Things economists say about happiness

From Derek Thompson, things that economists have shown tend to make people and countries happier:

• being richer, but only up to about $75k or so, after that, not so much
• living in a democracy
• working more but not too much
• being self-employed

And things that economists have shown tend to make people and countries unhappier:

• inequality
• unemployment
• inflation
• working too much
• commuting too much
• carrying too much debt

BOA duped its SHs on advice of counsel

This is what lawyers do when preparing the proxy statement in advance of a merger or acquisition: sit around taking about the various aspects of the deal's likely costs to the company, and make decisions about what has to be disclosed and how to write the disclosure in such a way as to prevent setting off any alarm bells, in other words, how to sugarcoat as much as possible all the risks involved at the time the proxy will be released.  The interests of the underwriters and the executives are well represented in these conversations; the shareholders are not.  The SEC requires the executives to disclose anything that is material.  What does that mean?  Anything that is likely to have a significant impact?  No, that's too broad.  Anything that will probably have a significant impact?  How probable does it have to be?  The conversation focuses on the relative probabilities and significance of various possible scenarios. At the end of the day lawyers try to include as little info as possible while staying on the right side of the SEC.  BOA is back in the news because its shareholders are saying that in its presentation of the Merrill deal it strayed well past the line, on advice from Wachtell.

"The bank’s purchase of Merrill, struck during the depths of the financial crisis, was the culmination of an acquisition binge by Mr. Lewis that transformed Bank of America from its base in North Carolina into a financial behemoth that could compete head-to-head with the biggest institutions on Wall Street. 

But the transaction, which was ultimately encouraged by government officials who were concerned about the impact on the financial system of a foundering Merrill Lynch, also saddled the bank with billions in losses and required an additional $20 billion from taxpayers on top of an earlier bailout it received in 2008.

Bank of America officials declined to comment. Andrew J. Ceresney, a lawyer for Mr. Lewis, also declined to comment on the filing, but he referred to a motion filed on behalf of Mr. Lewis on Sunday contending that the former chief executive did not disclose the losses because he had been advised by the bank’s law firm, Wachtell, Lipton, Rosen & Katz, and by other bank executives that it was not necessary."

Ryan Chittum comments that he'd like to see some follow-up stories that "focus on just how lawyers could advise that not disclosing billions of dollars in new losses was okay."

The SEC has already said that it was not ok; see Exhibit A.   BOA paid a $33 million fine to the SEC.  This is a tiny sum compared to the billions at stake in the deal; Chittum calls it a slap on the wrist and he's not alone in that characterization.   Of course BOA neither admitted nor denied wrongdoing in accepting the SEC fine, so it remains for a court to decide in this private action what executives and underwriters should have disclosed to the shareholders contemplating the proposed Merrill acquisition.

This is about as clear an illustration as it gets regarding the many problems of flexible disclosure rules and the high cost of information asymmetry.  

Jamie Dimon and the Fall of Nations

Simon Johnson discusses Jamie Dimon and the entrenchment of power in U.S. institutions in a recent NYT Economix blog post.  He says:

"Many societies have done well for a while — until powerful people get out of hand. This is an easy pattern to see at a distance and in other cultures. It is typically much harder to recognize when your own society has an elite less subject to effective constraints and more able to exert power in an abusive fashion. And given the long history of strong institutions in the United States, it appears particularly difficult for some people to acknowledge that we have serious governance issues that need to be addressed. The governance issue of the season is Jamie Dimon’s seat on the board of the Federal Reserve Bank of New York.

... We had strong institutions for a long time in this country — including effective checks on the power of bankers. Many people remember that history and still hold its image in their mind’s eye as they look at modern Wall Street. It’s time to wake up. In recent decades we abandoned the governance mechanisms that previously served us well. Global megabanks have obtained excessive and inappropriate power – the power to take a great deal of risk, with cash for their executives on the upside and huge damage for the rest of us on the downside.

More to worry about at the link.

Policy autonomy and the WTO

Alvaro Santos has published "Carving Out Policy Autonomy for Developing Countries in the World Trade Organization: The Experience of Brazil and Mexico," discussed last week at Opinio Juris where Santos says:

I argue against the commonly held assumption that WTO legal obligations overly restrict countries' regulatory autonomy.  Despite the presence of restrictions, I claim that there is still flexibility in the system for countries to carve out regulatory space for themselves. That countries can expand their policy autonomy means that governments of developing countries have more agency and responsibility than development scholars typically admit. At the same time, however, the asymmetry of power and resources between countries does affect their experience in the system and thus influences the outcomes to a greater extent than liberal trade scholars usually acknowledge.

...countries are creating policy space ... as repeat players (RPs), to make use of textual open-endedness in legal obligations, to seek out favorable rule interpretation, and to actively participate in the WTO system through strategic lawyering and litigation. To pursue this strategy, countries invest in "developmental legal capacity," through which governments recognize the need to make gains in policy autonomy in order to pursue economic policy goals that may be in tension with the WTO's free trade objectives.

Santos analyzes the trajectories of Brazil and Mexico in the WTO to show two different experiences of repeat players and explore how and why their strategies differ.  More discussion at the Opinio Juris link.

The world's richest countries and peoples

Two infographics of interest from NPR.  Total GDP by country:

and on a per capita basis:

Tax mitigation-avoidance-evasion

"Tax avoidance involves arrangement of a transaction in order to obtain a tax advantage, benefit, or reduction in a manner unintended by the tax law.  It is an unacceptable manipulation of the law which is unlike legitimate tax mitigation.  Mitigation involves use of the tax law to achieve anticipated tax advantages embedded in tax provisions.  Tax avoidance is also to be distinguished from tax evasion.  Evasion involves outright fraud, concealment, or misrepresentation in order to defeat application of the tax laws."

This is from Karen Brown's opening paragraph of "A Comparative Look at Regulation of Corporate Tax Avoidance," a new title edited by Prof. Brown and including 16 country reports.  She attributes the mitigation-avoidance-evasion taxonomy to Zoe Prebble & John Prebble's chapter on New Zealand.  They say:

"Tax mitigation and tax evasion, standing analytically before and after tax avoidance, have no statutory definitions.  ... New Zealand courts and practitioners prefer not to use the term "mitigation."  Instead, they employ circumlocutions like "permissible tax minimisation" [which] indeed encapsulates the meaning of tax mitigation, which is to reduce one's tax in a manner that not only complies with the letter of the law but that is consistent with the policy behind the legislation."

Mitigation is not a term I have used though I understand well enough the inclination to create some kind of ground around the term "avoidance."  I've used "aggressive tax avoidance" to suggest tax avoidance that may comply with the letter but not the spirit of the law, and have used "avoidance" to mean legal tax avoidance, e.g., taking advantage of provisions drafted for the purpose of giving the taxpayer an incentive or tax break (whether one agrees with the policy behind the law or not).  That would leave me with an avoidance-aggressive avoidance-evasion taxonomy, with evasion defined as Prof. Brown suggests above.  Perhaps mitigation or minimisation does a better job than plain "avoidance" and then "avoidance" can be used instead of "aggressive avoidance."  Still a spectrum but the variation in terms perhaps helps to more clearly describe the dividing line.

A major rhetorical difficulty I have had with this subject is that all of these terms suggest a shying away in degrees from an obligation that otherwise exists, and that doesn't quite capture the case of taking advantage of tax breaks the legislature has created by design.  Arranging one's affairs to take advantage of these intended gifts doesn't seem like shying away from an obligation, and that's likely why Learned Hand's quote remains so salient:

"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."

 Using the term mitigation or minimisation to describe this arranging of affairs doesn't quite seem to capture the range of stories involved in "arranging ones affairs."  One story is that taxpayers are free to take advantage of all the deductions, exemptions, exclusions, etc. they can find, and it's not minimisation to do that: for example, it does not really seem like tax minimisation to be human and therefore eligible for a personal exemption, or to have high medical bills and therefore be eligible for some additional tax relief.  But another story involves the amassing of power and influence to obtain specific tax breaks for your industry and then take advantage of those breaks, c.f., Bain capital and the carried interest rule for private equity managers or the film industry and the many film industry tax breaks.  That looks a lot more like tax mitigation or minimisation somehow.

Is mitigation-avoidance-evasion descriptive?  Yes, I think more so than avoidance-aggressive avoidance-evasion.  But there may be room for one more category before mitigation or minimisation.

Do we need to know more about our public companies?

In a new Tax Notes Int'l column this week (pdf here), I discussed the media coverage of Apple/GE/Google etc and explored the appropriateness of tax confidentiality with a brief discussion of disclosure rules past and present, and the current call for broader disclosure via country by country reporting.