Tax Havens and the Rise of Inequality

Gabriel Zucman, The Hidden Wealth of Nations (2015).

Tax literature is bitterly divided on the role that tax havens play in global economy. The negative view of tax havens paints them as parasitic, poaching revenue from other jurisdictions. The positive view suggests that tax havens facilitate low-cost capital mobility, mitigating some of the distortive effects of taxation.

To date, this extensive scholarly debate has produced very little information on tax havens themselves. This is hardly surprising, since tax havens are well known to be secrecy jurisdictions. This aspect of tax havens forces scholars who write about them to resort to financial modeling or available country data – data which is rarely on point. Zucman’s book is a unique breed in this context. In order to address the role of tax havens in global economy, Zucman actually collects and interprets the necessary data. Zucman assesses the wealth held in tax havens based on a long lasting anomaly in public finance: that in the aggregate, more liabilities than assets are recorded on national balance sheets, as if a portion of global assets simply vanishes into thin air, or as Zucman put it: “were in part held by Mars.” Zucman meticulously collected macro-economic data of multiple jurisdictions, and discovered that roughly the same amount of assets missing from national balance sheets shows up as ownership interest in investment pooling vehicles (such as mutual funds) organized in tax havens.

Zucman uses his data (which he makes freely available online) to make original contributions that can roughly be divided into three parts: First, he quantifies the amount of wealth held in tax havens. Second, he explains why we should care. Third, he offers a prescription for reform. I’ll briefly discuss each in turn.

Zucman estimates the wealth held in tax havens at $7.6 trillion, or about 8% of total global wealth! This estimation is conservative, as it ignores considerable amount of wealth that is not held in financial accounts, such as works of art. The book is full of eye popping figures. For example, did you know that Luxembourg national accounts report $3.5 trillion in mutual fund shares held in the Grand Duchy, yet $1.5 trillion is unaccounted for and unreported, since all countries, in the aggregate, report their citizens only hold $2 trillion in Luxembourg mutual funds? Equally concerning is the gradual but steady increase of offshore wealth accumulation noted by Zucman, in spite of the recent adoption of measures such as FATCA, specifically aimed at addressing such issues.

This should startle us all, as Zucman clearly and painfully explains. Zucman is unapologetic in adopting the negative view of tax havens. His view is that tax havens plainly “steal” revenue from other jurisdictions. Zucman estimates that as a result of haven-based tax evasion, non-haven jurisdictions lose about $200 billion in tax revenue each year. This estimation assumes that some of the assets held in tax havens are properly reported by their owners to tax authorities. Once he throws into the mix the role of tax havens in U.S. multinationals’ income-shifting strategies, another $130 billion of lost revenue annually results.

The revenue lost through tax evasion and avoidance facilitated by tax havens is presumably compensated for by increased taxes on taxpayers who lack the wealth and sophistication to make use of tax havens. This in turn leads to increased inequality. Zucman draws a direct line between the success of tax havens and the steady increase in inequality. Thomas Piketty, who wrote the forward for Zucman’s book, concludes that such process is so destructive that is may eventually impair the basic social contract on which modern democracies are built: “everybody has to pay taxes on fair and transparent basis”. Tax havens impair both fairness and transparency, and for the first time we have data to support such argument.

As depressing as it may seem, Zucman’s last part of the book offers some cautious optimism. He broadly outlines a plan which combines a global registrar of financial assets, and a small gross tax on such assets. Such tax would function as a form of presumptive taxation. That is, owners may claim credit for such tax, but in order to do so they will have to identify themselves to authorities. He would supplement such regime with sanctions (including in the form of trade tariffs) on uncooperative jurisdictions.

As much as such plan seemed grandiose to me at first, I ended up being convinced that it is technically feasible. As Zucman explains, most financial assets are registered today in very few repositories, the combination of which will account for most true ownership of financial assets. Once a registrar is instituted, the gross tax levy becomes administratively doable. Even trade sanctions on non-cooperative jurisdictions are not far-fetched. For example, Zucman calculates that if Germany, France and Italy alone cooperate in imposing a tariff on Swiss goods, a 30% tariff rate would be enough to deny Switzerland of all benefits associated with being a tax-haven. 30% is the same level of penalty imposed on non-cooperative taxpayers by FATCA. If more jurisdictions joined forces, the necessary tariff might become substantially smaller.

While I am convinced that Zucman’s plan is technically feasible, I am less than certain that the political will to adopt such a plan exists. Nonetheless, advocacy is the first step in any political change, and Zucman’s book makes a compelling case. The book is an essential reading if only for the trove of data it contains, and for clearly explaining how the ascent of tax havens hurts everyone else. Zucman does all that in 200 pages of plain English, free of any condescending jargon, yet with all the rigor of academic research.

Cite as: Omri Marian, Tax Havens and the Rise of Inequality, JOTWELL (January 25, 2016) (reviewing Gabriel Zucman, The Hidden Wealth of Nations (2015)), http://tax.jotwell.com/tax-havens-and-the-rise-of-inequality/.
 
 

Regulatory Gray Areas, Uncertainty, and “Human Equity”

There has been a growing literature of late discussing how higher education should be funded and by whom, and Benjamin Leff and Heather Hughes make an important contribution to this conversation. One of the key questions currently being debated is whether equity-based models of higher education funding, such as income share agreements and human capital contracts, are viable and ought to be considered more seriously. It is here that Leff and Hughes interject, proposing a derivative instrument they call an “income-based repayment swap” (IBR swap) as a new equity-based method of funding legal education. The Leff-Hughes proposal is innovative and, though it poses some problems, may in fact be viable. What is more interesting, though, is the fact that they propose it at all and what this tells us about the state of the “human equity” market and its relationship to law and regulation.

Some background is in order: Since Milton Friedman and Simon Kuznets first discussed the notion in 1945, economists and others have floated the idea of the “human capital contract,” an instrument that would allow investors to provide capital to individuals in exchange for a percentage of that individual’s future earnings, in essence allowing individuals to issue a sort of equity interest in themselves. From Yale’s “tuition postponement program” of the 1970s to Portland’s “IPO Man” to athlete-tracking stocks to arrangements between baseball players and the buscones who represent them, the markets have dreamed up a number of variations on the human equity theme.

In recent years, a number of startups and organizations (including Pave, Upstart, 13th Avenue Funding, and Lumni) began to offer funding through such income share agreements. The offerings have occurred both in and outside the higher education context. However, the market for these income share agreements never really seemed to gain traction. More than one of these entities has since backtracked from offering income share agreements and shifted to traditional loans instead. The limited success of offerings of income share agreements may be due in part to competition from the government. Income-driven repayment programs offered by the government sector, which cap repayment amounts, may offer students a better proposition for higher education financing than the instruments being offered by the private sector.

But there are two other possible explanations for the sputtering of the income share agreement market. First, there are limitations in how effectively one can raise large amounts of capital from investors to fund individuals. Second, regulatory uncertainties in the treatment of income share agreements may have created frictions that have dampened the market.

The IBR swap proposed by Leff and Hughes claims to solve these latter two problems. Basically, it works as follows: the student borrows money per usual by taking out a traditional student loan. The student then enters into a contract with a financial institution (the swap counterparty) under which that counterparty agrees to make the student’s loan repayment, while the student agrees to pay the counterparty a percentage of her future income. Leff and Hughes argue that the IBR swap has a number of advantages over regular income share agreements, including curing the two limitations of income share agreements noted above: First, the swap arrangement eliminates the need to raise a large amount of capital from investors upfront, while also reducing default risks and collection costs and coordinating better with current student loan programs. Second, as a derivative, the swap eliminates many regulatory uncertainties currently surrounding income share agreements. This is because derivatives are a well-recognized category of financial instrument and have relatively determinable treatment.  Of course, the IBR swap has problems too, which Leff and Hughes note, including discriminatory pricing, which may or may not be curable by regulation.

Putting these issues aside, however, the most interesting thing about the Leff-Hughes proposal is what it illuminates about the state of the equity-based human financing market. As Diane Ring and I have argued, the regulatory uncertainties for offerings of income share agreements are nontrivial, the instruments themselves are heterogeneous, and they are best regulated on a case-by-case basis, by analogizing to existing instruments that they most closely resemble. This “regulation by analogy” has costs, however, most obviously uncertain regulatory outcomes. Such regulatory uncertainties may have contributed to the decline of the income share agreement market and incentivized some promoters to redesign their products to conform more closely to traditional debt. Leff and Hughes argue that because it is a derivative, the IBR swap eliminates many of those regulatory uncertainties and will better allow equity-based human financing to thrive.

The fact that avoidance of regulatory uncertainties is one of the key motivators of the Leff-Hughes swap proposal is telling about the state of our legal regimes and their application to new economic arrangements that don’t fit well into current categories. Human equity, by virtue of being “not debt” and also not other familiar things, falls into a regulatory gray area that makes offering platforms, investors, and issuers nervous, and this creates an incentive to retreat into familiar boxes (such as debt). Of course, assuming one is a pragmatist, how we feel about this nervousness may depend on whether we like income share agreements and other “human equity” instruments in the first place. While the chilling effects of regulatory uncertainty may seem problematic, uncertainty is not per se a bad thing where it applies the brakes on a potentially problematic transaction. Thus, the big question with respect to regulatory uncertainty and Leff and Hughes’ method of circumventing it may really be a question of one’s priors. If we dislike the idea of income share agreements or human capital contracts, then we are likely to be somewhat comfortable with the chilling effects of regulatory uncertainty and may dislike the IBR swap as a way of getting around it. This is the more fundamental question that needs to be asked.

Cite as: Shuyi Oei, Regulatory Gray Areas, Uncertainty, and “Human Equity”, JOTWELL (January 8, 2016) (reviewing Benjamin M. Leff & Heather Hughes, The Income-Based Repayment Swap: A New Method for Funding Law School Education (2015)), http://tax.jotwell.com/regulatory-gray-areas-uncertainty-and-human-equity/.
 
 

Exploring the “How” of Tax Legislation

Much of tax scholarship—past and present—focuses on the “what” of taxation: the substantive content of the tax laws, and what that content is or ought to be. As Leigh Osofsky recently observed in a delightful series of posts on PrawfsBlawg (see here, here, here, here, and here), a growing trend in tax scholarship considers tax administration, which one might describe as the “how” of taxation, or at least part of it. A separate, but related, strain of tax scholarship concerns the “how” of taxation from a different perspective, that of the tax legislative process. Two recent articles published last year offer interesting insights into this aspect of taxation: Michael Doran’s Tax Legislation in the Contemporary U.S. Congress, and Rebecca Kysar’s The ‘Shell Bill’ Game: Avoidance and the Origination Clause.

Doran styles his article as an update of our understanding of the tax legislative process. He describes the old process as a tug-of-war between “tax instrumentalism,” with Congress “us[ing] the Internal Revenue Code to pursue nontax economic and social objectives” and cluttering up the Code with “particularistic provisions setting out narrow rules and exceptions for specific constituents and interest groups,” and “tax reform,” with Congress repealing those instrumentalist provisions. Doran posits that, since the late 1980s, gridlock has become the norm. (Pp. 555-556.) At the same time, he suggests that “major items of tax legislation” adopted during that period are “strikingly ‘clean’—that is, nonparticularistic.” To support this proposition, Doran looks at 25 years of “major tax legislation,” listed in a handy table. He documents a decline in the length of tax legislation and draws from that admittedly “very rough proxy”—in addition to his own impressions—that contemporary tax legislation is simply less particularistic than in the past.

Doran also documents past explorations of the tax legislative process as divided between “traditional policy” accounts that “explain tax legislation almost exclusively in policy terms” and “legislator-motivation” accounts that “explain tax legislation in terms of legislator motivations.” (P. 559.) He argues that neither of these descriptions adequately accounts for contemporary trends of congressional gridlock and cleaner, less particularistic tax legislation. Doran endeavors to develop a more nuanced account that appreciates

  • the role of exogenous events (overweighted by traditional policy accounts but underweighted by legislator motivation accounts);
  • the multiplicity of legislator motivations (including re-election, institutional power and prestige, and good policy, but generally rejecting personal enrichment);
  • legislative organization (defined as “the institutional structures by which individual legislators collectively determine the processes for their policymaking activity);
  • and also takes into account
  • the influence of polarization between Republicans and Democrats;
  • strong cohesion within those groups;
  • the re-establishment of centralized chamber management, particularly as managerial control in the House of Representatives has shifted from committee chairs to the Speaker of the House; and
  • the relaxation of the congressional budget process via the expiration of PAYGO rules and greater use of the Congressional Budget Act’s reconciliation mechanism.

Doran does not seem to give any one of the elements he discusses greater rank or weight as a contributor, leading one to conclude instead that contemporary trends in tax legislation defy easy labels or explanations. Doran also acknowledges that his account offers neither a positive nor a normative theory of the tax legislative process. Regardless, Doran’s article is nicely rich as a description of the context and environment of contemporary tax legislation.

Kysar’s article approaches the tax legislative process from an entirely different angle—that of the Constitution’s Origination Clause. The Origination Clause requires legislation that raises government revenue to originate in the House of Representatives. The Clause gives the Senate the power to amend such legislation, however, and the Senate has interpreted that power broadly as allowing it to strike the language of the House bill entirely and replace that language with the Senate’s own, completely different revenue bill. Hence “the ‘shell bill’ game” of Kysar’s title. The Affordable Care Act was adopted this way, and Kysar’s paper is at least partly a defense of that legislation against claims that the ACA violates the Origination Clause. But as Kysar notes, Congress used the same technique in adopting the American Taxpayer Relief Act of 2012, the Emergency Economic Stabilization Act of 2008, and “even” the Tax Reform Act of 1986. Hence, her defense of the ACA’s constitutionality extends beyond that legislation. (As an interesting side note, the table of major tax legislation in Michael Doran’s article includes the American Taxpayer Relief Act and the Tax Reform Act, but not the Affordable Care Act or the Emergency Economic Stabilization Act. An explanatory footnote distinguishes “major tax legislation” from legislation with a large number of tax provisions but nontax central policy objectives. One wonders whether including the latter would alter the picture Doran presents.)

According to Kysar, although the Supreme Court has claimed a judicial role in policing congressional compliance with the Origination Clause, the Court’s jurisprudence also demonstrates real reluctance to intrude upon the legislative process. The Court has rejected a searching inquiry into the purposes of legislation—concluding that any legislation that funds the general treasury falls within the Clause, and declining to distinguish between regulatory and revenue-raising taxes or to impose a germaneness requirement on the Senate’s amendment power. The Court’s jurisprudence has thus opened the door for the Senate’s expansive reading of its amendment power. Kysar goes on to defend this “legislative process avoidance doctrine”—“that courts should construe ambiguous constitutional provisions in a manner that avoids searching review of the legislative process”(P. 698.)—as a matter of constitutional theory, focusing particularly on separation of powers principles as embodied in the Rulemaking Clause and the political question doctrine.

One does not have to be a process-and-procedure guru to appreciate that how Congress makes the tax laws substantially affects their substance. Although Doran and Kysar approach the tax legislative process from different directions, their articles both offer tremendous insights into the “how” aspect of taxation. Hopefully, their efforts will inspire others to follow suit.

Cite as: Kristin Hickman, Exploring the “How” of Tax Legislation, JOTWELL (November 16, 2015) (reviewing Michael Doran, Tax Legislation in the Contemporary U.S. Congress, 67 Tax L. Rev. 555 (2014), available at SSRN and Rebecca M. Kysar, The ‘Shell Bill’ Game: Avoidance and the Origination Clause, 91 Wash. U. L. Rev 659 (2014)), http://tax.jotwell.com/?p=1916.
 
 

A New Tax Policy Criterion: Stability

Jason Oh, Will Tax Reform Be Stable?, UCLA School of Law, Working Paper Series Law & Econ. Paper No. 15-16 (2015), available at SSRN.

Fairness, efficiency, simplicity, and revenue-raising capability (not necessarily in that order) have long been the hallmarks of good tax policy. In a forthcoming article, Will Tax Reform Be Stable?, Jason Oh introduces a new criterion: stability. Oh persuasively argues that certain tax reform may be more or less stable than others, and contends that it is possible to analyze and predict stability. Moreover, as Oh explains, understanding stability is essential in order to determine the durability of any good (or bad) tax reform.

This article is impressive because of both its potential importance and its ambition. Oh is right, of course, that, all else equal, a reform that quickly unravels is unlikely to be as impactful as one that does not. In this regard, the article’s insights are akin in importance to the realization that taxpayers will change their behavior in response to legislation (for instance, by decreasing their sales of capital assets if the capital gains tax goes up), a realization that led to the practice of dynamic scoring of legislation. In pushing us to recognize a new dimension for evaluating tax policy, Oh has to color outside the familiar lines of existing debates. His willingness and ability to do so merits attention, and may well garner it in policymaking circles.

The article begins by carefully employing political science methodology in order to predict how liberal or conservative various tax policy positions are, and when legislative action is possible, based on the relationship between such policies and the preference of legislative pivots. The article then explores how such insights are crucial for analyzing the stability of tax reform. While a given reform package may bundle together various individual pieces of reform (such as a rate reduction for corporate taxes, a rate reduction for individual income taxes, and a rate increase for capital gains), in the future such pieces of reform will not necessarily be viewed together. Once unbundled, Oh argues that each piece of reform is going to be more or less stable, based on how extreme such a policy is, relative to the preferences of legislative pivots. Moreover, the article argues that certain tax reforms predictably will be more extreme than others and that, as a result, it is possible to predict, at the time a tax reform package is put together, which pieces are most likely to unravel.

The normative implications of this analysis are important. First, it suggests that policymakers should not assume that the pieces of tax reform packages will inextricably stay tied together. Rather, pieces of reform which, when viewed individually, are extreme, should be viewed as less stable pieces of reform. Indeed, although Oh focuses on extremity relative to legislative pivots, individual pieces of a reform may be unstable for reasons other than the extreme nature of a given reform piece relative to legislative pivots. In any event, Oh’s analysis underscores how the purported efficiency, simplicity, and revenue-raising justifications for an unstable reform should be discounted by the instability of the reform itself.

Recognizing the stability dimension also can help legislators craft more stable reform packages, or at least recognize the likely transience of unstable reform packages. For instance, Oh suggests that limiting the value of a variety of popular tax expenditures is likely to be more stable than an outright repeal of a popular tax expenditure, such as the mortgage interest deduction. The analysis also offers general lessons for how to make reform more stable. For instance, Oh explains that bridging compromises (which move existing policies on both sides more toward the legislative center) are likely to be more stable than polarizing compromises (which provide each side with extreme gains). Oh also explores how mechanisms that one might think would be stability-enhancing, such as supermajority requirements, likely increase stability less than one would expect.

To be sure, this article raises many questions. For instance, the article explains that extreme policies get enacted to begin with by explaining that such extreme policies, when coupled with other reforms, are more likely to get enacted. The question, then, is how to predict what reforms will stick when they will inevitably be coupled with unknowable, future, possible reforms, and political and economic conditions. Moreover, one wonders whether the very assessment of certain policies as more or less stable is more likely to make them so. This latter point is not so much a concern about the stability analysis itself, but rather a concern about how such analysis may be used, or even manipulated in the future, just as dynamic scoring is vulnerable to manipulation. In any event, Oh is careful to acknowledge that stability analysis is not going to be precise or uncontroversial. Rather, he persuasively argues that stability should be part of the conversation.

 

 

Cite as: Leigh Osofsky, A New Tax Policy Criterion: Stability, JOTWELL (November 12, 2015) (reviewing Jason Oh, Will Tax Reform Be Stable?, UCLA School of Law, Working Paper Series Law & Econ. Paper No. 15-16 (2015), available at SSRN), http://tax.jotwell.com/a-new-tax-policy-criterion-stability-2/.
 
 

Nobody’s Perfect, Not Even the IRS

Leigh Osofsky, The Case for Categorical Nonenforcement, 69 Tax L. Rev. (forthcoming, 2015), available at SSRN.

We tax academics in law schools have an affinity for the logical operation of rules. We could not remain immersed in the intricacies of the income tax—and therefore remain competent as scholars and teachers—if we did not. Considerable resources have been devoted to the elaboration of rules developed through the logical application of a few basic principles. These principles, including those associated with the Haig-Simons definition of income and those governing accounting for capital, allow us to view this body of law as determinative, and thus capable of uniform application. In other words, the income tax system has long used this logic as the basis of its claim to rule-of-law legitimacy. The resulting set of rules is elaborate, indeed, it often seems as if it is among the most elaborate sets of rules ever devised.

But as specialists engaged in this elaboration, we must also understand that a legitimate tax system cannot be maintained merely by the articulation of these rules. The rules themselves will never be self-enforcing. And the mere elaboration of additional rules will never close the gap between the revenue that would be collected under a perfect application of the rules and the revenue that will actually be collected.

Leigh Osofsky’s article, The Case for Categorical Nonenforcement, soon to appear in the Tax Law Review, provides an opportunity to explore this tension between the formal elaboration of the tax law and the capacity of the Internal Revenue Service to enforce it. The tension is easily seen throughout the actual operation of the income tax law, whether one looks at the actual treatment of large partnerships, frequent flyer miles, fringe benefits claimed by non-employees, or many other provisions.

At bottom, Osofsky argues that the IRS can and should admit that it cannot always do what it has been asked to do. Stated in this way, the proposition is incontrovertible. The administration of the tax law requires far more than the mere articulation of rules. It requires communication of these rules not only to the taxpayers to whom they will apply, but also to the bureaucrats who must ensure that the rules are consistently applied. Given that every revenue officer cannot know every relevant tax rule, much less every relevant fact relating to a taxpayer’s liability under those rules, tax administration must inevitably fall short.

How then can the income tax, as actually enforced by the IRS, retain its claim to legitimacy? Borrowing from the literature on administrative processes more generally, Osofsky offers three routes to legitimacy: steps that enhance political accountability, steps that promote civic deliberation and popular engagement, and steps that reduce the arbitrariness of the ultimate outcomes. Her primary claim is that categorical nonenforcement—by which she means public declarations that the tax consequences of some aspects of taxpayer behavior will simply not be explored—will enhance the legitimacy of the IRS rather than detract from it.

This conclusion has to be correct. Surely it is better that Congress and the public know where the weak spots in tax enforcement are. Osofsky’s contribution does not provide definitive answers to when and how these confessions should be made. But it should help us all in developing more realistic approaches to tax administration.

Cite as: Charlotte Crane, Nobody’s Perfect, Not Even the IRS, JOTWELL (October 16, 2015) (reviewing Leigh Osofsky, The Case for Categorical Nonenforcement, 69 Tax L. Rev. (forthcoming, 2015), available at SSRN), http://tax.jotwell.com/nobodys-perfect-not-even-the-irs/.
 
 

Can the Smart Market Solve the Problem of Undertaxed Intangibles?

Calvin H. Johnson, Organizational Capital: The Most Important Unsettling Issue in Tax, 148 Tax Notes 667 (2015), available at SSRN.

In his article, Organizational Capital: The Most Important Unsettling Issue in Tax, Professor Calvin Johnson argues that the undertaxation of intangibles is “the most important, most damaging issue in tax policy” and proposes a radical solution to remedy the problem: a new tax based on the trading value of public companies.

As Johnson explains, intangibles are undertaxed because businesses deduct—rather than capitalize—most expenditures related to self-created intangibles. At the same time, businesses report income from self-created intangibles over a period of years. As Cary Brown demonstrated, allowing an immediate deduction for expenditures that produce future income is the equivalent of exempting the income from tax. Thus, much income from self-created intangibles is in effect tax free.

The deduction for self-created intangibles contravenes the fundamental income tax principle, articulated in INDOPCO v. Commissioner and other Supreme Court jurisprudence, that expenditures producing future benefits should be capitalized and amortized over time as income is realized. As Johnson notes, Treasury regulations issued during the George W. Bush administration severely undermine the fundamental capitalization principle. The regulations so blatantly flout the capitalization principle that commentators have dubbed them the “anti-INDOPCO” regulations and have questioned their legality. The regulations, along with statutory provisions, lower court case law and other administrative guidance, allow taxpayers to deduct almost all costs of self-created intangibles.

The magnitude of the problem is enormous. By some estimates, $1 trillion or more of investments in intangibles is expensed rather than capitalized under the national accounting rules that measure economic productivity, indicating that a comparably large dollar amount is deducted for tax purposes. The 2014 Senate Finance Committee and House Ways & Means Committee proposals to require capitalization of just two types of costs—research and development and advertising—would have raised an estimated $362 billion in tax revenues over ten years. A more comprehensive capitalization requirement for self-created intangibles would increase tax revenues by several times that estimate.

The undertaxation of intangibles benefits some companies and industries more than others. Johnson cites Google and Microsoft as examples of companies whose self-created intangible assets, as evidenced by market capitalization, are worth hundreds of billions of dollars, but whose balance sheets show none of these assets. In large part because these companies deduct the costs of developing their intangible assets, Johnson argues, their effective rate of tax is a small fraction of the nominal 35 percent rate. In contrast, companies like Macy’s, whose market value closely approximates the assets on its balance sheet, pay tax at or near the nominal rate.

This disparity in effective tax rates leads to what Johnson considers to be the most serious problem created by the undertaxation of intangibles: distortions in investment decisions that produce inefficient misallocations of capital. Investors choose to invest Google rather than Macy’s, even if Macy’s would be a better investment the absence of Google’s tax advantage. Businesses choose to self-create intangibles rather than to acquire them in the market because they can deduct the costs of self-created intangibles, while they must capitalize acquired intangibles, even where, in the absence of tax considerations, it would be more efficient to acquire them in the market. These distortions in investment decisions reduce economic productivity and are costly to society as a whole.

To remedy the problem of undertaxed intangibles, I have proposed to capitalize and amortize over five years a broad array of costs related to the creation of intangibles, including research and development, advertising and market research, worker training, executive compensation, and strategic planning. Johnson argues that such a cost recovery approach would encounter many practical difficulties, such as matching specific costs with identifiable assets and determining accurate recovery periods. In addition, and perhaps more importantly, Johnson observes that such an approach, even if it could be implemented with reasonable accuracy, would fail to tax what he calls “organizational capital,” by which he means the value of intangibles over and above the costs related to their production. Some components of organizational capital that Johnson identifies are (1) the ability to access public markets and (2) the first-mover advantages for companies like Microsoft.

Johnson proposes a more radical solution to the problem of undertaxed intangibles: a new tax based on the trading value of public companies. He argues that his proposal would both avoid the practical problems of a cost recovery approach to intangibles taxation and capture the value of all intangibles including organizational capital. His proposal would essentially tax intangibles on a mark-to-market basis.

Johnson’s proposal is intriguing and theoretically sound but raises many design and implementation questions. Johnson provides scant detail about how the tax rate under his proposed tax would be calibrated, other than to say that a rate equivalent to the current tax rate on corporate income could be extrapolated using market capitalization and an assumed cost of capital interest rate. In addition, as Johnson concedes, a tax based on trading values would obviously work only for publicly traded companies, which constitute a very small percentage of businesses. Under Johnson’s proposal, the vast majority of businesses, which are are privately held, would not be subject to the new tax. For these businesses, the problem of undertaxed intangibles would have to be addressed in other ways such as the cost recovery solution I have proposed. Finally, Johnson’s proposal places faith in what he calls the “smart market,” despite indications that the market may not be so smart. However, as Johnson points out, the current tax and accounting treatment of intangibles is so deeply flawed that even an imprecise solution would almost certainly be an improvement.

Whether Johnson’s smart market proposal can better address the problem of undertaxed intangibles than a more conventional cost recovery approach is open to debate. Either way, however, I wholeheartedly agree with Johnson that it is a serious problem that deserves the attention of law and policy makers and I applaud his creative and bold proposal.

Cite as: Lily Kahng, Can the Smart Market Solve the Problem of Undertaxed Intangibles?, JOTWELL (September 25, 2015) (reviewing Calvin H. Johnson, Organizational Capital: The Most Important Unsettling Issue in Tax, 148 Tax Notes 667 (2015), available at SSRN), http://tax.jotwell.com/can-the-smart-market-solve-the-problem-of-undertaxed-intangibles/.
 
 

Using the Tax Code to Help Universities Put Big-Time College Sports in (Some) Perspective

Richard Schmalbeck, Ending the Sweetheart Deal between Big-Time College Sports and the Tax SystemDuke Law School Public Law & Legal Theory Paper (2014).

The modern university is a precious institution, providing a wide variety of benefits to society. But it is constantly in danger of being turned into something far less valuable, ironically by the very people who claim that “creating value”—but only in a very limited sense—should be the narrow goal of higher education. In addition, through political channels as well as financial incentives, universities are pressured to discontinue certain lines of research, to violate academic freedom, and in a variety of other ways to undermine independent academic inquiry. In the face of these ubiquitous and increasing pressures, it is essential that universities continue to defend their traditional role in society.

One quintessentially American collegiate tradition, however, has recently gained disproportionate influence in our universities. Big-time college sports programs have become dangerously influential on far too many campuses. It is important to remember that universities do not need to derive funds from operating lucrative sports programs. Many great American universities do not do so (for example, NYU, University of Chicago, and Carnegie Mellon), while others do so at lower levels of competition (the Ivy League, elite liberal arts colleges, and so on). Nevertheless, far too many top-flight institutions have increasingly committed themselves to being competitive in the sports that generate large amounts of revenue from television and merchandising: football and men’s basketball. That most of those institutions actually lose money on those “revenue sports” has not discouraged more and more universities from trying to win a piece of that revenue pie. The illusory promise of big money from sports has created many problems for American universities, but many proposals to address those problems are deeply misguided. In particular, as I have written (e.g., here and here), recent calls to allow cash payments to players would move us in exactly the wrong direction.

In Ending the Sweetheart Deal between Big-Time College Sports and the Tax System, Professor Richard Schmalbeck takes a different tack, explaining how the current federal tax system exacerbates the problem and increases the incentives for universities to become ever more ensnared in the big-time sports trap. He describes two tax provisions—universities not having to pay the Unrelated Business Income Tax” (UBIT) on their sports-related profits, and a provision allowing a partial deduction for barely disguised added charges for admission to games—that are “egregiously bad,” and he concludes that “these defects amount to an implicit tax subsidy of college sports that is neither healthy nor in any way justified.” Because of space limitations, I will focus here only on the first provision. Suffice it to say that Professor Schmalbeck’s arguments regarding the second provision are as strong as those for the first, which is to say very strong indeed.

The Internal Revenue Code currently permits universities to run their athletic departments like for-profit businesses, without requiring them to pay taxes on “unrelated business income.” Nonprofit tax status generally means that an institution need not pay taxes in a given year, even in years when its revenues exceed its expenditures, so long as the institution meets various requirements imposed by the tax code and Treasury Regulations. There are, for example, limitations on compensation for the institution’s officers, minimum requirements for disbursals of funds, and so on.

What raises Professor Schmalbeck’s ire (and mine) is not that universities are running side businesses. Any nonprofit can do that, if it likes, so long as it pays UBIT. These rules generally should also apply to public universities that run unrelated businesses. Professor Schmalbeck notes, however, that Congress, in enacting UBIT in 1950, went to great pains to make clear that football and basketball could not possibly be subject to the tax. The particular claim by supporters of these giveaways was that big-time sports are meaningfully “related” to the nonprofit mission of the American university. The IRS followed suit, and there is little doubt that any effort today to tax the business activities of the big-time athletic departments would send politicians into a frenzy, defending dear old State U. from the supposedly grasping hands of the tax man.

Professor Schmalbeck’s analysis is especially strong in the section where he challenges a later IRS ruling that “the educational purposes served by exhibiting a game before an audience that is physically present and exhibiting the game on television or radio before a much larger audience are substantially similar.” One can almost hear Professor Schmalbeck shout, “Are you kidding me?!!” He lays out all of the ways in which entertaining the in-person audience might be in some way “related” to the educational purpose of the university, although those connections are (as he would be the first to admit) already pushing the limits of credulity. For example, although it is true that members of a university’s community who are “loyal fans” might well commit large amounts of money to watching their favorite teams in person, so do fans of the very openly profitable New York Yankees and Dallas Cowboys.

But as much of a stretch as all of that might be, the argument for calling the television audience similarly “related” to the educational purpose is laughable. The typical viewer is unlikely to have “any interest in the educational enterprise that is associated with the universities whose student-athletes are on the field.” Professor Schmalbeck is too polite to directly mock the claim that the TV exposure builds “school spirit,” and instead addresses the argument seriously, noting that the only evidence to support that conclusion merely suggests that athletic success helps a tiny handful of schools increase their applications on a very temporary basis.

Moreover, he argues that we cannot assume that it is beneficial to the university “that a few applicants whose interest in the university was based largely on its athletic success were displacing a similar number of applicants who were almost as well-qualified, and had been attracted to the university by its other qualities.” Finally, he finishes by noting that “generating greater name recognition would not seem to be, in itself, sufficiently related to the university’s exempt purposes to take an activity out of the range of the unrelated business income tax.” He humorously describes various ways in which a university could connect its name to for-profit activities, which would enhance the name recognition of the university, but that cannot possibly be “related” to the exempt purpose in any meaningful sense.

Importantly, Professor Schmalbeck does not overstate his case. He concedes that the net impact of the two changes that he proposes would not suddenly turn big-time college sports into small-time entertainment—although he convincingly argues that the effects could be noticeable and beneficial. He also concedes that, as noted above, many politicians will line up against any such proposed reforms. In the end, however, he concludes that the battle would be worth fighting because the reforms would “improve the coherence and fairness of the federal income tax.”

I wholeheartedly agree. Even so, my reason for supporting Professor Schmalbeck’s proposal has little to do with improving the tax code, as laudable a goal as that might be. My concern is with the American university system, which already has enough trouble fighting the many corrupting influences that will always swirl around it. We should pursue any opportunity to reduce one of the most corrupting of those influences, even just a little bit. Whether it is for the good of the tax code, or the good of universities, however, Professor Schmalbeck’s proposals deserve to be taken seriously.

Cite as: Neil H. Buchanan, Using the Tax Code to Help Universities Put Big-Time College Sports in (Some) Perspective, JOTWELL (September 11, 2015) (reviewing Richard Schmalbeck, Ending the Sweetheart Deal between Big-Time College Sports and the Tax System, Duke Law School Public Law & Legal Theory Paper (2014)), http://tax.jotwell.com/using-the-tax-code-to-help-universities-put-big-time-college-sports-in-some-perspective/.
 
 

Who Should be Invited to the Tax Dinner?: Another Perspective on the Role of Tax Professionals

Gillian Brock & Hamish Russell, Abusive Tax Avoidance and Institutional Corruption: The Responsibilities of Tax Professionals, 56 Edmond J. Safra Working Paper, available at SSRN.

As I began reading Gillian Brock and Hamish Russell’s new article entitled Abusive Tax Avoidance and Institutional Corruption: The Responsibilities of Tax Professionals, a colleague shared the following cartoon with me:

xkcd

Arbitrage by xkcd.com. Reprinted under a Creative Commons License.

Not surprisingly, I immediately interpreted the cartoon in light of Brock and Russell’s article: the functioning of the tax system depends, in part on our acknowledgement that certain behavior is important to its successful operation, even though that behavior may not have been formalized explicitly into the law. Of course there are differences between absconding with the “free” restaurant chips and facilitating abusive tax avoidance, but the essence of the critique seemed to be the same. Systems and relationships that depend entirely upon clearly articulated rules of engagement without any overlay of moral responsibility face serious challenges. Can we articulate an appropriate moral standard by positing, as Brock and Russell suggest, a world in which our conduct and its implications are widely known? One in which, for example, all diners and restaurants see the abuse of the free chips system.

Unfortunately, while it may be relatively easy to identify and agree upon the moral framework for dining out, it has been more difficult to establish a shared vision of the moral responsibility for curbing abusive tax avoidance. But Brock and Russell seek to ignite this conversation through their fresh perspective.

Ethical discussions are not absent from gatherings of tax professionals. Many annual conferences devote a portion of the program to a presentation on ethics in tax practice (perhaps encouraged by the attendees’ need to satisfy state and other licensing requirements). The programs, however, tend to focus on understanding how the ethical rules (e.g., ABA Model Rules, Circular 230, AICPA Code of Professional Conduct, etc.) would or might apply to various scenarios. To be sure, this analysis includes room for the tax advisor to consider moral or ethical concerns in offering advice, apart from what is actually required by the law. For example, Model Rule 2.1 states in part: “In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the client’s situation.” Nevertheless, a broader examination of moral duties, outside the applicable regulations governing advisors, is usually beyond the scope of such panels. This observation is not a critique of the panels (some of which I have had the pleasure to join), but rather an understanding of their role. They predominantly provide guidance for practicing tax advisors who want to understand and comply with current law regulating their conduct. These are essential goals and their regular reinforcement is invaluable. Brock and Russell, however, enter the arena from a different perspective, and take the analysis further.

Prompted by evidence of significant tax evasion and avoidance across the globe, Brock and Russell seek to demonstrate how and why tax professional have a distinct, though not exclusive, responsibility to “help reduce the incidence of abusive tax avoidance and remedy its negative consequences.” In making this argument, Brock and Russell track the IRS and GAO use of the term “abusive tax avoidance”, reaching beyond evasion and into the realm of transactions in which tax advisors have played a central role in recent decades. Such abusive tax avoidance is costly to societies, and it is through a framing of this cost that Brock and Russell specify the source and the nature of tax advisors’ moral responsibility to remedy the problem of abusive tax avoidance.

Rather than enter the conversation through a study of the existing requirements imposed on tax advisors or through exploration of the lawyer-client relationship, Brock and Russell start with an account of institutional corruption and institutional integrity. Brock and Russell argue that institutional corruption exists when four conditions are met: (1) the institution fails to achieve its purpose in a fair and effective manner; (2) certain actors have improper influence over the institution; (3) public confidence in the institution is not warranted; and (4) public confidence in the institution would not survive a careful scrutiny of the institution. In applying this framework to taxation, institutional corruption would exist in a fiscal institution if: (1) it failed to fairly and effectively collect revenue; (2) certain actors had improper influence over tax policy or tax operations; (3) public confidence was unwarranted given the existence of points 1 and 2; and (4) public confidence in the fiscal institution would not survive scrutiny of the institution.

Using this framework of institutional corruption, Brock and Russell consider a number of well-known cases of abusive tax avoidance and evaluate the roles played by tax lawyers, accountants and financial advisors in shaping the law, designing the strategies, implementing the strategies, and in some cases, defending the strategies. Ultimately, Brock and Russell argue that those who have caused, have benefitted from, and have the capacity to fix the situation bear a special duty to undertake reform efforts. Brock and Russell are cognizant of the likely challenges to their framework (in particular critiques grounded in the traditionally recognized duties that lawyers owe clients). But their primary mission in this article is to provide an alternative framing of this entire debate – one that begins with notions of integrity and corruption in fiscal institutions, and concludes with a powerful claim that professionals who have contributed to abusive tax avoidance (and thus potential institutional corruption) bear a special duty to “engage in collective action to support necessary changes to practices or norms in their professions.” Brock and Russell’s fresh take on defining the ethical and moral duties of tax professionals provides a valuable contribution to the literature and one that I hope they continue to develop.

Cite as: Diane Ring, Who Should be Invited to the Tax Dinner?: Another Perspective on the Role of Tax Professionals, JOTWELL (July 28, 2015) (reviewing Gillian Brock & Hamish Russell, Abusive Tax Avoidance and Institutional Corruption: The Responsibilities of Tax Professionals, 56 Edmond J. Safra Working Paper, available at SSRN), http://tax.jotwell.com/who-should-be-invited-to-the-tax-dinner-another-perspective-on-the-role-of-tax-professionals/.
 
 

Equity and Efficiency in Rule Design

Great arguments aren’t always right, but they should be bold, persuasive, and force the scholarly community to respond by testing the arguments’ logic and limitations. In recent years, there are few arguments that have been more generative of thoughtful scholarship than Kaplow and Shavell’s claim that income redistribution should be done solely through the system of taxes and transfers and that legal rules should be chosen solely for their efficiency properties.1  This conclusion is instinctively repugnant to many scholars outside of the law and economics tradition, and surprising to many within it. Yet, first rank economists that they are, Kaplow and Shavell’s logic, at least under the assumptions of the model they use to make their argument, is unassailable.

But, what Kaplow and Shavell’s logic proves and what it has often been taken to prove are two very different things. Although many excellent scholars have offered incisive critiques of the Kaplow and Shavell result, Zach Liscow’s recent note in the Yale Law Journal does as fine a job as I’ve seen of both identifying the reason for this difference and arguing from within a welfarist framework that equitable considerations should apply to legal rules too. The note is admirable in its accessibility, clarity, and rigor. I would include it on the reading list for any law and economics or tax policy seminar that addressed the merits of redistribution through the tax and transfer system.

The slip between what Kaplow and Shavell prove and the more general claim that legal rules should not be used to redistribute income, arises from the fact that Kapow and Shavell consider only legal rules that redistribute in in the same way as the income tax system, by making the amount of damages conditional on the incomes of the affected parties. Liscow asks, instead: what if we choose our rules such that liability varies with a different factor, such as the incomes of the parties that are generally affected (not necessarily the incomes of the parties involved in any particular dispute)?

Liscow first asks us to consider the choice between a strict liability rule for pollution and a negligence rule, where both rules induce the efficient level of care by the polluter. The difference is that under a strict liability rule the polluter bears the cost of the harm and under a negligence rule the party that is harmed bears the cost. If polluters tend to have higher pre-tax incomes than the people being harmed, then by choosing strict liability we induce the efficient level of pollution and redistribute income to the people harmed. This allows us to reduce the amount of distortionary redistribution that would need to take place through the tax and transfer system if we had a negligence rule and thereby increases both efficiency and welfare.

Choosing among equally efficient rules, when redistribution comes for free, is the easy case. But Liscow goes further to specify the circumstances in which even legal rules that are inefficient can increase overall efficiency by redistributing income at a lower distortion cost than the tax system. He then argues that the legal system has certain institutional advantages over the tax system at identifying persons to whom we want to redistribute resources and can, for that reason, play a role in maximizing social welfare. Whereas the income tax conditions tax liability on income, which is only an imperfect proxy for ability-to-pay and other traits we actually care about from a social welfare perspective, legal rules may be able to incorporate additional information that is correlated with these traits and help target redistribution.

More generally, Liscow’s contribution can be seen as reminding us of the complex and sometimes unpredictable interconnectedness of policies in a second-best world. Once we move away from a fantastical world of head taxes or endowment taxes, and conditions of perfect information and perfect competition, the arithmetic of distortions changes such that adding one distortion to another could equal two distortions, or something smaller, or something bigger. In some sense, the genealogy of this insight goes back at least to Lipsey and Lancaster,2  but the importance of this category of challenges to myopic welfare analysis is often overlooked and Liscow provides a fresh and compelling application. The note is essential, and enjoyable, reading for anyone who seriously engages with Kaplow and Shavell’s argument.



  1. Louis Kaplow and Steven Shavell, Why The Legal System Is Less Efficient Than The Income Tax In Redistributing Income, 23 J. Legal Stud. 667 (1994). []
  2. Richard G. Lipsey and Kelvin Lancaster, The General Theory of Second Best, 24 The Review of Economic Studies 11 (1956). []
Cite as: Andrew Hayashi, Equity and Efficiency in Rule Design, JOTWELL (June 29, 2015) (reviewing Zachary D. Liscow, Reducing Inequality on the Cheap: When Legal Rule Design Should Incorporate Equity as Well as Efficiency, 127 Yale L.J. 2478 (2014)), http://tax.jotwell.com/equity-and-efficiency-in-rule-design/.
 
 

Discrimination Against Interstate Commerce vs. Double Taxation

For good reasons on balance, the best academic work in tax (and other) law has moved far away in recent decades from focusing primarily on which answers to particular questions are legally correct. Not only have scholars wanted to pursue larger game than just the current, inevitably flawed, state of the law, but it is often hard to say what “legal correctness” means. Writing about policy, rather than just about legal correctness, not only broadens the menu of possible topics, but permits one to devise clearer criteria for assessing the merits of competing arguments.

There is, however, a downside to thus broadening, diversifying, and deepening the menu of favored topics. Having a positive influence on real world legal outcomes, especially if one can get there without having to tailor one’s analysis or conclusions in the manner of either a politician or a hired litigator, is both good in itself and something that we ought to care about—both as lawyers and as academics—as a matter of professional responsibility.

It is therefore a great thing to see tax academics and other members of the broader tax policy community actually swaying the outcome of a Supreme Court case in a good way. This happened in Comptroller v. Wynne, decided on May 18, 2015, in which an unusual Supreme Court majority composed of three conservatives (Alito, Kennedy, and Roberts) and two liberals (Breyer and Sotomayor) converged to strike down a Maryland income tax rule as discriminatory against interstate commerce. The majority opinion not only extensively cited work by tax scholars, but really relied on it, not just to decide the case at hand, but also to clarify the often-vexed law of how one should define discrimination under the dormant commerce clause. The Court drew on two amicus briefs (one by Michael Knoll and Ruth Mason and the other lead-authored by Alan Viard) which arose out of and/or applied academic work by both sets of authors,1  and gave both coherent economic content and usable formulations to the potentially nebulous idea of tax discrimination.

Why might it be desirable for the courts to strike down clear instances of interstate tax discrimination? It’s well-known that, as soon as two jurisdictions’ income tax systems differ even just in rates, perfect tax neutrality is unattainable as between economic activity in any one jurisdiction and both that which is inbound and that which is outbound from its perspective. So the courts cannot mandate full neutrality, short of requiring complete uniformity between tax systems. Nor can they police all interactions between jurisdictions’ tax rules that might happen to disfavor interstate commerce in particular instances, simply due to incomplete harmonization between the jurisdictions’ rules.

However, there is reason to think that jurisdictions will sometimes be inclined to impose undue burdens on cross-border activity, whether because outsiders can’t vote or due to the set of internal collective action problems that may yield protectionist legislation even when this harms local consumers. Thus, assuming a good enough test for discrimination against interstate commerce, the courts can potentially improve public policy by applying it. Unfortunately, reflecting the difficulty of the underlying conceptual issues, courts have often done quite poorly at devising workable tests.

In this regard, as Mason and Knoll have written, one good tool that actually can be found in existing Supreme Court jurisprudence is the “internal consistency” test. Here one asks, about a tax rule such as that which Maryland applied in the Wynne case: If all jurisdictions applied the same rule as this one, would cross-border activity be disfavored? In illustration, suppose New York taxes all outbound investment but no inbound investment, while New Jersey taxes all inbound investment but no outbound investment. While this would be unfortunate for New York-to-New Jersey investment, it wouldn’t violate internal consistency. Use of the test may be motivated by the points that (a) there might be good reason for a state’s focusing either just on inbound or just on outbound investment, and (b) neither New York nor New Jersey is inherently to blame if the other state happened to make an opposite choice.

As generalized by Viard, one can put the point roughly as follows. Just by looking at one jurisdiction’s set of rules, one can discern discrimination against interstate commerce if the sum of (a) the tax rate on outsiders’ in-state income and (b) the tax rate on residents’ out-of-state income exceeds (c) the tax rate on insiders’ in-state income.2  Thus, for example, if Maryland were to tax purely in-state income at 5 percent, and all inbound and outbound income at 3 percent, it would be discriminating against interstate commerce, as two identical Marylands would levy a 6 percent combined rate on cross-border activity.

In actual practice, what Maryland did was combine fully taxing inbound income by nonresidents, with partly taxing outbound income by residents. For the latter, Maryland allowed a credit for taxes levied by other states, but only for a portion of the Maryland income tax liability. While the Maryland Court of Appeals had struck down this approach as discriminatory against interstate commerce, its ground for doing so was incoherent, reflecting an aversion to “double taxation” that the Supreme Court was unlikely to affirm. Conceptually, what matters is the overall tax burden on economic activity, not how many times one is taxed. And given the conundrum illustrated by the New York / New Jersey example above (which state should be treated as the one that’s “wrong”?), it is hard to base a workable tax discrimination test on the supposed principle of preventing double taxation.

The Supreme Court’s test is better. It required Maryland to devise a nondiscriminatory approach of some kind, based on the internal consistency / total tax burden analysis advanced by Knoll and Mason and by Viard and co-authors, and not necessarily including the use of tax credits. Considered in isolation, the result in Maryland Comptroller v. Wynne is surely of only modest importance. But the authors of the above amicus briefs, by effectively deploying their professional expertise regarding coherent legal and economic analysis in the service of improving the law, have not only put dormant commerce clause analysis generally on a better path, but offered an inspiring example to the rest of us.



  1. See Ruth Mason, Made in America for European Tax: The Internal Consistency Test, 49 B.C. L. Rev. 1277 (2008); Alan D. Viard, The Real Issue in Wynne is Discrimination, Not Double Taxation, State Tax Notes, January 15, 2015. []
  2. Viard, supra, at 46. As Viard explains, the computation must be slightly adjusted to reflect tax rate interactions. []
Cite as: Daniel Shaviro, Discrimination Against Interstate Commerce vs. Double Taxation, JOTWELL (May 27, 2015) (reviewing Michael Knoll and Ruth Mason, What Is Tax Discrimination?, 121 Yale L.J. 1014 (2012) and Ryan Lirette and Alan D. Viard, State Taxation of Interstate Commerce and Income Flows: The Economics of Neutrality (American Enterprise Institute Economic Policy Working Paper 2014-07, 2014)), http://tax.jotwell.com/discrimination-against-interstate-commerce-vs-double-taxation.