A Taxing Blog

Friday, April 18, 2003
Cultural Tax Literacy  
I had an interesting discussion with an NYU LLM student/future taxprof the other day about the "Tax Canon," i.e., if you could choose 10 tax articles for an aspiring tax academic, what would they be? Each of you must have your favorites, and I'm curious what people think of as required reading.

If you have a chance, email me 3 or 4 (or more) suggestions at vef2 at columbia.edu and I'll post the results next week. Unless your name is Bittker, don't list more than, say, 2 of your own articles. ;-)

A Tournament of Judges?  
Off tax topic, but Steve Choi and Mitu Gulati have an intriguing paper, A Tournament of Judges?, which is getting roughed up a bit in the blogosphere. The paper proposes that circuit judges be ranked according to objective criteria, based on things like citation counts and reversal rates. The "winner" of the tournament would then be a presumptive nominee for the Supreme Court. Or something like that -- the paper is a bit fuzzy on the details. The goal is to remove politics (or at least separate politics from merit) in the Supreme Court selection process.

I'm in favor of rankings in theory, but I'm also not sure how one comes up with an accurate and practical set of objective criteria. Or how one controls the gaming of this system that would follow. Gulati and Choi's proposal would encourage, among other things,

1) more long, published opinions of unimportant cases, thus making legal research more difficult and confusing, and leading to more conflicting opinions
2) skewed citation counts in favor of the larger circuits (esp. 9th)
3) judges taking more controversial stances in order to boost citation counts
4) judges finding for parties on multiple grounds and otherwise trying to cert proof their opinions

I certainly agree with Gulati and Choi that more info on the quality of judges would be helpful for everyone, including potential law clerks. But I'd rather see a compilation of subjective rankings by (1) the judges themselves and (2) academics, and of course not as a formal part of the Supreme Court selection process.

Lawrence Solum has more commentary here.

Alan Sokal has an interesting piece here, written in sort of the same vein.

Another Tax Shelter Case?  
Story here on two former Levi Strauss tax managers filing a suit claiming that the company engaged in tax and financial fraud. The WSJ reports that the suit alleges that, among other things, the company calculated unusable foreign tax credits as income and failed to disclose taxable gain on certain transactions. Although KPMG, the company's auditor, is not named in the suit, the suit alleges that when two KPMG auditors questioned Levi's tax treatment, Levi asked to have the partners removed and KPMG complied. Thus, the story here, which is similar to the allegations surrounding KPMG and Xerox, may be the power that clients have over their auditors. However, as noted by another WSJ piece, the suit also alleges Levis used some questionable tax shelters so it will be interesting to get more details on these transactions.

Thursday, April 17, 2003
A Deficit, Any Way It Is Sliced  
NYT article on the dynamic scoring of the administration's proposed tax cuts. I think people expected to see a rosier picture, i.e., tax cuts stimulating more growth, than the CBO report actually found.

Stanley Works cuts  
My last entry is full of mistakes. First, I misrepresented Victor's point. He is correct that it is much easier to abuse transfer pricing with intangibles. Second, Stanley Works did not actually make the move. However, as this story suggests, the company appears to be using that fact as one of the justifications for cutting its workforce and facilities.

Dividend Proposal -- Ed Kleinbard  
I attended Ed Kleinbard's presentation at NYU on the mechanics of the administration's dividend proposal. Ed was excellent, as expected. I came away thinking that the dividend proposal is not as confusing as I first thought, but still a challenge to implement. A few key takeaway points, only some of which I knew in advance:

1) the proposal is adds on to, rather than replaces, existing law, so much of the complexity derives from the interaction with the underlying (complex) treatment of different types of shareholders, etc.

2) the quest for the "perfect" rather than the good causes a lot of trouble,

3) the EDA (Excludable Dividend Allowance) is an annual concept, rather than a running account like e&p,

4) the current legislation, as drafted, calls any excludable dividend to a shareholder who has held the stock less than a year an extraordinary dividend under 1057, thus wiping out the whole point of the legislation for most shareholders. Ed reported that this is basically an exceedingly broad anti-abuse rule which the Treasury has promised to narrow by legislation. Seems to me that a 46 day holding period like section 246's requirement for the DRD (dividends received deduction) ought to do the trick.

Most people continue to think that the proposal is dead. Ed noted that the President seems committed to the dividend cut, and not just tax cuts in general. One proposal that has been bounced around is a 50% exclusion, or exclusion of up to a certain amount, say the first $3000 of dividend income. Much of this complexity potentially goes away if they just enact a special rate on dividends equal to the capital gain rate, or go with the exclusion of a certain capped amount.

Intangibles vs. Tangibles  
My hunch about intangibles is that it's easier to abuse transfer pricing rules when you're talking about the value of a computer program vs. the value of a screwdriver. A possibly useful analogy: many US companies house their domestic IP in Delaware or Nevada to avoid state income tax.

Did Stanleyworks actually make the move? I was going to use that as an example where shaming / patriotism worked.

Here is a Treasury Department paper on inversion transactions.

More Expatriation  
A tax staffer on the Hill has been educating me on the expatriation issue. On the provision that protects companies that already left, the energy bill denies tax benefits from corporate inversions that occur 3/4/03 to 12/31/04. Thus, all companies that engaged in the transaction prior to March 4 would have a free pass (unless other legislation is enacted).

According to the staffer, the main benefit of incorporating outside the U.S. is the ability to use debt, among other things, to shift income abroad. Since they are no longer a U.S. company, they don't pay U.S. taxes on worldwide income and thus attempt (by using debt, royalty payments, transfer pricing, etc...) to shift income to the low tax jurisdiction. Apparently, four approaches have been discussed in Congress to fix this problem:

(1) An ownership test that, if met, would ignore the inversion and treat the company as if it is still based in the U.S.
(2) Strengthening the earnings stripping provisions
(3) Strengthening the anti-abuse provisions of tax treaties
(4) Creating a quasi-subpart F regime for foreign and expatriate companies (it would basically cover income that is shifted to low tax jurisdictions).

Not surprisingly (on account of complexity, tax treaty issues, etc...), these provisions have not made it through Congress.

I believe (as many commentators have noted) that real reform is needed in the international area but we are unlikely to see it any time soon. Like Victor, I am also interested to see which companies made the move. I am not sure that his hunch is correct. If shifting income (via debt or transfer pricing) is the main benefit, I would think that it wouldn't matter whether the company makes money via intangible or tangible assets. Stanley Toolworks got the most press about its move and it appears to be a tangible asset company. However, Victor may still be correct since it is probably easier politically for a company that makes money with intangible assets to move offshore then a company with factories in the U.S. Thus, a finding that mainly companies with intangibles made the move could support the theory that patriotism and political backlash is a major reason that companies do not engage in this transaction despite the tax savings.

Wednesday, April 16, 2003
Bermuda, aka Margaritaville  
Deep Thrift, a Congressional Staffer and my source on the ground in DC, points me to an amusing video produced by Arianna Huffington's "The Bermuda Project," which is supporting legislation that would shut down corporate expatriation (aka inversion) deals.

It certainly is unfortunate that so many companies choose to move offshore. What surprises me, though, is that so many companies don't make the move. I'd like to do an analysis of who moves and who doesn't -- my hunch is that companies that make a lot of money from intangible assets make the move, and companies with lots of tangible assets (e.g. factories) don't. There is a lot more gaming of the system that can be done with IP, as the value of the IP may be produced largely in the US, but with the nominal situs of the IP offshore, it may be possible to take advantage of the sourcing rules and claim foreign source income.

It also suggests that patriotism / shaming may actually be a somewhat effective friction constraining companies from moving. Just a thought -- obviously I need to look into this further.

I also note, by the way, that when I was in practice I realized that being local tax counsel in Bermuda has got to be one of the best jobs in the world. The culture there encourages some pretty short working hours, as I recall. At least on the deals that I worked on, we actually drafted the tax opinions for them, and then faxed them over for a signature.

Tuesday, April 15, 2003
Charity Op-Ed  
Lawprof Ian Ayres and Busprof Barry Nalebuff have an Op-Ed in the NYT today arguing that we should add a line to the 1040 requiring people to calculate what percentage of their income they gave away to charity, and also add a line to the form noting the national average percentage. The idea is that people will be shamed into giving away more once they realize that they are giving away less than the average. So John Q. Public does his taxes, sees that he gave away 5% when the national average was 8%, and decides to give away some more money. Call it a Race-to-Generosity Proposal.

I am a huge fan of Ian Ayres, whom I met while I was on the job market this year. I also saw Ian present an interesting paper shooting down John Lott's semi-famous more guns, less crime hypothesis. But having said that ...

Two concerns I have about the Op-Ed:

(1) The change would encourage people to claim a larger charitable deduction, but not necessarily to make a larger charitable deduction. In other words, it's like calling people suckers for not claiming a bigger deduction. My impression, although I have nothing but anecdotal evidence, is that people cheat a lot on charitable deductions, claiming far more than FMV for property and services donated.

(2) There's something unseemly about opening the door to using tax forms as a way to correct what we see as flaws based on our armchair behavioral economics. Here, Ayres perceives what he thinks is a behavioral flaw, namely that he thinks people don't give away enough money because they think they are giving away more than they actually are. But why stop there? If we start using the tax forms as a method of social engineering, there's a lot more that could be done, and I'm not convinced either that tax forms are a good way to change social policy, or that the social engineering will be any good.

Moreover, there's a tradeoff that Ayres simply doesn't acknowledge -- more charitable contributions (or claimed charitable contributions) means less tax revenue, and so overall tax rates will have to be increased. Ayres might argue in response that charities will perform the social services that otherwise would have been performed by government using tax revenue. But I think the burden of proof should be on Ayres to convince us that charities are more efficient than government, not the other way around. We already give charities enormous tax breaks -- do we really need to provide people with more incentives to give away their money?

Tax Compliance  
Taxprof Leandra Lederman has two recent papers on tax compliance: Tax Compliance and the Reformed IRS, and The Interplay Between Norms and Enforcement in Tax Compliance. I've only read the abstracts thus far, but what I like is that she isn't just looking at more enforcement vs. less ---- everyone agrees we need more enforcement, except perhaps Congress ---- but how to make enforcement more effective and encourage the building of a healthy social norm of tax compliance.

Internet Taxes  
Greg Goelzhauser references a debate about how the Internet is taxed, suggesting that increasing (or enforcing) taxes on internet commerce could hurt the tech sector; Greg acknowledges, though, that states have a legitimate concern about raising revenue to avert further budgetary crises.

I'm hardly an expert (or even all that knowledgeable) about state and local tax issues, but I would note that I've yet to see a compelling theoretical argument that e-commerce should be taxed differently than regular commerce. There are better ways to subsidize the tech sector, if that's our goal.

I'd also note that one of the biggest Internet tax problems is one of enforcement. In many states, if you buy property in a low sales tax jurisdiction, say New Jersey, and haul it across the bridge to New York, you may still be liable for a "use tax," which is intended to discourage evasion of the sales tax you would have paid had you bought the goods in New York. Now, I've heard of use taxes, but I'm not sure I've ever met anyone who actually paid a use tax. It's impossible to enforce unless you track who carries what across state lines. The Internet, by making it even easier to purchase the property from a vendor in a low-tax jurisdiction, makes it that much harder for states to crack down on sales tax / use tax evasion.

Over the long term, I'd predict that the Internet will drive states away from sales taxes and towards taxes on real property and other things that are harder to move or hide. There's not necessarily a policy behind this other than lower administrative costs, and such a move could be good or bad, depending on how it's designed and what one thinks about (often regressive) sales taxes.

Monday, April 14, 2003
Estate Tax  
Texasprof Lee Anne Fennell has a paper on behavioral law and econ and the estate tax. Although I'm often skeptical of behavioral explanations, the estate tax is an area where it may make sense to take account of people's irrationality.

Bush & Cheney Tax Returns  
A peek at the President's and Vice President's returns. What a country. Thanks to Taxprof Paul Caron for the pointer.

I note that Cheney has more income from dividends than wages. Impressive -- it takes a lot of stock to generate half a million a year in dividends. I guess this makes Cheney just one of the many "senior citizens" who would benefit from the administration's dividend exclusion proposal.

Workshops This Week  
At the NYU Colloquium this week, Ed Kleinbard of Cleary Gottlieb will be talking about the Dividend Exclusion proposal. Cleary's memo about the proposal is quite notable for the fact that, although the memo only addresses the basics of the mechanics of the proposed legislation -- no policy analysis, no budget projections, nothing like that -- it's 22 pages long. In other words, it's not an easy proposal to implement, and Congress has left a lot of holes that Treasury would have to fill quickly by regulation.

In any event, I keep reading that the budget compromise means no dividend reform this time around.

I remember interviewing with Kleinbard years ago. (I got the job, but went to Davis Polk instead.) Kleinbard was very intimidating to me back then, I can tell you that. I have a vivid memory of him asking me a question about put-call parity. I understand put-call parity now, (e.g. how you can replicate the economics of owning stock by going long on a forward contract and selling a debt instrument) but at the time I was clueless. One doesn't normally learn put-call parity in law school, although I hope to help change that in the future.

Mike Knoll has a recent paper on put-call parity, if you want more.

What Economists Do  
Check out this amusing and fairly accurate link. Thanks to David Post at the Volokh Conspiracy for the pointer.

Sunday, April 13, 2003
Another piece on tax enforcement  
Washington Post article reporting that tax prosecution has declined in the past 10 years.

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