We divided up in advance the particular topics to be discussed by each of us, and here is a very rough effort to reproduce in miniature my comments:
1) What have we learned in the past year about the economic impact of the 2017 tax act?
This morning, the Sun rose. Did we thereby learn something new about the Solar System? No, because that is exactly what we expected. By contrast, we most definitely would have learned something new (assuming we were still around to reflect about it) if, for some extraordinary reason, the Sun HADN’T risen in the morning today.
For exactly that reason, we haven’t learned all that much, in the past year, about the economic impact of the 2017 tax act. For example, there was absolutely no dispute, among serious, responsible, and knowledgeable people, that the act was going to lose a lot of revenue. And so it has – perhaps slightly on the high side, relative to “dynamic” expectations, but that is what I expected for various reasons.
We also “learned” that it did not stimulate a flood of new U.S. investment and other economic activity. But the only thing that was seriously in dispute in this dimension remains so – what might be the effects on U.S. investment over a much longer time horizon – given, e.g., that the relationship between statutory and effective tax rates for multinationals is not perfectly understood (and may have changed in multiple ways by reason of the 2017 act), and that the long-term effect of rising debt overhang will need more time to be observed.
There also seems to have been, unsurprisingly, a bit of mild Keynesian stimulus at the wrong time, i.e., when it was not really much needed. The rising debt overhang may make it harder in the future to use Keynesian stimulus through budget deficits at times when it might be far more needed.
Whether or not the flood of stock buybacks by U.S. companies was expected, it should have been. What else to do with the money that one is no longer constrained from “repatriating” as an accounting matter? And big U.S. companies with overseas profits were not generally cash-constrained with regard to U.S. investment.
The buybacks gave a great talking point to critics of the 2017 act, because their occurrence seemed so contradictory to the ridiculous talking points that were being made by the act’s proponents. But were the buybacks as such bad? Not really. They presumably shifted funds from companies that had no particular current use for the $$ to shareholders who now might find it transactionally cheaper to direct as they liked the value that was paid out. This can be a good thing. And if the funds transfer was merely being delayed under prior law by international deferral, that wasn’t really doing anyone any particular good (including the U.S. tax authorities).
2) International changes
I’ve discussed the 2017 U.S. international tax changes in greater detail on other occasions. But 3 points I made are as follows:
(a) In the aftermath of GILTI and the BEAT, it’s clearer than ever that we’re in a “post-territorial” world, i.e., one in which the old “worldwide versus territorial” debate has been shown to be orthogonal to the issues of main interest to policymakers.
(b) Many U.S. tax lawyers with whom I have spoken have an aesthetic dislike for the shift in U.S. international tax law, and not just because it wiped out much of their knowledge and allowed their junior associates to be on a more even knowledge footing with them, going forward. GILTI, the BEAT, and FDII (to the extent that anyone actually cares about it) have devalued legal advice based on judgment, relative to clients’ running lots of scenarios to guide tax planning.
E.g., suppose the client is wondering about whether it will face the BEAT this year, rather than escaping it under the so-called 3 percent rule (under which the BEAT doesn’t apply if less than 3% of one’s deductions are “base erosion tax benefits”). Even if one can set the numerator for this computation with certainty – which may not be the case – one is highly unlikely to know the denominator with anything close to certainty, as it may depend on the uncertain course of various business outcomes. So rather than just ask the lawyers what the BEAT means, firms may base key planning choices on running lots of probabilistic scenarios. Whether or not this is any worse than the prior state of the play ifor American or global welfare, it’s definitely much less fun for the tax lawyers.
(c) It’s been interesting to observe that a number of other countries appear to be intrigued by the idea of adopting their own versions of GILTI and the BEAT. While not a huge surprise, I didn’t regard this in advance as entirely certain..
3) Partial repeal of state and local tax (SALT) deductions
On this front, it’s been fun (if that’s the word for it) to observe the fault lines in academic debate between people who might typically agree more with each other than they do on this issue.
In the broader policymaking world, I’ve been at least mildly surprised by:
(a) the extent to which blue states have stepped forward to devise what might be called workarounds (I think this reflects the legislation’s nasty red state vs. blue state optics).
(b) the extent to which the Treasury, in response, has seemingly been willing to back away from past limited giveaways to what were mostly red state (albeit more limited) workaround schemes. I had wondered if the Treasury might either (i) feel more constrained by past rulings that favored, e.g., the use of state law tax credit tricks to make private school tuition effectively deductible, or (ii) be willing to respond with baldfaced inconsistency as between past red state and post-2017 blue state planning responses.
4) Where might we be headed next?
This remains unclear, given both the long-term fiscal gap and pervasive U.S. political uncertainty. But future action may need to focus more on new revenue sources (such as from VATs, including disguised versions such as the BAT/DBCFT, and/or from carbon taxes and the like), and less on “tax reform.”
Indeed, I think the term “tax reform” is now dead, other than as a synonym for “changes that I, the speaker, happen to like.” And good riddance, as it had outlived its usefulness.
From at least the 1950s through the 1970s, “tax reform” mainly meant broadening the base so that high-end effective rates would tend to come closer to matching the era’s steeply graduated statutory rates.
Then in the 1980s, “tax reform” came to mean broadening the base and lowering the rates, in a manner that was meant to be net revenue-neutral and distribution-neutral. It might also involve switching from the current income tax to a far more comprehensive version of the consumption tax, although that definition didn’t really get very far off the ground until more recent decades, when it continued to lack political traction.
After the so-called 2017 “tax reform” that lost immense revenue, was extremely regressive, and in many respects narrowed the tax base (e.g., via the egregious passthrough rules), I think we can forget about the term’s being used in public policymaking without evoking derisive laughter. Whether or not 1986 tax reform was tragedy (I don’t think it was), 2017 was definitely farce, and this implies no third act for the concept.
The article is now close to being published, as a chapter in the forthcoming Oxford University Press volume, Tax, Inequality, and Human Rights.
He notes that I credit section 199A with having “achieved a rare and unenviable trifecta, by making the tax system less efficient, less fair, and more complicated,” and that I compare the 2017 proceedings to Gilded Age politics.
It’s a fun response by Reilly, and insofar as he disagrees with me it’s because my noting that the provision will require business people to “pay large sums to tax lawyers and accountants to figure out how best to structure their arrangements with an eye to minimizing federal tax liability” is good news for accountants such as him. “So a small portion of those large sums is coming my way.”
Reilly also quotes my noting, in the article, that the motivation for the pass-through rules appears to be sociological – aimed at rewarding members of the business elite while excluding member of the more educated professional and academic elites, simply because these are self-consciously distinct groups and the former were driving the bus in 2017.
He responds that this mistakenly classifies accountants as part of the educated classes and the intellectual elite. That may well be right, if one looks just as accountants from a sociological standpoint. But in the 199A list of professions banned from getting the 20% tax cut (other than below income phase-out), accountants were unlucky enough to get grouped, based on prior statutory precedents, with the likes of lawyers, doctors, and artists.
BTW, on a related note, I recently heard through the grapevine an explanation of why, at the last moment in the 2017 enactment process, architects and engineers were taken out of the professional classes’ exclusion from full pass-through benefits. The word is that Bechtel told their Congressional patrons (or servants?) to take out engineers, and architects got pulled too because the two groups were listed right next to each other, and a second deletion was thought useful in obscuring the political deal.
Gives you a nice sense of the sheer thoughtfulness behind contemporary Congressional Republican industrial policy.
Second, on Thursday, December 14, I’ll be among those discussing Tsilly Dagan’s excellent recent book, International Tax Policy: Between Competition and Cooperation. We international tax policy book authors need to stick together. Her book is complementary to mine, as I’m mainly interested in the unilateral angle (what a given country might want to do absent strategic interactions between countries) and she is more interested in the strategic aspect. In the time allotted to me, I’ll discuss underlying dilemmas in the field, the book’s main contributions, and follow-up qustions or issues.
Death to cliched overstatement and all that, but still bimodal division can sometimes help to sharpen a point, brought to mind most recently by the portion of the weekend just past that I spent reading the booklet and/or playing the bonus material from the 50th anniversity super deluxe reissue edition of a famous double album called The Beatles, aka the White Album.
By the time I was in my teens, it was no longer quite so true, in terms of the “two types of people” trope, that one was either a Beatles fan or a Stones fan. Even leaving aside that most people were both, hence it was a matter of relative preference rather than exclusivity (i.e., more like “Jets or Giants” than “Mets or Yankees”), by this time the Beatles were a few years in the past, and hence it was more like “Stones or Grateful Dead.” I was more in the former camp, though decently appreciative of the latter. There also was perhaps a bit of “Springsteen or punk / new wave” – although Springsteen had some new wave cred, e.g., Patti Smith had covered “Because the Night” – and here I was definitely in the latter camp. Springsteen felt a bit too earnest, un-ironic, and reverently retro to me – again, with all due respect for his virtues.
One also could say, along I would think with Brian Eno, that the real 1960s choice for older cohorts ought to have been “Beatles or Velvet Underground.” (Sorry, Stones.) Except that here, once I caught up with the Velvets’ legacy in the late 1970s, my answer was definitely “both.”
Returning to Beatles vs. Stones, however – with apologies for returning to a topic that I gather I have addressed here once before, albeit rather a long time ago (in August 2005), I did have a horse in this one despite its being a retro issue by the time I was able to take sides. The Stones spent the 1960s doing one great song after another (albeit, with dross mixed in as album filler). They also had a handful of great albums – in particular, the very good Between the Buttons (1966, with Brian Jones diversifying the sound palette) followed by the immortal Exile on Main Street (1972) and then the crucial comeback album Some Girls (1978). And Jagger in his true glory days could express vulnerability, not just grandiose swaggering, in a way that added to their work’s depth. But the Stones had good enough image management – not least by Jagger and Richards themselves – to succeed in creating widespread misapprehension of the true contrast between these two great and artistically overlapping groups.
I refer, of course, to the conceit that the Beatles were mainstream while the Rolling Stones were outrageous rebels. Now, it is true that the Stones sometimes went places where the Beatles, apart from Lennon, didn’t entirely want to go. But does anyone today think that “Street Fighting Man,” contrasted at the time with “Revolution” as showing that the Stones were more anti-Establishment, was even 10% as cathartic and heartfelt? (BTW, I hold no brief for Lennon’s post-Beatles “Imagine,” which I find mawkish and unconvincing.)
If the standard Beatles vs. Stones view were more accurate, then we wouldn’t see such outcasts and outsiders as Elliott Smith, Kurt Cobain, and Fiona Apple embracing the Beatles so fervently.
I see 2 main distinctions between the Beatles and the Stones. (Other than the Beatles’ having the inadvertent wisdom to break up at their peak, hence never have a decline phase other than as individuals.) The first is that the Beatles were outlanders who didn’t know the hip London definition of cool; hence they had to make it up for themselves. This aided their being more creative and original. (The Stones were overly in thrall to the idea of simply re-creating the blues as practiced by their heroes – the Beatles’ cast of heroes was more diverse and hence more artistically empowering.)
The second was the dynamic nature of the Lennon-McCartney partnership. (But note also that Harrison chafed at being an underling, to the band’s artistic benefit, especially at the end.) Jagger once commented that, of every 10 things the Beatles were going to do, both Lennon and McCartney wanted to run 9 of them. He then added, with the benefit of several decades’ hindsight, something like: “You can’t run a business that way.”
No, you can’t, which is why the Beatles exploded into a rain and reign of lawsuits and bitter take-down songs about each other, whereas the Stones’ corporate enterprise just kept going and going and going, well past the point of tedium. But going back to the very day (back in 1958) when Lennon and McCartney met, there was no clear hierarchy between them, but rather a dynamic tension. Lennon was the older and more forceful one with the cohort of bandmates / followers. But McCartney had more musical chops and had already started songwriting. So it was a continual struggle, friendly and synergistic until it inevitably blew up, that made each of them both better and keener. In a sense, each made the other feel like Scottie Pippen, being strengthened by his daily practice battles with Michael Jordan.
By contrast, Keith Richards has great fun chafing at Jagger in his autobiography, and he notes that he’d write most of a song, then hand it to Jagger to finish up (e.g., the verses in Satisfaction). Plus, he was clearly the main force behind Exile on Main Street. But his chafing reflects that Jagger, as lead singer and group spokesman, was far closer to being the boss than either Lennon or McCartney could ever dream of being in their partnership. This dynamic instability and rivalry (e.g., who gets the next single? Whose material is going to be stronger on the next album? He’s written another “masterpiece” – John’s very word for “Hey Jude” – how am I going to answer it?), combined with mutual admiration and help, and with their both complementary and overlapping strengths, pushed each of them further than he would ever have gotten by himself (or ever would again).
But this bring us to one last “two types of people” bit. Among Beatles fans, as one of the reviews of the White Album reissue noted, there are Sgt Pepper fans, and White Album fans. Well-honed pop perfection, or crazy creative explosion that’s all over the map, sometimes excessive or silly but almost always (if you can peel back the years and all the over-exposure) fresh and startling? Count me as very firmly on the White Album side (although I also give highest marks to the very cohesive Rubber Soul and Revolver albums). It’s an astounding achievement, with multiple stunning peaks, and (for the most part) all the more lovable, and admirably audacious, for its flaws.
The expanded reissue has a crisp sound where you can hear separate instruments more clearly, plus a fantastic 75-minute Unplugged album (aka the Esher demos, which I already had but not with such high-quality sound), plus 3 more disks of often very interesting outtakes and alternative or early versions. These last 3 require prior fandom and knowledge in order to be worth it (and again, some of it had been bootlegged with inferior sound), but if you have that they’re very interesting. Plus, they often have a great live band feel. The material on these disks confirms that the Beatles mostly made the right choices in developing the White Album material – leaving aside the regrettable over-orchestration of Good Night – but its release further enriches their legacy. (I didn’t buy the Sgt Pepper reissue, knowing that there wouldn’t be all that much of fresh interest there.)
Here’s hoping that next year they’ll do something of a multi-disk character with the Get Back / Let It Be sessions (the Abbey Road sessions were too concise and focused to leave as much interesting material lying around). Or maybe it could all be combined in a “Beatles 1969” package. If they do it right, as they did this time, I’ll buy it.
The slides are available here. The paper on which the talk was based is available here (Part 1) and here (Part 2).
Slide 23 was new, reflecting that I was giving the talk to an EC audience. I elaborated a bit in person on the last text box in the slides, from the perspective of: What should tax policy folks in the EC be thinking about the U.S., as an ally/partner/rival/potential dealmaking counterparty, etc.?
It was lovely to be in Copenhagen, which I had not previously visited, although close family members had (rightly) given it rave reviews. I lucked out on the weather, and if, after getting home after 10 pm last night I had to give a two-hour Tax I lecture this morning at 8:50 am, then I have only myself to blame, and/or I chose to do this with my eyes open.
Sometimes these days, when one visits a lovely European city on business, one asks oneself, on the return: Why exactly am I going back? (Leaving aside all my personal and professional connections in the U.S., which needless to say are entirely binding.)
I absentee-voted before leaving on the trip, as I knew the polls would be closed by the time I got back.
Suppose you were to guess: How many times, while I was in transit or away, did I check any U.S. news of any sort on my various screens or otherwise, leaving aside sports and culture?
If the over-under is one time, and you are betting on this, I strongly advise you to take the “under.”
In addition to touring Copenhagen a bit during such time as I had (I was there for about 72 hours), I also managed to read 3 books on Kindle, each of which I quite enjoyed: Mick Herron’s Slow Horses, Angela Thirkill’s High Rising, and Donald Westlake’s The Fugitive Pigeon. The common theme was (a) escapism / easy to read while tired and/or stressed, plus (b) good literary quality.