“Stanford Initiative for Business, Taxation, & Society,” Rebecca Lester

Stanford Initiative for Business, Taxation, & Society (STACKS)

• The Stanford Initiative for Business, Taxation, & Society (STACKS) is a new research group at Stanford University focused on business tax research.
• The group aims to make Stanford the leading institution for business tax research, producing high-quality research with significant policy impact.
• STACKS is led by Rebecca Lester, Josh Rauh, and Juan Carlos Suárez Serrato, who are professors in economics, finance, and economics, respectively.
• The group's mission is to conduct interdisciplinary research across finance, economics, accounting, and law to inform practice, policy, and academia.
• STACKS is assembling a team of scholars, including PhD students, pre-doctoral fellows, post-doctoral fellows, and visiting scholars, to conduct research and train the next generation of tax scholars.
• The group also aims to educate and train MBA students in business taxation.
• The initiative encourages collaboration between researchers from different fields, including accounting, finance, economics, law, and computer science.
• The initiative hosts seminars featuring leading scholars in accounting, finance, and economics to stay informed about cutting-edge research.
• The initiative provides training to future scholars on research skills and current tax events.
• The initiative offers a range of teaching opportunities, including MBA courses, public policy labs, and executive education programs.
• The initiative aims to translate research findings into practical applications and inform policy decisions at the state, local, federal, and international levels.
• The initiative has hosted a panel on business, government, and society, bringing together perspectives from practice and policy.
• The initiative includes faculty members such as Rebecca Lester, Juan Carlos Sádaba, and Josh Ral.
• The Stanford Initiative for Business, Taxation, & Society focuses on producing high-quality, data-driven research in four areas: federal tax policy, state and local tax policy, international tax policy, and environmental energy policies.
• The initiative aims to disseminate its research not only in academic journals but also to policymakers.
• The initiative is currently in its first year and has already assembled a team of students with diverse backgrounds, including those with expertise in machine learning and tax practice.
• The initiative aims to conduct cross-disciplinary research, mentor future scholars, and engage in teaching across disciplines.

Research Focus: R&D Tax Deduction

• One current research project focuses on the tax treatment of innovation, specifically examining a surprise rule implemented in 2022 that affects the deductibility of research and development (R&D) expenses.
• This rule requires companies to spread out deductions for R&D expenses over several years, reducing the present value benefit by almost half.
• The initiative argues that this change significantly cuts the tax benefit for conducting R&D in the United States.
• The research project aims to inform ongoing legislative discussions in the Senate regarding a bill to address this issue.
• The initiative has ongoing engagement with policymakers in Washington D.C. and across several U.S. states, including California.
• The initiative also collaborates with organizations like the OECD.
• The Tax Cuts and Jobs Act of 2017 reduced the tax benefits for research and development (R&D) expenditures.
• This change was intended to offset the cost of other business-friendly provisions in the Act.
• The implementation of the R&D tax benefit reduction was delayed until 2022.
• The delay was intended to allow Congress to revisit the policy before it took effect.
• Congress did not revisit the policy, and the reduction in R&D tax benefits went into effect in 2022.
• The reduction in R&D tax benefits has been criticized as a policy that discourages innovation.
• There is current legislation in the Senate that would reverse the reduction in R&D tax benefits.
• The legislation has bipartisan support, but it has not yet been voted on.
• The reduction in R&D tax benefits is seen as a negative trend in the United States, as other countries are increasing their support for innovation.
• The speaker plans to study the impact of the reduction in R&D tax benefits on companies.
• The study analyzed the financial statements of almost 600 large multinational companies to determine the impact of a recent change in the R&D tax deduction.
• The study found that these companies had to capitalize around $375 million of R&D in the first year alone, resulting in a total difference of $45 billion from 2021 to 2022.
• The study's estimate of the impact was twice as high as the initial estimate made by Congress.
• The change in the R&D deduction led to a significant increase in companies' tax liabilities, rising by almost 60%.
• In response to the increased tax burden, companies reduced their R&D spending by approximately $1 billion.
• The study also observed a decrease in other types of capital investment spending and shareholder payouts, as companies adjusted to the increased cash tax liabilities.
• The study suggests that the change in the R&D tax deduction has had a substantial and immediate impact on companies, leading to a significant reduction in R&D spending.
• The change in the R&D tax deduction was implemented as part of the Tax Cuts and Jobs Act of 2017, which was not revenue-neutral.
• The 2017 tax bill was initially estimated to cost $1.3 trillion, and the administration and Congress sought to reduce the cost of the bill by making adjustments, including raising the corporate tax rate from the original proposal of 15% to 21%.
• The speaker discusses a policy that increased the corporate tax rate to 21% in order to offset the cost of a bill. This policy was intended to be temporary but was never revised, resulting in a negative impact on companies.
• The speaker mentions that their research team is working on a paper to present this information to policymakers. They are using machine learning to analyze company financial statements and identify the impact of the policy.
• The speaker explains that they are planning to share their findings with journalists and policymakers through press releases and direct communication.
• The speaker addresses the possibility that companies are reclassifying their R&D expenses instead of actually reducing them. They acknowledge that they do not have access to internal company records but have not observed a significant shift in expense categories.
• The speaker mentions that press coverage has suggested that some small companies have laid off employees due to the increased tax burden. However, their research on large public firms has not found a clear correlation between reduced R&D expenditures and layoffs.

Tax Policy and Migration

• The speaker discusses the impact of a retroactive change in federal tax policy on R&D spending by companies.
• The speaker notes that while companies may be able to recoup some of the costs through deductions, they still experienced a significant financial burden in the short term.
• The speaker mentions that the speaker and their colleagues are conducting research to understand the effects of the policy change on different industries, including tech and pharmaceutical companies.
• The speaker highlights that the research includes data from a variety of companies, including Microsoft and Chipotle.
• The speaker also mentions a separate research project by colleague Josh Raal, which examines the impact of state tax rate changes on individual taxpayer migration in California.
• The speaker notes that Raal's research indicates a significant outward migration of high-net-worth taxpayers when marginal income tax rates increase.
• The speaker discusses the impact of high tax rates on individual taxpayers, citing research by Josh that shows a significant number of people leaving California for states with lower tax rates, such as Florida, Texas, and Nevada.
• The speaker highlights the importance of thoughtful tax policies and the need for a discussion between policymakers and researchers to address the issue of tax-induced migration.
• The speaker mentions ongoing projects at the state and local level, including collaborations with the California Department of Tax and Fee Administration and the Alabama government, to understand the impact of tax incentives on economic development.
• The speaker expresses concern about the growing national debt and emphasizes the need for a more holistic and thoughtful approach to tax policy.
• The speaker argues that a more targeted and comprehensive approach to tax policy could potentially raise revenue and avoid inefficient outward migration practices.
• The speaker contrasts the tax policies of the Trump and Biden administrations, noting that Trump's platform has focused on extending existing tax incentives while Biden's administration has not yet released a detailed tax plan.
• The speaker believes that corporate tax rates need to increase to fund government programs. They advocate for targeted policies rather than a broad approach to tax cuts.
• The speaker acknowledges the intuitive notion that higher earners might relocate due to higher taxes, but they emphasize the importance of quantifying the extent of migration and its impact on revenue.
• The speaker discusses the potential of a wealth tax as an alternative revenue source, citing examples from Scandinavia. They highlight the challenges of implementing a wealth tax, particularly in accurately valuing assets held in private companies or real estate.

International Tax Policy

• The speaker mentions a research project with Juan Carlos Sosa Sado, who studies how companies structure their operations to shift income across jurisdictions. This research utilizes IRS data to analyze company-specific income shifting strategies.
• The speaker notes that countries with higher corporate tax rates face challenges in attracting economic activity and income due to companies' incentives to shift income to lower-tax jurisdictions.
• Multinational companies often report their income in lower tax jurisdictions, leading to a movement by the OECD to establish shared principles for reducing corporate tax arbitrage.
• The OECD is expected to release rules on the implementation of the Global Minimum Tax (Glo) by the end of June.
• A paper by Professor Suarez examined the prevalence of tax planning strategies used by US companies, such as the "double Irish Dutch sandwich," which allows for very low taxed income.
• The paper revealed the extent to which companies utilize these legal strategies, which have come under scrutiny for potentially contradicting the spirit of the law.

Future of Tax Policy

• The Stanford Initiative for Business, Taxation, & Society aims to conduct cross-disciplinary research on various tax policies, including federal, state, and international tax issues.
• The initiative collaborates with the IRS, the California Department of Tax and Fee Administration, and other state agencies to access administrative data and conduct research.
• The initiative's primary goal is to become a leading center for business tax research, with a focus on increasing connections to policy and practice.
• The initiative seeks to partner with the broader Business, Government, and Society initiative at Stanford to build relationships with policymakers, CFOs, and tax directors.
• The initiative aims to ensure that its research is relevant to the real-world practices of companies.
• The Stanford Initiative for Business, Taxation, & Society aims to foster a two-way conversation about research, grow its team, increase awareness of its work, and secure funding for policy impact.
• The initiative is concerned about the lack of revenue neutrality and budgetary constraint in tax policy, particularly in light of the Tax Cuts and Jobs Act and the Inflation Reduction Act, both of which were expensive pieces of legislation.
• The speaker believes that academics should consider the holistic impact of policies rather than focusing solely on individual provisions.
• The speaker highlights the global minimum tax as a potential solution to the issue of tax arbitrage and revenue generation, noting that it requires cooperation between countries with varying economic development levels.
• The speaker expresses concern about the sustainability of current tax strategies and the need for a more sustainable approach.
• The speaker expresses concern about the global minimum tax, arguing that the US is unlikely to implement it under a Republican-controlled White House.
• The speaker believes that the US would lose out on revenue if it doesn't implement the global minimum tax, as US companies would end up paying the tax to other jurisdictions.
• The speaker suggests that a focus on tax enforcement could be a more effective way to generate revenue than specific tax policies.
• The speaker highlights the "tax gap," which is the difference between what taxpayers should be paying and what they actually pay.
• The speaker believes that a significant portion of the tax gap is driven by high-income taxpayers who may be engaging in tax evasion.
• The speaker emphasizes the importance of understanding the complex financial structures used by high-income taxpayers to avoid paying taxes.
• The speaker notes that research shows a high return on investment (ROI) for IRS audits, particularly in the high-net-worth space.
• The speaker believes that the US needs to have a serious conversation about the appropriate corporate tax rate, arguing that continuing to lower the rate may not be sustainable.