- Okay, ready for the debate session.
Next up is the provocative debate session
where certain policy aspects of U.S.
International Tax Reform
will be debated.
Some of you will recall the theme
from last year's NYU KPMG tax lecture.
It was U.S. tax reform a perfect storm.
As some of you will proceed
from the debate discussions
to come, it seems that
we are still operating
under a cloud or thick fog as an aftermath
of that perfect storm from last year.
As noted, this session
is going to be somewhat
audience interactive.
Some of you have handheld polling devices
that will be passed around
throughout the auditorium
in the next few minutes and you can react
to certain polling
questions during the course
of the debate.
The debate is going to be
moderated by Willard Taylor.
And the debate team includes
Professor Daniel Shaviro,
Kimberly Blanchard,
Dana Trier and Tom Zolo.
Willard Taylor was a partner
with Sullivan and Cromwell
for 35 years and remains
of counsel to the firm.
Willard is a former
chair of the tax section
of the New York State Bar Association
and as an adjunct professor
at NYU law school.
Professor Daniel Shaviro
is the Wayne Perry
professor of taxation at NYU law school
and formerly served with the
joint Congressional Committee
on Taxation.
Professor Shaviro teaches tax
policy related topics at NYU,
and is a prolific author on
topics involving tax policy,
budget policy, and entitlements issues.
Among many of his
writings, Professor Shaviro
authored a book several
years ago, entitled
"Fixing U.S. International Taxation"
which was published in 2014.
Interestingly or surprisingly,
his book did not even mention
GILTI, the BEAT or FDII.
Kimberly Blanchard is a tax partner
with Weil, Gotshal and Manges.
Kim speaks frequently
and writes extensively
on many aspects of U.S. international tax.
Kim is a former chair of the tax section
of the New York State Bar Association
and a former president of the
International Tax Institute.
Kim earned her JD degree
here at NYU law school.
Dana Trier is of counsel
with Davis Polk and Wardwell.
Dana recently served as
Deputy Assistant Secretary
for a tax policy in the
U.S. Treasury Department,
where he oversaw the Office
of tax Legislative Counsel.
Tom Zolo is an international
tax principle with KPMG's
Washington National Tax
Office based in Chicago.
Tom is a frequent speaker and writer
on international tax matters.
The debate is going to
address four different
debate propositions in all of 60 minutes.
Debate team, please assume your positions.
(clock ticking)
- Okay, thank you, Larry.
So usually we have trouble
coming up with debate questions
but this year is a lot easier, I think.
And the first proposition
for debate is GILTI.
But this is the way you respond.
By the way at the end
of each debate question,
we're gonna pull the audience.
So, forget that slide for the moment.
Global Intangible Low Tax
Income or GILTI and as you know,
I couldn't go over in much detail.
GILTI is included in Gross
Income much like subpart F
inclusion and basically it's
the excess of the corporation's
net income exclusive certain
items like subpart F income
over 10% of its investment
in qualified business assets.
And there was also a
50% deduction for GILTI
that's granted by section 250.
And so, GILTI aims to tax low taxed income
of a controlled foreign
corporation that would otherwise
not be subject to current U.S. taxation,
is not subpart F income and
it's not necessarily remitted.
Is this a worthwhile goal,
does GILTI achieve its goal
or is there a better way
to address the issue?
Dan, do you wanna?
- Sure.
Well, as written, I'm
probably a little bit
on the fence about this one.
But I think I should probably say yes
'cause there'll be people here to say no.
I do agree it's a worthwhile goal.
Will it achieve the goal,
that surely overstating it.
It's being a distorted
calculation of income derived
from intangibles, I see
no reason why it has to be
just about income from intangibles.
There are better ways to do this.
Well, anyone who has an
idea, please step forward.
If it's not too self
indulgent to say this,
I'll note that GILTI, even
though I inexplicably failed
to mention it in my 2014
book, for the pocket part,
of course, it does, I
think, it is consistent
with some of the things I say in the book
about how International Tax
Policy should be structured.
And if you look at
countries around the world
that there CFC rules,
they almost invariably
are interested in foreign
source income that ends up
being and tax havens are
paying very little tax.
And even though there's
no particular reason
for a home country to
want their multinationals
to pay more foreign tax rather than less,
there are reasons for this.
Because when you see
income in tax havens use
is rightly suspect that
some of it might have been
drained from the domestic tax base
through profit shifting.
One of the problems with
setting policy in this area
is that it's awfully hard to know.
I call it a Goldilocks
problem, too hot, too cold
or just right.
It's sort of hard to know
just what the right level
of attacking this problem
is because in principle,
if you're eliminating domestic taxes,
then that might be
something you don't like.
Although, in truth, you might
wanna let the multinationals
lowered a little bit so
that they will be more
willing to invest there.
But if you're saving foreign
taxes, that's sort of fine.
So it's kind of hard to know really
what the right thing to do here.
This is sort of an imaginative,
creative new way of doing it
that I haven't seen in prior
countries subpart F rules.
So, too harsh or too light, hard to say.
I do think it's smarter
design that it is something
I'd advocate that you don't
give you dollar for dollar
tax saving and foreign taxes
paid with respect to GILTI.
And I do think the 10% rate
of return is a bad rule.
Essentially, whenever the rate of return
that you allow someone to
deduct from the measure
is higher than your actual
expected rate of return.
It kind of creates an incentive
to put tangible assets abroad,
which is not the purpose of the Act.
I don't know for sure
how serious or unserious,
how grave or less grave this problem is,
but it seems to me like kind
of a odd way to go about it.
You'd really wanna try to hit it
at the expected rate of return.
Maybe even have it relate to prevailing
market interest rates.
So it's very far from perfect.
But I have some sympathy for
what they're trying to do,
especially under the time
pressures and everything else.
- Kim, do you wanna speak?
- Yeah, I think actually,
Professor Hay in the audience
suggested the way to do this.
I took it from your comment.
In many years ago, I
tried to write a paper.
It didn't make its way
into a book, unlike Dan's,
where I said, "Why don't we just tax
"controlled foreign
corporations on their income
"and get rid of all this ENP nonsense
"and all this sort of
overlay of subchapter C
"in the international area."
And I started to write the
paper and it just got too hard.
So, I never finished it.
And one of the reasons
it got hard was that
I kept stumbling across
how you deal with things
like foreign tax credits.
So they solve that
problem in enacting GILTI.
They just put it on top of
the system we already had
instead of trying to start over.
But I think GILTI would be
fine if it were a replacement
of what we had and then
thought through carefully
how it would work.
The big problem, I
think with GILTI is that
we actually don't know
what Congress intended.
As many of you may know,
there's a sentence or paragraph
in the legislative history,
where Congress tells us
that they really didn't
mean the GILTI tax to apply
as long as the local tax rate
was at least 13 and an 8%.
But that's not what they wrote.
And it's very unclear how we deal
with the foreign tax credits,
how we deal with expense allocation.
Very unclear what they
meant to do about that.
So well, or just too wrong
foot, my debate opponents.
I have to do something stupid
and pointless in every debate.
So what I'm gonna do here is--
- Usually, you win though.
- I have a little aphorism or
saying for each one of these.
And the one for GILTI is, "Do
as I say and not as I do."
And what I mean by that
when you think about GILTI,
think about whether we're
supposed to be interpreting it
the way Congress apparently
wanted us to interpret it
or whether we should
interpret it in terms of
what Congress actually wrote.
- Thank you, Tom.
- Sure.
Well, I'm not sure how I will answer this.
I will say it may not be worthwhile
but it was certainly necessary,
because as Tom Bertold just pointed out,
there are two problems with the U.S.
international tax system.
One was our rate was too high.
The second is, we didn't
have an exemption system.
And moving to an exemption system
without broadening our anti deferral rules
could have been a disaster
because you'd be relying
on traditional subpart F and
transfer pricing enforcement
to protect the U.S. tax base.
It strikes me that the 10.5%
rate were the roughly 13%
you need to get to them
for foreign tax credit.
Is about right because
in the post BEPS world,
if tax havens get put out of business,
it'd be a hard time not to average to that
on substantial foreign operations.
And so I think it achieves
its goal in a broad sense.
Now, it is a little bit of a Monet.
It looks fine from a distance
but when you get up
close, it's not so great.
And a couple of the problems
have already been pointed out.
First, the 10% return on
QBA is completely arbitrary.
And it favors foreign
investment in tangible assets
over service businesses, for example.
And second, the foreign
tax credit mechanism
is just a complete mess.
One of the biggest problems
is the year by year
foreign tax credit with no carryover
because if you have a
company with domestic losses,
eventually those are
gonna get characterized
as GILTI and when they come
out of the domestic loss,
they have to shelter that
with your form tax credits.
The foreign taxes that
really are associated
with that income having been
incurred in prior years.
So, there are a lot of problems with that
and in the basket issue under Section 78
that need to be worked out.
But, given the current
political environment,
I don't think you could expect perfection
at the time of enactment.
And this is I think, the
first strike of the scalpel.
You can't expect the statue to be done
until we have a few
more wax at the marble.
- Dana.
- Well, embarrassed to say that I think
the other three people have
said elements of my view.
I believe there has to be
something similar to the GILTI
and generally sympathetic
to it similar to time.
I think there has to be
a provision like that.
I think it's a good start.
In my particular case,
the issues that I have
with our principaly, the technical issues
that relate to allocation of expenses,
the foreign Tax Credit mechanism.
More broadly what Kim referred to,
putting this on top of the existing rules.
If our political system was
such that some of those issues
that are in the current
statute could be worked out
in the manner that other tax
legislation has been worked out
over time, I would think
that something like the GILTI
is a good start.
And it's probably the element
other than the participation
exemption that I have the
most favorable view of
in the international legislation.
- Okay, so we'll find out
what the audience thinks now.
That right, Larry.
All right.
So, here the choices.
Maybe we should have had a third choice.
We're reflecting the comments here.
But yes, GILTI is a worthwhile goal
or aims to achieve a worthwhile goal
and the inclusion of GILTI and income
will achieve that goal.
No, distorted calculation of
income derived from intangibles
there are better ways to do this.
(instrumental music)
(laughter)
He votes twice.
- I would love to see that.
- Okay, so it turns out that
contrary to the views up here,
that 59% ignore distorted
calculation of income derived
from intangibles, there
are better ways to do it.
41% thinks is a worthwhile goal and GILTI
as inclusion will achieve that goal.
Okay, so let's see if we
can do better next time.
Okay, so second question
is on FDII or FDII
or however you want to pronounce it.
and (speakers talking over each other)
FDII alternative, there was a wall street
journal article actually which they talked
about the difficulty of
announcing some of the GILTI
FDII, FDII etc. phrases.
Anyway, in order to encourage
intangibles to stay.
The Act allows in Section
250, the U.S. corporation
to deduct 37.5% of its for FDII or FDII,
thus bringing the effective
rate on FODII or FDII
down to 13.125%.
And FDII is the percentage
of the U.S. corporations
deemed intangible income
that equals the percentage
of its net income that is foreign derived,
excluding subpart F
and certain other items
and it's deemed intangible
income is the excess
of its net income over 10% of
the tax basis of investments
in depreciable tangible
property use in this business.
So, Kim, what do you think?
- Well, FDII, as I think
was mentioned already
is a pretty unstable
regime internationally,
I think there's a good chance
it's gonna be challenged.
But the problem with it is,
it purports to be a benefit
given to you as taxpayers
for intangible income.
But just like GILTI intangible
doesn't really have anything
to do with intangible.
And I know Dan has said that he thinks
that it's too generous in the GILTI case,
but in FDII the incentive is reversed.
If you wanna be in FDII
you want your income to be
"From intangibles."
And you don't want that return
that perhaps too high return
on tangible property to
be taken into account.
Which I think creates some
pretty bizarre incentives.
So, even apart from its
vulnerability to challenge,
I think it's got problems.
Having said that, even though
Dan hasn't had a chance
to state his views on this,
my answer to Dan, of course,
I have an answer already
on a piece of paper,
which Peter Blessing
already made reference to.
So, he kind of stole my thunder.
But it's, what's good for the
goose is good for the gander.
If you're gonna define
and tangibles this way
for purposes of GILTI, maybe Congress felt
they had to do it for FDII as well.
So we have a very broad incentive.
- Tom.
- Yeah, I mean, I tend to
think that the 10% return
on QBA is just misguided in both cases
and not to be dispensed with.
But it clearly has the perverse result
that it encourages investment
in tangible assets offshore
and discourages the investment onshore.
In terms of whether it
meets its objective,
I think you need to define
what its objectives are.
One certainly is to stimulate the export
of goods and services.
It may have some of that
effect, although I tend to think
that companies will not
realign their supply chains
based on what they think is going to be
a temporary provision.
I think that there is a
strong belief out there
that FDII is going to
have a temporary life,
either because it's successfully
attacked at the WTO level,
or just because various
countries put in measures
that erode the benefit of it.
The second though, is
to take the pressure off
of the incentive to outbound
intellectual property.
And I think that FDII and
GILTI do work together
to reduce at least temporarily
the arbitrage opportunity
and do have many companies,
even rethinking their decision
to have IP offshore.
Actually thinking about bringing back.
And the reason for that is that
there are many offshore IP
structures where the business
has never grown up to have
a mature and supportable
offshore structure with
appropriate dumpee and so on.
And the lower rate and
FDII certainly gives them
some cover for bringing that IP back.
- Dana.
- First of all, I would
understand the principle purpose
to be Tom's second proposition which is,
I would look at as part of
a carrot and stick approach,
GILTI and FODII combined.
That, in part addresses the
round tripping type of issue
where you're moving in tangibles abroad
and partially importing
back into the United States.
I don't have as negative
of view of the basic idea
as many people do.
I am not sure whether
it will be a novelty,
I think Kim called it a
novelty in one of her articles.
And that's sure it will have
some effect and the location
of intangibles, etc.
But as was just discussed,
I do think the instability
of the provision
is going to be a central issue
and having that incentive effect.
So, I have a less positive view of this,
certainly than I do of GILTI.
- Dan.
- Well, since I don't like FDII
and it's not 'cause it's a tax break,
it's because of something about it.
But I'll just start with
some points in favor of it.
The first is that IP activity
may be fairly mobile,
both in actuality and in terms
of where you're report it
that might call for a
lower tax rate on it.
Second point in favor
is that they're already
sort of grotesquely exploitable
source rules under prior law
under which U.S. companies developed IP
and the U.S. could then
treated as foreign source
for other foreign sales.
And the act I believe, tightened up
on a little bit of that stuff.
And the third is I don't think that
they had to identify intangibles directly.
It might have made sense
whether it's sauce for the goose
and the gander or something
else to back into it
the other way again, leaving
aside the point of the 10% rate
is probably too high.
My problem with FDII is that it's done
via an export subsidy.
That's the source of the WTO problem,
'cause it's an export subsidy.
Patent boxes, generally
not export subsidies,
they might be attacked as
"Unfair tax competition
in OECD, pallava"
and such, but they're not
export subsidies, this is.
That's the reason the WTO is
probably gonna strike it down.
And that is unstable.
That's also the reason why it's bad policy
'cause I don't think export subsidies
would find very many
economists in favor of them.
And it's also the reason why you get
into round tripping problems
and things like that.
If you have kind of the
symmetric treatment of exports
and imports that say, the
destination based cash flow tax
would have had other critical
things to say about that.
You don't really get export subsidies
'cause exports and imports
are treated symmetrically.
Well, you might get some from
sort of tax planning games
or avoidance or evasion,
but fundamentally,
the system doesn't create
incentives to export something
and then bring it back in again.
That's what this system does,
because it's an export
subsidy, not a coherent
consistent treatment
of exports and imports.
It's gonna be a tax planning nightmare.
There's only so much that
can be done about it.
And it's just a bad way of
doing the understandable
objective that they had.
- Okay, and now the audience.
What do you guys think the questions?
Does the way in which the tax
base is determined make sense?
Does it achieve its intended purpose?
What about the 10% return on QBA?
Is income above that necessarily
related to intangibles?
Answer is yes, encourages U.S. corporation
to keep intangibles here.
And the base makes sense
because it includes FDII income
not derived from intangibles.
No, treating all income
as from intangibles
other than a 10% return on
tangible asset goes too far.
What do you think?
(instrumental music)
Well, 75% don't like it.
No, treating all income as intangibles.
Other than 10% return goes far.
25% think it's a good idea.
It encourages domestic
intangibles to stay domestic etc.
- Things are getting worse.
(laughter)
- So we move on to question three,
which predictably is BEAT.
And as you all know from
this morning and elsewhere,
BEAT is intended to present
received base erosion
and abuse in inbound transactions.
The reduction of the U.S.
tax base by foreign investors
and there is imposed in Section
59 A, minimum to accept 10%
over the so called BEAT
on a modified taxable base
that disallows base erosion payments made
by U.S. corporation
to related foreign
person, including payments
for depreciable property,
but not cost of goods sold.
And then there is the
threshold of 500 million
in gross receipts and a
base erosion percentage
of more than 3%.
So the questions that we will discuss
or whether BEAT is too harsh,
too mild or just right.
Is it a good approach?
Completely miss directed, where did the 3%
or more deductible expenses come from?
Tom, what do you think?
- Well, I think first of all that answer A
is gonna win this time by wide majority.
It is--
- Who you are prediction's gonna win.
- It's far too harsh.
- Far too harsh.
- It's far too harsh,
because it's overkill.
You know, when the BEAT
was first proposed,
I thought that it was designed primarily
to affect base stripping by
form based multinationals.
And a particular inverted companies.
But when you look at its application,
it applies extremely broadly.
And applies in a way that
is, in many cases arbitrary
in the way it distinguishes
among taxpayers.
And one reason for that is that
it is a strong preference for companies
that make and sell tangible goods
over those that provide services.
So you could have equivalent companies.
One of which operates through
buy sell manufacturers offshore.
And because the costs of products
going to cost of goods
sold, those are not treated
as base erosion payments.
If on the other hand, you
had told manufacturing
and the U.S. parent entered
into contracts with customers
and that subcontracted performance
to its foreign affiliates
that are paid a service fee,
virtually everything that's
brought in as a gross receipts
is going to go out as
base erosion payments.
And so you could have to kind of--
- UPS or FedEx.
- So for service based companies,
it goes beyond total manufacturing,
its construction companies,
engineering companies,
any kind of international
service business.
It hits them very hard, and it's not clear
why they would be disfavored relative
to manufacturing concerns.
A second thing is that it hits
companies when they're down,
because if you have net operating losses
or low profitability, your
regular tax is going to be low.
And even if you have
what a relatively minor
base erosion payments,
just over the 3% threshold,
you can get hit with the BEAT.
It also does favors us multinationals
that are very successful
outside the United States.
Because as the foreign business
grows relative to the U.S.,
unlike the mechanism under GILTI
where you would think a
13% tax rate it shelter you
from additional U.S. tax,
the foreign tax credit
isn't allowed for purposes of the BEAT.
So those foreign earnings
come back naked of credit
for purposes of the base erosion payment.
The final point is that,
in some ways we're flogging
a dead horse, we have interest
limitations under 163 J,
which limit the amount of bass stripping
you can do via interest.
I don't think that services have ever been
a particularly good way to strip income.
And when you're talking about royalties,
we've already dealt with outbound charges
by subsidiaries of U.S. multinationals.
So you're really just
dealing with royalties
that U.S. companies are
paying to foreign affiliates,
foreign parents, and that
has never, in my experience
been a big part of IRS
transfer pricing enforcement.
So I wonder if that's the
last significant piece
that needed to be addressed,
whether it was best done
by casting this very
broad net of the BEAT.
Call me cynical, but I tend to think that
the lowering of the
threshold from 4% to 3%.
And this kind of broad net was done
for revenue scoring purposes,
rather than any good
tax policy reason.
- Daniel.
- Well, it's a lot of revenue
and it's going to be
difficult to modify it,
but at the end of the day,
quite negative on the BEAT.
I think, actually, this morning sessions
did a pretty good job of
articulating my views.
It's partly as Tom
mentioned, once you're in it,
the treatment of foreign tax credits,
to me is perverse and harsh.
It's also the treatment
of services businesses
and at the minimum quite
awkward for services businesses
and is causing quite a bit of
change in way of operations.
And I also think the
netting issue with respect
to foreign banks as led to
an inappropriate treatment
under the BEAT.
The problem that I have with
respect to the binary nature
of the questions is that I
actually think in other ways
the BEAT is not as good a
buttress and base erosion is,
it could be with the cast
of goods sold exception,
which seems arbitrary compared
to the treatment of services.
There's can be a fair
amount of embedded interest
or royalties.
And sort of more broadly, I
started to get a little bit
of cool aid on the
destination based approach
for inbound matters and
would have preferred
a more of an element of that
in the base erosion provision.
So I definitely believe
in a placeholder here,
I believe there's room for a
another significant provision,
but I personally don't think
the BEAT is constructed,
is like that.
And I think it's less acceptable
in it's dual nature today
to modify modification and reform
than for example, the GILTI.
I can imagine the GILTI
evolving in a more rational way
with tweaks around the basic system.
I don't personally quite see
that with the BEAT myself.
- Dan.
- Well, I have a fair amount of agreement
with what's already been said.
But I going to quote the old joke.
"How do you like the food here?"
"Oh, it's terrible and the
portions are too small."
Here, it's kind of, "Yes,
it's too harsh and it applies
to too few taxpayers"
'Cause I think the 3% rule makes no sense.
It's a cliff and it creates
game playing around the margin
that's pointless.
Also, I think if you're gonna
have a provision of this kind,
the net proceeds the 500
million strikes me is too high.
On the other hand, the
regime that we would like
to apply to people, there are
certainly are some problems
with this one that have been pointed out.
It really is kind of
about transfer pricing.
Saying that the transfer
price is too high.
One way to view it is saying
that the correct transfer price
is zero except for the cost
of goods sold exception.
Obviously zero is not a
plausible transfer price.
On the other hand, it is at a lower rate.
I guess you could say that it's kind of
like having an excise tax on all payments
to all the covered payments
to foreign counterparties.
And in that sense, I guess
you could see an excise tax
of the rate was set right as responding
the transfer pricing problem.
However, imperfectly or crudely.
Of course, it's sort of a weird excise tax
because once you're on
the BEAT, you face it.
When you're not on the BEAT,
it's like a zero excise tax
when you're not on the BEAT
it's positive excise tax
when you are on the beat at the margin.
And that doesn't necessarily
attract anything else.
I am troubled by the ways
it can kind of distort
supply chains and lead to sort
of pointless rearrangement
of things and certainly
it can in some cases,
perhaps be too harsh.
On the other hand, it
is fairly comprehensive,
which makes it less avoidable rather than
through the cost of goods sold.
And there is an issue or a problem there.
I'm not quite sure what to do about it.
And said even some of
its strongest advocates
like Ty Grinberg admitted, well, kind of,
we've thrown up our
hands in it and not tried
to sort of transfer price more properly,
which kind of addressed
me but it's aimed at.
And says we assume the trans price zero.
I guess there's a lot of revenue,
there's a real province addressing.
It is hard to know how to do it better.
This is a problem that
countries around the world
have been wrestling with for decades.
- Kim.
- Yeah, I have a really
cynical take on the BEAT.
Now I'll throw it out there.
I don't know if it's right or not.
- Unlike the other guys.
- Yeah.
Well, it's awful.
But my take is a little different.
Most of the reasons that we've
identified for being awful
the really big problems
with the BEAT relate
to what happens when you
have a U.S. corporation
that is not necessarily foreign parented
but instead just has
affiliates, including CFCs.
Two of the problems and I
could name 10 if I had time,
but two of the problems
are that the payments
that you're counting toward
your modified tax liability
by adding them back can include,
as was pointed out in a panel earlier,
payments to not only a branch
with PCI but also your own CFC
who's taken to account and GILTI or sub F,
which looks a lot like
double taxation to me.
The other problem which has
been mentioned already up here
and in this morning was
that the foreign tax credits
get added back, which makes no sense.
Now both of those problems
are really problems
for U.S. parented groups was CFCs.
And so my cynical view of this is that
Congress started with
something that was really meant
to beat foreign parented
groups over the head with,
including inverted companies.
They really wanted to expand
our base erosion rolls
past that for just interest
and get it a bunch of other things,
'cause they couldn't
figure out transfer pricing
and didn't trust it.
But in order to avoid the
charge of being discriminatory
or violating our treaties or whatever.
You remember with the old 163 J.
We said, "Oh, it's okay,
we got a price to payments
"to tax exempt, not just foreign people."
I kind of think that's
what's going on here.
That we're applying it
to U.S. parenting groups
and their CFC's just as
a fig leaf to pretend
that we're not really
going after foreign Parent
and companies.
And I think in doing that,
we've created a monster.
I mean, it was pretty bad anyway,
but we've made it a ton worse with that,
I think really thinking of it.
So, my aphorism for the
BEAT is an old standby.
Congress, two wrongs don't make a right.
Fix it.
- Willard, I'm sorry I
need to say one more thing.
One thing I like about
the beat in principle is
the thing that Kim viewed
cynically and that is,
I argued before the 2017
Act that the U.S. rules
attacking profit shifting
place too much emphasis
on hitting it by U.S.
headed multinationals
compared to foreign multinationals,
when you might really
want to address it by both.
So this is an attempt
to redress the balance
despite the problem Kim says.
And I think it's probably
desirable to redress
the balance because we
were kind of via subpart F
in the leaning.
Again, it's not to say
that we were too harsh
in Profit shifting, too
harsh on U.S. headed
versus foreign headed.
This is an attempt to redress
that overall balance a bit,
which in principle makes sense.
Even though of course, now
it applies to U.S. companies.
So that's just an example
of another good intention
underlying it that may or
may not have gone wrong.
- How is paying amounts
to your CFC profit sharing
is shifting, particularly
given the new rules
that applies to--
- You're saying because it
applies to U.S. companies.
I'm talking about the part
that you mentioned too,
which is hitting the foreign companies.
Now that may be when you said cynical,
I thought you're gonna say politically,
who cares about them in Washington.
But it is true that they
could kind of had more leeway
than U.S. companies.
So, now I'm not disagreeing with you
about the part of hitting us company.
I'm saying that hitting
the foreign companies
is actually a goal that made
sense in relative terms.
- We're just replying to that.
I think that it is a
provision that is too easily
structured out of I mean,
I mentioned that we already
have 163 J to basically
regulate the amount
of interest expressed
that can be stripped out.
But if you think about
royalties is another one,
it's very easy to
reorganize your supply chain
so that the foreign parent owning the IP.
- Easy.
- Contract manufacturers
with U.S. manufacturer
for a limited return,
then sells the product
to U.S. distributor for a
limited return and makes all
of its profit and a buy sell.
And since that is a cost
of goods sold transaction
to the distributor,
you're outside the BEAT.
So, it's not clear to me
what it really accomplishes
at the end of the day.
But the other provisions haven't already--
- Any these problems are
fixable by regulation.
- I think that was assumed
that there would be
embedded royalties in
embedded capitalized interest
in the cost of goods sold
and it would be beyond
the legislation's intent
to fix it by legislation.
I think Tom is making another point
that doesn't quite fit our binary point
because it is too harsh in many ways,
but it's also easily
avoided in other contexts.
So, to me that's kind of
the worst of both worlds.
So I'm not real happy
with where it ended up.
- Okay, so what do you guys think?
The question is, is BEAT too
harsh, too mild, just right.
Is a good approach, or
completely miss directed
and where did the 3% or more come from?
A - Yes too harsh,
B - No, base erosion is a serious problem.
And imposing a minimum checks and payments
to related foreign persons is
a good way to deal with it.
(instrumental music)
I gotta consider exhibiting register.
A yes, too harsh wins by 81%.
19% disagree with that.
- That's less bad than
I thought it would be.
- Me too.
- Okay, last question.
Question four.
Relates to the Act as a whole.
The provisions of the Act addressing
cross border investments
and transactions are complex
in addition to those we've described here
include the repatriation
tax and section 965,
changes to the foreign tax credit system,
the moldable section subpart
F, treatment of transfers
of intangible property,
rules for transfers
of tangible property generally
as opposed to just by
U.S. shareholders, the source of income
from sales of inventory.
And the basic question and
the list could go on and on.
I mean, just the number
of acronyms is staggering
as we all learn this morning.
The question is, and
we'll start with Dana.
Is there too much change
and complexity in the Act
with respect to cross border
investments and transactions.
Should we start over?
- Why, I'm not going to admit
that I can't begin to understand it.
I can begin to understand
it, that's about where I am.
I think it's what's Daniel said,
the tax complexification Act of 2017.
I do believe that is
true of this legislation.
But I still vote no, I think
it's too late to start over
and we're gonna have to work
out the complexity over time.
- But you think something has to be done.
- I think something has to be done.
I thought that my mind was
blown by the '84 and '86 X
taken together, I think over time,
particularly with guidance
that Doug promise today
that over time, this
will seem less complex
than it does now.
- Dan.
- Although I'm not gonna endorse, yes.
I'll start by saying, when
I first started reading
about this, Darren Act, just
the international stuff,
I couldn't keep it in my
head for five minutes.
I'd like read GILTI, BEAT,
then like five minutes later,
what are these things.
I did the only thing I knew how to do,
which was to write an article about them.
So, now I think I sort of understand them.
But at a very general level.
These guys if they had my
level of understanding,
which they don't understand it,
'cause they'd be getting client questions
they wouldn't know the answer to.
So, I think I understand
the conceptual a bit.
I do think obviously, there's
gonna be a lot of complexity
and a lot of planning things,
a lot of open questions,
a lot of rush drafting, and so forth.
It's certainly too late to start over.
And on balance, each of the three things
kind of addresses
something that's important
in a way that's imperfect,
but that it's hard
to address really well.
I guess I've been harshest about FDII
maybe not that favorable
on BEAT us either,
on the BERAT either.
I think the good thing about it is,
there's been this misguided
debate for a long time
about "Worldwide versus territorial,"
Which I think is simply
a bad way of describing
the actual choices that countries have it.
The banal point is that every
country has a hybrid system.
So, if everything is a
hybrid, then the terms
aren't really doing much good.
A more interesting point
maybe, is that worldwide
and territorial don't
really describe the choices
countries are wrestling
with and are trying to make
as well they can.
Things like whether it
who hit profit shifting
to have bad foreign source income
versus good foreign source income
that you treat less relatively.
The kinds of choices that
countries are actually facing
are not illuminated by that.
So we didn't go territorial in 2017.
What we did is we got rid of deferral,
which are the people said the same thing
by saying the exemption system.
So what does the U.S. system used to say,
is a stable tax, a bit of
your foreign source income now
under subpart F, and the rest
of it in theory will tax later
but probably never.
And if you weren't lying
to your accountants
when you said it was
permanently invested abroad,
you know then maybe we'll never tax it.
What it now says is, now or never.
We're gonna tax it now or
we're gonna tax it never,
your foreign source income.
Current year will hit you under subpart F
or will hit you under
GILTI or something else
or else we're not.
I guess I'm really just
addressing the outbound
when I say this whereas
there's also inbound here.
And I think deferral
was a bad system because
it makes the taxpayers
incentives depending
what they think is gonna
be the future tax rate
compared to the current tax rate.
That makes no sense,
it leads to the trapped earning problems.
Deferral was a bad rule, we got rid of it.
We tried to replace it with other things
that as other people here
have said, try to make it
not tipped the balance too much
in favor of profit shifting.
So in that general sense along with things
in each of these rules,
it's kind of in the ballpark
each time of trying to
wrestle with tough problems,
in which even the answers aren't clear
and much less how to implement
them even if you knew them.
But we're definitely it's
too late to start over.
We don't really wanna bring deferral back.
So this is kind of the world we're in now.
We might as well grin
and enjoy it, I guess.
- Kim.
- So a very wise tax lawyer
once said to me many years ago
when I started practice that,
"You know, complexity is okay
"and maybe even desired
by big large multinational
"corporations who can deal with it.
"But it isn't fair and it isn't right
"for small businesses and individuals."
And I think that is true.
And I think it is becoming
even more apparent today.
This bill in its entirety,
was written by a congress who,
I shouldn't say in its
entirety, I should say,
in all of the International provisions,
was clearly written by
a congress who thought
that the only multinational
enterprises around
were big sophisticated corporations,
whether foreign parented or U.S. parented.
The GILTI itself is a disaster
as applied to individuals
who can, of course be
shareholder There's of CFCs,
who didn't get the benefit of the low rate
on the repatriation or transition tax,
who don't get GILTI foreign tax credits
and don't get GILTI's lower rate.
And by the way, all those
problems are not solved
by the 962 election if
any of them are solved.
And that theme is not just about GILTI,
it runs throughout all the
international provisions
of the Act.
And it's gotten to the
point where I really think
that there will be massive
non compliance with this Act,
not because people are cheating
on their taxes or whatever,
they're just will not be
able to comply with it.
And if somebody like me, tells
them what they need to do,
they're not going to believe me.
Michael Cabrera, I don't
know if you're still here.
We said this morning,
with all this complexity,
it's not about into anymore,
it's about modeling.
And he's exactly right.
Now, I'm an old lady.
I've been doing this for 35
years based on intuition.
It's about ready for me to retire, right?
But I feel bad for the young people.
Because there is no policy,
there is no principle,
there's no theme, there's nothing here
except a bunch of modeling.
And then you tell your client
if it's a big sophisticated,
U.S. Corporation, maybe you have some fun.
And you plan out of the 3% hurdle
and all this kind of thing.
But the whole world is not that.
And Congress has completely forgotten
that there are other
taxpayers in the world
and I think it's just a real mistake.
Oh, I have to put my sign.
- You do.
- It's my last one, I promise.
I would have written a shorter
act, but I didn't have time.
That's good.
(applause)
- I have to say that Kim surprised me
with the advice from her wise old mentor.
I thought he was gonna say
complexity is good for profits.
- If you're with an accounting firm, Tom.
- If you're KPMG.
- But it is too late to start over.
And, in my view, it wouldn't be advisable
to go back to what we had.
The old international tax
system had become outdated.
And this Act really does
accomplish two important things.
First, it brings the U.S.
headline rate more in line
with our trading partners.
And second, it eliminates
the lockout effect.
So, going to what is effectively
a worldwide tax system
with bad and better kinds
of foreign earnings tax
as either old school
subpart F 21% or GILTI.
We have immediate taxation
but we've taken down that wall
that kept cash out of the
United States for reinvestment.
And those are very good things.
The changes that need to
be made around the margins,
we should start now.
But I think the broad outline
of the two major points
are things that, as Tom
Bartold said a few minutes ago,
were broadly bipartisan concepts.
So I think although our country now acts
in a very partisan manner
and things get passed
by just one party,
I don't think that there's
broad disagreement,
that that was a preferred route.
And certainly the 1962
Act, there's a lot of talk
during the legislative process,
that this was the first
big tax bill since '86.
Well, '86 to me was more
about horizontal fairness
among individuals.
I think the better antecedent is 1962.
So we had a system that
we live with for 55 years.
- We redid series 62 system really.
- And not until Doug
palms joined Treasury,
we're all liked questions
answered under the 62 Act.
- I hope he did a little quicker--
- 50 plus years before Doug got there.
And so complexity is unavoidable I think.
And these will be worked
out over the years
and decades to come.
- Okay, so last audience question.
Yes, absolutely, too much
change in complexity.
I can't begin to understand
it, you can drop that
if you want to.
But to vote against the Act no.
On balance, the changes
are good, and in any event,
too late to start over.
(instrumental music)
I know what you guys are gonna say.
Consistently our vote you're
gonna vote the Act down.
- They've been pretty sympathetic.
- Holy hell.
- That's hard to believe.
- 50/50.
- 50.
- What?
- Recount.
- One off.
Here we go,
- It's 50/50.
- Yeah,
- Absolutely.
- Unpredictable.
- We could separate out changes are good
from too late to start over.
See what we--
- Well, we could rephrase the
question and do another poll
if you wanted, but okay.
Thank you guys.
- Thank you.
- Early.
(applause)
- Great job.
- Okay, well thank you
Willard, Dan, Kim, Dana and Tom
for an impactful debate.
The last voting 50/50 we
don't know if Tom Bartold
had weighed in, whether or
not that would have swayed
the vote one way or the other.
By the way, for those of
you with a handheld advice,
please hold on to them.
There'll be one more
opportunity for audience polling
during the industry session
later this afternoon.
Understanding the economic effects of U.S.
International Tax Reform
is of paramount importance,
and considering its likely
impact on the commercial
and tax behavior of U.S.
and foreign multinationals.
Our speaker for this topic is Alan Viard.
Alan is a resident scholar
at the American Enterprise Institute,
where he studies Federal
Tax and budget policy.
Prior to joining the American
Enterprise Institute,
Alan was a senior economist
at the Federal Reserve Bank
of Dallas and assistant
professor of economics
at Ohio State University.
He has also been a visiting scholar
at the U.S. Department of the Treasury's
Office of tax analysis
and a staff, accountant,
a staff economist at the
Joint Committee on Taxation
of the U.S. Congress.
Alan, over to you.
- Well, thank you all for being here.
Thank you, Larry, for
organizing this great conference
and for inviting me to take part again.
There's certainly a lot of
interesting issues to discuss.
I feel that I am able
to discuss some of them
and not others.
The bewildering complexity this new law
is certainly something
that many of us have noted.
What I'm gonna do today is two things.
First, I'm gonna discuss the
corporate rate reduction.
I think David Rosenblum
is right to say that
that is really the most
important part of this law
from international perspective.
It's also something economists
have said a great deal about
and where I think a lot
of the economic principles
are clear, even though the magnitudes
are not necessarily known.
And therefore, it's something
on which I and economists
in general can really usefully weigh in.
I guess, I also believe
that both supporters
and opponents of the
corporate rate reduction
have been saying a lot of
things that don't make sense.
And I'm gonna try to say things
that I think do make sense,
but you'll have to be the
judge of that, I suppose.
The second thing I'm
gonna do is try to make
some high level comments about
the international provisions.
I had felt a little
discouraged with myself
for not really understanding
those provisions in detail.
I feel better about that today
after hearing the
difficulties that all of you
who have so much more grounding
in this are also having.
But so I'm not going to be
commenting on the details
of those provisions.
But I will offer some high level thoughts
that hopefully we have some value.
But let me begin with what I
do think is the easier part,
which is the corporate tax rate reduction,
certainly very dramatic, very
important part of the law.
Clearly a portion of law
that was central, I think,
to republicans objectives
in in moving forward
with tax changes.
What I do in this slide is
really outline the basic,
very simple economic
story for the advantages
than the economy might get
from reducing its
corporate income tax rate.
And I think it's important
to note these things
simply because, in many cases,
they're not understood well.
That supporters of the
rate reduction are trying
to make other different
types of claims for it.
They don't really hold up.
And opponents are really
attacking it on grounds
that are unrelated to the
actual economic case for it.
Which is not surprising, I
think that in many cases,
criticisms made by opponents
are responding to off point
arguments made by it's supporters.
But here in a nutshell is
is what incentive effects
you would expect a corporate
tax rate reduction to have.
And I here again, just abstracting
from all the other features of the law
and just looking at a
corporate tax rate reduction.
So first of all, even though
the law used to have the name
jobs in its title, and of
course as Tom and others
have pointed out, it
actually doesn't anymore.
The quarter rate reduction
does not have a direct effect
on hiring incentives.
And it got to a point
that's often misunderstood.
And the reason of course is that there
are offsetting effects here
that cancel each other out.
It is true Of course, that
if their corporate rate
is reduced from 35 to
21%, than an employer
that is deciding whether
to hire a new worker
and pay them wages, knows
that they will be able
to keep 79% instead of 65% of the output
or additional revenue produced
by that workers efforts.
And so of course, that's
obviously is an incentive
to hire the worker.
But since we know that
with rare exceptions,
wages are deductible and
computing taxable income,
there is obviously an offsetting effect,
which is that the out of pocket
costs of paying the wages
are now only 79% instead of 65%.
And so on the one hand,
the company will keep more
of what the worker produces,
but on the other hand,
they will they are more out
of pocket cost of hiring them.
And of course, it's an offset
no matter what the rate is.
If a worker can produce $100 of output,
then they should be hired
if the wage is $100.
That's true at a zero percent rate.
It's true to 21 percent
rate, is true at a 35% rate.
Because no matter what the rate
is, it's reducing both sides
of the equation by the same percentage.
And of course, the same
analysis, as we know,
applies to any investment
that can be expensed.
At least unless firms are kind of misled
by financial accounting rules,
which is an interesting topic
in its own right that
we can get into today.
So these are not areas
where we would expect
to see direct incentive
effects either on hiring
or an expense to investment.
But we would expect to see them
for depreciable investment.
Because they are the tax rate reduction
increases the hurdle rate,
or reduces the hurdle rate
that the firm requires in
order to make the investment.
It simplest to say of tax depreciation
happens to exactly match
true economic depreciation.
Because in that case, the hurdle rate
that you need before tax is
just equal to whatever rate
you're demanding after tax,
divided by one minus the tax rate.
And so if the rate is 35%,
you need an hurdle rate
that will cover that 35% wedge.
Once the tax rate goes down to
21%, the hurdle rate is lower
because you only need to
cover a 21% tax wedge,
assuming that interest
rates remain unchanged.
And that's an absolutely
crucial qualification
that I'll come back to in a few slides.
And so the story here
is that we would expect
the corporate tax rate reduction
to give self interested
profit maximizing corporations
and incentive to engage in
additional depreciable investment
that they otherwise would not have done,
that they would not have done at all
or they would have done abroad
instead of in the United States.
So that's one effect we expect to see
as an increase in investment.
What implications of that
have for the labor market?
Well, here there is an
effect on hiring and wages,
although you can call it an indirect one,
which is of course, that when
the additional investment
occurs, the capital stock becomes larger.
A higher capital Stock
makes labor more productive.
The worker who previously
could produce $100 of output
and whom you were willing
to pay $100 wage to,
you would be willing to hire
if the wage was $100 or less.
Now that worker maybe can
produce $105 worth of output
probably not actually
that big of an increase,
but just as a round number.
And so now, of course,
anybody who was willing
to hire the worker at the
wages that used to prevail
would be even more eager to
hire more workers than before,
again, as a matter of self
interest, because that worker
will provide output to the
firm that is worth more
than the previous level of wages.
And so every self interested
employer will then want to hire
additional workers because of
their additional productivity.
Employers will compete against each other
to hire the workers that are available.
And as they do so they bid up the wages
that the workers are paid.
So, employers are forced
to pay higher wages
in order to hire workers
away from other firms.
And of course, if the
higher way induces people
to enter the labor force who
otherwise would not have,
then it also does increase hiring.
And so that's the basic economic case,
which I think often gets lost.
And if you listen to
supporters and opponents
of the rate reduction,
they're saying all kinds
of other things that just
don't line up with this.
And so I wanna make a
few comments about this,
just the basic logic here.
And the first is that there
really is among economists
very broad agreement on this story
and the basic outline of it,
and the principles involved.
Even though there is a
great deal of disagreement
and a great deal of
uncertainty about the magnitude
and the timing of the effects.
And just a couple quotes here,
I think they really cover it well,
both from the New York
Times in recent months.
Justin Wolfers, who is
ambivalent about the tax law
explains the tax cut
increases the incentive
to in fact to invest.
Very few economists debate
its underlying logic.
Although there's considerable
debate about whether
it's a large or small increase investment
that we're talking about.
Nobel economics lawyer, Paul Krugman,
who is adamantly opposed to the tax law
also outlines the theory
based in great detail
and pretty much in line
with my earlier slide
and concludes to be fair, there's probably
something to this theory.
Something, but not very much.
And so I think that illustrates the views
that are out there.
Obviously, if we put someone on the slide,
who was a die hard
supporter of the tax law,
they would probably give
a very effusive statement
of how big these effects are.
But the basic story I
think, is pretty clear cut.
To address, I think, what
may be the most troubling
misconception about this
is, that the story depends
entirely on incentives and self interest.
There is no role in it,
as it stands for cash flow
and certainly none for altruism
on the part of corporations.
The theory assumes that
firms are completely
self interested.
So it does not assume that
upon receiving a tax cut,
that firms will give some
of that money to workers.
There's no conceivable reason
to think that employers
would do that to any systematic extent.
But of course, you would think
that employer would pay more
if they were bidding against
other firms to hire workers
who would become more productive,
because investment had
expanded the capital stock.
I saw an article recently
in the mass media,
which said that companies
sharing of their tax cuts
with workers have been less
generous than had been hoped.
Well, certainly was not less generous
than the economic theory suggested,
because the economic
theory suggests three,
no generosity whatsoever.
And so presumably there
would not be less generosity
than that.
So, that I think is a pretty
serious misunderstanding
and I will in a minute in a few minutes,
be discussing these one time bonuses,
where I think we've seen a
lot of these misconceptions
by supporters and
opponents of the new law.
It's almost like someone
like scratching their finger
on the chalkboard because it
just, you know, I'm like, Oh.
Here's when I hear people talking about
how the tax savings are being used.
Because again, that of
course, it's not anything
about what the economic
theory is discussing.
The question is not how
you use your tax savings
from the investments or other
decisions you've already made.
The question is how a self interested
Corporation would change its behavior
in order to obtain larger tax savings.
And so in this instance, of course,
the fact that there is a rate reduction
on your U.S. taxable income
means that you would increase
your U.S. taxable income to
obtain larger tax savings.
And you would do that in large part
by investing more in the United States.
And so this question of how
the tax savings are being used
is completely misdirected.
And so in the standard economic model
that I'm presenting here,
investment behavior is determined
by the profitability
of future investments.
It's not the tax savings
on the past investments
or the unrelated cash
flows that the company
may happen to have.
So in other words, if the
Corporation for some reason
were to buy lottery ticket and happen
to get the winning number, and
so the company had a payoff
from the lottery, we would
not expect them to undertake
investments that would
otherwise not be profitable.
The fact that the lottery ticket paid off
has no implications whatsoever
for the profitability
of any of the investments that the company
could be considering.
And so the only exception to that would be
if the company was liquidity constrained
and due to a lack of cash,
couldn't make some investments
that were profitable.
And so I guess in that case, of course,
the lottery payoff might induce
some increase in investment.
But for the major companies
that are getting the bulk
of the tax savings here,
we don't really think
the liquidity constraints are an issue.
And So that is not at all
what we're looking for
from this tax cut.
And so that I think is
the basic economic story
we want to look at.
And then the relevant question becomes
what size effects we should expect?
Well, if we want to answer
that question though,
we've got to go back to the interest rates
because I mentioned earlier
that the key assumption
of interest rates staying the same.
And under that assumption,
the story really holds up very well.
In fact, it's very
interesting if you actually
work through a standard economic model,
under the assumption that interest rates
are just fixed at some
value and won't change
in response to tax policy or in response
to investment demand or such not.
You really do get a very
simple policy directive.
And I think in some ways,
we all wish that we did live
in this fixed interest rate world
because we could kind of go home.
And what we would say then is that
a corporate rate reduction,
actually is very beneficial,
workers receive higher wages
by a very substantial amount.
Now, it's true that
except in extreme cases,
the corporate rate reduction
still does not pay for itself.
And that notion certainly
has no foundation
that we're gonna somehow
gonna have a revenue gain
or no revenue loss, there
would be a revenue loss.
And you may say, "Well,
then there is really
"a trade off here.
"Higher wages, revenue loss."
But in this fixed interest rate world,
things would still be great.
Because the wage gain for
workers would be larger
than the revenue loss.
And so you could make up the revenue loss
completely by taxing workers.
And yet workers would
still come out ahead.
And so again, what you'd wanna do
in that fixed interest rate world would
be pretty straightforward.
And it's really an economic
theorem that you'd want
like a zero corporate tax rate.
Well, we don't actually
live in that kind of world.
I think it's quite clear
that higher investment demand
will in fact, drive up interest rates.
If that's the only thing that's going on,
just that as companies go out
there and try to invest more
the way the simple story says,
they had to pay higher interest rates.
If that was it, if that was the only thing
that was causing interest rates to go up,
you would still get higher
wages and higher investment
as a result of this
corporate rate reduction.
Now, those wage gains would
not necessarily be bigger
than the revenue loss, they might easily,
quite easily be smaller.
And so then there would
be, what's the net impact
on workers, what's gonna
depend on how you pay
for that revenue loss.
And so the picture
obviously becomes more murky
as to whether this is a
good policy or a bad one
and require some
difficult value judgments.
There is another factor
to bring in though,
which is that if the
corporate rate reduction
is deficit finance, which of
course happens to be the case
with public law 115 97,
then you have a further
interest rate increase
through that channel.
And under those circumstances,
it's not necessarily clear
whether investment in wages
will even increase on net.
In my view, it's likely they will
but that may dependent
part of the time horizon
you're looking at.
The increases in the
very long run may not be
as likely as they would
be in the medium run.
It also depends on how long
you allow that extra debt
to stay out there before
you begin servicing it.
And it depends on how you do service it
once you get around to doing so.
So what we'd really like to know, I guess,
is what the size of these effects are.
And so it would be great
if I could stand up here
and give a number.
Certainly not going to be
tempted by that type of hubris.
There's just too many factors
that would come into play here.
The statistical evidence, for example,
on how corporate tax
rates are related to wages
is really all over the map.
And I've really, personally
at least given up
on trying to get too much useful guidance
from those statistical studies.
So, I really think this is an area where
because it is so difficult
to do statistical work
that adequately controls for
other confounding effects,
we really should go back
to theory and look more
at economic models.
Unfortunately, the models
give a pretty wide range
of results as well, depending
on numerous factors.
You can see some models
where output and wages
basically don't change.
You see others, for example,
that assume fixed interest rates.
And those would tell you
that in the long run,
the level of output would
be maybe 3%, higher,
two to 3%.
Of course, as I've said, the
fixed interest rate assumption
is unrealistic.
And so in my view, the two to
3% estimate would be too high.
I do wanna make one crucial
point that has really
gets lost quite easily in the debate.
Another one of these things that is like
the scratch finger nail on
the chalkboard type experience
is when I hear people
talking about what change
there will be in the
growth rate of the economy.
And people say, "Well,
you know, we're expected
"to grow it like 1.8% a
year in the next 10 years
"before this law was passed and what
"will this growth Rate become,
"what will it change to?"
Well, of course, we expect
it to change growth rates
but that's really the
wrong way to look at it.
We don't expect there
to be a permanent change
in the growth rates.
Neither this tax change
nor any other tax change,
nor most policy changes
will permanently change
the growth rate to say,
"Oh, we're going to grow it
"2% a year or 3% a year forever,
"when we otherwise would have
grown at 1.8% a year forever."
Instead, if the policy is
permanent, we would expect it
to permanently change
the level of the output.
And so of course, the growth
rate would rise temporarily
to get us to that new
level, and we would then
revert to the growth rate,
who otherwise would have had
at that higher level.
So suppose you take the
optimistic case of a 3% increase,
maybe I should refer
to that as unrealistic
instead of optimistic,
since it does require
the fixed interest rates.
It almost certainly not be
3%, it'd be lower than that.
But if it was 3% and suppose
that that full 3% increase
was in place at the end of 10 years.
And suppose that occurred
smoothly over those 10 years,
what that would translate
into is an increase of 0.3%
per year in the growth
rate over those 10 years.
And so if were otherwise
gonna be growing at 1.8,
you would grow at 2.1 for those 10 years
and then you would go back to 1.8.
And so that, again,
probably the actual effects
are smaller than that.
But that gives you a sense
of what kind of effects
you might be looking at.
I think it does provide some
perspective on the claims
of people who say, oh, there'll
be a permanent change or 3%
growth rate or a 4% growth
rate, or well, let alone a 6%
growth rate, which was
mentioned by by the president
in one of his speeches.
Just a word about these employee bonuses.
I was quite surprised
these bonuses occurred.
I guess what did not surprise
me although it disappointed me
was, of course, that supporters
of the rate reduction
seized on the bonuses as
a success story of the law
and saying, "Well, gee, we
said it would raise wages
"and give workers more money.
"And it's doing that.
"So, good news on that, case proven."
Well, that can't be right of course.
Remember what the cause is
the wage increases to occur
is that there's additional
capital in the economy
that makes workers more productive.
So the wage increases would occur
as the additional capital comes online.
The one time bonuses cannot be that,
they are timing is exactly wrong
because it gives workers
more money at the end of 2017
or the beginning of 2018,
which is far too soon
for the capital stock to expanded.
And, of course, the one time
bonuses and of themselves
don't give workers anything
in the upcoming years,
when there would be an expansion
of the capital stock in place.
So clearly, these are not
responses of the economic type
to the tax law.
I guess one possibility is
that they are public relation
responses to the tax law.
That seems actually unlikely
because this would be expensive
to give these bonuses for PR reasons
that you otherwise wouldn't have given.
Probably the more likely
story is these are bonuses
that would have been given
anyway because of tightening
labor markets as the
economic expansion continues.
And then for public relations reasons,
the companies attribute
them to the tax law.
So they may be trying to
win goodwill with the public
at large, or some some of them
are in regulated industries,
They may be trying to win
goodwill with the President.
And there's been some articles on that.
Well, the path not taken here.
I just mentioned a couple.
One is that, I said that the
favorable investment effects,
which then drive the wage gains occur
because of the increased profitability
of future investments.
And it is not a matter
of using the tax savings
from your past investments.
This really suggests, of course,
that it would be desirable
to target the tax relief
to the future investments
and away from the past investments.
Now, one way to do that is by expensing
instead of rate reduction.
And of course, there is
some expensing in the law
along with the rate reduction.
Financial accounting rules
may induce some firms
not to fully respond to that.
Another way to do it,
though, if you are determined
to lower the corporate tax rate is that
as my colleague at AI Alex Brev
and I recommended last year,
you could phase in the
corporate rate reduction
over a number of years.
That would limit the revenue loss,
it would limit the windfall
gain that shareholders
would receive on investments
they've already made
while keeping in place the
favorable incentive effects
for the future investments
that firms might make.
Well, obviously, that path was not taken.
And then since the deficit
financing is really
an economic problem here,
you also might have wanted
to try to offset the revenue loss.
And one way to do that while
maintaining progressivity
or perhaps even increasing it,
would be to increase
taxes on shareholders.
As you know, Eric Toder
and I have a plan on that,
which he and I discussed
here, I guess two years ago.
The late Harry Gruber
and Roseanne Altschuler
also have a very similar plan.
That path also not taken.
All right, well, I'm gonna
try to say a little bit
about the international tax
provisions and certainly do that
with some trepidation.
So, simplified description
and the simplified almost
doesn't do justice to it, I guess.
You know, as Dan Shapiro was emphasizing
and many people have
pointed out, these worldwide
and territorial systems are really,
I mean, almost caricatures in
a sense and in most countries
or all countries actually
have hybrid systems
between the two extremes
and certainly we did so
before this new law, and we
now still have a hybrid system.
It's obviously a different
hybrid system where
instead of taxing earnings
as they're repatriated,
we tax them currently under GILTI
or we don't tax them at all.
Another feature is a of course,
the one time mandatory tax
on passed on repatriated
earnings within the provision
for tax free repatriation going forward.
And then we have FDII and we have BEAT,
and export subsidy and an import tax.
And so these things affect
many different margins
and choice and other
point that Dan Shapiro
repeatedly emphasizes
that you wanna look at
all the different incentives
that are being affected,
not just one of them.
And I'm gonna look at a
few of them, but certainly
by no means all in the time that I have.
One key question of course
is where income is located,
which includes both where
physical real investment occurs
and also where income is booked
under accounting strategies.
Both the worldwide and
territorial systems penalize
U.S. investment and U.S. income
reporting by foreign parents
because of course the U.S. will tax income
that is booked here
by foreign companies
but not income abroad.
The worldwide system has
additional distortions
built into it, which is that
it will penalize investment
that is done through U.S.
parents relative to investment
that's done by foreign parents.
That's a distortion it's
gotten a lot of attention
and is often called a
competitiveness concern.
It also as again, Dan Shapiro emphasizes,
it penalizes the avoidance
of foreign income taxes
by U.S. firms by giving a credit
for the taxes that they do,
in fact, pay the credit for
taxes that they don't avoid.
So those are additional
distortions that are built into
the so called worldwide system.
Of course, the territorial
system comes with its own
set of distortions,
which is that it penalizes U.S. investment
and U.S. income reporting
by U.S. parent companies.
It says, "Yeah, we're not going to tax you
"if you can book your profits abroad,
"through real investment
or through accounting."
So how do we think about
the new provisions here
in terms of this worldwide
territorial dichotomy.
Well, again, as many
speakers have emphasized,
I think it's absolutely
right, absolutely crucial.
This is not a territorial
system, it is a hybrid system.
In some ways it almost looks
like a worldwide system
but with a low rate
under the GILTI provision
to the extent that we do bring in
the dividends received
deduction and by itself,
that would be territorial.
Well, that is removing the problems
that the worldwide system
distinctively poses
while amplifying the problems
that the territorial system imposes.
But GILTI by moving us
back from territoriality
really just has the opposite effects.
It mitigates the problems
of territoriality.
It gives U.S. companies more
incentive to book profits here
as opposed to abroad.
But then it's reintroducing
the worldwide problems,
notably putting the U.S.
parents at a disadvantage
relative to foreign parents.
So, we have that seesaw between
the problems that worldwide
poses and the problems
that territorial poses
and we're continue, I guess,
to find an in between solution.
We will see and this was
mentioned in the debate panel,
there are some advantages
and some disadvantages
to the new way that we
are going about this.
So just in terms of the
income location things,
FDII and BEAT are trying
to target income shifting
and mobile above normal
return investments.
I think it's clear that they're
they're highly imperfect
in how they do that.
I just wanna say of course
there was an approach considered
that really would have
been much more elegant
and much simpler and
much more comprehensive
in this approach, which was, of course,
the border adjustment.
Roseanne Altschuler and I
discussed that last year.
This would have applied across
the board about the inbound
and outbound transactions,
it would have automatically
removed any U.S. tax incentive
to shift income abroad
or to move above normal
return investments abroad.
There would be no special rules required
to identify those things.
Those are the things that
would have experienced
a net effect from a
uniform border adjustment
that applies on both the
import and the export side
that would have been
automatically self selecting.
The border adjustment
did have some drawbacks
such as transferring wealth to foreigners
who had investments in the United States
at the time the border
adjustment was in reduced.
But it would have actually solved
all these things very well.
And so what we've done
is we've really abandoned
that approach and move to
these really complicated
provisions, which I view
is the border adjustments,
illegitimate children, and
they're trying to do this
kind of thing, but they
do it much less well.
Of course, one of the big criticisms
of the border adjustment was
they would almost certainly,
be struck down at the WTO.
And so you might say, well,
okay, so we couldn't do that.
And so we need to do something instead,
that would be WTO compatible,
even if it doesn't work as well.
The problem, of course, is
that it seems highly doubtful
that these measures are WTO compatible.
And so it's not quite
clear why we move to that.
The GILTI and the FDII and isolation
of course, do encourage shifting
in tangible investments abroad, although,
less so probably than a pure
territorial system would.
I wanna echo Dan Shapiro his point again,
the 10% is too high of a rate
if it's intended as a proxy
for normal returns, which I believe is
what it is intended to be.
The normal return can
be proxied for actually
by any investment that is
available on the margin two firms.
If firms had available to them
a 10%, safe nominal return,
then a 10%, fixed nominal
imputed rate of return
would be a valid proxy
for the normal return.
But of course, safe nominal interest rates
are less than that.
Granted here you also should
make an allowance I guess,
for bankruptcy risk that the firm faces
but I would still tell you
like use the firm's bond rate,
not not 10% nominal.
Of course, the market return would be
a perfectly valid proxy.
It would drive people
crazy and it would be hard
to administer 'cause one year
the market return is 30%,
the next year, it's negative
20% and so you would
have a proxy return given to
you towards the end of the year
that was bouncing around
from 30%, one year
to negative 20% another year.
I don't think the market
return in practice
would be a very administrable
proxy for the normal return.
So, some people are tempted to say,
"Well, let's use a fixed rate equal
"to the expected return on the market."
No, that's not a valid proxy
because you're putting in
a safe imputed return that's not equal
to a safe market rate,
but instead is equal
to the expected return
on a risky portfolio.
But any of these ratings that
are available in the market
is a valid proxy, 'cause
they're all ex ante equivalent
in the market, even though
they are different expos.
So the 10% is too high.
You know, as Dan Shapiro
said, I guess I find myself
really agreeing with
almost all of his points.
The one desirable effect here that we see
is just a more rational
treatment of repatriation
and the point particularly is
to not tax the repatriation.
It never made any sense
that tax would be triggered
by that particular financial transaction.
It clearly introduced
distortions, there's no reason why
foreign subsidiaries should be
holding more than $2 trillion
of unrepatriated profits
at the subsidiary level
instead of sending them
to the parent through
a dividend payment or otherwise.
And so that distortion has been removed.
At the same time, though,
I think we need to be aware
of the notion that this
money is coming back
to the United States and
will be invested here.
And we saw the clip this
morning by the president
about the money coming back.
I mean, what we're talking
about here, of course,
is the money being
transferred, once repatriation
is tax free, and we
expect this vast amount
of repatriation to occur.
We mean, of course, that
a large amount of funds
will be moved from the bank accounts
of foreign subsidiaries,
into the bank accounts
of U.S. parent companies.
And the notion of that will
then Cause the parent companies
to engage to use that money
for additional real investment
in United States is of
course, the same mistake
as talking about the use of tax savings
or about thinking that a company would use
it's winning lottery ticket
to make additional investments
in the United States.
The fact that this money has
moved from one bank account
to another doesn't
change the profitability
of any future investments
that could be made
in the United States.
So, and you could tell various stories
on why there might be some
minor investment effect,
certainly not a major one.
Instead, you would expect all else equal
the increased in repatriated funds,
should be distributed to
shareholders or used to retire debt
which of course is what
appears to have happened
with the elective holiday in 2004.
So, while supporters of the
tax cut are talking about
the bonuses as a success
story for the tax cut,
the opponents at all talking
about the stock buybacks
as a failure But that doesn't
make any sense either.
That's what you'd expect
the repatriated money
to be used for all else equal.
Now true, of course, all else is not equal
because we hope and expect that
the corporate rate reduction
will induce self interested
companies to invest more
in the United States and so
presumably that on a buybacks
should not go up quite by
the amount of repatriation
because this other thing is coming along
to make investment more profitable.
But the fact that there is
a vast amount of buybacks
following a vast repatriation of funds
is exactly what you would expect,
because we just don't think
repatriation in itself
is gonna boost investment,
which is something
I've discussed before back in August.
Another point, I guess that
Dan Shapiro often talks
about the avoidance of
foreign income taxes,
which can promote U.S. national interest,
if it's not money that
should be in the U.S..
And so the TCGA, the law,
whatever want to call it
does lower the penalty on
avoiding foreign income tax,
'cause obviously, we don't
have a foreign tax credit
on the income that that's
tax free under the DRD.
And the GILTI credit is
set up at the 80% rate.
There are a couple of problems with it,
which I don't wanna take
time to repeat here,
the year by year approach,
and then the pooling,
the cross crediting across countries.
So that's probably not
something that features
you would really want.
So just a few references here
and there's many you could turn to,
I have an article in tax
notes on back in March 5th
that discusses all these
issues and some further things.
There's a paper forthcoming
and the Brookings papers
on economic activity, which
I really want to recommend
anyone who's interested
in trying to get a sense
of how this law may affect the economy.
It has two authors, one
of whom is Robert Barrow
of Harvard University, who is
also visiting scholar at AI.
And also my colleague.
He is a strong supporter of tax law.
The other author is Jason Farman,
who is a strong opponent of the tax law
and who was Chairman of the
Council of Economic Advisors
in the Obama administration.
These are both top notch
economists and privilege
to know both of them.
I think it's just fantastic that Brookings
persuaded the two of them
to co author an article
on a topic where they
disagree so strongly.
And I think that the
product they came up with
is a very good one.
It really sets forth the
various possible effects
that could occur and the
evidence that would might point
one way or another and what
things might be expected
to occur, what things might
not be expected to occur,
like the tax cut paying
for itself, for example.
And that's forthcoming
and the Brookings papers
on economic activity.
And so I think that will
definitely be a classic
in the literature on this tax law.
So just strongly urge that.
And then Marty Sullivan had a good article
back in tax notes in January.
And as usual, very
thorough analytical article
where he really does
what I did not do here,
which is to dive into the weeds
on GILTI and FDII and BEAT
and try to quantify how those
different incentive effects
would reinforce or offset each other.
Well, there's many, many more
things that could be said
either about the international provisions
or other provisions like the
net operating loss rules,
the move, the expanded,
expensing for equipment,
the scheduled move away
from expensing for research
and so forth.
But I guess with 13 minutes
left, I should open this up
for questions and see
what is on your minds.
We have one question over here.
- So I guess beating up on the BEAT
does make the BAT look good.
(laughter)
- Everything is relative, isn't it?
- And when we were thinking about the BAT,
I think one of the concerns
was that a wholesale
implementation of the BAT
would require this reliance
on a foreign currency
adjustment that was massive
and had windfall issues.
And since you mentioned
phasing as maybe a better way
to do things, it made me wonder.
And I think I asked at the time
being very politically naive,
why not just a little bit
of BAT and a corporate income tax.
And I think I was told
politically republicans
can't enact a second tax.
But of course they did that with the BEAT,
the new alternative minimum
nasty brutal BEAT tax.
So it seems that they can.
Now we're starting to think
how would we fix the BEAT?
What would we do?
BAT's looking kind of good.
Can we do like, a little BAT?
- Yeah, I mean, I think from
an economic perspective,
you can.
So for example, suppose you have a 20%
or 21% business income
tax, either the 20% rate
from last year the 21%,
we finally ended up with
in the new law, you don't have
to have a border adjustment
that's at a 20% or 21% rate.
For it to be trade neutral,
you do want it to be uniform.
The economic theory about
how nicely and elegantly
a border adjustment works
applies to an immediate permanent
uniform border adjustment.
And IPUBA and IPUBA.
So immediate and permanent,
so there's no variation over time.
But then uniform, meaning
that the same tax rate applies
to all imports and the
same subsidy rate applies
to all exports and those two
rates are equal to each other.
And so if those conditions
are met, you really can
have the rate anything you want.
So you could do a 1% border adjustment
or a 5% border adjustment,
or a 10% border adjustment.
Doing it at the same rate as
the business income tax rate,
has the best effects in
terms of neutralizing
any domestic tax incentives
for profit shifting.
If you have a rate lower
than that you are mitigating
that income shifting problem
instead of solving it
but there is no reason
why you couldn't do that.
It would make those
windfall effects smaller.
I do think to my mind, the
biggest economic disadvantage
of the border adjustment
always was the fact
that it gave a rather
large tax cut to foreigners
who are holding
U.S.investments on the date
that the dollar denominated
investments on the date
that the border adjustment is announced.
There's other windfall
changes to that people
have legitimate concerns
about such as countries
that had borrowed with
dollar denominated debt,
developing countries.
And all those effects would be mitigated
if you had a smaller border adjustment.
So there is no reason
yet to preclude that.
The fatal problems though
with the border adjustment
seem to be that people
either did not understand
or did not believe the economic theory.
And so I don't know what to do about that.
And I think that would
be a problem, of course,
at the lower border adjustment
as well as at the bigger one,
maybe less of one.
And then of course, the other
concern was the WTO issue.
And I don't know whether some of the WTO,
again, one of the WTO
objections is that the tax
applied to an imported
item is larger than the tax
on a similarly situated
domestically produced item
because you have a wage reduction,
if it's produced domestically.
And if you make the border
adjustment small enough,
that problem sort of goes
away, at least on average.
Now, is that good enough
for trade lawyers?
Well, I do not know, that
is their prerogative.
And none of those objections again really
made economic sense.
But yeah, I don't know.
Seems like a worthwhile option to me.
I wouldn't give it any
much political traction,
unfortunately.
I mean, it's a good question,
if the BEAT goes away
one way or another, what will replace it?
One assumes that it couldn't
be much worse than the BEAT
but could be famous last words.
- As the deficit grows as
a result of these policies
and none of the positive
effects of what they
were supposed to do, like you were talking
about the repatriated cash.
What do you expect to happen
with the economy overall,
and do you think it will
engender another tax reform?
- Well, I guess you may be
asked a number of things there.
I mean, I think that my own
view is that unbalanced,
the corporate rate reduction
will likely still boost output
and wages to some extent,
even though it does
add to the deficit.
As I mentioned, that is by no means clear
as a matter of theory.
And of course, the favorable
effect would have been
significantly larger, if it
had not added to the deficit.
In terms of how we will deal
with the fiscal imbalance,
that is a long standing question.
Every time we take an action
that makes the fiscal imbalance worse,
it becomes more pressing.
It also becomes more
pressing, even when we don't
just because we are moving forward in time
and the future increases in healthcare
and retirement spending loom ever closer.
So I think there's two possibilities.
One is that a crisis occurs
and we then deal with this
in a crisis situation.
Now, I don't think a crisis
is imminent by any means.
And again, this is the
case of people making,
I think bad arguments for good reasons.
I think we want Congress
to address the deficit
as soon as possible, which
is, of course, right.
So let's say that a crisis
is right around the corner.
And that may prompt
Congress to take action.
Well, first of all,
it hasn't prompted
Congress to take action.
And it obviously creates
the crying wolf syndrome
because the crisis doesn't occur.
And I suspect we could run
the debt up considerably
more before a crisis hit.
And we shouldn't do
that, we should act now
before there's a crisis.
But it's possible we'll
wait until there is one.
The other alternative which does look
maybe hopelessly optimistic
is that at some point,
there actually will be
a fiscal package adopted
to narrow the long run fiscal imbalance.
If that happens, I think we can
say several things about it.
First, that it will
include both tax increases
and entitlement spending,
reductions or restraints
of entitlement spending growth
because it's just hard
to imagine a politically
feasible package that includes
only one of those two measures.
If the measure that includes
those kind of unpopular steps
is adopted in a non crisis situation,
it will definitely be
by bipartisan agreement.
It is inconceivable that either
party would do that alone
and then be hammered for
it by the other party.
And it also follows I think
that it would occur at a time
when the two parties are sharing power.
When we do not have a
single party controlling
both chambers of Congress
and the White House
because it's hard to imagine
the party that is out of power
signing on to that with
the party that is in power.
I guess the other thing
I would say specifically
about that package, is that
it will almost certainly
include a value added tax,
which is really hard to see
how you would avoid doing
that in a package that tries
to address the imbalance in a serious way.
And ironically, of course,
this means that we would
end up getting a border
adjustment, because of course,
the VAT would be border adjusted.
And people actually seem to
understand the economic theory
of how a border adjustment works
when it's done as part of a VAT,
but they don't understand
it when it's done
as part of a business cash flow tax.
So that will be I guess,
maybe the way in which
the border adjustment
eventually rises again.
Probably not in any other form.
But when we, I believe, finally
move to a value added tax.
Have all the questions been answered?
There are no uncertainties remaining.
No uncertainties that
you think I can address.
You're probably right about that one.
- Thinking back to 1981 when
President Reagan took office,
we had the economic recovery
Tax Act, which cut the rates
for both individuals and corporations.
- It did lower corporate
taxes through depreciation
and investment tax credit.
- There was a recession,
interest rates were very high.
It didn't really jumpstart the
economy the way they thought
and it expanded the deficit,
just like you have today.
And then after that, we had Tephra in '82,
we had the '84 Act.
And then in '86, we had what
I considered to be like,
true reform as compared to this act.
Do you think it's possible after this Act
that then another year or two,
if things aren't working out,
there will be somewhat
some kind of modification
in '18 or '19, or '20? or maybe it goes
to the next administration?
- Yeah, well, so this is
obviously an excellent question
and It's a question I guess about sort of
near term political events.
And I think those are
very hard to predict.
But certainly very hard for me to predict.
My training as an economics,
I was, of course venturing
opinions about the politics
of what could happen
with long term deficit reduction.
I feel a little more comfortable on that
than trying to predict
short term political trends.
The '81 precedent is very interesting
because you had this whole
series of tax increases
following '81.
And then Ronald Reagan
was still able to run
for reelection in '84 on the pledge
that he wouldn't do any tax increases.
So that was like, truly amazing
and quite impressive, I guess.
But I don't know that that is
a good precedent for today.
I think that frankly, the
congressional Republicans
are just really, really averse to taxes.
And so to see them agreeing
to the kind of tax increases
that we saw in '82, or
'84, I just don't really
think that It's in the cards.
Now in terms of where their
visa modifications of this law,
I'm sure that will happen.
I mean, some of them
will be under the rubric,
of course of technical corrections.
And Tom told us about the
timetable in which that
could occur if Congress
decides to pursue it.
And I think all of us hope that
a good Technical
Corrections Bill is passed
because it's obviously sorely needed
for this particular law.
I think there will also be policy changes.
You've got to think that
things like the BEAT
are gonna be changed in some respect,
for example, even if the
WTO doesn't force our hand.
But I don't know that those changes
are likely to be revenue raising.
Indeed, I almost wonder if they
might not be revenue losing,
which would certainly in my view,
not be the direction to go.
I do think that addressing
the fiscal imbalance
is just not something I see
happening in the near term.
I wish I did.
I'm predicting it won't
happen in the near term
but I certainly hope I'm wrong.
All right, well, it
looks like my time is up.
So thank you all very much.
(applause)
- Thanks Alan.
Alan thank you very much
for your thought provoking
presentation on the economic effects
of U.S.international tax reform.
It's now time for the afternoon break.
Coffee and refreshments are
available across the hall.
Please make sure to return
by 4:40 for the panel
that will cover the industry perspective
of U.S.international tax reform.
Thank you.
