Sheppard on International Tax: What's Gonna Work? Teamwork.

Lee Sheppard has a nice column today on dual consolidated loss rules and BEPS (gated), in which she states:

Would-be reformers of the corporate income tax like to believe in the tax equivalent of a single game-changing player. They want an instant, simple solution -- be it a territorial system or formulary apportionment. They don't want to have to think about the grunt work of making an international system work. They don't want to have to think about the heavy lifting of rewriting the source rules. They don't want to think about detailed anti-hybrid rules. 

Of course she uses Argentina v Germany rather than the Wonder Pets, but same idea.

She goes on to explain the multiple problems posed by hybrid entities and how the BEPS hybrid draft has, and has not, addressed these. Sheppard's article demonstrates yet again that making income taxation work today means regulatory globalization that parallels the scale and scope of economic globalization.

The magnitude of the task is vividly demonstrated in FATCA: a concise statute that has rapidly expanded into thousands of pages of regulations, guidance, and agency explanations, a bilateral agreement network that dwarfs the US tax treaty network, and the spawning of a global compliance industry trucking in data collection, transfer, and analysis in both the private and public sectors. BEPS would be no different. it would require the same type of global infrastructure and the same level of sustained commitment. But it is clear that while the US has a great appetite for making FATCA work, and has directed all of its economic might to that effort, it is much, much less interested in seeing BEPS through. The ultimate outcome of BEPS is all too predictable from past OECD efforts that were not initiated by the US.

Lavigne & VanRybroek on Language, Communication and Access to Justice

This recently posted article by Michele Lavigne and Gregory VanRybroek, entitled 'He Got in My Face so I Shot Him': How Defendants' Language Impairments Impair Attorney-Client Relationships, while not directly tax-related, presents a very interesting take on what it means to have meaningful access to justice, which is a major aspect of thinking about what it means to say we are governed by the rule of law. I am still more optimistic than PJ about this concept, but I have grave fears for the future of law in the face of the many severe procedural impairments we have been seeing of late. This paper outlines in a deep and rich way some of the fundamental components necessary to a just legal system, but it also just a very well written and fascinating account of the role of language and communication in expressing and implementing law. Abstract:

Language impairments -- deficits in language and the ability to use it -- occur at starkly elevated rates among adolescents and adults charged with and convicted of crimes. These impairments have serious ramifications for the quality of justice. In this article, we focus specifically on the effects of a client's language impairment on the attorney-client relationship, the constitutional realm that suffers most when a client lacks essential communication skills. The effects of language impairment can be seen in a client's ability to work with a lawyer in the first place, tell a story, comprehend legal information, and make a rational and informed decision. This article shows how these effects play themselves out within the attorney-client relationship, and the impact on the lawyer's ability to meet her constitutional and ethical obligations. We also propose concrete steps for improving the quality of communication within the attorney-client relationship. While attorneys will obviously shoulder much of the responsibility, judges and prosecutors are not exempt. A client's poor communication skills are not simply be "the lawyer's problem," but a matter of great concern for all stakeholders in the justice system.

IRS brushes aside the constitution to make way for FATCA

In a Tax Notes International article [gated] today, Lee Sheppard discusses remarks about FATCA by Jesse Eggert, Treasury associate international tax counsel, at a March 1 IFA meeting. The most troubling aspect for me comes in the last part, when Sheppard describes a Q&A over the intergovernmental agreements and the IRS rep casually dismisses any constraints on the Treasury's attempt to bind the US with these documents as a matter of international law. There are two main questions here and both answers strike me as deeply problematic. First, there is this:

Can there be an IGA with a country that has no treaty or tax information exchange agreement? Yes, Eggert responded. It would have to be a Model II or nonreciprocal Model I . Amendments would have to be made to add information protections and assistance provisions.

With respect, this does not accord with what we have been given to understand so far about these IGAs. One need only read the preambles to the IGA models and signed agreements and consider the treaty power briefly to see that there is a very large legal difficulty here. As I have said before (and have a feeling I will be saying repeatedly), the Executive Branch cannot simply bind the US to any agreement it wants to without doing violence to a constitutional process that has been expressly laid out and subject to decades of analysis and debate by the country's most preeminent legal minds.

This is why the IRS has been very quietly implying that the IGAs interpret existing treaties. I don't agree on the merits that this could possibly be true, but the IRS needs it to be true because if it is not true, the only alternative is that the IGAs are sole executive agreements entered into by the executive branch with no congressional oversight whatsoever. That puts them on the most precarious legal ground in terms of foreign policy power in the US, and by this statement Eggert pushes them closer in that direction.

Second, there is this:

Does Treasury have authority to make IGAs? Eggert argued that IGAs are within Treasury's statutory authority to make FATCA regulations (section 1471(b)). Treasury and IGA signatories are discussing how to make domestic implementing laws consistent.

Again with all due respect, this just simply is not true as a matter of US law. The executive branch does not have the power to authorize itself to enter into treaties without congressional oversight. It is the constitution that provides the treaty power, and Congress is expressly involved. Congress could have granted the executive specific authority in this case, as it has done in other cases, but it clearly did not do so here. It is not clear what Eggert means by "making domestic implementing laws consistent." Maybe that refers to the domestic laws of treaty partner countries, which will have to change their data privacy laws to accomodate the information sought by the IRS. If so, that has nothing to do with the US. From what we have seen so far, it seems clear that the IRS is treating the IGAs as operational once the other country so indicates it is operational from their perspective (cf Mexico).

Arguing that the authority is implied within Congress' mandate to Treasury to issue regulations under 1471 is blowing a hole through the treaty power. It argues that Congress empowers the Executive Branch with treaty making authority with each and every directive to enact regulations. It makes a farce of the congressional executive agreement process that has been begrudgingly accepted as authentic by most constitutional scholars today. And never mind the old standard, the Article II treaty power. By this logic if the President wants an international agreement--any international agreement of any kind--he never needs to consult the Senate again, he can simply find some reference by the Congress directing his regulators to regulate. If Eggert is right in this assessment, it is not a stretch to see this as the beginning of the end of the Article II treaty ratification process in the United States. In other words if this works, then it's anything goes when it comes to the Executive Branch overriding domestic law with an international agreement.

Finally, I note that one other Q&A Sheppard mentions is also intriguing, though on the surface it seemed uncontroversial:

Existing IGAs will be interpreted to say that countries may choose the definition of an item in the final regulations which came later in time. Treasury will not amend IGAs wholesale when regulations change, Eggert explained.

This may seem benign--it provides flexibility despite the apparently rigid parameters of the documents (which are treaties, after all, and not so easy to just unilaterally alter at whim). But this is in fact very interesting as a legal matter because it quietly moves the world a little closer to yet another US tradition that many people in other countries find odd if not outright incompatible with international law, namely, the treatment of treaties as equal in legal status to other laws, including statutes and case law, so that treaties can be overridden at any time by a new statute or judicial decision. But it goes a further step to include regulations within that overriding scope--where they might not so clearly belong even under US law.

In other words, the IRS is saying that not only does the "last in time" rule apply to IGAs (as they would to any US international agreement), but we'll apply the last in time rule to other countries too (even if under their own laws the treaty would override later-enacted domestic laws); moreover the last-in-time rule is now extended to treasury regulations (a unilateral law that will be used to "interpret" a bilateral agreement, yet another controversial treaty interpretation position), and finally we are going to make it the treaty partner's choice to pick among the regimes to get the best result (which treats treaty partners not as negotiators in a bilateral agreement but rather in the same way as taxpayers subject to an elective regime).

It is getting progressively more difficult to keep up with the sheer volume of violations of laws and norms being undertaken by the IRS in order to get FATCA to work. It is rather disheartening (in the sense of being a scholar who studies legal process as though it matters) to realize that to many or most people involved in this project, all of these violations are just technicalities and semantics getting in the way of a result everyone wants.

Who is to blame for Starbucks-style tax dodging?

The answer is "government" if you believe the Telegraph, from an opinion by "Richard Emerton, Head of Board Practice at Korn/Ferry Whitehead Mann" (an executive recruiting firm). He's enthusiastic about tax competition: the kind that will keep European companies "competitive" on a "level playing field" by lowering their taxes on purpose, and he's keen to blame government alone for any failure of tax policy to date, e.g. the kind of failure that led to the public shaming of Starbucks and friends.

I agree with Emerton when he says stop blaming the companies (alone) for failing to pay taxes when this is the system that has been deliberately set up to meet them. But let us not forget that the rules have long been written collaboratively amongst government and business interests with virtually no civil society oversight. Once again, multinationals have the best tax system money can buy. Emerton does forget to mention that part, and goes too far in shifting the blame to government alone. Excerpts:

...The UK Government has done a good job in creating a tax system that encourages businesses to set up in Britain and the Chancellor has made it clear he wants international businesses to operate here. It is therefore important he does all he can to prevent European politics from perverting his well-intentioned efforts to look at the problem from an international perspective.  

What strikes me as counter-productive about the debates that have taken place over the likes of Starbucks and Google is the anti-business rhetoric from many politicians in the search for public approval. A degree of anger from the public may be understandable, but is it directed at the right targets? Korn/Ferry’s latest “Boardroom Pulse” survey of FTSE 100 chairmen suggests that business leaders think not.

Not sure what that survey asked, but let's assume it was something on the order of, "do you enjoy being publicly pilloried for doing your best to exploit every means of tax reduction your government generously makes available to you?" And the follow up question ought to have been (but probably was not) "Do you enjoy public scrutiny of your constant attempts to influence tax policy at every level of governance in order to achieve that generosity of spirit on the part of lawmakers?" To which the answer would no doubt have likewise been a resounding "business leaders think not." Emerton goes on:

While agreeing that the public has a right to be angry, many respondents felt that dissatisfaction should be directed towards the tax legislation and those in charge of it, rather than the companies observing it. Indeed, it is governments that have failed to modernise international tax legislation in decades, despite the wholesale changes that have taken place in the way businesses operate across borders. 

Oh, but Mr. Emerton, you failed to define a key term here: "those in charge of it." I mean, it's not like the companies that help write the law are shy about it. That is, after all, what organizations like the BIAC and the ICC are for, and if you don't know what the BIAC or ICC are, well, you're not trying hard enough to understand international tax. Look also for example at any number of marketing brochures by the likes of the big four. They are not hiding their influence, they are selling it as a product. Here's one by KPMG that I just happened to come across yesterday:

Our professionals have been directly involved in writing and reviewing the applicable Treasury regulations ... which govern tax-free separations."

You will come across this kind of claim all the time if you do any work at all in tax, so it is disingenuous at best to fail to mention industry influence as a major aspect of tax lawmaking at the national and international levels. But Mr. Emerton moves along quickly to make hay of the old adage that every one has a right to minimize their taxes and for company directors this has become a duty:

The chairmen we surveyed pointed out that company directors have a fiduciary duty to minimise tax bills, providing they are acting in an ethical manner and are not inviting legal risks.

That's a pretty vague provided, and a big weight to carry for fiduciary law. Emerton hammers it home:

Which raises a fundamental question stemming from the tax issue – should the primary duty of a company’s board and senior management be to its shareholders, or to the wider moral and social concerns of the public?

Notice this is assumed to be an either/or and not a both, and it's also committing the false dilemma fallacy. But having committed, we must have follow-through:

The chairmen we talked to were divided. Yes, business leaders have a duty to drive value for their shareholders. And yes, businesses also have a duty to act responsibly as members of wider society. It is the responsibility of the leaders of these businesses to strike a balance and most of them make significant efforts to do so. Inevitably, sometimes they get this balance wrong, but attacking them for trying to drive shareholder value while playing by the rules of the game will solve little. A better focus of our energies is to ensure that international tax laws are strengthened by the regulatory framework governing businesses, allowing them to focus on achieving long-term sustainable value for shareholders and for society. However, policymakers must ensure that this isn’t achieved at the expense of a level playing field for businesses across the world, not just one part of it.

The author channels every "we paid all the tax that is legally due" defense ever given in the face of public pressure against tax dodging. He also invokes the "level playing field" metaphor, which is always invoked for every destructive tax policy that was ever invented in response to every other destructive tax policy that was ever invented. So three cheers for tax industry rhetoric, bandied about in any tax policy dialogue to make sure no one thinks too hard about the systemic choices at issue here.

Score ten points to Mr. Emerton in pointing out that blame for tax dodging rests in a legal system that has been specifically designed to encourage it. But take away nine points for failing to mention the big part business plays in constantly perpetuating that kind of design. Then take away two more points for failing to mention that some things only look like dutiful tax minimization until the tax authority figures out what you are doing, and then they are clearly tax evasion. Cf Dow, Ernst & Young, and Jenkins & Gilchrist tax partners, and that's all in just one week.

That puts the column in the negative territory, which is right about where the author appears to think that the tax liabilities of fiduciary-duty-abiding corporate managers ought to keep their companies' tax burdens.

Fix the Debt: bipartisans fooling some of the people all of the time (a primer on the solidarity of the 1%)

Gaius Publius is upset with bipartisan support for Fix the Debt, and points out the class-based solidarity of the rich (which of course aligns interests both within and beyond the nation state in ways that appear unprecedented to us today, but remind us of how things were during the last gilded age). He says:

Most left-side commenters paint "Fix the Debt" — the well-funded campaign to scare Americans into believing the debt is not only going to destroy us all, but that massive cuts to Medicare, Social Security and Medicaid are the only way to "fix" the "problem" — as a billionaire-led, CEO-led operation to kill (or at least seriously maim) the social programs by delivering one blow after another. But Fix the Debt is also a bipartisan operation.

This is about bipartisanship — real bipartisanship, bipartisanship in the bad way. 

...The real divide in this country is not Left versus Right — it's the Rich versus the Rest. It's the horizontal division between the people taking all the money they can, and those they're taking it from.
Among the rich, there's a widely-agreed center position — more for us, less for everyone else on the planet.

GP directs us to research done by watchdog group SourceWatch: a Fix the Debt portal, where they say:

The Campaign to Fix the Debt is the latest incarnation of a decades-long effort by former Nixon man turned Wall Street billionaire Pete Peterson to slash earned benefit programs such as Social Security and Medicare under the guise of fixing the nation's "debt problem." Through this special report -- and in partnership with The Nation magazine -- the Center for Media and Democracy exposes the funding, the leaders, the partner groups, and phony state "chapters" of this $60 million "astroturf supergroup," whose goal is to achieve a grand bargain on austerity by July 4, 2013.

SourceWatch lays out the various supporters and their bipartisan credentials, corporate ties and conflicts of interest; most have transitioned at least once from politician to lobbyist and/or vice versa, and big pharma, big oil, big finance, and the health insurance industry are all well-represented.  This is a delightful romp through the revolving door of democracy, American style.

GP says many (or most) of these individuals also have big-time conflicts of interest, as documented by Source Watch; they stand to benefit personally if what is now public becomes private and for-profit. They are all simple rent seekers, in other words, and the national debt is their trojan horse (or is it a rabbit).  This is not (or should not be) news, yet time and time again we see that you can fool some of the people all of the time...and, per George W. Bush,  "those are the ones you want to concentrate on.”

For an absolutely terrifying view of what that kind of concentrating looks like, GP ends with this video (which I can't even get all the way through so I can't tell you how it ends). The sheer number of rhetorical games played in the first 15 seconds alone is enough for me; when they get to the dancing I just want to weep.

Sheppard: OECD report on base erosion demonstrates OECD is not serious about base erosion

Lee Sheppard has a column today on the OECD's new-found vision for reversing course on the international regime of tax base erosion it created [gated]. She's not buying it. Highlights:

...the OECD Centre for Tax Policy and Administration has been adept at sweeping huge problems under the rug. It was long in the habit of denying the multinational tax avoidance problems that OECD guidance and the international consensus enabled. 

But the problems are now blindingly obvious, as leading investigative journalists have attached corporate names and faces to tax avoidance. The person on the street now knows that some household-name companies pay no corporate income tax anywhere in the solar system. And a new group of managers has come to the OECD, ready to at least admit to the problems. So with its newly issued report, "Addressing Base Erosion and Profit Shifting," the OECD promises to do something about the income shifting problem and meet its critics. 

The report contains some astonishing admissions against interest about the causes of the zero-tax results under the current international system. Putting the best face on it, the report is a baby step toward practical proposals -- which are supposed to be ready for the G-20 meeting in a mere four months! 

The report provides little in the way of proposals, and it leaves the reader worrying that the OECD will jump in front of the parade and carry on with its useless projects. 

Pressure Points 

The report identifies six pressure points in the international system, without ascribing blame. Here is the list, annotated with blame: 

• hybrid structures and instruments (U.S. check-the-box rules and European formalistic characterization rules); 
• treaty treatment of remote commerce (OECD model treaty); 
• tax treatment of related-party financial transactions (OECD model treaty); 
• transfer pricing, especially separation of income from relevant activity (OECD transfer pricing guidelines); 
• antiavoidance measures (American, British, and commonwealth courts); and 
• harmful preferential regimes (Vienna Convention on the Law of Treaties). 

Despite these admissions, the report is strangely solicitous of tender corporate feelings. The drafters appear to have inherited the OECD's long-standing fear of incurring the displeasure of the United States and its mighty multinationals. 

...The report makes the seemingly harmless statement that member countries have a common interest in stopping base erosion and establishing a level playing field. As the drafters understand, it is not at all clear that every OECD member is on board. The British are systematically dismantling their corporate tax base, and the Americans are being urged to follow. Those are the home countries of the most tax-aggressive multinationals. 

And ever mindful that its real constituency is multinational business, the OECD proposes to come up with its coordinated action plan in consultation with all the stakeholders! It was considerate of the OECD to include "civil society" among those to be consulted. The old order ignored nonbusiness groups. 

One could well ask why multinationals should be invited to this particular discussion -- not that they don't appear to have veto power over every OECD project. They have cast their votes already. They don't feel like paying corporate income taxes, thank you very much. What are they expected to do, apologize for stripping income out of every market country? 

... Maybe it's easier to blame globalization than to blame a highly discriminatory system that is a vestige of World War I. The international consensus was designed by the Europeans and Americans to minimize taxation of multinationals. 

...The report does not admit that a large part of the problem is the international consensus itself. Like a manager firing workers, the OECD blames globalization. 

...The report's suggested fixes are already being pursued by member governments: more government-to-government cooperation, more transparency, simplified transfer pricing guidelines, better documentation, antiabuse rules, and controlled foreign corporation rules. The report recognizes that some of these fixes are difficult to administer, leading only to counterproductive litigation against well-represented multinationals. 

A constructive suggestion is that intragroup financial transactions be subject to restrictions. This is a startling admission from the organization whose transfer pricing guidance has required recognition of nonsensical legal arrangements and self-serving intragroup contracts in all but the most drastic cases. 

...The report suggests that something be done about harmful preferential tax regimes. But the previous mangled effort was squelched by the United States two decades ago, and hypocritical to boot. European enablers were not included in the list of harmful regimes. The OECD gives itself credit for the Global Forum on Transparency, an effort to accommodate tax havens while signing a lot of unenforceable tax information sharing agreements. 

...The degree to which the OECD still acts like this is a real risk is shown by the report's suggestion that it should be easier for multinationals to get their money back in mutual agreement procedures. The real risk of collective action is, as always, veto by the United States, whose multinationals pioneered the techniques complained about in the report. 

...Having blessed restructuring to stripped-risk distributors and contract manufacturers as business motivated, the OECD now admits that it is a component of the base erosion problem. The restructuring nonsense recently added to chapter 9 of the transfer pricing guidelines hardly merits a mention in the base erosion report, which seriously undercuts that guidance. 

...If the OECD were serious, it would advise member governments to disallow deduction of payments by and to entities treated as tax nothings by the other government. Some governments treat hybrids the same way their home governments treat them. Either straightforward fix would claw back the benefits of the U.S. check-the-box rule. Essentially a check-the-box switchover clause, either approach would ensure that the income represented by the payment was taxed somewhere. 

...Several times, the report describes tax planning as reducing profits attributed to substantive operations while increasing the profits associated with legal constructs like intangibles holding companies. This is a huge admission for an organization whose own transfer pricing guidelines call for intragroup contracts to be respected except in drastic circumstances. 

...The report does not explain why affiliates with no assets and no activities should be respected in the first place -- only that the transfer pricing rules entitle them to very little income! Google had an APA approving its transfer of intangibles outside the United States. Google's Irish affiliate has 2,000 employees. The point of the arrangement was to keep intangibles income out of the United States and to siphon it out of Europe. 

What would the OECD do if it were serious about intangibles migration? It would be compelled to think about factor allocation of intangibles income to countries where they are exploited. ...

Oh so much more at the link. This is a lengthy and detailed criticism. I am with Lee that the OECD is not likely a true apostate when it comes to base erosion. I would like to be wrong but the institutional structure of tax policy norm-making being what it is, there is no reason for optimism. The OECD used to like referring to itself as the "market leader in international tax policy," as if tax policy was a commodity they were particularly adept at creating and selling. Recent developments show tax policy is a commodity all right, but the OECD understates its own market share: it holds 100%. It is a monopoly that created the regime it now professes to view as having failed to keep up with the times.

You can't call it base erosion when you've been operating the backhoe and preventing anyone from building a retaining wall for 50 years.

Corporate tax: why disclosure is the key to reform

Two columns of interest emerged today on the issue of corporate tax disclosure, plus another interesting public hearing in the UK, this time with the big four in the hot seat.  Put all of this together and we can see very clearly the intense connection between tax reform and public understanding of the status quo.  With the latter as to corporate tax being woefully inadequate and relevant information intentionally hidden from public view, the former can be neither informed nor meaningful.  The answer is corporate tax transparency, particularly for multinationals, i.e., on the order of country-by-country reporting for listed companies.  First, on the columns, both from the FT.

In this one, John Gapper says "Companies are complying with laws that governments could change if they wished," and then explains:

Starbucks’ supposed immoral act is not to pay UK corporation tax that it does not owe, and would not owe even if it did not license its brand from the Netherlands. It obeys both the letter and the spirit of global tax law, which governments could reform if they wished.

That's 100% correct. And if you think there is some "spirit" in the transfer pricing law that isn't being acknowledged, then you are forgetting that the transfer pricing rules were effectively written by the industry they are meant to police. So I think the spirit is pretty much being well given its due. Gapper also nicely illustrates what I call the mercenary tendency of the tax state in an economically integrated world: agree with whatever seems politically expedient in principle, defect in practice:

I look forward to Mr Cameron naming and shaming companies such as Google (also a target of British politicians) if they are drawn from Ireland to the UK by his tax arbitrage. 

...Governments must decide which regime is fair, and companies and individuals must comply. 

... most companies that place operations or intellectual property in low-tax countries – or even in tax havens such as Bermuda – are not breaching the spirit of global tax law. They comply with a structure established under the League of Nations in the 1920s. 

This allows – indeed, encourages – multinationals to split their operations among countries, paying taxes as if they were separate entities, in order to avoid double taxation. They have to make transactions at “arm’s length” – as they would deal with others. 

It worked for a long time but is under strain because of the growing value of brands, intellectual property and intangibles to global corporations. “Ideas are their biggest asset, and what generate profits, and it is far easier to shift intangibles than factories,” says Jeffrey Owens, of the Institute for Austrian and International Tax Law.

Well, this is mostly right, at least close enough for its purposes. However, I am just not sure what principles we should expect to emerge when reporters turn, as they too often do, to Mr. Owens, former director of the OECD's tax arm and the man who presided over the demise of the corporate tax on a global scale under the nurturing constancy of the OECD's business-driven tax policy making machine, a person moreover who has publicly called for governments to "avoid like hell" any taxes on corporations. He would seem to be the last person you would ask about how to make a corporate tax system function, again, unless we are talking about that movie.  Gapper concludes:

Politicians thus have the choice of indulging in easy rhetoric against companies that obey the laws they have passed or struggling to reform the tax regime for little reward, with lots of disruption. In their position, I might posture too.

If that's not an argument for greater public accountability of how transfer pricing works out in practice, I am not sure what is.

That brings me to the second column of the day from the FT which illustrates why the public ought to know more about how these regimes work in practice, this one by Bruce Bartlett in which he asks, can publicity curb corporate tax avoidance? He lays out the case nicely for the runaway corporate tax base and he concludes:

[L]ittle in the way of real economic activity, such as jobs or tangible investment, has shifted anywhere. All that has shifted is the tax base. 

...This makes the international tax regime a ripe target for reformers.

... With reports of low domestic taxes paid by large profitable corporations such as Starbucks in the UK, the time may also be ripe for an international agreement to curb tax shifting. The US has recently implemented a law called the Extractive Industries Transparency Initiative that requires companies to disclose their payments to governments from oil, gas and mining assets. Allison Christians of McGill University argues that the expansion of such information reporting to the transfer pricing of all multinationals is the first step towards capturing the revenue now lost to the shifting of business costs to high-tax jurisdictions and revenues to low-tax jurisdictions. 

There is growing evidence that corporations are sensitive to the public outcry when they are caught avoiding taxation excessively. Starbucks, for example, recently agreed to pay more taxes in the UK than legally required to quell the controversy over its virtually nonexistent tax bill. The same shaming technique may have broader application to multinationals generally. 

As Justice Louis Brandeis of the US Supreme Court once put it, “publicity is justly recommended as the remedy for social and industrial diseases”.

First, thank you for the shout out, Mr. Bartlett! Second, this column demonstrates clearly the strong connection between tax reform and public understanding of the status quo, as I suggested above.  Tax reform is not going to come from the only party that has all the info it needs right now, namely, the IRS. Tax reform comes from public expression.  Right now, observers of tax policy need more information in order to offer meaningful reform proposals, and that information is being hidden because governments do not require it to be disclosed, plain and simple.  That is a matter of regulatory choice, and these columns show the choice is bad for policy analysis.

That then brings us to the UK's hearings today in which the public accounts committee taking on the big four accounting firms, trying to suss out what the letter and the spirit of the law is with respect to corporate tax on multinationals.  What emerges is the "perfectly legal" nature of all of this tax avoidance, again confirming the editorials by Gapper and Bartlett.  Here is the BBC's take on the hearings, worth reading in full.  Richard Murphy declares it a win for the PAC but the question is whether that translates to a win for those who do in fact pay taxes in the UK and elsewhere.

That question will be answered affirmatively if instead of killing EITI, which is currently apparently a high priority for many, we expand it to cover all listed companies.

A handy guide to Davos-speak

From Ryan McCarthy at Reuters:

...What Davos folks mean when they constantly call for a “growth plan” or “restoring growth” is that no one can see any particular industry that’s going to increase the pace at which they get rich. And, as a result, the rest of us will have fewer jobs.

...[Bridgewater hedge fund CEO Ray] Dalio expanded a bit: the big conversation in politics and economics, he said, will be about how to get more out of workers – growth won’t come  from the next Internet, the next real estate boom or any new asset, in other words. This means, he said, hard choices about questions like “How long is a vacation?” or “What is a good life?” 

...what Dalio is saying is particularly dire for the rest of us. When the world’s most successful investors tells you economic growth is going to depend on whether or not you take a vacation, it’s time to worry. 

Emphasis mine. Make no mistake: whenever CEOs call for policies to increase growth, they mean in their own pockets.

Up Goer Your Law Review Article

The Faculty Lounge throws down a challenge to legal academics: can we tell people what we are talking about in words that are easy to understand?

Cedar Riener (follow him @criener), an enterprising psychology professor, has begun a Tumblr, Up Goer Your PhD, collecting doctoral dissertation abstracts written in layman's terms, as described above. His project is a riff on this brilliant layman's diagram of Saturn 5, otherwise known — when one is limited to the most common 1,000 words — as "Up Goer 5." People using Up Goer to explain a variety of other complicated concepts can be found on Twitter at #UpGoerFive. Many Up Goer projects turn out to be hilarious, and they're fun to create, too.

But there's a serious point here as well. Jargon (including technobabble, neurobabble, and other babbles) can be efficient shorthand when conversing among other experts. But let's be frank: it can also conceal some serious B.S., not only from our readers, but also from ourselves.

That's right, and I spend a lot of time trying to stop my own tendency toward jargon in thinking, in teaching, and in writing. This is not easy when your world is dominated by code sections, acronyms, and hyperlexis. I suspect I fall short most of the time, in fact, I just did, five times in that last sentence alone. Sigh.  In my defense, "tax" is not even on the list of the "ten hundred most used words."

Ecuador's new tax on bank profits

Ecuador has a new law with the title "Income Redistribution for Social Expenditure," which will impose new taxes on financial institutions. I often remark on the deceptive titles of US tax legislation (the HIRE Act, the JOBS Act, etc)--which always make the legislation seem obviously to promote social good even while they too often include provisions that do the opposite--see, e.g, Charles Kingson's The Great American Jobs Act Caper. Of course, using the term "redistribution", "social", and maybe even "expenditure" would kill the legislation in its infancy in the US. So I was interested to see new taxes on bank profits cast in this rhetorical language.

FP's Top Global Thinkers for 2012

Whatever credibility this list might have had, it was all lost at #8.

If you're entitled, you probably don't deserve it.

What does it mean to be entitled to something?  It used to mean you earned it, and are owed it, and it would be unfair not to give it to you.  Now it means you are demanding something that you have not earned, are not owed, and cannot in fairness be given.  I view this rhetorical shift as a subtle but very destructive development for spending programs that are tied to revenue sources, e.g., social security in America.  Roosevelt famously insisted on tying the benefit to the tax that funded it:

“We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits,” he reportedly responded. “With those taxes in there, no damn politician can ever scrap my social security program.”

But if it becomes rhetorically acceptable to use entitlement to mean the opposite of entitlement, this creates a license for the damn politicians to scrap these programs after all.  This is so even if, like social security, such programs are not actually in fiscal straits.  Rhetoric matters, maybe far too much, in politics.  It is all too easy to convince people that entitlements are not deserved, therefore anything called an entitlement can and should be eliminated.  Worse, so long as you use another term to describe other benefits doled out by government, you get a pass from this scrutiny and judgment.  "Tax incentives" is a ready candidate to fil that rhetorical space, as we have seen in this campaign.  

Jersey to take ball, go home

If the UK won't play nice.  It seems that the island of Jersey is growing weary of political attacks coming from the UK that label Jersey as an unrepentant tax haven. Tax analysts reports [pdf]:

"Jersey Chief Minister Philip Bailhache, in a June 26 interview with the U.K. newspaper The Guardian, said relations between Jersey and the U.K. have been "strained" over the past several years as their interests have diverged, and that Jersey should be ready to escape the "thrall of Whitehall" if necessary."

I am not sure how independence will stop the UK from using Jersey and its fellow channel islands as a shield to deflect attention away from the notorious city of London, prime tax haven territory.  But in the meantime, the plan is to spend money on marketing to work on Jersey's image:

 "Jersey plans to open an office in London with the specific goal of improving the island's tax image among the British public. (Jersey has already opened a similar office, together with Guernsey, in Brussels.) Noting Jersey's many tax information exchange agreements with EU member states and other countries, Bailhache stressed that Jersey does not market itself as a tax haven or a tax avoidance facilitator."

Jersey's $5.1 billion GDP is built on financial services.  From the US CIA World Factbook, 

Jersey's economy is based on international financial services, agriculture, and tourism. In 2005 the finance sector accounted for about 50% of the island's output. ... Tourism accounts for one-quarter of GDP. ... Light taxes and death duties make the island a popular tax haven. Living standards come close to those of the UK.

That Jersey is a tax haven can't seriously be doubted, I don't think.   Of course the same is true for the UK.  Jersey's chief minister says if UK taxpayers do use Jersey to shelter their income, that it is a governance failure on the part of the UK:

"despite the island's efforts to downplay its use for tax avoidance, ... the real issue is why the U.K.'s and other jurisdictions' tax laws are written in such a way that they allow legal avoidance, which is then condemned."

That's true, but unfortunately for Jersey, it's convenient for them to serve as a focal point for anti-austerity and anti-tax dodger anger in the UK. It would be inconvenient to the UK to target the city of London similarly. 


Update: Tax Analysts sent me a link to an ungated pdf, link replaced above.

The private sector really is doing ok, or, why workers collaborate in their own self-destruction

If by private sector you mean US corporations, which are making more profit than ever:

From Business Insider.  But not if by private sector you mean wage earners.  As we know median wages have plunged in the US; this article shows that in addition wages as a percentage of GDP are at an all-time low:

The author comments that "[o]ne reason companies are so profitable is that they're paying employees less than they ever have as a share of GDP. And that, in turn, is one reason the economy is so weak: Those "wages" are other companies' revenue."


The juxtaposition thus paints a zero-sum picture: that as wages fall, corporate profits rise.  We've seen other charts that show corporations and managers claiming most or all productivity gains over the last several decades at least.

Richard Murphy responds: "the reason why we have a crisis is that the wealthiest and companies got too rich whilst most got left behind so the wealthiest and companies lent the rest of us their excess wealth through debt arrangements which people could not repay."

Now consider Yves Smith's post today in response to sociologist Claude Fischer, who asks "Why Don't Americans Take Vacations?" and answers with rugged individualism and something about the American way.  Nonsense, says Yves, the right answer is, because of a systemic and steady diet of anti-labor propaganda.  Yves points us to a related article of interest by Mark Ames from 2006, "We're not going on a summer holiday," which says:

vacation time has been slowly disappearing for American workers ever since the Reagan Revolution, which ushered in a violent shift in corporate culture away from the paternalistic post-New Deal model towards the current stock-price-is-God model. According to Harvard economist Juliet Schor, in the 30 years before Reagan's presidency American workers were getting more and more vacation time; however, in the 1980s, that trend suddenly reversed. By the time Reagan left office, Americans got three and a half fewer days off per year, on average.

Ames says at the same time corporate managers have vastly increased their leisure time and pursuits.  A glance at the FT's How to Spend It can certainly confirm the market for vacation by the ultra-rich.  For Ames the most amazing aspect is that

the designated victims in this drama - America's workers - are such willing collaborators in their own existential demise.

...according to a New York Times article, British workers get more than 50% more paid holiday per year than Americans, while the French and Italians get almost twice what the Americans get. The average American's response is neither admiration nor envy, but rather a kind of sick pride in their own wretchedness, combined with righteous contempt for their European worker counterparts, whom most Americans see as morally degenerate precisely because they have more leisure time, more job security, health benefits and other advantages. 

We have seen a related version of this in the public outrage ginned up over the "generous" health and pension packages of public sector employees that has allowed conservative governors to eviscerate worker's benefits and their rights in the process--c.f. Wisconsin.   A constant stream of propaganda tells us that public sector workers must be stripped of their many unearned and undeserved benefits.  There is no equally powerful alternative stream of propaganda demanding better health and pension benefits for all workers.   There is no alternative stream painting a picture of life as an American worker when wages stabilise to global median levels.  The result seems to perfectly illustrate Ames' willing collaboration in self-destruction.

Must Read: Factual Free Market Fairness

This is required reading for anyone interested in markets, governance, and human flourishing.  Dierdre McCloskey never disappoints.  I won't even bother to excerpt because you just have to read the whole thing.

Romney = dressage

What is it with horses?  Every time I teach the intro tax course in the U.S., we all have a good laugh at the sheer volume of horse-specific tax rules, many of which are outright giveaways (like the depreciation schedule...check it out, exciting!*  Of course the best laughs** come from the hobby loss case where Prieto, the orthopedic surgeon with the $300k-losing "horse activity" habit tries to pretend the horse activity is a business and not a means of entertaining his bored wife and kids.  Very few of my students ever think Prieto should get deductions for all the money he spent on horses.  Here's a write up in Equine Chronicle (Never heard of it?  Me neither).  This is all to say that the latest on horses is the increasing attention on the Romneys and their dressage activity.  Never heard of dressage before people started talking about Ann Romney?  Me neither.  It's horse ballet.  It's very expensive.  And it's generating tax deductions, apparently.  Big, big deductions:

The Romneys declared a loss of $77,000 on their 2010 tax returns for the share in the care and feeding of Rafalca, which Mrs. Romney owns with Mr. Ebeling’s wife, Amy, and a family friend, Beth Meyers. 

This blogger reminds us, that is more than the median family made last year.  Yes, it's quite a lot more.

Side note: declared a "loss"?   I don't think so.  I think they took deductions.  But I am not sure under what authorization.  It's not obvious from a quick look at their return, but I am sure some enterprising tax prof out there is already looking into it and will supply us with an answer in due course.

For me the story here is more about the effectiveness of using this dressage + tax break narrative as a rhetorical tool for political purposes.  What are the political implications if people equate Romney with some sissy elite thing like dressage, some sissy thing that costs more than they make in a year?  What if they then equate him with using that sissy elite thing to reduce his taxes by more than they made last year?  I am not sure how powerful a political tool this kind of narrative can be.  It is simple enough to be distilled and tweeted in 140 characters or less, perhaps, but only if you don't have to explain dressage.  Lower taxes = freedom is still shorter and more to the point.  Perhaps it is just more read meat for his opponents while completely off the radar for his supporters.

* If you're not excited by the Tax Code, I just don't know what to think of you.
** Some of these "laughs" may have been produced in order not to cry.

Save Taxes, Burn Books!

In another tax story from Michigan, a brilliant if inadvertent tribute to Ray Bradbury (August 22, 1920 – June 5, 2012), from Cory Doctorow:

The Leo Burnett/Arc Worldwide agency has won a gold prize in the Effie awards for their hoax "Book Burning Party" campaign, which is credited with saving the public library in Troy, MI.  Michigan's extreme austerity measures and collapsing economy had put the library under threat, and the town proposed a 0.7% tax raise to keep it open. The local Tea Party spent a large sum of money opposing the measure on the grounds that all taxes are bad, so the Burnett campaign reframed the issue by creating a hoax campaign to celebrate the library's closure with a Book Burning Party a few days after the vote. 

The outrage generated by this campaign was sufficient to win the day for the library, as Troy's residents made the connection between closing libraries and burning books, focusing their minds on literacy and shared community, rather than taxation. 

Here's a video that tells the story:

Is this the same as putting fake but realistic looking eviction notices on people's houses?  Why or why not?

Tax mitigation-avoidance-evasion

"Tax avoidance involves arrangement of a transaction in order to obtain a tax advantage, benefit, or reduction in a manner unintended by the tax law.  It is an unacceptable manipulation of the law which is unlike legitimate tax mitigation.  Mitigation involves use of the tax law to achieve anticipated tax advantages embedded in tax provisions.  Tax avoidance is also to be distinguished from tax evasion.  Evasion involves outright fraud, concealment, or misrepresentation in order to defeat application of the tax laws."

This is from Karen Brown's opening paragraph of "A Comparative Look at Regulation of Corporate Tax Avoidance," a new title edited by Prof. Brown and including 16 country reports.  She attributes the mitigation-avoidance-evasion taxonomy to Zoe Prebble & John Prebble's chapter on New Zealand.  They say:

"Tax mitigation and tax evasion, standing analytically before and after tax avoidance, have no statutory definitions.  ... New Zealand courts and practitioners prefer not to use the term "mitigation."  Instead, they employ circumlocutions like "permissible tax minimisation" [which] indeed encapsulates the meaning of tax mitigation, which is to reduce one's tax in a manner that not only complies with the letter of the law but that is consistent with the policy behind the legislation."

Mitigation is not a term I have used though I understand well enough the inclination to create some kind of ground around the term "avoidance."  I've used "aggressive tax avoidance" to suggest tax avoidance that may comply with the letter but not the spirit of the law, and have used "avoidance" to mean legal tax avoidance, e.g., taking advantage of provisions drafted for the purpose of giving the taxpayer an incentive or tax break (whether one agrees with the policy behind the law or not).  That would leave me with an avoidance-aggressive avoidance-evasion taxonomy, with evasion defined as Prof. Brown suggests above.  Perhaps mitigation or minimisation does a better job than plain "avoidance" and then "avoidance" can be used instead of "aggressive avoidance."  Still a spectrum but the variation in terms perhaps helps to more clearly describe the dividing line.

A major rhetorical difficulty I have had with this subject is that all of these terms suggest a shying away in degrees from an obligation that otherwise exists, and that doesn't quite capture the case of taking advantage of tax breaks the legislature has created by design.  Arranging one's affairs to take advantage of these intended gifts doesn't seem like shying away from an obligation, and that's likely why Learned Hand's quote remains so salient:

"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."

 Using the term mitigation or minimisation to describe this arranging of affairs doesn't quite seem to capture the range of stories involved in "arranging ones affairs."  One story is that taxpayers are free to take advantage of all the deductions, exemptions, exclusions, etc. they can find, and it's not minimisation to do that: for example, it does not really seem like tax minimisation to be human and therefore eligible for a personal exemption, or to have high medical bills and therefore be eligible for some additional tax relief.  But another story involves the amassing of power and influence to obtain specific tax breaks for your industry and then take advantage of those breaks, c.f., Bain capital and the carried interest rule for private equity managers or the film industry and the many film industry tax breaks.  That looks a lot more like tax mitigation or minimisation somehow.

Is mitigation-avoidance-evasion descriptive?  Yes, I think more so than avoidance-aggressive avoidance-evasion.  But there may be room for one more category before mitigation or minimisation.

On philanthropy, and why free speech is expensive

This is an interesting story by Curtis White, who was asked by Orion magazine, a not for profit, to write about philanthropy in the USA.  White was hesitant: "From the first I was dubious about the assignment. I said, “Not-for-profit organizations like you cannot afford to attack philanthropy because if you attack one foundation you may as well attack them all. You’ll be cutting your own throat.”  He forged ahead anyway, until the editor that asked him to contribute left the organization and the new editor's view was that "publishing the essay would be an exercise in “self-mutilation.”"  But there's an internet, so it gets published anyway.  White says:

In the United States, everyone may enjoy freedom of speech so long as it doesn’t matter.  For those who would like what they say to matter, freedom of speech is very expensive. It is for this reason that organizations with a strong sense of public mission but not much money are dependent on the “blonde child of capitalism,” private philanthropy. This dependence is true for both conservative and progressive causes, but there is an important difference in the philanthropic cultures that they appeal to.

The conservative foundations happily fund “big picture” work.  They are eager to be the means for disseminating free market, anti-government ideology. Hence the steady growth and influence of conservative think-tanks like the Heritage Foundation, Accuracy in Media, the American Majority Institute, the Cato Institute, the Brookings Institute, the Manhattan Institute, the Hoover Institute, and on (and frighteningly) on.

On the other hand, progressive foundations may understand that the organizations they fund have visions, but it’s not the vision that they will give money to. In fact, foundations are so reluctant to fund “public advocacy” of progressive ideas that it is almost as if they were afraid to do so. If there is need for a vision the foundation itself will provide it. Unfortunately, according to one source, the foundation’s vision too often amounts to this: “If we had enough money, and access to enough markets, and enough technological expertise, we could solve all the problems.” The source concludes that such a vision “doesn’t address sociological and spiritual problems.”

And then there's this:

One of the most maddening experiences for those who seek the support of private philanthropy is the lack of transparency, that is, the difficulty of knowing why the foundation makes the decisions it makes. In fact, most foundations treat this “lack” as a kind of privilege: our reasons are our own.  One of the devices employed by philanthropy for maintaining this privilege is what I call the mystique of the foundation’s Secret Wisdom. 

So you want to ask, “What do you know that I don’t know?  What do you know that makes your decisions wise?”  The closest thing to an answer you’re likely to hear is something like this: “The staff met with some Board members last night to discuss your proposal, and we’re very interested in it.  But we don’t think that you have the capacity [a useful bit of jargon that means essentially that the organization should give up on what it thought it was going to do] to achieve these goals.  So what we’d suggest is that you define a smaller project that will allow you to test your abilities [read: allow you to do something that you have little interest in but that will suck up valuable staff time like a Hoover].  Meanwhile, we’d like to meet with your Board in six months and see where you are.”

And on you go one year at a time. But cheer up, you’ve made your budget for the year! 

More at the link.  The article demonstrates why accountability is not just an issue for government.  If government is going to subsidize and defer social goals to philanthropy to solve, then it becomes very important how philanthropy works, and who decides which issues matter and are worthy of support and which do not and are not, and what goals those working in philanthropic organizations actually seek to serve.

Tax policy report by UK anti-tax group

Whenever a "report" on tax policy begins with artwork depicting oppressed people in chains, I brace myself for a now familiar chorus about the terrible impact of tax on jobs, growth, productivity, freedom, beauty, and truth.  The UK Taxpayers Alliance "Single Income Tax: Final Report of the 2020 Tax Commission" fits the bill.  Richard Murphy summarizes its overall tone and describes it as a horrid world view.  At over 400 pages long, it's not a light read.  I've only skimmed it but note that the report very quickly dismisses the important work by Piketty & Saez as weak empirically (p. 246), yet blandly summarizes US Congressman Paul Ryan's outrageously lopsided budget plan with no critique whatsoever (p. 390-91).  That's telling.  The foreword says:

"The level of economic and policy debate has long been poor in the UK. There is very little awareness of the oodles of academic research on how high marginal tax rates or punitive income or capital taxes reduce growth and jobs."

Aside from using the term "oodles" in a purportedly serious study, that's an aggressive opener that lets us see the framing that will go to work in this report.  The author complains that "In the very rare instances when they are mentioned, respectable and important studies are dismissed out of hand or not properly understood; the only “moral” arguments ever referred to are those that advocate the state seizing ever greater proportions of individuals’ incomes."  This leaves us in no doubt of the direction and makes the easy dismissal of research by people like Piketty & Saez even more bothersome.