NYU Tax Policy Colloquium on Herzfeld, Defining Taxes in Economics, Accounting and Law

 Yesterday was our penultimate NYU Tax Policy Colloquium session. The semester has certainly gone fast. Mindy Herzfeld presented the above paper, and here are some quick thoughts that I had in response:

1. Overview

In a number of areas, legal rules distinguish between “direct” and “indirect” taxes, and treat them quite differently. Often “direct tax” means income tax (and wealth tax if pertinent) in particular, while “indirect tax” describes VATs, excise taxes, and so forth. The paper looks at 4 distinct areas in which some version of this happens:

a) US Constitution – Direct taxes, unlike indirect taxes, must be apportioned. As we discussed earlier in the semester, in connection with our discussing this paper by Jake Brooks and David Gamage), in 1895 Pollock held (contradicting prior authority) that income taxes are direct taxes for this purpose, although the 16th Amendment then intervened with respect to the need for apportionment. 

b) International trade law – VATs, as indirect taxes, can exempt exports without violating WTO rules. Income taxes, by contrast, as direct taxes, have been held to violate the WTO if they have export subsidies. The US learned this the hard way by losing WTO litigation with respect to its DISC rules, then FSC, then ETI.

c) Foreign tax credits – Under US federal income tax law, foreign tax credits are allowed only for other income taxes (or certain levies that are deemed to be in lieu of income taxes) that look sufficiently like out income tax. Recent proposed regulations make it clear that digital services taxes (DSTs) are not creditable.

d) Financial accounting – Income taxes get detailed reporting in financial statements. Other taxes show up, at best, in a single line entry for “Other Taxes,” or may even be amalgamated with other above-the-line items without separate reporting – e.g., being included in the cost of goods sold.

2. Overall takeaways

I personally find “direct tax” vs. “indirect tax” too underspecified and formalistic to be of much use analytically. However, once we recognize that the distinction often cashes out as things like income taxes vs. things like VATs, one can start drawing meaningful contrasts. Consider the following polar distinctions between pure or typical income taxes, and pure or typical VATs and other consumption taxes.

a) Is the normal return to waiting being taxed? In a pure income tax the answer is yes; in a pure consumption tax (such as a VAT) the answer is no. In practice, however, things may be far more blurred. For example, the existing US income tax has provisions such as the realization requirement, expensing for various capital outlays, and lower capital gains than ordinary income rates, that may make it more consumption tax-like. For that matter, a consumption tax that uses the “traditional IRA” methodology (deduct savings today, tax them when used to fund consumption) may place a tax burden on saving if the later tax rate is higher than the earlier one.

b) Is the tax base domestic production, or domestic consumption? An income tax is typically origin-based, while VATs are generally destination-based. Thus, in theory the income tax reaches all domestic production, and a VAT all domestic consumption. Note, however, that in practice each may exempt or tax-favor a significant portion of its presumed base. Plus, actual income taxes may have destination-based features. Consider, for example, the use of sales-based formulary apportionment in US state income taxes, along with US source rules for royalties that rely on where the items is used.

c) Who is the tax “on”? – We commonly think of business income taxes as being “on” the business itself. But when they collect and remit VATs or retail sales taxes (RSTs), we think of these taxes as being “on” the consumer. This distinction, however, lies somewhere in between being an economic incidence theory and being based on the taxes’ formal features.

d) Administrative timing – Income taxes often allow deferral for economically accrued income (and for such income that has accrued for financial accounting purposes). They also often have deferred resolution of reporting and audit issues. These tend not to be issues (at least, for the latter, to the same degree) with respect to consumption taxes such as VATs.

The paper performs a service by laying out such issues as these across the various contexts. But a question of interest is what main takeaways one should derive from the comparisons.

One takeaway might be that problems arise when these distinctions prove to be less binary in practice than they are in theory. However, this view was more prominent in earlier drafts of the paper than it is in the current one.

3. U.S. constitutional law

Here “direct tax” has a distinctive historical meaning. The phrase was inserted into the Constitution’s text at a time when modern income taxes (even in the sense of what the US had during the Civil War) did not yet exist. Moreover, while in other areas (such as WTO law) it’s clear that an income tax is viewed as a direct tax, this apparently was not the case in US constitutional law until the Supreme Court in 1895, pursuant to its right-wing members’ ideological mission of combating socialism, so held in not incredibly good faith.

Today’s right-wing Supreme Court majority will undoubtedly likewise so hold, if an unapportioned wealth tax comes before them. But many who are more on the left disagree, and much of the dispute comes down to the question of how much precedential weight (if any) one should give Pollock.

In my view, however one comes out in the end, this is a rather hard issue to relate to the other three that the paper discusses. The distinguishing point is that it involves the interpretation of cryptic eighteenth century text that predated the modern context.

4. Trade

Again, the WTO bans export subsidies in direct taxes such as income taxes, but it allows indirect taxes (such as VATs) to tax imports and exempt exports.

The historical and political grounds for this distinction may pre-date the WTO, reflecting earlier stages such as the GATT. But in economic models, based on idealized models of an income tax on the one hand and a VAT on the other, it makes perfect sense.

Suppose that we have, on the one hand, an origin-based income tax that reaches all domestic production, and on the other hand a VAT that reaches all domestic consumption. Then an export subsidy in the income tax, equivalently with an import tariff, violates free trade principles and ought to be struck down under a global free trade agreement. By contrast, the VAT’s taxing the full value of imports and exempting exports does not violate free trade principles and should not be struck down. Without providing the full analysis here, it is simply tautologically correct under the assumed premises.

So what’s the problem with drawing these distinctions in WTO law? Insofar as the analysis is correct, US resentment of the decisions striking down DISC, FSC, and ETI, and associated griping about why the VATs (which everyone else has) do better, is simply misguided.

But in fact there are two big problems with accepting the binary distinction in current WTO law:

a) The models are too simple – As noted above, it’s not quite true that actual income taxes reach all domestic production and only that, whereas VATs reach all and only domestic consumption.

Starting with the income tax, suppose various income tax preferences either wholly or partially exempt production for the domestic market. (E.g., consider tax preferences for real estate). Then tax-favoring exports may not, on balance, cause the latter to be, in the aggregate, more favorably taxed than the former. Indeed, it’s conceivable that export subsidies might in practice push towards leveling the playing field.

Turning to the VAT, suppose (as is generally true of existing VATs) that it exempts or effectively excludes lots of domestic consumption, and that this tends mainly to benefit domestic production. Examples might include food, financial services, the informal economy, and small businesses that are exempted. Collecting the full VAT on imports, when home production often escapes being taxed, might end up being a bit tariff-like.

b) Hybrid instruments – Recent decades have seen the birth of the proposals that occupy space in between existing income taxes and VATs. For example, the Hall-Rabushka flat tax, David Bradford’s X-tax, and more recently the DBCFT put businesses on what is effectively a VAT plus wage deductions. Most legal experts view this as making them direct taxes for WTO purposes, with the consequence that they might be viewed as containing illegal export subsidies. But proponents say: Why should they be treated any differently than VATs, when the economics are the same? (Whether they are actually the same depends on how one analyzes the wage deduction, but here they note that it could be placed in a separate tax instrument from the VAT, avoiding any WTO violation even if the overall economics were now in fact entirely the same).

The conclusions I would reach are as follows. First, it’s a serious question whether the application of the binary distinction to actual income taxes and VATs is more problematic than the textbook economic analysis would suggest. This is partly an empirical question: how consequential are the real world deviations from the pure models?

As to the hybrid instruments, I (and most others) tend to accept the proponents’ argument that finding WTO violations for what are essentially formalistic reasons does not make a great deal of sense. But even if this is so, the rise of hybrid instruments may present real challenges for the binary WTO distinction that could get worse if and as further variants in the hybrid space emerge.

5. Foreign tax creditability

The US rules limiting foreign tax credits (FTCs) to income taxes in the US sense can lead to some odd results. For example:

–A Haig-Simons income tax, while a truer income tax than ours, would not be creditable because it would not use realization.

–Some years ago, Bolivia considered replacing its corporate income tax with a flat tax, but then backed off when it learned that this tax, unlike the instrument that it was replacing, would be non-creditable. Flat tax proponents responded, with understandable indignation, that it was hard to see why the US would seek to discourage such a tax change, rather than regarding it as an internal Bolivian decision that had no adverse impact on US interests. On the other hand, it is true that VATs (which a flat tax resembles, as it is simply a VAT plus wage deduction) are not creditable, a feature of the US rules that has not attracted significant complaint.

The big current issue in this area is the recently issued proposed regulations that make it clear that DSTs paid by US companies abroad do not get the FTC. They might already have been non-creditable because they are gross, not net, taxes, but the proposed regs also take aim at them for not following traditional international norms with respect to tax jurisdiction.

My own view about this is twofold. First, I think the US rules are logically wrong (or inconsistent) in thus distinguishing between DSTs and traditional source-based income taxes (or more specifically taxes in lieu thereof, such as gross withholding taxes). But second, the denial is at least arguably in the US national self-interest.

The logic supporting DST creditability – As Wei Cui has argued (and as I largely concurred here), multinationals often have limited marginal costs of using their digital platforms in a given country. Thus, a tax on their gross advertising revenues from exploiting a particular national consumer market may not be all that different from their net revenues. Indeed, a gross measure might even come closer in practice to capturing the true net than a purported net measure in which they got to play lots of fun and games.

Additionally, DSTs generally have a very traditional corporate income tax aim. They seek to impose some tax on income that the multinationals derive from tapping their consumer markets. This truly is domestic source income if one adopts a destination-based rather than an origin-based view of source (and actual income taxes do indeed do this to a degree), yet the companies have been able to avoid paying it because they don’t need physical presence, permanent establishments in the jurisdiction, etc. In that sense, they are in substance traditional / playing defense rather than offense, however novel their means of doing this may be. So there is a powerful logic in favor of the view that they are merely in lieu of traditional corporate income taxes, and hence as a matter of logical consistency ought to be creditable just like the traditional instruments that they, in effect, aim to revivify.

National welfare grounds for denying FTC creditability – But this is not to say that the US ought to credit them. As I have written in various formats (for example, here), it generally does not make sense, as a matter of unilateral national self-interest, to offer resident companies 100% reimbursement of their foreign taxes paid. And, while this can potentially make sense reciprocally or multilaterally (i.e., we’ll credit your income taxes if you credit ours), the US is not in the position of imposing DSTs that it would like other countries to credit.

More broadly, however, why should we generally limit creditability to foreign income taxes? As noted, for example, here, the policy reasons for doing this are, at best, far from obvious. Perhaps the best and only reason one can come up with is that this is the deal countries implicitly made – insofar as there ever was a deal to begin with. That is, the reciprocal practice in fact applied to income taxes and nothing else (albeit, not really to income taxes given that one could exempt foreign source income instead of crediting the source-based taxes).

6. Financial accounting

Whether or not financial accounting should provide for greater disclosure than it does with regard to non-income taxes, it is easy to understand why it requires the more extensive income tax disclosure than it does. Reason 1 is that deferral for taxable income relative to accounting income means that there are deferred liabilities to consider – not similarly an issue in the ordinary course for, say, VATs. Reason 2 is that income tax reporting positions that are uncertain to prevail may commonly linger unresolved for a significant time – again, less of an issue in other contexts (where disclosure may be required in special cases where there is such an issue).

While those two reasons are surely the operative ones in practice, there’s arguably a third reason why we might be glad that financial accounting provides as much information about companies’ income tax liabilities as it does (which is not to say that it currently provides enough, or does the analysis entirely right). Because the income tax planning space is so capacious, especially internationally, capital markets may derive valuable information from disclosure of how much in such taxes given companies are paying relative to their reported financial accounting income. For example, investors might like companies that are very aggressive. Or, they might alternatively fear that such companies are also aggressively managing reported earnings and/or engaging in managerial diversion of profits. Either way, they may learn more from reporting about income tax liability than from that concerning other taxes that are less planning-susceptible.

Is this binary distinction also susceptible to breaking down in practice? Maybe so. Had the US adopted the DBCFT in lieu of the existing corporate income tax, back when the House Republican leadership was briefly contemplating doing such a thing, this would have given the financial accounting authorities an interesting classification challenge. They were probably as relieved as anyone not to have to face it. But in any event, the issues that control how best to draw lines in financial accounting appear to me to be quite distinct from those that are most relevant, say, for WTO purposes.

In the end, therefore, these various disputes may all end up proceeding on separate tracks, even if to a degree they employ common language and concepts.

New drafts and publications

 I have just now posted on SSRN a copy of my short piece, “Tax Law, Inequality, and Redistribution: Recent and Possible Future Developments.” It’s available here, where you can also read the abstract.

On Monday, I will be posting on SSRN my recent Tax Notes publication, “Bittker’s Pendulum and the Taxation of Multinationals.”

I also today submitted to the publisher a final manuscript for my forthcoming book “Bonfires of the American Dream in American Rhetoric, Literature, and Film.” The next stage is copyediting, and the target date for publication is May 2022.

NYU Tax Policy Colloquium on Mason & Knoll, Unbundling Undue Burdens

 Yesterday at the colloquium, we discussed the above article, coauthored by Ruth Mason and Michael Knoll. In a welcome departure from COVID-era norms, they were actually both physically present for the event.

The article is the fruit of a LOT of research, including careful reading of a large number of Supreme Court cases on the dormant commerce clause (DCC), in both the tax and regulatory realms. This is one of those times when one says: I’m glad they did it, so I don’t have to. These cases are notoriously turgid, all over the place, and difficult to fit into a coherent framework. But they are also, I think, important.


Let me start with a bit of background shorthand from the paper, so that the terms noted here can simply be plugged in below.

Internal consistency – In the 2015 Supreme Court case of Maryland v. Wynne, the Supreme Court struck down a Maryland tax provision on DCC grounds as violating “internal consistency.” (Knoll and Mason wrote an amicus brief, urging analysis that the Court then adopted.) This term is useful but not immediately intuitive, and hence worth explaining briefly here.

Maryland’s income tax taxed residents at 3.2% percent on both Maryland and non-Maryland income. It provided no credit for non-Maryland state income taxes paid on non-Maryland income. It also taxed nonresidents on Maryland source income at 1.25%.

Maryland argued that this tax oughtn’t to present a DCC problem. After all, it taxed Maryland residents’ outside income at the same rate (not a higher rate) than their local income, and it taxed non-residents at a lower rate than residents. But the tax was struck down as discriminatory against interstate commerce because it violated internal consistency.

The question asked by internal consistency is whether, if each of say 2 states adopted the challenged rule, cross-border transactions between them would be disfavored relative to same-state. The answer here was YES. Suppose we have Maryland 1 and Maryland 2, each with the same rules. A resident of either state would pay tax at a 3.25% rate on in-state income. But income earned in the other state would face a 4.45% tax rate (3.2% under one’s own state’s residence-based tax, and 1.25% in the other state from the source-based tax, with no abatement given the lack of home-state credit).

Knoll and Mason, along with Alan Viard, have discussed elsewhere why internal consistency is a sound economic method for identifying provisions that are tariff-like in the sense of burdening cross-border activity relative to one-jurisdiction activity. Obviously, an overt tariff would violate internal consistency, since only cross-border trade would lead to its being incurred, but the aim here is to generalize the concern and the inquiry.

Note that the inquiry does not involve actually looking at what other jurisdictions do. Although I agree with Mason and Knoll that this is an appropriate mode of inquiry into both the DCC and international equivalents (e.g., the ECJ’s review of member tax provisions that are charged with violating the EU’s commitment to a single market), the point for now is just that it offers a powerful and convenient analytic.

Pike balancing – In Pike v. Bruce Church (1970), the Supreme Court struck down an Arizona rule requiring cantaloupes that were grown in-state to be boxed in-state. The claimed rationale for the rule related to letting consumers know that particular cantaloupes were from Arizona (thus, e.g., spreading awareness of their quality). But it violated the DCC by burdening companies from out-of-state that might have boxing facilities (and cantaloupes) from elsewhere. “Pike balancing” is the process of thus weighing benefits vs. the burden on interstate commerce where it is a single-state issue. That is, one is looking at the Arizona rule independently of the question of how it fits with other states’ rules.

Bibb balancing – In Bibb v. Navajo Freight Lines (1959), Illinois had required truckers that were using its roads to use curved mudflaps to protect the cars behind them, whereas other states were requiring straight mudflaps. The Supreme Court struck down the rule under the DCC. Here the issue involved “interaction burdens” rather than a single-state analysis. That is, there was nothing wrong with curved mudflaps as such. But given other states’ widespread adherence to a straight mudflaps requirement, trucks engaged in interstate commerce would have to stick on new mudflaps – kindly made available, for a fee, by local Illinois businesses – if they wished to use Illinois roads. Just as in Pike, the court balanced legitimate in-state benefits (e.g., suppose the curved mudflaps worked better, at least under Illinois’ road conditions) against the burden to interstate commerce. But Bibb balancing differs from Pike balancing because it not only requires examining a broader set of questions regarding how different states’ regulations interact with each other, but also (if a DCC violation is found) may in effect require the courts to pick between alternative rules and cement one of the choices in place simply because it has become the prevalent one. This has various downsides, such as its potentially impeding the emergence of new and improved approaches. But if one doesn’t do it, one is inviting states to play the kind of destructive game that Illinois may conceivably have been engaged in here.

Green margarine rules – This term isn’t in the paper, but I find it expositionally useful. Wisconsin is a big dairy state, and hence a butter producer. Margarine predominantly comes from outside the state. For many years, Wisconsin forbade the in-state sale of yellow margarine. (I remember hearing decades ago from my parents that Wisconsin required margarine to be green, which apparently is not true – it could be white under the rule. But let’s say green because it is more vivid.)

A green-margarine rule in a dairy state looks on its face like it is simply there to help consumers tell apart margarine and butter. But in context it may be sneaky protectionism, aimed at reducing consumer demand for the imported relative to the local product because yellow is the color that looks right to them in this context.

It seems to me that the green-margarine rule ought to have been challenged on DCC grounds, but if it was the challenge apparently failed, and there is no well-known precedent. So let’s just call this type of effort at disguised protectionism a “green margarine rule.” Whether we group a challenge to it under Pike or Bibb (an issue that I discuss below), it seems clear that there is a DCC issue that may need, under existing precedent (but for good reason) require the court to balance the burden to interstate commerce against the legitimate (i.e., non-protectionist) benefits.


The DCC can reasonably be viewed as reflecting an underlying set of views about both economics and politics. These are worth describing briefly because they affect not only its merits (some Supreme Court members, and of greater intellectual interest also some commentators, want to get rid of it), but also its interpretation.

In brief, the DCC empowers the federal courts to strike down state rules (whether taxes or other regulation) that are protectionist. The classic protectionist rule is an overt tariff, but a DCC inquiry also looks at provisions that are challenged as being tariff-like.

The DCC thus applies a bit selectively with regard to the totality of distortions that might arise from a given state’s having distinctive taxes or other rules. Other problems may be addressed by Congress, exercising its legislative powers under the active commerce clause (ACC), but are thought to lie outside the proper scope of DCC review.

For example, whenever two states have different tax rules in any way, this can violate locational neutrality. For example, if State A has a lower income tax rate than State B, this creates an incentive to earn income in A rather than B. But while Congress may address locational neutrality problems under the ACC, the courts don’t do so under the DCC.

Likewise, there may be spillovers such as that resulting from a race to the bottom. An example is tax competition – if one views it as normatively creating a race to the bottom, rather than (as I discuss below) to the top. Again, Congress can address this under the ACC, but courts don’t under the DCC.

Another issue is tax exportation (actual or attempted), but to things from getting too longwinded I will leave it out here.

Economics – There is a long tradition, prominent (for example) in the work of Adam Smith, to the effects that tariffs are generally inefficient. Indeed, unless a given jurisdiction has the requisite market power, it is likely to make itself worse-off on balance, not just the people in other jurisdictions, by reason of imposing them. Moreover, while it’s true that “optimal tariffs” (where one has the requisite market power) can benefit the jurisdiction that imposes them, there is still likely to be deadweight loss from the standpoint of all jurisdictions – suggesting that they should all agree to forgo even optimal tariffs if they are making this choice behind the veil.

If we accept the generalization that tariffs are bad, and what’s more view the federal courts under the DCC as well-situated to police the field, then it may make sense to hand them this power. But locational neutrality has far less definite policy implications, once one accepts that it nonetheless makes sense to allow inter-jurisdictional rule variation. So relegating this to the ACC and legislative choice makes sense.

Likewise, the only difference between a “bad” race to the bottom and a “good” race to the top is how one views the suggested equilibrium normatively. Consider the classic case of Delaware’s preeminence with respect to corporate law. This was once viewed as a race to the bottom, allowing managers to exploit the shareholders by reason of incorporating in a place where the governance rules are lax. Then it came to be viewed as a race to the top, on the ground that capital markets work well enough to incentivize good place of incorporation choices by founders and managers. Thus, the question of whether the race to Delaware should be addressed at the federal level depends on one’s view of how well capital markets are functioning – an issue completely distinct from that of the spillover process as between the states, when Delaware succeeds in capturing this business. Once again, the implication is that this is a legislative policy choice, and hence reasonably placed within the reach of the national legislature under the ACC, but not handed to federal courts under the DCC.

Politics – Why is there even a problem with tariffs (other than optimal tariffs), if sub-federal jurisdictions don’t generally benefit from imposing them? So why even bother with higher-level oversight. The standard answer is that jurisdictions are prone to enacting tariffs, and other tariff-like protectionist provisions, due to interest group politics. For example, concentrated producer groups and their lobbyists prevail legislatively over diffuse consumer interests.

So there is also a political theory under which the states might actually want federal oversight, including via the federal courts and the DCC, in order to help protect them against themselves. But this theory is about protectionism in particular. In other scenarios, even if the states are willing to concede (and indeed have conceded) ACC powers, they may not want to make it federal oversight as automatic and widespread as the DCC may make it with respect to protectionism. Plus, again, the optimal remedy isn’t so clear with respect to locational neutrality and race to the bottom vs. the top scenarios.


Again, both internal consistency as in Wynne, and Pike balancing, involve a single-state analysis. One is looking at a given state’s rules in isolation, not at how different states’ rules interact as in Bibb.

Under existing doctrine, endorsed by Knoll and Mason, internal consistency is distinctively relevant to tax cases, and results in per se finding of commerce clause violation – no Pike balancing needed. This potentially raises issues of tax exceptionalism that I discuss below. But herewith are a few efforts to poke at the distinctiveness, notwithstanding that (for reasons I’ll omit here) I am generally comfortable with this state of the doctrine.

Internal consistency in form, but arguably not in substance – Suppose a state with a retail sales tax imposes a use tax rate (for purchases of out-of-state) that exceeds the sales tax rate on sales made in-state. On its face, this is a clear violation of internal consistency, and indeed it could scarcely look any more tariff-like. But suppose that widespread avoidance of the use tax meant that this was, in the aggregate, moving towards the overall equalization of effective tax rates on in-state vs. in-bound sales. Would this potentially offer a defense, at least requiring the court to evaluate the underlying merits instead of striking down the higher nominal levy per se? If so, do we enter the realm of Pike balancing?

No internal consistency violation in form, but arguably yes in substance – Recall the Wisconsin “green margarine rule.” On its face, this has nothing to do with internal consistency. But suppose we consider this requirement equivalent to an explicit tax – and Wisconsin indeed had a margarine tax, on top of the green margarine rule – and generalized it as “Impose a special tax on mainly non-local businesses that compete with mainly local businesses” – then one could view it as an internal consistency violation. Is this a helpful perspective, at least in the quest for intellectually consistent rules across the board?

Can internal consistency apply beyond tax? – In the green margarine example right above, I considered both calling the rule in effect a tax, and stating it in a more general form (which the state imposing it would of course dispute). But what if we look at single-state analyses of other standard examples from outside the tax realm. Thus, recall Pike, in which, as discussed above, Arizona tried to require in-state boxing of Arizona cantaloupes. 

Suppose that all states required in-state boxing of in-state cantaloupes. Then you have 2 cantaloupe-growing states, Arizona and California. Any one-state cantaloupe grower can enjoy the efficiencies (if there on balance) of boxing everything at the same plant. But any two-state cantaloupe grower needs to have two boxing plants, one in each state. This might conceivably create competitive disadvantage for multi-state cantaloupe growers.

I run through this simply as a way of getting a better handle on how internal consistency fits into the broader doctrine. It may not matter substantively whether or not we call this an internal consistency violation – although it might conceivably aid us in identifying suspicious cases – unless the identification meant that there would be a per se violation in lieu of Pike balancing. So one has to consider the case for tax exceptionalism, which again I will get to shortly.


Again, Bibb balancing pertains to interaction problems, which involve a disparity between states’ rules, rather than how any one of them operates in isolation. And again, the problem with Illinois’ rule requiring curved mudflaps was that it imposed a cost on out-of-state or multi-state trucks given that straight mudflaps were generally required elsewhere. The paper argues that, while Bibb balancing may be necessary given the ingenuity of legislators (or lobbyists) in particular states – along with the barriers to Congressional action and the difficulty of proving malign intent even if one deems that a suitable focus in principle – it has also proven especially tricky in practice, including because it may effectively place an existing prevalent rule beyond the reach of evolutionary change that might conceivably have been for the better.

The paper usefully distinguishes 3 scenarios regarding how such evolution, if permitted to go forward, might systematically unfold. One is the Delaware scenario of race to the bottom (or to the top, depending on one’s normative view regarding the end state).

A second is the California scenario, so named because California is a big enough player, given the size of its economy, to prescribe rules that companies will then decide to follow nationwide. (E.g., if it has tougher emission rules for cars than the federal government, companies may decide that it’s cheapest simply to follow those rules nationwide.)

A third is the Balkans scenario, a term that the paper uses in the spirit of “balkanization”), in which markets get segmented by reason of incompatible regulatory rules. A classic instance of this problem was the instance in which the ECJ had to deal with Germany’s requiring that liqueurs have at least 25% alcohol, while France required that they not have more than 20% alcohol. The ECJ solved the problem here, arguably Solomonically, by invoking a rule called mutual recognition, under which each state had to allow the sale of liqueurs that met either rule.

DCC issues arise under the Balkans scenario, leaving the Delaware and California scenarios purely for the federal legislative power under the ACC. But one complication here is that it won’t always be so clear which scenario presents itself most forcefully.

To illustrate, consider Moorman Mfg. Co. v. Bair, the 1978 Supreme Court case that, by a 5-4 vote, upheld Iowa’s rule (which was novel at the time) replacing the standard 3-factor formula (sales, property, and payroll) for determining in-state income with a purely sales-based formula. Consider the following 3 scenarios that, based on knowledge at the time, might conceivably have transpired:

Scenario 1 – The prior near-consensus in favor of the 3-factor formula is required by each state’s choosing whatever formula worked for it best. E.g., Iowa reportedly chose sales because it was a “market state” in which there wasn’t much corporate property or payroll. Suppose that similarly self-interested choices were made by “property states” and “payroll states.” National businesses might then have found themselves including more than 100% of their national income in one state or another, disfavoring them relative to one-state businesses. This would systematically disfavor interstate commerce, relative to one-state activity, and arguably would have supported intervention under the DCC even if it doesn’t quite achieve Balkans levels of disjuncture. But this is not in fact what happened.

Scenario 2 – The diversity between states’ formulas ends up imposing tariff-like extra administrative and compliance burdens on national businesses. Again, this is not what happened, and it was perhaps never a realistic threat, but again we’d be in DCC territory. This resembles the 1967 National Bellas Hess case, overturned by Quill and then Wayfair, which held at the time that use tax compliance was simply too administratively burdensome to be demanded of national businesses. I recall the case saying that there were 50,000 separate sales tax districts, including mosquito abatement districts. And in a pre-computer age this simply imposed too much burden. It is plausible that National Bellas Hess was a reasonable decision when issued, and only became unreasonable later as the rise of computer technology and the Internet both (a) triggered the growth of interstate commerce, and (b) made compliance far cheaper than it had previously been.’

Again, this scenario might in principle have supported a DCC challenge to what Iowa was doing in Moorman, but even at the time probably was not factually plausible.

Scenario 3 – What actually happened is that states learned of the advantages that they would enjoy, via tax competition, from using sales-only allocation. States didn’t want to discourage the local placement of property and payroll, and sales were far less tax-elastic insofar as this depended on where the consumers lived. So there was a race to the bottom towards sales-only apportionment – AKA a race to the top, if you happen to view this as a better approach than use of the 3-factor formula. Good or bad, it does seem to lie outside the DCC’s concerns.


Lately and with good reason, tax folk have tended to be more self-conscious than previously about tax exceptionalism. This is the view that tax cases are unique and distinctive, and hence should be treated differently than non-tax cases. (By using the word “cases,” I don’t mean to restrict myself to DCC cases or other litigation. It arises as an issue in a variety of realms.)

The paper early on criticizes doctrinal instances of what it calls “unjustified tax exceptionalism,” such as the 4-factor DCC test for tax cases under Complete Auto Transit v. Brady (1977). But it later explains why tax exceptionalism may be justified with respect to treating internal consistency violations as per se adversely dispositive in tax cases, but not non-tax cases. This is distinct from requiring Pike balancing.

It makes clear that it is being substantive rather than formalistic in how it defines tax cases for this purpose. For example, a Pigovian tax would be treated like regulation in terms of DCC review. Likewise, issues of administrative burden from complying with a tax (as in my hypothetical Scenario 2 for Moorman) would face balancing. But when it’s just a matter of getting revenue, the paper argues that money is money. So a state’s interest in getting tax revenues in a particular manner that violates internal consistency is trivial, since they can get the same $$ some other way.

In response, one could argue that not all tax revenue is the same, in that states may have particular reasons for wanting to raise $$ in one way rather than another. But agreed, in a case such as Maryland v. Wynne, once one has shown through internal consistency that the provision does indeed have the tariff-like effect (whether intended or not and actualized or not) of burdening cross-border activity relative to one-state activity), the state’s legitimate interest in getting the $$ exactly this way, rather than in some other way, might reasonably be viewed as fairly trivial (making the formal occurrence or not of balancing rather a non-event). Whereas, under, say, the Pike or green margarine scenarios, it may be more necessary to look in detail at the state interests, even if they end up being deemed trivial.

What Are the Characteristics of Business Coaching?

A business coach in Edmond will aid and educate a company owner in managing their firm by assisting in the future goals or how it aligns with their ambitions. Business coaching in Edmond will help in achieving success.

Because both professions contribute years of knowledge, coaching or mentoring may be easily misconstrued. The difference is that mentoring focuses on advising. Coaching will support the owner in goal-setting and hold them responsible.

What are the characteristics of business coaching?

The idea and the implementation of the concepts are your responsibility. It’s necessary to be aware of why you established a business. They will help in keeping things running smoothly. A coach can assist you to dream big and know the current situation. Then only you can choose where you wish to go and devise a strategy for getting there.

Business coaches help in different fields like sales, promotion, team structure and so on. They help you to track the profits gained by selling products and services. They will assist in saving the time so that you focus on your task.

Help to achieve goals

Coaching helps you to achieve the strategy if you have a clear vision. They ensure that the company goals you select are the proper ones.

It’s critical to set specific goals that will help you achieve success. A coach assists you in linking your beliefs. Business coaches assist you in establishing the strategy first, followed by the goals. Such that the business may give you the lifestyle you want.

Business consultants can assist you if you are short of ideas. They give unique ideas to help you discover about regions where you’ll have the most influence.

Use your skills and limitations to your benefits

With a strong direction and the appropriate goals, you will achieve a lot. Going against the natural tendencies, on the other hand, can result in you whirling the wheels. A good coach will assist you in seeing all aspects of yourself, including those you suppress and those you are unaware of.

Provide responsibility

A business coach in Edmond is a partner who will assist in making strategies. They give you feedback at each level since they know about your position. You will be focused on the work and achieve all your goals. The coach will help you in overcoming the problems and help you in achieving something better. There is not any shortcut to grow. You have to give the best if you desire to gain success.

How Much Would a Business Consultant Cost?

Price of hiring a business coach varies. It’s like going to the grocery and wanting to prepare a fruit bowl, but there are different kinds of berries that one doesn’t know where to begin. The same may be said about coaches and the fees. Regrettably, they aren’t all similar.

Business coaches often charge from $140 and $350 for a one-hour appointment. That depends on the business, and you can’t be sure how much a business coach in Edmond charges unless they notify you. It depends on the knowledge of the business coach in the field.

NYU Tax Policy Colloquium on Manoj Viswanathan’s Retheorizing Tax Progressivity, Part 2

 After the windup in my prior blogpost, here is more of the pitch concerning the paper itself, organized by its 4 main parts.

1. Why progressivity matters – Arguably, this section title should change to better tip off to readers its content and main takeaway. It argues that distribution is what matters, not “progressivity” within the contours of a tax system that is merely a subset of the broader fiscal system, and shows how the tax policy literature has moved over the decades in exactly this direction.

In earlier decades, the literature tended to discuss “ability to pay” and how it related to how progressive the tax system ought to be. For example, declining marginal utility (DMU) was understood as supporting rising absolute tax burdens as (say) one’s income increased. If DMU rose fast enough, one would want average tax rates (ATRs), not just absolute tax liabilities, to rise with income, and this is how progressivity was typically defined.

As the paper notes, one problem in the “ability to pay” era was the lack of a clear basis just how fast (if at all) ATRs should rise with income. But another problem was that, as I noted in the prior blogpost, ATRs could be misleading absent a budget-neutral and indeed revenue-neutral comparison. One couldn’t ignore the spending side in making informative distributional assessments.

Next in the tax policy literature, as the paper notes, came Blum and Kalven’s famous early-1950s piece, The Uneasy Case for Progressive Taxation. After a whole lot of very sharp argumentation, Blum and Kalven famously conclude that the case for progressivity is best grounded in the aesthetic view that inequality is “unlovely.” Viswanathan rightly notes that this presupposes focusing on overall distribution – although Blum and Kalven emphatically that one simply can’t do a thing about the incidence of government spending, which instead should be treated for analytical purposes as if the revenues, rather than being used in any way, had simply been thrown into the sea.

That aspect of the Blum-Kalven analysis is now a bit dated, but mainly because the world has changed. They had in mind a bunch of tedious and unilluminating debates in the literature of the time about who benefits more from, say, police and national defense spending: the rich because they have more property to defend? The poor because the rich could hire private armies if they had to? While that point about the difficulty of allocating certain types of public goods spending remains valid, the changes in the federal budget since the early 1950s – e.g., the rise of Medicare and Medicaid – means that a lot of things on the spending side now can be meaningfully allocated.

Anyway, though, the Viswanathan paper rightly notes that Blum and Kalven are already, despite that disclaimer, moving towards a whole-budget view. Optimal tax theory (OTT), which it discusses next, then goes the rest of the way in that direction.

2. Definitional ambiguities – This very useful section of the paper includes the contribution it makes that I suspect will be best remembered: the introduction of the term “progressivity base.” Defining such a thing is an application of devising vertical distributional measures more generally.

There is no one right answer to what the progressivity base for distributional assessments (including those of tax progressivity) should be. But we can see the concept at work, albeit without the name and sometimes without a clear expression of what is going or or why, in such circumstances as the following: (a) the Joint Committee on Taxation uses “expanded income” to measure the progressivity of given tax legislation, (b) NGO or other private-sector analysts use income or wealth to assess the progressivity of, say, property or consumption taxes.

If I had to list some of the more plausible progressivity base candidates, I would include at least: (a) expanded income (and at the limit Haig-Simons income, (b) wealth, (c) wealth plus the present value of expected future earnings, and (d) lifetime income including inheritance. A key issue here, of course, is the choice of time frame, e.g., snapshot versus a longer period.

Anyway, in a standard ATR computation the progressivity base supplies the denominator, and the numerator is something like taxes paid or accrued or borne economically. (Again, there are time frame issues here.) But I think the paper could call out at least one dubious entry in the field that it mentions. The Cato Institute argued recently that the 2017 tax act was progressive because poor people had a larger percentage reduction in tax liability than rich people. Thus, if a poor person’s liability went down from $1 to zero (i.e., by 100%), while Jeff Bezos’ liability went down by only 99.9% (e.g., from $100 million to $100,000), this would be a progressive change.

With all due respect to Cato – which not only does some good work, but indeed (on a personal note) once was kind enough to publish an article penned by me – I don’t think this was their best moment. The change in my tax liability as a % of everyone’s tax liability is simply not a good enough measure of a given tax enactment’s effect on me – especially absent a full-budget, budget-neutral comparison – to be plausible as the numerator here. Its use in that instance smacks of trolling – as in, “we like the 2017 tax act for other reasons, but just to blow some smoke in the air we’re going to use the only measure we can think of that yields the result we want.” So I think it would make sense for the article to call them out on this, in the friendly hope of encouraging better work from them the next time.

3. Calculational ambiguities – The article notes that, in assessing the numerator (tax burden), it would be desirable to adjust taxes paid to reflect determinations of incidence and deadweight loss, insofar as this was sufficiently feasible.

This is a very good point, although its feasibility in particular cases will vary. But to give a simple example, showing how both the numerator and the denominator may change, suppose that $100 taxable bonds pay $10 of interest, while otherwise similar but tax-exempt $100 municipal bonds pay $8 of interest, reflecting a $2 implicit tax. I gather that the JCT, under its “expanded income” measure, would include the $8 in the denominator. In principle, however, one should at least arguably include the $2 implicit tax in the numerator, and $10 in the denominator.

What about deadweight loss? E.g., X would have earned me $10 of income and generated $2 of true surplus (i.e., doing what I needed to to earn this income would have generated disutility that I value subjectively at $8.) But because the tax on it is $3, I don’t do X, and earn zero instead of $10

True, we are unlikely this sort of question in practice, due to real world measurement difficulties, but in principle it should be addressed theoretically.

In practice, all of deadweight loss, externalities, and internalities may be very important to how we think about particular tax provisions or proposals, including distributionally. The difficulty of incorporating them into an ATR measure should not lead us to forget that they are important.

Here’s a real world practical case. Suppose a soda tax is borne mainly by poorer people but improves their welfare, because they reduce their consumption of unhealthy glop. The revenues will show up as regressive, the lost subjective surplus from reduced consumption won’t show up, and the increased welfare if people’s health improves also doesn’t show up. This is important stuff to think about, whether or not we can make any progress in deciding how to use it in an ATR measure.

A further topic that the paper identifies is macroeconomic effects. For example, suppose we accepted Kevin Hassett’s 2017 claim that cutting the US corporate tax rate would raise workers’ incomes by an average of $6,000 per household. I personally think that this claim was wildly wrong, but if it was indeed reasonably expected to happen, and within the relevant timeframe, then of course one should consider it.

There is a further procedural issue of whether we should allow such claims to affect respectable computations, if we fear that they will be misused. But perhaps the experience of the JCT in keeping the measurement of “dynamic” revenue effects within a reasonable and respectable range, by using plausible and internally consistent models, offers a favorable precedent for allowing macro estimates to be used here as ell.

A final big issue here is timeframe. For example, if a VAT was enacted in the US, the expected current year liability effect on people with a lot of wealth would be a whole lot smaller than the effect on the present value of their expected long-term liabilities. So time frame, along with the distinction between transition and permanent effects, is an issue that requires attention and clear statement (possibly along with alternative presentations).

4. Improving progressivity assessments – Among the issues this section of the paper currently discusses is earmarking, as in the case where one has a budget-neutral enactment because it raises revenues that are linked to a particular spending use. Earmarking is a tricky subject, both because there are multiple issues raised by its political economy and other merits, and because its reality in substance may be hard to gauge. For example, Social Security payroll tax revenues are ostensibly earmarked to pay for Social Security benefits, but are they really? Suppose Congress notionally “includes” a current year Social Security surplus when deciding how big a deficit for a given year to tolerate (i.e., they look at least implicitly at the unified, not the on-budget, deficit measure). And suppose future benefit payouts turn out not to depend so much on the stated measure of the Social Security Trust Fund. Then the earmarking’s degree of reality may be open to fair debate.

Another thing that this section might do is offer guidelines for real-world tax progressivity measures that are done either by the Joint Committee on Taxation and other government entities, or by NGOs such as the Tax Policy Center, Cato, and, say, the folks at Penn-Wharton should they decide to enter this area (as they are certainly qualified to do, and my apologies if I am overlooking that they have already done so). One might lay out a set of alternative best practices – e.g., you could reasonably do any or all of A, B, C, or D, but you really shouldn’t do E or F – without being overly restrictive or narrowly ideological. And one might also note how underlying theoretical constructions (e.g., noting incidence and deadweight loss issues, even if they can’t be measured properly) might lead, in some circumstances, to systematically different results.

Clearly, addressing all the issues that I find interesting here would take multiple papers, and they surely don’t all belong in this paper. But it already offers a very welcome advance, and it would be great to see follow-up papers, whether by Viswanathan or anyone else, that push the analysis further.

NYU Tax Policy Colloquium on Manoj Viswanathan’s Retheorizing Progressive Taxation, part 1

This past Tuesday at the colloquium, we discussed the above paper by Manoj Viswanathan. If I had to give a two-sentence summary / overview / elevator pitch for the paper, it would be: The notion of tax progressivity relates to things that are important, although it doesn’t frame them in the best possible way. Given, however, that people are going to be discussing progressivity in any event, they ought to be clearer about how they are defining it, what underlying assumptions this presupposes, and how all that relates to the conclusions that they draw.

This is a very useful and needed project design, and one that the paper is ably carrying out. It brought to mind a similarly motivated paper that I once wrote concerning tax expenditures. The author might consider, however, pushing further by more aggressively defining and advocating “best practices” in the progressivity measurement business. That is, while a key feature of the paper is its demonstrating that there is no single “right answer” regarding how to define and measure progressivity, it could (a) say “these are some plausible approaches to particular design choices, no one of which is indisputably the best, and (b) call out blatant misuses of the concept.

I’ll comment in 5 parts: a background section that I will include here, and then a response in turn to each of the paper’s sections 1-4, which I will put in a follow-up (i.e., Part 2) blogpost.

Background – Tax progressivity is a measure or concept that has to do with distributional issues pertaining to inequality. To evaluate such issues, one needs to apply vertical measures of people’s relative economic positions. For tax progressivity itself, this involves in particular applying what the paper very usefully calls a progressivity base.  That is, to evaluate the progressivity of, say, the federal income or a state property tax, we look at the tax burdens borne by people at different vertical levels of one’s measurement framework (i.e., the progressivity base), which need not be the same as the particular system’s choice of tax base.

Often, progressivity analyses are engaged in a  comparative statics exercise – that is, comparing State of the World A to State of the World B. These might differ due to the passage of time (e.g., the tax system has become either more or less progressive, reflecting legal and/or economic changes in the interim). Or the question might be how particular legislation would affect it or has done so.

Such comparative exercises work best with a fully specified counterfactual. This is especially a problem if we ask how progressive the tax system “is.” (Compared, at least implicitly, to what? No tax system? No government? A uniform head tax or flat tax to pay for everything?)  But even when we are looking at, say, current law vs Proposed Set of Tax Changes XYZ, we really need a budget-neutral, or perhaps even revenue-neutral, counterfactual in order to avoid being potentially very misleading.

For example, consider the large tax cuts enacted in 2001, 2003, and 2017. They were designed to offer tax cuts at pretty much every income level. But these tax cuts were generally small at the bottom and large at the top. Given that these tax cuts would need, pretty much as a matter of basic arithmetic, to be funded eventually in some way (e.g., through higher taxes or lower spending than would have applied in their absence), do we really need to get into some of the measurement games that enliven (to put it kindly) the debate? Or is it pretty clear that people at the bottom, or their kids or grandkids, were pretty definitely losing overall, while those higher up were very likely winning?

In a budget-neutral and indeed revenue-neutral comparison, typically rising average tax rates (ATRs) as one vertically ascends are what you need for the system to be “progressive” within common nomenclature. The ATR is a fraction in which the numerator is something like tax liability or tax burden, and the denominator is the underlying distributional measure (i.e., the progressivity base).

In a non-revenue-neutral comparison, however, a focus on ATRs may prove highly misleading. Consider, for example, the fact that most of the US’s peer countries have less progressive tax systems, but more progressive fiscal systems, than we do. Suppose that we became more like them, by reason of adopting a VAT and using the revenues to better fund healthcare, childcare, education, etcetera. Our tax system would now look less progressive, focusing on ATRs, but our overall fiscal system would probably now be far more progressive than it had previously been. Or at least, to put it differently, after-tax-and-spending distribution would now be less unequal than it had been before the change.

By contrast to ATRs, marginal tax rates (MTRs) are merely a technical tax design feature that would lack the distributional significance of ATRs. Thus, suppose that (in the spirit of a Mirrlees OIT model) we applied 100% MTRs at all income levels, so that all national economic production was nationalized and then paid out in uniform demogrants. This might be a very bad system, but it would NOT fail to be duly “progressive” because its MTR structure was flat!

Still, under various fairly common design features, rising MTRs may be necessary to create rising ATRs.

As a sidenote, when we speak of “progressive consumption taxes” (such as here), we typically are referring purely to the technical MTR structure. But this reflects that consumption taxes, such as those remitted by sellers, typically have a completely flat MTR structure (at least as to consumers, if not as to consumer goods). So the word “progressive” here calls attention to a distinctive design choice.

In sum, when used with proper care, progressivity assessments that are based on how ATRs change as one vertically ascends the progressivity base. But one has to do this carefully (e.g., using budget-neutral comparisons and looking at both taxes and spending), in order to address the risk of being badly misled.

New minimum tax proposal for companies’ book profits

Reportedly, the Senate Democrats are nearing an agreement on a corporate minimum tax  that would apply in lieu of some things that Senator Sinema opposes, e.g., generally raising the corporate rate.

I am not entirely a fan of minimum taxes, as discussed here. But when political constraints limit what can be enacted, the best shouldn’t be the enemy of the sufficiently good. I do think there’s a strong case for increasing U.S. corporate tax burdens relative to where the 2017 act left them – as a new article of mine that is coming out in Tax Notes next Monday (November 1) will discuss. So let’s consider the merits of doing it in the particular way that the emerging agreement envisions.

The following are the key features that were listed in a fact sheet. The items from the fact sheet are in bold, with comments of mine in regular font.

The Corporate Profits Minimum Tax would:

  •   Apply to roughly 200 companies that report over $1 billion in profits – These probably include many of the leading suspects that are currently earning what look like large rents and paying low taxes. Thus limiting the tax’s reach might be viewed as equivalent to imposing graduated corporate rates, which is not generally the best approach. And the exemption amount is surely above the level that one would adopt purely on administrative grounds. Setting it that high is presumably a political  constraint. (I am presuming that it is indeed an exemption amount, to avoid large “cliff” effects when one goes a dollar over the threshold.)

  •   Create a 15% minimum tax on the profits that these giant companies report to shareholders – I suggested here that there may be grounds for assigning some tax liability to book income, not just the income measures devised by legislators. I have since backed off this a bit, since my friends in the accounting profession are so vehemently and almost unanimously opposed to it (although I suspect that there might be a bit of NIMBYism going on there). But in any event this is the direction in which the international tax world is moving, since politically book income nas become the fallback of choice for minimum taxes, faute de mieux. With flawed political institutions setting corporate tax bases, there is certainly a kind of second-best case for doing this. The minimum tax (as opposed to low-rate supplemental tax) design feature is one that I’d probably on balance recommend against, but again that’s not to overstate the problems caused by it.

  •   Preserve the value of business credits including R&D, clean energy, and housing tax credits and allow credits for taxes paid to foreign countries – These credits vary in their meritoriousness. I hope the foreign tax credits aren’t 100% (i.e., dollar-for-dollar domestic tax reduction for foreign taxes paid, leading to a “marginal reimbursement rate” of 100%, for reasons that I wrote about, for example here. But there are already precedents (such as GILTI) for applying a less than 100% MRR, so I am hopeful that it is also the case here.

  •   Include some flexibilities for companies to carry forward losses and claim a minimum tax credit against regular tax in future years – This is certainly a desirable feature, as it offsets the arbitrariness of annual accounting.

  •   Raise hundreds of billions in revenue over 10 years – Again, while the details will be key, raising that sort of money from these taxpayers is indeed a direction in which I believe we should generally be going.

  • Bottom line, I look forward to seeing further details, but even if some political compromises were necessary, I am hopeful that this will prove to be a meritorious proposal on balance. More to come.

The Beatles Get Back project so far

 I am enough of a fanatic to have been anticipating with great interest the Peter Jackson project regarding the Beatles’ January 1969 Get Back / Let It Be sessions. The 3-part, 6-hour movie is due out late next month on Disney+ channel (for which I will need to get a month’s subscription). But earlier this month the accompanying book came out, as did the expanded box set CD reissue. I’ve now read the former, and listened to the latter on Spotify.

Some thoughts about the project so far:

1) Although 6 hours sounds like a lot, and Peter Jackson has earned some mistrust by blowing up The Hobbit into three bloated, pompous, and tone-deaf movies, I think there’s likely to be enough good material here for the thing to be of great interest, at least to fans. One of the virtues is that, as Jackson has been saying, there is a built-in dramatic structure. Part 1, the Beatles gather for the project in Twickenham Film Studios, blows up when George Harrison suddenly quits the band. But it has been hampered by their difficulty in figuring out, much less agreeing, just what sort of end product they are after. Then in Part 2, the Beatles in Apple Studios, they rebuild the project and their focus with the help of Billy Preston. Finally, in Part 3, they triumphantly take to the rooftop (and also fill out the set of finished album tracks the next day).

2) The box set CD is a bit of a disappointment because it’s overly focused on the end product, i.e., the album they ended up with (plus tracks that appeared on later Beatles or solo albums). It thus misses out on the various byways that they engagingly fooled around with during the sessions – e.g., some very enjoyable versions of oldies (both their own and others’), some of the early tracks they wrote but never seriously recorded, etc. There’s a couple of hours of really fun, if informal and a bit ragged, stuff that has been bootlegged but not will not be getting any official and sonically cleaned-up release.

3) The box set does perform a service by finally releasing the long-bootlegged Glyn Johns proposed Get Back album, which the Beatles rejected at the time. This torpedoed version of the project often has great charm, and is true in some ways to the spirit of the sessions. But it appears to have repeatedly missed out on including the best takes of various original songs.

4) The book with its pages of dialogue is often pretty interesting – some online reviewer compared it to an off-Broadway play. It helps that John, Paul, and George are often articulate and witty.

5) Even in Twickenham, when they are going around in circles a bit, you can see how strong the chemistry between Lennon and McCartney remained. But the tensions do appear to a degree. For example, when John is not around Paul says how odd it might seem in 50 years to learn that the group broke up because someone got mad about Yoko sitting on a speaker. And he discusses John’s turning away and that there’s nothing they can do about it. Meanwhile, John waits until Paul is not in the room to tell George that he should really meet with Allen Klein.

6) George is a very active and often skeptical participant in discussing the plans for the sessions. And he’s a bit of a bystander when John and Paul are goofing around. But, apart from the famous (and here somewhat expanded) “I’ll play whatever you want me to play” spat with Paul, he doesn’t voice his frustrations, so his quitting seems to come out of nowhere.

7) It’s been much-noticed that the original Let It Be movie focused on dysfunction, while the Peter Jackson version is expected to focus on how joyful the sessions often were. It seems from the book as if both versions have some validity. They’re still great friends and collaborators, and the tensions are palpable at times yet usually subterranean. 

8) The audacity of the project still in some ways amazes. Here’s a group that had just finished a 5-month slog through recording a 90-minute double album, at which they had experienced both the joy of playing live together again (as they had not really done in the Sgt Pepper era) and the first emergence of irreconcilable differences. The White Album had come out less than 6 weeks ago when they first showed up in Twickenham, and of course was #1 on all the charts, when they start working every day in the midwinter to accomplish at warp speed a new project that they haven’t figured out for themselves (nor do they have songs ready when it starts). So they put all this extraordinary pressure and strain on themselves, partly at Paul’s behest but seemingly with some buy-in from the others, because they … Well, this part isn’t 100 percent clear. As good an explanation as any is that they are mourning their lost youth, much of it spent playing together, and are trying to see if they can, yes, get it back, right here and right now.

NYU Tax Policy Colloquium on Blouin-Krull, Does Tax Planning Affect Organizational Complexity: Evidence from Check-the-Box, part 2

My prior blogpost offered background concerning check-the-box (CTB) in the international realm. It sought to explain why the adoption of CTB amounted to a partial indirect repeal of the US subpart F rules. Partial because it only undermined the rules’ deterrence of foreign-to-foreign tax planning, as opposed to its continued application to the earning of net passive income abroad. Indirect because the rules were still on the books, but now one could easily avoid them through the properly implemented use of transparent / disregarded foreign entities. 

These two aspects of CTB inspire the 2 big topics in the paper that we discussed at the colloquium yesterday. The first is how CTB affected organizational complexity (e.g., from the incentive to add transparent entities to one’s organizational schema in order to effectuate foreign-to-foreign tax planning that would escape subpart F). The second is how it affected US companies’ worldwide and US tax liabilities with respect to foreign source income (FSI), along with their US tax liability with respect t domestic source income (DSI).
The paper is based purely on data preceding the enactment of the 2017 US tax act. Given, however, that the 2017 act retained subpart F, that should not prevent it from being highly relevant to what US companies might be doing today. To be sure, the 2017 act’s tax rate change, enactment of dividend exemption, and enactment of GILTI et al might have important effects on US companies’ precise marginal incentives and choices, but the basic subpart F parameters did not themselves change.
1) CTB and Organizational Complexity

     a. Empirical Evidence
One would expect CTB to have encouraged US companies to create more foreign affiliates, especially in tax haven countries. It should also have encouraged them to increase their foreign-to-foreign intra-group cash flows. One might also speculate that it would have decreased foreign-to-US parent cash flows pre-2017. There would be less previously taxed income that one might as well repatriate given that it has already been hit by subpart F. And, cross-crediting maneuvers responding to subpart F liability might not now as often be necessary.
The paper finds very strong correlations between the promulgation of CTB and multiple measures of organizational complexity. For example, post-CTB as compared to pre-CTB, US companies have far more foreign affiliates in far more countries – and especially in tax havens – along with longer corporate chains, more chains with 4+ tiers, and greater sales dispersion under the Herfindahl index.
While all this is consistent with concluding that CTB had the expected effects, the authors recognize that it does not necessarily establish causation. During the same period (i.e., pre- vs. post-CTB’s adoption at the end of 1996), a lot of other things might have pushed in the same direction. For example: ongoing globalization, falling travel and communications cost, increased global production chains for economic as well as tax reasons, the rise of e-commerce, the big accounting firms’ rising role in customized global tax planning, the rise of highly valuable IP associated with various global brands that were even friendlier to profit-shifting and the use of tax havens than “old economy” factory production, etc., etc.
In addition to its tables showing pre- vs. post-CTB aggregates, the paper contains a Figure that shows the year-by-year trend line for various parameters of organizational complexity. This one arguably doesn’t look as I might have expected insofar as CTB was driving the change. It shows a fairly steady rate of increase throughout the period, with no particular inflection point for CTB’s adoption at the end of 1996 (or for the enactment of section 954(c)(6) in 2005). I might have expected CTB to yield a sharper rate of increase right when it came into effect. In addition to having been hard to anticipate, as it arose as a byproduct of a Treasury project aimed mainly at domestic entity classification, it strikes me as not being super hard to exploit promptly. The measures it encourages (e.g., creating transparent entities that link tax haven jurisdictions and “real” source” jurisdictions) are not super hard either to figure out or to implement. Then again, maybe the knowledge did need time to disseminate past the most well-informed circles, plus there may have been concern that Treasury would take it back (as it tried to do, only to be scared off by the lobbyists and their Congressional friends). And also perhaps taking full advantage requires first converting more DSI into FSI, which might not be easy to do overnight. So perhaps there is an explanation (other than that CTB wasn’t having large standalone effects) for the relatively smooth upward drift of complexity indicators without particular inflection points.
A couple of other tables in the paper – although likewise showing just correlation, not causality – might further support the inference that here the correlation was indeed causal. Companies that did more of the sorts of things that CTB encourages had greater tax liability reductions than their peers. In terms of explaining this intuitively, it is plausible both that (i) these changes indeed drove a significant piece of the tax liability reductions, and (ii) were sufficiently well-recognized by the firms as to support the inference that they were doing it deliberately for tax reasons once the adoption of CTB had cleared the decks of certain subpart F concerns.
    b. Normative Implications
All else equal, encouraging greater organizational complexity is surely a bad thing. It may increase deadweight loss (DWL) both by imposing various costs (e.g., filing fees, hiring various lawyers and accountants, arranging various in-house cash flows after determining their optimal amount, etc.) and by reducing the companies’ transparency, which might increase agency costs.
CTB increased DWL insofar as it caused these things to be done more than previously. But it is very hard to quantify, or even estimate with any confidence, how high or low the marginal DWL would have been. So how to trade this problem off against other considerations, or merely just how much to disvalue it, is far from clear.
A further normative complexity is the following. While DWL, considered in isolation, is always bad, causing undesired tax planning to require increased DWL can possibly be preferable to the alternatives This is why, for example, economic substance rules may desirably (on balance, all else equal) impede aggressive tax sheltering that one wishes one could stop directly. Thus, suppose one believes that subpart F’s discouraging effect on foreign-to-foreign tax planning was good US policy and should not have been scaled back. CTB’s doing so indirectly, rather than more directly through repeal of the undermined provisions, might limit the net harm relative to the case of outright and direct repeal.
2) CTB’s Effects on US and Foreign Tax Revenues
    a. Empirical Evidence
The paper finds significant declines, post-CTB, in US multinationals’ worldwide effective tax rates. This decline is incremental to the effects of declining statutory rates abroad.
It also finds that US multinationals’ effective worldwide tax rates on their FSI declined, not just absolutely, but also relative to that on their DSI.
And it finds a more than 50% decline in US multinationals’ effective U.S. tax rates on their FSI.
Once again, the findings pertain to correlation, not causation. But here, despite similar independent contributing factors to those I noted in 1 above, it may be intuitively more plausible that CTB may have been doing a lot of the work here. At least to my mind, it simply looms larger in the universe of plausible explanations that naturally suggest themselves.
Purely as a mechanical matter, there are just 3 main ways that the US tax rate on US companies’ FSI could have declined during the period. (I leave aside such further explanations as declining FSI from US companies’ foreign branches, on the view that this seems unlikely to have been a quantitavely significant contributor.)
These three main mechanical explanations are (1) reduced subpart F income, (2) reduced taxable repatriations (since this is pre-2017 act), and (3) increased use of cross-crediting to reduce foreign tax liability.
Of these possibilities, (3) seems unlikely to have helped much. If anything, declining foreign tax rates seem likely to have increased its scope.
(2), reduced repatriations, is a plausible contributor. The rise of permanently reinvested earnings (PRE) that US companies pinky-swore they would never be repatriating would have tended to reduce (and to reflect reduced) repatriations. Plus the 2004 foreign dividend tax holiday is shown by several papers to have apparently reduced repatriations once it expired, due not only to the release of pent-up demand but also rising expectations that it would soon happen again. But, while reduced repatriations during the period surely is a plausible ground for the reduction in US tax liability on FSI, the amount involved may simply have been too small to yield reductions as great as those that the paper finds.
This leaves reduced subpart F income as a likely major culprit, and here it is highly plausible that CTB would have been playing a major role.
    b. Normative Implications
It is telling, although not surprising, that the paper finds reduced US tax liability on US companies’ FSI once CTB comes into play. It would have been startling not to find this result.
Absent far more repatriation than was occurring, and thus far greater marginal importance for US foreign tax credit claims, there is perhaps only one plausible way that this could not have happened. That would be if, given investors’ ability to escape the US tax net by not using US companies (in particular, to invest abroad), the tax burdens that the US system would have been imposing if not for the indirect partial repeal of subpart F would have been above the Laffer Curve peak.
While this by itself is probably not plausible, at least in the short run and as applied to the period under study in the paper, tougher issues are raised in a very long-term projection. Also, a set of rules that raise revenue may nonetheless be bad for national welfare, if the associated deadweight loss is great enough (also taking due account of distributional effects). So the fact that CTB did what it apparently did – that is, reduce US tax revenues from US multinationals’ FSI – the broader normative debate of course continues.
There is also, however, a plausible source of revenue loss from the repeal of CTB that the paper’s methodology would not have caught. That is the revenue loss from increased conversion of DSI into FSI, now that the repeal of CTB makes it easier to on-shift the reported profits from peer countries to tax havens.
Here too, of course, there are Laffer Curve / broader desirability issues that have fueled decades of international tax policy debate. This will not change any time soon, but the Blouin-Krull paper does indeed offer suggestive evidence on some of the parameters.