Category: Tax

The Shock Doctrine Meets Tax Law

Naomi Klein could have predicted it. As panic over the financial crisis set in, the US Treasury department put into action a “two-decade effort by conservative economists and Republican administration officials” to eviscerate a limit on tax shelters.

In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention. But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion. . . .

Until the financial meltdown, its opponents thought it would be nearly impossible to revamp [Section 382 of the tax code — a provision that limited a kind of tax shelter arising in corporate mergers] because this would look like a corporate giveaway, according to lobbyists. . . . [According to other experts,] “It was a shock to most of the tax law community. It was one of those things where it pops up on your screen and your jaw drops,” said Candace A. Ridgway, a partner at Jones Day, a law firm that represents banks that could benefit from the notice. “I’ve been in tax law for 20 years, and I’ve never seen anything like this.”

Sen. Charles E. Grassley (R-Iowa), ranking member on the Finance Committee, was particularly outraged and had his staff push for an explanation from the Bush administration, according to congressional aides. . . [But] “[w]e’re all nervous about saying that this was illegal because of our fears about the marketplace,” said one congressional aide, who like others spoke on condition of anonymity because of the sensitivity of the matter. “To the extent we want to try to publicly stop this, we’re going to be gumming up some important deals.”

Lee A. Sheppard, a tax attorney who is a contributing editor at the trade publication Tax Analysts [has stated;] “We’re left now with congressional Democrats that have spines like overcooked spaghetti. So who is going to stop the Treasury secretary from doing whatever he wants?”

Which makes one wonder–where will the main engineers of this giveaway be working after they leave Treasury? How richly will they be rewarded for their policy innovation? Or was this more a form of “return on investment,” rather than the kind of service that generally garners tips? As Gretchen Morgenson has written, more transparency, please.


Citizens and Taxpayers

Under the provocative title “How Many Americans Should Have Skin in the Income Tax?” the TaxProf blog recently described a study by the Tax Foundation regarding the number of people who pay no federal income tax. While about one-third of income tax filers reported no federal income tax liability in 2006 (up from 20% in 1981), this number is estimated to rise to 43% under John McCain’s proposed tax policies and 44% under Barack Obama’s. TaxProf concluded: “The Tax Foundation rightly notes: ‘It is time for a serious public discussion of whether it is desirable to have so many Americans disconnected from the cost of government and what the consequences are of using the tax system as a vehicle for social policy.'” It is, indeed, a good idea to have a serious discussion about why this question seriously misses the point.

This view of low-income taxpayers is reminiscent of the Wall Street Journal editorial page’s infamous “lucky duckies” argument from several years ago. The basic idea is that

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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.