New Paper: What is Freedom For?

Leslie Green asks What is Freedom for? Answer:

Two conceptions of the value of political freedom are popular. According to one, freedom serves autonomy, creating one's own path through life. According to the other, freedom serves authenticity, keeping faith with an identity one did not choose. This paper bridges the gap between these views in several ways. It shows that autonomy embraces some of the unchosen aspects of life that authenticity stresses, and that authenticity is consistent with scope for choice within an unchosen identity. It is also shows that both views share a stake in a neglected value, self-knowledge. Partisans of authenticity cannot keep faith with their identity if they do not know what it truly is. Partisans of autonomy cannot choose a path in life without knowing what the options are for them, and these options can be affected instrumentally and constitutively by their identity, which they therefore have a stake in knowing. Of course, there can be more than one sound argument in favor of freedom. But contrary to what many suppose, autonomy and authenticity are complementary, not competing, in making that case. The differences between them are matters of nuance and degree.

Interesting. We see the term freedom used fairly frequently in tax policy debate--certainly, freedom is a concept that animates the anti-tax crowd. Murphy & Nagel did the best work, I think, in showing the unstated assumptions and flawed thinking that goes in to seeing taxation as an affront to freedom; this paper seems to complement that work.

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.

What is "money"?

It's a question I ask every intro tax class, and so I am always on the lookout for stories like this one, about a small city in Greece developing an alternative currency. The headline has it wrong--this is not bartering, rather it is substituting one exchange medium (Euro) for another (tem); either currency could fail, both are subject to inflation, etc. Also I don't get the impression that these are desperate people bargaining over staples, even though the headline calls them "impoverished"--but I could be wrong. Whether intended or not, the use of alternative currency is likely a tax dodge since no one is presumably collecting VAT in Euros on a sale in tem. So it is surprising that the mayor is encouraging this.

International Law and Language Policy

Here is an interesting new book, by Jacqueline Mowbray: Linguistic Justice: International Law and Language Policy (Oxford 2012).  From the abstract:

Globalization and migration are producing societies of increasing linguistic diversity. At the same time, English is achieving unprecedented global dominance, smaller languages are becoming 'extinct' at an alarming rate, and ethnic tensions in countries from Belgium to Tibet continue to centre on questions of language. Against this background, the issue of how to ensure justice between speakers of different languages becomes a pressing social concern. Matters of 'linguistic justice' are therefore drawing increasing scholarly attention across a range of disciplines. 

How does international law contribute to linguistic justice? This book explores that question by conducting a comprehensive, interdisciplinary examination of international law on language ... the book explores the conceptual framework which underpins international law on language, unearthing underlying assumptions and ideas about what constitutes a 'just' language policy from a legal perspective. ..

This explores an interesting aspect of international society and culture.  More at the link.  

Eight Corporate Subsidies in the Fiscal Cliff Bill

Matt Stoller at NC points out the ubiquitous presence of corporate lobbying when it comes to tax policy:

Throughout the months of November and December, a steady stream of corporate CEOs flowed in and out of the White House to discuss the impending fiscal cliff. Many of them, such as Lloyd Blankfein of Goldman Sachs, would then publicly come out and talk about how modest increases of tax rates on the wealthy were reasonable in order to deal with the deficit problem. What wasn't mentioned is what these leaders wanted, which is what's known as "tax extenders", or roughly $205B of tax breaks for corporations.  ... few political operatives have bothered to pay attention to this part of the bill. But it is critical to understanding what is going on.

...Most tax credits drop straight to the bottom line – it's why companies like Enron considered its tax compliance section a "profit center". A few hundred billion dollars of tax expenditures is a major carrot to offer. Surely, a modest hike in income taxes for people who make more than $400k in income and stupid enough not to take that money in capital gain would be worth trading off for the few hundred billion dollars in corporate pork. This is what the fiscal cliff is about – who gets the money. And by leaving out the corporate sector, nearly anyone who talks about this debate is leaving out a key negotiating partner.

Stoller points out "eight corporate subsidies in the fiscal cliff bill that you haven't heard of":

• NASCAR - welfare for racetrack builders, about $43M per year

• Railroads - welfare for track maintenance, 165M/yr.   Stoller says "It's unclear why private businesses should be compensated for their costs of doing business." 

• Film producers - we're used to that brand of welfare here, aren't we.  Stoller calls this provision "a relatively straightforward subsidy to Hollywood studios."

• mining companies – mine safety welfare.  Stoller:  "Taxpayers shouldn't have to bribe mining companies to not kill their workers."  

• Goldman Sachs –  welfare for HQ building, via tax exempt financing in the New York Liberty Zone, which amounted to "little more than a subsidy for fancy Manhattan apartments and office towers for Goldman Sachs and Bank of America Corp." The whole free zone thing is ludicrous in general but it seems particularly preposterous in Manhattan.

• Offshore financing – a subpart F giveaway, Stoller says it "basically allows American corporations such as banks and manufactures to engage in certain lending practices and not pay taxes on income earned from it." No wonder then it gets support from the likes of GE, my favorite tax dodger.  I like how Stoller points out that this particular form of welfare has its own trade association, ad reminds us yet again that lobbying pays: "Steve Elmendorf, super-lobbyist, has been paid $80,000 in 2012 alone to lobby on the "Active Financing Working Group.""

• Foreign subsidiaries -another subpart F rule, this time essentially ignoring payments between related CFCs, which Stoller explains "allows US multinationals to not pay taxes on income earned by companies they own abroad." 

• R&D & capital expenditures – both are well subsidised in the US, Stoller calls them "well-known corporate boondoggles." There are of course arguments for both, but it does seem rather silly to pretend that businesses must capitalize things and then keep giving them accelerated dereciation schedules that basically allow them to expense everything.

Stoller links to a number of his sources including a JCT repot that scored these expenditures.  There are no doubt many more expenditures in the bill.  Most, and perhaps all, could have been safely disposed of without bringing on the austerity bomb that we are meant to fear had we gone over the cliff. But that is tax politics in a system driven and dominated by lobbying.

Lobbying pays: rewards for legislative favors edition

Sungmun Choi asks, “Do Interest Groups Reward Politicians for their Votes in the Legislature?” And answers: of course they do.  Choi examined monetary contributions paid by interest groups to members of the U.S. House of Representatives and found evidence that the politicians who voted for the 2008 bank bailout were rewarded in the form of "more monetary contributions from the interest groups in the financial sector after passage of the EESA."  Conclsion; "interest groups reward politicians for their favorable votes in the legislature, at least in the case of the EESA. Of the two hypotheses that I develop in the theoretical part of the paper, I find evidence for the hypothesis of the long-term relationship between interest groups and politicians." Paper at the link.

So let's recap.

• Politicans need money to get (re-)elected: lobbying pays for that.
• Politicians need jobs when they retire from public office: lobbying pays for that.
• Lobbyists need clients who benefit from legal reform: lobbying pays for that.
• And now we see that politicians need to be rewarded for their legislative votes: lobbying clearly pays for that, too.

The Two Faces of Facebook

£440M hidden in the Caymans to avoid tax; $500M given to charity.  In my view this is no coincidence; the two events are inextricably intertwined.

Recent scholarship of interest

Here are some recent papers of interest:

On the power and role of the state:

• Bernard Schneider, The End of Taxation without End: A New Tax Regime for U.S. Expatriates, arguing that the US should settle for residence based taxation like everyone else in the world. Has a nice section on the history of the practice.
• Claudia Williamson, Contracting Institutions, asking what constrains the state from plundering its people, if the state has monopoly power, and concluding that cultural norms do.
• Martha Fineman, Beyond Identities: The Limits of an Antidiscrimination Approach to Equality, comparing legal cultures of equality and concluding that in the US, human need is seen as a matter of individual responsibility alone while other constitutional democracies also see it as a state responsibility. 

On the inequitable impact of tax treaties:

• Fabian Barthel & Eric Neumayer, Competing for Scarce Foreign Capital: Spatial Dependence in the Diffusion of Double Taxation Treaties, when bilateral FDI positions are asymmetric (as between rich and poor countries), capital importers (poorer countries, usually) lose by entering into a tax treaty; they sign anyway because of competition. Studies DTTs between 1969–2005.

On subsidies & industrial policy:

• Stephanie Rickard, A Non-Tariff Protectionist Bias in Majoritarian Politics: Government Subsidies and Electoral Institutions. Examines how different governments use trade protection via tariffs and subsidies, and finds that majoritarian systems are biased toward both.

And on methodology in legal scholarship:

• Tom Ginsburg, Pitfalls of Measuring the Rule of Law, pointing out methodological challenges for rule-of-law scholarship, calling for caution in policymaking (same argument as I made about using "case studies" to advance international tax principles, you can find that here)

UK on FATCA: Guidance, and more forthcoming

Here are 81 pages of "guidance notes" from HMRC on how the UK will implement its IGA, and here is a story that says more will be forthcoming in the first 6 months of 2013.  Remember, this is a moving target since everyone is waiting for final regs from the US. They were expected by the end of the year (i.e., in the next 11 days).

An interesting point for treaty interpretation enthusiasts is that the HMRC is issuing its guidance in the form of "regulations" for interpreting the US-UK treaty.  Interesting!  Interpretive regulations for tax treaties--not common, and not uncontroversial--see, e.g., here and here.  FATCA continues to deliver a treasure trove of international law questions.

Your income & taxes, then and now: an interactive

From Flowing Data, a link to this interactive chart where you can input your annual income and then see what you would have earned and paid in taxes back to 1913:

From the chart designer:

Having not been alive in the '50s or '60s, let alone filing taxes, I was struck by the high top income tax rate—exactly double the highest tax rate today. It made me wonder: what would my income tax be if I had earned the equivalent of what I earn now several decades ago—or even in 1913, when the current federal income tax program was first introduced? What would the history of income taxes look like through the collective eyes of people in my exact financial situation over the past 100 years?

Neat! Also, a very fast and easy way to discount a present dollar amount back 100 years.

Another paper on arbitration-as-law

There seems to be a surge of articles on arbitration-as-law lately: the latest, Judging Lite: How Arbitrators Use and Create Precedent, involves empirical research involving hundreds of US arbitration award records, and it provides some interesting insights.  The article was reviewed on jotwell, excerpt:

...The criticisms include the concern that widespread arbitration mandates will lead to a privatization of public law, with arbitrators that are not bound by public law authorities producing awards of no precedential value. 

...Mark Weidemaier worked from [various databases of arbitration awards].  He analyzed these awards to gauge the extent to which arbitrators cited and engaged with precedent. 

Weidemaier, not surprisingly, found very little citation to precedent in securities awards because reasoned opinions accompanying those awards are extremely rare.  Among labor awards, 48.6% cited to at least one precedent, as did 66.7% of employment awards, and 71.8% of class action awards. 

...Weidemaier attributed the differences in types of authorities cited to the different nature of each type of arbitration.  Labor arbitration is concerned predominantly with interpreting and applying collective bargaining agreements and is frequently fact-based, making it more likely that arbitrators will not cite any precedent and more likely that when they do cite precedent, it will be other arbitration awards.  Employment awards are much more likely to be adjudicating statutory claims, resulting in arbitrators looking to judicial authority interpreting the statute.  Arbitral authority is far less relevant.  Class awards look more to judicial authority but many deal with whether class arbitration is permitted under the contract and, consequently, in Weidemaier’s view, they are more likely than employment awards to look to arbitral awards interpreting similar contracts.

... Candidly acknowledging many limitations to his study, Weidemaier found no evidence outside of securities arbitration that arbitrators were deciding cases in an ad hoc fashion.  Rather, he noted, the process has become highly legalized and arbitrators appear to be trying to follow the public law when it is at issue before them.  ... he suggests that judges discuss arbitral authority in their opinions, thereby providing valuable feedback to the arbitrator community.

Jotwell reviewer Martin Malin calls Weidermaier's article "required reading for all participants in the on-going debate over arbitration mandates." You can read his whole review here.

New Issue: International Studies Review

ILR posted the latest issue of International Studies Review, which has several articles of interest:

• Richard J. Harknett & Hasan B. Yalcin, The Struggle for Autonomy: A Realist Structural Theory of International Relations
• Frank Grundig, Jon Hovi, Arild Underdal & Stine Aakre, Self-Enforcing Peace and Environmental Agreements: Toward Scholarly Cross-Fertilization?
• Monika Bauhr & Naghmeh Nasiritousi, How Do International Organizations Promote Quality of Government? Contestation, Integration, and the Limits of IO Power
• Peter Wilson, The English School Meets the Chicago School: The Case for a Grounded Theory of International Institutions
• Johan Hellman, The Occurrence of Mediation: A Critical Evaluation of the Current Debate

Cost to poor countries of illicit Cash flow: $859B

TJN posts this report from Global Financial Integrity, showing that

Crime, corruption, and tax evasion cost the developing world $858.8 billion in 2010

... the biggest exporters of illicit financial flows over the decade are:

• China,  $274 billion average ($2.74 trillion cumulative)
• Mexico, $47.6 billion avg. ($476 billion cum.)
• Malaysia, $28.5 billion avg. ($285 billion cum.)
• Saudi Arabia, $21.0 billion avg.  ($210 billion cum.)
• Russia, $15.2 billion avg. ($152 billion cum.)

Table 2 of the report's appendix has a complete list. This demonstrates why information gathering and exchange has got to be global and, contrary to how it's going right now, should probably start with the world's wealthiest countries imposing their gathering, reporting, and sharing regime on their own financial institutions vis a vis the rest of the world, rather than working to protect their own bases first and foremost.  This is a time for leadership by example.

International Tax as Depicted by Cats

Kevin Jon Heller linked to international relations as depicted by cats, which I should have avoided.  But then there were these ones depicting international tax, so of course I couldn't resist (apologies for the language in the last one):

Fortune 500 holding trillions offshore

Taxprof links to a Citizens for Tax Justice report (pdf) that says Fortune 500 corporations are holding at least $1.6 trillion in profits offshore.  290 of the 500 collectively self-reported the figure (via SEC filings), as at the end of 2011. Interesting: half of the $1.6T is reported by just 20 companies (7% of the self reporting, .4% of the fortune 500--the corporate 1%?).  The report includes a list of each of the 290 and the amount they reported as offshore.

It looks like notorious tax dodger GE tops the list here, with $102B waiting for a holiday to repatriate (recall that GE's global head of tax Will Morris, is also head of the tax committee of the business and industry advisory council at the OECD, winner of an "external engagement award" for his service to HMRC, and a long time and vociferous opponent of corporate tax transparency efforts through the OECD and related fora, for a discussion, see here).

Next in line comes a familiar cast of characters, all on that ever-growing tax dodger ledger:

• Pfizer (63B) 
• Microsoft (60B) (and check out Microsofttaxdodge.com)
• Apple (54B) 
• Exxon (47B)
• Merck (44B)
• Johnson & Johnson (a family company that doesn't like to pay taxes in its very own family's back yard, let alone around the world, 42B)

But really, every big American company you can think of appears on this list.  Starbucks can be forgiven for being a bit touchy on the tax dodging radar, since its offshore holdings of less than a billion look positively benign compared to the companies occupying the top of the list.  No wonder that multinationals fear increased corporate tax disclosure, because you never know where the media will train its spotlight for naming and shaming.

Scholarship on Global Citizenship

International Law Reports posts the latest issue of Global Society, a special issue on the topic of Cosmopolitanism and Global Citizenship--of interest especially to anyone thinking about citizenship-based taxation (perhaps especially in a post-FATCA world--you can see what's occupying my thoughts these days).  Contents at the link.  Good vacation reading, especially if you're travelling across a border to visit family.

WTO overwhelmed with disputes

Simon Lester notes a deluge of cases: "they keep coming, and it may be starting to strain the WTO's resources." He cites this report from Reuters:

The WTO's 157 members have launched 26 trade disputes so far in 2012, the most since 2003 and three times more than the eight new complaints filed in 2011. 

According to an internal WTO document seen by Reuters, the WTO decided to reallocate staff to the disputes team to deal with the increasing number and complexity of legal cases....

As well as moving staff, the trade body also advertised for a senior dispute settlement lawyer, at a starting salary of around 161,900 Swiss francs ($175,300), and is seeking short term candidates to help deal with the caseload.

Interesting development, especially against the backdrop of increased scrutiny and questions about the legal nature of these decisions.

Picciotto: States can and should switch to unitary corporate tax

Professor Sol Picciotto has a guest post over at TJN today, in which he talks about the viability of unitary taxation for multinationals and why detractors are too pessimistic because they are too wrapped up in transfer pricing. Excerpts:

The main response to my paper on unitary taxation published last week has been that it would take too long or be impossible to agree. ... Not so.  

.. people have spent too long labouring in the salt mines of the OECD's Transfer Pricing Guidelines: They need to get out and look at the real world.

... The trouble is that the OECD approach starts from the wrong end [by treating offshore subs as independent from their onshore parent companies]. ... A unitary approach would do what any sensible person would, as even the M.P.s on the PAC did, and compare the profits shown in the UK with the share of the companies' worldwide business actually done in the UK. If they are seriously out of line, as they have been shown to be, the UK companies' taxable profits should be adjusted accordingly.

 Sol goes through the history of arms' length and how the world has evolved past the principles.  He concludes that yes, agreeing cooperatively on a measurement and allocation regime will take time, but --

In the meantime, tax authorities could use the weapons already at their disposal much more vigorously. ...Perhaps now that they all are beginning to understand that public opinion will no longer find this acceptable, they will see the need for a new approach.

More at the link.

Model participating FFI FATCA agreement: a plea to readers

It really does not pay to start getting interested in FATCA because it raises all sorts of questions to which I really don't know the answers. And re-reading the statutes is not helping much. My question pertains to these "agreements" (aren't they really more like "submissions"--I assume they are one-sided) between the IRS and participating foreign financial institutions (PFFIs). The IRS apparently promised to release some sort of model PFFI agreement at some point...vague. Of course, the IRS has been so busy pushing through on the IGA front that it hasn't done that, at least, I cannot find anything like that anywhere. Notice that the deadline for FFIs to become PFFIs (and thereby avoid withholding, but not necessarily completely) by June 30 of next year? Again, one gets the feeling that FATCA is rushed and it is truly brazen given that the problems for the rule of law it poses are legion.

So my question: does anyone have (or know where I could find) an existing PFFI agreement I could look at? Or at minimum does anyone have a sense of what's in these agreements? Are they just one-sided agreements with the FFIs agreeing to hand over all the info listed in IRC s 1471, or does the IRS undertake anything therein? If you prefer not to comment in public, you can always email me via my faculty profile here.

To sell weed legally, you're going to need a shell company

NPR had a story not too long ago that is of interest, not (or not only) because it is always fun to think about how the world would be a better place if states would legalize & tax it, but also because it highlights the central role of US shell companies in facilitating crime. Since the US won't legalize weed but some states have effectively decriminalized it, it falls to shell companies to ease the federalist rift.

NPR talked to an owner of a "legal" (under state law) medical marijuana business in Washington state:

He described one of the big hurdles of starting a legal marijuana business: It's really hard to get a bank account. His story reveals not only the gray area the marijuana business still inhabits (it's still illegal under federal law), but also just how hard it is to run a small business without a bank. 

Here are four key steps Davis recommends, based on his own experience: 

...4. Create a shell company. Banks don't want to do business with weed shops. But they don't mind opening accounts for legal corporations whose business dealings are vague. "I had to be colorful with the way that I opened my account," Davis said. "I don't feel great about having to toy with the truth, but it's essential for me to have banking. I'm a business."

This might sound like an apology for shell companies. But it is absolutely not.

Rather, the shady area between federal criminal law and state law has opened up an opportunity to find honest people who are willing to talk about shell companies and how they work. They are sympathetic souls who seem to be acting in good faith, so we will listen to them when they tell us the quasi-criminal or criminal-feeling, anyway, path they must travel in order to do something, the essentially criminal nature of which is itself in question.

That presents a fascinating confluence of actors, institutions, lawmaking, and compliance issues, worthy of much further study. Field research anyone?