, except that the last two are tied, is David Bradford, Alan Auerbach, Mihir Desai, Bill Gale, Rosanne Altshuler, and Kevin Hassett.)

One sign of institutional health, I suppose, is that we can’t accommodate all of the students who want to enroll.  Luckily from an overall institutional standpoint, the law school ties my hands so that I can’t act in accordance with what would otherwise be my revealed preference of just letting everyone in.  (The problem is that the feel of the class changes for the worse if the class size grows too great.)

Although lots of other tax policy colloquia around the country have followed in our wake – maybe 20 or more, although they may not all be operating at present or in a given year – we still have a unique format, in which the author doesn’t present the paper, but rather a lead commentator focuses the conversation on a couple of main topics, one at a time.  We consult with each other first, then with the author, and then we run the show at 4 pm.

Not having the author present is admittedly a tradeoff.  I personally find the conventional twenty minute presentation upfront to be boring – including, and indeed especially, when I am the author and presenter at someone else’s session – if I have already read the paper carefully (or wrote it).  And not having the presentation induces the audience either to (1) invest more in reading it in advance or (2) not to come.  The key, for it to be a positive strategy, is that there must be enough people out there who choose option (1) rather than option (2).

For me, the tiebreaker against the author presentation is that, if you do that and then follow it up with your own commentary, the audience is just going to be sitting around forever before it gets to participate.  I don’t find that to be either fun or interesting, whether I’m in the audience or at the front.  So in my view, not shared by everyone who runs a tax policy colloquium, skipping the author presentation verges on being a necessary cost of leading and initially directing the discussion, rather than just asking for audience questions.

Anyway, on to yesterday’s session.  The author was Brigitte Madrian, presenting “Does Front-Loading Taxation Increase Savings?  Evidence from Roth 401(k) Introductions.”

While I thought it was a really good session, I don’t comment here about the content of a given session, because that would be inconsistent with our policy that they are off the record.  So here are some thoughts about the paper and the issues it raises, mainly based on expanding my notes for the session (I was in the lead this week).

The paper reports on the findings of a study of 11 firms that initially had just “pre-tax” retirement saving plans under Internal Revenue Code section 401(k), but then added Roth options.

To illustrate how these two types of section 401(k) plans work, suppose that my marginal tax rate is 35 percent at all times.  Suppose I contribute $100 to a pre-tax plan, and withdraw it after retirement once the money has doubled to $200.  I get to deduct the $100 contribution, generating a $35 reduction in my current year tax liability.  Thus, the cost to me is only $65.  Then, when I withdraw the money, it is taxable at 35%, so I end up with $130.

Under Roth, my contributions are not deductible, but the withdrawals are not taxable.  Thus, it turns out to be exactly identical – again, assuming my marginal tax rate is the same at all times, and ignoring various statutory differences between the two types of plan – so long as my nominal contribution – matching my “true” after-tax cost under the pre-tax option - is $65.  Once again, I have $65 less in my pocket up front, but end up with $130 in retirement once the money has doubled.

Suppose that, under a switch to Roth, I still nominally contributed $100, and thus ended up with $200.  I would then have changed the amount of consumption that I am actually from the present to the future.  Absent more to the story, it would violate consistent rational choice for me to contribute the same nominal $100 under pre-tax as under Roth, given that, in the rational choice model, I am aiming for a particular consumption flow, and wouldn’t change this merely due to form if my true opportunity set was the same in both cases.

Anyway, the paper finds evidence that people didn’t reduce their nominal contributions by reason of the firms’ adding Roth to pre-tax employer retirement plans.  The apparent violation of consistent rational choice (unless otherwise explainable) might come as a surprise if not for twenty years of excellent empirical research into retirement savings behavior, much of it by Madrian herself, that finds even greater violations of consistent rational choice regarding even simpler decisions, such as whether or not to save for retirement.  (I discuss this evidence and its broader implications in a recent paper that you can find here.)

I proffered two discussion topics: the paper’s empirical analysis, and the broader policy implications.

1) Empirics.

The paper is based on studies of 11 firms that added a Roth option between 2006 and 2010.  As one would expect given the skill of the researchers, it is normalized for age, salary level, and gender.  It compares people who were hired just before the Roth option was added, to those who were hired 12 months later (and thus at the same time of year) when the Roth option was available.

Suppose marginal tax rates are entirely fixed, even for the future, will be the same for each individual all times, and that there are no relevant differences between the actually available pre-tax and Roth style 401(k) plans.  Then any individual who contributes $X under pre-tax should contribute $X(1 – t) under Roth, where t is that individual’s marginal tax rate.

To know how much employee contributions should drop when a Roth option is made available, we have to know how much they utilize it.  E.g., suppose everyone’s marginal tax rate is 35%, and that given everyone’s hypothesized complete indifference they are simply told which type of plan they were in.  Then contributions should drop by 35% if everyone is put in Roth, 17.5% if it’s half-Roth and half-pretax, and zero if no one uses Roth.

The paper shows that only about 15% of the money that employees were contributing ended up in Roth plans after the option was introduced.  Hence, if we posit that everyone has a marginal tax rate at all times of 33.3%, the expected drop in pretax contributions would only be 5%.

This alone might be small enough for one to worry about losing it amid the statistical noise.  (The authors had only limited data, and published to get the ball rolling in terms of academic study of the issue – they not only acknowledge the need for further research, but very likely will be doing some of that further research themselves.)

Now let’s add the fact that pretax and Roth plans are not entirely identical in practice.  For example, Roth is better if you expect your tax rate at retirement to be higher than it is at the time of contribution.  Optionality – pretax versus Roth – inherently makes retirement saving through the employer plans more attractive (although admittedly this might lead not just to increased true saving via substitution effects, but also reduced true saving via income effects).

Anyway, the bottom line is that one can’t be sure the “rational adjustment” effect would actually show up here in the data.  So while I believe the result, this reflects my priors, as much or more than what we learn from the study.

One bit in support of independently crediting the paper’s finding was that pretax contribution rates did not discernibly differ as between firms which had different levels of Roth utilization.  I would guess the authors’ reason for not highlighting this potentially very helpful point more (although they do mention it) was that the amount of data involved was admittedly limited.

They did apparently find, although not reported in this paper, that peculiar behavior around 2008, when the financial crisis hit and (obviously) may have strongly affected people’s thinking, does not appear to have a measurable effect.

2) Policy implications

(a) Zero long-term budgetary cost – or zero “unintended” long-term budgetary cost? – The paper concludes: “These results raise the possibility that governments may be able to increase after-tax private savings while holding the present value of taxes collected roughly constant by making savings non-deductible up front but tax exempt in retirement, rather than vice versa.”

Just as a quibble, if people make (in real terms) more use of Roth than pre-tax 401(k) plans, because their fixed nominal contributions are equivalent to making what are actually greater tax-adjusted contributions, implies that there might be a positive long-term budgetary cost.  To be sure, this is an “intended” budgetary effect if we think of policymakers as wanting to encourage greater utilization of the retirement savings provisions.

(b) Pre-tax vs. Roth if Congress uses time-limited budget windows. – Because Congress tends to use short-term, rather than infinite horizon, budget windows, Roth saving “looks” cheaper than pre-tax in budgetary terms even if the true  long-term cost is the same.  Both Congress and particular legislators, making supposedly budget-neutral proposals, have not been shy about exploiting this point to engage in bogus “deficit reduction” or “budget neutrality.”  So it is plausible that, even if using Roth in lieu of pretax increased private saving, it might induce increased government dissaving.

(c) Other pre-tax versus Roth issues – The tax benefits for retirement saving under Roth are less truly pre-committed than those under pre-tax.  We can be confident that in, say, 2030, Congress won’t increase particular individuals’ taxes because they got deductions in 2015 from using pre-tax retirement savings plans.  But Roth exemption would effectively remain on the table in 2015 even if Congress didn’t explicitly and directly renege.  An example would be partly or fully replacing the income tax with a VAT or an X-tax (i.e., an individual-level progressive consumption tax that effectively combines a VAT with low-wage subsidies).

This difference could be either good or bad from the standpoint of evaluating Roth.  It makes the tax benefit less credible, but leaves Congress with more discretion.  (Those are basically two different ways, with seemingly opposite normative implications, of saying the same thing.)

One thing I don’t like about Roth style exemption is that it can result in effectively exempting extraordinary returns that people have a limited opportunity to generate.  E.g., Mark Zuckerberg would have done a whole lot better with Roth than pre-tax treatment for his initial investment in Facebook.  This is a real issue when you recall the evidence suggesting that, say, Romney (along with lots of other financial sector insiders) appears to have played games with the IRA contribution limits by grossly undervaluing initially contributed assets.  The answer, when using Roth-style savings rules, is to require that only true arm’s length asset purchases and contributions be permitted.

.

(d) Construing the choice set more broadly – It makes perfect sense for this paper to research pre-tax versus Roth, and then in its conclusion to spell out the main direct implication of its empirical finding.  But obviously policymakers should be thinking in broader terms than just pre-tax versus Roth.  The big items on the agenda today are Social Security, the use of “nudges” such as automatic enrollment in employer plans, and whether to continue using income tax “incentives” to encourage / increase retirement savings.

But note that income tax “incentives,” such as pretax and Roth, actually result in tax-neutral treatment of retirement saving – not in tax-favoring it – if one’s marginal tax rate is the same at all relevant times.  Thus, despite my general admiration for Raj Chetty’s work (with coauthors such as John Friedman) in this area, it makes my teeth ache a bit they describe the income tax rules (for example, here)  as providing “subsidies” for retirement saving.  This is only so (a) relative to an income tax baseline that discourages saving, or (b) when one uses a pre-tax plan and one’s marginal tax rate is lower at retirement than in the year of the contribution (which is, admittedly, likely to be a common scenario).

(e) Income tax vs. consumption tax – As discussed in my article on behavioral economics and retirement saving  a lot of evidence suggests that people have a great deal difficulty with intertemporal choice.  This has important implications for the income tax versus consumption tax policy debate that have not as yet been widely recognized.

Taxing capital gains at death

I'm pleased by the headline item in the tax proposals issued by the White House in connection with tomorrow's State of the Union address: the proposal to tax capital gains at death.

Current law, with its stepped-up basis at death, is  rightly called, by the write-up "perhaps the single largest loophole in the entire individual income tax code."  It means that asset appreciation that accrued during one's life will never be taxed.  (The possible, but today relatively limited, application of the estate tax, is quite different - it applies to value without respect to appreciation.)

Here is a simple hypothetical illustration of why this matters.  Despite my personal fondness for Apple products, I will take the late Steve Jobs as my example.  Suppose - no doubt exaggerating the actual facts, but probably in close relationship to them of Jobs, and even if not for him than for others - that he paid $1 for his initial stake of Apple stock when it was founded, and that the value of this stock appreciated to $1 billion by his death.  The income tax will never reach this enormous gain under stepped-up basis.

What about Jobs' salary from Apple?  With his famous dollar-a-year salary, this wouldn't have done anything either.  But even if Apple had paid him an arm's length salary, rather than effectively compensating him via stock and option appreciation, each dollar of salary it paid him would be includable by him yet deductible by it, leading to zero net tax revenue if their tax rates were the same (as during the long period when the top marginal rate was 35 percent for both individuals and corporations).

What about taxing Apple at the entity level?  In principle, taxing Apple at the corporate level could be a proxy for taxing Jobs as an individual, subject only to the question of whether its marginal tax rate was as high as the rate that one might have wanted to apply to him.  But Apple famously has minimized its tax liabilities through clever international tax planning.

In sum, Jobs' income may never be taxed to any significant degree absent a tax on capital gains at death.  And note that, in this instance, we are talking about labor income that any sensible tax base - including, for example, a well-designed consumption tax - would have reached at some point.  It is not just a question of taxing "capital income."

The tax on capital gains at death really is directed at the top 0.1 percent, especially with the bells and whistles that the White House proposal adds to address political concerns about "small business" and the like.  Note also that, in at least one respect, it actually increases the efficiency of the tax system.  Lock-in, or tax-induced reluctance to sell appreciated assets even if one would otherwise like to do so, is greatly worsened by the tax-free step-up in asset basis at death.  With step-up, selling one's appreciated assets while alive means that one is not merely accelerating a tax that will be due at some point in any event, but incurring a tax liability that would simply go away if one waited.  Hence, it encourages the simple tax planning trick that Ed McCaffery has labeled "buy, borrow, die."  Without step-up, capital gains taxes can achieve a decent tradeoff between revenue raised and distortionary costs from lock-in at a higher rate than is possible today.

The White House fact sheet calls tax-free step-up the "trust fund loophole," which is fair enough although we will see whether or not it catches on.  Obviously, there is not a snowbill on the Sun-facing side of Mercury's chance that the repeal of tax-free step-up will be enacted any time soon, but, if it enters the conversation as a serious reform proposal, this could matter down the road.  And note that sincere progressive consumption tax advocates should recognize that present law's step-up undermines their vision, not just the achievement of more comprehensive income taxation.

Someone has attacked my work!

It was unprovoked, and not on the merits.  Here is the evidence.

The attacker was sharp-clawed Sylvester, the individual on the lower step in this picture.  

From this picture alone, it should be obvious that serene Gary, unlike the crazed Sylvester, would never do such a thing.

Stanford talk on behavioral economics and retirement saving

This past Tuesday, I flew to Stanford Law School for a one-day visit, and presented my paper "Multiple Myopias, Multiple Selves, and the Under-Saving Problem" at Joe Bankman's and Dan Kessler's tax policy colloquium.

My slides, revised from when I presented the paper at the National Tax Association annual meeting last November, are available in pdf form here.

Although I struggled a bit writing this paper, some have told me that it makes a couple of reasonably new contributions to the literature on behavioral economics and retirement saving.  One is to connect the issue about retirement savings "incentives" in the income tax to the fundamental tax reform debate.  For example, I note that if we take the Chetty et al point that "subsidies don't work" in increasing retirement saving, the underlying claim is highly relevant to the relative merits of income and consumption taxation.  The case for income taxation is potentially strengthened if people are relatively oblivious to the deferred taxation of saving.

Second, I talk about the labor supply issues raised by, say, reducing under-savers' take-home pay via "nudges" that cause them to enroll in employer retirement savings plans.  These are at least conceptually important, as they are part of understanding how people make decisions, even if short-term labor supply responsiveness is generally low for the relevant population.

I'm aware of no empirical work on this issue.  As the paper notes, under some of the explanations for under-saving one would expect to have offsetting substitution and income effects, making the research problem more complicated than it would otherwise be (though surely not impossible to address).

I also haven't seen anything discussing the labor supply issues from a theoretical standpoint, with the exception of this article by Louis Kaplow, which helped to inform my own thinking.

The article will be appearing in the Connecticut Law Review sometime this year, as the focus of a symposium issue that will also have three or more papers commenting on it.

One of the questions I was asked at the Stanford session was: What sort of responses have you gotten to the article?  I answered: I've gotten some nice feedback from commenters, and from a few other people to whom I sent it.  But other than that, it was exactly the same as what almost always happens when you post or publish something.  Out it goes, you don't hear much back, and you just go on to your next project, whatever it might be.

2015 NYU Tax Policy Colloquium

We start up in less than two weeks, on January 20 at 4 pm.

Our first two papers, by Brigitte Madrian of the Harvard Kennedy School and David Kamin of NYU are now available through our website. Madrian's paper, "Does Front-Loading Taxation Increase Savings?  Evidence from Roth 401(k) Introductions," is available here.  Kamin's paper, In Good Times and Bad: Designing Legislation That Responds to Fiscal Uncertainty, is available here.

Both should be good sessions and, as we like to do from one week to the next in the colloquium, on wholly different topics.

Both will be followed small-group dinners.  Interested attendees can sign up in advance, and can also get on the regular weekly mailing list for the papers, by contacting me off-line.