What Jobs Do Taxes Do?
Twice this week, I listened to someone mention the three jobs taxes are intended to do. One of these times was on Lisa De Simone and Bridget Stomberg’s excellent tax podcast, Taxes for the Masses, where they mentioned the canonical three jobs of taxes: 1. Raise revenue to run the government, 2. Redistribute income, and 3. Change taxpayer behavior. These three purposes of taxes are pretty standard, and, extremely useful for thinking about tax policy. I have mentioned them myself many times. But, I would like to propose that there is a fourth purpose of taxes that we should always keep in mind. What is it?More
Special Dividends versus Repurchases: Which is Better for Bill Gates?
There has been a huge debate over share repurchases lately. The most recent tax proposals by the democrats includes a tax on share repurchases. Why all the repurchase hate? In my opinion, most of the repurchase hate stems from a misunderstanding of repurchases, what they do to share price, earnings, the nature of the company, etc. Many people who don’t like repurchase s simply either do not understand repurchases, or, chose to ignore what buy backs are. What is the alternative to a buyback? If a company wants to get rid of the cash and hand it back to shareholders, the alternative is to pay more in dividends. Increasing a regular dividend is a pretty large commitment, so, I think it is most appropriate to think about the alternative to a repurchase as a special dividend. And, there are big tax differences between a special dividend and a share repurchase.More
Avoiding the Tax on Excess CEO Pay
Many people are frustrated with how much CEOs get paid. There have been many proposed solutions to this perceived problem. One that has gained traction recently is to impose some kind of tax on the difference between CEO pay, and, the average worker in the corporation’s pay. One proposal that has been around for a while, but, currently being floated by democrats, would have an incremental tax on the difference between average CEO pay and the median worker, up to a maximum of a 5% tax for companies that pay their CEO more than 500 times the average worker. There are so many interesting ways around this tax, some of which are intended by the proponent of this tax (pay employees more, or CEOs less), and some of which would be unintended (outsourcing more work, using more independent contractors, shifting income abroad if the extra tax applies only to domestic income, etc.). But, one way I have not heard discussed goes back to the time honored method of bunching, useful when taxes are imposed with maximum (or minimum) thresholds. Here is how it would work:More
A Plea to AOC!
I recently emailed this to Representative Alexandria Ocasio-Cortez. Here’s to hoping…
I am the chief curator of The Tax Museum, a collection of thousands of tax-related artifacts housed here at the University of North Carolina, Chapel Hill (examples of some of our items can be found at thetaxmuseum.org). I would like to inquire about your willingness to donate...More
What is the mechanical effect of share repurchases on stock price and earnings per share?
Share repurchases are getting a lot of attention. One thing that is often thrown around is that share repurchases somehow manipulate a company’s stock price. What are the direct, mechanical effects of a share repurchase on share price, and, incidentally, on earnings per share (EPS)?More
How Much Should Socially Responsible Firms Pay in Taxes?
Milton Friedman famously defended the position that “the social responsibility of business is to increase its profits”. Let’s assume that Friedman was wrong, and that the social responsibility of business is not merely to increase its profits, and that it needs to consider the many stakeholders involved in business outcomes. Under the Friedman framework, with regards to taxes, firms should seek to maximize profits, which may involve paying as little in taxes as is legally possible (subject to the other costs of tax avoidance, and assuming the law is clear). Simple enough. But what about under the anti-Friedman framework? How Much Should Socially Responsible Firms Pay in Taxes?More
Scientific Progress Goes “Boink”
There is a very interesting and useful paper on the design of tax returns that suggests that based on psychology research, we should redesign the tax return so that the location of the signature of the taxpayer is adjusted to elicit more honest behavior from the taxpayer. I was aware of this paper some time ago, and, have proposed a field experiment that would redesign the tax return for a state I was communicating with, but, institutional barriers didn’t allow what would have been a fascinating field experiment to happen. Luckily. Why luckily?More
Ancient Evidence of Effective Tax Rate Misunderstanding
I am sometimes called by journalists or other organizations who want me to confirm their biases that some company is not paying enough in tax. The conversation never goes as the journalist wishes, starts to get real complicated, as I explain that the effective tax rate the journalist is looking at takes a lot of background to understand, and that a low rate is very often nothing nefarious. This is a pretty universal sentiment among accounting professors.
Someone recently sent me a document written by Seymour Fiekowsky and issued by the Office of Tax Analysis at the U.S. Treasury Department that does an amazing job explaining this. Following is a long excerpt. But, before that long excerpt, it is fascinating to me what year this came out. 1977! 44 years ago! Amazing. The excerpt:More
Are you praying for peace and paying for war?
I am the curator of The Tax Museum, the largest collection of tax artifacts in southern Chapel Hill. This means that every once in a while, usually late at night, I just roam around the internet looking for interesting tax things on the internet, some of which could eventually be tied to physical items I could acquire for my collection. I recently ran across the website of the National War Tax Resistance Coordinating Committee, and, ordered some items from their store. These items were promptly and personally shipped, and I was delighted with these items.
What is the National War Tax Resistance Coordinating Committee?More
The IRS Tax Code
Tax folks, as a collective group, have a lot of pet peeves. One is attributing the tax law, or the Internal Revenue Code, to the Internal Revenue Service. Congress writes the tax law, and, the Internal Revenue Service enforces it. In a recent excellent podcast by Bridget Stomberg and Lisa De Simone, they remind us of this fact, and, reference a Texas politician who likes to refer to the Internal Revenue Code as the “IRS Code”. Who is this politician, and, is he so uneducated as to think that the good people at the IRS are the authors of the tax code?More