All posts by Janet Byrd

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NYU Tax Policy Colloquium schedule shift!

The next NYU Tax Policy Colloquium will be held on Tuesdays from 4 to 6 pm during the spring semester (as they laughingly, or perhaps wistfully, call it here despite how early it starts), which runs from January 22 through April 30, 2019.

But we will then be changing things up, perhaps permanently, by switching to the fall semester. Our current plan is  to hold the 2019-20 colloquium in the fall semester – late August through early December 2019, in lieu of our holding it in “spring” 2020. This will then become a permanent scheduling feature unless we get too much of an enrollment hit from the switch. (It’s possible that we’ll learn more students are able to fit it into their schedules in the spring than the fall semester, and if so we may have to reconsider.)

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Jotwell post on recent Zucman et al paper

A website called Jotwell (for Journal of Things WE Like Lots) encourages its contributors to write very short pieces calling out for praise particular recent articles that were published in one’s field.

I tend to participate in this annually, although with the press of other obligations I skipped 2017. But they have just posted this short piece that I wrote that discusses the recent Torslov, Wier, and Zucman NBER paper, The Missing Profits of Nations, which argues that big multinational firms are shifting A LOT (40% or more) of their economic profits to tax havens.

I note in my short piece that there is an ongoing dispute among leading empirical economists regarding whether the amounts being shifted are this high, or significantly lower. My own anecdotal sense of things is that the high estimates are likely to be correct, but I accept that there is a genuine empirical dispute here for the experts in such research to hash out. But in any event Zucman et al have found a creative and interesting new way of addressing the question, as I note very briefly in my piece and they explain at greater length in their paper.

As I note in my short comment, the greater the magnitude of such income-shifting, probably the less the real responses we ought to expect to, say, the recent U.S. corporate rate cut from 35% to 21%. But even if we get only minimal real responses because they do so much income-shifting anyway, it’s somewhat of a separate question whether there would be more real responses if the income-shifting were more substantially shut down.

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Hypothetical taxation of gambling

The fall semester at NYU Law School has begun, which by now feels fine (although it was kind of tough, as it always is, to start classes before Labor Day). I am teaching the introductory Income Tax class for the first time in several years. It’s always fun to see (some?) students finding out that the subject has greater interest and more depth than they had expected.

Perhaps as soon as next week, we will reach the topic of how the Internal Revenue Code treats gambling losses. In brief, what the Code does is deny deductions for net gambling losses during the year. This is probably best rationalized as a proxy for the fact that people – say, gambling in a casino or at the racetrack for an evening here and there – may gamble despite expecting to lose money, viewing it as an entertainment activity. E.g., Person 1 goes to the theater at a cost of $100, because he or she likes to attend plays. Person 2 goes to the casino, expecting to lose $100 but anticipating a sufficiently fun time at the tables while this is happening. In the case where this expectation is precisely satisfied, these two cases look pretty much the same, and the tax law treats them the same by denying the deduction in both cases. (Leaving aside the issue of gambling gains on a different evening, against which the $100 gambling loss could be deducted.)

This is of course a bit of an arbitrary rule. And it has the odd implication that if, say, I bet you $100 on the outcome of the Super Bowl (and neither of us does any other gambling during the year), then as a matter of income tax law the winner has $100 of taxable income, while the loser has a nondeductible $100 loss. Plus, if I lose $200 rather than $100, than I’m actually worse off – perhaps emotionally as well as economically – yet the rule, by denying any deduction, in effect treats me as if I had enjoyed $200 of consumption value.

It strikes me that the taxation of gambling is a more interesting topic theoretically than it is as a practical matter (where rough and ready rules such as what we have today are certainly close enough for government work,). 

To illustrate a part of what I have in mind, suppose there were 3 types of gamblers, each wholly distinguishable from the other two and known both to themselves and the authorities. Suppose further that everyone was perfectly rational, given his or her preferences, and that there were no administrative issues of measurement (as well as none of identification), and also that there were no borderline or mixed-motive cases. Then it is plausible that each should be treated under a wholly separate regime, as follows.

PLEASE NOTE, HOWEVER, THAT WHAT FOLLOWS BELOW IS A THOUGHT EXPERIMENT TO TEASE OUT THE SEEMING IMPLICATIONS OF VARIOUS IDEAS – NOT AN ACTUAL PROPOSAL FOR THE FAR MESSIER REAL WORLD!

Case 1: Taxpayer rationally expects to break even, but wants to bet because taking on the risk is fun: As an example of what I have in mind here, people generally hate and try to avoid the sensation of free fall, yet they also have been known to stand on hour-long lines to ride scary rollercoasters. Suppose, analogously, that I bet $100 on the Super Bowl, despite ordinarily being risk-averse, because it will add to my excitement and pleasure in watching the game. (Or for that matter, I may bet the money on the Patriots as a psychic hedge, because I’m otherwise rooting against them.)

Here, under the strict assumptions that I am making, there is an argument for excluding both gains and losses. There is no reason to tax-penalize the activity, as between consenting adults who are in fact on equal terms. (I’m ruling out the scenario where one is a more skillful bettor than the other, hence should actually expect to win on average.)

The standard insurance argument for income (or consumption) taxation might suggest symmetrically including gains and deducting losses. Then one might raise the Domar-Musgrave point, to the effect that the bettors could offset this by scaling up the bet. E.g., if they want to bet $100, but gains are included and losses are deducted (with loss refundability if needed), they can get there anyway if their tax rates are the same. E.g., if the counterparties both face 33% marginal rates, then instead of betting $100 without tax consequences, they bet $150 with, and get to exactly the same place.

Is it unfortunate that they can do this? Not at all, under my assumptions. The income tax as insurance responds, in rational actor scenarios, purely to undesired risk (e.g., from the “ability lottery” or from having under-diversified human capital by reason of needing to specialize). But here, by assumption, people are rationally doing what they want and like. So, while their presumed ability to offset the undesired “insurance” suggests that maybe it just doesn’t matter, ignoring the bet leads directly to the desired result. There is no motivation for making them adjust (even if it does no harm under the assumption that it’s easily done, and indeed that in any event they are betting given the degree of mandatory insurance).

Case 2: Taxpayer rationally expects to win, and bets in order to make money: Suppose we have a card-counter in the game of 21, or else a really good poker player, who bets so as to make money, just as other people go to the office in order to earn a salary. Now we face the standard case of risky business investment, in which gains should be taxed and losses deducted (including with loss refundability). Real world loss limitation rules, such as the fact that one cannot use net operating losses to get direct federal payouts at the applicable marginal rate, arguably reflect measurement concerns – we may fear that people are creating tax shelter losses rather than reporting real economic ones. But I have ruled all that out of bounds for purposes of my hypothetical.

This regime of including/taxing gains while deducting/refunding (at the tax rate) losses provides arguably desirable insurance through the tax system in at least two senses. First, it in effect redistributes from better gamblers to worse ones, consistent with the ability lottery scenario where people differ in “wage rate” and can’t insure against this privately due to adverse selection. Second, as with any other risky business investment, it provides desired insurance that might otherwise be unavailable. To illustrate this point, I used to know a card counter who went to casinos when he could spare the time, solely to make money. He hated the short-term variation, which in fact was high enough that he could go, say, from plus $35,000 to minus $20,000 (with gambler’s ruin potentially looming) in the course of a few hours. He really just wanted to earn his expected return – while also needing to manage his stress over avoiding detection (which required making some deliberately bad bets, so as to throw off the watchers employed by the gambling establishment).

It’s worth noting a further assumption that may be needed here to make this approach attractive. Normally we are glad that people are willing to engage in risky activity that has a net expected payoff. But in the case of gambling, the gains are other people’s losses. If one thinks of this as rent-seeking or negative externalities, the approach I’m suggesting arguably is undermined. But under my assumptions, as opposed to those that it would be reasonable to apply in the real world, this is not an issue. After all, no one is systematically losing under my gambling hypotheticals unless, as I discuss next, they are deliberately (and rationally) undertaking it as a consumption activity.

Case 3: Taxpayer rationally expects to lose, but happily gambles anyway for the entertainment value: Suppose again that we have two people. The first spends $100 to go to the theater, anticipating an enjoyable show. The second spends a few hours in the casino, expecting to lose $100, likewise regarding this as a fun way to spend the evening. And suppose that the fun comes out of the process of the gambling itself – unlike in Case 1 above, let us assume that it’s not from wanting to bear risk as such.

The theatergoer faces, of course, the risk that the play will prove to be a dud (and hence revealed ex post not to have been worth $100, much less a couple of hours  that one will never get back). But at least the financial cost is known in advance. One certainly could imagine the gambler thinking about the evening in much the same way, and thus regretting that in fact it’s possible to lose a lot more than the expected $100 (or to have to end the night of gambling sooner than expected).

While we may be starting here to leave far behind the actual psychology behind gambling (which surely includes the hope of winning against the odds), one could, if one liked, conceptually divide the gambler’s results into a “consumption component” and an “investment component.”  From this standpoint, one might say that the above gambler has what ought to be a nondeductible consumption outlay, in the amount of the $100 expected cost, along with investment variation above or below that which “ought” to be deducted or included, as the case may be.

E.g., suppose I actually break even when I ought to have lost $100. Under the hypothetical approach, I would have $100 of taxable income. (After all, I’m $100 better-off than my otherwise identical peer who actually did lose exactly $100.)  Or suppose I have a rotten night and lose $200, even though I actually should have expected to lose only $100. Now I have a deductible $100 loss.

Note that, with perfect knowledge (by the gambler and the government) of the expected loss, we don’t get into Domar-Musgrave adjustments here. If I change how I am actually betting, then I change the expected loss.

If one revised the treatment of Case 1 so that gains were included and losses deducted (rather than both being ignored), it would be receiving the same treatment as Case 3 (given that the expected loss in Case 1 is zero). So those two start to collapse together, once one picks at the examples a bit.

Likewise, once we see that, in Case 2, it’s really the positive expected return that one might want to tax (as “ability”), one might start feeling inclined to ask whether, in Case 3, one should want to treat lousy gamblers, who rapidly accumulate large expected losses, less favorably than the more skillful (though still loss-expecting) gamblers, who are able on average to slow the bleeding, and thus to gamble less unprofitably or for longer. This might start to push us in the direction of wanting to treat really bad gamblers more favorably than good ones, e.g., by not simply benchmarking them off the larger expected losses that reflect their lower ability in this respect. This would in effect be insurance against being the sort of gambler who is bad enough at it to have a larger than typical expected loss. (And of course I am assuming that the difference here is in ability, not effort – we’re in the same realm as a wage tax that discourages work if our making this adjustment discourages people from learning how to become better gamblers.)

But here, at last, is the ACTUAL takeaway that I derive from all this: Theory, at least of very simple kinds, is more tractable than reality. It’s easier to say where greatly simplified hypotheticals would lead us under particular normative views, than to reach confident judgments about the real world, in which multiple, conflicting such hypotheticals may each be more than 0% true, and yet each push us in very different directions.
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My John McCain story (such as it is)

I just belatedly remembered that I have a John McCain story of a sort. It goes back to 1997 or so, and is perhaps more about TV, media, and promotion than McCain as such, but he did, from my standpoint, have an amusing cameo in it.

At the time, I had just published my book Do Deficits Matter?, and the publisher was seeking to help me get publicity to boost sales. So I got a call from a booker from Good Morning America, asking me if I wanted to appear on the show and apparently get a chance to discuss deficit issues briefly.

I said yes, even though I had to get there, pre-show, at something like 5:30 in the morning, which was no fun. I also had an Income Tax class to teach that morning, but say it was at 10, so I knew I’d get to it on time.

When I arrived at the show, I found out that I had been misled by the booker, who just wanted to have warm bodies in the room. They were going to be discussing deficit issues with a visiting celebrity, none other than John McCain, and they invited all members of the audience to submit proposed questions on index cards. 2 or 3 would then be pre-chosen to ask their questions live on the show. I didn’t bother to submit, but I also, out of curiosity, didn’t leave. I was feeling a bit grumpy by this point, however (despite scoring loot in the form of a free Good Morning America t-shirt).

They also had another guest on the show who had become a celebrity. She had actually worked in the same law firm as me, and indeed in the office next to mine, and we had been on friendly terms. I remember thinking that it would have been nice to go over and say hello to her, off-camera, except that security would have hustled me out pronto, long before I could get within eyeball range. The consequent feeling of relegation to plebe status added, I suppose, to my resentment about being there.

When the show was over, McCain, being a professional politician, came over to shake hands with all the plebes in the studio audience. I shook his hand but didn’t leave right away, because I was hoping to talk to someone who worked for the show about the dragooning that I by now so resented. Then I said to myself, the hell with it, and decided to file out. This brought me within a few feet of McCain, who was still lingering and talking to people. We made eye contact, and he growled at me, kind of angrily, “I already shook your hand!”

My thought at the time was: With all due respect, it’s not as if shaking your hand is such a great thrill that I’d be angling for an encore. So get over yourself, if you don’t mind. Once was quite enough for me, just as it understandably was for you.

This then lingered as the event’s final indignity, although the whole thing had turned comic in my mind by the time I got to my tax class.

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Random musical aside

I happened to hear recently, for the first time in a while, one of my all-time favorite songs, Sam Cooke’s Bring It On Home to Me.  Looked it up on Wikipedia to learn more about it, and gleaned several fun facts:

–It was only a B side.  The A side was Having a Party – obviously a far lesser song, although one can understand what the record company was thinking.

–The backup vocalist with the deep voice, whose call-and-response interplay with Cooke is so powerful, was Lou Rawls.

–The piano player, who does his part so beautifully although it’s simple enough that I suppose any really first-rate session pianist could have nailed it, was Ernie Freeman, who did a lot of jazz, pop, and R&B records and worked with Woody Herman, Duane Eddy, and Frank Sinatra, among others.

–Cooke must not initially have realized how good a song it was, as he offered it to fellow singer Dee Clark, who turned it down.

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Act soon when supplies start

Subject only to a bit more light editing, I seem to have finished, at last, a complete draft of the book on literature and high-end inequality that I started in 2014.  I’m usually a fast writer, but in this case I had to spend years deciding exactly what I was doing and learning how to do it well. Plus a whole lot of disparate research was required for each new topic.  And I wrote long chapters that I subsequently deleted from the project and published separately as freestanding law review articles.  Etcetera.

My current working title is Dangerous Grandiosity: Literature and High-End Inequality Through the First Gilded Age. This, too, has changed multiple times in the course of the project.  I would certainly be willing to discuss alternative title suggestions with a publisher, as they can often come up with something crisp and salable.

Whether or not this book is either the best or the most important thing I’ve written, I think it is my favorite, although this partly reflects the particular tastes and values that led me to write it. (I can be very self-critical, although I generally prefer to keep that to myself.)

I’ve talked with a couple of editors / possible publishers in the past, but before I had fully nailed down the project. My aim was not just to gauge interest, of which I found some, but also to get feedback, which several gave generously and which I found very helpful.

The book clearly has more upside sales potential than my tax policy books, but also less of an automatic built-in audience, and I don’t have the same instant cred when doing something like this as when writing about, say, corporate or international tax policy. That’s fine, I’m willing to earn it and feel that the book is up to this challenge. (And I’ve gotten positive feedback about particular chapters.) But I do now face the question of how best to go about publishing it. E.g., university press versus high-brow independent press, and it really needs the right fit to get its best shot at landing audibly.

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International tax policy article, part 2, posted on SSRN

I have just now posted on SSRN the second part of my recent Tax Notes / Tax Notes International article discussing U.S. international tax policy.

It’s available for download here.

The abstract goes something approximately like this: “This paper, published in Tax Notes on July 9, 2018, is the second half of a two-part paper examining and analyzing the three main international provisions in the 2017 tax act. Part 1 discussed normative frameworks for international tax policy. Part 2, contained herein, focuses on the base erosion and anti-abuse tax (the BEAT), global intangible low-taxed income (GILTI), and foreign-derived intangible income (FDII).”

I am thinking that this may be of greater practical interest than Part 1 to people who are looking, not just for an overview of the major international tax provisions in the 2017 U.S. tax act, but also for what I would say is a genuinely evenhanded assessment of its purposes, virtues, and defects, including suggestions for how the above rules might best be changed if one took as given the broad-gauged policy views that appear to have motivated them.

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I think the NYT’s article title says it all

Today in the NYT, an article entitled “Trump Administration Mulls a Unilateral Tax Cut for the Rich” discusses the latest tax and budgetary outrage – a term that I think is justified here – that is under consideration in Washington:

It starts: “The Trump administration is considering bypassing Congress to grant a $100 billion tax cut mainly to the wealthy, a legally tenuous maneuver that would cut capital gains taxation and fulfill a long-held ambition of many investors and conservatives.”

The idea would be to index assets for inflation for purposes of measuring capital gain, while not adjusting anything else for inflation.

To illustrate one of the main problems with doing this, Daniel Hemel and David Kamin explain:

“Imagine that a taxpayer buys an asset for $100 that is fully financed by a loan. Assume that the real interest rate is zero, that the inflation rate is 10%, and that the nominal interest rate on the loan is 10% as well. One year later, assuming no change in the real value of the asset, the asset will be worth $110 on account of inflation. If basis is indexed for inflation, the taxpayer can sell the asset for $110 and recognize no taxable gain. Assuming that the interest is properly allocable to a trade or business, the taxpayer can claim an interest deduction of $10 with no offsetting gain, despite the fact that the taxpayer is in the same pretax position as previously.  Put differently, the effort to eliminate the taxation of phantom gains leads to opportunities for the creation of phantom losses.”

Inflation is in principle worth addressing, but comprehensively – albeit subject to the complexity costs of doing so, which are less worth incurring when the inflation rate is relatively low (as it has generally been for a number of years). But addressing inflation so selectively and piecemeal, creating heightened inconsistencies all across the Internal Revenue Code, is likely to make things worse, such as by encouraging rampant tax sheltering.

There are also other obvious problems with the proposal. Its being so regressive and losing so much revenue when the long-term fiscal gap is already exploding due to the 2017 tax act, ramped-up military spending, etc., goes beyond being reckless. It is also extremely aggressive as a regulatory move, exposes the hypocrisy of those doing it (who would be outraged if a Democratic administration were half as aggressive), and (as Hemel and Kamin argue) there is a good chance that the courts, at least if they address the issue in good faith, will strike it down as beyond regulatory discretion.

What’s more, capital gains already benefit from deferral and a low rate, and even the issue of double taxation of corporate profits (where it’s a sale of appreciated corporate stock) already verges on being a non-problem due to tax rate changes, not to mention adjustments in the capital markets.

In sum, despite the fact that inflationary gain is phantom gain as an economic matter, this is a horrible proposal and not one that I believe is being advanced in good faith, either legally or as a policy matter. Rather, it is another payoff to favored constituencies, and when it’s financed (as it must be in the long run) many Trump voters will be among the main losers.

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International tax policy article, part 1, posted on SSRN

Earlier this month (on July 2 and 9) I published, in 2 parts, my new international tax policy article, The New Non-Territorial U.S. International Tax System, in Tax Notes and Tax Notes International.

The publishers permit SSRN posting after an exclusive period. Thus, as of today, I am permitted to post Part 1 of the article, and have done so. It’s available here. I will post Part 2 next Monday (August 6).

Part 1 discusses normative frameworks for international tax policy, while Part 2 discusses the BEAT, GILTI, and FDII. I suppose that, stretching things desperately, one could say that Part 1 leaves the reader with a cliffhanger, as it sets the stage for assessing those three provisions but holds off on actually doing so. (The article would simply have been too long for Tax Notes had I published the whole thing at once.)

Although I’ve been authorized by the publisher to post Part 1 today, the usual drill is that SSRN takes it down after a couple of days on copyright grounds and I have to contact them with copies of the authorizing emails in order to get it back up.  Kind of annoying, as the take-down usually occurs right when the download traffic, be it high or low overall, is at its peak. I’m going to try to forestall this by contacting SSRN upfront, but we will see if this works.