Taxing R2-D2? ABA Tax Section Panel on Automation and AI

Kerry Ryan
Associate Professor
St. Louis University School of Law

I had the pleasure of attending the midyear meeting of the ABA Tax Section this past weekend in San Diego. The Tax Policy & Simplification committee organized an interesting panel entitled: “Taxing R2-D2: How Should We Think About the Taxation of Robots and AI.” The panel was organized and moderated by Surly’s own Leandra Lederman, and panelists included Shu-Yi Oei (Boston College), Roberta Mann (Oregon Law), and Robert Kovacev (Steptoe & Johnson LLP).

For those of you who read Shu-Yi’s post, you know that she is “deeply skeptical” of the “robot tax” frame. At best, it is misleading—no one is attempting to impose a tax on a “robot” (whatever that is?) per se. As Robert Kovacev succinctly put it: “robots don’t pay taxes, people pay taxes.” The key question is which people: owners, workers, and/or consumers? Roberta linked this question to the long-standing debate about who ultimately bears the burden of the corporate income tax.

At worst, the “robot tax” terminology captures (and perhaps amplifies) the fear (“the robots are coming!”) and angst driving much of this discussion. The underlying concern relates to the potential negative impact on labor of increased utilization of technology/artificial intelligence (AI)/automation in the production process. Experts disagree about whether, over the longer term, automation will reduce the number, or merely the type, of human workers. The unanswered question is whether this is just the next in a long line of technological shifts in the economy dating as far back as the Industrial Revolution, or whether AI/machine learning truly represents a technological tipping point.

What is clear is that the transition to this new automated workplace may lead to worker displacement (particularly for those in manual/routine jobs). Mass unemployment could negatively impact the tax base—fewer workers mean fewer taxpayers. Notice that any revenue loss would hit at the same time as funding demands increased for re-training and/or social protection programs (existing and/or proposed universal basic income) for displaced workers.

Assuming you believe there is a problem(s), what is the policy prescription? While most of the panelists agreed that tax has a role to play here, they disagreed as to the contours of that role. Should we plug the hole in the income tax base by shifting more of the tax burden onto capital, as opposed to labor? Do we attempt to tax work completed by robots in the same manner as comparable work by employees (see Bill Gates proposal)? Should we raise the overall level of taxation (under existing or new tax structures)? Do we view automation as imposing negative externalities on the labor market and impose some type of Pigouvian tax? Should we attempt to slow the pace of technological development, rather than workplace implementation, by reducing either direct funding or tax incentives for R&D and innovation (see South Korea)?

Many interesting questions with no easy answers. At the very least, we must resist allowing zeitgeist to drive the policy response, while at the same time affirming the legitimacy of the underlying concerns and working to minimize their negative consequences on workers and their families.

IU Tax Policy Colloquium: Brooks, “The Case for Incrementalism in Tax Reform”

By: Leandra Lederman

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Left to right: Jake Brooks, Leandra Lederman, Bill Popkin, David Gamage, Tim Riffle

On February 1, the Indiana University Maurer School of Law welcomed Prof. Jake Brooks from Georgetown Law School as the second speaker of the year in our Tax Policy Colloquium. Jake presented an early draft of a paper titled “The Case for Incrementalism in Tax Reform,” which led to a lively and interesting discussion about what incrementalism is, what constitutes fundamental reform, how politics may affect the making of tax policy, and whether and how tax law differs from other fields of law.

The paper, which is not yet publicly available, argues that “fundamental tax reform,” while sometimes necessary, should not generally be the goal of tax policy, and that instead, policymakers should take an incremental approach to changing tax laws. “Incrementalism” has a long history in political science, and was first described by Charles Lindblom in an influential 1959 article, “The Science of Muddling Through.” In general, Lindblom’s approach in that article was to reject the urge to use a formal method that involves clarifying the principal goals up front, identifying the means to achieve them, and then analyzing every relevant factor in the decision. Lindblom instead advocated the use of a more casual method that he termed “successive limited comparisons,” which ignored important possible outcomes or alternatives and did not involve distinguishing means and ends. (Page 81 of Lindblom.) Lindblom argued that this “muddling through” approach was not only what was actually practiced by administrators, but also a method for which they need not apologize because administrators are less likely to make serious and lasting mistakes if they proceed through small, incremental changes (pp.86-87). As Jake acknowledges, Lindblom wrote at a time with much more limited ability to model and process large quantities of empirical data. He notes that incrementalism has continued to be an important theory in the literature. Despite technological advances, we cannot see the future, and there remain limits to what empirical data can help us predict.

Jake’s argument is driven in part by arguments in favor of tearing the Internal Revenue Code out by its roots and starting over. I agree with Jake that such an approach seems extremely risky. Policy driven by rhetoric and “horror stories” risks being ill-conceived, hasty, driven by political rent-seeking, and even destructive, as I have written about in the context of IRS reform. But does that necessarily mean that legislative tax changes should take a Lindblom-style incremental approach? Continue reading “IU Tax Policy Colloquium: Brooks, “The Case for Incrementalism in Tax Reform””

IU Tax Policy Colloquium: Brennan & McDonald, “Debt and Equity Taxation: A Combined Economic and Legal Perspective”

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Left to right: Tim Riffle, Tom Brennan, Leandra Lederman, David Gamage, Karen Ward

By: Leandra Lederman

 

On January 18, the Indiana University Maurer School of Law welcomed Prof. Tom Brennan from Harvard Law School as the first speaker of the year in our Tax Policy Colloquium. Tom presented an early draft of a paper co-authored with Robert L. McDonald, Debt and Equity Taxation: A Combined Economic and Legal Perspective. We had a lively and interesting discussion about it in the workshop, as well as over dinner.

The paper, which I do not believe is publicly available yet, deals with the taxation of hybrid securities. It describes current law on how those securities are categorized as debt or equity, as well as the history of how the law developed. The paper criticizes the binary categorization of hybrid instruments as either debt or equity. It thus argues for a bifurcated approach.

The core of the current draft is a proposed new approach to debt and equity that considers the capitalization of a corporation as a whole and taxes the components in line with the underlying economics. The paper disaggregates the risk-free return, the risky return, and abnormal returns (rents). The paper proposes two possible systems of taxation: the “unlevered equity system” and the “levered equity system.” In the unlevered equity system, debt consists of risk-free obligations (like short-term Treasury bills) and equity is unlevered ownership of assets. In the levered equity system, the definition of debt is the same but equity is fully leveraged ownership of assets (fully financed by risk-free obligations). Under the unlevered approach, although particular investors may own a mix of debt and equity, the corporation itself effectively issues no net debt because it issues no risk-free obligations.

A key insight of the paper applies the Domar-Musgrave economic result that, under certain assumptions, risky returns on assets do not bear tax. Brennan and McDonald point out that the Domar-Musgrave insight also applies to corporations, although the securities are liabilities for them instead of assets. (Many years ago, I applied Domar-Musgave analysis in an article of mine on the tax favoritism for entrepreneurship, but I had not thought about its possible application to corporate income, which is a fascinating idea.) The implication of that insight, as Brennan & McDonald note, is that the risk-premium portion of return on investment effectively does not bear tax. As a result, under the unlevered system, all corporate income would bear corporate tax because the unlevered system does not have any net debt obligations. By contrast, adopting the levered system would make the corporate tax burden only rents, given a tax deduction for debt. The paper explains that this reaches the same result as the Mirrlees Review’s exemption for “normal returns” on corporate capital, as well as the allowance for corporate equity (ACE), if the ACE deduction is defined in a particular way. Continue reading “IU Tax Policy Colloquium: Brennan & McDonald, “Debt and Equity Taxation: A Combined Economic and Legal Perspective””

The 2018 Tax Policy Colloquium at the IU Maurer Law School

ColloquiumPosterBy Leandra Lederman

The 2018 Tax Policy Colloquium at the Indiana University Maurer School of Law will kick off next Thursday, January 18, with the presentation by Harvard Law School professor Tom Brennan of a fascinating and timely paper he is co-authoring with Robert L. McDonald, Debt and Equity Taxation: A Combined Economic and Legal Perspective. Tom is a terrific speaker, and I expect the workshop to be really interesting.

Last year, I did a closing post noting that some themes had emerged in the semester’s colloquium. This year, I plan to blog each workshop afterwards, with permission of the speakers. The full workshop schedule follows after the jump. If you will be in Bloomington and are interested in attending one or more workshops, just let me know and I can send you the paper once I receive it. (Most of the paper drafts will not be publicly available.)

The Tax Policy Colloquium is a course for students; I expect about 14 this semester, including a visiting scholar from another school on campus who has asked to audit. I conduct a background session with the students to help them get up to speed on the concepts presented in the paper draft. Typically, the actual workshops are attended not only by the students but also by my colleague David Gamage, senior tax attorney/Maurer alumnus Tim Riffle, and a few other faculty–law school colleagues and/or tax or economics faculty from other schools on campus. Sometimes other members of the community attend, such as a tax professor from another law school; another attorney practicing in Bloomington or Indianapolis; a student not enrolled in the class (Shuyi Oei‘s and Ben Leff‘s talks in 2016 were particularly popular with other students!); and/or a local judicial clerk. Eric Rasmusen from the IU Kelley School of Business and Margaret Ryznar from IU’s McKinney Law School in Indianapolis have each attended several of the talks.

Continue reading “The 2018 Tax Policy Colloquium at the IU Maurer Law School”

What’s Up with the Sharing Economy? (Report from the 13th International Human Rights Researchers Workshop)

By: Diane Ring

Sometimes we do get what we are seeking. In some of my recent work on the sharing economy I have advocated for more discussion and analysis across legal boundaries, so that the rules we develop have outcomes that more closely match our goals and don’t bring unexpected—and undesired—surprises. The two-day conference on “Sharing Economy: Markets & Human Rights” that I have been attending at the College of Law and Business in Ramat Gan, Israel has provided just such an opportunity. The papers presented cover a wide range of legal fields and issues from taxation to discrimination, and will ultimately be published together in the Law & Ethics of Human Rights Journal. Although we are all benefiting from the discussion of our drafts and will continue to revise our work, some interesting themes have emerged already . . .


Continue reading “What’s Up with the Sharing Economy? (Report from the 13th International Human Rights Researchers Workshop)”

Cary Martin Shelby (DePaul) Presents “Closing the Hedge Fund Loophole: The SEC as the Primary Regulator of Systemic Risk” at Boston College Law School

Professor Cary Martin Shelby (DePaul) is presenting “Closing the Hedge Fund Loophole: The SEC as the Primary Regulator of Systemic Risk” at BC Law School’s Regulation and Markets Workshop today.  The abstract:

The 2008 financial crisis sparked a flurry of regulatory activity and enforcement in an attempt to reign in activity by banks, but other institutions have also been identified as potentially threatening to the stability of the financial markets. In particular, several empirical studies have revealed that systemic risk can be created and transmitted by hedge funds. In response to the risk created by hedge funds, Congress granted the Financial Stability Oversight Council (“FSOC”) authority under the Dodd-Frank Act of 2010 to designate hedge funds as Systemically Important Financial Institutions (“SIFIs”). Such a designation would automatically result in stringent capital constraints and limitations on liquidity risk on these non-bank institutions. Yet in over six years since FSOC has been granted this authority, it has failed to identify even one hedge fund as a SIFI. In the face of massive resistance and deregulatory initiatives introduced under the Trump administration, it is highly unlikely to do so in the near future. The inability of FSOC to regulate systemically harmful funds is particularly troubling because several post-financial crisis studies have revealed that systemic risk can still be created and transmitted by hedge funds. Given FSOC’s inability to close this hedge fund loophole, this Article argues that Congress should explore appointing the SEC as the primary regulator of hedge funds because: (1) hedge funds can still pose a systemic threat to the economy; (2) the transparency framework inherent in the federal securities laws can supply a more effective means for mitigating systemic risk than the prudential framework currently mandated for SIFIs; and (3) appointing the SEC in this regard would reduce the fragmentation of the current regulatory structure which has been extended and complicated by the creation of FSOC. Although the federal securities laws are typically used to promote investor protection, this Article posits that enhancing transparency to hedge fund counterparties and investors can decrease systemic risk by empowering such market participants to better protect themselves against risk. Enhancing protection in this manner could in-turn weed out systemically harmful funds from the marketplace, without imposing the severe capital constraints that would be mandated under FSOC’s model.

If you’re an academic in the Boston area and would like to join us, please send me an email.

 

ABA Tax Section 5th Annual International Tax Enforcement and Controversy Conference (Washington, DC, Oct. 27, 2017)

 By: Diane Ring

Yesterday my frequent co-author, Shu-Yi Oei, and I attended the ABA’s conference on “International Tax Enforcement and Controversy” in DC. The panels and discussion covered a range of interesting intersecting issues. These included: (1) the relationship among international organizations and bodies (such as the OECD, UN, World Bank, IMF and G20) in directing the shape of international tax law content and enforcement; (2) the place of developing countries in the evolving international tax system; (3) competing goals of finance ministers and tax ministers in various countries and the impact of that conflict on taxpayers; (4) the consequences of and responses to limited IRS resources; and (5) continuing benefits to enforcement from the Swiss Bank Program.

But probably the most significant theme that ran through the day’s discussion was the role of data, especially “big data”. . . .

Continue reading “ABA Tax Section 5th Annual International Tax Enforcement and Controversy Conference (Washington, DC, Oct. 27, 2017)”

International Sharing Economy Conference: Day 2 Takeaways

By: Diane Ring

Yesterday I blogged about Day 1 of the international sharing economy conference, titled “Reshaping: Work in the Platform Economy.” Today the Conference resumed in Amsterdam and included a fascinating roundtable with representatives from some of the platform firms alongside some sharing economy workers. Each offered their experience/perspective on the sector, posed questions to each other, and took questions from the audience.

Not surprisingly, just as there are a range of business models and niches in the sector, there are also a variety of reasons why workers participate in and do platform work. What workers seek from the platforms (beyond good pay) may differ from worker to worker. For example, a sharing economy worker may desire contact with other workers, a sense of community, predictability, or worker dignity. Building on the Day 1 discussions, several themes emerged by the close of the Conference:

Continue reading “International Sharing Economy Conference: Day 2 Takeaways”

International Sharing Economy Conference: Day 1 Takeaways

By: Diane Ring

Today the “Reshaping: Work in the Platform Economy” Conference got underway in Amsterdam. In contrast to many academic conferences, the explicit goal here is to bring together a truly wide array of actors in the sharing economy (policy makers, academics, actual gig workers, platform businesses, research institutes, and media) in a mixed format setting that includes academic presentations, panel presentations by gig workers, small group active round tables, and research-poster sessions. The international dimension, with participants and presenters from a variety of jurisdictions, contributes to the breadth of discussion.

I thought I would offer a few of my takeaways from day one: Continue reading “International Sharing Economy Conference: Day 1 Takeaways”

Analysis of the ABA Tax Section’s Reduced Travel Support for Academics

CaptureAusBy: Leandra Lederman

A hot topic among professors at the recent ABA Tax Section meeting in Austin was the reduction in travel support for academics scheduled to take effect with the upcoming meeting in San Diego. As Prof. Bryan Camp wrote on TaxProf blog, The background is that, for years, and through the most recent meeting, full-time professors who have a leadership role in the section (Chair or Vice-Chair of a committee, or higher positions) have received a travel subsidy. The subsidy consists of $100/night toward actual hotel expenses, reimbursement of coach airfare (up to a mileage-based cap*), and $10 towards local transportation. Full-time professors speaking on panels who are not in leadership have also long received a travel subsidy, which I believe is the same as for professors in leadership, except without the $100/night towards hotel room cost. The Tax Section recently decided to eliminate the subsidy for academics, except for those who meet the Section’s definition of “young lawyer,” which has been reported as under age 40 or less than 5 years in practice. (I’m not sure how the “less than 5 years in practice” works, but I imagine it refers to something like bar membership, so that someone like me, who practiced for less than 5 years before entering academia in 1994, would not qualify.)

What’s so sad about this decision is that Tax Section meeting attendance by academics is likely to drop off markedly, although academics add a lot to the Section, as discussed further below. The Teaching Taxation Committee will suffer significantly, and so will other committees with many professors in leadership. It will also be harder to get faculty to speak on panels. There are several factors that will drive this effect:

  1. Law school budgets, and notably travel budgets, have been cut significantly in the wake of student application declines nationally that began in about 2011. My school continues to be generous, but I have heard from so many professors I have lost count about reduced, often dramatically reduced, annual travel budgets for faculty–budgets that may not support more than one or two conferences a year, for example. Continue reading “Analysis of the ABA Tax Section’s Reduced Travel Support for Academics”