Category: Tax



One of the certainties of being a tax policy scholar who is not opposed to all taxes is that I am called names on a regular basis. The most common epithets are the standby favorites of the Cold War era: commie, pinko, commie-pinko, socialist, red, Marxist, Marxist/socialist . . . you get the idea. It pretty much does not matter what one says — again, unless one says that all taxes are theft — but the most surefire way to become subject to this kind of name-calling is to advocate any kind of income redistribution. Thus, while giving a talk last year, someone asked me if my argument might suggest that we should increase the estate tax. When I said yes, another academic (!) in the room said, “Oh, I see, so you believe in ‘from those who have the ability to those who have the need,’ right?”

I bring this up now because of the recent

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I’ve been wanting to write an article entitled “Oatmeal Raisin: The Cookie Nobody Loves.” Unfortunately, although this title captures, I am convinced, a deep truth, I could not find a way to link it to tax law. So instead of describing why, if you leave out lots of plates of different kinds of cookies and come back a little while later there are always more oatmeal raisin cookies left than any other kind, but if you come back an hour later, all the cookies, including the oatmeal raisin cookies, are gone (nobody loves ’em, but they do like ’em), this post will describe the piece I wrote instead: Probably? Understanding Tax Law’s Uncertainty.

As I described in an earlier post, flipping a coin is risky, because while we do not know whether it will come up heads, we do know the probability that it will come up heads (50%). The presidential election is uncertain, because we do not know whether John McCain will be elected president, and we do not know the probability that he will be elected president. A.J. Sutter pointed out in a comment to that post that the distinction between risk and uncertainty (that is, between known probabilities and unknown probabilities) ties into the debate about the correct interpretation of probability statements. As it happens, that debate is precisely Probably?‘s topic.

We might say that the probability that an event will occur is the number of times that event will occur over the long run out of the number of times that it could occur. So when we say that a coin has a 50% chance of coming up heads, we mean that if we flip the coin a lot of times–a million, say–about half of those flips will come up heads. And the more times we flip, the closer the percentage of heads will get to 50%. This is a frequentist interpretation of a probability statement.

But this interpretation doesn’t work if the event we’re talking about is not risky, but is, rather, uncertain. As others have noted, tax law is uncertain–that is, that we do not, and cannot, know the probability that a court will uphold a particular tax position. Tax advisors make these sorts of probability statements all the time, because a taxpayer faces lower penalties if he can get a tax advisor to give an opinion that there is a certain level of probability that the taxpayer’s position will eventually be upheld by a court. But if we don’t and can’t know this probability, what does it mean to say that there is a, say, 90% chance that a particular tax position will be upheld?

It means, I think, that the speaker believes that there is a 90% chance the tax position will be upheld. Or, put another way, the speaker would pay 90 cents to play a game in which he would get a dollar if the position were upheld and get nothing if it were struck down. This is what’s known as a “subjectivist” interpretation of a probability statement.

So, who cares? Well, everyone should care, of course!

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How Much is that Simulacrum in the Window?

When America’s wealthiest families start beating the drum for estate tax repeal, remember this heartwarming story of canine cathexis from Leona Helmsley:

[Helmsley’s] instructions, specified in a two-page “mission statement,” are that the entire trust, valued at $5 billion to $8 billion and amounting to virtually all her estate, be used for the care and welfare of dogs, according to two people who have seen the document and who described it on condition of anonymity.

This news reminds me of part of John Chung’s fascinating article Money as Simulacrum, which comments on the unreal differentials of power created by contemporary inequality:

In 2007, the average amount of compensation for the top 25 highest paid hedge fund managers was $892 million. The compensation for the highest paid manager was $3.7 billion. . . . Earlier this decade, the price of some paintings broke the $100 million mark. Single family homes also have broken the $100 million mark this decade. To the ordinary person, such amounts are beyond comprehension. Such numbers are the product of a different world, a different reality that bears no resemblance to the reality of most people.

Perhaps the numbers seem unreal, even unimaginable in an increasingly innumerate society. But the power they manifest is all too real, all too able to shift scarce resources from increasingly hungry persons in the developing world to spoiled pets in ours.


More On Endowments

Late last week Crooked Timber had a lively discussion about university endowments, prompted by my recent post here and Larry Solum’s response to it. Those who are interested in the topic should take a look at the discussion, as it partially mirrors the debate that is taking place more generally. I’ve been following Crooked Timber with interest, and here’s several points that have struck me:

* I’ll start with the observation I found most interesting: that some elite institutions have a mission that is as much (or even more) about research than about education. I agree that I need to emphasize this distinction more than I have to date. My proposal that an endowment per full-time student of $300,000 or more trigger less favorable tax treatment could penalize institutions whose primary output is research rather than education. Recall, however, that the most frequently proposed trigger is an absolute endowment value of $1 billion or more. Elite research universities tend to have endowments of this magnitude, so my proposal is not tougher on these institutions than the oft-suggested alternative. In fact, my proposed trigger would exempt some research-oriented universities that would otherwise be subject to new tax rules, such as Cornell and Columbia. The institutions most “negatively” affected by the $300,000 trigger are liberal arts colleges with endowments less than $1 billion and small student populations.

More important, however, is that a research-oriented mission actually strengthens calls for increased endowment spending. The sort of research taking place at America’s premier universities is designed to eventually lead to much social good: the easing of the global food crunch, the elimination of certain diseases, and so on, as well as the creation of knowledge more generally. Few science departments, for instance, are likely to argue that a dollar is better spent in the stock market than in their labs. The ability of researchers and scholars to make productive use of endowment funds seems almost endless, as do the potential gains from their work. This strikes me as a strong argument for elite research universities spending more of their endowments than they currently do.

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Super-Sized University Endowments: Is Your Alma Mater Richer (or Poorer) Than You Think?

stockxpertcom_id795202_size0.jpgNew York Times recently published an opinion piece by a Harvard alum who was refusing to make a donation to her alma mater, which in 2007 reported an endowment of more than $34 billion. Yesterday the Times reported on a group called Harvard Alumni for Social Action, whose goal is to convince Harvard to use its endowment in untraditional ways, such as for the support of colleges in Africa. As the Harvard alum opined, “Many colleges may genuinely still need alumni contributions to stay solvent, but Harvard isn’t one of them — nor are Yale, Princeton or several other super-rich universities.”

Endowments provide plenty of fodder for discussion and this month I plan to do at least a couple of posts about them. Today I want to start with the preliminary question of how to determine whether a university or college is “super-rich.” This is a critical inquiry, because everyone agrees that if Congress adopts measures designed to spur endowment spending, most of these measures should apply only to the wealthiest institutions. In my estimation, this means those institutions with an endowment per full-time student of $300,000 or more. In 2006, about 30 universities and colleges fit this description.

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Italians Know What Their Neighbors Make: Why Don’t You?

769388_money_scoop_2.jpgSure, it was a leak, possibly politically motivated. But for 24 hours, every Italian’s tax information was publicly available on the web.

The finance ministry described the move as a bid to improve transparency.

Deputy Economic Minister Vincenzo Visco said he could not understand what all the fuss was about.

“I can’t understand what the problem is,” he is quoted as telling Italy’s Corriere della Sera newspaper.

“This already exists all around the world, you just have to watch any American soap to see that. We had the system ready by January but we delayed publication to avoid arguments during the election campaign.”

I can’t imagine what Visco means by American soap opera’s treatment of tax law, but I myself would be perfectly happy in a world where folks’ tax filings were transparent. (In part, of course, the cost to me isn’t terribly low, as I’m sure that the public institution I work for will eventually be compelled to disclose salary data. Similarly, government officials, whose salaries are knowable, have small incentives to care about privacy). But even so, wouldn’t the privacy losses we’d all feel be balanced by the pro-social consequences of transparency? For example, I’d bet that you’d see a rise in competitive charitable giving, and more pressure on unequal pay for equal work.

The To-Be-Blogged Pile

As the semester draws to a close, I’ll be adding a couple features to my blogging here. First, there’s always a big pile of stuff each week I’d like to blog on, but don’t get around to. So I’ll just post links to the articles, ala Tyler Cowen. Second, I’ll be trying to do a series on art & politics this season. Having lamented the press repeatedly, I think I owe it to readers to comment on people who are thinking more creatively about the political scene. . . including Kenneth Tin-Kin Hung, Timothy Donnelly, MIA, and Paul Chan. Without further adieu:

1. Have a tough time memorizing things? Check out this software program by Piotr Wozniak (which I’m definitely consulting if I try to re-learn Spanish).

2. Patrick S. O’Donnell both comments incisively on the food crisis and rounds up posts from around the blawgosphere. O’Donnell and Paul Horwitz have an interesting discussion on sustainability here. My own take would begin by comparing an article on the new living standards of very poor persons, and one on a “Club Med for Dogs.”

3. China’s new weapon: Low executive pay. Over to you, Todd Henderson.

4. Yale U. Press leads the way in opening access to books on internet topics. [Full disclosure: they do advertise here.]

Have a great weekend.


Fantasy Authors, Tax Policy & Veil Piercing

Pat Rothfuss, author of the best-selling fantasy novel “The Name of the Wind, and an interviewee in my “Law and Hard Fantasy” series, has a post up on his blog ruminating about tax policy and incorporation.

Up until this year, I’ve always gotten money back because I’ve lived well below the poverty line. This year, I got to give them money. It was, as they say, more fun than getting kicked in the throat. Mostly.

Don’t get me wrong, I’m not against taxes. Everyone loves to bitch about them, but taxes pay for schools, and roads, and snowplows, and sewage treatment plants. My friends have a son who is autistic, and the government helps them by bringing in well-trained people.

These things are important. If that’s all my taxes went toward, I would pay them gladly. I would sing a song while writing out the check.

However, we all know that’s not the case.

So, under the advice of several wise people, I’ve decided to start a corporation. This is supposed to prevent the government from taking quite as big a bite out of my ass for next year’s taxes.

It doesn’t seem right, honestly. The corporation is just me: I own it. And this corporation (let’s call it Me-corp) will be employing me. That, apparently, is different from being actually self-employed. Sorry? What? How does that work?

I guess what it comes down to is that the government is really, really dumb. Dumb enough so that if I put on sock on one of my hands and use it as a puppet, it will be convinced that the puppet is actually paying the taxes, not me.

But I’m not above exploiting a loophole in the system. So all that remains is to figure out what to call this corporation. I having trouble picking a name. Names are important things, you know. They tell you a great deal about a… a corporation.

I’m not an expert in tax law, so I’ll leave discussion of the income-sheltering aspects of this structure to the experts, but I know something about corporate veil piercing. And I’ll just say that calling a corporation a “puppet” would seem to make it less likely that a court would consider it a bona fide entity for the purpose of shielding a shareholder’s personal assets in any suit against Me.corp.

Who Wants to Think They’re Millionaires?

Lots of Americans, apparently:

A Time Magazine poll in 2000 found that 19 percent of those surveyed believed themselves to be among the richest 1 percent of Americans. Another 20 percent said they expected to one day be among the richest 1 percent.

But as Citizens for Tax Justice estimates, “This year, the best-off one percent will have an estimated average income of $1.5 million each. Just to get into this elite group requires an income greater than $466,000.” And the middle class of, say, ABC debate moderator Charlie Gibson is also pretty expansive–it includes people with adjusted gross income over $250,000, though CTJ notes that only about 2% of taxpayers fit that category.

As the “millionaire’s amendment” in our tattered campaign finance laws comes under attack, misperceptions about wealth feed into Supreme Court arguments as well:

Consider Tuesday’s oral arguments over the so-called Millionaires’ Amendment, the federal law that lifts some political fundraising limits for candidates facing wealthy self-funded opponents, defined as those who pour at least $350,000 of their own cash into their campaign.

Justice Antonin Scalia suggested that practically anybody had that cash available for political activism, if he or she really wanted to tap some family assets. “Are we talking wealthy people here? What’s the average price of a home in the United States? I think it’s a good deal above $350,000, isn’t it?” he said.

Actually, it’s nowhere near that. According to provisional figures from the National Association of Realtors, the average single family home price last month was $246,000. And falling.

As I noted two years ago, even the assumption that everyone has $200 to spare for a political campaign is pretty objectionable. And it is downright nonsensical to deny that donating $200 “hurts” a poor family far more than one with disposable income to spare (just think of the parable of the widow’s mite). The legitimacy of our current “dollar primary” politics probably rests in large part on the erroneous perception of 38% of the population that they are (or someday will be) in the top 1% of earners.

UPDATE: Given my title, I should note that about 3% of the US population are millionaires (i.e., have assets over and above principal residence that are worth over a million dollars). Nevertheless, given that the median net worth of the top 10% in the U.S. was $833,600 in 2001, and that of the bottom ten percent was below $7,900, Americans live in very different economic worlds.

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