Comments at NTA plenary session on fiscal policy after the 2017 act and the 2018 midterm elections

Today at 10:15 am, the National Tax Association’s 111th annual meeting had a “plenary session” on the topic of Fiscal Policy After the Midterm Elections. The law prof on the panel was originally scheduled to be Michael Graetz, but he got trapped in NYC by the freak November snowstorm, so yesterday afternoon they decided to call for the left-hander, and asked me if I would be able to sub in as a panelist. I said yes, and here is approximately what I said in my 5-minute opening statement on the panel:

I have 5 points to make today about fiscal policy in the aftermath of the 2017 tax act and last week’s midterm elections: 

1) I don’t call what happened last year “tax reform.” Not because it was bad legislation – although I think that in the main it was, despite some good features – but because the term has become completely empty, and now just means “legislation that the proponents like.”

The 1986 Act was called “tax reform” because it related to a particular conceptual model that had captured the term’s then-agreed meaning, and that involved cutting rates and broadening the base while being at least short-term revenue and distribution neutral.

The 2017 act was unfunded, seems fiscally unsustainable, and in some ways narrowed the base, even from a consumption tax perspective (which I consider an entirely valid one for assessing “base-broadening”). For example, a broad-based consumption tax wouldn’t have industrial policy in it like that from the pass through rules.

2) The 2017 act’s proponents undermined its long-term prospects by allowing it to look unprincipled – For example, it doesn’t look like good faith to cut the corporate rate to 21% without either funding it or attempting to limit the use of corporations as tax shelters by high-earning owner employees. The passthrough rule look like sociological discrimination in favor of business types over professional types and employees, for no discernible reason other than the pass-throughs telling Congress “the C corporations got theirs, so we want ours.” Meanwhile, employees not only pay higher rates than non-employees who are doing the same jobs, but lose all business expense deductions.  This is not a defensible policy, even though it’s true that, in practice, actual employee business expense deduction claims may tend to include a lot of junk. 

The new restrictions on state and local income tax deductibility might have been viewed less hostilely in the blue states if the overall bill hadn’t looked to so many people as something that was politically targeted and designed in bad faith.

3) It’s hard to see a sustainable budgetary path forward – Democrats are unlikely to play the fools a third time with regard to addressing the fiscal gap, after Clinton was followed by Bush II and Obama was followed by this tax bill. This is dangerous for our country, and reflects a broader breakdown of cooperative political norms that are really vital to our national welfare.

4) The broader destruction of American social capital in recent years has further bad implications for the tax system – If no one believes in a fair, cooperative policy process any more, and the IRS has next to no auditing capacity and an inadequate budget, could we be risking a serious tax compliance breakdown, from changed behavioral norms?  It’s not impossible.

5) On a brighter note, thank goodness the unhelpful “worldwide vs. territorial” distinction in international tax policy discussion has been put to bed. By repealing deferral, we replaced “now or maybe later” taxation of foreign source income with “now or never” taxation, but the “now” has been significantly expanded. The new international provisions have serious flaws, but could in principle be cleaned up a lot if we still had a functioning bipartisan legislative process. And they do mostly focus on issues of genuine concern that tend to lack clear answers from a policy standpoint.

It’s also interesting to note that other countries are starting to copy aspects of the BEAT and GILTI. This might be good or bad for the U.S. and for the world, and doesn’t prove that the provisions are good ones, but it is an interesting trend to keep in mind.

It could conceivably betoken a future era of greater global cooperation than we observe right now. And why don’t I close now on that relatively optimistic note.

There are two types of people in the world: one kind, and the other kind …

… Or alternatively, there are two types of people of people in the world, those who believe there are two types of people in the world, and …

Death to cliched overstatement and all that, but still bimodal division can sometimes help to sharpen a point, brought to mind most recently by the portion of the weekend just past that I spent reading the booklet and/or playing the bonus material from the 50th anniversity super deluxe reissue edition of a famous double album called The Beatles, aka the White Album.

By the time I was in my teens, it was no longer quite so true, in terms of the “two types of people” trope, that one was either a Beatles fan or a Stones fan. Even leaving aside that most people were both, hence it was a matter of relative preference rather than exclusivity (i.e., more like “Jets or Giants” than “Mets or Yankees”), by this time the Beatles were a few years in the past, and hence it was more like “Stones or Grateful Dead.” I was more in the former camp, though decently appreciative of the latter. There also was perhaps a bit of “Springsteen or punk / new wave” – although Springsteen had some new wave cred, e.g., Patti Smith had covered “Because the Night” – and here I was definitely in the latter camp. Springsteen felt a bit too earnest, un-ironic, and reverently retro to me – again, with all due respect for his virtues.

One also could say, along I would think with Brian Eno, that the real 1960s choice for older cohorts ought to have been “Beatles or Velvet Underground.” (Sorry, Stones.) Except that here, once I caught up with the Velvets’ legacy in the late 1970s, my answer was definitely “both.”

Returning to Beatles vs. Stones, however – with apologies for returning to a topic that I gather I have addressed here once before, albeit rather a long time ago (in August 2005), I did have a horse in this one despite its being a retro issue by the time I was able to take sides. The Stones spent the 1960s doing one great song after another (albeit, with dross mixed in as album filler). They also had a handful of great albums – in particular, the very good Between the Buttons (1966, with Brian Jones diversifying the sound palette) followed by the immortal Exile on Main Street (1972) and then the crucial comeback album Some Girls (1978). And Jagger in his true glory days could express vulnerability, not just grandiose swaggering, in a way that added to their work’s depth. But the Stones had good enough image management – not least by Jagger and Richards themselves – to succeed in creating widespread misapprehension of the true contrast between these two great and artistically overlapping groups.

I refer, of course, to the conceit that the Beatles were mainstream while the Rolling Stones were outrageous rebels. Now, it is true that the Stones sometimes went places where the Beatles, apart from Lennon, didn’t entirely want to go. But does anyone today think that “Street Fighting Man,” contrasted at the time with “Revolution” as showing that the Stones were more anti-Establishment, was even 10% as cathartic and heartfelt? (BTW, I hold no brief for Lennon’s post-Beatles “Imagine,” which I find mawkish and unconvincing.)

If the standard Beatles vs. Stones view were more accurate, then we wouldn’t see such outcasts and outsiders as Elliott Smith, Kurt Cobain, and Fiona Apple embracing the Beatles so fervently.

I see 2 main distinctions between the Beatles and the Stones. (Other than the Beatles’ having the inadvertent wisdom to break up at their peak, hence never have a decline phase other than as individuals.) The first is that the Beatles were outlanders who didn’t know the hip London definition of cool; hence they had to make it up for themselves. This aided their being more creative and original. (The Stones were overly in thrall to the idea of simply re-creating the blues as practiced by their heroes – the Beatles’ cast of heroes was more diverse and hence more artistically empowering.)

The second was the dynamic nature of the Lennon-McCartney partnership. (But note also that Harrison chafed at being an underling, to the band’s artistic benefit, especially at the end.) Jagger once commented that, of every 10 things the Beatles were going to do, both Lennon and McCartney wanted to run 9 of them. He then added, with the benefit of several decades’ hindsight, something like: “You can’t run a business that way.”

No, you can’t, which is why the Beatles exploded into a rain and reign of lawsuits and bitter take-down songs about each other, whereas the Stones’ corporate enterprise just kept going and going and going, well past the point of tedium. But going back to the very day (back in 1958) when Lennon and McCartney met, there was no clear hierarchy between them, but rather a dynamic tension. Lennon was the older and more forceful one with the cohort of bandmates / followers. But McCartney had more musical chops and had already started songwriting. So it was a continual struggle, friendly and synergistic until it inevitably blew up, that made each of them both better and keener. In a sense, each made the other feel like Scottie Pippen, being strengthened by his daily practice battles with Michael Jordan.

By contrast, Keith Richards has great fun chafing at Jagger in his autobiography, and he notes that he’d write most of a song, then hand it to Jagger to finish up (e.g., the verses in Satisfaction). Plus, he was clearly the main force behind Exile on Main Street. But his chafing reflects that Jagger, as lead singer and group spokesman, was far closer to being the boss than either Lennon or McCartney could ever dream of being in their partnership. This dynamic instability and rivalry (e.g., who gets the next single? Whose material is going to be stronger on the next album? He’s written another “masterpiece” – John’s very word for “Hey Jude” – how am I going to answer it?), combined with mutual admiration and help, and with their both complementary and overlapping strengths, pushed each of them further than he would ever have gotten by himself (or ever would again).

But this bring us to one last “two types of people” bit. Among Beatles fans, as one of the reviews of the White Album reissue noted, there are Sgt Pepper fans, and White Album fans. Well-honed pop perfection, or crazy creative explosion that’s all over the map, sometimes excessive or silly but almost always (if you can peel back the years and all the over-exposure) fresh and startling? Count me as very firmly on the White Album side (although I also give highest marks to the very cohesive Rubber Soul and Revolver albums). It’s an astounding achievement, with multiple stunning peaks, and (for the most part) all the more lovable, and admirably audacious, for its flaws.

The expanded reissue has a crisp sound where you can hear separate instruments more clearly, plus a fantastic 75-minute Unplugged album (aka the Esher demos, which I already had but not with such high-quality sound), plus 3 more disks of often very interesting outtakes and alternative or early versions. These last 3 require prior fandom and knowledge in order to be worth it (and again, some of it had been bootlegged with inferior sound), but if you have that they’re very interesting. Plus, they often have a great live band feel. The material on these disks confirms that the Beatles mostly made the right choices in developing the White Album material – leaving aside the regrettable over-orchestration of Good Night – but its release further enriches their legacy. (I didn’t buy the Sgt Pepper reissue, knowing that there wouldn’t be all that much of fresh interest there.)

Here’s hoping that next year they’ll do something of a multi-disk character with the Get Back / Let It Be sessions (the Abbey Road sessions were too concise and focused to leave as much interesting material lying around). Or maybe it could all be combined in a “Beatles 1969” package.  If they do it right, as they did this time, I’ll buy it.

Tax conference in Copenhagen, DK

On Monday, I discussed the new U.S. international tax rules, and what they might mean for the future (from both a U.S. and a European Community perspective) at an International Tax Conference that was held at the Copenhagen Business School.

The slides are available here. The paper on which the talk was based is available here (Part 1) and here (Part 2).

Slide 23 was new, reflecting that I was giving the talk to an EC audience. I elaborated a bit in person on the last text box in the slides, from the perspective of: What should tax policy folks in the EC be thinking about the U.S., as an ally/partner/rival/potential dealmaking counterparty, etc.?

It was lovely to be in Copenhagen, which I had not previously visited, although close family members had (rightly) given it rave reviews. I lucked out on the weather, and if, after getting home after 10 pm last night I had to give a two-hour Tax I lecture this morning at 8:50 am, then I have only myself to blame, and/or I chose to do this with my eyes open.

Sometimes these days, when one visits a lovely European city on business, one asks oneself, on the return: Why exactly am I going back? (Leaving aside all my personal and professional connections in the U.S., which needless to say are entirely binding.)

I absentee-voted before leaving on the trip, as I knew the polls would be closed by the time I got back.

Suppose you were to guess: How many times, while I was in transit or away, did I check any U.S. news of any sort on my various screens or otherwise, leaving aside sports and culture?

If the over-under is one time, and you are betting on this, I strongly advise you to take the “under.”

In addition to touring Copenhagen a bit during such time as I had (I was there for about 72 hours), I also managed  to read 3 books on Kindle, each of which I quite enjoyed: Mick Herron’s Slow Horses, Angela Thirkill’s High Rising, and Donald Westlake’s The Fugitive Pigeon. The common theme was (a) escapism / easy to read while tired and/or stressed, plus (b) good literary quality.

International tax talk tomorrow

Tomorrow morning, I’m flying to Detroit, thence by wheels to Ann Arbor where I will give a talk at the University of Michigan Law School. It will be in re.my recent Tax Notes article, “Tne New Non-Territorial U.S. International Tax System,” part 1 of which is available here, and part 2 here.

This is actually the first of 5 occasions on which I’ll be discussing the paper, and/or issues within its purview, within the next couple of months. The other 4 occasions are as follows:

1) this Friday, October 26, at a Fordham Law School conference entitled The Future of the New International Tax Regime, registration & other info available here.

2) Monday, November 5, Copenhagen Business School, International Tax Conference: Recent Developments in International Tax Law, registratrion and other info available here.

3) Friday, November 16, National Tax Association Annual Meeting, in New Orleans, 1:45 pm session on a panel entitled Legal Perspectives on the TJCA.

4) Tuesday, December 11, faculty seminar at Bar-Ilan Law School, Tel Aviv.

I’ll also be back in New Orleans on January 5, participating in an American Association of Law Schools annual meeting panel entitled “The 2017 Tax Changes, One Year Later.” But here I suspect the paper would be somewhat misdirected in terms of what I anticipate being asked to discuss.

It’s always good for business if you can standardize your talks and keep giving the same thing. (At the cost of its being boring for you, and for any repeat audience members.) But in this set of instances I’ll be speaking to some rather distinct audiences, besides which my speaking times will vary from 13 minutes to 50. So I will certainly have to do a lot of customizing.

As it happens, the topic remains of current interest to me, as I have in mind the plan of writing a short book updating my 2014 publication, Fixing U.S. International Taxation. I see what’s happened since then as affirming and even vindicating the analysis in that book, which I feel in retrospect substantially anticipated what policymakers and scholars would increasingly realize are the real topics of interest in international taxation. (And the book is far less about saying “This is the answer” than “These are the questions.”) But there’s a need for an update – and I’m doing a fresh (although much shorter) book, rather than a new edition – because the law has changed, the debate has moved forward, and there are lots of new developments to discuss.

So I will have the new enterprise in mind as I discuss the by now months-old article with these various audiences.

2019 NYU Tax Policy Colloquium, Phase 1

We now have pretty much finalized our lineup of speakers for the spring 2019 NYU Tax Policy Colloquium, which I will be co-leading with Lily Batchelder.  It looks like this:

1.      Tuesday, January 22 – Stefanie Stantcheva, Harvard Economics Department.

2.      Tuesday, January 29 – Rebecca Kysar, Fordham Law School.

3.      Tuesday, February 5 – David Kamin, NYU Law School.

4.      Tuesday, February 12– John Roemer, Yale University Economics and Political Science Departments.

5.      Tuesday, February 19 – Susan Morse, University of Texas at Austin Law School.

6.      Tuesday, February 26 – Li Liu, International Monetary Fund.

7.      Tuesday, March 5 – Richard Reinhold, Willkie, Farr, and Gallagher LLP.

8.      Tuesday, March 12 – Tatiana Homonoff, NYU Wagner School.

9.      Tuesday, March 26– Michelle Hanlon, MIT Sloan School of Management.

10.  Tuesday, April 2– Omri Marian, University of California at Irvine School of Law.

11.  Tuesday, April 9– Steven Bank, UCLA Law School.

12.  Tuesday, April 16– Dayanand Manoli, University of Texas at Austin Department of Economics.

13.  Tuesday, April 23– Sara Sternberg Greene, Duke Law School.

14.  Tuesday, April 30– Wei Cui, University of British Columbia Law School.

All sessions will meet from 4:00 to 5:50 pm in Vanderbilt 208, NYU Law School.

I called it above “Phase 1” of the 2019 NYU Tax Policy Colloquium because we are planning to switch to the fall semester, and hence will have 14 more sessions in September – December 2019 (and then again in September rather than January 2020, etc.)

Domestic mischief

How might this have happened? Garbage cans get knocked over rather often in our house, and all resident humans deny responsibility.

The only lead we have to go on is that this individual was found very near the crime scene. Name Gary, age about 6, known to enjoy playing with rolled-up pieces of paper, which he will even, on occasion, fetch repeatedly (well, up to a point) like a dog.

The NYT’s Trump tax fraud story

In an alternative reality that I very much wish was our actual one, today’s lead story in the New York Times, “Trump Engaged in Suspect Tax Schemes As He Reaped Riches From His Father,” would be a political bombshell. In our actual reality, it may get drowned out, but it shouldn’t.

Suppose that this story were about any other twenty-first century major party presidential candidate, premised on his or her having been elected. That is, suppose we had this story about either actual President George W. Bush or Barack Obama, or hypothetical Presidents (because they lost the elections) Al Gore, John Kerry, John McCain, Mitt Romney, or Hillary Clinton. This would be a bombshell story – tax fraud connived at by the president! Talk of impeachment by the other party. Demands for investigations, etcetera.

But in the world we find ourselves living these days, it risks being just another story. We’ve got credible suspicions of obstruction of justice and collusion with a hostile foreign power to hijack an election. There are immigrant children living in prison camps. We have a Supreme Court nominee who has been accused of sexual assault and perjury. There are Emolument Clause issues that may involve corruption, bribery, and the outright sale of foreign policy favors, etcetera, and on and on. Against that background, investigative journalism that appears to show decades of tax fraud is a bit like someone’s kitchen oven exploding in Pompeii on the same day as the Vesuvius eruption. It gets lost in the din.

This whole environment, by the way, has tended to discourage me from commenting actively here on current politics. If you’ve read this blog for long enough, you may recall that I was a bit harsh at times on Mitt Romney during the 2012 campaign. But this was premised in part on the fact that I actually expected better from him. Plus, while he engaged in some quite aggressive tax planning that seemed open to question and audit challenge, it was well within the bounds of what well-advised people in his industry, working with the leading firms, were doing.

I don’t believe that the same can be said of the tax maneuvers described in today’s NYT article. Consider the discussion of All County Building Supply and Maintenance, using padded bills to transfer millions of dollars from Fred Trump to his children. As described in the article, fraud is the only word for it. Likewise, while self-serving, somewhat lowball valuations are nothing new in the estate and gift tax planning field, there is a limit. Reputable taxpayers, advised by reputable firms, don’t claim values that are only 5 or 10% of the lawful number. And they don’t set up clearly sham corporations, although there might be a case where the IRS claimed sham and the taxpayer had opinions from reputable (but well-compensated) tax lawyers explaining why they believed it had economic substance.

There will be a tendency for cynical people to say: “All very rich people do this.” I don’t think that’s correct, at least to anything like this degree. It’s partly about very rich people’s self-interest. Why commit fraud with all its downside risk, when there are plenty of lawful tax planning opportunities that can significantly reduce one’s liability anyway? (If not to the same degree.) And likewise, practitioners in the leading firms generally don’t get engaged in this stuff, which would be bad for their professional reputations (and which they might personally find offensive).

In this regard, recall the Panama Papers. Not a whole lot of outright tax fraud by rich Americans was revealed therein – it was more about rich people from other countries. Or the enactment of FATCA to address secret offshore bank accounts. This was generally thought to be about people with high-flying (or mid-flying) cash businesses, not about the names in the New York social register, if such a thing still exists, or Page Six of the New York Daily News.

So if Trump’s peer group is very rich people, what the NYT article describes does not appear to be anywhere near “par for the course.” On the other hand, if his peer group is criminals – and he has, of course, expressed outrage about Al Capone’s being convicted of tax fraud – then this is indeed the sort of behavior about which one would tend to suspect that they’re all doing it.

What about very rich people in NY real estate? Here I think it is well beyond the norm, but I admit that I don’t know with the same degree of confidence. I am certain that these people are not using people from the leading law firms to engage in tax fraud, but that doesn’t rebut the possible existence of a norm more dishonest than that which is followed by rich people generally. I recall, for example, that Jared Kushner’s dad was jailed on tax fraud charges, among others.

But I don’t think it would be much of a moral defense of Donald Trump to say that rampant criminality and blatant tax fraud were common among NYC real estate tycoons, even if this proved to be the case (and again, my point here is just that I can’t say from personal knowledge that it ISN’T the case). It would still be exceptional for people at his wealth level

How could the IRS have missed all this? I don’t know the answer to that, but if the Trumps were extreme outliers compared to the peer groups that the tax authorities had in mind, that might offer a partial explanation. Auditors may not try so hard to look for things that they don’t expect to find. They’re presumably not asking, for example, whether Jeff Bezos got paid $100 in cash to mow someone’s lawn and then didn’t report it. And while they may audit GE and question its transfer pricing, they’re probably not looking for off-the-books transactions in which GE was paid cash and didn’t report it. So analogously, by transgressing peer group norms (at least, as defined by the tax authorities), the Trumps may have benefited from the auditors’ assuming relatively normal behavior.

What are the tax consequences today? I’d like to hear from estate and gift tax lawyers about that, as it’s outside my area of personal expertise. But what I believe to be the case is as follows. Say Fred Trump filed a fraudulent gift tax return in 1990, or fraudulently failed to file. The fraud means that the tax return remains open, and this may support collecting the amount due from the beneficiaries, without any need to prove for this purpose that they were engaged in the fraud. But again, this needs verification from someone who knows more directly about all that.

Last point, are there income tax implications? Suppose that, having in mind here All County, $X was fraudulently diverted from Fred Trump to a company owned by his children. It’s treated as a payment for goods, or perhaps alternatively as a salary payment, whereas in fact it’s just a concealed gift via the markup. In this scenario, the correct income tax treatment would be that Fred doesn’t deduct it (or has higher gross income) and All County doesn’t include it, by reason of its actually having been a gift. But if their marginal tax rates are the same, the net effect on their combined income tax liability might be a wash. E.g., if both sides had a 40 percent marginal rate at the time, then Fred would have paid .4X too little in tax, and All County .4X too much. But it would be interesting to know more about All County’s tax planning, e.g., did it actually report the transaction consistently with this, if so did it deploy tax shelter losses to offset it, etc.

But here’s a further income tax angle suggested by the article. It says that, by age 3, Trump was earning $200,000 per year (in current dollars)  from his dad’s real estate empire. If this was being treated as salary, and being deducted by the father and included by the toddler-aged Trump, it could potentially have been criminal income tax fraud. A three-year old generally can’t perform services of sufficient economic value to support that salary. And there would be a purported income tax saving from the child’s having been able to benefit from the lower tax brackets with the respect to the amount at issue. But that’s not to answer the separate question of what would be the IRS’s legal recourse today, as the crucial fraud part would have been the deduction on Fred’s return, since Donald’s return would have involved over-reporting, not under-reporting, of taxable income.

Altera amicus brief

A number of law professors, headed by Susan Morse of the University of Texas Law School, have filed an amicus brief in the Altera case. I am a signatory, not because I participated in writing it (although I did review it before adding my name), but as a gesture of agreement and support. More particularly, this is an important IRS regulatory case, at least in its broader implications, I believe the government’s side in the case is clearly correct, but that the weight of self-interested businesses and people in the tax bar taking the other side requires countering by the considered views of people who care about the proper functioning of the tax system, without having economic stakes to consider. One wouldn’t want the court to be deceived about where, in my view, the weight of thoughtful opinion actually lies

The amicus brief is available here.

I blogged about an earlier Altera amicus brief here. Quick background: the case involves transfer pricing, or more particularly use of the cost-sharing regulations to enable U.S. companies to report as arising in tax havens the value of intellectual property (for foreign sales) that was developed by employees of U.S. companies working in the United States. The Tax Court held for the taxpayer, on grounds I personally found ridiculous although there are those who view it more charitably than I do (based largely on what I would call formalistic misunderstanding of how to apply rules that are meant to yield accurate, rather than absurdly manipulable, income allocations). The Tax Court decision also had implications potentially undermining, not just IRS reg authority when being exercised completely reasonably, but also the use of Treasury preambles to new regulations as genuinely explanatory, rather than litigating, documents.

Clint Wallace and Susan Morse took the lead in preparing amicus briefs two years ago that may conceivably have influenced the Ninth Circuit’s initial decision (by a 2-1 panel vote) in the government’s favor. But one of the majority opinion’s two signatories, Judge Reinhardt, had died before the opinion was issued. So it was decided, understandably I suppose, that a new judge had to be appointed to reconstitute the three-judge panel and decide it all over again.

The Morse et al amicus brief is arguing for the good guys in the “all over again” stage.