Wednesday, January 12, 2005
Joint Committee on Taxation staff jobs are great for the right person, and this Congress looks like it will be a very interesting and busy one in the tax area. As you know, it's really one of the few opportunities to do meaningful public service in the tax policy area. The collegiality of the JCT staff is also terrific - it's like working for a medium sized firm which does solely tax and has the most important client in the country. Members of the firm consist of a mix of lawyers, accountants and economists (both public finance and macro).
Experience, technical proficiency, and excellent writing skills are all extremely important. We are quite thinly staffed for the type of work we are asked to do and the time we are given to do it. Thus, each staff member really has to carry his or her own weight pretty much from the beginning. Staff are asked to master areas very quickly, including areas they may not have worked in before, and then to produce written product which is clear, accurate, and meaningful to non-experts. Usually, a minimum of 3-4 years of significant tax experience either in the private sector or government is essential, and we have hired people with many more years of experience than that. As a nonpartisan staff, we shy away from hiring people with obvious political affiliations.
Transactional experience, for example, the type of work one does in big firms in major cities, is always a plus. A breadth of experience and a willingness to work in several different areas are also positives. Right now, EO, financial products, general business (but not international), and E&G are all areas in which we could probably use some help. We would also certainly consider excellent people with other backgrounds.
If interested, send a CV and cover letter to Carolyn E. Smith, Associate Deputy Chief of Staff, via email or via snail mail at Joint Committee on Taxation, 1015 Longworth House Office Building, Washington, D.C. 20515.
Brian Leiter (Texas) is out with his list of the ten "most significant lateral moves in the legal academy for the past year," along with thirteen other "notable" faculty moves. The Law School Observer, 8 Green Bag 2d 99 (2004). Once again, none of the year's lateral tax moves (chronicled here on TaxProf Blog) made Leiter's list, including such major moves as:
- Maureen Cavanaugh (Washington & Lee) to Penn State-Dickinson
- Paul McDaniel (Boston College) to Florida
- George Mundstock (Minnesota) to Miami
- Diane Ring (Harvard) to Florida
Judy Xanthopoulos (Quantria Strategies, LLC) has published A Closer Look at Revenue Estimating, 106 Tax Notes 217 (2005) (also available on the Tax Analysts web site as Doc 2004-24017, 2005 TNT 7-33). Here is part of the Introduction:
This report has three descriptive sections and a subjective section. The first descriptive section discusses the operational system of the revenue estimating bodies. The second is an attempt to let the reader inside the sanctum to view the real world practical system. The third identifies the limitations and problems with the operational and practical systems and pays particular attention to the institutional practices that shape the revenue estimating process. The subjective section explores the common estimating myths given the operational and practical systems. In that final section, an attempt is made to address the "gray areas" surrounding the need for change, or to demystify the myths.
Jack M. Mintz (Deloitte & Touche Professor of Taxation, University of Toronto, Joseph L. Rotman School of Management; President & CEO of the C.D. Howe Institute) presents Conduit Entities: Implications for Investment and Tax Policy at the University of Toronto today from 12:10 - 1:45 p.m.
Inveterate readers of this blog know that we ran several posts on the tax problems associated with Oprah Winfrey's giveaway of 276 new Pontiac G6 sedans to members of the audience at her premiere of the 2004-05 season (9/14, 9/21, 11/3, and 12/20). Because the cars constitute taxable prizes, Oprah's largesse resulted in heft tax bills for the audience (hilariously parodied on Jon Stewart's The Daily Show).
The "Shop Talk" column in the January isssue of the Journal of Taxation by Sheldon I. Banoff (Katten, Muchin Zavis Rosenman, Chicago) & Richard L. Lipton (Baker & McKenzie, Chicago) notes that although Oprah has learned some tax lessons, she has a way to go to solve the tax problems her show can cause her audience.
As part of her "Oprah's Favorite Things" show on November 22, she gave away over $13,000 worth of stuff to each of the school teachers in her audience, including:
- $2,249 TV
- $2,189 washer/dryer
- $2,000 laptop computer
- $1,499 navigation system
- $495 leather duffel bag
- $188 sweater
- $38 champagne glasses
Although Oprah gave each member of the audience $2,500 to help defray taxes, the media wrongly reported that there would be "[n]o Pontiac boomerang effect this time around." The Shop Talk folks ran the numbers and report that Oprah's $2,500 cash subsidy will cover less than half of the federal and state tax bill caused by inclusion of the $15,500 in each audience member's income. Instead, Oprah should have paid each audience member $8,000 to eliminate all of the tax liability. They conclude:
We again applaud Oprah for making her audience happy with valuable giveaways – at least until next April 15, when their tax return preparers will give the teachers a math lesson on their tax bills!
Tuesday, January 11, 2005
National Taxpayer Advocate Releases Annual Report to Congress, Cites Tax Law Complexity as Biggest Problem Facing Taxpayers
National Taxpayer Advocate Nina E. Olson today released a report to Congress that identifies the complexity of the Internal Revenue Code as the most serious problem facing taxpayers and the IRS alike. “Without a doubt, the largest source of compliance burdens for taxpayers and the IRS alike is the overwhelming complexity of the tax code, and without a doubt, the only meaningful way to reduce these compliance burdens is to simplify the tax code enormously,” Olson writes. The report cites the alternative minimum tax (AMT), the earned income tax credit (EITC), and the large number of provisions designed to encourage taxpayers to save for education and for retirement as key illustrations of the problems of complexity wrought by the 1.4 million-plus word tax code.
- National Taxpayer Advocate 2004 Annual Report to Congress (630 pages)
- Press Release (IR-2005-7)
- Taxpayer Advocate Service
In its first private ruling released in 2005, Chief Counsel Advice 2005-01-001, the IRS ruled that it was unable to determine whether a LLC was a single- or multimember entity for federal tax purposes. Tax & Business Law Commentary has a detailed discussion of the ruling. Here is the opening:
More often than not, private letter rulings and Chief Counsel Advice memoranda deal with fairly esoteric questions of tax law, but present facts that are clear and unambiguous. It is a somewhat refreshing change to read a Chief Counsel Advice memorandum that deals with the sort of factual pattern that real life lawyers deal with all the time. That is, nobody could say with any certainty what the facts were. In CCA 200501001, a simple transaction became so overwhelmingly screwed up that the Service couldn't determine whether an LLC had only one member, making it a disregarded entity, or two members, calling for classification as a partnership for income tax purposes.
As Mark Twain said in Tom Sawyer: "Being rich ain't what it's cracked up to be. It's just worry and worry, and sweat and sweat, and a-wishing you was dead all the time." A new survey commissioned by PNC Advisors finds that of those with more than $10 million of assets:
- 29% say "having a lot of money brings more problems than it solves"
- 19% "worry they will not have enough money to support the lifestyle they want to have in retirement"
- 37% do not have a will, trust, or health care durable power of attorney
The survey also reveals that people feel they need to double their wealth in order "to feel financially secure":
- Those with $1 million say they need $2.4 million
- Those with $5 million say they need $10.4 million
- Those with $10 million say they need $18.1 million
For press coverage, see the Wall Street Journal.
Craig M. Boise (Case Western) has published Tax Fraud and Inflated Corporate Earnings: Is There an Alternative to the Missing Legislative Fix?, 106 Tax Notes 191 (2005) (also available on the Tax Analysts web site as Doc 2004-23621, 2005 TNT 7-32). Here is the abstract:
On October 22, 2004, President George W. Bush signed the American Jobs Creation Act of 2004, which included several provisions aimed at curbing both corporate tax shelters and corporate tax avoidance. Boise finds that an important provision of the Senate version of the legislation was unfortunately left on the conference committee cutting-room floor. That provision, a response to the wave of accounting scandals that have rocked the markets over the last few years, would have increased the penalty applicable to corporations that filed fraudulent income tax returns to disguise earnings inflation. Boise thinks that the existing penalty provisions impose fines so small that they are not likely to have any deterrent effect on that type of tax fraud. But he argues that even without the missing legislative remedy, the IRS is not without the means to combat tax fraud related to earnings inflation. This article argues that because tax refund claims are in essence equitable claims, the IRS may, and should, assert equitable defenses such as the doctrine of unclean hands to deny refund claims arising from the fraudulent inflation of income. To facilitate that process, the article proposes a simple administrative structure using the newly issued Schedule M-3 to the corporate tax return form and oversight of earnings inflation-related refund claims by the Joint Committee on Taxation.
This document contains proposed regulations amending Reg. § 301.7502-1 to provide that, other than direct proof of actual delivery, a registered or certified mail receipt is the only prima facie evidence of delivery of documents that have a filing deadline prescribed by the internal revenue laws. The proposed regulations are necessary to provide greater certainty on this issue and to provide specific guidance. The proposed regulations affect taxpayers who mail Federal tax documents to the IRS or the Tax Court.
The hearing will be held in the IRS Auditorium, 1111 Constitution Avenue, N.W., Washington, DC.
The monthly Tax Talk Today program offers a free webcast today from 2:00 - 3:00 pm EST on Get Ready for Filing Season 2005 (Part 2 - Business):
Moderator: Les Witmer, APR Communications Consultant
- Frances J. Coet, Principal, Coet & Coet
- Larry Faulkner, IRS Office of Personnel Management
- Curt Freeman, IRS Tax Forms & Publications Division
- Keith Stanton, Principal, Stanton & Associates
Monday, January 10, 2005
Tenured Director of Yale's Corporate Governance Institute Forced Out for Double-Billing 150k of Business Travel Expenses
From the man bites dog file: the Wall Street Journal reports that Florencio Lopez-de-Silanes, a tenured professor at Yale's School of Management and Director of its International Institute for Corporate Governance, is being forced out for allegedly double-billing Yale for $150,000 in business travel expenses:
Governance experts fear fallout from the Yale incident. It's another example "of why leadership by example is fundamental" in the corporate and public sector, said Anne Simpson, executive director of the International Corporate Governance Network, a London-based group largely comprised of activist institutional investors. "We all need to make sure we are what we do, not just what we say."
Stripping a professor of his tenure, academia's ultimate sanction, rarely occurs. An estimated 50 to 75 tenured professors out of 280,000 in the U.S. lose their positions for cause each year and the number fired over financial improprieties "would be very small," said Jonathan Knight, an expert on tenure at the Washington-based American Association of University Professors.
For further discussion, see:
- Our sister White Collar Crime Prof Blog
With all due respect to the group, whose members generally deserve a great deal of respect, the membership of the commission tells me that we are not likely to get anywhere significant, be it good or bad, on tax reform.
For the most part, however, these are not people who have been heavily involved in thinking about or designing tax reform....And they are not, so far as I know, identified with particular approaches to tax reform. So they would have an uphill climb under the best of circumstances. And though they might come up with some interesting ideas if given the chance, I seriously doubt the White House is interested in finding out what they really think. This is not exactly a White House that cares much either for expertise or for delegating authority to those outside the charmed circle.
By the way, no tax practitioners. Those guys actually do know a lot, and serious tax reformers might want to involve them. No tax law professors, apart from Garrett who is excellent but really does her work elsewhere. And, while it's hard to quarrel with the choice of Poterba, many first-rate economists on both the left and the right have done extensive work that comes closer to the commission's territory.
So with all due respect to the generally high abilities of the commissioners, I think that the decision to choose this panel is evidence that fundamental tax reform (a) either is meant not to go anywhere, or else insufficiently meant to go anywhere in particular, and (b) will in fact not be going anywhere.
The Tax Guru also is unimpressed:
[B]ased on the roster of people chosen as members of the official President's Advisory Panel on Federal Tax Reform, I don’t see how this time will be any more effective at doing anything but screw the tax code up even more. While they claim to have a diverse mix of members, I can’t help but notice the glaring absence of any real life tax practitioners. While politicians and academicians have their different viewpoints, there is no substitute for the real life world of doing actual tax returns and fighting with IRS on behalf of real people. Contrary to popular belief, there are countless huge differences between the theoretical and real world applications of the tax system. Ignoring the real world aspects is ridiculous and shows an utter lack of sincerity in this year’s stab at fixing the tax code. I am surprised and disappointed that our first MBA president would establish such an incomplete panel and truly expect it to do any better than the dozens of similar ones previously.
Lucy F. Ackert (Kennesaw State University, Michael J. Coles College of Business), Jorge Martinez-Vazquez (Georgia State University, Department of Economics) & Mark Rider (Georgia State University, Andrew Young School of Policy Studies) have posted Tax Policy Design in the Presence of Social Preferences: Some Experimental Evidence on SSRN. Here is the abstract:
This paper reports the results of experiments designed to examine whether a taste for fairness affects people's preferred tax structure. Building on the Fehr and Schmidt (1999) model, we devise a simple test for the presence of social preferences in voting for alternative tax structures. The experimental results show that individuals demonstrate concern for their own payoff and inequality aversion in choosing among alternative tax structures. However, concern for redistribution decreases when it leads to increasing deadweight losses. Our findings have important implications for the design of optimal tax theory.
Section 6404(g) suspends interest accrual for individuals on taxes due if the IRS does not notify a taxpayer of the potential liability within 18 months after the filing of the return. This interest suspension then continues until 21 days after the IRS notifies the taxpayer of additional taxes due.
Previously, this rule was applied only where the additional taxes were found by the IRS. Rev. Rul. 2005-4 extends the scope of § 6404(g) to additional taxes voluntarily reported by taxpayers on amended returns or in correspondence to the IRS. Further, to allow taxpayers to benefit from these expanded rules for earlier years, the ruling applies to amended returns or correspondence submitted for tax years ending after July 22, 1998, the date § 6404(g) was enacted.
Following up on Friday's post on the Executive Order creating the President's Advisory Panel on Tax Reform: this morning's Tax Notes Today (available on the Tax Analysts web site (Doc. 2005-581, 2005 TNT 6-1)) has bios of each of the nine committee members:
- Panel Chair Connie Mack, a senior policy adviser with Shaw Pittman in Washington, retired from Congress in January 2001 after serving 18 years, including 12 years in the Senate, where he served as the head of the Joint Economic Committee. While it appears he did not endorse a specific tax reform agenda while in office, he outlined some preferences in a 1999 $755 billion 10-year tax cut he said would also spur economic growth. His plan would cut capital gains taxes and repeal estate and gift taxes. On the AMT, a problem the panel must address, Mack proposes indexing the AMT exemption amount.
- Vice chair John Breaux, who retired from Congress earlier this month after three Senate terms, served on the Finance Committee as well as its Subcommittee on Oversight. As a senator, Breaux cultivated a strong reputation as a centrist dealmaker, often working with both parties to reach consensus. On tax cuts, Breaux supported the $1.35 trillion tax cut in 2001 as well as the American Jobs Creation Act (P.L. 108-357), the biggest overhaul in the corporate tax code since 1986. Conference negotiators reworked a proposal to allow multinational corporations to repatriate income at a one-time low rate to accommodate Breaux's concerns that the dollars be spent on specific U.S. activities such as employee hiring and training, research and development, and capital investments. Breaux, who reportedly rejected an offer to be Bush's first energy secretary four years ago, has endorsed private accounts for payroll taxes to supplement Social Security, a proposal similar to Bush's.
- Bill Frenzel, a guest scholar at the Brookings Institution, served as a House taxwriter and Budget Committee member during his tenure as a Republican House member from Minnesota from 1971 to 1991. Frenzel is also cochair of the Committee for Strategic Tax Reform, a group that proposed simplifying the code in "five easy pieces" -- a road map to a more consumption-based system through lower marginal income tax rates, eliminating taxes on dividends, increasing expensing, expanding Roth individual retirement accounts to all personal saving, and excluding export and other foreign trade income of American companies from taxation.
Testifying before a Ways and Means Committee hearing on tax reform in 2000, Frenzel endorsed the Simplified USA tax reform plan (H.R. 134), introduced by taxwriter Phil English, R-Pa., which would replace corporate and personal income taxes with an 8 percent to 11 percent business tax paid when income is produced and a 15 percent, 25 percent, and 30 percent progressive tax rate paid by individuals when they receive wages, interest, dividends, and other income. Frenzel praised the bill for encouraging saving, not taxing foreign income, and relieving "problems of regressivity and of disincentives to job formation caused by Social Security taxes."
"The need for major surgery on the U.S. tax code has been obvious for years," Frenzel told the panel. The English bill, Frenzel said, "doesn't tear the system out by the roots as you have always wanted to do, but it does rough up the system pretty well."
- Charles O. Rossotti, IRS commissioner from 1997 to 2002, is currently a senior adviser with The Carlyle Group, a global private equity firm. President Bill Clinton tapped Rossotti, then the head of a technology systems development firm, to lead the IRS through its computer systems upgrade.
- Elizabeth Garrett, a law professor at the University of Southern California, served from 1991 to 1993 as legal counsel and legislative assistant for tax, budget, and welfare reform issues for former Democratic Sen. David L. Boren of Oklahoma. In 1993 she became Boren's legislative director and budget counsel. In 2003 Garrett joined the faculty at the USC law school, where she teaches law and the political process, statutory interpretation, administrative law, and civil procedure.
- Edward Lazear, professor of human resources, management, and economics at the Stanford Graduate School of Business, is also a senior fellow at the Hoover Institution. Lazear was the founding editor of the Journal of Labor Economics, and he was the first vice president and president of the Society of Labor Economists.
- Timothy Muris, chair of the Federal Trade Commission from 2001 through 2004, is now with O'Melveny & Myers LLP in Washington. He was with the Office of Management and Budget from 1985 to 1988, joined the faculty of the George Mason University School of Law in 1988, and served as interim dean of the law school from 1996 to 1997. He teaches antitrust, consumer law, European Union law, and international trade.
- Liz Ann Sonders is chief investment strategist and a senior vice president for Charles Schwab & Co. Inc. Before joining Charles Schwab in 1999, she was with Avatar Associates, an asset management company, for 13 years. According to the Charles Schwab Web site, she speaks frequently about the stock market and the economy at money management seminars and is a regular panelist at events hosted by the New York Society of Security Analysts and the Securities Industry Institute.
- James Poterba is an economics professor and the associate head of the economics department at the Massachusetts Institute of Technology, where he has taught since 1982. Poterba serves as director of the public economics research program at the National Bureau of Economic Research, and his writing and research focus on how taxation affects the economic decisions of households and firms.
- Top 5 Tax Paper Downloads
- Job Watch Says Bush Tax Cuts Did Not Deliver on Promised Jobs
- Tax Analysts: Malamud on The Online Tax Gap
Saturday, January 8, 2005
This week's list of the Top 5 Tax Paper Downloads on SSRN is the same as last week's list:
1. Starving the Beast: The Psychology of Budget Deficits, by Jonathan Baron (Pennsylvania, Wharton School) & Edward J. McCaffery (USC)
3. Are Non-Profit Firms Simply For-Profits in Disguise? Evidence from Executive Compensation in the Nursing Home Industry, by Anup Malani (Virginia) & Albert H. Choi (Virginia, Dep't of Economics)
The Economic Policy Institute's Job Watch web site has posted a report, Final Grade on the Bush Tax Cuts: Failure to Produce Jobs:
The Bush Administration called the tax cut package, which took effect in July 2003, its "Jobs and Growth Plan." The president's economics staff, the Council of Economic Advisers, projected that the plan would result in the creation of 5.5 million jobs by the end of 2004—in other words, 306,000 new jobs in each of the 18 months from June 2003 to December 2004. Even without the passage of Bush's tax cut plan, the CEA projected that the economy would generate 228,000 jobs a month.
With the newly released payroll employment data for December 2004 it is now possible to assess whether the administration's tax cut strategy produced the employment growth that was projected. The final verdict is grim. Job growth over the last 18 months has fallen short by 1,703,000—more than one-third less than the number of jobs the administration said would be created without the tax cuts. Given that the economy failed to produce the number of jobs expected with no policy change, it seems hard to argue that the tax cuts were a successful strategy in adding any jobs—the promised 1.4 million additional jobs never materialized. The announced revisions (up 236,000 in March 2004) to the payroll employment series do not materially change this assessment.
All taxpayers should pay their fair shares of taxes. The system breaks down when a large percentage of businesses fail to report their income. Fairness dictates that the IRS crack down on those who don't report their income, especially if that can be done easily by amending outdated regulations so that gross income of many businesses would be reported to the IRS. Section 6045 appears to provide that answer for some businesses that sell over the Internet and for others that sell their products through traditional consignment sales. Unfortunately, if reporting is required, some nonbusiness sellers might get caught in the net and might have to explain to the IRS that their sales were personal and therefore not taxable. They should be able to handle that. It's a small price to pay compared to the cost of not closing the tax gap.
The article also is available on the Tax Analysts web site (Doc 2004-24049, 2005 TNT 2-38).
The UCLA School of Law made one of the largest leaps in the latest US News survey of tax programs, moving from #25 in 2002 to #6 in 2004. In large part, this move was fueled by the unprecedented hiring of three tax professors in 2003, joining the four tax professors already on the faculty to form one of the strongest tax faculties in the country.
The resurgence of UCLA’s tax program is evident in its many activities planned for this year, including its Tax Policy and Public Finance Colloquium this Spring, the UCLA Law Review's Symposium on Rethinking Redistribution: Tax Policy in an Era of Rising Inequality in January, UCLA’s Institute on Tax Aspects of Mergers and Acquisitions in May, and the hosting of a Conference on Historical Perspectives on Tax Law & Policy in July. Moreover, because of the combination of an expanded tax faculty and substantial student interest, the UCLA Program in Business Law and Policy will offer a separate tax track in its business law concentration starting next year.
In a seven-part series, TaxProf Blog will spotlight the tax professors who make up the heart of UCLA’s tax program.
Victor Fleischer is the latest addition to a new tax powerhouse at UCLA School of Law. He teaches Federal Income Tax, Deals: Engineering Financial Transactions, and a seminar on Regulating Wall Street. His principal area of research focuses on the interaction between tax and corporate governance, with particular focus on the structure of venture capital startups and the importance of understanding institutional details when designing effective tax policy.
Victor’s route to teaching was fairly traditional. After graduating from Columbia Law School, he clerked first for Judge Blane Michael of the 4th Circuit in Charleston, West Virginia. Although there were few tax cases that year, Victor explained that Judge Michael did work on one case dealing with rolling over capital gains from one residence to another under old section 1034. The issue was whether one must be married to the same spouse to take advantage of the higher rollover amount for married couples. Victor added that while Judge Michael had great respect for the IRS, he did on occasion note that when he was growing up, his neighbors in rural West Virginia referred to the IRS as “those dang revenuers” when they came around to shut down the moonshine still. Victor thinks that Judge Michael was kidding about the moonshine, but he’s not sure.
Victor next clerked for Judge Alex Kozinski of the 9th Circuit, who is, well, no big fan of the Service. Victor had the pleasure of watching him write the Peracchi opinion, a corporate tax case which deals with the basis of a note contributed by a shareholder to a controlled corporation. “It’s a neat little opinion, and it caused a bit of controversy,” Victor explained. That year Judge Kozinski also wrote a dissent about a “tax turtle” case. The majority had held that the taxpayer, who worked on the road for the Ice Capades, had no permanent home and thus could not claim traveling expenses while “away from home.” (The taxpayer was thus like a turtle, carrying his tax home on his back from show to show.) Judge Kozinski explained that while the taxpayer was on the road a lot, he always returned to Idaho to stay with his folks in between shows. If the taxpayer had rented an apartment, the IRS would surely have allowed the deductions, but since the taxpayer was staying at home and had no duplication of expenses, they did not. Judge Kozinski concluded with the line, “Leave it to the IRS to turn a family reunion into a taxable event.”
Victor explained that his two wonderful judges taught him how to write about complex legal topics – even tax – in a way that’s accessible, persuasive, and even entertaining. Victor strives to carry those lessons into his work.
After clerking, Victor worked for Davis Polk & Wardwell for three years. He subsequently went to work for David Schizer as a Research Fellow at Columbia. Victor says that David was the ideal mentor to learn from – a gifted teacher, a brilliant scholar, and a patient and compassionate friend. As a rookie candidate, Victor had some great options. Victor explained that he was drawn to UCLA by not just the depth but the intellectual diversity of the tax faculty. He now has a stable of mentors who patiently answer questions and provide guidance. Bill Klein shares Victor’s interest in how tax affects the organization of economic activity. Michael Asimow shares his interest in tax and administrative law. He goes to Steve Bank for an historical perspective and Sam Thompson when he needs an M&A guru. Kirk Stark shares Victor’s interest in public finance and Eric Zolt is Victor’s go-to guy when he needs guidance on how to teach a particular tax concept or just a funny story to tell during class.
Lately, Victor has been studying the interaction between tax and private equity, and venture capital in particular. His first article, The Rational Exuberance of Structuring Venture Capital Start-Ups, 57 Tax L. Rev. 137 (2003), examined the puzzle of why start-ups organize as tax-inefficient corporations rather than as partnerships or LLCs. He’s also worked on some case studies in connection with his “Deals” course, which looks at the structuring of corporate transactions. Victor’s current work-in-progress looks at the puzzle of why investors in most private equity fund investors receive an 8% preferred return on their investment, while investors in venture capital funds do not. Surprisingly, tax provides part of the answer – though you’ll have to read his paper, The Missing Preferred Return, to find out why. It will be posted on SSRN (and the TaxProf Blog!) in a couple of weeks.
For prior UCLA tax faculty profiles, see:
Each Saturday, TaxProf Blog shines the spotlight on one of the 700+ tax professors in America's law schools. We hope to help bring the many individual stories of scholarly achievements, teaching innovations, public service, and career moves within the tax professorate to the attention of the broader tax community. Please email me suggestions for future Tax Prof Profiles. For prior Tax Prof Profiles, see here.
Calls for reform of the Internal Revenue Code more often relate to issues of administrability, complexity, and efficiency. The question of the proper treatment of the business entity or entrepreneur and upper-income individuals tends to dominate these debates. Often missing is consideration of the interests of the low-income taxpayer in a fair system. Recent focus on the compliance of low-income taxpayers has heightened a need for overhaul of the Code with this group in mind. Scrutiny is invited in a number of areas, including progressivity of the rate structure, employment, retirement income, education, social justice, and housing. This program will address these important issues as we stand at the crossroads on the path to reform.
Moderator: Karen B. Brown (George Washington)
Dorothy Brown (Washington & Lee):
The Tax Treatment of Children: Separate but Unequal
Bradley K. Meyers (North Dakota):
The Movement of Housing Assistance Programs to the Tax Expenditure Budget
Deborah A. Geier (Cleveland State):
Payroll Tax Burden on Low and Middle Income Taxpayers
Neil Buchanan (Rutgers, Newark):
Progressive Income Taxation and the Vickrey Cumulative Averaging System
Oddly enough, there's nothing in the AALS program about blogging. I find that curious, since many top bloggers are law professors (including the big dog and most of the famed Conspirators; plus, well, modesty forbids, but you know). Indeed, the first three conversations I had with fellow law profs at the hotel all turned to blogging at some point. Yet, as far as the AALS is concerned, it's apparently irrelevant.
Although not on the program, members of our Law Professor Blogs Network (Jack Chin (Arizona) and Mark Godsey (Cincinnati) of Crim Prof Blog and Douglas Berman (Ohio State) of Sentencing Law and Policy) were the luncheon speakers at the Section on Criminal Justice Luncheon. For a report on their remarks, see here.
Friday, January 7, 2005
Instead of focusing on transfers to individual accounts, the public should evaluate President Bush's Social Security plan against four financial yardsticks that do provide meaningful measures of the fiscal merits of the proposal.
- To what extent does the plan address the system's long- term fiscal imbalance?
- The public should pay close attention to the manner in which the president proposes to reduce traditional Social Security benefits for those who participate in individual accounts.
- The public should consider the impact the president's proposal can be expected to have on the growth of unfunded statutory obligations of Social Security over the next decade or two.
- A reformed Social Security system should have adequate and clearly identified sources of liquidity to meet its statutory obligations over the next 75 years, the traditional time horizon for the long-term actuarial balance of social insurance programs.
If the president's plan measures up on these four financial yardsticks, the plan will make fiscal sense notwithstanding substantial transfers to individual accounts over the next few years.
The article also is available on the Tax Analysts web site (Doc 2005-23246, 2005 TNT 2-39).
Tax Prof Elizabeth Garrett (USC) is one of nine members named by President Bush to the President's Advisory Panel on Tax Reform chaired by John B. Breaux and Connie Mack. The other six committee members are:
- Bill Frenzel (former GOP Representative, Minnesota)
- Edward Lazear (Stanford Business School)
- Timothy Muris (O'Melveny & Myers, Washington D.C. (and former George Mason law prof and law dean)
- James Poterba (MIT)
- Charles O. Rossotti (Former IRS Commissioner)
- Liz Ann Sonders (Chief Investment Strategist, Charles Schwab)
The Executive Order creating the panel outlines its charge:
The purpose of the Advisory Panel shall be to submit to the Secretary of the Treasury in accordance with this order a report with revenue neutral policy options for reforming the Federal Internal Revenue Code. These options should:
- simplify Federal tax laws to reduce the costs and administrative burdens of compliance with such laws;
- share the burdens and benefits of the Federal tax structure in an appropriately progressive manner while recognizing the importance of homeownership and charity in American society; and
- promote long-run economic growth and job creation, and better encourage work effort, saving, and investment, so as to strengthen the competitiveness of the United States in the global marketplace.
At least one option submitted by the Advisory Panel should use the Federal income tax as the base for its recommended reforms.
The panel must submit its report to the President by July 30, 2005.
The Congressional Budget Office has published Effective Tax Rates: Comparing Annual and Multi-year Measures. Here is the Introduction and Summary:
The distribution of the economic burden of taxes is central to tax policy. In constructing measures of effective tax rates -- the share of their income that people pay in taxes -- analysts must confront a wide range of issues: what to include in measuring income, the range of taxes to be studied, the shifting and ultimate incidence of taxes (that is, on whom the ultimate burden of a tax falls), whether to study individuals or households, and the period that the analysis is to cover. This CBO paper focuses on how the choice of a particular time frame affects distributional assessments of the burden of federal taxes.
The National Taxpayer's Union has pledged its support for efforts to repeal the estate tax:
Considering the economically dubious nature of the death tax, it is quite surprising just how difficult it has been to kill. After all, most economists would agree that the death tax is an inefficient means of raising revenue. In fact, due to private and public sector collection, compliance, and avoidance costs, eliminating the tax is likely to increase rather than decrease the net revenue yield to the federal government. A recent Congressional study projected $24.4 billion in increased personal income (and therefore higher revenue) if the tax were axed.
While the economic case against the death tax is persuasive enough, the moral case is even more powerful. Because it taxes virtue -- living frugally and accumulating wealth -- the tax wastes the talent of able people, both those engaged in enforcing the tax and the probably even greater number engaged in devising arrangements to escape the tax. The death tax is also punitive, because it adds a second or third layer of taxation on the same assets.
Although some in the charitable community have expressed fears that repealing the death tax will result in a significant decline in giving, such fears are overblown. It is far more likely that eliminating the tax will lead to higher economic growth, which is the most important variable in determining the level of charitable giving.
Having been in place for more than 80 years, the main effects of the estate and gift taxes have been to create an industry for thousands of highly paid lawyers and estate planners, to help the super-wealthy waste time and money avoiding it, and to bankrupt successful family businesses when their original owners die. For this reason and those outlined above, any votes in favor of permanent repeal of the death tax will be among the most heavily weighted votes in our ratings of the 109th Congress.
John A. Townsend (Townsend & Jones, Houston) has published Collateral Estoppel in Civil Cases Following Criminal Convictions:
The law is settled that collateral estoppel applies in tax litigation and that findings in criminal tax proceedings may be preclusive in a subsequent civil tax proceeding.
The article also is available on the Tax Analysts web site (Doc 2005-24079, 2005 TNT 4-28).
William F. Buckley, Jr., has published Whither Taxes? On the Prospects for Reform in the National Review:
[T]ax reforms seek to improve on previous tax reforms by arching their provisions, like jungle leaves writhing for the sunlight, towards such rays of justice and equity as are discernible at any given moment of relative composure in American politics, when the pandemonium freezes, as for a photographer, for just long enough to permit one set of claimants to overshadow another. Thus a tax reform is born.
(Thanks to the Tax Guru for the tip.)
The House and Senate yesterday passed by unanimous consent legislation (H.R. 241) to permit taxpayers to claim charitable deductions in tax year 2004 for donations they make for tsunami disaster relief until January 31, 2005, instead of having to wait until next year's filing season. Only cash gifts made specifically for disaster relief are eligible.
Here is the text of H.R. 241:
SECTION 1. ACCELERATION OF INCOME TAX BENEFITS FOR CHARITABLE CASH CONTRIBUTIONS FOR RELIEF OF INDIAN OCEAN TSUNAMI VICTIMS.
(a) IN GENERAL- For purposes of section 170 of the Internal Revenue Code of 1986, a taxpayer may treat any contribution described in subsection (b) made in January 2005 as if such contribution was made on December 31, 2004, and not in January 2005.
(b) CONTRIBUTION DESCRIBED- A contribution is described in this subsection if such contribution is a cash contribution made for the relief of victims in areas affected by the December 26, 2004, Indian Ocean tsunami for which a charitable contribution deduction is allowable under section 170 of the Internal Revenue Code of 1986.
Thursday, January 6, 2005
The IRS has updated the optional sales tax tables in Publication 600 for Arkansas, California and Virginia. The optional sales tax tables were updated to reflect sales tax changes made by the three states during 2004; the original tables were based on the states’ sales tax rates as of January 1, 2004.
Richard Kogan & Robert Greenstein have posted President Portrays Social Security Shortfall As Enormous, But His Tax Cuts And Drug Benefit Will Cost At Least Five Times As Much on the Center on Budget and Policy Priorities web site. Here is the conclusion:
The President has suggested or implied that Social Security presents a greater budgetary problem than Medicare or his tax cuts, and that the Medicare prescription drug bill will help to reduce the overall cost of Medicare by averting unnecessary hospitalizations. Analysis conducted by the Social Security and Medicare Trustees and actuaries, the Congressional Budget Office, and the Government Accountability Office, among others, show that such views are mistaken.
The reality is that the Social Security shortfall, while sizeable, is not gargantuan, and it is not necessary to alter Social Security’s basic structure to close the shortfall. Both rising health care costs, which drive much of the projected growth in Medicare costs, and the long-term cost of the President’s tax cuts pose much larger budgetary problems.
The Treasury Department sent a letter to Senator Charles Grassley (R-Iowa), Senate Finance Committee Chair, claiming that it lacks "sufficient legal authority" to change the regulations under § 125, which provide that amounts from a salary reduction agreement to fund a heakth care flexible spending account ("FSA") which are not used to reimburse medical expenses incurred in a calendar year are forfeited and may not be carried forward to reimburse expenses incurred in later years. Senator Grassley yesterday issued a press release critical of the Treasury's position:
I’m glad the Treasury Department is looking at ways to improve the use-it-or-lose-it rule, but I’m disappointed that the department seems reluctant to make changes to a proposed rule that’s never been finalized. That rule doesn’t pass the common sense test, and it’s hurt taxpayers for more than 20 years. I also don’t understand the argument that the Treasury Department and the IRS don’t have the power to change the rule. If they wrote it, surely they have the power to change it. Regardless, I want to resolve this issue, and I’m looking for the best way to do that. Americans need every possible tool to meet their health care expenses. I hope they don’t have to wait another 20 years before someone writes a more common sense rule.
For press coverage, see Tom Herman, A Setback For a Popular Health Benefit; Treasury Rejects Effort to Ease 'Use-It-Or-Lose-It' Provision Of Flexible-Spending Accounts, Wall Street Journal, Jan. 5, 2005, at D1.
Darryll K. Jones (Pittsburgh) has published Nonrecourse Debt: Newspeak in the Tax Code, 106 Tax Notes 117 (2005) as part of his "K Rations" series of articles on partnership tax isues. Here is part of the Introduction:
The tax code (broadly defined to include statutes, regulations, and interpretive guidance from all sources) is talking from both sides of its proverbial mouth, using oxymoronic newspeak such as ‘‘nonrecourse deductions’’ and ‘‘partnership minimum gain’’ to obscure the plain fact that spending other people’s money neither results in negative income to, nor justifies a deduction, for the spender. We would do well by ridding the code of newspeak. Basis, like religion, is highly personal. It is one person's previously taxed (or exempted) wealth embodied in property. The expenditure of other people's money should justify negative income -- a deduction -- only if the acquisition of other people's money first resulted in positive income -- inclusion in gross income. I propose that a nonrecourse borrower should pay tax on the receipt of nonrecourse loans and anything that looks like a nonrecourse loan -- such as the transfer of a contingent liability.
The article also is available on the Tax Analysts web site (Doc 2005-23438, 2005 TNT 2-40.
Lorraine Eden (Mays Business School) & Robert T. Kudrle (University of Minnesota - Twin Cities) have published Tax Havens: Renegade States in the International Tax Regime?, 27 Law & Pol'y 100 (2005). Here is the abstract:
Taxing multinational enterprises (MNEs) is inherently conflictual because national tax systems are not well designed to handle their international activities. The OECD has been instrumental in developing an international tax regime to govern the conflicts and interdependencies induced by national taxation of MNEs. The strength of this regime depends on the extent to which states adhere to the regime's norms and practices. We examine the OECD's Harmful Tax Competition initiative, arguing that tax havens have been as renegade states in the international tax regime. We explore how the OECD initiative developed and evaluate its impact on regime effectiveness.
A small wooden tea chest has returned to Boston more than 230 years after rebellious colonists dumped it overboard during a famous protest that helped set the scene for the American War of Independence.
(Thanks to reader Ben Cunningham for the tip.)
Wednesday, January 5, 2005
Anup Malani (Virginia) & Albert H. Choi (Virginia, Dep't of Economics) have posted Are Non-Profit Firms Simply For-Profits in Disguise? Evidence from Executive Compensation in the Nursing Home Industry on SSRN. Here is the abstract:
It is well-established that non-profit hospitals employ performance bonuses with much lower frequency than for-profit hospitals. Weisbrod suggests that this implies that principals of non-profit and for-profit firms have different objectives or purposes. Brickley and Van Horn dispute the different-objectives hypothesis. They present evidence that the salaries and turnover of executives at non-profit hospitals reward financial performance but not altruistic activities. Employing a unique data set of executive compensation at 2,700 nursing homes in 2001 and 2002, this paper improves on Brickley and Van Horn's analysis in three important ways. First, we provide an explanation for how non-profit firms and for-profit firms may both seek to reward financial performance but write different executive compensation contracts. This explanation relies upon tax penalties on the use of financial rewards for executives by non-profit firms. Second, we introduce direct comparisons of wages at non-profit and for-profit facilities as well as superior controls for quality of patient care and the risk profile of patients. Third, we consider the implications of observed patterns in executive compensation for alternative theories of non-profit behavior, such as quality/quantity maximization. We conclude that executive compensation at non-profit firms supports that the hypothesis that principals at non-profit firms either care about profits just like principals at for-profit firms (the strong version of the for-profit-in-disguise model) or behave as if they do (the weak version).
Senate Finance Committee Chair Chuck Grassley (R-Iowa) joined with Ranking Minority Member Max Baucus (D-Mont.) yesterday in proposing to permit taxpayers to claim charitable deductions in tax year 2004 for donations they make for tsunami disaster relief until January 31, 2005, instead of having to wait until next year's filing season. Only cash gifts made specifically for disaster relief would be eligible.
Burgess J. W. Raby & William L. Raby have published Confidence Levels, Circular 230, and Practitioner Penalties on the Tax Analysts web site (Doc 2005-372, 2005 TNT 3-24). Here is the Conclusion:
The revisions in Circular 230 are of great importance to the tax practice profession. They mark an official recognition by the IRS that tax practice is conducted by groups and not merely by individuals, and they place responsibility on the leaders of those groups for a system of quality control being in place to review the work done by the group members. We think those revisions could be the first step toward requiring tax practice peer review by outside reviewers -- preferably, we should add, conducted by members of the profession as is peer review of attest function work within the CPA profession and not by an outside governmental body, such as the Public Companies Oversight Board audit practice reviews mandated by the Sarbanes-Oxley Act.
The recitation of best practices is also a change of emphasis, with the IRS starting to recognize the importance of aspirational standards to true professionalism. We would hope that the common interests of the IRS, the AICPA, the ABA, and the NAEA would lead to an attempt to arrive at a basic statement of standards that could be adopted by all those engaged in federal tax practice. IRS adoption is important because the IRS is the ultimate policeman in the tax practice area. Adoption by the professional bodies is likewise important because, we believe, the ideal system involves cooperation in maintaining voluntary quality control systems within practice units, universal peer review of tax practices, and vigorous and sustained action against practitioners who transgress.
Larger practice units face the challenge of evaluating the adequacy of their quality control systems in light of the standards of Circular 230. Smaller practice units may have to face up to the impossibility in many instances of maintaining a system of quality control without the use of outside resources. Cooperation between independent practice units can often solve the problem of how to review one's own work by having independent professionals reviewing each others' work, a practice that many already have incorporated into their systems with increased benefit to both their clients and their own level of comfort with the work they do.
This Circular 230 revision, in other words, could be the start of something big. Now we await the follow-through.
A memorable line in the Tax Court's first summary opinion of the year: "Not eveything in life is deductible." Walz v. Commissioner, T.C. Summary Opinion 2005-1 (Jan. 3, 2005) (denying deduction for various alleged business expenses of Los Angeles cellist). For further discussion of the case, see Roth & Company.
New York Times: Law Firm to Settle Suits Over Tax Advice:
Jenkens & Gilchrist, a Dallas law firm, has agreed to pay $81.6 million to settle lawsuits filed by clients who said the firm gave them poor tax advice.
The lawsuits were filed on behalf of more than 1,100 taxpayers in 41 states. They stem from a decision by the Internal Revenue Service to disallow tax shelters designed by the law firm.
For further coverage, see Sheryl Stratton, Jenkens Insurers Sweeten Shelter Settlement Pot, Doc. 2005-374, 2005 TNT 3-4: "The landmark class-action settlement between a law firm and its shelter investor clients appears to have survived a large opt-out contingent, with insurers agreeing to pony up more money for both the class fund and to deal with the dissenters." (Thanks to our sister blog, White Collar Crime Prof Blog, for the tip.)
Tuesday, January 4, 2005
Most public finance books are texts, which are aimed at undergraduate or graduate students. They are overly technical in nature and appeal only to a narrow range of bureaucrats and academics. Books on taxation are written for tax practitioners and usually emphasize either what the law is or how to maneuver through the labyrinth of tax law to minimize taxes for clients. Philosophy books on taxation or public finance simply do not exist.
The Philosophy of Taxation and Public Finance is different. It is written in nontechnical language and is aimed to appeal to a wide range of readers, including practitioners, academics and students in the fields of taxation, public finance, economics, law, philosophy and political science as well as general readers who are interested in learning why they are being taxed the way they are. The author addresses the major issues and topics in taxation and public finance and injects them with philosophical insights. He discusses questions such as:
- What arguments have been used to justify taxation?
- When is tax evasion unethical?
- Are some taxes better than others?
- What are the proper functions of government?
- How much is enough?
- Is the ability to pay concept valid?
- When can punitive taxes be justified?
The EITC program lifts millions of low-income taxpayers and their families out of poverty. However, its high rates of noncompliance — overclaims for the credit — could potentially undermine the credibility of the program because billions of dollars are annually paid out that should not have been. IRS’s three tests — qualifying child certification, filing status, and income misreporting — are major initiatives to reduce overclaims by addressing the leading errors taxpayers make. Given the importance of the EITC to many low-income households and concerns about high overclaims, these tests are being closely watched by numerous stakeholders.
Although IRS has generally implemented each of the tests smoothly, it did not fully document some key management decisions and other significant events....The evaluations that IRS is conducting of each test are likely to yield some useful information and results that will help IRS officials and other stakeholders judge whether and how to proceed with further implementation of the new approaches to reducing EITC overclaims. Nevertheless, the lack of detail and documentation in the evaluation plans impeded officials’ ability to manage the evaluations as well as external stakeholders’ ability to review and understand the evaluations’ strengths and limitations.
David M. Schizer, Dean of Columbia Law School, has published Balance in the Taxation of Derivative Securities: An Agenda for Reform, 104 Colum. L. Rev. 1886 (2004). Here is the abstract:
By now, it is well understood that aggressive tax planning among high-income individuals and corporations represents a grave threat to the U.S. tax system, and that derivatives are staples of this planning. In response, the usual recommendation is consistency, which means that the same tax treatment should apply to economically comparable bets, regardless of what form is used. Yet because consistency is unattainable, this Article develops an alternative theory: Policymakers should strive instead for balance. This means that for each risky position, the treatment of gains should match the treatment of losses. For example, if the government bears 15% of losses, it has to share in 15% of gains. On a different derivative, if the government bears 35% of losses, it should share in 35% of gains.
As long as this matching is achieved across the board for all risky bets, the admittedly counterintuitive reality is that taxpayers need not prefer, or engage in planning to attain, a low effective rate. A low rate obviously is appealing for gains, but it is correspondingly unappealing for losses (i.e., since deducting the loss is less valuable). Moreover, even if a low rate is desired, taxpayers can get the same aftertax return by increasing the size of their bet. The main advantage of this reform agenda is flexibility. To prove this point, this Article outlines three ways to match gains and losses on derivatives: mark-to-market accounting; a novel reform called the stated-term approach, in which gains and losses are deferred until the scheduled maturity date of the derivative, even if the contract is terminated earlier; and a zero tax rate. The provocative conclusion is that these thoroughly inconsistent approaches can coexist for economically comparable derivatives, without prompting planning. Yet this flexibility is not free, so the limitations of this reform agenda are considered as well, along with implications for cutting edge problems in the taxation of derivatives, including the timing and character rules for swaps, Section 1032, and the wash sale rules.
Edward D. Kleinbard (Cleary Gottlieb Steen & Hamilton, New York) has published The Business Enterprise Income Tax: A Prospectus, 106 Tax Notes 97 (2005), also available on the Tax Analysts web site as Doc 2004-23324, 2005 TNT 2-37. Here is the abstract:
In recent months, Kleinbard asserts, many policymakers, practitioners, and politicians have argued the case for fundamental tax reform. Reform advocates, he says, often point to the recent wave of corporate tax shelter controversies as emblematic of the Internal Revenue Code's complexity and economic inefficiency and conclude that our current income tax is a system gone irredeemably awry.
Most tax reform advocates urge that our income tax system be replaced or supplemented by a consumption tax (most often, a value added tax). This paper, by contrast, urges a genuine reformation of the income tax applicable to business enterprises. Kleinbard's central thesis is that, in our decades-old quest for a perfect income tax, we have failed to design a very good one.
Kleinbard proposes a new "business enterprise income tax" that would comprise four related revisions to our current system for taxing business income:
- First, a broadening of the business tax base to impose entity-level tax on all business enterprises, whatever their form. Thus, partnerships, for example, would become taxable entities.
- Second, a comprehensive new approach to the taxation of financial capital invested in business enterprises, the cost of capital allowance system, which would eliminate current law distinctions between debt and equity, and subject all investors to current tax on their implicit returns, regardless of whether they receive current cash distributions.
- Third, the repeal of our tax-free incorporation and reorganization rules, and their replacement with a uniform asset-acquisition tax model, coupled with new "tax-neutral" tax rates on the disposition of business assets.
- Fourth, the replacement of our current schizophrenic consolidated return rules with comprehensive true consolidation principles.
Kleinbard argues that the resulting system would be fairer, more efficient, and simpler than current law. Most important, the business enterprise income tax should reduce greatly the role of tax considerations in business thinking.
The IRS yesterday released seven Filing Season Fact Sheets:
Monday, January 3, 2005
New York Times
- Transferring Title in a Home to the Children (1/2): Aging homeowners often transfer title in their cherished family home to a child or children long before the parents die. That kind of estate planning, which seeks to protect the home from claims for end-of-life medical expenses or nursing-home costs covered by Medicaid, is permitted, with certain restrictions, by Medicaid regulations. But in most cases, estate-planning experts say, simply deeding a home to children can end up being frustrating for the parents, who lose control over the property, and costly for the children, who could wind up paying significant capital gains taxes when they sell. There is a way, however, for parents to accomplish their estate-planning goals while retaining some control and minimizing the tax the children will ultimately have to pay.
- Six Convicted in Tax Case (12/28): A federal jury convicted six people on Monday in a tax shelter scheme that helped 1,500 people take $120 million in false income tax deductions from 1997 to 2001. Justice Department officials called the tax shelter scheme by Anderson's Ark & Associates of Hoodsport, Wash., one of the most far-ranging ever prosecuted. The defendants earned tens of millions by charging clients $50,000 to $250,000 to buy tax shelters over the Internet. The scheme involved investments in shell companies, illusory loans from Costa Rican bank accounts and other superficial transactions.
- Some Older Investors May Find Roth IRAs More Attractive (1/3): Many older Americans are relying on withdrawals from their individual retirement accounts to cover living expenses. But some seniors who don't want or need to dip into the mutual funds and other securities in their IRAs now have a new opportunity to leave bigger IRA nest eggs to their heirs. Under a tax-law change that went into effect on Saturday, more people past age 70½, the age at which people are generally required to begin taking annual distributions from traditional IRAs, have the option to convert their existing IRAs to Roth IRAs. That can be attractive because Roth holders aren't required to pull money out in their li fetimes and any withdrawals by Roth holders or their heirs are generally tax-free.
- IRA Inheritance (1/2): If you inherit an IRA jointly with someone else, it pays to split up the account.
- It's Irrational to Save (by Nobel Laureate Edward C. Prescott) (12/29): Regarding tax policy, we have learned that labor supply is not inelastic and does indeed respond to changes in tax rates. This insight, so simple and yet so powerful, has implications for all sorts of tax policies, and one policy that would greatly benefit from an application of this insight would be our Social Security tax system.
- AMT Can Complicate Timing of Tax Breaks From Charitable Gifts (12/29): There is still time to reap big tax savings by making charitable gifts this year. But the timing gets particularly complicated for taxpayers subject to the alternative minimum tax.
- Sales-Tax Deductions Can Be Tricky (by Tom Herman) (12/28): Here is a tip for many big spenders: Make a New Year's resolution to save evidence of how much you pay in sales taxes so that you don't need to rely on the IRS tables. Many people, especially those earning more than $200,000, will discover those table amounts are less than generous.
- Not Such a Simple Deduction (1/3): Every year about this time, a chorus of politicians sing out that old song: "Next year we will simplify the federal tax code." And yet also about this time, millions of Americans sit down to analyze, interpret and understand the complexities of filing their annual income tax returns.
- Charities Expect a Late Donation Rush; Law to Take Effect Cutting Deductions for Old Vehicles (12/31): Unlike other businesses closing for the New Year's Eve holiday, the Melwood Horticultural Training Center, a charity in Upper Marlboro, is bringing in extra staff members to handle hundreds of old cars it expects donors to leave in the parking lot before midnight tonight.
- 401(k) Rule Changes Issued; Regulations Designed to Simplify Operation of Plans (12/29): The government yesterday issued a comprehensive new set of rules to govern the operation of 401(k) and similar retirement savings plans, generally making them easier for employers to run and more attractive to higher-paid workers. The rules announced by the Treasury Department and Internal Revenue Service implement more than a decade's worth of legislative changes, many meant to address employer complaints that anti-discrimination laws, enacted during the 1980s, made the plans too difficult to administer.
- Bush Expected To Delay Major Tax Overhaul; Social Security, Budget Move to Center Stage (12/28): Wholesale changes to the tax code that just weeks ago were identified as a Bush administration goal by the end of 2005 are being pushed back for at least another year. White House economists, Republican tax aides in Congress and outside economic advisers say key White House officials have determined that they have their hands full with Bush's pledge to overhaul Social Security and a budget plan that will demand politically painful cuts to non-defense spending. The president will soon name a panel to examine tax policy, but he will leave it to the Treasury Department to monitor the panel's work. It is widely expected that Treasury Secretary John W. Snow will ultimately recommend incremental changes to the tax code, not replacing it with a new system, such as a single flat income-tax rate or a national sales tax, according to these sources.
Back in September, we blogged the unsuccessful attempt by Cardozo Tax Prof Edward Zelinsky to avoid paying New York state income tax on the portion of his salary attributable to his work in his Connecticut home office. The New York Court of Appeals is scheduled to hear oral argument this week in Matter of Huckaby v. New York State Division of Tax Appeals. According to law.com, Mr. Huckaby has a much more tenuous connection to New York than Prof. Zelinsky:
To whom does a telecommuter pay state income tax? Most states resolve the issue by simply apportioning income.... New York, however, has different ideas on how to tax out-of-state residents. In New York, if the employee works out of state for convenience rather than employer necessity, the state clams it is entitled to tax 100 percent of the income earned. Since some states, such as Connecticut, base their income tax on where the taxpayer lives rather than where the income is earned, that means some workers are subjected to double taxation on the same income.
Virtually all of New York's neighbors have urged it to revise its tax code and eliminate the convenience of the employer test, but Albany is loathe to abandon a source of income that brings in around $100 million annually. U.S. Senator Christopher Dodd, D-Conn., has gone a step further with his "Telecommunications Tax Fairness Act." Dodd's bill would bar states like New York from collecting taxes for work performed out of state. The bill was prompted by the case of Edward Zelinsky, a professor who teaches tax law at the Benjamin N. Cardozo Law School in Manhattan but frequently works from his home in New Haven, Conn. Zelinsky challenged New York's tax scheme but lost at every level of state court and then was denied certiorari by the U.S. Supreme Court.
Huckaby, however, raises different issues, which Peter L. Faber of McDermott, Will & Emery in Manhattan hopes will yield a different result. Unlike Zelinsky, Huckaby is a telecommuter. Also unlike Zelinsky, Huckaby's principal place of business is outside of New York -- so far outside New York that he rarely and only indirectly benefits from government services in the state. Huckaby lives approximately 900 miles from Manhattan.
"Mr. Huckaby's case presents the plight of a nonresident telecommuter," Faber argues in his brief. "Telecommuting did not exist when the regulation at issue first appeared on the scene, but it is widespread now." Faber contends that the convenience of the employer test, as applied to Huckaby, is in violation of the equal protection and due processes clauses of the U.S. Constitution and contrary to "common sense."
N. Gregory Mankiw (Chairman of President Bush’s Council of Economic Advisers; on leave from the Department of Economics at Harvard) has published The Economic Agenda, The Economists' Voice, Vol. 1, No. 3, Article 3 (2004) (Berkeley Electronic Press). Here is the abstract:
The U.S. economy is now on a sound footing for sustained expansion. This is a remarkable state of affairs in light of the powerful contractionary forces that have been at work since early 2000 — the bursting of the high-tech bubble of the 1990s, corporate scandals, slow growth among our major trading partners, and of course terrorist attacks. But it is important not to take the economic expansion for granted. President Bush has set out an ambitious agenda to ensure a continued and expanding prosperity. At the top of his economic agenda are tax reform, the reduction of the fiscal deficit, and social security reform.