Yearly Archives: 2016
Feb 24, 2016 Adam Rosenzweig
I typically begin my Federal Income Tax course discussing how tax is the one area of law that touches every aspect of life, from birth to death, from marriage to divorce, from retirement to child-care, and everything in between. Similarly, tax scholars write on topics ranging from same-sex marriage and the earned income tax credit, on the one hand, to carried interest and corporate inversions, on the other. By this point, my colleagues are surely tired of hearing me repeat how tax law has something meaningful to say about everything.
Given this incredible breadth and diversity of the tax law, why is it that most people think of tax scholarship primarily as number-crunching, or business planning, or law and economics? While I happen to be sympathetic to this point of view, primarily because it happens to coincide with my primary interests, why is it so often considered the standard for the best of tax scholarship?
Shari Motro considers this phenomenon in her article Scholarship Against Desire (“SAD”). In particular, among other things, in SAD Motro examines the role of the legal academy as a conforming institution by examining the path of one of her recent, and by all objective measures successful, articles—Preglimony. Motro published Preglimony in the Stanford Law Review and presented it at several faculty workshops (including one at Washington University) and numerous other conferences. In SAD, however, Motro details how the institutions of the legal academy—tenure, conference invitations, publication placement, among others—subtly influenced her to change the scope and focus of Preglimony from her initial normative goals.
SAD is a powerful piece of writing. In it, Motro is honest and vulnerable in a way that few legal academics are willing to be. She writes about how the desire to be accepted and validated can weaken or undermine the normative goals of legal scholarship; in her own words, how “Preglimony was like consensual unwanted sex.” SAD is compelling both as a narrative of the legal writing and publishing process, and as a familiar story of an emerging academic within the legal academy. These points notwithstanding, my initial reaction was that SAD was not necessarily “scholarship” as I typically thought of it. My second reaction was to stop and ask myself a number of questions—why did I feel this way? what contributes to the academic debate? what adds to the state of knowledge in the world? This internal debate ultimately led me to the question that became the title of this post: what is tax scholarship, and who decides?
From this perspective, by any objective metric, I have had a deeply privileged academic career and I am extremely grateful for it. But in reading SAD I began to consider to what extent I too may have faced subtle pressures that have affected my scholarship, or even worse to what extent I may have contributed to them for others. For example: if I only review articles sympathetic to my own scholarship am I reinforcing existing biases in the legal academy? Do I place models in certain articles because they are truly necessary or to impress readers? Do I submit papers to conferences to get feedback or to be included in the club? Even if I do such things for less than ideal reasons, does that really undermine my ultimate scholarly goals?
Ultimately, SAD invites, and challenges, each of us to examine ourselves as academic writers. In particular, Motro’s article prompted a realization for me, one that forced me to examine the arc of my own career. If the premise of SAD is correct, the then the legal academy as a whole, of which I am a part, (though perhaps implicitly or unintentionally) could well be imposing multiple types of conformity not only on legal scholarship, but also ultimately on ideas. Collectively, we as tax professors (and law professors more generally) can profess to the ideals of diversity of viewpoints all we want, but if the institutions we build and perpetuate undermine those ideals, then perhaps we are not truly as committed to them as we believe.
A couple of years ago I wrote that before I joined the academy the one thing I most admired and respected about academia was the nature of the scholarly debate… “Being wrong was almost as valuable as being right, so long as the ideas contributed to [the] advancement of knowledge in the world.” In reading SAD, I ultimately came to realize (admittedly slowly) that it accomplishes much of what I described as the ultimate goals of legal scholarship, even if it looks and feels completely different from what I have considered “scholarship” in the past. This is true notwithstanding that I am still not convinced that I agree with many, if not most, of the portrayals of the legal academy in SAD. Thus, upon reflection, and measured by the standard for scholarship to which I aspire, I consider SAD a successful piece of scholarship. Perhaps that is enough for a start.
Jan 25, 2016 Omri Marian
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.
Jan 8, 2016 Shu-Yi Oei
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.
