The Beginnings of the U.S. Capital Gains Tax Preference

With the recent release of the Trump administration’s tax plan, discussions of tax “reform,” or at least tax cuts, are once again at the center of American law and politics. Although the president’s tax plan is short on details, it has plenty of potential benefits for high-income earners, including a reduction in top marginal income tax rates and a modest decrease in the tax rate on capital gains. More specifically, the White House tax plan seeks to repeal the 3.8 percent Obamacare tax on net investment income, thereby increasing the tax preference for realized gains from capital investments.

Unsurprisingly, the … Read more

Targeting Corporate Inversions: Are We Doing the Right Thing?

Congress, the U.S. Department of the Treasury (“Treasury”), and countless legislators have criticized corporate inversions — mergers designed to help American companies lower their tax bills by moving overseas — since McDermott International completed the first one in 1982. Nearly 59 percent of registered voters across the country believe it is Congress’ duty to stop such deals, according to a 2015 study, but about 35 years after the first one, little progress has been made. Every law against these transactions is met with a creative way around it. In other words, when Congress and the Treasury close one loophole, another … Read more

What Responsibilities Do Sovereign Funds Have to Other Investors?

With trillions of dollars in assets, sovereign wealth funds (SWFs) play a major role in financial markets around the world. With billions (and perhaps trillions) of dollars’ worth of equity investments around the world, the investment behavior of SWFs is of primary concern to regulators, portfolio firms, and other investors. Most work on SWF equity investments has focused on the challenges that SWFs present to regulators, portfolio companies, or their own domestic constituencies. In a forthcoming essay, I seek to provide a realistic appraisal of the benefits and potential costs of SWF investment for other investors.

As numerous scholars have … Read more

How Substitutable Are Workers? Evidence from Worker Deaths

The fluidity of labor markets depends on the ease with which one side of the market can fulfill the needs of the other: whether workers can find employment that suits their skills and firms can find adequate substitutes for workers who leave. Today much is known about the worker’s perspective. A large body of empirical literature documents that workers suffer persistent earnings losses after they have been displaced from their job – in line with Becker’s (1962) idea that human capital has firm-specific components (see, e.g., Topel 1991; Jacobson et al. 1993; and Dustmann and Meghir 2005).

The other side … Read more

Jones Day Discusses IRS Rulings on Spin-Off Issues

In Short

The Situation: The IRS had discontinued issuing private rulings on certain transactions related to spin-offs, leaving companies to wonder if favorable tax treatment was likely.

The Action: Recent IRS guidance announced the resumption of private rulings in transactions under consideration, and provided confirmation that certain “north-south” transactions will not adversely impact second-step spin-offs.

Looking Ahead: Further clarification on these matters is necessary, and additional guidance on spin-offs may be in the offing.

The IRS recently provided taxpayers with favorable guidance involving tax-free spin-offs. First, the IRS will resume issuing private rulings that allow a distributing corporation to satisfy … Read more

How Tax Policy Favors Robots over Workers and What to Do About it

There is a longstanding and growing public debate about the costs and benefits of automation. Earlier this year, Bill Gates argued that robots who take human jobs should pay taxes. Mark Zuckerberg recently warned the graduating class at Harvard University that, “Our generation will have to deal with tens of millions of jobs replaced by automation like self-driving cars and trucks.” Elon Musk has joined the ranks of industrialists in favor of guaranteed minimum income, which he says will be necessitated by automation.

It isn’t just industry leaders who are aware of the problems automation poses. This year the EU … Read more

How to Regulate TechFins and Data-Based Finance

In a new research paper, we consider the impact of a group of new entrants into financial services and regulation. These new entrants include technology, e-commerce, social media, and telecommunications companies with often large pre-existing bases of non-financial services customers. These firms (loosely termed “TechFins”) may be characterized by their capacity to leverage data gathered in their primary businesses into financial services by the use of Big Data analytics, machine learning, and artificial intelligence. Initially they often act as conduits linking their customers to regulated financial firms.

China’s Alibaba with its subsidiary Ant Financial is the frontrunner, and its founder, … Read more

Fed Governor Brainard Discusses Why Opportunity and Inclusion Matter to U.S. Economy

I want to thank Neel Kashkari for launching the Opportunity and Inclusive Growth Institute and for inviting me to join the deliberations of this distinguished group today [May 22]. This new Institute is another great example of how individual Reserve Banks are taking the initiative in illuminating key dimensions of our work and shaping the agenda of the Federal Reserve System.1

While it has long been understood that opportunity is central to the strength of America’s social fabric, it is now increasingly clear that opportunity and inclusion are central to the strength of America’s economy. I will touch on … Read more

Are Hedge Funds Worth As Much As They Say They Are?

In 2001, hedge fund manager Cliff Asness co-wrote a famous paper, Do Hedge Funds Hedge?1 Sixteen years later, amid significant changes in the industry, it’s worth asking, Are hedge funds worth as much as they say they are? And what explains the expectation, as reported by Preqin,2 that outflows from hedge funds will continue in 2017 (I suspect either performance-related or cost-related issues, or both)?

Using the CSFB/Tremont Hedge Fund Index’s monthly returns from January 1994 to January 2014,3 I conducted a study similar to the one described in Asness’s paper. I tried to determine whether hedge … Read more

The Monitoring Role of the Media: Evidence from Earnings Management

The news media are an important source of information for the U.S. capital markets, especially when drawing attention to questionable behavior of corporate executives. Coverage can, however, pressure companies into making dubious financial decisions like emphasizing short-term earnings over long-term value. In our recent article, we explore the effect of media coverage on earnings management to shed light on the media’s role in the U.S. capital markets.

Earnings management is the use of accounting techniques to produce financial reports that misstate a firm’s business performance and financial position. There are two main mechanisms through which managers manipulate earnings: accrual-based and … Read more

Better Responses to Financial Crises

How can regulators best respond to financial crises? In a forthcoming article in the Duke Law Journal, I show how a law-and-economics framework can guide regulators’ responses. There are two kinds of remedies for failing to comply with a law: property rules and liability rules.  Liability rules require compensation, such as money damages.  Property rules impose draconian penalties, such as injunctions, punitive damages, or large fines.  Property rules can make sense during normal times, because the threat of harsh penalties ensures compliance.  But financial crises upend many normal assumptions and prevent some entities from complying with all of their legal … Read more

A Tax on Aggressive Tax Planning

Tax planning by multinational enterprises (MNEs) is estimated to generate a worldwide loss of corporate tax revenues of between $100 billion and $240 billion. U.S.-based MNEs alone are believed to retain a total of $2 trillion in earnings outside the U.S., largely for tax reasons. Over the last few years, the Organization for Economic Cooperation and Development (OECD) has been trying to come to grips with the tax reduction strategies of MNEs. Its results, presented in the 2015 final reports of BEPS (Base Erosion and Profit Shifting) have disappointed many. That is understandable: Most of the proposals depend on further … Read more

Fed Vice-Chair Fischer Discusses Committee Decisions and Monetary Policy Rules

It is a pleasure to be at the Hoover Institution again. I was privileged to be a Visiting Scholar here from 1981 to 1982. In addition, many of the researchers and practitioners with whom I have discussed monetary policy over the years have had affiliations with the Hoover Institution–including several people here today. It is a pleasure also to have been invited to speak at this Hoover Institution Monetary Policy Conference, for the Hoover conference series provides a valuable forum for policymakers and researchers to engage in dialogue about important monetary policy issues facing the United States and other countries.… Read more

The Agency Costs of Teamwork

It is common wisdom among transactional lawyers that good teamwork results in smoother deals and better service for their clients.  Perhaps for this reason, capital-markets practices frequently tout their teamwork skills as a source of value for clients, especially in securities offerings where lawyers acting for issuing companies work closely with underwriters and their lawyers in a team-like fashion, all pulling for the success of the issuing company.

However, teamwork holds a potential pitfall for transactional lawyers, because their desire to work collaboratively with other parties in a deal can blunt their ability to advocate effectively on behalf of their … Read more

Insiders’ Investment Horizons Matter in Interpreting Their Trades

Executives, directors and other corporate insiders have privileged access to material non-public information. Previous research shows that trades by insiders are informed, on average. For example, insider purchases tend to precede positive stock returns. In addition, like other investors, corporate insiders may have different investment horizons (i.e., anticipated stock-holding periods) when they trade their company’s stock, depending on their personal investment objectives and styles; desire for liquidity, diversification, or corporate control;, compensation contracts; or understanding and attitude toward insider trading laws.

In our recent paper, “Insider Investment Horizon,” we examine the relation between the investment horizon of corporate … Read more

Federal Reserve Vice Chairman Stanley Fischer Discusses International Effects of Recent Policy Tightening

I appreciate your invitation to participate in this [April 19] panel discussion. In my remarks, I will discuss how U.S. monetary policy actions affect our foreign trading partners, with particular focus on how foreign economies have responded to the Federal Open Market Committee’s (FOMC) ongoing normalization of policy rates.1

Spillovers from the Fed’s Unconventional Policies

Extensive empirical research on spillovers–including by Federal Reserve and International Monetary Fund (IMF) staff members–indicates that spillovers from the actions of major central banks occur through several important channels.2 While the exchange rate is a key channel of transmission and gets a great … Read more

Federal Reserve Governor Discusses the Financial System and Future Changes

Thank you for inviting me to speak here today (April 20).1 I will begin by looking back at the global financial crisis and the great recession, which were arriving on the horizon at about this time 10 years ago. For the United States and many other countries, this would turn out to be the most painful economic crisis since the Great Depression. The fact that we had a severe recession but not another depression is a tribute to the aggressive response of those who were in a position to act at that time.2

In the event, the financial … Read more

Arnold & Porter Discusses Arbitration Battles

It’s been five years since Concepcion made “clear” that the Federal Arbitration Act (FAA) preempts state laws that forbid class action waivers.  Concepcion did not protect arbitration agreements from laws of general applicability (such as unconscionability), but it did confirm that the FAA preempts state laws that seek to limit or invalidate various arbitration provisions.

In its decision on April 6 in McGill v. Citibank, the California Supreme Court fired the latest salvo in the battle over arbitration clauses.  In McGill, Citibank sought to compel arbitration of claims under California’s Unfair Competition Law (UCL), False Advertising … Read more

Elite Law Firms Cash in on Market Knowledge

The legal advisory market for major corporate transactions is dominated by a relatively small number of elite law firms.  What value do these law firms provide?  Regulatory expertise, innovative drafting, speed of execution, and reputational cachet have all been offered as likely candidates. In Market Information and the Elite Law Firm, I argue that a considerable share of the profits earned by these firms also derives from selling their information about current “market” transaction terms.

Indeed, corporate transactions such as mergers and acquisitions or financings are characterized by several salient facts that lack a complete theoretical account. First, they … Read more

Federal Reserve Governor Discusses the History and Structure of the Fed

I am delighted to have this opportunity to speak at West Virginia University. Thanks to Brian Cushing for inviting me here today.1

Gathered in this part of West Virginia, we are located in the Fifth Federal Reserve District, which stretches down from here to South Carolina and east to the Atlantic Ocean (figure 1). More than 100 years ago, the organizers of the Federal Reserve System divided the country into 12 of these Districts, each with its own Federal Reserve Bank. Together, the Board of Governors in Washington and the 12 Reserve Banks are the key elements … Read more