Monday, October 16, 2017

Back in the U.S.A.

Last Friday, I returned to NYC after almost a month abroad.

Most of my time away was spent in Berlin, where I was a Research Fellow for 3 weeks at NYU Berlin. My professional activity there consisted mainly of working on a new article draft on international tax policy.  Then I spent a week in Vienna, where I taught a mini-course on International Tax Policy for graduate students in Vienna University's doctoral program in international business taxation (DIBT).  Side trips to Amsterdam (for a public speaking event) and Ljubljana (for enjoyment).

Although I enjoyed the trip, it's nice to be back in NYC, which remains my favorite city apart from its winters.

Tuesday, October 10, 2017

Ninth Circuit oral argument on Altera

I have been reliably informed (and then was able to confirm for myself online) that the Ninth Circuit oral argument in the appeal of the Tax Court's misguided Altera decision is taking place this Wednesday.  I gather that Susan Morse and Steve Shay will be blogging about this, and I'll duly post links thereto.

I previously discussed the Altera decision here and here. Stripped to its substantive (as opposed to administrative law) essentials, it's a case in which the Tax Court ruled that an indisputably correct Treasury regulation, to the effect that the bulk of compensation costs in a cost-sharing deal between related parties should be included in the formula even if they're structured as incentive compensation, was arbitrary and capricious, hence an abuse of discretion. In effect, it's an abuse of discretion to say that 1 + 1 = 2, unless one spends pages of regulatory preamble explaining why taxpayers were incorrect when they filed briefs at the notice and comment stage arguing that 1 + 1 = 1.

The Tax Court relied upon aspects of true arm's length deals that had zero pertinence or relevance to related party paper-shuffling agreements, and accepted expert testimony to the effect that incentive compensation that in fact is worth millions of dollars should be viewed as having a cost of zero.  Here's hoping that the Ninth Circuit straightens things out.

UPDATE: Here is the link for the Morse-Shay posting, further explaining why the Tax Court so clearly erred in striking down the regulation at issue in Altera.

Leandra Lederman adds her comments here.

Tuesday, October 03, 2017

Busy weekend in Ljubljana

Taking time off from my Berlin stay to enjoy a vacation weekend in Ljubljana (pronounced Loobleeyana), I kept busy by testing my new superpowers.
I also got to practice my famous John the Baptist impression.
Unfortunately, neither special talent seems to have survived my return to places further west.

Thursday, September 28, 2017

The international part of the "Framework"

The bit on international in the "framework" is worth quoting in full:

"The framework transforms our existing 'offshoring' model to an American model. It ends the perverse incentive to keep foreign profits offshore by exempting them when they are repatriated to the United States. It will replace the existing, outdated worldwide tax system with a 100% exemption for dividends from foreign subsidiaries (in which the U.S. parent owns at least a 10% stake).
To transition to this new system, the framework treats foreign earnings that have accumulated overseas under the old system as repatriated. Accumulated foreign earnings held in illiquid assets will be subject to a lower tax rate than foreign earnings held in cash or cash equivalents. Payment of the tax liability will be spread out over several years.
"To prevent companies from shifting profits to tax havens, the framework includes rules to protect the U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations. The committees will incorporate rules to level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies."

Let me see if I can make any sense of this. They say it's a territorial system. But they also say that they will be "taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations." This can formally be reconciled, in the sense that what they literally say up top is that they will offer dividend exemption.  Of course, a full worldwide system in which deferral (for the foreign profits of foreign subsidiaries) was repealed would also have dividend exemption. Bringing the foreign profits home would have no tax consequences, since those profits would already have been taxed.

Is that what they are saying, albeit with a reduced rate for foreign source income? Seemingly yes, but then how is it a "territorial" system? And if they are taxing U.S. companies' foreign source income, how do they propose to "level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies"?

The repatriation tax is of course a welcome feature of switching to territorial, but the rate imposed is all important here.  I'm guessing it will end up being very low.  The dual feature, as between cash equivalents and illiquid assets, has a rationale but is likely to be messy at best in practice.

Neither tax reform nor a plan

I often feel impelled to quote that famous line about how the Holy Roman Empire was neither holy, Roman, nor an empire. The supposed tax reform plan that the "Big Six" have just released gets two-thirds of the way there. It is about taxes, but it's not reform - just massive, unfunded tax cuts - and it's not a plan - just rough ideas, sketched in crayon, that a Tax I law student could have done (better) in 24 hours or less.

It's really an insult to have to focus on so sketchy and poorly conceived an issuance.  I have better things to do with my time, and there are more thoughtful people around, on the right as well as the left, with whom it would be more fruitful to interact intellectually.

Just two quick things, as I'm saving international for a follow-up post:

--Why raise the bottom rate from 10% to 12%? I can see no good reason for this apart from malicious class warfare.  It can't be about revenue, given everything else in the plan.

--The 25% rate for business income of pass-throughs may take the prize as the worst new tax policy idea of the past thirty years. They say they'll have rules to prevent conversion of "personal income" into business income - but that just states (a part of) the problem, rather than offering any suggestion that it could be handled with any success or without massive and idiotic complexity. And why should "business income" get a lower tax rate than "personal income" - such as wages - anyway? Do they hate employment, as opposed to being self-employed? If so, why not simply fine people who take jobs working for someone else? That is essentially what they are proposing to do.

Wednesday, September 27, 2017

Back from Amsterdam

Back in Berlin after 3 days in Amsterdam, where I participated in a KPMG conference meant to enlighten corporate tax directors and such on what to expect and prepare for. I played the role of American expert (as did Danielle Rolfes) and of house pessimist.   The two are strangely linked these days.

Back in Berlin, where I've been writing a new international tax article on the treatment of foreign taxes by the U.S. and other tax systems and how this might related to what I call unilateral and strategic tax policy approaches. This piece pushes forward on some ideas that I've covered more cursorily in the past, and is a nice change of pace for me before returning to my literature & high-end inequality book. Among other things, it's easier to write.

Tuesday, September 19, 2017

The view from my window at NYU Berlin

Nice to see this corvid right outside my window at NYU Berlin, where at the moment I am working on a new international tax article (as a brief change of pace from my literature book).  I am a fan, or more like a distant admirer, of corvids as a group.

Corvids, due to their strikingly high intelligence, have been called "flying monkeys" by knowledgeable bird experts.  I gather that they need the brains (which are definitely not "bird brains" in the colloquial sense) both for social reasons and to navigate a complex environment. E.g., given that they are willing and able to eat just about anything, they both need to make good choices, and may try to access things that require some work and cleverness.

But, alas, it doesn't seem practical (and might not be prudent) to try to make a new friend here.

I am confident that my cats, if they were on the scene, also wouldn't deem it prudent to seek a closer association, even if they could get through the closed window. This bird is too big for them.

Friday, September 15, 2017

Precise targeting to increase high-end inequality?

I haven't yet read this recently posted article, but I plan to, as it seems to be important (and is by good researchers). But here is the key finding from its abstract:

"Using administrative data linking 10 million firms to their owners, this paper shows that private business owners who actively manage their firms are key for top-income inequality. Private business income accounts for most of the rise of top incomes since 2000 and the majority of top-earners receive private business income - most of which accrues to active owner-managers of mid-market firms in relatively skill-intensive and unconcentrated industries."

This would appear to suggest that the proposed lower tax rates for business owners of pass-throughs are almost precisely targeted to increase high-end inequality as much as possible, in exchange for as little efficiency payoff as possible. These probably tend to be people with low labor supply elasticity and/or who are in effect reaping rents.

What could Trump / Mnuchin mean when they claim taxes won't decline for the wealthy?

Not just Trump but also Mnuchin have been claiming that taxes won't decline for the high-income in the supposedly soon-emerging tax "reform" plan. The fact that Mnuchin is saying it, too, makes one think that maybe it isn't just impulsive lying or oblivious salesmanship, but reflects a view about what they will be able to claim about the ultimate package. Yet this is a deal that they are working on with Paul Ryan, not with Ron Wyden or Chuck Schumer.

So what might they be thinking, if we make the assumption (not 100% certain to be correct) that they actually are thinking strategically about the next stage? The following four things occur to me:

1) The fact that a corporate rate cut is likely to be at centerstage in the package may help them. Their argument that this doesn't help rich people can be both formalistic (corporations are separate taxpayers) and substantive (claims about the incidence of the corporate tax). Two points they will have to ignore, however, are (1) the transition incidence of cutting the corporate rate, which benefits existing shareholders if it wasn't fully anticipated, e.g., due to political uncertainty, and (2) the tax planning opportunities that a low corporate rate may give to high-income owner-employees.

2) They will be trying desperately to ignore the effects on high-income taxpayers of lowering the tax rate on amounts that business owners earn through pass-through entities. This is where the really big distributional action will be, if they go ahead with their reported plans to require people whom the tax system classifies as employees to pay significantly higher tax rates than those whom the tax system classifies as business owners. They'll call this a "small business" tax cut, but the point will be made in response that this a misportrayal of where the bulk of the benefit actually goes.

3) They anticipate announcing a package that takes away state and local tax deductions, and perhaps that also does something to home mortgage interest deductions. But these provisions seem highly unlikely to get through the Senate even if they are in the package and pass the House. Indeed, it's possible that they're being over-optimistic about the prospects even for unified "Big Six" endorsement of this.

4) Might they be planning not to propose repealing what is left of estate and gift taxes? Leaving that out of the package would certainly make it easier to claim that taxes aren't declining for the wealthy. But if I had to guess, they'll just try to brazen through the awkward tension between proposing estate and gift tax repeal and dressing up the package as no tax cut for the rich.

Plus ça change, plus c'est la même chose

After last night's game, the New York Mets' team ERA climbed to 5.02.

In 1962, the Mets' team ERA was 5.04.

Very different eras, but just sayin'.

Thursday, September 14, 2017

Tax "reform" update

According to this account in Politico, the so-called Big Six disagree fundamentally about what their tax "reform" legislation should look like.

Speaker Ryan wants to enact expensing, but "Senate Republicans believe it won't fly in their chamber."

Ryan also wants to eliminate (net?) corporate interest deductions, but "the break is important to many companies, and other negotiators [Senate? Administration?] want only to reduce it."

Ryan wants to repeal state and local tax deductions for individuals, "but some are concerned over what that means for upper-middle class people."

Meanwhile, Senator Hatch favors a corporate integration proposal that presumably is dividend deductibility, but "the idea has not gotten much traction with House Republicans."

These are some pretty fundamental disagreements. Indeed, other than cutting rates and exempting things, which as a standalone cannot plausibly be called "reform" and would of course raise budget issues, there's nothing of comparable importance left. (Home mortgage interest deductions are presumably even a bigger political lift than state and local tax deductions.)

Tuesday, September 12, 2017

Tough question?

Two weeks from today, I'll be speaking at a KPMG-run conference in Amsterdam entitled "EMA Tax Summit 2017: A Year of Disruption and Rapid Change."  It would be rather a long trip to undertake from the U.S., but as it happens I'll be by then in Berlin, amid a three-week stay at NYU Berlin, where I'll be doing some work on my literature book. (The work isn't site-specific, except insofar as I suppose that getting away can help one's focus.) So I thought it was reasonable to engage in the side-trip.

Since the conference deals with what tax planners should expect in both the US and the EU, I wouldn't be surprised if they asked me whether it's realistic to expect Congress to enact comprehensive tax reform - say, by the end of this year or so.

Hmmm, that's a tough one. I will have to think about it.

Sunday, September 10, 2017

Why is Exile on Main Street so much better than Let It Bleed and Sticky Fingers?

More ruminations here from my resurrecting stuff via Spotify that I hadn't listened to for a while, to help get me through my elliptical machine sessions at the health club:

The canonical view of the Rolling Stones' career, for those in my approximate taste sector, goes something like this. In the 1960s, they were the best and most important white rock or pop musicians, with the exception of the Beatles and Dylan, plus in retrospect perhaps the Velvet Underground. But they were mainly just a great singles band (plus other outstanding tracks - e.g., Sitting on a Fence, What to Do, She Smiled Sweetly, and Ride On Baby, to name four that come right to mind), whose albums generally fell short of showing them consistently at their best. Then came the mistake of Satanic Majesties, after which they pulled themselves together by starting their mature period with Beggars Banquet, followed by the 3 classics - Let It Bleed, Sticky Fingers, and Exile on Main Street - after which they got bored and mostly dull for a few albums (albeit, still with a few great tracks). Then they woke up one last time for Some Girls, the fading echoes of which somewhat enlivened the next two albums (Emotional Rescue and Tattoo You). But after that, while perhaps there's a good track here or there, their recordings are generally best forgotten.

Canonical or not, this basically matches my view of their career, except that I would make one big revision that I know is not canonical. Of the "3 classics," I find Let It Bleed and Sticky Fingers overrated and at times boring, although of course they have a number of essential tracks. But Exile on Main Street truly is their pinnacle.

I would put Some Girls second and Between the Buttons, released in January 1967 as their version of Revolver, third. Each of my favorite 3 Stones albums has a distinctive internal creative dynamic. Exile on Main Street is basically a Richards album with Jagger just along for the ride. Some Girls is basically a Jagger album with Richards just along for the ride. And Between the Buttons gets a lot of its punch from Brian Jones' playing a different odd instrument to flavor the sound on almost every track. (It thus makes their much later work sound incredibly monochromatic and boring.)

Anyway, so what makes Exile on Main Street so much better (in my view at least) than Let It Bleed and Sticky Fingers? Again, the latter two have a number of incredible tracks. But there's a whole lot of not that interesting macho posturing going on, along with rock-blues stuff that sounds a bit generic although I realize of course that this is partly from its being imitated so much afterwards (but then again, they were imitating earlier black artists when they did it). Take Honky Tonk Women and Brown Sugar, even leaving to one side their racial and sexual political incorrectness, which were deliberate, pursuant to their outlaw image in a more retrograde era than ours today. Although these tracks are extremely catchy, dynamic, and fun, they can't be at or near the artistic and expressive pinnacle of popular music from the rock era, unless that pinnacle was considerably lower than some of us would like to believe.

But Exile on Main Street is not just rich, full, and beautiful in its sound (despite its famously murky mix) - it makes fantastic use of all the great extra musicians and singers they had on hand - but soulful, wistful, elegiac, and hurt.  (Just one great example among many is Torn and Frayed.) Macho preening isn't its thing; instead it's about staring into an abyss of one's own creation. A suitable mood, perhaps, for the United States these days.

Tuesday, September 05, 2017

Not wonky enough?

Matt Yglesias, in a generally excellent column about the sorts of federal income tax changes that the Administration and Republican Congressional leadership may seek in the next couple of months, rightly notes that tax reform, in common usage, means “reducing tax rates without massively reducing federal tax revenue because the losses from the rate cuts are offset by closing loopholes and eliminating or curbing deductions.”  He also rightly notes that the Republicans are unlikely actually to attempt this, since base-broadening sufficient to offset the revenue loss is no fun politically. He then asks why, on policy grounds, one might favor bona fide tax reform:

“What’s good about tax reform?

“The official wonky case for tax reform stems from a divergence in the way that a normal person thinks about taxes from the way that an economist [does] ....

“To a normal person, taxes are a necessary evil. The evil thing about them is that after you pay taxes you have less money than you had before. Most people like money, so they like the idea of getting a tax cut, and they don’t like the idea of getting a tax hike, primarily because they are focused on the impact of tax changes on their after-tax income. If Congress changed the law to cut my taxes by $500, I’d be pretty happy about that. And I wouldn’t care whether they did that by tweaking the individual exemption, tweaking the dependent exemption for my 2-year-old, making his preschool tuition tax-deductible, or cutting my marginal income tax rate. At the end of the day, the point would be to get the $500.

“But from a supply-side viewpoint, these are very different policies. Making the individual exemption a little bit bigger puts $500 in my pocket but it doesn’t give me any new incentives to work harder and earn more money. If anything, by making me a little more economically comfortable it reduces my incentive to work harder and earn more money. By contrast, cutting my marginal income tax rate doesn’t just put $500 in my pocket. It makes it more worth my while to try to go out and hustle up some paid speaking appearances or otherwise find ways to earn a bit more.

“Tax reform is good, on this view, because it’s a way to greatly improve incentives without costing the government much in the way of revenue. The 1986 tax reform bill, for example, eliminated enough loopholes to pay for a cut in the top marginal income tax rate from 50 percent all the way down to 33 percent — drastically increasing the incentive of rich people to go out and try to become even richer.”

In the above text, Yglesias offers a generally useful explanation. However, he may overstate (or, at least, slightly misstate) the main character of the economist’s case for tax reform.  To show this, let’s make two tweaks to his illustration.  First, let’s suppose that I’d get $500 via Congress’s newly making preschool tuition tax-deductible, rather than by its either (a) raising personal or dependent exemptions or (b) lowering marginal tax rates.  Second, let’s suppose that I would decide to work and earn more if I were sending my child to a costly preschool than if I were keeping the child at home.

Now, with the tax treatment of preschool tuition tax being an input to my labor supply choice, it lines up more the marginal tax rate change, and less with changing the individual and/or dependent exemption. So, if we already had preschool tuition tax-deductibility as a feature of current tax law, and we were thinking of repealing it to fund a lower marginal tax rate, the “tax reform” might end up, at a first approximation, not increasing my incentive to earn. E.g., suppose that, when I was thinking of working more so I could send my child to preschool, the combination of (a) an increased after-tax return from my work and (b) an increased after-tax cost to the preschool, left me in the same place as I was before.

To make this a more plausible revision of the hypothetical, suppose that both decisions are scalable. E.g., I can work just a little bit more or a lot more; I can send my child to a cheaper preschool or a more expensive one. The bottom line may still be a lot less change than might otherwise have been expected to my labor supply incentives. I work to earn money to spend on things I want, and the base-broadening makes it costlier than it was before to buy the things I happen to most want.

Why point this out? In the 1986 tax reform, at least some studies found afterwards that work incentives hadn’t really changed much, by reason of the base-broadening. E.g., suppose I previously hadn’t minded the 50% top rate because tax shelters would prevent me from actually having to pay it. Now the rate was lower but the tax shelters were gone, so I would actually have to pay the headline rate. This may have been a good policy change for other reasons that I’ll get to in a moment. But it could mean that my incentive to earn more $$ wouldn’t actually have increased.

Now let’s turn to contemporary thought experiments in which, say, state and local tax deductions, home mortgage interest deductions, and/or 401(k) deductions are repealed to fund lower rates.  (In the 401(k) example, even if the current deduction is replaced by a future exclusion that’s slated to apply when I withdraw the money, suppose that I’m either myopic or else don’t trust future Congresses to retain the exclusion.) If I’m paying about as much tax on balance as I was before, it’s plausible, depending on the details and on my level of understanding, that my view of my after-tax incentive to work will also remain about where it was before, given the changes to the tax treatment of some of my earnings’ possible uses.

With that in mind, let’s re-ask Yglesias’s question: “What’s good about tax reform?” The answer, if any, is that, even if we haven’t substantially changed my incentive to work and earn, we have done so with respect to how I spend my earnings.

In terms of the 1986 example, it’s presumably good that I’m no longer investing in tax shelters (assuming that their tax benefits were socially undesirable), since I will now seek opportunities that offer greater expected pretax profitability. But it’s my inter-asset choices that are now less tax-distorted than previously, rather than my incentive to work and earn.

Likewise, for the 2017 scenario, suppose we see no relevant social difference between my spending my $$ on (a) preschool tuition or (b) fancy vacations. Then eliminating the distortion to my choice that resulted from the hypothetical tuition deduction is a good thing here, albeit by express stipulation. But if we don’t think the deduction was bad, e.g., because we see positive externalities to people’s sending their kids to preschool instead of spending the $$ on own consumption, then so much the worse for the case for “tax reform” here.

I myself tend to like the inter-asset efficiency consequences of a revenue-neutral tax rate cut plus reduction to the home mortgage interest deduction. But that’s because I don’t like the deduction, or more precisely what I take to be its main effects. The state and local tax deduction example is potentially quite different. So is the 401(k) deduction repeal, although there we would need to specify a lot more about what people expect, how they make savings choices, how we should think about socially optimal savings choices, etcetera.

Returning to Yglesias’s main point about tax reform, we’ve now both (a) made the economist’s argument wonkier still – by relating it to distortions in asset or activity or consumption choice, rather than to labor supply as such, and (b) shown that it needs to be evaluated case-by-case, in terms of the arguments for a particular tax benefit that would be eliminated to pay for tax reform.

Of course, as I agreed with Yglesias at the start, the Republicans appear unlikely to attempt bona fide “tax reform” (with significant base-broadening) anyway. But just in case anyone should ever attempt it in the future, I hope it’s useful to clarify the nature of the main argument for it.

Thursday, August 31, 2017

Talk on my literature book and its E.M. Forster chapter

This Tuesday, hard on the heels of my international tax talk at USF Law School the previous day, I gave a talk at U.C. Hastings College of Law on my literature book in general, and its chapter on E.M. Forster's Howards End in particular.

Slides for the talk are available here.

Talk on inversions and corporate residence

This past Monday, I gave a talk at USF Law School entitled "Inversions and the Legal Fiction of Corporate Residence." Details about the event are available here.

My slides for the talk are available here.

Is it "populist" to cut taxes for Wall Street?

To call corporate tax cuts "populist" really achieves a new level in rhetorical depravity.

It's true that lowering the tax rate on inbound investment (including that which might otherwise be outbound without facing the domestic rate) should increase U.S. investment, all else equal, presumably with positive implications for wages and/or jobs.  Although, that said, two important points to keep in mind are:

(1) the labor market is complicated, and it's not a simple question how employment levels end up being set.

(2) the link between productivity and wages also is complicated.  It used to be more or less assumed that, if labor productivity increased, including due to added capital investment, wages were bound to go up, too.  But data from the last twenty years have cast doubt on this, as "capital" rather than "labor" - although the standard use of these terms may be questioned - has seemed to capture nearly all of the productivity growth.  One really has to look closely at how markets operate, how wages are set, who has market power and in what dimensions, and so forth, in order to answer that.

So, even in the best case, calling tax cuts for Wall Street a shot in the arm for American workers is simplistic and questionable, even though it's surely true, all else equal, that we would like U.S. investment to increase and that lower effective tax rates on business investment should tend to accomplish this.

But then we have further aspects to think about.  For example, the transition gain from cutting corporate taxes (or, more precisely, from a change in information regarding the likely future tax rate on corporate investment) goes to existing shareholders.  Note also that the lower tax rate applies to the fruits of old investment, which are no longer subject to choice based on new incentives.  (On the other hand, it is true that Auerbach-Kotlikoff models find a loss to old investment when new investment increases due to a cut in its effective tax rate.)

Also, unfunded tax cuts that the government has to finance through borrowing may lead to crowd-out of new investment.  So even the basic simple model in which investment increases so workers gain will not clearly hold.  And if you fund the rate cuts - however unlikely that might be in terms of the tax changes that the Republicans are seeking - then someone or something has to pay for it.  So middle class taxpayers (and poor people who get reduced services) will have to pay - since it's not going to be the high-income ones, with this crew - and/or there have to be offsetting tax increases on investment (although there is the same issue here of new vs. old investment) that might blunt the incentive effects right from the start.

Final answer: These are complicated issues, so if you want to respect all nuance there is no clear answer to exactly who wins and loses from cutting taxes from Wall Street.  And it also of course depends on the package's full details.  But if I were forced to give an unnuanced short answer, I would say that the initial optics are probably the best short summary: cutting taxes for Wall Street benefits Wall Street.  If that's populist, then it's clear the term has been substantially redefined.

Friday, August 25, 2017

Off to the West Coast, then back again, then Berlin/Vienna, then back again

I'll be giving a talk at USF Law School on Monday (8/28) regarding inversions and corporate residence, and will probably post slides here afterwards.

Then on Tuesday 8/29 I'll give a talk to the Hastings Law School faculty regarding my literature book and its chapter on E.M. Forster's Howards End. While that's not a public event and I won't be posting slides during the talk, I wrote slides to use as my own lecture notes and may post them afterwards.

Then back to NYC on Wednesday 8/30. I'll be blissfully detached from the start of the new semester, as I'm on sabbatical this fall. On September 18 I'll start 3 weeks at NYU Berlin, mainly just doing my own work while there. I'll fly to Amsterdam for a day to do a tax panel there for CEOs and such, and also to Ljubljana for the weekend at one point for purely touristic reasons, and then I'll spend a week teaching or really more discussing international tax policy with Vienna University's excellent DIBT graduate students. Then back home for a while.

I may actually complete my literature book this fall - the trick that makes this possible is my dividing it into two separate books so it wouldn't be unduly long. The first book ends with the late Gilded Age, and with all the horrors of the twentieth century that eased high-end inequality (World War I, the Great Depression, World War II, and then more benignly the continuation) still looming around the corner but as yet out of sight. Before starting Book 2, which carries us through to the present, I will probably write an international tax policy article. Rather than just rehashing past things I've said in the past, I do have a couple of relatively novel ideas that I might tackle in this.  One concerns thinking about the welter of inconsistent policies that arguably underlie the current U.S. system - when they must be used, e.g., to define (whether legislatively, administratively, or judicially) "abuses" that are counter to its "policy" - and the other, all the recent hoodoo about shifting entirely from origin basis to destination basis.

Thursday, August 24, 2017

Harry Grubert tributes

The National Tax Association has posted a compendium here.

Tuesday, August 22, 2017

Say it and get out?

Despite my most recent blog post on music, not everything I listen to was released before some of my readers were even born. Indeed, my playing roster - which these days is more a function of Spotify than my CD collection - includes material from each decade since the 1950s, admittedly with a particular focus on the 1960s, 1970s, 1990s, and 2000s. (Less from the 1980s and 2010s.)

And while I don't listen to music at home as much as I used to (or at work at all - whereas I wrote my college senior thesis to the sound of Marquee Moon and Elvis Costello), my needing to cope with the extreme boredom of health club elliptical machine sessions means that I am always on the lookout for things that I would like to listen to. These include, not just new things, but also old favorites that I haven't played for a while.  So there's a cycle of rediscovery that I try to keep going, although new fare is needed or else it will tend to run down.

Anyway, the last couple of days I've been listening to Lily Allen's two fine albums from the 2000s, which I hadn't played for quite a few years. She released them and then announced that she was quitting the music biz - although she's been back since with lesser impact culturally, artistically, and commercially.

Her retirement surprised me at the time, but in retrospect I understand it. Her methodology as a songwriter on those two albums seems to have involved her adopting a very clear topic and point of view for each song.  In effect, they were short stories, essays, or character studies, and you could almost imagine her having had a topic sentence in mind for each before she started writing it. It doesn't feel as if she started each song with a riff, like Keef or something - although the melodies and hooks are often quite strong.

Sometimes the pitch sentence seems to have been thematic - e.g., addiction, consumerism, George W. Bush, or young single women living unsatisfying lives - but often it involved drawing a picture of a particular person. These included her father, grandmother, brother, and apparently a rogue's gallery of mainly disappointing boyfriends. (Important message: be very careful if you date a songwriter.) It's plausible that she simply ran out of good material, in addition to entering a life stage where slagging those around her (often an artistically promising approach) would grow increasingly costly.

"If you can't keep it up at the same level, quit" can be good advice aesthetically, but it's not always an optimizing strategy in career terms. It brings to mind an issue that we academics can face. If you spend enough years writing about a bunch of things, you can reach the point where you no longer have a lot to say that's as important or as interesting (to yourself as well as others) as what you said before. Of course, you can always keep on saying the same thing again and again (especially if you feel that a point you've discussed remains underappreciated), but this faces diminishing returns.

A lot of us in the biz have dealt with this issue in different ways. A key one for me, although also for some others whom I know, is to try decidedly new things. I've been happy with that approach on my current literature project (more on this shortly, perhaps), but it certainly can be an audience risk.

Friday, August 18, 2017

Correcting Krugman's latest column

In re. today’s Krugman column comparing Trump to Caligula:

“Never mind tax reform [enacting regressive tax cuts]. Congress has to act within the next few weeks to enact a budget, or the government will shut down; to raise the debt ceiling, or the U.S. will go into default; to renew the Children’s Health Insurance Program, or millions of children will lose coverage.”

As noted yesterday, I don't think the Republicans' tax plans merit being called "tax reform" - especially by those who oppose them. It's analytically misleading. And while the mislabeling is within normal rhetorical bounds for the tax plans' supporters, opponents should feel strongly motivated to reject the labeling.

So here's hoping that Krugman, among others, will stop using the term "tax reform" to describe the Republicans' tax plans.

Thursday, August 17, 2017

"We Can Work It Out"

I've been ruminating lately about the above-named Beatles song, perhaps in part because we're at a time and in a place where things do not seem working out for our country or the world, on many levels, but also due to its own extraordinary merits, beauty, and pathos - despite its surface optimism - as a song.

There's a longstanding genre of popular songs in which the character played by the singer conspicuously doesn't get it, adding irony and pathos to his or her romantic plight. To name two examples from songs covered by the Beatles, in "Please, Mr. Postman" we know perfectly well that it isn't the postman's fault no letters are arriving from the loved one. The singer is deflecting his (or in the Marvelettes' original version her) anxiety away from the real source of the problem.

Likewise, in "Slow Down," the woman who's "moving way too fast," and who needs to "gimme a little loving ... if you want our love to last," plainly doesn't want it to last. She's got a "boyfriend down the street," after all. So the singer is petitioning her in vain, and misdiagnosing the problem because it's less painful than admitting straight up that she has dumped him.

"We Can Work It Out" is a subtler, less overt version of this self-deceiving narrator motif. The song (mainly written by McCartney) opens mid-argument - we don't hear what the argument is actually about - with the singer insisting that his girlfriend see it "my way," not hers. "Do I have to keep on talking till I can't go on?"

This is not generally a good way of bridging disagreements:  You don't say to the other person: "your way" is wrong, stop exasperating me. And for that matter, the singer openly admits that "my way" offers no guarantees. They will either "get it straight or say good night," and "only time will tell if I am right or I am wrong."

So you get the infectious optimism of the singer's insistence that "we can work it out" - conveyed also by the vocal performance, yet undercut by the realization that they probably won't work it out, that he is approaching it the wrong way - without adequate sympathy, flexibility, or understanding - and that he pretty much realizes where they're likely headed, even as this remains the best he can do to try to head it off.

One of the song's widely noted merits is the back-and-forth between McCartney's verses, which I've been quoting so far, and Lennon's terse middle-eight ("Life is very short and there's no time / For fussing and fighting my friend"). That section provides a great change of pace and musical contrast, but it's not really pessimism undercutting optimism, so much as weariness and impatience undercutting the pretense of optimism. And the slowdown at its end into 3/4 time as they head back to the verse ("So I will ask you once again ...") adds to the sense of impatience, impending failure, and just being stuck.

"We can work it out / We can work it out," the song ends - the singer radiating enthusiasm that is clearly just a thin shell masking anxiety - followed by a striking minor-key chord run on the harmonium that's held for a few seconds.

Be it good or bad, let's stop calling it "tax reform"

The media pervasively uses the term "tax reform" to describe the income tax changes that the Republicans are seeking.  And it pervasively compares these changes to 1986 tax reform. This should stop.

My reason for saying this is not just rhetorical - it's about using terms meaningfully to convey information. But I'll admit that the rhetorical aspect matters here. "Tax reform" sounds like it's a good thing. I happen to think that any tax changes that the Republican Congress passes and Trump signs will be horrendously bad - increasing the fiscal gap, hugely benefiting the top 0.1% at the expense of everyone else, and very possibly un-leveling the playing field (e.g., in favor of "business owners" at the expense of "employees"). But there's more than just rhetoric going on here - there's an implicit descriptive claim that appears to be false.

Historically, one thing that "tax reform" has meant is indeed "changes that I, the proponent, think are good." So by definition anyone who wants to change the tax laws is proposing "tax reform," and anyone who opposes those changes doesn't think that they constitute "tax reform."

But historically it has long had a more specific meaning than that, as I discussed in my 5/25/11 Tax Notes article, "1986-Style Tax Reform: A Good Idea Whose Time Has Passed." And the Republican plans aren't sufficiently well-related to this idea in order to be called "tax reform," other than in the "we think it's good, even if you think it's bad" sense.

From at least the 1950s through the early 1980s, "tax reform" tended to mean repealing income tax preferences, and broadening the tax base, so that the tax would become more progressive, with the high statutory rates at top income levels coming closer to be true effective rates.

Thus, for example, the Reagan changes in 1981 - mainly, greatly reducing income tax rates and speeding up cost recovery for business assets - weren't called "tax reform." Obviously, the proponents thought that these were good changes, but they didn't use a label that they knew meant something else.

Then the meaning of "tax reform" changed. A key moment was the introduction of Bradley-Gephardt by two Democrats, followed by Kemp-Kasten by two Republicans. The Reagan Administration Treasury I and Treasury II plans, followed by House and Senate bills that gave rise to the enactment of the Tax Reform Act of 1986, cemented the new meaning.

Now "tax reform" meant broadening the base and lowering the rates, with the aim of being both revenue-neutral and distribution-neutral. So it was no longer about increasing progressivity, but it also wasn't about reducing it.

Whether or not this is a good model, it is what the term "tax reform" has generally meant for more than 30 years. (In the above-cited article, I argue that it's no longer a good model for how we should change the tax laws.) The line of argument for it, which is pretty compelling if one agrees that the "preferences" it would eliminate are bad, relies (perhaps naively) on horizontal equity between taxpayers along with inter-asset neutrality. The underlying political economy theory holds that stuff Congress put in that diverges from taxing all income the same is likely to reflect interest group politics, administrative problems, or something else other than good policymaking.

More recent Republican-led "tax reform" efforts have often aimed at something quite different: reducing not only tax rates but progressivity and net revenue. Not always - Dave Camp's international tax reform plan when he was House Ways and Means chair tried to do something akin to "tax reform" as typically defined. And Mitt Romney in 2012 at least gestured towards revenue and distributional neutrality, although he was rightly criticized because that was not realistically achievable under his parameters (which he had deliberately left vague).

Now, however, Republicans in both the Administration and Capital Hill are pretty clearly - although there is occasional lying about it - aiming to reduce business taxation, reduce progressivity, and reduce revenues. Reducing tax rates is now the main feature, rather than one of two paired features. There may be some offsetting items that at least arguably constitute base-broadening, but they will be greatly outweighed by the rest of it.

This also, notoriously, will no longer be a bipartisan process. The idea of being revenue-neutral and distribution-neutral was crucial to the once-bipartisan character of "tax reform." In effect, the Democrats and Republicans said to each other: "Since we disagree about distribution and revenue levels, let's take all that off the table and find things about which we can agree." One reason that the likes of McConnell are so vehement about excluding Democrats from the process is that it would push them towards retaining those features, which they now oppose.

BTW, just as an aside, in the academic community the chief focus of discussion and interest has long since moved past 1986-style exercises. When we talk about tax reform, we are usually focused (whether pro or con) on (a) partially or wholly switching from income taxation to consumption taxation, and/or (b) finding more neutral ways to tax business income, be it domestically or internationally. This often proceeds under the view that revenue and/or distributional neutrality should be a key feature of the switch, so as to keep the main focus on the structural issues.

Okay, back to the bottom line. The term "tax reform" has come to have a clear historical meaning, beyond simply "we think this is good," based on attributes that emerging Republican proposals in Washington are certain to lack. So let's drop any pretense that the term is properly descriptive, other than in the sense that the proponents of course are arguing that their proposals are good.

And let's drop the analogy to 1986, which involved a very different set of changes, adopted in a very different era through a very different process. It's not illuminating here.

Friday, August 11, 2017

In memory of Harry Grubert

I am sad to pass on the news that Harry Grubert, longtime Senior Research Economist in the Office of Tax Analysis at the U.S. Department of  the Treasury, and also a friend I greatly admired, has died quietly from a long-term illness.

Harry had more knowledge about U.S. international taxation than any other living individual. I'm not referring to legal knowledge, of course, as he was an economist - albeit, an exceptionally well-informed one about the law. But his long years of research and study regarding U.S. multinational firms, based on tax data that he understood better than anyone else, made him an extraordinary resource, almost like a public utility in light of his kind generosity and willingness to share what he knew.

He was also a leading scholar who developed a number of interesting and important international tax reform ideas (often in coauthored work with Rosanne Altshuler), and one whose research yielded innumerable consequential empirical findings - for example, regarding the costs associated with U.S. multinationals keeping their funds tied up abroad.

I would generally see him a couple of times a year at research conferences, most recently in Oxford this past May. And he was a presenter at the NYU Tax Policy Colloquium, I believe three times. We wouldn't have kept asking him back if he hadn't combined excellent and important papers with being a great presenter and fount of knowledge as well as wisdom.

As a matter of style, Harry was a fox, not a hedgehog - he knew many things (and I do mean many), rather than being inclined to focus on one big thing. If you'd ask him, say, about Rule or Proposal X's effects, he'd say: Here are the 17 margins at which it has an impact. He could even snap at the hedgehogs a bit, when the mood took him (suitably to the metaphor, I suppose). But his kindness and generosity always prevailed, with all who engaged with him.

Thursday, August 03, 2017

Possibly near the end

Buddy, age 14 and a member of our household since he was 10 months old, is not looking good - this photo perhaps fails to capture the full dinginess and fatigue that you can see on him in person - and evidently is not feeling good. He just sits like this in one place all day, sometimes a sheltered place. He has multiple progressing medical conditions, including a tumor, a heart murmur, and most recently diabetes. We're not certain yet, but it appears today that he may have decided to stop eating.

Until recently he'd been sick only once in the entire time that we have had him. Energetic (one of the great escape artists of his generation), easygoing (albeit manically energetic as a kitten), and unfailingly benign in temperament, he has been a great companion for a very long time. He likes (liked?) to lick people he knows on the nose. It hurts to see him like this.

The vet will see him tomorrow, and perhaps we'll know more then.

UPDATE (8/6/17) - He's eating small quantities of things that are very fragrant and appealing (e.g., bonito flakes). The vet thinks the cancer may have spread to his lymph nodes; gives him a week or two. We're trying to keep him as happy and comfortable as possible in the interim.

UPDATE (8/14/17) - Buddy died tonight, hopefully without much pain. Tapped out about what to say, but a great cat who had I think a good life.

Monday, July 31, 2017

Video of a recent talk

A month ago (on June 30), I gave a talk at the Oxford Summer Conference entitled "A U.S. View of the EU State Aid Cases."  I briefly blogged about it here, and posted a link to my slides, which are available here.

The Oxford folks have now posted videos of all the sessions at the Sumer Conference, and a video of my talk is available here.

Friday, July 28, 2017

The latest on "tax reform"

Six Republicans in leadership positions with respect to tax policy - Ryan, McConnell, Mnuchin, Cohn, Hatch, and Brady - have now issued a public statement regarding their plans for significant tax legislation, which they call "tax reform." It appears to promise a more open, conventional, and committee-based process than that which the Republicans used with respect to healthcare. Other than that, here is the key paragraph, broken down sentence-by-sentence with my annotations after each:

"We have always been in agreement that tax relief for American families should be at the heart of our plan."  Comment: This is standard boilerplate. "Tax relief for American families," in the sense that this term is meant to have (e.g., middle-income two-parent households with children), will get only a small percentage of the benefits, if indeed they get any.

"We also believe there should be a lower tax rate for small businesses so they can compete with larger ones, and lower rates for all American businesses so they can compete with foreign ones." Comment: This appears to mean that the self-employed, even if they are extremely high-income, will pay lower tax rates than employees. I've commented previously on what a poor design feature this is. But there is admittedly an underlying dilemma here. All else equal, it might make sense to align the tax rates of small business and large business. And it might make sense to lower the tax rates for internationally mobile capital income insofar as it is only lowering the "normal" rate of return. But it makes no sense to tax employees at higher tax rates than the self-employed, and it's also likely to be extremely regressive. There are indeed ways out of the box, but they generally would require more significant structural changes than these folks appear to be contemplating at this point.

"The goal is a plan that reduces tax rates as much as possible, allows unprecedented capital expensing, places a priority on permanence, and creates a system that encourages American companies to bring back jobs and profits trapped overseas." Comment: They're not committing to how much they'll cut tax rates, but this (unsurprisingly) means as a practical matter that the proposal will lose revenue, requiring it to be phased out after 10 years unless they come up with some trick to avoid that result. "Unprecedented capital expensing" is a consumption tax-like result that would make more sense if accompanied by interest deduction limits, on which they are at this point silent. "Permanence" seems to mean they want to avoid the phaseout if possible, by one means or another, but I think it will be impossible unless they play games with the budget rules. "Bring back jobs" doesn't have a definite meaning unless it refers to lowering the corporate rate. Shifting to a territorial system (which I'd presume they'd want to do) is hard to square with these words rhetorically. The reference to profits taxed overseas presumably means that they anticipate no longer taxing U.S. companies' dividends from foreign subsidiaries - suggesting the enactment of territoriality - perhaps with a deemed repatriation at the transition. I've for years advocated taxing deemed repatriations, to address the foreign profits issue, but I suspect they'd have a very low repatriation tax rate, because otherwise the taxpayers subject to it (who have friends) might be unhappy.

"And we are now confident that, without transitioning to a new domestic consumption-based tax system, there is a viable approach for ensuring a level playing field between American and foreign companies and workers, while protecting American jobs and the U.S. tax base. While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform." Comment: That one speaks for itself. Buh-bye to the destination-based cash flow tax, at least for now. Ryan and Brady would have been politically unwise to fight further on this front.

Thursday, July 13, 2017

It all depends on how you look at it

The New York Mets must be the best team in baseball.  They have an All-Star outfielder whom their manager doesn't even plan to play.

Somehow it doesn't sound as good if you say that they have a manager who doesn't even plan to play their All-Star outfielder.

Speaker schedule for 2018 NYU Tax Policy Colloquium

We now have a tentative speaker schedule for the 2018 NYU Tax Policy Colloquium, which I will be co-teaching with Lily Batchelder. We'll be meeting on Tuesdays, from 4:10 to 6 pm, in Vanderbilt 208 (our usual room).  It goes like this:

1.  Tuesday, January 16 – Greg Leiserson.Washington Center for Equitable Growth.
2.  Tuesday, January 23 – Peter Dietsch, University of Montreal Philosophy Department.
3.  Tuesday, January 30 – Andrew Hayashi, University of Virginia Law School.
4.  Tuesday, February 6 – Gerald Auten, U.S. Treasury Department.

5.  Tuesday, February 13 – Vanessa Williamson, Brookings Institution.
6.  Tuesday, February 27 – Jacob Goldin, Stanford Law School.
7.  Tuesday, March 6 – Lisa Phillips, Osgoode Hall Law School.
8.  Tuesday, March 20 – Michelle Hanlon, MIT Sloan School of Management.
9.  Tuesday, March 27 – Damon Jones, University of Chicago Harris School of Public Policy.

10.  Tuesday, April 3 – Ajay Mehrotra, American Bar Foundation and Northwestern University School of Law.
11.  Tuesday, April 10 – Jason Furman, Harvard Kennedy School.
12.  Tuesday, April 17 – Emily Satterthwaite, University of Toronto Law School.
13.  Tuesday, April 24 – Wolfgang Schon, Max Planck Institute.
14.  Tuesday, May 1 – Joshua Blank, NYU Law School.

Leaving aside the horror of its being winter again at the time when the colloquium starts - and that will have happened anyway by then, colloquium or no colloquium - I'm looking forward to 14 interesting and diverse papers and discussions, and to another great semester.

Sunday, July 02, 2017

Travel reading

The amount I read for pleasure on my travels was reduced by my also needing to read papers that were being presented, while also polishing my presentations and working on my literature book. But, during the Mexico City and Oxford trips, I did get to read most of (1) Chimamanda Adichie's Americanah, and (2) Henry Blake Fuller's With the Procession.

In Americanah, it's a bit depressing from the perspective of 2017 to read about the characters' response to Obama's election and inauguration. But it's a really excellent work of both narrative fiction and sociology. A friend suggested that I consider it for my literature book, in which I'm not absolutely set on all of my current-era choices. But while it deals with class, and while I ought to deal with U.S. race-class interactions at some point, I don't see it as sufficiently directed at my particular interests in the book (as distinct from, as an American living in our society today).

With the Procession was published by Fuller in 1894 and is set in Gilded Age Chicago. I had decided, after initial inquiry well short of a full read, not to include it among my 3 U.S. Gilded Age chapters (which will deal in turn with Twain & Warner's The Gilded Age, Dreiser's The Financier and The Titan, and Wharton's House of Mirth). But it's sharply satiric and quite good, and certainly makes the list of the next 3 that I would have done from this era if I were spending more chapters on it (the others being William Dean Howells' The Rise of Silas Lapham, which I like but don't love, and Booth Tarkington's quite interesting The Magnificent Ambersons).

For those who might be interested, With the Procession is available as a free Kindle download from Amazon, although for some reason it can be hard to find in this format on their website.

Comments on the EC state aid cases at the Oxford Summer Conference

On Friday I spoke at the Oxford University Centre for Business Taxation's Summer Conference. This is a public event with a large audience, discussing matters of general tax policy interest, as distinct from the academic conference earlier in the week, which focuses on attendees' works in progress.

I discussed the EC state aid cases, with particular reference to the Apple-Ireland case, on a panel that was more generally focused on issues of tax uncertainty. My slides are available here. They're different and I think better than the slides I posted a few weeks ago when I discussed the same topic at a conference in Luxembourg. They generally aim to be balanced, fair, and above-the-fray.

Thursday, June 29, 2017

Some photos and an odd fact

From a Liverpool Beatles tour that I did today, in between yesterday's end of the Oxford academic symposium and tomorrow's one-day Oxford summer conference:

1) Here's where Julia Lennon was killed in July 1958 by a bus, moments after saying goodbye to John at the Mendips house where he was living with his Aunt Mimi.

2) On a more cheerful note, this is Strawberry Fields. And here's an odd fact: according to my guide, when Mimi would tell John that he'd get in trouble for climbing over the wall to spend time here (which he did around the back, not at the front gate), he'd reply: "They won't hang me for it, you know." The guide suggests that this is (part of?) what he had in mind when he wrote the line "Nothing to get hung about."
3) And here's the Penny Lane roundabout. There's also a barber shop and bank nearby, both apparently the same storefronts but extensively remodeled since back in the day.

Wednesday, June 28, 2017

Working in the same garden?

Courtesy of the Tax Prog Blog, I note that my old friend Mihir Desai, with whom I co-taught the Tax Policy Colloquium a few times, has published a book entitled "The Wisdom of Finance: Discovering Humanity in the World of Risk and Return."

From the description, it appears to be quite different from my literature project, but there is a commonality to our both engaging with the broader liberal arts, etc.  Plus, we have at least one text in common. To quote from what I take to be Mihir's opening:

"... This book is about how the philosopher Charles Sanders Peirce and the poet Wallace Stevens are insightful guides to the ideas of risk and insurance, and how Lizzie Bennet of Pride and Prejudice and Violet Effingham of Phineas Finn are masterful risk managers...."

Excuse me here while I break in for a moment  What's this "Lizzie Bennet"? It's ELIZABETH Bennet. Mihir doesn't know her well enough to call her that. I don't know her well enough to call her that. Quite improper, unless one is one of her intimates. Miss Bennet would be most displeased if she knew.

Monday, June 26, 2017

Comments on Kleinbard's "The Right Tax at the Right Time" (discussing his Dual BEIT proposal)

Today, at the Oxford University Centre for Business Taxation's 2017 Academic Symposium, I was the discussant for a paper by Ed Kleinbard that discusses his business tax reform proposal, the dual BEIT (dual for using the dual income tax to separate capital income from labor income; BEIT for business enterprise income tax).

The slides for my comments are available here. Two quick bottom lines might be (1) I think this proposal deserves to be on the agenda when people discuss business tax reform, and (2) for all of the various proposals out there, it's analytically useful to decompose them a bit into their multiple components.

Two acronyms in the slides that I didn't explain because I knew they would be covered in Ed's presentation are (1) COCA = cost of capital allowance (allowed to businesses on their assets inline of any actual interest deductions, and (2) PCO = participating controlling owner (who the proposal taxes on suspected labor income that has been retained at the entity level rather than being paid out as salary).

Wednesday, June 21, 2017

"Tax Scholarship, Illustrative Examples" panel at LSA

Today at the Law and Society Association's Annual Meeting, in Mexico City, I participated in a very interesting panel entitled "Tax Scholarship, Illustrative Examples."  Thanks to Neil Buchanan and Jennifer Bird-Pollan for arranging it.

My co-panelists were Leandra Lederman, Aja Mehrotra, and Lisa Philipps, and each of us had an entirely distinct topic. Leandra's was the relationship between tax enforcement and voluntary compliance, Ajay's was the rise of the VAT and why the US doesn't have one (with comparison to Japan, which didn't have one until 1989), and Lisa's was the relationship between  tax expenditure analysis and that of budget policy's effects on gender issues. The unifying theme, in part for more junior scholars in our informal LSA tax group, was looking at different directions that scholarship can take and the lessons for people who are in the earlier stages and still figuring out what sorts of things they want to and/or should do.

My talk was based on my literature and high-end inequality project, with particular reference to my Jane Austen chapter "Why Aren't Things Better Than This? Class Relations Within the Top One Percent in Jane Austen's Pride and Prejudice." But I also touched on the broader panel themes of deciding what sort of scholarship to do, etc.

The slides for my talk are available here.

Monday, June 19, 2017

Video of the Tax Reform panel at NYU last week

Here is the video of the tax reform panel at NYU last week. I speak from about 6:20 to 19:15.

Friday, June 16, 2017

Slight revision to my DBCFT slides

In case it's of interest, I've slightly revised my slides on the DBCFT. They are available here.

The only non-trivial change is the newly inserted Slide 11, which questions whether we all should continue focusing, to the degree we have been, on the DBCFT as  a leading tax reform instrument.

Thursday, June 15, 2017

VAT follow-up

At yesterday's ABA-Tax Analysts Tax Reform Panel, someone from the audience made the suggestion that, if Congress actually enacted a VAT, whether straightforwardly or via a disguise such as the DBCFT, it surely wouldn't be a pure-looking broad-based one. Rather, there would presumably be lots of special rules for particular industries, etc.

I actually once wrote and published a commissioned article about this very topic, for a conference on tax reform.  The piece is more than 10 years old, so the political discussion might be a tad out of date, but the more general points may still hold. It's available here.

Wednesday, June 14, 2017

ABA-Tax Analysts Tax Reform Panel

Today at NYU I participated in a panel, sponsored by the ABA and Tax Analysts, regarding the current prospects for tax reform (be it so-called or actual). My fellow panelists were Ajay Mehrotra, Peter Merrill, Ray Beeman, and Lee Sheppard. Here's a photo (courtesy of the Tax Analysts Twitter site). I'm second from the left, and the others are in the order in which I named them above.
Here's more or less what I said during my speaking slot near the start of the session (much of it based on the content of these slides):

There's an old joke in which a proud mother, watching her son march with the high school band, says: "Will you look at that! Everyone's out of step but my Johnny."

The U.S. federal tax system invariably brings this joke to my mind, at discussions of tax reform, because of how it differs from everyone else's.  All peer countries have a VAT, a lower statutory corporate rate than we do, and less relative reliance in their tax systems on income tax revenues.

It's not just due to the wisdom of crowds that we might reasonably suspect that we have it wrong. Our distinctiveness also contributes to the facts that (a) our tax system is more progressive than the norm, but (b) our overall fiscal system is considerably less progressive than the norm, plus (c) we have worse problems of tax competition and tax inefficiency than we would have if we conformed to standard global practice.

All that being said, tax reform is easy.  All that we need to do is: (1) enact a VAT, (2) lower our statutory corporate tax and overall reliance on income tax revenues, plus (3) take care of THE REST - i.e., make all other changes that are needed to get to an overall tax and fiscal system that we like.

Obviously, I'm kidding when I say that tax reform is easy. Even leaving aside the political issues, which I'll turn to shortly, the big problem lies in properly defining "THE REST." It includes deciding on: revenue levels going forward, spending levels going forward, and achieving desired distributional goals - which relate to people on both the top and the bottom of the wealth/income spectrum.

But the thing is, properly handling "THE REST" should mean that one can get a better fiscal system, by one's lights, whether one is on the left or the right politically, or anywhere in between.  Indeed, it even should mean in principle that there potentially are "Pareto deals" available from the standpoint of people on the left and the right. If they could negotiate in good faith towards creating a stable new fiscal system that included a VAT, there ought to be available options, with regard to "THE REST," that would leave both sides happier than they are now. For example, the left could get a bit more funding for social spending, the right a bit less capital income taxation, and if there is increased efficiency and inbound investment there ought to be a source of surplus available for them to split to mutual advantage.

But there are two problems that impede our getting to this happy state: (1) our broken politics, which would prevent us from either negotiating the Pareto deal or keeping it in place afterwards, and (2) the apparently unshakable political constraint against our having an explicit VAT.

Why can't we have an acknowledged VAT? Part of the problem is historical (1970s tax revolt, defeat of Al Ullman in the 1980 election after he advocated a VAT, Reagan "revolution," etc.). But it's more than just historical - after all, decades have passed since then, and it still seems to be true.

To my mind, the key to why we can't have a VAT lies partly in the old Larry Summers joke that's frequently quoted but rarely analyzed. Larry reportedly said: "We don't have a VAT because conservatives view it as a money machine, and liberals view it as a tax on the poor. But we'll get it when liberals figure out that it's a money machine, and conservatives see that it's a tax on the poor."

People usually just mention this joke and move on. But there are two odd things about it. First, it's paradoxical. Why should liberals and conservatives be so myopic in opposite ways? Even if it's true, it doesn't make sense without further explanation. Second, it seems to make a prediction ("we'll get it once..."), but the prediction doesn't seem to be coming true.

So how can we explain these two odd aspects? I see two main points. First, even outside the US it's politically hard to introduce a new tax such as the VAT. In many countries, it got help from, say, its replacing rightly disliked gross receipts taxes, or being a precondition of joining the EU, or responding to a fiscal crisis. Without something like that, it's a hard political sell even without crazy US politics.

Second, US political dissensus, and both sides' risk aversion, stands in the way of a deal. While it's true that a tax system with a VAT can be superior to what we now have, from either a liberal or conservative standpoint, so long as "THE REST" is properly specified, it's also true that a VAT would permit either side (if it had control) to make the system worse, from the other side's standpoint (for the reasons that the Summers joke identifies). So the players are angsty about a VAT unless they are confident enough about what "THE REST" will look like, not just today but also in the future.

The end result is that one can only introduce a VAT by camouflaging it. And as it happens, for a structural reason only Republicans can currently do this. They can sub it in for the existing corporate income tax, and not admit that it's a VAT, thus avoiding both the label and the creation of a new tax instrument. But the Democrats can't do this, given that they generally want to retain the corporate income tax, unless they can identify something else to replace it with. (Here the payroll tax comes to mind, but the problem is that one can't turn it into a VAT and claim that it's still the payroll tax - whereas one can convert the corporate income tax into a VAT and pretend it's still a corporate income tax.)

Examples of a disguised VAT that would replace the existing corporate income tax include (1) Ted Cruz's "business flat tax" from the 2016 campaign, which Marco Rubio correctly, if inelegantly, called a "VAT tax" (i.e., a value-added tax tax), and (2) the destination-based cash flow tax (DBCFT) from this year's Ryan plan.

The DBCFT appears to be politically dead, but the episode was nonetheless politically illuminating. The public didn't understand it, and I thought at times that tax policy experts got a  bit confounded by it as well. Now, experts individually and collectively did a really outstanding job of analyzing, for example, its trade effects, the currency issue, possible legal problems under the WTO and tax treaties, etc. But where I thought they sometimes went wrong is in thinking of it as  really a thing - like, say, the Bradford X-tax is a comprehensive thing - rather than as an assemblage of distinct proposals that is incomplete unless one specifies the rest of the fiscal system.

Conceptually, the DBCFT has 3 main parts. First, it creates a VAT - clearly, in my view, a good thing if "THE REST" is suitably tailored. Second, it lowers the origin-based corporate income tax to zero. There are reasonable arguments for doing this, but in my own view (shared, for example, by business tax reform plan authors such as Toder & Viard, Altshuler & Grubert, and Kleinbard) zero is too low here unless one sufficiently fixes a bunch of other things as well. Third, it has its own "everything else," - including, in particular, a wage deduction. But (a) one can't really assess the wage deduction without looking at how wages are treated overall by the tax and fiscal system, and (b) we still haven't really fully specified the rest, so it's hard to tell without more if the sum total is good or bad. Also, putting the wage deduction into the same tax instrument as the VAT, instead of adjusting the overall treatment of wages somewhere else in the tax or fiscal system, appears to have huge downsides - pertaining, for example, to WTO and tax treaty issues, along with the refundability problem for exporters that would always have "losses" by reason of paying wages.

The apparently politically adverse fate of the DBCFT may tell us that disguising the VAT doesn't sufficiently address the political obstacles to adopting it. And I am not optimistic regarding the merits of what Congress might do this year instead. If they vastly increase the fiscal gap and also fail to achieve bipartisan buy-in, they will just be making things worse (and more unstable) and setting the stage for more and more lurching "tax reforms."

Wednesday, June 07, 2017

There is little reason for anyone outside the U.S. to be thinking about the DBCFT as such

The destination-based cash flow tax has been attracting excitement from all over the place, dim though its current U.S. legislative prospects appear to be. In the EU, for example, I'm going to at least 2 events later this year at which it will be extensively discussed, and I am sure there are plenty more such events.

I don't think the DBCFT merits all this discussion - not because it's bad (depending on the broader context and myriad design/implementation details, it might even be good), but because it's not really a thing in the sense that people think it is.

What is the DBCFT, basically? As per the slides I recently posted, what it would amount to, in the U.S., is (1) enactment of a VAT, plus (2) elimination of the origin-based corporate income tax, plus (3) a wage deduction, plus (4) various other details - e.g., interest generally included and deducted, but no net interest deduction.  Let's go through these features, one at a time.

(1) Enactment of a VAT - Nearly all other countries already have one. The key reason for talking about the DBCFT is entirely U.S.-specific. It's about enacting a VAT without having to call it that.

Now, it's true that the policy options other countries might want to consider could include raising their VAT rates and using the extra revenues to help fund eliminating their origin-based corporate income taxes. But if so, why not put it that way? Who needs all the rigmarole about a "DBCFT" to describe and evaluate such a policy move?

(2) Eliminating the origin-based corporate income tax - Other countries tend to have lower-rate origin-based corporate income taxes than ours. But all such taxes, including ours, face serious problems in a world of global tax competition. So there is a case for eliminating origin-based corporate income taxes.

There might also, however, be reasons for keeping them. E.g., in order to tax rents earned by domestic producers on exports (a particularly important issue for the U.S., what with its West Coast IP mega-firms). And/or, to back up the income tax on individuals. Due to such issues, a number of recent U.S. business tax reform proposals have proposed NOT zeroing out the origin-based, entity-level corporate income tax. E.g., Altshuler-Grubert, Kleinbard, Toder-Viard.

The debate here - should origin-based corporate income taxes be eliminated? - is an important one, in which there are significant arguments on both sides. But I think this debate is murked up and mystified, not clarified, by posing the question as "should we shift to destination basis." Yes, there's a good case for having a destination-based consumption tax (i.e., a VAT) in one's tax instrument toolkit. But it isn't either-or - again, the question is whether we should ALSO keep something of the origin-based corporate income tax.

(3) Wage deduction - This is an important feature of the U.S. DBCFT as proposed. In the particular U.S. context, it might cause replacing existing business income taxation with the DBCFT to be more progressive than replacing it with a VAT that raised the same revenue.

But as a more general or abstract matter, one can't have an intelligent or coherent discussion of the wage deduction without looking at the overall treatment of wages in a given fiscal system. So the right question is how should we treat wages overall, not whether taxes that were collected from business entities should have a wage deduction.

The original X-tax proposal by David Bradford (building on the Hall-Rabushka flat tax) was a coherent and comprehensive package. It took a VAT (be it origin-basis, as it was at the end for Bradford, or destination basis) and packaged it not just with the wage deduction, but also with worker-level taxation of wages at graduated rates in the context of also replacing the individual income tax. That was a comprehensive overall plan that one could evaluate coherently.

But, in the DBCFT as such, the rest of the package isn't specified, so we don't know what we're doing overall or why. Now, in the specific U.S. context in which it was originally proposed, this arguably made sense. Alan Auerbach's rationale for the DBCFT, as I understand it, was that, even if non-business income taxation remained largely unchanged due to underlying disagreements, inertia, etcetera, it might still be possible to improve taxation on the business side. That's perfectly reasonable, as an incremental reform idea in the U.S. context. But it doesn't change the point that the fundamental system features to think about aren't "DBCFT or not," but VAT or not, origin-based corporate income tax or not, and how should wages be taxed given the business tax instrument PLUS everything else.

(4) Various other details - In many other ways, the "DBCFT" label or packaging convention has the potential to make things worse. E.g., VATs typically ignore interest income and deductions; the DBCFT would tax interest income, while allowing interest deductions up to the amount of the interest income. But this seems to be proposed less for its own sake than as a consequence of tweaking the existing corporate income tax without having to admit that one is enacting a VAT.

Similarly, combining a wage deduction with the VAT potentially makes business-level refundability problems much worse. So, why not handle wages wholly outside the VAT, such as by adjusting positive tax rates on them directly in the tax instruments that we use to tax wages? Then we wouldn't have to worry as much about refundability, providing interest on net losses, etcetera. The placement of wage deductions inside the DBCFT appears to be a byproduct of subbing it for the corporate income tax without overtly having a VAT (and to make it more progressive than just adopting a VAT while everything else remains the same as a political constraint), rather than of any direct instrumental design rationale.

In sum, let's all (in the academic world, at least - politics may have its own packaging rationales) try to be less excited about the "DBCFT," whether said excitement is favorable or hostile. Instead, let's think more clearly about destination-based VATs, about the retention or not of origin-based income taxes on business activity, about the overall tax treatment of wages, and about the treatment of financial flows and, for that matter, financial firms - all of which might be conceptualized more clearly if we were less transfixed by the shiny new label.

Back from the EU

After a whirlwind European tour I'm back in the U.S,, and at the moment quite tired but I hope to recover swiftly as I'm off again in less than two weeks.

In some ways, this was the "If this is Tuesday, it must be Belgium" tour. I slept in my own bed on May 26, on the airplane on May 27, in Zurich on May 28-29, in Luxembourg on May 30, in Haikko Borga, Finland on May 31, in Warsaw near the airport on June 1, in Lodz, Poland on June 2, in Helsinki on June 3, in Tallinn, Estonia on June 4, and in Helsinki again on June 5-6.

That's a lot of moving around, but in addition to giving 3 talks I did get to see a lot of nice things. My travel strategy is to hit a new city, get oriented, walk around all day (for as long as I'm there) checking out museums, churches, neighborhoods, parks, restaurants, food courts, shops off the main tourist track, etc., etc., and after a couple of days you really do get a feel of having seen something of a place. And all the travel was flawless - no delays, and the planning (which took some effort) all worked out.

I'm off to Mexico City followed by Oxford in a couple of weeks, and in September will have a very different sort of trip (3 weeks in Berlin with only very limited side travel).

I consistently find that I quite like Europe, although I regret being so limited to just speaking English.