Category: Law

From the comments, on corporate tax

How about the corporate minimum tax provisions?

Different rules apply for the determination of income for US tax purposes and for financial reporting purposes. Both are artificial constructs. Who is to say that one is a more accurate indication of “income” than the other? Congress is largely responsible for the difference by creating incentives through the tax code by offering accelerated depreciation, etc. for taxable income for pet projects such as climate related investment.

The AMT provisions of this tax bill create enormous additional complexity. The fact that they are designed to apply to only about 150 large corporations isn’t a way to create an rationale and equitable corporate tax system. Rather, it is designed to punish, in a Robin Hood like manner, the most successful US corporations and to *temporarily* fund spending provisions in the bill. Its complexity will create additional complexity and costs which consumers and investors ultimately bear.

I say *temporary* funding because the corporate AMT is generally an acceleration of regular tax liability. If a corporation pays the AMT, a credit against future corporate regular tax is carried forward. Congress likes to complain about corporations artificially carrying forward financial book income and postponing taxable income. Here, Congress is engaging in the same sort of shenanigan by accelerating current tax revenues at the cost of future revenue. The JCT only estimates additional revenue over a 10-year period. What they don’t report is that the AMT revenue during the first 10 years will reduce tax revenues in the years thereafter. It’s not completely zero sum, but mostly zero sum over a longer period of time.

The extent of public accounting games played by our political *leaders* is shameful.

That is all from Vivian Darkbloom.

From my email, on the new health care provisions

I saw your post on the new bill, and I actually think the healthcare components of it might be worse than the rest of it.The bill has a provision that allows the government to “negotiate” prices for drugs that are among the top 10-20 by spend in Medicare Part B (physician administered, usually IV infusions) and Part D. Since drugs that are selected in one year are not eligible for inclusion in subsequent years, this will capture more and more drugs over time. The negotiation of course happens with a gun to the head—the bill sets statutory minimum discounts of anywhere between 25-60%, depending how long the drug in question has been on market.The biggest issue with the bill is that it makes small molecule drugs eligible 9 years after approval, while biologic drugs are eligible after 13 years. This is based on some silly misconception that small molecule drugs are quicker and cheaper to develop and therefore have shorter payback periods. That may have been true when we were tackling relatively low-hanging fruit like high cholesterol, but small molecule drugs that tackle unmet needs today are nothing less than miracles. An oral pill that treats cystic fibrosis, like Vertex’s Trikafta, or sickle-cell disease, like Global Blood Therapeutics’ Oxbryta, is incredibly challenging to develop.This is going to hurt returns for small molecule drugs and skew R&D efforts away from them to biologics. Biologics like monoclonal antibodies are great, but many of them carry substantial administration costs or suffer from worse compliance/adherence because they are IV infusions that require patients to go into a care setting periodically to receive their next dose. But the real issue is they do not go generic the way small-molecule drugs do. Generics for small-molecule drugs are relatively cheap to develop, benefit from a streamlined approval process, and can be substituted for the branded drug at the pharmacy counter even if the doctor prescribes the brand, and as a result, drive 90% discounts to the brand price. Biologics, as the name suggests, are derived from living cells and thus cannot be easily proven to be equivalent to the brand—clinical trials are required and the overall expense of developing a biosimilar is 10x that of a small-molecule generic ($20M vs $200M). Between the higher development cost, lack of automatic substitution, and doctor and patient reluctance to believe these biosimilars are identical to the brand, biosimilars discount the brand price less and take a smaller share of the market, resulting in smaller savings to the system.It gets worse—many drugs these days are a “pipeline in a product,” targeting a biological mechanism that is implicated in many diseases. The most famous example might be Humira, which began as a rheumatoid arthritis drug and added psoriasis, psoriatic arthritis, ulcerative colitis, Crohn’s disease, ankylosing spondylitis, and hidradenitis suppurative over time, running trials to prove efficacy in each. Humira is a complex example—patent evergreening extended its lifetime and justified the investment in expanding its approved indications, and on a societal basis, it’s hard to know whether that’s good or bad, but hopefully we can agree that the solution to an IP issue is not to create an artificial time of expiry that discourages investment in science.The bill also includes an exemption through 2028 for orphan drugs that are approved in only one indication—these are drugs that target very rare diseases and generally charge extremely high prices to be financially viable. Some of these drugs are eventually tested in and expand to other smaller indications—but this exemption would discourage that and create an incentive to only try the drug in the largest indication and not expand the label to maintain the exemption and maximize its lifespan.Moreover, small companies that derive at least 80% of their revenue from one drug get a partial exemption from this, rendering them unacquirable by a larger drug company, since the drug is worth more as a standalone asset. This is again a failure of incentive design—it forces replication of corporate and commercial infrastructure that would otherwise have been a source of cost synergies for an acquirer.An example of the orphan disease issue is a drug called mavacamten, that Bristol-Myers acquired for $13.1B (it was the main asset of a company called Myokardia). The development plan was to first test the drug in an orphan indication, obstructive hypertrophic cardiomyopathy (oHCM), then expand to non-obstructive HCM, and eventually to a broader non-orphan heart failure market. This is a small-molecule drug, so negotiation eligibility is 9 years after launch in oHCM, or 2031–this would leave only 5-6 years for commercial launch in the heart failure market. While it probably makes sense for BMS to go ahead and test this molecule in heart failure at this point, the NPV of the molecule would be materially lower assuming a 25% discount to Medicare prices at year 9. The investment bank Jefferies estimates it at a 19% haircut—$10.6B from $13.1B. If the discount is deeper and/or spills over to commercial reimbursement, the haircut gets steeper and steeper—this overhang will reduce the number of drugs developed and/or force ever-higher launch prices since more of the value of the molecule has to be generated from the first indication.Lastly, this encourages even more gaming of the system. In theory, authorizing a generic competitor at a small discount at 9 or 13 years would protect the branded drug, as drugs with generic/biosimilar competition are exempt from negotiation. Handing the rights to produce a 10% cheaper version of your drug to Teva or Sandoz could therefore be less costly than the government’s proposed price  cuts.This is sadly the story of our entire HC system—poor incentive structures layered on top of each other in an increasingly wobbly manner rendering the whole system unfit for purpose and on the verge of collapse. I should note here that this also targets one of the few industries where the US is still the undisputed global leader—can we really afford to do that? Especially when pharmaceuticals are less than a fifth of US HC spend, and the real drivers of out-of-control healthcare spending are guilds like the AMA and local monopolies (hospital systems that have consolidated heavily and are the largest employers in many congressional districts and even states, giving them both outsize negotiating power against insurers and lobbying clout in Congress).

That is from Anonymous!

Ireland facts of the day

The republic is enjoying a €8bn corporate tax windfall after bumper pandemic-enhanced revenues from tech and pharmaceutical companies. The tax take from companies attracted by Ireland’s 12.5 per cent corporate rate has soared since 2015 and leapt a further 30 per cent last year compared with 2020.

Ireland’s economy expanded by 6.3 per cent over the second quarter, against an EU average of just 0.6 per cent. So great was the impact from multinationals that Ireland’s numbers distorted EU figures, despite the nation of 5.1mn making up less than 3 per cent of the region’s economy.

Here is more from the FT.

The tax provisions of the new climate and taxes bill

I can’t quite bring myself to call it the Inflation Reduction Act.  One thing I have learned from experience is how hard it is to judge such bills upfront.  For instance, I just learned that the electric vehicle tax credits do not currently apply to any electric vehicle whatsoever, nor will they obviously apply to any electric vehicle to be produced in the near future.  Now the United States might take a larger role in battery production, or perhaps the law/regulation will be modified — don’t assume these standards will collapse.  Still, the provisions are going to evolve.  Or maybe there is a modest chance that provision of the bill simply will never kick in.

I don’t know.

How about the corporate minimum tax provisions?  It sounds so simple to address unfairness in this way, and how much opposition will there be to a provision that might cover only 150 or so companies?  But a lot of the incentives for new investment will be taken away, including new investment by highly successful companies.  (You can get your tax bill down by making new investments, for instance, and that is why Amazon has paid relatively low taxes in many years.)  Most of the companies covered are expected to be manufacturing, and didn’t we hear from the Democratic Party (and indeed many others) some while ago that manufacturing jobs possess special economic virtues?  Furthermore, some of the tax incentives for green energy investments will be taken away.  Has anyone done and published a cost-benefit analysis here?  That is a serious question (comments are open!), not a rhetorical one.

Here are some other concerns (NYT):

“The evidence from the studies of outcomes around the Tax Reform Act of 1986 suggest that companies responded to such a policy by altering how they report financial accounting income — companies deferred more income into future years,” Michelle Hanlon, an accounting professor at the Sloan School of Management at the Massachusetts Institute of Technology, told the Senate Finance Committee last year. “This behavioral response poses serious risks for financial accounting and the capital markets.”

Other opponents of the new tax have expressed concerns that it would give more control over the U.S. tax base to the Financial Accounting Standards Board, an independent organization that sets accounting rules.

“The potential politicization of the F.A.S.B. will likely lead to lower-quality financial accounting standards and lower-quality financial accounting earnings,” Ms. Hanlon and Jeffrey L. Hoopes, a University of North Carolina professor, wrote in a letter to members of Congress last year that was signed by more than 260 accounting academics.

How bad is that?  I do not know.  Do you?  My intuition is that the book profits concept cannot handle so much stress.  By the way, kudos to NYT and Alan Rappeport for doing that piece.  It is balanced but does not hold back on the skeptical side.

And here’s one matter I haven’t seen anyone mention: the climate part of the bill, and indeed most of the accompanying science and chips bill, assume in a big way that private sector investment is deficient in solving various social problems and needs some serious subsidy and direction.

Now the direction of that investment is a separate matter, but when it comes to the subsidy do you recall Kenneth Arrow’s classic argument that the private sector does not invest enough in risk-taking?  Private investors see their private risk as higher than the actual social risk of the investment.  This argument implies subsidies for investments, as much of the rest of the bill and its companion bill provide, not additional taxes on investment.  This same kind of argument lies behind Operation Warp Speed, which most people supported, right?

And yet I see everyone presenting the new taxes on investment in an entirely blithe manner, ignoring the fact that the rest of the bill(s) implies private investment needs to be subsidized or at least taxed less.

Overall the ratio of mood affiliation and also politics in this discussion, to actual content, makes me nervous.  The bills went through a good deal of uncertainty, and so a significant portion of the intelligentsia has been talking them up.  Biden after all needs some victories, right?  And at some point the green energy movement needs some major legislative trophies, right?  What I’d like to see instead is a more open and frank discussion of the actual analytics.

It is very good when a top economist such as Larry Summers has real policy influence, in this case on Joe Manchin.  But part of that equilibrium is that other economists start watching their words, knowing some other Democratic Senator might fall off the bandwagon.  There is Sinema, Bernie Sanders has been making noise and complaining, someone else might have tried to extract some additional rents, and so on.

The net result is that you are not getting a very honest and open discussion of what is likely to prove a major piece of legislation.

The new class of “insider” trader?

Then, crucially, the government stepped in with covid-relief funds, which were somehow granted to prisoners. (Congress did not bar us from getting stimulus cheques, though the Internal Revenue Service tried to.) That windfall came as a total shock…

Stimulus payments meant people habituated to scarcity suddenly had $1,200 in their hands (then $2,000 more as the government approved two additional payouts). And rather than splurge on items we usually go without – honey buns ($1.10 each), king-size chocolate bars ($2.40) or high-end toothpaste ($5.28) – more than a few of us chose to invest.

Cryptocurrencies have been popular too.  Here is the full Economist/1843 story.  And get this:

The perverse incentive structure of prisoner accounts makes things worse. The prison does not touch account balances below $25, the threshold at which a prisoner is considered indigent. But for those with more than $25, the prison deducts onerous fees totalling 55% of incoming transfers. “Every week I have to max out my commissary order and zero out my account,” Steve said. Prisoners are being conditioned to live pay cheque to pay cheque.

The authors are themselves incarcerated in Washington state.  Via Mike Rosenwald.

Colombian supply curves slope upwards

The most shocking revelations were that soldiers killed civilians and dressed them up as guerrillas to inflate their body counts. In return, they received benefits and promotions. Last year, a tribunal identified more than 6,400 of these so-called “false positive” killings dating from the 2002-2010 rule of hawkish rightwing president Álvaro Uribe, who is under investigation in an unrelated case and could come under further scrutiny with Velásquez as minister.

Here is more from the FT.  This is also an object lesson in why we do not use direct incentives to achieve all tasks.

The new tax on stock buybacks

Democrats opted to seek a new 1 percent tax on corporate stock buybacks, a move that would make up at least some of the revenue that might have lost as a result of the [Sinema-driven] changes.

Here is further detail.  Something has to be taxed, and I don’t pretend to have a comprehensive ranking of tax options from best to worst.  I can’t tell you where this might rank on the list.  I can however tell you these three things:

1. This is flat out a new tax on capital, akin to a tax on dividends.

2. Are you worried about corporations being too big and monopolistic?  This makes it harder for them to shrink!  Think of it also as a tax on the reallocation of capital to new and growing endeavors.

3. The real reason this is being proposed is because so many Democratic and left-leaning public intellectuals have written “flat out wrong, doesn’t matter what your partisan stance is” pieces on stock buybacks.

And there you go.

The climate segment of the new bill

The bill aims to tackle global warming by using billions of dollars in tax incentives to ramp up wind, solar, geothermal, battery and other clean energy industries over the next decade. Companies would receive financial incentives to keep open nuclear plants that might have closed, or to capture emissions from industrial facilities and bury them underground before they can warm the planet. Car buyers with incomes below a certain level would receive a $7,500 tax credit to purchase a new electric vehicle and $4,000 for a used one. Americans would receive rebates to install heat pumps and make their homes more energy-efficient.

I would like to know more details, most of all about how things actually happen (for instance can they succeed in keeping the nuclear plants open?).  At the very least I will reiterate my oft-repeated claim that the age of policy gridlock has been dead for some while.  (And Congress just passed the Chips and Science Act.)  Here is the full NYT story.  I do hope to cover the new bill more as details come out, but in terms of broad sweep most of the basic ideas already have been analyzed on MR.

My Conversation with Leopoldo López

Here is the audio, video, and transcript.  Here is the CWT summary:

As an inquisitive reader, books were a cherished commodity for Leopoldo López when he was a political prisoner in his home country of Venezuela. His prison guards eventually observed the strength and focus López gained from reading. In an attempt to stifle his spirit, the guards confiscated his books and locked them in a neighboring cell where he could see but not access them. But López didn’t let this stop him from writing or discourage his resolve to fight for freedom. A Venezuelan opposition leader and freedom activist, today López works to research and resist oppressive autocratic regimes globally.

López joined Tyler to discuss Venezuela’s recent political and economic history, the effectiveness of sanctions, his experiences in politics and activism, how happiness is about finding purpose, how he organized a protest from prison, the ideal daily routine of a political prisoner, how extreme sports prepared him for prison, his work to improve the lives of the Venezuelan people, and more.

And one excerpt:

COWEN: In 1970, you were richer than Spain, Greece, or Israel, which I find remarkable. But do you, today, ever look, say, at Qatar or United Arab Emirates, Dubai, and think the problem actually was democracy, and that here are oil-rich places that have stayed stable, in fact, but through autocratic rule, and that it’s the intermediate situation that doesn’t work?

LÓPEZ: Well, I think that I, personally, will always be in favor of a democratic regime, a democratic system that promotes a rule of law, the respect for human rights, the respect of freedoms. I think that’s a priority. For me it is, and I believe it’s a priority also for the large, large majority of the Venezuelan people that want to live in a democracy.

However, there has been great mismanagement due to misconceptions of the economy, to a state-led economy that did not open possibilities for a private sector to flourish independently of the state, but also with the level of corruption that we have seen, particularly over the past 22 years — it’s what has led Venezuela to the situation in which we are.

In Venezuela, you could argue that we did much, much better economically, and in terms of all of the social and economic standards, than what happened during these last 20 years of autocracy. This autocracy had the largest windfall and the largest humanitarian crisis.

During the democratic period of 40 years, Venezuela became one of the most literate countries in Latin America, with the largest amount of professionals being graduated every year, with the best in social, health, and education standards, vaccination rates, housing programs that were in Latin America. So, we did perform much better under the democratic period than has been the performance by any means in the autocratic regimes of the last 22 years.

Interesting throughout.

In praise of regulatory arbitrage

That is the topic of my latest Bloomberg column, here is one excerpt:

So if you issue a crypto token, but don’t have to register it as a security and go through the process of satisfying securities laws, you are engaging in regulatory arbitrage.

It is worth thinking through why some of the regulations ought to change in this new context. In the pre-crypto world, issuing a security involved a host of institutional preparations and investments and legal planning, even apart from whatever regulatory constraints needed to be met. Issuing crypto tokens is usually easier and quicker, and quite immature institutions have done so. Software and blockchains do much of the work that once required offices, personnel and a lot of hands-on management…

Standard US regulatory practice typically focuses on regulating host firms and intermediaries, rather than software. Yet once a blockchain is verifying, storing and communicating information, it is hard for regulators to step in and make a meaningful difference. Thus the old regulatory model no longer applies to a significant part of the crypto experience.

And the lower costs of token issuance mean that the issuing intermediaries can be quite thinly capitalized. Often they are either not able or not incentivized to meet a lot of regulations. In addition, an institution can participate fully in the crypto space without being based in the US or being tied to any specific nation-state.

You can inveigh against those features of the market. Regardless, they are going to mean a radically different set of regulatory constraints. They also mean that some kinds of securities (if it is appropriate to call them that) can be issued far more cheaply than before.

Given this reality, shouldn’t regulations be changed — and substantially? This may include some areas where regulation is even tighter, though overall regulations will likely become looser. The regulators will have to learn to live with a more decentralized market structure that has lower costs and is harder to control. It is common sense that when software can substitute for major capital investments, regulations ought to change, even if observers disagree over how.

Unfortunately, the regulatory process is static and typically slow to change. Regulatory agencies often stick with the status quo until it is no longer tenable. One of the benefits of regulatory arbitrage is that it forces their hand and brings about a new equilibrium.

Recommended, this topic remains underdiscussed.  “Regulatory arbitrage” is in fact one of the more significant potential benefits of crypto, noting that not everyone in the crypto space wants to come out and say that.

Incentives matter, installment #5637

America needs more than 5 million new houses to meet demand, according to a study last year by With sales of existing homes slowing, the need for more new houses is only growing. Florida, my home state, might have found part of the solution: Reform the permitting process so that building houses is easier.

Last year, Gov. Ron DeSantis (R) signed a bill that fundamentally changes the state’s permitting process for home building. It requires local jurisdictions to post online not only their permitting processes but also the status of permit applications. The transparency takes a good amount of mystery out of what can be an inscrutable branch of bureaucracy.

More important, the reforms also created a system that strongly incentivizes cities and counties to approve new home permits in a timely way. When a builder or property owner submits an application to build a new home, cities and counties have 30 business days to process it or request corrections.

If the government offices fail to respond in that time frame, the locality must refund 10 percent of the application fee for every additional business day of silence. Application fees can vary widely by locality, but the average cost in Florida is nearly $1,000, according to If officials request corrections to the application, they have 10 business days to approve or disapprove of the resubmitted application. Blowing past that deadline leads to an automatic 20 percent refund, with a further 10 percent added for each additional missed day, up to a five-day cap.

And this:

A study of housing sales in southwest Florida between 2007 and 2017 by the James Madison Institute found that permitting delays added as much as $6,900 to the cost of a typical house. That’s a de facto tax on Florida families; now the Sunshine State is making cities and towns pay for their own delays.

Here is the full story, via the excellent Kevin Lewis.

Our regulatory state is failing us, NIH edition

…the lawmakers pressed NIH leadership for answers about the mysterious disappearance of the Scientific Management Review Board, a committee that Congress empaneled in 2006 to ensure the agency was operating efficiently…

“There wasn’t any notification that we weren’t going to meet again — it was just that the meetings stopped getting called,” Nancy Andrews, a onetime board member and the former dean of the Duke University School of Medicine, told STAT in May.

She added: “I had the sense that we were asking questions in areas that they didn’t really want to get into, and I suppose Francis [Collins] in particular didn’t really want us working on.”

Here is the full StatNews piece.