Thursday, October 30, 2014

A concern for the 99.9 percent?

According to a recent paper posted by Emmanuel Saez and Gabriel Zucman, "the rise of wealth inequality [in the U.S. in recent decades] is almost entirely due to the rise of the top 0.1% wealth share, from 7% in 1979 to 22% in 2012."

Saez presented this paper yesterday (Wednesday) at the University of British Columbia in Vancouver.  I was actually in Vancouver at the start of the day, by reason of my having presented my Piketty paper (coauthored with Joe Bankman) on Monday, but a change to my flight time prevented me from attending the session.

Here are the slides for my talk from my prior presentation of the paper at Virginia - all that changed in the interim was the title page.  And the photo here was taken right after the talk - I am only actually, not figuratively, backed up against a fence.

World Series note

I was rooting for the Royals, but obviously had to admire Bumgarner's performance.  (Plus, extra bonus points from me because he's left-handed.)

The interesting thing was that he appeared to realize, within a few batters, that he simply didn't have his usual command or velocity, so he adapted.  Rather than throwing nothing but strike after strike (to all four corners of the strike zone), he kept on moving the ball around, but frequently missed the strike zone on purpose - especially high.  The Royals, knowing his usual style by now and presumably over-anxious as well, couldn't adapt and kept swinging at pitches a foot out of the strike zone.

Monday, October 27, 2014

Avi-Yonah reviews Kleinbard

Speaking of Chicago-style legal writing, at least in the sense of frequency as opposed to scope of enterprise, Reuven Avi-Yonah has posted a very short book review of Ed Kleinbard's We Are Better Than This.

The style, as in Avi-Yonah's book review a few months back of my Fixing U.S. International Taxation, is to say, in 6 pages or less: "The author says ABC and DEF.  I agree with ABC but disagree with DEF.  Therefore, the author is to be commended for saying ABC, but criticized for saying DEF."

Actually, in my case, I don't think there was an ABC - just a DEF, but, as I noted at the time, we are all entitled to our own opinions.

In Kleinbard's case, Avi-Yonah defines "ABC" as being concerned about the overall progressivity of the fiscal system but not being too concerned about the super-rich.  This matches Avi-Yonah's views.  In the abstract, Avi-Yonah includes an odd putdown of Thomas Piketty for having an "obsession" with taxing the rich.  The only follow-through in the text of the article is a statement that an "obsessive focus" with raising top marginal tax rates is "misguided," since historical data from Elliott Brownlee suggest that we have not, as a historical matter, actually redistributed more from the top when we had higher (but generally more porous) top income tax rates.  I rather think there is more one could say on this topic.

"DEF," for Avi-Yonah in his review of Kleinbard, is not adopting Avi-Yonah's proposals - in particular, a VAT.  The book review does not explore what might be the similarities and differences between a VAT on the one hand, and Kleinbard's proposing to lift the annual earnings cap on the Social Security tax, on the other hand.  Clearly (and needless to say), these two are very different proposals in quite a few dimensions.  Yet there is enough general economic similarity between them - since a wage tax can resemble a consumption tax, when both are operating prospectively (and subject to tax rate differences, important administrative details that affect their reach, etc.) - that addressing it wouldn't have been out of place, at least in a more ambitious book review effort.

In Avi-Yonah's review of my book, although I tried at the time to put this delicately, it was not entirely clear that he had actually read it before writing his review.  For example, the review found it  surprising that Fixing U.S. International Taxation ostensibly hadn't discussed "national neutrality."  In fact, however, this had actually been a main subject of my book's chapter four, although I hadn't specifically mentioned my extensively discussing it in either the introductory chapter or the conclusion.

Then again, you know the old joke in which a writer says: "I never read the books I am reviewing.  I fear it should prejudice me."

As noted in an earlier post here, I'll be commenting on Kleinbard's book at an NYU book event later this week, and I will probably then post my comments here.  For me, ABC is most of the book, but DEF is the fact that I'm more concerned about rising high-end wage and wealth inequality than Ed is.  One thing I'll discuss, however, is that I recognize reasonable people can disagree about this.

UPDATE: It is fair to note here that Reuven Avi-Yonah takes exception to the suggestion about how carefully (or not) he read my book.  He regards it as an attack on his integrity, which goes beyond any suggestion that I meant to make, and I apologize insofar as it can be taken that way.

"Are you a Chicago-style (Quantity) or a Harvard-style (Quality) scholar?" - I try to be both at the same time

The other day, the TaxProf Blog linked to an Orin Kerr blogpost rightly noting two distinct styles in legal academia: the Chicago style, which involves writing a lot, and the Harvard style, which involves trying to make fewer but more significant, comprehensive, and well-thought-through statements.

A blog with regular entries, like this one, is clearly a Chicago-style enterprise.

But in my academic writing, I try to be both at the same time: closer to Chicago than Harvard frequency, but (apart from a few quick commissioned pieces and such) with the aim of putting more into each project than the Chicago approach deems necessary.

Friday, October 24, 2014

They're not happy

One argument we sometimes hear concerning U.S. international taxation is that, whereas the current U.S. system is "out of step" with world norms, other major OECD nations have figured out what to do.  Just enact a territorial system, exempting foreign source active business income, perhaps with some moderate anti-tax haven rules, and you're done / good to go / insert bland bromide of choice.

One good thing about these other systems, as I emphasize in my book, is that adopting territoriality happens to rid you of both deferral and the foreign tax credit - but not because the tax rate on designated foreign source income.  You can have a positive rate (preferably low for a bunch of other reasons) at that margin and be "full worldwide" in the sense of taxing foreign source income, at whatever rate you do, immediately and with foreign taxes only being actually or implicitly deductible.  (Anti-tax haven rules, however, may effectively make them worse than deductible, a move that might itself have good rationales, as I discuss in the book.)

Anyway, back from the detour to the main point.  If everyone else has gotten it right, and they are now doing so great, why aren't they happy?  The whole OECD / BEPS (base erosion and profit-shifting) issue shows that they do not think they have gotten it right.  Note that a zero rate for foreign source income does indeed increase the temptation for profit-shifting, even relative to the dysfunctional U.S. system (in which resident multinationals with billions stashed abroad may at least find that this reduces the appeal of further income-shifting).

One answer I've heard to this point is that they are only unhappy about income-shifting by foreign multinationals, not their own (e.g., Starbucks in the UK, since it isn't a UK company).  But even if this is true of the domestic politics, try finding an economist who will agree that a "national champions" strategy actually makes sense.

A second answer I've heard is that countries like to let foreign multinationals do some income-shifting, so that they will be more interested in inbound investment.  An example might be the U.S. having no qualms about Toyota using debt to strip the income out of its U.S. plants, since this permits them to invest here without actually facing our 35% statutory rate on much of the profits they derive from U.S. production.  They can only do this successfully because they aren't a U.S. company, and hence don't have to worry about generating taxable passive income via the interest outflows to foreign affiliates (or deduction disallowance against U.S. source income under our interest allocation rules).

The funny thing about this story is that it's the opposite of the first one.  Now we're told that countries want to tax foreign multinationals less than domestics, rather than more.

I do believe this story has some truth, however.  But what's happened in the BEPS controversy, is that the income-shifting has simply gone too far, from the standpoint of various countries including the U.S. (at least in the view of some people here).  In effect, I see the countries thinking: "We were fine with you lowering your effective tax rate from A to B, which is why we didn't enact rules to stop you, but instead you've raced far past that point and lowered them all the way to C, which is less than we think we can and should get from you on domestic economic activity."

This is not to say whether the countries are right or wrong about this, from the standpoint of domestic national welfare - clearly a tough judgment to make, and one that depends in part on your normative inputs.  But I do think it explains why they're not happy.  And if they're not happy, we shouldn't be so quick to conclude that they have made life easy for us by showing us how best to tax income from cross-border investment.

Thursday, October 23, 2014

My remarks at this afternoon's Fordham session on corporate inversions

The panel today, which I mentioned in my previous blog post, was off the record, so I can't address any of the particulars of the session.  But here is the written version of my remarks there:

One of the hazards of being asked regularly to comment on things is that you start wanting to be known as a sage who has made great predictions in advance.  So you get football prognosticators who keep picking the upset special, on the view that no one will remember when they’re wrong, but that they’ll be able to crow about it when they’re finally right.

Insofar as I predicted something in this area, it definitely wasn’t the upset special.  If anything, it was more like predicting that the Mets wouldn’t make the playoffs this year.

And anyway, I didn’t specifically say that we’d be back in the inversion soup so soon after Congress addressed the issue in 2004 (if ten years later is indeed soon).  What I said, with a kind of confirmation from the current inversion controversy, is that a really crucial attribute, in assessing what sort of international tax regime the U.S. should have, is what I call the effective degree of our system’s corporate residence electivity.  If we attach potentially adverse tax consequences to being a U.S. company, then it is important to know how avoidable that status is, or isn’t.

There are multiple margins at which you need to think about corporate residence electivity.  One involves new incorporations, and the extent to which tax considerations affect their occurring in the U.S. rather than abroad.  A second margin involves existing companies, both U.S. & foreign, and the question of which of them are the ones to issue new equity and/or make overseas investments.  And inversions involve a third margin: changing the corporate residence of the company at the top of an existing multinational group, as when a U.S. multinational becomes a foreign one.

When I was doing research for an NYU Tillinghast Lecture discussing corporate residence electivity that I delivered in 2010, I was surprised to hear from leading New York practitioners that, even just for new incorporations, effective electivity appeared to be lower than I had expected.  That is, while they typically told their clients to incorporate abroad for tax reasons, they often didn’t win these arguments.  Data about new incorporations actually seem to bear this out (there’s a paper, for example, by Eric Allen and Susan Morse).  But I thought that corporate residence electivity was likely to rise over time, with adverse long-term implications for the extent to which we can benefit from following policies that seek to impose distinctive tax burdens on U.S., as compared to foreign, multinationals.

At the time of my Tillinghast lecture, the pre-2004 inversion fever had abated, because those deals were generally self-inversions with zero economic substance, making them easy to address legislatively.  What we have now are deals with some economic substance, although often very strong tax planning considerations as well, making the design of rules that will block at least some of them, if that’s what you want to do, more challenging than it had been in 2004.

There are several ways we could address inversions like the ones that we are seeing today, involving actual mergers between foreign and U.S. companies that are not pure cases of a minnow swallowing a whale.  One is just to let them happen.  Another is to change the rules by requiring somewhat more economic substance than we do under current law.  A third, emphasized by the Treasury in recently issued regulations, is to reduce the expected tax advantages of these deals.  And a fourth is more generally to address the differences in U.S. tax treatment of U.S.-headed, as compared to non-U.S.-headed, multinationals.

Before saying more about that, I want to address two half-truths that purport to explain why U.S. companies may engage in these deals.

According to the first half-truth: “U.S. companies want to invert because the U.S. tax rate is just too high.” 

Now, it’s true that the U.S. corporate tax has a 35 percent statutory rate, even disregarding state-level corporate income taxes, and that peer countries have lower statutory rates.  But first, the average or effective tax rate matters more for many taxpayer decisions than the statutory rate applying at the margin, and U.S. companies’ overall effective rates do not appear to be out-of-line with those that foreign companies pay.

Second, the U.S. source income of foreign as well as U.S. companies is, at least on its face, generally taxable by us at 35 percent.  If that rate is too high, this goes more to the domestic corporate tax rate question than to inversion issues.

So why isn’t it wholly false to say “U.S. companies want to invert because the rate is too high,” instead of the clearly true statement: “Companies will be more interested in shifting their investments and claimed profits abroad if our rate is high, than if it is low”?  The reason the first statement isn’t wholly false is that there actually is a practical link between inversion and the effective domestic tax rate.

A major reason why U.S. companies want to invert is the hope that this will make it easier for them to reduce reported U.S. source taxable income, even if their true economic activities around the world remain the same.  This reflects what I’d call existing anti-base erosion features of the U.S. international tax rules – involving, for example, interest allocation and subpart F.  These rules, at least when they’re working effectively, can make it harder for U.S. companies than foreign ones to lower their U.S. tax bills through such planning steps as assigning lots of debt, including intercompany debt, to the U.S. affiliates in a global group. 

The second half-truth about inversions goes as follows: “U.S. companies want to invert because we, unlike most other countries, tax our resident companies’ foreign source income.”  Well, perhaps this is even a two-thirds truth.  But it does require amplification and correction, potentially changing its apparent implications a bit, if we actually want to understand it.

Now it’s formally true that we have a “worldwide” system, in which U.S. companies’ foreign source income, even if earned through foreign subsidiaries, is eventually supposed to be taxable here.  Most of our peer countries have territorial systems, in which at least active business income that’s earned abroad is domestically exempt, albeit potentially subject to the reach of anti-tax haven rules.

For three particular reasons, however, the statement can misleading if one doesn’t say a bit more about it.

First, we don’t do a great job of taxing U.S. companies’ officially reported foreign source income.  More than $2 trillion of that income is currently reported for accounting purposes as “permanently reinvested abroad” – which means that the companies have successfully argued to their auditors that they will NEVER have to pay the U.S. repatriation tax.  The reason those companies may be interested in inverting is to make it easier for themselves to access the funds that they have stashed abroad, without as much concern about triggering a taxable U.S. repatriation.  This can reduce their tax planning costs even if they would never have paid the U.S. tax anyway.  Now, this is potentially a pro-taxpayer point, since no one wins except for the lawyers when the companies incur extra tax planning costs, but it does show that we’re not overtaxing as such.  The conclusion might be, not that we are taxing U.S. companies’ foreign source income too much, but that we are doing it the wrong way.

Second, a lot of the foreign source income on which U.S. companies want to avoid paying U.S. tax may actually, as an economic matter, have been earned here.  Again, this goes to the U.S. base erosion and profit-shifting opportunities that are greater here for foreign than U.S. multinationals.  Now, this does mean that the U.S. companies can truthfully say that they are trying to put themselves on more of a par with their foreign rivals, although the issue here is actually U.S. rather than foreign investment.  But we may not be entirely happy about it in either case.

Third, some of the motivation for inversions relates to the past, not the future.  Suppose you are a company with $10 billion of foreign earnings.  If you repatriated the funds today, you would pay $3.5 billion of U.S. tax on this income, minus the amount of any foreign tax credits (which may be trivial if you have stashed most of the profits in tax havens).  The only reason the U.S. doesn’t make you pay that tax is that we have deferral, permitting you to postpone the payment until you actually repatriate the funds.  Deferral is a realization rule.

In theory, deferral – unlike realization in some other cases – doesn’t reduce the present value of your U.S. tax liability.  After all, the amount that’s waiting to be repatriated presumably is growing annually at your after-foreign tax rate of return.  Thus, in terms of my earlier example, in theory you’ll eventually pay $3.5 billion plus interest on earnings of $10 billion plus interest, eliminating the present value benefit of deferral.  So, again in theory, allowing deferral to U.S. companies is like granting them a loan – and not an interest-free loan, but a true loan with a floating market rate that automatically depends on actual rates of return.

As soon as you invert, however, this may change.  Even if the U.S. company’s prior foreign subsidiaries remain below it on the ownership chain, with the new foreign parent standing above both, it may now become much easier in practice to avoid ever paying the U.S. repatriation tax.  You may have more ways than you had pre-inversion to actually access the funds while you sit and wait for the next corporate tax rate cut, or foreign dividend tax holiday, or the enactment by Congress of a territorial system, all of which might potentially reduce or even eliminate the deferred tax bill.

So allowing U.S. companies to invert without triggering realization of the deferred gain is a bit like allowing them to increase the likelihood of default on a loan.  This is why there has been some talk of an exit tax – a deemed taxable repatriation – when U.S. companies invert, even if the U.S. company’s foreign subsidiaries still stand below it in the ownership chain.

“Exit tax” is an ugly-sounding term.  It brings to mind Soviet-era harassment of dissidents.  So let me propose a term that sounds better and yet is metaphorically accurate: loan repayment acceleration.  When you own your home subject to a mortgage, and you sell the house and buy a new one, they generally make you repay the loan.  I think we should consider applying such an approach to deferral, via deemed repatriations when U.S. companies expatriate, on the view that the loan’s “credit risk” – i.e., the chance that it will never be repaid, has likely increased.  This doesn’t mean that the special tax rate here should be as high as 35 percent, even in the absence of foreign tax credits – but perhaps a zero tax rate on deemed repatriations when you invert, by reason of not deeming them at all, is too low.

Now, companies that invert are typically looking forward as well as back.  They want to ease profit-shifting and their access to foreign earnings for the future, not just retroactively for the earnings that already are stashed abroad.  So the tax motivations for a given deal are likely to go beyond easing the company’s full access to permanently reinvested earnings.

Given that issue, I would like to see us move in the direction of adopting what I call more residence-neutral rules for determining the source of income – and in substance, not just formally, although this is tricky when the methods used to address base erosion include treating resident companies’ claimed foreign source income as currently taxable, rather than re-defining it as actually U.S. source.

I also agree that we have to accept that we are living in a world in which corporate residence electivity, genuine capital mobility, and inevitable source tax reporting flexibility mean that it’s going to be growing ever harder to hold the line.  Indeed, some retreat from relying on entity-level corporate income taxes, and income taxes more generally, is surely in order – perhaps even a large retreat, depending on what else is on the tax reform table.  But that requires a much bigger conversation, and in the interim I believe that we should take some steps to hold the line a bit longer, both on the corporate inversions front and with regard to base erosion and profit-shifting generally.

Even if we are in retreat with regard to taxing corporate income at the entity level, there is a difference between an orderly withdrawal and a rout.  Making it too easy to escape the U.S. tax net, especially when that means that you can get a kind of retroactive windfall gain from reducing the expected tax burden on foreign earnings that you accumulated in the past, would in my view make the retreat too much of a rout.

Tuesday, October 21, 2014

Yet another upcoming event at which I'll be a speaker

On Thursday, October 30, from 6:30 to 8:30 pm, NYU Law School will be hosting a book event for Ed Kleinbard's We Are Better Than This: How Government should Spend Our Money.  At this session, Ed will speak for a while, then Linda Sugin and I will both offer, say, 10 minutes each of commentary, followed by open discussion in the room.  A link for the event that includes a further registration link is available here.

The book is great - important, convincing, highly informative, entertaining, both erudite and sure-footed on a wide range of topics, and a major public service.  I'll make more particular comments at the session, and then post something about them here.

Roundtable discussion on corporate inversions

This Thursday, October 23, from 12 to 2 pm at the Fordham School of Law, I will be participating in a roundtable discussion on tax inversions.  Details are available here, and you can register for free on-line.

The other panelists will be David Shakow (a fellow academic, although he is also in practice), John Samuels (from General Electic), Paul Oosterhuis (from Skadden Arps), and Harry Grubert (from the Treasury Department).  These individuals are all aptly described as heavy hitters, with plenty of Washington connections and Treasury or Capital Hill experience in addition to field knowledge.

I might possibly be one of the more pro-government and anti-inversion of the panelists (so far as allowing the deals to have full intended effects is concerned), but I am certainly not doctrinaire, and it's possible that others will say things I'm not expecting.

I'll post something here afterwards, perhaps including a rough version or outline of my remarks.

Monday, October 20, 2014

New project

I've been reluctant to mention this here, for fear of jinxing a still inchoate new thing, but I appear to be moving towards (and into) a new book project, inspired by one of the small sidelights in the Piketty article that I coauthored with Joe Bankman (and that we will soon be posting on SSRN).

There's a short section of that article, representing one of my parts of this true joint project, in which we discuss Piketty's much-noted discussion of literature to help illuminate past rentier societies that he believes may tell us something about the future.  In particular, he discusses Austen and Balzac.  We quibble with his use of Balzac (who describes not just rentier society but more particularly the struggles of would-be arrivistes), and then briefly note other 19th and 20th century literature that is also about adventurers and arrivistes, before briefly commenting on Wodehouse's Bertie Wooster, who is the true comic embodiment of rentiers' decline amid the mid-20th century Great Easing.

This may, I am hoping, end up inspiring a book that, if it meets its objectives, will be fun both to write and to read, discussing the wealthy and the arrivistes, along with underlying social attitudes about both and their evolution over time, in fiction of my choice over the last two-plus centuries (e.g., Austen, Balzac, and Wodehouse, among others).  I'll be looking at the fictional worlds in these books, not in any close detail at the actual contemporaneous societies, and with no presumption that the books I choose to write about are the "right" ones in any sense other than that I personally find them fun and interesting (and usually, though not always, of high literary merit).

More travel and recent travel

I will be reprising my talk on the Piketty book in a talk at the University of British Columbia Law School in Vancouver on Monday, October 27.  Details here.

Good session in Charlottesville last Thursday when I last presented this paper, although the air travel aspect was not as much fun.  (Five-hour delay heading out, including a flight that returned to NYC after many minutes in the air, due to mechanical problems; one-hour delay heading back.)

The main comments I got in Virginia concerned the likely virtues of spelling out, a bit more thoroughly than the current draft does, the implications for tax instrument design of (a) different normative concerns about rising high-end inequality, and (b) different sources of rising wage inequality that one might to address, if one modifies Piketty's assumption that r > g is doing most of the work.

I also got an interesting sidebar comment on my blog, generally praising it but saying that, when I discuss politics, I am (a) too ungenerous to Republicans, (b) at least implicitly too generous to Democrats who often are equally in bed with plutocracy (I say "implicitly" because I don't actually praise them much here), and (c) insufficiently mindful of the sharp divides within the Republican camp - as shown by the populist and anti-rent-seeking passions that helped to retire Eric Cantor to a life where he will have to accept multimillion-dollar paychecks in lieu of being an inside player.  Point taken; I will try to do better.

Friday, October 17, 2014

Bill Gates on Piketty

As promised in an earlier post, here are some thoughts on Bill Gates' recent blog post on Piketty.

By the way, I would see no reason to take notice of this just because he's Bill Gates.  That does indeed in a way automatically make it of interest, because it's a famous multi-billionaire's response to a book about rising high-end inequality.  But I have too many conflicting demands on my time to bother noticing it here based on that fact alone.

Rather, the reason I comment on it here is that, in addition to that, the post actually is intelligent and interesting.

Early on, Gates says: "I very much agree with Piketty that:

o        High levels of inequality are a problem—messing up economic incentives, tilting democracies in favor of powerful interests, and undercutting the ideal that all people are created equal.

o        Capitalism does not self-correct toward greater equality—that is, excess wealth concentration can have a snowball effect if left unchecked.

o        Governments can play a constructive role in offsetting the snowballing tendencies if and when they choose to do so.

"To be clear, when I say that high levels of inequality are a problem, I don’t want to imply that the world is getting worse. In fact, thanks to the rise of the middle class in countries like China, Mexico, Colombia, Brazil, and Thailand, the world as a whole is actually becoming more egalitarian, and that positive global trend is likely to continue.

"But extreme inequality should not be ignored—or worse, celebrated as a sign that we have a high-performing economy and healthy society. Yes, some level of inequality is built in to capitalism. As Piketty argues, it is inherent to the system. The question is, what level of inequality is acceptable? And when does inequality start doing more harm than good? That’s something we should have a public discussion about, and it’s great that Piketty helped advance that discussion in such a serious way."

While I wholly agree with this, admittedly what it makes it especially noteworthy is that Gates is saying it.  How many others whose economic success approaches his would?

Gates then makes the following points, to each of which I respond after noting it:

1) Other economists have questioned the central importance that Piketty attaches to "r > g" in explaining rising high-end inequality.  That is certainly true.

2) Do "different types of capital" have "different social utility"?  For example, if A uses his capital to build his business, B gives all of her capital away to charity, and C uses his for high-end consumer goods, such as a yacht and a private plane, then the first two are delivering greater value to the society than the third.

No surprise that Gates should want to value charitable giving.  My understanding of his charitable activity is that it actually does, at least very frequently, have great social value.  But I wonder how widely applicable the conclusion he draws is.  Super-rich people who choose to add their money to Harvard's $36 billion endowment might as well throw it in the ocean instead, unless we see general merit to investing money in hedge funds. 

His distinction between saving and consuming could also be questioned.  The issue is really one of net positive externalities, if any, from the one choice as compared to the other.

3) Wealth accumulation decays as well as rises.  Half of the people on the Forbes 400 list of the wealthiest Americans made it to the top themselves.  We aren't dominated by people who bought huge land parcels and have been collecting rents ever since.  You get savers but also wastrels, and also wrenching economic change that creates new fortunes that outstrip old ones.

Here again I agree, but the topic raised requires more discussion than Piketty, Gates, or for that matter Bankman and I in our recent article have given it.  The question here, a subpart of what if anything is wrong with high-end inequality, concerns the relevance of turnover as to the particular families that are extremely rich.  In a simple optimal income tax model, it doesn't matter, but in the real world it might.  I think there is major room for work on how to think about the impact of high-end inequality under different circumstances.

4) Piketty has over-focused on wealth and income data relative to consumption.  Gates also notes that income data can be misleading for lifecycle reasons, e.g., if one is a medical student with low income and high loans but one expects a million-dollar surgeon in a few years.  Gates argues that "consumption data may be even more important [than wealth and income data] for understanding human welfare.  At a minimum it shows a different - and generally rosier - picture from the one Piketty paints."

Yes, I agree that income data can be misleading for lifecycle reasons.  Note that, for wealth data, the related problem is simply our inability to measure human capital and include it as wealth (which at least in many senses it is).  But the problem with consumption data is that it ignores unspent wealth that one can consume whenever one likes.  Suppose I have $1 billion but spend "only" $1 million on consumption this year.  I am better off than someone who spends $1 million and has nothing left.  In addition, given the choice I made, presumably reflecting my preferences, I am presumably better-off in a long-term sense than if I had consumed the entire $1 billion this year.  

A consumption measure misses this. By the way, that does NOT establish that a consumption tax fails to measure wellbeing on an appropriate basis.  After all, while it only taxes me this year on the $1 million that I actually spend, the present value of the deferred liability on the rest of the $1 billion is the same as if I had spent it this year (assuming constant perpetual consumption tax rates, etc.).  So the consumption tax doesn't get it wrong, at least in the trivial sense that seems indicated by looking just at current year liability, because one has to consider the deferred tax.  But if one is looking at current year consumption totals to judge how well off people are, it is not obvious how one could similarly be taking into account the deferred consumption.

5) Gates favors moving to a progressive consumption tax plus an estate tax.  Here I may be fairly substantially in accord with him.  I have written in the past about the case for progressive consumption taxation, and while I've increasingly grown concerned that it wouldn't in practice do enough about high-end wealth accumulation, I have been coming to think that, in principle - ignoring political economy problems! - taxing inter vivos donative transfers to other individuals plus bequests could take care of the rest.

6) Finally, Gates puts in a last word in favor of philanthropy, and notes that he and his wife are keen on its benefits while uneasy about the transmission of dynastic wealth.  Here I'd say that it depends on what sort of philanthropy is going on.  Private foundations in which the dynasts retain control probably are not adequate here, although admittedly this is not a subject that I know much about.  But also, when very rich people decide where the money should go, this is not always for the best.  You get, for example, charities for the rich (Harvard, the Metropolitan Opera, etc.) that may not be worth anything near the implicit budgetary cost of excusing application of the high tax rate on bequests that Gates suggests should otherwise be levied.

Overall, I'm quite impressed by this contribution to the debate even though I don't agree with all of it.

Slides for my talk at the U Va Law School concerning Piketty

Yesterday at the Law and Economics Colloquium at University of Virginia Law School, I presented the article on Piketty, coauthored with Joe Bankman, that we earlier had presented at the NYU-UCLA Symposium.  This time around, as a solo act, I revised the slides, which you can see here, and talked extemporaneously rather than having prepared remarks like those which I had previously posted here.

On Slide 3, standing at the far right, you can see the alter ego or stand-in for Joe and myself, as we thought of it when writing the paper.

Tax Notes article on the Boston College conference on reforming entity taxation

In my last post, I linked to Amy Elliott's Tax Notes article from this past Monday, entitled "Academics Dismiss Corporate Tax Reform Consensus as Superficial."  But for some readers it may behind a paywall.  So here are the parts most pertinent to the topic highlighted in the article title:

"Bipartisan talk of corporate tax reform is easy to come by in the halls of Congress, but it's merely talk, agreed a group of academics gathered in Newton, Massachusetts, on October 10.

"'The big consensus about corporate tax reform is really a superficial consensus,' said Daniel N. Shaviro of the New York University School of Law, speaking at a conference on entity taxation hosted by Boston College Law School and cosponsored by Tax Analysts. 'There's no obviously good way of doing it and that means that any proposal you put forth, . . . even if it would be an improvement, is going to have serious objections.'

"Harvard Law School professor Stephen E. Shay indicated he has lost hope for major tax reform in the near term. 'I don't view fundamental tax reform or any major piece of reform as remotely plausible for the next couple of years -- at least until some event-changing election,' he said. 'Any tax reform has to win a majority. The practical problem that we face today is we have -- unlike in [1986] -- a vastly more disparate set of objectives with respect to tax.'

"Shay added that the consensus that really needs to be built is between House and Senate Republicans. The party that controls the Senate 'is actually much less important for this issue than some people put credence on,' he said, adding that Congress is still struggling with the core structural problem presented by corporate tax reform: how to ameliorate its negative effect on owners of passthroughs.

….

"Brian Galle of Boston College Law School said he's not convinced that the passthrough model is the right way to tax corporate income. He said he thinks the U.S. tax system should increase the number of available rate structures and the nuance within those structures, providing for different rates for different kinds of business income.

"'The elasticity of salary can be very different from the elasticity of business income, [and] within business income, you can have very different elasticities between old-and-cold businesses,' entrepreneurial businesses, domestic versus foreign-owned businesses, and real-property-heavy businesses, Galle said.

Revenue-neutral tax reform 'is just another form of tax holiday,' Galle said, adding, 'It's locking in the fairly light burden that's resulting right now from a system that's been severely undermined by fairly abusive behavior in some cases.' He said that if Congress were to sign on to another revenue-neutral reform plan, 'it just tells industry that if they can undermine the next system and riddle that next system with holes, then they can clamor for another revenue-neutral deal.'"

A couple of quick comments in response to Galle's interesting points, which I didn't get a chance to say anything about at the session.  His first point about the elasticities of different types of income I agree with, except that it doesn't necessarily weigh against thinking that the passthrough model would be best if (counterfactually) it were feasible.  Rather, to me it suggests that, even when you are taxing individuals directly, the tax rate you want to apply may depend both on who it is and on what type of income it is.

His second point is a great one, and I think especially applicable to international taxation, in which the multinationals that have greatly reduced their tax burdens through aggressive planning might now be happy to lock in the end result by a different mechanism.  There is a legitimate issue of whether and how much their tax burdens, depending in part on elasticity, U.S. market power (or ability to coordinate effectively with other countries if this increases the collective market power that the cooperating governments can deploy).  But the fact that they have succeeded in lowering it so much does not establish that the right level is so low.  This is a problem for proponents of "burden-neutral" international tax reform, as much as for Congress if it wants to put on a 1986-style tax reform hat for the international area in particular.