Category Archives: Default

Default

NYU Tax Policy Colloquium, week 7: Richard Reinhold’s Does the Parsonage Exemption Violate the Establishment Clause?

Yesterday at the Tax Policy Colloquium, Richard Reinhold presented Does the Parsonage Exemption in Internal Revenue Code Section 107 Violate the Establishment Clause of the 1st Amendment?

Here is a bit of background. Section 107 of the Internal Revenue Code provides: “In a case of a minister of the gospel, gross income does not include (1) the rental value of a home furnished to him as part of his compensation, or (2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent a home or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.”
This is potentially suspect under the Establishment Clause of the First Amendment, which provides that “Congress shall make no law respecting an establishment of religion.” Indeed, it would unambiguously violate the Establishment Clause, as that clause has come to be understood, if the rental exclusion were limited to Christian “ministers of the gospel,” as distinct from, say, rabbis and imams. But it has been interpreted as applying to the equivalent of “ministers of the gospel” for religions generally – a concept that may involve considerable ambiguity! (E.g., does “religion” have to involve belief in a God or gods, should the IRS be on the lookout suspected sham religions, how broad is “minister” and how does it track across religious affiliations.)

In Gaylor v. Mnuchin, 278 F. Supp.3rd1081 (D. Wi. 2017), the section 107(2) exclusion for cash rental allowances was held to violate the Establishment Clause. The case is on appeal to the Seventh Circuit, oral argument took place last October, and a decision is expected imminently. The main legal issue in dispute, other than section 107(2)’s constitutionality, is whether the plaintiff has standing. In an earlier case, the same judge had found standing but the Seventh Circuit had reversed. Here, the plaintiffs sought to create standing (without which, there is no justiciable case for the court to hear) by filing for a tax refund under section 107(2) despite being employed by the Freedom From Religion Foundation, Inc., rather than by a religious institution in the conventional sense. Thus, the options available to the Seventh Circuit include reversing and dismissing the case on standing grounds. If that happens and is upheld more generally (e.g., by the Supreme Court upon appeal), then section 107(2) (in common, it appears, with section 107(1)) might prove, as a practical matter, to be wholly immune to constitutional challenge through litigation even if it does in fact violate the Establishment Clause.

Reinhold’s article argues that section 107 IS constitutional and ought to be upheld by the  courts even if there is standing (as to which he is skeptical).  The paper raises 3 topics that I’ll (in varying detail) address here: constitutionality, standing, and how we should think about the role of the courts and of constitutional litigation.

1. Is section 107 constitutional? – Suppose Gaylor v. Mnuchin ends up in the Supreme Court, and is definitively addressed on the merits (i.e., the court finds requisite standing). Then we might end up with a decisive precedent, to the effect that section 107 (or at least section 107(2), the cash allowances aspect) either is or isn’t constitutional.

If one were handicapping the outcome of this still-hypothetical case, it would of course be of enormous predictive moment that the Scalia seat ended up going to Neal Gorsuch, rather than to Merrick Garland. I’d personally place a large bet (if this were the type of thing I did) on the Court’s 5 conservatives finding section 107 constitutional, if they reached the issue. But it also wouldn’t surprise me if, upon reading such an opinion, I personally found it unpersuasive and ascribed it to political and policy preferences (as distinct from the legal grounds offered for the Court’s conclusions) that differ from mine.

If that happened, I might find myself concluding that the Supreme Court had (in my view) gotten it “wrong,” and that section 107 “is” unconstitutional. But what does that mean exactly, once we’ve untethered the notion of constitutionality from blind adherence to precedents? The more general problem I am adverting to here is the difficulty of setting forth definite criteria for determining constitutionality. The inquiry is not well-specified, nor can a dispute between A and B on any such question be resolved, other than if they sufficiently accept common premises and one of them has made errors in reasoning from those premises.

Con law, in my view, tends to be a lot murkier and less well-specified in this sense than, say, disputes over tax policy between people who accept generally welfarist frameworks and are open to empirical evidence that those frameworks make normatively relevant.

But with all that said, I am strongly inclined to view section 107 as unconstitutional under the Establishment Clause. I view it as favoring religion, and funding it at the expense of the non-religious, without sufficient justification. (For much more detail than I will offer here, see this article by Adam Chodorow )
One can think of the Establishment Clause as limiting permissible subsidies to religious institutions and actors, and the Free Exercise Clause as limiting the permissible imposition of special burdens on them. This suggests looking for neutrality in some sense, notwithstanding baseline issues in defining it.

Consider sections 170 and 501(c)(3) of the Internal Revenue Code, which provide tax benefits to charities, including religious organizations. I would question their constitutionality, on Establishment Clause grounds, if they were ONLY for religious organizations. I would also question their constitutionality, on Free Exercise grounds, if they offered tax benefits to all charities EXCEPT religious organizations. I don’t think we need to ask ourselves any sort of neutrality question (requiring that one specify the baseline) with respect to having versus not having special treatment for charities in general.

Now let’s look at section 107 from this standpoint. It is JUST for “ministers of the gospel,” as generalized to be nonsectarian within religions. This strikes me as exactly the sort of thing that the Establishment Clause is supposed to inhibit.

As Reinhold’s article notes, one counter-argument is that we actually have a broader category of exempt housing, akin to the broader section 501(c)(3) that I noted above with respect to exempting churches from federal income tax and allowing charitable contribution deductions to those who donate to them. But it’s really just dribs and drabs, apart from the big entry here, which is section 119, excluding the value of housing provided by an employer to an employee, if (a) it is provided for the convenience of the employer, (b) the employee is required to accept it as a condition of employment, and (c) it is on the employer’s business premises (although this can be satisfied where the employee’s off-site house is sufficiently used in the business, e.g., as a site for business meetings).

Although I question section 119 – it over-responds to valuation problems that arise when the home serves business as well as consumption purposes, hence I believe that a value greater than zero ought to be includable – I’m perfectly fine with “ministers of the gospel” (in the broader sense) seeking to qualify under it. Indeed, there would be Free Exercise problems with not allowing them to do so. But section 107 is far broader, especially (although not solely) given section 107(2)’s exclusion for cash allowances. The difference is great enough that section 107 has been scored (I believe, in official tax expenditure budgets) as costing nearly $1 billion a year.

Boris Bittker, a rightly towering figure but one who liked to argue absurd things sometimes, apparently claimed that section 107 should be viewed as merely an evidentiary rule establishing a presumption – albeit, an irrebuttable one even when demonstrably false – that one qualifies under section 119. Or perhaps the argument is better put as: section 107(1) might be reasonable as an evidentiary presumption re. section 119, then once we’ve gone that far why not vastly broaden it (on the claim that this increases neutral effects between religions) by adding section 107(2).

This line of argument strikes me as rather a triumph of bootstrapping. But the rationale for the initial evidentiary presumption is that testing “ministers of the gospel” for qualification under section 119, potentially subject to audit, would raise undue “entanglement” concerns under the Establishment Clause. But to my mind, these concerns are small not only absolutely, but also relative to the entanglement concerns raised by needing to define “ministers” who can claim the benefit of section 107.

So I regard the Establishment Clause case against section 107 as extremely powerful, although (as Reinhold’s article helps to show) not everyone agrees about this.

2. Standing – The standing issues in Gaylor are clearly significant, and I won’t address them here. But I agree that standing is not just some sort of arcane technical requirement (although it is that, too). Rather, it serves substantial purposes in limiting courts to resolving the sorts of disputes that they are best equipped to handle. It would presumably be a big mistake to offer “taxpayer standing” whenever a taxpayer happened to dislike a particular appropriation or tax preference, and thus wanted to raise all conceivable challenges.

Still, if section 107 is unconstitutional, yet no one has standing to challenge it (or at least section 107(1), even if the taxpayer in Gaylor succeeds in establishing standing to challenge section 107(2)), then we have a potential problem of under-enforced constitutional norms. This is especially troubling if one believes that a key reason for having constitutional limitations, such as those in the First Amendment, is to allow the courts to address violative behavior by the executive and legislative branches, in circumstances where our supposedly (whether or not actually) majoritarian politics may fall short of offering adequate protection.

3. Role of the courts and of constitutional litigation – While the paper mainly makes specific legal arguments, it’s also about what one might call sound social practice: Is constitutional litigation really a good way to handle the sort of issue that section 107 raises? Does it overly politicize the courts, and/or overly judicialize politics? Rather than providing a way to reach consensus in a diverse and pluralistic society, does it instead end up intensifying social discord?

These are serious questions, and hard to answer confidently. With respect to institutional choice, I am not confident that Congress and the executive branch can be trusted to adhere sufficiently to Establishment Clause norms, without judicial oversight. But then again, my confidence in the Supreme Court as a good faith arbiter has been higher at times in the past than it is now.

In terms of consensus versus discord, I admittedly identify with the plaintiffs in Gaylor. As one whose own descent and set of personal beliefs about what one might call cosmological questions places him outside of the U.S. majority, I would like to be able to invoke the protection of the courts when Establishment-type issues arise. I remember, as a child in public school, being offended by the public assemblies in which I was expected to recite the “under God” language from the Pledge of Allegiance. To this day, I am affronted when ignorant Supreme Court justices falsely (although, I presume, sincerely) assert that a crèche, or even crosses in a public graveyard, are not religious symbols and are not rightly perceived by minorities / outsiders as such.

But even granting that I (and “we”) are rightly affronted, do we help ourselves by bringing these cases?  Are we better off just swallowing the ill feeling than creating larger controversies that may inspire pushback? Maybe yes, maybe no.
Default

Financial transactions taxes et al

Now that there is renewed talk of legislation that would tax financial transactions, I thought I’d mention my article on these issues from a few years back: “The Financial Transactions Tax Versus (?) the Financial Activities Tax.”

Here’s the abstract:

In both Europe and the United States, there has been much recent debate regarding whether, in response to the 2008 financial crisis, one should enact a financial transactions tax (FTT) or a financial activities tax (FAT) – commonly viewed as mutually exclusive alternatives. This article evaluates these two alternative instruments, focusing on recent proposals by the European Commission and the International Monetary Fund. It concludes that the case for enacting an FAT is considerably stronger than that for an FTT, mainly because the FAT focuses on a broad “net” measure, rather than a narrow “gross” measure, of financial sector activity.

The article further concludes that a rationale for the FTT not emphasized by the European Commission – its addressing wasteful over-investment in the activity of seeking trading gains at the expense of other traders – could conceivably support its enactment, though it is uncertain that the social benefits would exceed the costs. The issues raised by this alternative rationale are independent of whether or not an FAT has been enacted. Finally, the desirability of enacting an FTT may be affected by broader political economy constraints on revenue-raising and on the pursuit of greater tax progressivity by alternative (including clearly superior) means.
Default

Upcoming NYU event on Kim Clausing’s “Open”

Next Monday, March 11, at NYU Law School, 12:45 to 2 pm in Vanderbilt 214, Kimberly Clausing will present her new book Open: The Progressive Case for Free Trade, Immigration, and Global Capital. I will offer comments, and Timothy Noah will moderate the discussion.

It’s open to the public, and info about attending is available here. Info about the book is available here, and you can buy it from Amazon here. I may post comments about the book on this blog, after the session.

Here is a basic description:

Globalization has a bad name. Critics on the left have long attacked it for exploiting the poor and undermining labor. Today, the Right challenges globalization for tilting the field against advanced economies. Kimberly Clausing faces down the critics from both sides, demonstrating in this vivid and compelling account that open economies are a force for good, not least in helping the most vulnerable.

A leading authority on corporate taxation and an advocate of a more equal economy, Clausing agrees that Americans, especially those with middle and lower incomes, face stark economic challenges. But these problems do not require us to retreat from the global economy. On the contrary, she shows, an open economy overwhelmingly helps. International trade makes countries richer, raises living standards, benefits consumers, and brings nations together. Global capital mobility helps both borrowers and lenders. International business improves efficiency and fosters innovation. And immigration remains one of America’s greatest strengths, as newcomers play an essential role in economic growth, innovation, and entrepreneurship. Closing the door to the benefits of an open economy would cause untold damage.

Instead, Clausing outlines a progressive agenda to manage globalization more effectively, presenting strategies to equip workers for a modern economy, improve tax policy, and establish a better partnership between labor and the business community

Accessible, rigorous, and passionate, Open is the book we need to help us navigate the debates currently convulsing national and international economics and politics.

Default

The Great Gatsby and the Great Gatsby curve

Paul Krugman’s column today mentions the  “Great Gatsby curve,” which shows a negative historical correlation between inequality and upward mobility. Economist Miles Corak, who played the lead role in discovering it, and also wrote a useful Journal of Economic Perspectives piece discussing and explaining it, starts that article by mentioning the so-called “American dream,” of which F. Scott Fitzgerald’s The Great Gatsby has been called, by generations of literary critics, an important critique.

The name “Great Gatsby curve” was cleverly chosen but is paradoxical, perhaps deliberately so. In the novel, Gatsby exemplifies upward mobility, as he rises with remarkable swiftness, and it seems almost effortlessly, from humble circumstances to the possession of a vast fortune. But on the other hand, the book seems to show the impregnability of self-confident, hereditarily super-rich American aristocrats like Tom and Daisy Buchanan at the top. It doesn’t take much of a high school English teacher to conclude that the book somehow portrays the emptiness or elusiveness of the “American dream” of upward mobility, or perhaps more specifically of using upward mobility to reinvent and change oneself. So does The Great Gatsby suggest that one can rise, or that one can’t rise quite enough, or that the quest to rise is for the hollow, and/or leaves one feeling hollow?
And however one interprets or responds to The Great Gatsby as a text, does it offer broader takeaways for thinking about high-end inequality in its, or our, time and place? My recently completed book manuscript, Dangerous Grandiosity: Literary Perspectives On High-End Inequality Through the First Gilded Age, ends in the run-up to World War I, hence does not include The Great Gatsby, but it is premised on the idea that one can enrich one’s understanding by such literary means. But I have found myself struggling, when I try to think about how I might use The Great Gatsby in this way. I did not comparably struggle (beyond simply the perspiration of intensive thought and effort that sometimes passed through dark caves) when I was writing, in Dangerous Grandiosity, about classic nineteenth to early twentieth century works by Austen, Stendhal, Balzac, Dickens, Trollope, Forster, Twain, Wharton, and Dreiser. This struggle relates to my ambivalence and uneasiness regarding The Great Gatsby as both literary work and sociological resource.
I’ve always liked The Great Gatsby – but I don’t love it! The darkness and unhappiness appeal to me aesthetically, but I never fully bought into either Gatsby’s magical appeal or the Gatsby-Daisy romance. (Using Nick Carraway as the narrator seems deliberately to distance us from the latter, but to aim at selling us on the former.) Indeed, as an adolescent reader I was possibly more emotionally invested in the diffident romance between Nick and Jordan Baker than in the novel’s main tragedy, perhaps in part because it’s so deliberately un-filled out.
I also of course admire the writing, and the way things are left bare so you can imagine them for yourself. But the poetry about boats against the current, and the symbolic bread crumbs strewn about that so delight high school English teachers,* aren’t entirely to my taste.
But why am I relatively uneasy about how best to use The Great Gatsby sociologically, in relation to thinking about high-end inequality? This brings us back into the vicinity of the Great Gatsby curve.
If ever a character in fiction found it incredibly easy to become super-rich without breaking a sweat, it is Jay Gatsby. He does it in just a few years, apparently through bootlegging, bond fraud, and other such schemes in cahoots with gangster Meyer Wolfsheim. But he appears to be utterly unmarked by all this, leaving aside his embarrassment when Tom Buchanan throws it in his face. Gatsby came out, of course, before the gangster theme, now associated with classic movie roles played by the likes of Cagney, Bogart, and Edward G. Robinson, had flowered in American culture. (I gather that a little-remembered late 1940s movie version of Gatsby brings in all those gangster tropes, but they’re not in the book, beyond a bit of derision about Wolfsheim’s low-class Jewish ethnic schtick.)
One is left thinking – or, at least, I am – what’s the problem? Why can’t Gatsby just get over his adolescent obsessions with a rich young woman he met while he was “Mr. Nobody from Nowhere”? We even see in Gatsby the emergence of alternative social elites to the horsey WASP set of the Buchanans – for example, the show biz glitterati who enliven Gatsby’s parties. The Buchanans only have a monopoly over their particular sector.  
Hemingway famously mocked Fitzgerald for having a moony fascination with the super-rich, rather than seeing that they were just “dull” and “repetitious” – as indeed the racist ranter Tom Buchanan clearly is. If fortunes like Gatsby’s can be made so readily, and given the 1920s rise of increasingly modern-looking mass popular culture, we’re already nearing a transition point that the book doesn’t seem to anticipate. True, the hereditary WASP establishment would continue to hold many of the ramparts at the top of American society (such as in government and the Ivy League) for decades to come, but the Buchanan view that inherited wealth is the only worthy kind has already faced repeated challenges in American culture, from the perhaps more culturally dominant myth of the “self-made man,” and it won’t be all that long before even the vilest and most pathetic scions of inherited wealth (no need to name odious names here) will be feverishly insisting that they were self-made.
The Great Gatsby was somewhat of a commercial and even critical bust when it first came out, and truly begun its triumphant rise only twenty-odd years later. By then, the Great Easing was well underway and the super-rich had lost the commanding heights that they had reached during the Gilded Age and perhaps were still aggressively holding, even if in defiance of emerging new economic trends, during the early-1920s “return to normalcy.” So perhaps one should think of Gatsby as being more about American Dream aspirations, than about the super-rich or class relationships as such.
Yet I’m still left thinking: if Gatsbyesque wealth could be achieved so swiftly, easily, and without leaving a mark – such that the Great Gatsby curve did not apply – then, even if a few parvenus found their newly won heights disorienting,  how much would there really be to worry about, so far as our ongoing Second Gilded Age is concerned?
I personally seem to find more interest and insight, with regard to issues of high-end inequality that might peculiarly resonate today, in P.G. Wodehouse’s classic 1930s Wooster novels, which I hope to write about soon.
__________________________________________________________________________
*Lest I sound too harsh on high school English teachers here, I should note that perhaps my favorite teacher ever, and certainly the funniest one I ever had (despite even Marvin Chirelstein), was Mr. Cammarata of the Bronx High School of Science, who in my eleventh grade English class brought The Importance of Being Earnest forever into my life.
Default

Death of Charles Kingson

I’m very saddened by news of the death of Charles Kingson.

Charley was a pillar of the NYC Bar, an important member of the NYU tax community, a serious thinker and writer, delightful company, and a greatly valued professional friend. I will miss him.

Default

NYU Tax Policy Colloquium, week 6: Ruud de Mooij on profit-shifting (semi-)elasticities

Yesterday at the Tax Policy Colloquium, Ruud de Mooij of the IMF presented his paper (coauthored by Sebastian Beer and Li Liu at the IMF), International Corporate TaxAvoidance: A Review of the Channels, Magnitudes, and Blind Spots.

The piece is a meta-study of profit-shifting by multinational corporations (MNCs). That is, it in effect combines all the prior studies, using them as data to be amalgamated towards seeking an overall empirical bottom line from research to date. The prior studies’ weighting may be affected by the numbers of observations they had, confidence intervals that they found, etc., but not by the meta-studier’s (so to speak) view that, say, some were better studies than others.
Profit-shifting here means “the international reallocation of profits by an MNC in response to tax differences between countries, with an aim to minimize the global tax bill. Hence, we ignore reallocation of real capital in response to tax.” In other words, the response being studied is formal or artificial profit-shifting, not actual changes in where substantial economic activity takes place. In practice, of course, and as the paper notes, real and artificial reallocations are richly intertwined with each other – e.g., an MNC may put a factory here rather than there not just due to statutory tax rates, but because of how it can or can’t profit-shift, with respect either to this particular factory or anything else it might happen to be doing around the world.

The paper’s headline finding is that the average semi-elasticity over the period from 1990 to 2015 was 0.98, but this reflects an upward trend from 0.6 in 1990 to 1.5 in 2015. But let’s build in a bit more background about why and how the issue is of interest, before discussing what the headline empirical finding here actually means.

What is profit-shifting? – Reallocation of profits by reason of tax rate differences presupposes a prior allocation that would have prevailed otherwise. It’s of course well-known that source issues regarding where profits arose often lack clear answers, even assuming that one has (controversially) decided on the question of what it means for a dollar of profit to have arisen here rather than there (e.g., when there is a multi-jurisdictional productive integration or else a cross-border sale). The underlying conception one has in mind might involve both “true” profit-shifting relative to a correct standard, and tax rate-motivated interpretation of source rules that leave one room to place a dollar of profit here rather than there, even holding constant one’s relative substantial economic decisions about what to do where.

Why does profit-shifting matter? – The two inputs into a given MNC’s source-based income taxation in a given country are the rate and the base. Suppose we think of the latter as “true” source-based income (despite that concept’s limitations, as noted above) as adjusted for profit-shifting. In a high-tax country, this will presumably tend to be net profit-shifting out of, rather than into, the jurisdiction.

Given that the MNC’s tax liability is a product of the rate and the base, profit-shifting’s effect on the latter does not automatically matter all by itself. Rather, one needs to push a bit further to establish why and how it might matter.

Suppose that a given country wants to impose a 15 percent effective tax rate on MNCs’ true source-based income. Without more to the question, one might be indifferent about whether it got there by (a) measuring the MNCs’ income accurately and directly imposing a 15% rate, or (b) allowing 40 percent of the profits to be out-shifted and imposing a 25% rate on the rest.

But why not just measure the income accurately and impose the rate one likes? Well, it’s not as simple as that. For one thing, if monitoring profit-shifting is costly, it might make sense to up the nominal rate in lieu of spending the extra resources to get it exactly right.

But I think there are two main considerations here, in terms of why care about profit-shifting, with greater practical force than just that::

a) For optical reasons, both domestic and international, one may want to apply the same statutory rates to MNC income and that earned by purely local businesses. Yet one may want the MNCs to face lower effective rates, because they are more mobile. A relatively extreme example would be Ireland’s quite rationally, from a unilateral national welfare standpoint, offering Apple a special tax deal. Allowing just the “right” amount of profit-shifting, but not “too much,” may be a convenient (if not exactly first-best) way of getting there.

b) Despite its artificial character, profit-shifting generally isn’t costless, so requiring companies to engage in it may create deadweight loss. (Then again, differential tax rates around the globe may also lead companies to incur deadweight loss, and profit-shifting opportunities can enable them to reduce that other DWL.) But even insofar as profit-shifting induces MNCs to incur extra DWL, a given jurisdiction may not care much about it, on the view that the individuals bearing it may be foreign (e.g., shareholders across global capital markets) rather than domestic.

Semi-elasticities vs. elasticities – Again, the paper finds an MNC profit-shifting semi-elasticity of 0.98 for the entire period from 1990 to 2015, but rising throughout the period so that by 2015 it stood at about 1.5. What does this mean in plainer English.

A semi-elasticity, in this particular context, is a change in reported profits per 1 percent change in the corporate tax rate. Thus, if the semi-elasticity is 1.5 percent throughout, then reported profits – holding the real location of investment constant – will decline by that percentage whether the corporate rate rises from (say) 20% to 21%, 33% to 34%, or 66% to 67%.

Econometric research often offers elasticities, rather than semi-elasticities. Had the paper’s measure been stated in terms of elasticities, rather than semi-elasticities, it would have offered a number for the change in reported profits, by reason of changes to profit-shifting, as the corporate tax rate changed by a percentage of its prior level.

If the corporate rate rises from 20% to 21%, it has increased by 5% of its prior level. Accordingly, here a semi-elasticity of 1.5 = an elasticity of .3 (i.e., as stated in terms of a 1% change in the prior corporate rate, as distinct from in the absolute corporate rate).

Likewise, a semi-elasticity of 1.5 as the corporate rate increases from 33% to 34% (i.e., by 3% of its prior level), equates to an elasticity here of .5.

And a semi-elasticity of 1.5 as the corporate rate increases from 66% to 67% (i.e., by about 1.5% of its prior level) equates to an elasticity here of 1.0. This would imply, all else equal, that 66% was the revenue-maximizing corporate rate.

In short, constant semi-elasticities would imply rising elasticities, since the same 1% increase in the absolute corporate rate becomes an ever-smaller relative increase as we get higher up.

The fact that the U.S. corporate rate just changed by so much – from 35% to 21% counting the federal component only, adds interest to the question of whether one should think of the semi-elasticity as likely to be comparable at different absolute rate levels. Other changes to the U.S. corporate tax rate by reason of the 2017 tax act may also affect the answer to this question. Thus, suppose we think of the enactment of GILTI as meaning that U.S. MNCs are no longer looking at driving their global tax rate down from 35% to 0% when they profit-shift out of the U.S., but instead just from 21% to 13.125%. (This is based on the GILTI marginal rate of effectively 10.5%, increased for the foreign tax liability that would be needed to zero out one’s GILTI liability, given that foreign taxes are only 80% creditable thereunder.) This might conceivably reduce both the elasticity and the semi-elasticity of profit-shifting for such MNCs for the post-2017 period, relative to pre-2018.

One also should presumably be cautious about assuming that the same semi-elasticities apply to very large, as opposed to much smaller, tax rate changes. For example, suppose that the semi-elasticity is simply 1.5 throughout. Then lowering the U.S. corporate tax rate from 35% to 21% would have caused about a 23 percent increase in the reported U.S. corporate tax base. As per the paper’s Table 6 (on page 20), a 23 percent increase in the reported 2015 U.S. corporate tax base would have caused it to be more than 100 percent of the year’s “true” corporate tax base. (This is basically 1.5 percent times 14, upped slightly by reason of compounding.)

This would have been by no means paradoxical or inconsistent. It would simply have meant that there was now, in the hypothetical 2015 to which 2018 law applied, net inward profit-shifting to the U.S., rather than net outbound from the U.S.

Nonetheless, I personally would have thought that a surprising result, given that there are still plenty of tax havens out there. On the other hand, it is true that some set of things constrains profit-shifting, or else reported profits would be zero everywhere apart from in the havens. But I don’t think that either I personally, or we collectively, have a good handle on the cost functions and everything else that determine how much profit-shifting occurs. What exactly limits it? We may have some general ideas, but not very well-honed and specific ones.

Doing some simple arithmetic with the numbers in Table 6, had the 2015 U.S. reported corporate tax base been 23 percent greater, but the tax rate 14% lower, there would have been an overall revenue loss of about $80 billion. Although this ignores real (as opposed to mere profit-shifting) effects on where investment and economic activity are actually located, it helps one to see why it was so totally obvious (at least to the fair-minded) that the 2017 U.S. corporate rate cut would lose a ton of revenue, unless there was a wildly unrealistic level of inbound real responses.
Default

Amazon’s zero federal income tax bill last year

There’s been a lot of press covcrage recently of the fact that Amazon paid zero federal income taxes last year, despite earning $11 billion in profits (as per its financial statements). I’ve been too busy with teaching and other work to take a close look at this story, but I know enough about the general issue to have realized that it doesn’t tell us anything definitive prior to considering how exactly Amazon got there.

Now, however, Matthew Yglesias has done me the favor of explaining how Amazon got its taxes down from over $2 billion (had it paid 21% on $11 billion) to zero

If this had happened in 2017 or earlier, net operating losses (NOLs) might have been the lead suspect, at least before one actually examined the evidence. Amazon had big losses for years, and there’s absolutely nothing wrong if a company (genuinely) loses $11 billion in Year 1, then earns $11 billion in Year 2, and pays no Year 2 tax by reason of the NOLs from Year 1. But ironically, the 2017 act effectively presumes that there would be something wrong here, as it limits NOL deductions to 80% of current year profits. This was presumably directed at optics, more than at substance, although note that the disallowed excess NOLs can be carried forward indefinitely.

Yglesias finds three main causes in the record for Amazon’s zero tax liability. The first is research and development (R&D) credits, which he notes get wide academic support, because research may yield positive externalities.

The second is temporary expensing for investing in equipment, which he notes is more controversial than R&D credits, but also gets some support across party lines. But I’d add two points here. First, expensing makes more sense when one is doing more than the 2017 act did to limit the tax benefit from effectively pairing it with interest deductions, which can cause debt-financed investment to be better than exempt. Second, there may have been a temporary transition effect insofar as, in 2018, Amazon was combining expensing for new equipment with continued depreciation for past years’ equipment. This overlap from the shift between regimes would be expected to diminish in future years as expensing remains in place. And if equipment expensing is indeed allowed to expire as currently scheduled, then in the first year after the expiration Amazon’s tax liability, relative to reported profits, might be unusually high (all else equal), by reason of the opposite regime shift.

The third cause for Amazon’s zero tax liability, despite its $11 billion in reported earnings, is that its surging profits, by driving up its stock price, increased its deductions for paying stock-based compensation to its executives. Yglesias explains why allowing the deduction may make sense from a corporate income measurement standpoint, leaving aside the corporate governance issues that may be associated with very high executive compensation, but I’d add one more thing. The $1 billion in stock-based compensation that he reports as having been deducted by Amazon presumably DID lead to significant tax liability on the executives’ part – indeed, one would presume, at a tax rate that was generally well above Amazon’s 21 percent corporate rate. So the paid-out $1 billion in profits was indeed taxed to someone, and perhaps at more than the U.S. corporate rate, unless there were tax planning machinations at the individual level.

Insofar as this $1 billion was taxed by the U.S. at the individual level at a rate above 21%, I’d view that as an entirely adequate substitute for Amazon’s being directly taxed on the same value.

Default

NYU Tax Policy Colloquium, week 5: Susan Morse’s “Government-to-Robot Enforcement”

“I’m sorry, Dave, I’m afraid you can’t deduct that.”

2001’s HAL, of course, wasn’t a robot, if one’s definition of the term requires creature-like embodiment. But he was enough like us to be capable of going mad. (For that matter, I once inadvertently gave an otherwise well-adjusted pet iguana a seemingly neurotic aversion to going into his water bowl when there were people around – he instinctually expected to be safe when he was in there, so was startled to find I’d just take him out of the cage anyway. I concluded that at least fairly intelligent animals – iguanas, surprisingly, qualify! – can develop neurotic aversions. But I digress.)

Yesterday’s colloquium guest, Susan Morse, presented an interesting paper that addresses how the rise of automation and centralization in legal compliance may transform the character of enforcement. These days, lots of tax filing involves the use of software – for example, Turbo Tax, H&R Block, TaxAct, Tax Slayer, Liberty Tax, and proprietary products that, say, a leading accounting firm might deploy with respect to its clients.

These programs, though hardly on the more sentient side of AI (unless one agrees with David Chalmers about thermostats) might nonetheless have their own versions of “I’m sorry, Dave, I’m afraid you can’t deduct that.” An example that I’ve heard about, from a few years back, concerns Turbo Tax and how to allocate business vs. personal use regarding expenses that relate to a second home which one also rents out. By days of specific business versus personal use, or using a 365-day base? Apparently there are arguments for both approaches, but Turbo Tax either heavily steered people one way, or actually “refused” to do it the other way.

What’s more, they might offer an opportunity for centralized enforcement – for example, for the IRS’s directly collecting from Turbo Tax the taxes underpaid on Turbo Tax filings, at least where this reflected an error in the Turbo Tax program. The amount might be estimated, rather than calculated precisely as to each particular Turbo Tax-filed return.

In this scenario, if we assume that Turbo Tax isn’t going to try to get the money from individual filers (and note its current practice of holding customers harmless for extra taxes paid by reason of its errors or oversights), then in effect it will add expected IRS payouts into its prices, making it somewhat like an insurer.

The paper’s goal is not to advocate approaches of this kind, but rather to say that their increasing feasibility means we should think about them, and about the broader opportunities and challenges presented by rising automation and centralization, both in tax filing and elsewhere.

I myself have tended to see Turbo Tax, which I used until recently, as little more than a glorified calculator and form filler-outer. For example, it allows one to spare oneself the enormous nuisance of computing AMT liability (a real issue for New Yorkers pre-2017 act), or of having forgotten to include a small item until after one had already made computations based on adjusted gross income. So Intuit would really have had to screw up something basic, in order for Turbo Tax to have gotten my federal income tax liability wrong.

Nonetheless, especially if these programs become more HAL-like, but even just today when they offer a data and collection source, they can become important loci for federal enforcement and collection efforts. The paper notes, however, that there might be issues both of capture (Intuit manipulates government policymakers to favor its interests) and of reverse capture (Intuit, despite incentives to please customers that push the other way, decides on “I’m sorry, Dave” by reason of its relationship with the tax authorities).

Here’s an example that occurs to me – although I suspect it’s not actually true. New York State created certain charities, gifts to which qualify for an 85% credit against state income tax. Thus, if at the margin I can’t deduct any further state income taxes on my federal return, giving a dollar to such a charity costs me only 15 cents after state tax, but leaves me 22 cents after federal tax, if a full $1 charitable deduction is permissible and my federal marginal rate is 37%.

The Treasury has taken the view that, under these circumstances, my permissible federal deduction would only be 15 cents (i.e., the contribution minus the value of the state credit) – even though claiming simple state charitable deductions is not thus treated. But the Treasury might be wrong – i.e., it depends on what the courts ultimately decide, if the issue is litigated. Suppose, however, that Turbo Tax, which has you list the names of the charities to which you have given deductible contributions, in effect said “I’m sorry, Dave” once you had typed in the requisite name. This would in effect be reverse capture (although I doubt that Turbo Tax actually works this way, and it wouldn’t be hard for taxpayers to think of simple workarounds). It might impede taking the deductions, and then fighting the IRS in court if necessary, while using Turbo Tax.

One of the paper’s important themes concerns the relationship between (1) finding someone (such as tax sofrware providers) to serve an insurance function, and (2) being able to improve taxpayer incentives, at least in one particular dimension, by having no-fault penalties for underpayment of tax. (I wrote about this issue here.)

To illustrate the reasons for and problems with no-fault penalties, consider the following toy example: Suppose I can either owe $50 of tax with certainty, or else engage in a transaction the correct treatment of which is legally uncertain. If I do it and the issue is then resolved, there’s a 50% chance that I’ll owe zero, and a 50% chance that I’ll owe $100. So my expected liability is $50 either way – assuming that the latter transaction will definitely be tested.

In reality, however, what we call the “audit lottery” means that I can do the transaction, report zero liability, and be highly likely never to have it examined. Suppose that the chance of its being examined was as high as 50%. Even under that, probably quite unrealistic, scenario, my expected tax liability, if I do the transaction, is only $25. 50% of the time it’s never challenged, and 50% of the time when it’s challenged I win.

This is actually a pervasive issue in tax planning, inducing taxpayers to favor taking uncertain and even highly aggressive positions because they might never be challenged. The key here is that one generally won’t be penalized if one loses, if the position one took was sufficiently reasonable. A 50% chance of being correct would easily meet that threshold.

The solution to this incentive problem was stated long ago in work by Gary Becker concerning efficient crime deterrence. Suppose a crime one might commit has a $100 social cost. With certainty of detection, the Becker model advocates a $100 fine (leading, of course, to the notion that there are efficient crimes, e.g., one that I commit anyway because the benefit to me is $105). But then, Becker notes, there is the issue of uncertainty of detection. If there’s only a 50% chance that I would be caught, then the penalty, from this standpoint, ought to be $200.

Ditto for the above tax planning / audit lottery example. Given the 50% chance of detection, it all comes out right (in terms of ex ante incentives, ignoring risk) if we say that I have to pay $200, rather than $100, in the case where I am audited and lose. This is a no-fault or strict liability penalty, ramping up the amount I owe in order to reverse out the incentive effects of the audit lottery.

But what about the fact that I apparently did nothing wrong, yet am being penalized? Surely it’s not unreasonable for me to take a position that has a 50% chance of being correct. And we don’t currently require that taxpayers flag all uncertain positions in their tax returns – partly because the IRS would never be able to check more than a small percentage anyway. While I’m not being sent to jail here, there is an issue of risk. But before turning to that, consider one more path to the same result: Steve Shavell’s well-known work concerning negligence versus strict liability.

Shavell doesn’t have a multiplier for uncertainty of detection in his simplest model (although I’m sure he deals with it thoroughly somewhere). But he notes that strict liability produces more efficient outcomes than negligence where only the party that would face the liability is making “activity level” choices. E.g., if drivers don’t have to pay for the accidents they cause unless they’re negligent, they’ll drive too much, by reason of disregarding the cost of non-negligent accidents. (It’s more complicated, of course, if, say, the pedestrians they would hit are also deciding on their own activity levels.)

Returning to tax uncertainty, the problem with a negligence standard for underpayment penalties is that it leads to an excessive “activity level” with respect to taking uncertain positions that might be wrong yet remain unaudited. Strict liability is therefore more efficient than negligence at this margin, unless we add to the picture the equivalent of activity-level-varying pedestrians. For example, we might say that the government’s losing revenues from uncertainty plus < 100% audit rates gives it an incentive to try to reduce uncertainty. But I don't personally find that a very persuasive counter-argument in this setting. Okay, on to the problems with strict liability tax penalties. Let’s suppose in the above toy example that my chance of being meaningfully audited on this issue was only 5%. Then the optimal Becker-Shavell penalty is twenty times the under-payment, or $2,000. Add a few zeroes and, say, a $10,000 tax underpayment (as determined ex post) leaves me owing $200,000.  Or, if the chance of a meaningful review was 1%, the short straw leaves me owing $1 million – even though we may feel I did nothing unreasonable. (Again, the disclosure option, while in special circumstances required under existing federal income tax law, can’t go very far given the costliness of review – which is itself a further complicating factor for the analysis.) If I am risk-averse, the burden this imposes on me may yield deadweight loss (other than insofar as we like its deterring me). From an ex post rather than ex ante perspective, it leads to particular outcomes that we may find unpalatable. A further, but lesser, problem is that it may be hard to compute audit probabilities accurately. Note, however, that requiring negligence is equivalent to presuming a 100% audit chance, in cases where it would not be found. From that perspective, multipliers that are still “too low” but greater than 1.0 at least do something to improve incentives around uncertainty and the audit lottery. So the risk problem arguably weighs more heavily against strict liability than the difficulty of getting the multiplier just right. This is where insurance comes in. The above problem goes away if taxpayers with uncertain positions can and do transfer the risk, for an actuarially fair price, to counterparties that can price and diversify it properly. But tax insurance is not widely available, and is hard to price. Hence the potential appeal of recruiting entities (such as Turbo Tax) that sit in a centralized position, if doing so doesn’t create overly bad problems such as adverse selection or moral hazard. (Adverse selection is inevitably an issue, however, if not all taxpayers use entities that can be recruited to serve, in effect, as insurers.) One further issue, in this regard, on which the paper touches is the feasibility of a system that would, say, charge Turbo Tax for user underpayments that reflected factual inaccuracies in the data that one entered. Can we even imagine a system in which, if I used Turbo Tax and left out a $10,000 cash payment that someone had made to me, it was liable?

The answer would seem to be no, but actually it’s a bit more complicated. Consider car insurance. The insurer will typically pay for accident costs even if they’re completely the driver’s fault, reflecting wildly inappropriate behavior (such as driving drunk, running red lights, texting while driving, etc.), In other words, the insurer loses if the driver is negligent, even though negligence is under the driver’s control or at least influence.

How is such insurance coverage feasible? Well, it certainly creates moral hazard, but there are ways of addressing it, such as literal coinsurance (such as ffrom deductibles and copays), implicit coinsurance (such as from collateral psychic or other accident costs to the driver that aren’t covered), and future years’ insurance rates that will now presumably be higher. So it’s feasible to have at least some car insurance for negligent drivers, despite the issue of moral hazard.

By extension, we could conceivably have a model in which Turbo Tax was liable, at least in part, even with respect to factual errors made by its customers, so long as analogous mechanisms sufficiently addressed moral hazard. But this still of course leaves the problem of mandatorily drafting software providers to serve as insurers by imposing no-fault collective liability, if strict liability doesn’t apply to taxpayers who file without using such providers.

Returning to the paper, it doesn’t purport to resolve any of these questions, but rather to begin laying out and addressing them. This particular piece will be appearing shortly in the University of Illinois Law Review, but I’ll be looking forward to Morse’s further work in the area.

Default

Tax Games article: law review version

The official law review follow-up to the “Tax Games” article (and sequel) that 13 of us co-authored during the 2017 tax act’s rush to enactment has now officially appeared in the Minnesota Law Review.

It’s called “The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the 2017 Tax Act,” and it’s available for download here.

The abstract goes something like this: “The 2017 tax legislation brought sweeping changes to the rules for taxing individuals and business, the deductibility of state and local taxes, and the international tax regime. The complex legislation was drafted and passed through a rushed and secretive process intended to limit public comment on one of the most consequential pieces of domestic policy enacted in recent history.

This Article is an effort to supply the analysis and deliberation that should have accompanied the bill’s consideration and passage, and describes key problem areas in the new legislation. Many of the new changes fundamentally undermine the integrity of the tax code and allow well-advised taxpayers to game the new rules through strategic planning. These gaming opportunities are likely to worsen the bill’s distributional and budgetary costs beyond those expected in the official estimates. Other changes will encounter legal roadblocks, while drafting glitches could lead to uncertainty and haphazard increases or decreases in taxes. This Article also describes reform options for policymakers who will inevitably be tasked with enacting further changes to the tax law in order to undo the legislation’s harmful effects on the fiscal system.”

Default

Understanding Leukemia Marrow Transplant

When we talk about a bone marrow transplant, we are referring to a medical procedure. The procedure is done for replacing damaged bone marrow. The damage could have occurred because of chemotherapy, infection or certain types of diseases including leukemia and other forms of blood cancers. The procedure is about transplanting healthy blood stem cells. The blood stem cells move to the bone marrow where they start producing healthy blood cells and also assist in the growth of new marrow. Bone marrow is important for healthy blood cell production. It is spongy and fatty tissue which is located in the hollow of our bones. It is useful for generating red blood cells, white blood cells, platelets and other forms of cells.

What Happens In Leukemia

When a person suffers from leukemia, he or she is suffering from a form of blood cancer. These patients have a situation where the bone marrow does not produce enough healthy blood stem cells. Instead, it starts producing unhealthy stem cells which are of odd shapes, sizes, and other attributes. These stem cells start the process of giving birth to cancerous cells that start overwhelming the healthy cells. This leads to anemia and other related problems. Hence, patients suffering from leukemia need to have health stem cells in their body and this is where the role of bone marrow transplant becomes important.

Why The Need For Bone Marrow Transplant

As mentioned above, a bone marrow transplant is needed when the body is not in a position to produce the required amount of healthy blood stem cells. Unless the damaged blood stem cells are removed and replaced with healthy ones, the patient could slowly be slipping out of control and would most certainly die within a few months or a year at the most. Therefore, whenever a patient has been confirmed to be suffering from leukemia, Bone marrow donor match is considered to be one of the most important options.

The Risks Associated With Bone Marrow Transplant

There is no doubt that BMT or match for bone marrow donation Transplant is a major medical procedure and there are risks involved in it. The patients could exhibit quite a few symptoms and these include nausea, headache, and drop in blood pressure, shortness of breath, pain in the body, fever and unexplained chills during the summer season and a host of other such problems. Therefore these risk factors must be weighed against the benefits and your doctor or specialists are the right person to take a call on this.

There are other factors which also should be taken into accounts such as the age of the patient, his or her overall health, the disease for which the patient is being treated, and the type of transplant that is required. Here again, your doctor or the specialist handling the case is the best person to decide as to whether you are the right candidate for a bone marrow transplant.

The Final Word

In fine, there is no doubt that leukemia, like all other forms of cancer, is a dangerous ailment. However, if a diagnosis is made accurately and at an early stage, it is curable with the help of bone marrow transplant and other methods of treatment.

Contact US:

Gift of Life Marrow Registry

Address:
800 Yamato Rd suite 101
Boca Raton,
FL
Phone: (800) 962-7769