Wednesday, September 28, 2016

The Trump tax-exempt foundation story

I was among many tax people who spoke to David Farenthold as he researched his Washington Post story on diversion of income from Donald Trump to his tax-exempt foundation.  In case you haven't seen the story, the key reveal is that "companies that owed money to Trump or one of his businesses ... were instructed to pay Trump's tax-exempt foundation instead, according to people familiar with the transactions."  An example is the $400,000 appearance fee that Comedy Central reportedly paid to the foundation, rather than to him.

In some instances, what then would happen is that the foundation would make charitable or other payments on Trump's behalf to settle his business liabilities. These payments might well have been deductible by Trump himself, had he made them, whether as business expenses (where compelled to settle a dispute) or as charitable donations.

In a pure case, diversion of income is tax fraud plain and simple. Think of the characters in The Wolf of Wall Street taking suitcases full of $100 bills to Switzerland, so they could be secretly depositedd in a Swiss bank account without ever being declared as U.S. taxable income. That is an illustration of what is absolutely the canonical, core case of criminal tax evasion.  So the question is, to what extent was something similar going on here?

First point against equating the two: no net tax saving for Trump in any case where inclusion and deduction of the same amount would have occurred in the same year, but for the use of the foundation as an intermediary.

Second point against equating the two: reflecting that equivalence, there is a common practice, when people such as entertainers or politicians, want to help a charity, of their providing services for a fee or other profits (such as gate revenues) that are paid to the charity, rather than to them.  Sometimes it's legally unclear whether what they've done should be classified as (a) donating services for the charity, which is tax-free or (b) making money that they then donate to the charity, which would require express inclusion plus deduction.

The main reason it can make a difference is that charitable deductions generally are limited to 50 percent of adjusted gross income (AGI).  Thus, suppose my AGI is otherwise $1 million, but that I want to provide services that will cause the charity of my choice to earn $3 million.  If this money is deemed to have been paid directly to me, then my AGI is $4 million and I can only reduce it to $2 million via the charitable deduction.  (The extra $1 million deduction can be carried over to the next taxable year.)  But if it's outside my income altogether, then I get to report only $1 million of income, which is arithmetically equivalent to having been allowed the excess deduction after inclusion.

Though I am not an expert on tax practice in the charitable area, I have the sense that practice and enforcement can be a bit flexible and accommodating in this scenario, even though the "donation of services" rubric can be used (where what actually happened is better viewed as receipt followed by donation) as a means of evading the AGI limit on charitable deductions.  I believe that the reason is not just that the line can be hard to draw in some cases, and more reliant on careful planning than on true differences in substance or intent, but also that devising a workaround with respect to the 50 percent AGI limit is considered far less of a malum in se than classic Wolf of Wall Street-style evasion.  One isn't lining one's pocket, relative to the case of simply not providing the services, and as it happens the rationale for the 50 percent of AGI limit may not be all that strong to begin with.

A third ambiguity, raised by a Trump advisor who is quoted in the Farenthold story, pertains to a different set of facts than I have assumed so far.  Suppose I decline to be paid for something I have done, but suggest that the donor instead pay the amount to the charity of his or her choice.  Then there is authority for classifying this as a tax-effective renunciation by me of income that I would otherwise have earned. This, however, would be inapplicable to the facts that Farenthold reports unless it was the donor's idea, rather than part of the deal's terms, to donate the money to the Trump Foundation in particular.

When one puts all this together, including suggestions that some of the Trump Foundation's outlays were not just for Trump's benefit but would not have been deductible by him (e.g., paintings of himself, or a Tim Tebow helmet), then one is definitely inching closer to Wolf of Wall Street territory. But admittedly the facts are still unclear, and establishing criminal intent would require more than has yet become known.

What would the requisite criminal intent here involve? In a Wolf of Wall Street scenario, it pretty much speaks for itself. You don't really put money in suitcases (or taped to your body) that you smuggle through Customs unless you are knowingly engaged in tax evasion. But suppose it were to be established, through the testimony of people working for Trump, that he considered the Trump Foundation's money to be his, hence available to pay for anything he liked. Then telling people to pay the Trump Foundation, rather than to him personally, would become harder to explain innocently. So a finding of self-dealing by the Trump Foundation, in violation of the charitable rules, would also, in this context, tend to strengthen the case for fraudulent assignment of income upfront.

One last point: even if it was just a matter of avoiding the AGI limit on charitable deductions, rather than of using the Trump Foundation as an untaxed piggybank for personal inurement, there's every reason to believe that actual tax dollars were at stake. After all, while we haven't gotten to see Trump's tax returns, there are widespread suspicions that he regularly drove his AGI and taxable income so low that the 50 percent limitation might well have been a serious constraint, even though there is evidence suggesting (despite his frequent protestations to the contrary) that he does not actually give much to charity, other than to settle liabilities of his business organization.

UPDATE: One further aspect that I forgot to include the first time through is SECA tax liability. This is the self-employed individual's analogue to the Social Security and Medicare FICA taxes for employees.  It might be raised as an issue by the Comedy Central fee, although presumably not for the amounts that Farenthold reports Richard Ebers paid to the Trump Foundation for tickets and the like.  How large the stakes would be here depends on whether Trump already had sufficient reported income from self-employment to place out of the Social Security piece.  (This would only take about $100,000, depending on the tax year as it's indexed to inflation, but who knows how he was structuring things?)  The SECA tax rate stands at 15.3% until one gets above the Social Security ceiling, whereupon it declines to 2.9% for just Medicare.  The latter rate would amount to $11,600, if applied to a $400,000 fee (like the amount reportedly paid by Comedy Central).  Chump change for Trump? You tell me.

Also, for gifts to private foundations, the AGI limit is 30 percent, not 50 percent.

Tuesday, September 27, 2016

Exposed

Let's face it, there's something almost glamorous about being an existential threat to everything positive that the United States has achieved over the last two-plus centuries, such as prosperity, the rule of law, progress towards racial justice, and a respected place in the world.  But apparently ninety minutes is enough to strip off any such glamor, and show that the bearer of the threat is just a dull, angry, incoherent, ranting old bore.

Monday, September 26, 2016

An NYU Law School first?

I am wondering whether my colleague Lily Batchelder's paper, "Families Facing Tax Increases Under Trump's Latest Tax Plan," might actually be mentioned, or at least referred to, during tonight's presidential debate, whether by Hillary Clinton or even by moderator Lester Holt.

From the abstract: "Donald Trump's latest tax plan would cost more than $5 trillion over 10 years. Trump claims his plan would cut taxes for every income group, with the largest tax cuts for working- and middle-class families. But despite its enormous price tag, his plan would actually significantly raisae taxes for millions of low- and middle-income families with children with especially large tax increases for working single parents....  I conservatively estimate that Trump's plan would increase taxes for roughly 7.8 million families with minor children. These families who would pay more taxes represent roughly 20% of households with minor children and more than half of single parents. They include roughly 25 million individuals and 15 million children."

The paper notes 4 reasons for this effect: repeal of personal exemptions, repeal of head of household filing status, replacement of the 10% bracket with a 12% bracket, and relative lack of benefit to low- and middle-income caretakers from Trump's ostensible tax deduction and credit for child care (which is actually a deduction for having children, insofar as it doesn't turn on actual outlays).

Now admittedly, whenever one changes things around in ways that include some tax-increasing provisions as well as tax-reducing ones, there is a likelihood that some will lose. Thus, suppose there were 20 million affected lower-income households, half of which won and half of which lost from a set of changes. Until one knew more about who won and lost, as well as why, one couldn't easily say whether this was better or worse or neutral as a distributional matter, compared to the law it replaced. But I suspect, from the list of reasons for the adverse effects, that there is a downward skew here - i.e., the losers are often particularly worse-off than others.  After all, having (a) more children, (b) a higher percentage of one's income in the lowest bracket, and (c) only one parent in the household often would correlate with being especially economically vulnerable.

UPDATE: Sure enough, the research in Lily's paper came up at the debate.

Sunday, September 25, 2016

More on the Brian Wilson concert

The Brian Wilson concert was great - astounding playlist of classic songs (and a few, mainly later in the first half, that were OK but not quite in the same league), performed with enormous skill by an extremely talented group of musicians.  I also thought the acoustics were good; I gather the Beacon has a reputation for that.  And they played for more than two hours total, even with the intermission, with unflagging energy from the ten or so musicians who accompanied Brian.

But I found it interesting to reflect about his role in it all, given how completely dispensable he was musically, and yet at the same time vital to the experience - not just to the audience, but probably also to the other musicians.  Without him there, it's just a superior cover band doing someone's hits.  Yet any other aging luminary whom one might see on the road these days - Dylan, McCartney, the Stones, Neil Young, what's left of the Who, Springsteen, Hot Tuna, Yes, what's left of the Dead, etcetera - would always be the musical focal point of the concert, even if ably helped by younger and more energetic musicians, whereas Brian's role was just to be ... there.  He plinked at his piano occasionally, although I never clearly heard him in the mix, he sang some of his old vocal parts to the extent they are still within his range (but he's really no singer any more), and he very briefly introduced most of the songs.  E.g., "Surfer Girl" is the first song he ever wrote, he considers "God Only Knows" the best song he ever wrote, and he loves the drumming on the instrumental track "Pet Sounds."

Ringo Starr in the Beatles Anthology interviews says that fans during the touring days "didn't come to hear us [obviously enough given the screaming], they came to see us."  It wasn't quite like that with the older crowd that goes to a Brian Wilson Pet Sounds concert in 2016, because we certainly did want to hear all the songs performed, with full achievement of the studio effects plus live-in-the-house sound.  Also, it wasn't quite just to see Brian, at least in the same sense as the fans who in 1965 wanted to see the Beatles.  We know that he has what's been called a "schizo-affective disorder," is out there more than a bit on the Asperger's spectrum, and doesn't actively retain the talents of his younger days.  And it was sad to see how stiff he was when he tried to bow at the close, not to mention when he shuffled off the stage near the end of each set while the band was finishing its last song.

Not that it's a huge sacrifice to go to a concert where a technically great band plays some of the best popular music of the last 55 years, but part of it - certainly for me, but I think for others as well - relates to the emotional pull of the Brian Wilson story.  This is the myth that's actually true, about the genius (with more than a touch of the idiot savant) who hears these incredible things in his head, just wants to record them, and runs into hateful, manipulative people, with their own shallow and selfish agendas, who destroy him.  (Unfair to Mike Love, perhaps - he felt he had a family business to run, and here's this crazy visionary who's flipping out on drugs and doing all these things that will hurt sales, not to mention that the genius doesn't seem to want to work with Mike any more, and is getting impossibly grandiose and irrational to deal with, while all his new hangers-on keep telling him he's a genius who's being held back by his bandmates, and some of them have sinister agendas.  But still.)  Then Brian spends decades in a haze, it's a miracle he's still alive, he spendsmost of this time convinced that the last of his visions (Smile) was drug-addled garbage, and then finally, at the end of it all, he's vindicated.

So you want to be there to celebrate what he did, and his triumph, and to let him know what it means to you, even though it's not entirely clear at what level he takes this all in.  With the tug of that story, plus the music that you get to hear live, it's a great concert experience even though the star's job is just to be there, as a physical matter, up on the stage and in full view.  

Saturday, September 24, 2016

The boy who lived

Brian Wilson concert at the Beacon Theatre tonight, honoring the 50th anniversary of Pet Sounds (which they played in full after the intermission).

He's almost like a stiff, old giant crustacean, seated at a piano at center stage with his white helmet hair, doing some of the singing (with varying degrees of enthusiasm) but never trying any of the high notes, which he can no longer reach (so they're done by Al Jardine's son, second from the right in the back).

While Brian is not needed on stage to create any part of the sound - they don't rely on his keyboards, and others could do all of his vocal lines, for the most part better (at this point he is only intermittently expressive or on the beat) - he is of course needed up there as the show's symbolic focal point.  By seeing him up there, we honor him for having written and arranged all that great music, for having suffered so much, and for having survived, and I think one reason for cheering is out of the hope that he'll enjoy feeling appreciated now.

Friday, September 23, 2016

Slides for my conference talk

Excellent conference, which ended just a half hour ago, on "Human Rights and Tax in an Unequal World."  Very diverse range of topics, ideas, and approaches, but it also hung together well.  Props to Philip Alston and Nikki Reisch for all their great work in bringing it to life.

While it's a bit too late on Friday afternoon, after a long day, to say anything more about it at the moment, here are the slides for my talk (with one slight addition, motivated by a tweet about one of my slides before I made the editing change).  And the paper itself is here.

Wednesday, September 21, 2016

"Human Rights and Tax in an Unequal World": NYU Law School conference this Thursday and Friday

Tomorrow and Friday at NYU, we will be holding our long-planned conference on Human Rights and Tax in an Unequal World.  Very good and varied speakers list, bringing together lots of interesting people who are not always seen at the same venues.  You can find a full schedule and program here.  It will take place at Lipton Hall (108 West 3rd Street).

I myself will be speaking at Session 4, which meets on Friday from 10:30 to 11:45 am.  Here again is my paper (mainly in the form of a dialogue between two fictional individuals).

Further information, including re. how to register to attend the conference, is available here.

Two birds with one stone?

An op-ed by Morris Pearl in today's NYT argues the following: "With companies engaging in high-risk tax avoidance, the investing public needs more information, clearly expressed.  Investors should, at a minimum, be given a list of all countries in which a company operates, the revenue and earnings attributed to each country, and the amount of taxes paid in each."

He argues that, otherwise, investors can't realistically evaluate tax risks, such as those in the Apple case.  I gather that neither Apple nor its peer companies had pre-2014 financial accounting reserves for what's now clearly threatened by the EU state aid cases, because their advisors blithely thought there was no risk.

There are obviously more issues to consider with regard to Pearl's proposal.  For one, would it further empower governments to challenge companies' tax positions?  That might be good for the world, but is less good for current shareholders, who benefit if the positions aren't challenged.  Note, however, that investors generally shouldn't mind, since a higher expected tax bill would presumably be built into the stock price at which they bought.  Note also that OECD-BEPS may succeed in inducing some measure of country-by-country reporting anyway.  (This ostensibly would not be public, but one would not be surprised if salient tidbits leaked out.)  What's more there are already instances in current financial reporting practice of apparently sacrificing accounting accuracy for ethical / compliance reasons (e.g., not taking into account tax savings that have a less than 50% chance, even if well above 0%, of being sustained).

Companies no doubt will also argue - I don't know how credibly, as this isn't an area of personal expertise - that publicly reporting the information would give competitive advantages to rival companies, including those not facing U.S. reporting requirements, by revealing info about the scope and direction of their operations.

But the points in favor include not only that emphasized by Pearl - that otherwise investors may be under-informed about significant tax risks - but also the point, which has come out in accounting research over the last ten-plus years, that companies which engage in aggressive tax planning often turn out  to have unexpected negative earnings shocks even if for wholly separate reasons.  A company's international tax profile genuinely is and should be relevant to investors for multiple reasons, and it doesn't appear that financial reporting to date has done all that it could have to inform investors properly.

Forthcoming colloquium on high-end inequality

As I've mentioned in prior blog posts, during the second half of the semester at NYU Law School, economist Robert Frank (generally at Cornell) and I will be co-teaching a Colloquium on High-End Inequality.  The afternoon sessions, with invited speakers, will be held at NYU Law School, 40 Washington Square South (Vanderbilt Hall), Room 202, from 4:10 to 6:00 pm on Mondays from October 24 through December 5.  They're open to the public, although non-NYU people might want to RSVP in advance (details to be available later).  We'll also be going to small-group dinners after the sessions.

I've previously mentioned the list of speakers, but I now also have the list of papers.  (Indeed, I also now have the papers, which I can send to interested parties, although we'll also be posting most of them online and sending all of them to our email distribution list.)  It's as follows:

October 24 – Robert Frank, Cornell University. 5 short pieces: (1) Why Has Inequality Been Growing?, (2) Why Luck Matters More Than You Might Think, (3) Does Inequality Matter?, (4) Why have weddings and houses gotten so ridiculously expensive? Blame inequality, and (5) The Progressive Consumption Tax.  Guest commentator: K. Anthony Appiah, NYU Philosophy Department.
October 31 – Kate Pickett, Department of Health Sciences, University of York.  (1) Income Inequality and Health: A Causal Review; (2) The Enemy Between Us: The Psychological and Social Costs of Inequality (both co-authored by Richard Wilkinson).
November 7 – Ilyana Kuziemko, Princeton University Economics Department.  Support for Redistribution in an Age of Rising Inequality: New Stylized Facts and Some Tentative Explanations (coauthored by Vivekinan Ashok and Ebonya Washington).
November 14 – Alan Viard, American Enterprise Institute.  Progressive Consumption Taxation: The X Tax Revisited (chapters 1-3) (coauthored by Robert Carroll)
November 21 – Daniel Shaviro, NYU Law School.  The Mapmaker’s Dilemma in Evaluating High-End Inequality.  Guest commentator: Liam Murphy, NYU Law School.
November 28 – Adair Morse, Haas School of Business, University of California at Berkeley.  Trickle-Down Consumption (coauthored by Marianne Bertrand).
December 5 – Daniel Markovits, Yale Law School.  Meritocracy and Its Discontents.

Never give up, never surrender

The tree in the tree pit outside our house seemed to have died, so folks from the city came and cut it down, leaving only a stump.  But it refused to go so easily, sending up an array of branches and leaves.  It was cut down again, but fought back a second time.  Although it doesn't currently look very tree-like, I'm admiring its fighting spirit and wondering if we should keep it there after all.