Donald Trump is Tax Analysts' 2016 Tax Person of the Year. Tax Prof Lily Batchelder (NYU) is one of nine other honorees:
Seeing that then-candidate Donald Trump's tax plan seemed to raise taxes on many families, New York University School of Law professor and former Senate Finance Committee and White House tax counsel Lily Batchelder conducted research to predict the size of the impact [Trump Plan Raises Taxes For Millions Of Low- And Middle-Income Families].
"It was pretty obvious from just the structure that it would be raising taxes on a lot of people," Batchelder told Tax Analysts. "I had no idea of the magnitude," Batchelder said. She also said she didn't realize she would find that more than half of single parents would owe more in taxes. She added that the plan raised taxes on single filers without children because of the way "Trump consolidated the rate bracket."
Batchelder said she sees her research as "a sub-part of" what she described as very strong analysis conducted by the Tax Policy Center, the Tax Foundation, Citizens for Tax Justice, and others on Trump's tax plan. Her research shows that under his plan, some taxpayers will be "really winning and some . . . really losing," she added.
The conservative-leaning Tax Foundation corroborated Batchelder's analysis — Kyle Pomerleau, director of federal projects, wrote on Twitter, "We were able to replicate many of the numbers in the report. The results seem reasonable to me." But Trump's national policy director, Stephen Miller, said in a statement to The Washington Post that the "entire exercise is fatally flawed" because of parts of the plan he said Batchelder's analysis didn't take into account.
Democratic presidential nominee Hillary Clinton used Batchelder's analysis as the basis of an argument she made in the first presidential debate. PolitiFact reported that Clinton's campaign referenced Batchelder's analysis when Clinton said at that debate, "Independent experts have looked at what I've proposed and looked at what Donald's proposed, and basically they've said this, that [his tax plan] would blow up the debt by over $5 trillion and would in some instances disadvantage middle-class families compared to the wealthy."
Batchelder said that Trump ran on a promise of lowering taxes on middle-income earners and that she "was surprised that [the Trump campaign] didn't fix the plan."
Margrethe Vestager, EU Competition Commissioner, is Tax Analysts' 2016 International Tax Person of the Year. Tax Prof Edward Kleinbard (USC) is one of three other honorees:
Edward Kleinbard — Creator of The Stateless Income Concept:
While his groundbreaking work on stateless income is viewed by many in the tax community as having given the EU the philosophical basis for its recent state aid rulings, Edward Kleinbard said the primary impetus for his theory was what he referred to as "intellectual laziness" by many academics studying international taxation.
"Like much of my work, it reflects impatience with the work of both law professors and economists who would write that the U.S. tax system is a worldwide tax system without really thinking about how the system would actually operate," Kleinbard explained during an interview with Tax Analysts. Kleinbard is the Ivadelle and Theodore Johnson Professor of Law and Business at the University of Southern California Gould School of Law. Before becoming a professor in 2009, Kleinbard served as the congressional Joint Committee on Taxation’s chief of staff after spending more than 20 years as a partner in the New York offices of Cleary Gottlieb Steen & Hamilton LLP.
Kleinbard laid out his ideas in a pair of 2011 papers, Stateless Income and The Lessons of Stateless Income. (See Tax Notes Int’l, Oct. 29, 2012, p. 499; and Tax Notes Int’l, Nov. 12, 2012, p. 671.)
"The point of the pair was, first, that the tax system operates in a way that is completely different than what the casual understanding on the part of many academics is and that if you are going to talk about international tax policy, you have to come to grips with how the system operates, not simply settle for a lazy headline-type summary," Kleinbard said. "And second, that while there has been a lot of focus on income shifting out of the United States, that story was a small part of a larger story in which U.S.-based multinationals and multinationals from other countries — but I focused on U.S. multinationals — systematically gamed the tax systems of foreign countries’’ by moving income from high-tax to low-tax jurisdictions."
In doing so, Kleinbard said, multinationals are avoiding what he referred to as ‘‘tax rents.’’ He explained that economic theory suggests that in a world of capital markets, after-tax returns on investment must be similar around the world because if they are not, money will flow out of countries where taxation is hurting returns. This means that high-tax jurisdictions have to offer higher pretax returns to yield the same after-tax profits.
"So the point of the tax rents argument is to say that if you can, as a multinational firm, go into a hightax foreign country and then strip pretax income out from that country to a tax haven. Well, then you’ve captured a supersized return because you’re effectively capturing the high pretax income from a jurisdiction but avoiding the tax that explains why that income was high," Kleinbard said.
The result is that multinationals using that strategy are gaining easy supersized returns, which economists refer to as "economic rents," he said. They are doing that through various transfer pricing strategies described in his papers, he said.
"So the irony is not, as some of the economists like to think, that the U.S. tax system encourages investments in tax havens. That’s false," Kleinbard said. "There is no real investment to speak of in the Cayman Islands, or whatever, but what you really do is make real investments in high-tax foreign countries and strip the income out through tax havens."
"So that is kind of a demonstration of the difference between the sort of lazy story of the U.S. as a worldwide tax system, on the one hand, and reality, on the other. Frankly, I think it was helpful to people in recognizing the scope of the stateless income problem, and I have been gratified that the term has now become part of the standard lexicon," Kleinbard said.
Papers Opened Eyes in the EU
Kleinbard said EU or OECD officials should speak for themselves about their recent rulings, but that he’d like to believe that his papers were helpful in the recent state aid investigations. However, he acknowledged that the transcript of the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations (PSI) hearings on the issue of tax avoidance by multinationals was probably the single most helpful document for the EU.
"But I think that the papers helped open people’s eyes to the fact that transfer pricing was more than just income being streamed out of the United States to tax havens," he said. "It was also being streamed from high-tax foreign countries to low-tax foreign countries, and the Apple facts and the other facts that have emerged through the PSI hearings — and also elsewhere — demonstrate the validity of the hypothesis."
Kleinbard added that he authored a Tax Notes article on Starbucks, which predated the EU state aid investigations, as a demonstration of how effectively a multinational operating a traditional bricks-and-mortar business could create stateless income. (Through a Latte Darkly: Starbucks’s Stateless Income Planning, Tax Notes, June 24, 2013, p. 1515.) He noted that Starbucks was not operating over the internet, but was serving its customers in face-to-face transactions.
"If Starbucks could create stateless income, then any firm can, and I went through and tried to demonstrate some of the gaming behind the scenes in the Starbucks case, and when the EU state aid case was published on Starbucks, I think that frankly, a lot of my suppositions turned out to be correct," Kleinbard said.
Tax Is Only Part of the Picture
While he is still speaking and producing papers on tax issues, Kleinbard said he has expanded his work to include fiscal policy. "It is how we tax and spend, not just how we tax," he said. "Tax is an important part of that, but it’s very much an incomplete picture by itself." Kleinbard said his 2014 book, We Are Better Than This: How Government Should Spend Our Money, reflects the recent broadening of his interests beyond tax. The book came out in paperback this summer. He explained that while tax policy is important, what really shapes a country and societies is how governments spend their tax revenue.
"Within some reasonable parameters, tax systems around the world in developed countries are more similar than they are different, and what distinguishes countries and distinguishes the societies within those countries is the level of commitment the citizens make to themes of insurance and investment through the mediation of government," he said.
There is no reason to finance government inefficiently; however, Kleinbard said it would be a terrible mistake to define the best government as the one that taxes the least. He said that view simply ignores all the parts of any conceivable economy that private markets cannot, and do not, reach.
"The United States is the lowest-taxed large economy in the world as a percentage of its national income, as a percentage of GDP," Kleinbard said.
"And then you have to ask, ‘Are we the happiest large economy?’ And the answer there, of course the studies are more imprecise, but the answer certainly does not seem to be a clear yes. So we have to ask what it is that government can do that private markets cannot and how much of that do we want to pay for, and those are the kinds of conversations we don’t have. We simply assume that government is bad, that taxation is bad, and that the absence of taxation leads to greater happiness."
Kleinbard said the larger theme of his book is that Americans need to come up with an answer to what is the government good for. He said there needs to be an examination of those areas in which government can do a better job of providing benefits to its citizens than the private market, adding that two such areas are investment and insurance programs.
"When you think about it, there are lots of places where government, in fact, is better situated than our private markets to deliver what we’re looking for," he said. "So then the question is, 'What is the best way of financing that government?'"
An Elegant Approach to Taxation
Despite his recent moves into the broader fiscal sphere, Kleinbard has retained an interest in tax issues. In December he published two papers outlining his proposal for a dual business enterprise tax, which he refers to as the dual BEIT (pronounced "bite"). The two papers, "The Right Tax at the Right Time" and "Capital Taxation in an Age of Inequality," are both available for download on the Social Science Research Network website.
"The two papers together are 150 pages of analysis of comprehensive business tax proposals, so I am continuing to work on technical tax questions where I think I can add value," he said.
According to Kleinbard, the two papers present a comprehensive business tax reform proposal. He said the proposals occupy the space where he believes his experience can provide the most value, the intersection of the economic theory of policymakers and what he termed ‘‘administrability.’’
"I don’t have a lot of patience for law professor work that doesn’t come to grips with policy and administrability reality," he said. "I think that’s where the law schools add value, and where I add value is in the engineering of how this is going to work. What are the issues in this or that policy initiative? What is an elegant way to get the best compromise that the constraints of the political system will enable us to implement?"
Kleinbard said the two papers are representative of his goal of making the world a better place in the one small area he knows well. To do that, he said he has three parallel agendas. The first is to continue to produce technical work along the lines of his new capital income papers and his dual BEIT agenda that engages the academic and policy communities.
"The second is that I feel quite strongly that the comparative advantage that law schools hold over economics departments is that law school academics can, and should directly engage in policy debates as they are lived out in the messy world of politics and opinion in which we live," he said. "So I write op-eds and the like to try to call people to task when they make false claims — when people claim that tax cuts pay for themselves, for example, those claims need to be called out."
Finally, Kleinbard said citizens who want to understand policy issues on a deeper level than permitted by Facebook are confounded by a large information gap and are unsure of where to turn for trustworthy information.
"The book was an effort on my part to reach such citizens, and I worked very hard to make that book as accurate as possible," he explained. "It has no patience for charlatans and dissemblers, but it also doesn’t make exuberant claims that the United States should become France. I’ve got some other ideas along those same lines that I’ll be working on as well, but I try to do those three things."
Not Missing the D.C. Experience
The move to Los Angeles and academia has agreed with Kleinbard, who does not harbor the fondest memories of his time in Washington, despite his generally positive experiences in working with the JCT staff. "I learned that when the TV cameras are off and it’s just the members of Congress and their staff behind closed doors, they behave even worse than they do when the TV lights are on, particularly the staff," he recalled. "I found it to be an extraordinarily disagreeable environment with a reckless indifference to figuring out actual policy implications of proposals. I always understood politics — I did lobbying work — but I never appreciated just how systematically indifferent the members of Congress could be to understand what the policy implications of their ideas were, and I was thrilled to be able to move to an academic setting, which had been my long-term plan from the beginning."
Kleinbard said he was thrilled when USC made him the offer of a professorship but that he did not know whether the Los Angeles lifestyle would agree with him. However, he found California to be a place with a healthy, healing climate where it is impossible to be a "hot-tempered New York lawyer."
"I keep telling my students who are looking at careers in big law that they have to earn their right to come back to Los Angeles," he said. "That they should leave and suffer and earn their right to come back. It is not a well-received message, but I think that California is a healing climate and California is the perfect example of a society that has made a different bargain with itself than, let’s say, Alabama in terms of the level of state government and on the level of taxation. I think it would be instructive for people to think about where people are happier, California, on the one hand, and Alabama, on the other."