Saturday, April 30, 2005
Arthur Cockfield (Queen's University) published an op-ed in Friday's Globe & Mail, Don't Scrap Tax Cuts. The article focuses on proposed Canadian tax cuts but also discusses possible corporate tax competition between Canada and the United States:
Because Canada has a relatively small economy in a North American free-trade area, lower corporate tax burdens could create a number of benefits. Ireland, for instance, which slashed tax rates for most corporations to 12.5%, has managed to attract multinational businesses to its shores in order to serve the European Union market. Irish citizens now enjoy greater wealth on average (measured by gross domestic product per capita) when compared to Canadians.
Both Canadian and foreign companies often choose between Canada and the U.S. as a place to base their next operations. When corporate tax burdens are lower in Canada, compared to the U.S. this makes Canada a more attractive place to invest.
But what of the downside? Tax-policy folks sometimes worry that reducing tax burdens on corporations to attract international investment - a process known as tax competition - will lead to a so-called "race to the bottom" as countries continually lower corporate tax rates, ultimately leading to an inability to collect revenues to fund needed public services. This is not a valid concern in North America.
The U.S. will not retaliate against Canada if the Canadian government chooses to reduce corporate tax burdens because the U.S. is generally indifferent to tax-reform efforts north of the border. Unlike Canadian governments, which track U.S. tax developments very closely to ensure that we remain an attractive investment location, the Americans are not overly concerned about Canadian tax-reform efforts that could siphon away U.S. investments because the Canadian economy is less than one-tenth the size of the U.S. economy.
The Government Accountability Office has released IRS Assessment of the Fiscal Year 2006 Budget Request (GAO-05-566). Here is the abstract:
The IRS has been shifting its priorities from taxpayer service to enforcement and its management of Business Systems Modernization (BSM) from contractors to IRS staff. Although there are sound reasons for these adjustments, they also involve risks. With respect to the fiscal year 2006 budget request, GAO assessed (1) how IRS proposes to balance its resources between taxpayer service and enforcement programs and the potential impact on taxpayers, (2) status of IRS's efforts to develop and implement the BSM program, and (3) the progress IRS has made in implementing best practices in developing its Information Technology (IT) operations and maintenance budget.
IRS's fiscal year 2006 budget request of $10.9 billion is an increase of 3.7% over last year's enacted levels. This includes an 8% increase for enforcement, and a 1% and 2% decrease for taxpayer service and BSM. However, the potential impact of these changes on taxpayers in either the short- or long-term is unclear, because IRS has not provided details of proposed taxpayer service reductions, and although it is developing long-term goals, they are not yet finalized. Because of the proposed reductions and new and improved taxpayer services in recent years, this is an opportune time to examine the menu of services IRS provides. It may be possible to maintain the overall level of service to taxpayers by offsetting reductions in some areas with new and improved service in other areas such as on IRS's Web site. Taxpayers and IRS are seeing some payoff from the BSM program, with the deployment of initial phases of several modernized systems in 2004. Nevertheless, the BSM program continues to be high-risk, in part, because projects have incurred significant cost increases and schedule delays and the program faces major challenges in areas such as human capital and requirements management. As a result of budget reductions and other factors, IRS has made major adjustments. It is too early to tell what effect these adjustments will have on the program, but they are not without risk and could potentially impact future budgets. Further, the BSM program is based on strategies developed years ago, which, coupled with the delays and changes brought on by budget reductions, indicates that it is time for IRS to revisit its long-term goals, strategy, and plans for BSM. Because of these challenges, IRS is redefining and refocusing the BSM program. Likewise, IRS has made progress in implementing best practices that would improve its budget development and support for its IT operations and maintenance request. In particular, the recent release of a modernized financial management system included a cost module. However, at this time, historical data is not yet available for IRS to use this module in formulating its IT operations and maintenance request.
Frederick D. Royal (Western New England)
- B.A. 1968, University of Massachusetts
- J.D. 1972, Cornell
- LL.M. (Taxation) 1973, Boston University
“When I think about all of the Professors who I have taken class from in law school, Fred Royal stands out as truly the best of them all. Last year, I was just another uninspired 1L, thinking I would maybe wind up in a general practice or doing civil litigation, but my first income tax class with Professor Royal completely changed my law school experience and opened my eyes to an area of law that I am now passionate about! Now, I am a 2L, with a sense of direction and looking forward to pursuing my LLM in Taxation… No one breaks down tax law like Professor Royal!” - 2L Student, Western New England College School of Law
This week's Tax Prof Profile comes to us from the Student Bar Association at Western New England:
Each spring, the Student Bar Association at Western New England College in Springfield, Massachusetts conducts an election for its highest honor, the Professor of the Year Award. Named for a beloved, long-time member of the faculty who died in 2004, the 2005 Catherine J. Jones Professor of the Year Award was recently bestowed to Frederick D. Royal, a twenty-seven year tax teaching veteran. Beloved by his students, and known for his entertaining, inspiring, and thoroughly-engaging teaching style, Frederick Royal truly embodies all of the qualities of a great law Professor. Accordingly, it is with great respect and admiration that we, the students of Western New England College, wish to congratulate and “spotlight” one of our own—and one the finest individuals teaching in the academy today.
Most of the current students at Western New England are surprised to learn that Professor Royal began his teaching career as a member the law school’s adjunct faculty. At just thirty-two years old, with a young family and a bustling tax practice in tow, Fred Royal fell into tax teaching almost by accident. When the Dean needed another tax instructor, along came Royal, credentialed with practical experience, an LL.M from Boston University and a Clerkship with Judge William Drennan of the United States Tax Court. What is of no surprise, however, is how quickly favored this new addition to the law school was to both its students and staff. Royal’s natural teaching talent soon became evident, and in 1978, he joined the law school’s full-time faculty. More remarkably, he was named the Professor of the Year in 1979, after just one year of full-time teaching. This extraordinary recognition, coupled with his receiving the Award again in 1997, and this year, places him in an ultra-elite group of instructors which includes only three individuals, including the Award’s namesake.
As with all great teaching personalities, Royal’s trademark euphemisms now form a timeless connect spanning three decades and two generations of students. “Ah, look how pretty you’ve ‘colored’ here!” he cajoles at the sight of a law student’s fond affinity for highlighting the entire text of Code sections... “Ah, yes, ‘day and night, youth and age’... any takers?” unfailingly lures in at least one novitiate tax student. Or, his standard retort to the student in his introductory class who always insists on calling him ‘Fred’: “Sure, I believe in you calling me by my first name. My first name is Professor.” Yet, this rapier wit does not detract from his personae as a most serious and dedicated teacher; his “Royalisms” merely enlighten the scene, making many students who loathed the thought of taking income tax enthusiastic about the subject. It’s this enthusiasm that is trademark Royal: “A teacher must have committed and dedicated students” he said in his Professor of the Year acceptance speech, “and people like you make my job fun. A teacher feels the energy and excitement of his students, and in that way, my job is that of a cheerleader. If I can interest you in my subject matter, then all I have to do is encourage you to use your own intellectual abilities.”
However, perhaps most remarkable of all these things, is that at a time when some of his contemporaries might look favorably on a slower pace, Professor Royal has taken up the charge as Director of a new LL.M program in Estate Planning and Elder Law at Western New England College School of Law. Royal created the program from the ground-up and it is the only program of its kind in the Northeast and one of only a few in the nation. In this role, he has provided more than just excellent teaching, but an opportunity for current students and members of the local bar to gain a practical expertise in the expanding areas of estate planning and elder law.
This year, like every one before it, Royal will send off a small group of his advanced students to some of the best LL.M Taxation programs in the country. They will take with them a wealth of knowledge and a most thorough rudimentary preparation in tax law. But most importantly, they will join a litany of former students, including prominent members of the tax field, with fond memories of a truly inspiring teacher who radiated with a profound commitment for his student’s learning, an unwavering admiration for his professional colleagues, and a deep devotion to his friends and family.
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.
John R. Dorocak & S.E.C. Purvis (both of California State University-San Bernadino) have published Using Fiction in Courses: Why Not Admit It?, also available on the Tax Analysts web site as Doc 2005-8694, 2005 TNT 82-86. Here is the abstract:
This is an article about using literary fiction as a teaching aid in accounting courses. Intuitively, many academics suspect that this approach will educate students to real-world situations and consequences in a way that is engaging and fun for both the student and the professor. Professors in the Law have been so experimenting for over twenty years. This article explains some of the rationales supporting the use of fiction, describes an informal case study in a tax course, and suggests some of the fiction available for use in accounting courses. It is the authors' hope that this article will instigate empirical studies that will further support this teaching approach for use in accounting as in law and other disciplines.
Dan McCall (Georgetown 2005) has published Are There Added Preservatives in Section 170(h) of the Tax Code?: The Role of Easements in Historic Preservation, 39 Real Prop. Prob. & Tr. J. 807 (2005). Here is the abstract:
Owners of historic property are able to take tax deductions when they donate preservation easements. This Article discusses how to determine the value of a preservation easement and concludes that the value of the easements typically is not as great as commonly believed. Because the tax deduction value and the actual value of the easement are often different, any type of realignment between the two values likely would reduce the number of donated easements. The author concludes that realigning the values, which would treat the easements as commodities, might reduce the efficacy of easements as a preservation tool.
Friday, April 29, 2005
Jack Bogdanski (Lewis & Clark) of Jack Bog's Blog fame bids farewell to the tax podium for another year -- the tally for 2004-05: since August, he "stepped up to the podium 112 times, for a total of 182 hours, before a total of around 235 students." As Jack notes, "[so] now the theater goes dark for the summer, and most people think it's a four-month picnic for us academics, but for me, work continues -- just different kinds of work." Check out the comments from several of Jack's fans -- a sample:
- "Tax isn't my thang, but you certainly made it more than bearable. You rock."
- "After just a few short hours with him, law students who couldn't even balance their penny jars would have signed up for a crack at the 704 regs."
- "I was in your first class at LC and thoroughly enjoyed it. That was pre-Power Point, of course, which meant fill up the blackboard, erase, and repeat. Then there was the end of class signoff: "Well, here's another hour gone by, and as usual I end up looking like a powdered donut."
Roger Bate, Richard Tren & Jasson Urbach have posted Taxed to Death on the American Enterprise Institute/Brookings Institution Joint Center for Regulatory Studies. Here is the abstract:
This paper examines the role that tariffs, domestic taxes, and regulatory requirements pose on access to essential drugs and devices for the diseases that afflict the developing world, especially HIV/AIDS. While aid has increased in recent years and the price of many drugs has fallen, access to medicines and devices has not increased greatly. There are numerous reasons for this. The major one, discussed in this paper, is the barriers imposed by recipient countries themselves. For example the combined tax and tariff barrier in India and Brazil are respectively over 60% and 38%. Only just over a third of Indians have access to essential drugs and it is likely that a reduction of these financial impediments would increase access. Removal of these barriers would therefore likely save thousands of lives across the developing world. Southern African countries generally have fewer tariff barriers. But if South Africa removed its 14% sales tax, HIV patients could afford more food, and many are currently malnourished. Furthermore, many Southern African countries, such as Namibia, impose regulatory constraints (expensive and time consuming registration of products already approved in US/EU), which reduce access to essential medicines.
The Tax Policy Center has published several recent tax reports:
- Options for Reforming the Estate Tax (4/18)
- If You Think Taxes Are a Pain Now... (4/15)
- AMT Coverage by State (4/11)
- State and Local Tax Revenues (3/28)
- Options To Reform the Estate Tax (3/23)
- Demythologizing the Russian Flat Tax (3/14)
William B. Barker (Penn State) has published Expanding the Study of Comparative Tax Law To Promote Democratic Policy: The Example of the Move To Capital Gains Taxation in Post-Apartheid South Africa,109 Penn St. L. Rev. 703 (2005). Here is the abstract:
This research advances a new method of comparative tax law analysis. The paper suggests that comparative analysis must proceed by studying the ideological purpose behind law and legislation, the manner in which legislation tries to achieve these goals, and the manner in which law's interpreters help or hinder the realization of these goals. It develops a stratagem to guide this analysis that focuses the study on certain defining elements in an income tax system that must be critically studied to determine the system's true potential for equal treatment and distributive justice or their opposite. It looks to the example of South Africa, a country which is redefining itself through taxation as a democratic nation. On the basis of this comparison, one can see how the normative approach to comparative law uncovers law's potential for promoting economic equality through taxation.
"Hunt Now on the Pay-Never Plan" was the title of a newspaper article in the April 18, 2005, Arizona Republic by Michael Markarian, executive vice president of the Humane Society of the U.S. His point: "A big-game hunter can shoot an exotic animal in Asia, in Africa or even at a drive-through 'canned hunt' here in the United States and write off his vacation at the expense of American taxpayers." Part of Markarian's concern was the tax incentive he saw the U.S. providing for the slaughter of animals. "In an ironic twist of so-called conservation," he said, "the more animals that are hunted, the more rare the species and thus the higher 'value' of the animal and tax break to the hunter." Our concern is with what can be done about exaggerated valuations of donated property short of simply banning fair market value as the measure of tax deductions for property donations. Related to that is our concern over the responsibility of tax practitioners when advising a taxpayer regarding those donations or preparing his tax return.
More classroom tax fodder ripped from the news headlines: a Wisconsin judge "ordered a woman convicted of theft to decide whether to spend 90 days in jail or donate her family's Packers tickets next season to charity." The TaxProf Discussion Group sprang into action, debating whether the woman will be able to claim a charitable deduction if she chooses to avoid jail time by donating her Packers tickets to charity.
- Christopher Hoyt (Missouri-Kansas City), who sparked the discussion, argued that, under Waldman v. Commissioner, 88 T.C. 1384 (1987), aff'd, 850 F.2d 611 (9th Cir. 1988) (denying § 162 deduction to embezzler who avoided jail by making restitution to victims), there should be no § 170 charitable deduction where the contribution was coerced by the court.
- Others asked, as a theoretical matter, if it mattered that the quid pro quo did not come from the charity.
- John Lee (William & Mary) noted that in Allied-Signal, Inc. v. Commissioner, T.C. Memo 1992-204 (1992), aff’d, 54 F.3d 767 (3d Cir. 1995), the courts denied a claimed $8 million charitable deduction for payments Allied-Signal made to a nonprofit environmental fund in lieu of a fine.
"At our six public meetings that were held all over the country, we learned about the complexities of the tax code and its impact on taxpayers," stated Senator Connie Mack, Chairman of the President's Advisory Panel on Federal Tax Reform. "This request for ideas to reform the tax code marks a shift of our focus from defining the problems in the current code to considering options for reform. We will be reviewing specific proposals for reform that have been offered in the past as well as new ideas that are submitted. We expect to hold more public meetings in the coming months to discuss these options and alternatives."
This is the Panel's second specific request for comments. In connection with its first request, the Panel received thousands of comments describing complexities and burdens, unfair aspects and distortions in the current tax system.
For details on how to submit comments to the panel, see here.
Thursday, April 28, 2005
When teaching the per diem expense rules, recent press reports about Tom DeLay's per diem travel expenses offer an interesting comparison. The Wall Street Journal reports that DeLay and his wife spent $28,000 for a 10-day trip in 2000 to London and Scotland; the hotel and meal costs were $584 per day. The State Department's 2000 per diem rate was $318 for London and $306 for Edinburgh.
The Government Accountability Office yesterday released Management Report: Improvements Needed in IRS’s Internal Controls. The 31-page report outlined improvements needed in the IRS's internal controls to better safeguard taxpayer data, refunds, and lien resolutions.
Robert R. Gunning (Silverstein & Pomerantz, Denver) has published Into and Out of the Bog: The Intergovernmental Tax Immunity Doctrine, 41 Willamette L. Rev. 151 (2005). Here is part of the Conclusion:
At first glance, intergovernmental tax immunity jurisprudence is a bog of inconsistent decisions containing delicate and subtle distinctions. At least two open questions remain. First, may a state or local taxing authority assess a private party's possessory interest in federally owned property by equating the value of the interest with the market value of the underlying property? Second, how do courts determine whether a state or local tax discriminates against the United States when there is no transparent or facial discrimination in the challenged statute?
- State tax revenues increased 8.1% to $593 billion (up $44 billion from 2003)
- All 50 states increased their tax take
- The two biggest sources of state tax revenues:
- Sales taxes up 7.5% to $198 billion
- Individual income taxes up 8.5% to $197 billion
- The biggest tax increases:
- Documentary and stock transfer taxes up 26%
- Severance taxes up 18%
- Occupational and business license taxes up 16%
- Per capita taxes collected by states averaged $2,024
- Highest per capita taxes:
- Hawaii: $3,048
- Wyoming: $2,968
- Connecticut: $2,937
- Minnesota: $2,889
- Delaware: $2,862
- Lowest per capita taxes:
- Texas: $1,367
- South Dakota: $1,378
- Colorado: $1,533
- New Hampshire: $1,543
- Alabama: $1,549
- Highest per capita taxes:
For the complete data, see here, including:
- 50-State Ranking by Total Taxes and Per Capita Taxes
- 50-State Tax Collections Spreadsheet
- Individual State Data
Sheryl Stratton has an interesting news report, Tax Lawyers Critique Graetz Reform Plan at Judicial Conference, also available on the Tax Analysts web site as Doc 2005-8747, 2005 TNT 80-5:
Tax lawyers gathered at the U.S. Tax Court's judicial conference April 21 and 22 in Farmington, Pa., to, among other things, listen to a panel of tax policy professionals debate the merits of a simplification proposal of one of their own....
The four pieces of Graetz's proposal for a "fair and balanced tax system for the 21st century" would:
- repeal the regular individual income tax, index the alternative minimum tax, increase the AMT exemption for married couples to $100,000, and lower the AMT rate to 25%;
- reduce the corporate income tax rate to 25% and more closely align book and tax accounting;
- impose a value added tax at a 10%-14% rate to replace revenue that would be lost; and
- replace the earned income tax credit with a refundable payroll tax offset....
Purporting to represent the Treasury Department, Ronald Pearlman, a professor at Georgetown University Law Center, wondered what the plan would do to the tax base....
Stanford Law School Prof. Joseph Bankman observed that retirees' purchasing power would go down under the plan.
The most recent issue of the Canadian Journal of Law & Jurisprudence (Vol. 18, No. 1, 2005) contains a wonderful collection of tax articles by a dazzling array of American and international tax scholars assembled by Guest Editor Edward J. McCaffery (USC):
- Richard A. Epstein (Chicago & Stanford), Taxation with Representation: Or, the Libertarian Dilemma:
Without question, the libertarian vision that envisions the use of state power to control force and fraud as a proper governmental function is one piece of any comprehensive political theory. But the hard-line libertarian goes astray in finding this the sole function of government or in thinking that the maintenance of order is possible without the imposition of taxes. Rather, the case for taxation rests on the familiar view that state coercion is sometimes necessary to overcome coordination problems. The justification for a minimal system of taxation therefore is that it provides more in benefits for the individuals taxed than they lose in revenue. Stressing the benefit shows the mistake in Nozick’s famous observation that taxation is “on a par” with forced labor. And the proper understanding of the logic of taxation shows the defects in the series of steps in demoktesis—or “ownership of the people, by the people, and for the people”—that Nozick offers to show how difficult it is to draw any clear line between taxation and slavery.
- David Duff (Toronto), Private Property and Tax Policy in a Libertarian World: A Critical Review:
The idea that taxes involve the confiscation of private property is widely held in popular thinking and scholarly writing. This article challenges the libertarian foundations of this assumption by critically examining libertarian theories of private property and their implications for tax policy. Part II summarizes the leading libertarian theories of private property, reviewing John Locke’s argument in the Second Treatise of Government and Robert Nozick’s account in Anarchy, State, and Utopia. Part III examines the implications of these libertarian theories for tax policy, considering libertarian prescriptions for substantive tax measures as well as institutional arrangements that affect tax policy outcomes. Part IV criticizes libertarian theories of private property, casting doubt on tax thinking that relies on these libertarian foundations. Part V considers the implications of this critique for tax policy and tax scholarship.
Conventional wisdom among contemporary liberal egalitarians is that taxing individuals according to their “endowment” or “earnings capacity” would constitute an unacceptable intrusion on basic human liberties. In effect, the argument goes, such a scheme would result in a type of slavery – in order to pay the tax, people would be forced to accept jobs commensurate with their identified levels of endowment. The most succinct formulation of this argument comes from John Rawls, who argued that an endowment tax “would force the more able into those occupations in which earnings were high enough for them to pay off the tax; it would interfere with their liberty to conduct their life within the scope of the principles of justice…”
This Article examines the Rawlsian objection to endowment taxes and considers whether it can be distinguished from the libertarian claim, advanced most famously by Robert Nozick, that taxation of earnings is unjust because it is “on a par with forced labor.” The Article’s principal claim is that unless one assigns greater moral value to non-market activities than to market activities (a position arguably in tension with the liberal principle of neutrality as between alternative visions of the good life), there is no difference in kind or in degree between the interference with liberty occasioned by the two types of taxes. It follows from this analysis that if one accepts Rawls’s argument regarding endowment taxes, one must also accept Nozick’s argument regarding wage taxes. If correct, this conclusion presents the liberal egalitarian with a dilemma: she must either (1) embrace endowment taxes as a moral ideal, rejecting the liberty concerns expressed by Rawls and others, or (2) join Nozick in renouncing the ordinary taxation of earnings, a move that would substantially weaken her commitment to egalitarian outcomes.
The purpose of the Article is not to offer any particular resolution of this dilemma, but rather to expose some of the tensions inherent in the liberal egalitarian framework and to suggest that consideration of these tensions is necessary to the development of a more satisfactory liberal egalitarian position on questions of taxation and distributive justice. Toward that end, an alternative framework is suggested for assessing the liberty cost of taxation. It is contended that all taxes—whether on income, consumption, wealth, endowment or other tax bases—interfere with individuals’ pursuit of the good life. For any given level of revenue to be raised through taxation, the recognition and protection of a liberty interest in one type of activity will simply increase the liberty costs associated with unprotected activities. The liberal instinct to shield non-market activity from taxation does not reduce the liberty cost of taxation, but rather shifts it to those whose conceptions of the good life involve the use of markets. This is not to suggest that a concern for personal autonomy should not inform our choice of tax institutions, but rather that the question may ultimately be one of distribution. That is, in fashioning a tax system, how best can we allocate the benefit of being free from taxation’s inevitable interference with personal autonomy?
- Andrei Marmor (USC), On The Right to Private Property and Entitlement to One’s Income:
In this short essay I argue that the main insight of Murphy and Nagel’s book, The Myth of Ownership, that people have no right to their pre-tax income, is not supported by their claim that the right to private property is not a natural right. The non-naturalness of the right to private property, I argue, is irrelevant to their moral argument. The plausibility of their moral conclusion derives from the thesis (which they also seem to endorse) that people have a right to the fruits of their labor, maintaining, however, that there is no possible conception, morally speaking, of what the fruits of one’s labor are, independent of a system of legal and social norms that constitute the terms of fair bargaining, pricing, etc. People can only have a right to a fair assessment of the added value of their labor, and the latter cannot make any sense independent of the entire system of norms prevailing in the relevant society. I argue that this last conclusion is not affected by the nature of the right to private property.
- J.E. Penner (London School of Economics), Misled by Property:
It is not untypical for arguments about the justice of taxation to be framed in the rhetoric of property, for example by equating taxation with the taking of property by the state, a form of expropriation. An important recent example is found in Murphy and Nagel's book, The Myth of Ownership: Taxes and Justice. In this paper the author argues that the equation of taxation with expropriation is conceptually awry, and that, properly understood, justifications for property rights bear only tangentially on the justice of taxation. The author elaborates this view by discussing Murphy and Nagel's general strategy when they attempt to justify taxation in the face of libertarian 'pro-property' arguments, in the particular case of the 'saver's argument', i.e., the argument that taxation on the income from investments amounts to an unfair burden on savers.
- Marjorie E. Kornhauser, Doing the Full Monty: Will Publicizing Tax Information Increase Compliance?:
Publicity of information is a fundamental principle of American democracy. Not only is it instrumental in increasing compliance with the laws, a necessity of any government, but also it is an essential element of the right to know — which itself is an aspect of the first amendment right to free speech. Unfortunately, publicity often conflicts with another fundamental right —the right to privacy. In regards to taxes, citizens essentially have two rights to know: a right to know what the tax laws are, and a right to know that these laws are being administered fairly. Publicity in the tax context traditionally means making tax return information public records in an attempt to ensure the fair administration of the tax laws. This type of publicity, however, generates intense hostility because taxpayers perceive it as a huge invasion of their privacy. After examining the pros and cons of traditional publicity of tax information, this Essay suggests that tax publicity be reconceived more broadly. Redefined in the dictionary sense of simply the transmission of information, tax publicity can include a wide array of communications, varying as to content and audience, which can better achieve publicity’s underlying goals with minimal invasions of privacy. A large portion of publicity in this broad sense can be — and should be — educational.
The Essay outlines four publicity proposals to stimulate discussion. Three use the expanded definition of publicity and focus on individual taxpayers: an annual tax statement, a short booklet to accompany the 1040, called Know Your Taxes, and an annual W-4. These essentially educational programs should deliver tax information to taxpayers more effectively than currently occurs. The fourth, more controversial, proposal suggests partial publicity — in the traditional sense. It attempts, however, to minimize the customary objections to publicizing tax return information by reducing invasions of privacy. All the proposals will cost money, but probably less than the costs of enforcing compliance only through increased audits and litigation. They may also have psychic and political costs. Although recent studies show that more informed taxpayers are often more compliant, some of the information may trigger negative attitudes which would decrease compliance and/or create pressure for lower taxes.
Regardless of whether taxpayer reactions to the increased information are positive or negative, the greater publicity proposed in the Essay could have salutary effects, especially if it occurred in the context of a rational debate by elected officials about tax policy (instead of the current inflammatory rhetorical sound bites). On the one hand, if taxpayers respond positively to publicity, compliance will increase. If they act negatively, and their hostility to taxes increase, at least the publicity will arm them with more precise information that will allow them to focus their objections to the income tax and thereby lobby more effectively for real tax reform.
- Michael A. Livingston (Rutgers-Camden), Law, Culture, and Anthropology: On the Hopes and Limits of Comparative Tax
This article considers the use of cultural analysis by tax academics, particularly as it concerns comparative tax issues. While various authors have used the terms "culture" and "cultural" in tax scholarship, it is not clear that they have ascribed the same meanings to these terms, and their approaches have (with rare exceptions) not yet been systematic. In particular there is a division between those scholars who have used the term to indicate broad national characteristics, such as the American ambivalence toward wealth or the Italian tolerance for tax evasion, and those who have considered the beliefs and practices of tax professionals or administrators--what might better be called the tax anthropology or sociology of a given country or region. The author considers these issues in the context of two specific problems: the issue of progressivity and tax reform, and the narrower issue of statutory interpretation and tax shelter limitations. The author concludes that cross-cultural comparisons hold substantial promise in the tax field, but are likely to be most productive when focused on specific, well-defined problems and when the author is clear as to what definition of culture he or she is concerned with.
- Daniel N. Shaviro (NYU), Can Tax Cuts Increase the Size of Government?:
Recent U.S. tax cuts, to the extent that they involved a principled, long-term policy view, seem to have been aimed at shrinking the size of government. The idea apparently was to force eventual spending discipline, even (or perhaps especially) with respect to Social Security and Medicare, by turning reduced tax revenues into a political fact on the ground that would be difficult to reverse. In fact, however, the idea that the tax cuts would make the government smaller seems to have rested on spending illusion, or confusion between the actual size of government, in terms of its allocative and distributional effects, and the observed dollar flows that are denominated ‘taxes’ and ‘spending’. Given the long-term budget constraint, which holds that government inflows and outlays must ultimately be equal in present value, and the huge preexisting fiscal imbalance, the tax cuts are likely to be paid for, in the main, through some combination of future tax increases and cuts to Social Security and Medicare. (Other government spending cuts, relative to the case where the tax cuts were not enacted, are likely as well, but cannot contribute nearly enough.) To the extent that the 2001 through 2003 tax cuts lead to future tax increases, the combined effect is likely to make the government bigger both allocatively and distributionally. To the extent that Social Security and Medicare spending bear the brunt, the government still gets larger in the sense of increasing redistribution from younger to older generations, although Medicare cuts might decrease the size of government allocatively.
- Edward J. McCaffery (USC), Three Views of Tax:
Virtually all liberal egalitarian advocates of redistributive taxation support an income tax, believing that consumption taxes fail to reach capital and its yield. But this is not true under progressive rates. There are two forms of consumption tax, prepaid and postpaid. A consistent progressive postpaid consumption tax reaches the yield to capital in just those cases in which ordinary moral intuitions want it to be reached: when savings are used to finance a "better," more expensive, lifestyle. Such a tax stands between an income tax, which double taxes all savings, come what may, and a prepaid consumption tax, which never taxes savings. It is the last, best hope for some semblance of redistribution via tax on earth.
The ABA Real Property, Probate & Trust Section has posted commentary about two new family limited partnership cases:
Wednesday, April 27, 2005
The Washington Post has an interesting article, Audit Urges End of IRS's Employee Tuition Plan; Administrative Costs Said to Be "Far Too High":
The IRS's employee tuition assistance program has spent more than 60% of its funds -- or $4.4 million in two years -- on administrative costs, employing the equivalent of 30 full-time workers while turning away hundreds of employees for lack of funds, an inspector general audit has found. The audit ... suggests the IRS's Human Resources Investment Fund should be abandoned. Its findings come as Treasury Secretary John W. Snow pleads to Congress for more funding for the nation's tax collection agency....
The tuition plan was established as part of the IRS reorganization of 1998 to promote career development and improve employees' skills. Course subjects include accounting, computers and foreign languages. But in 2002 and 2003, only $2.8 million of the program's $7.2 million budget went to tuition assistance. The remainder was swallowed by administrative costs and the salaries of more than 80 employees detailed to the project, most of them part time. During that time, 1,680 employees were rejected for tuition assistance for lack of funds.
For a copy of the audit, see here. (Thanks to reader Ben Cunningham for the tip.)
After a New York Times article on tax abuses of "supportint organizations," A Tax Benefit for Big Donors Often Bypasses Idea of Charity, the Chair and Ranking Member of the Senate Finance Committee announced that
they plan to propose reforms to stop the use of “supporting organizations” for generous tax breaks rather than charitable purposes. The senators plan to include a crackdown on supporting organization abuse in their comprehensive charitable governance reform legislation to be introduced in the next few months.
The New York State Bar Association Tax Section has submitted a report to the IRS on Regulation § 1.901-2(f)(3) and the Allocation of Foreign Taxes Among Related Persons:
This report discusses issues pertinent to the regulation project that has been announced by the Treasury Department and the IRS to consider possible revisions to Treasury regulation § 1.901-2(f)(3), which in general deals with the allocation of foreign income taxes that are imposed on the combined income of related persons that are jointly and severally liable for such taxes.
The National Taxpayers Union has released several tax letters and reports:
- 17-Group Coalition Expresses Vehement Opposition to Schumer Death Tax "Compromise" (4/15)
- California's "ReadyReturn" Filing Program Could Trap Taxpayers (4/15)
- Tax Relief and Spending Restraint go “Hand in Hand” (4/15)
- Tax Law's Complexity Continues to Snare Filers (4/14)
Robert W. Wood & Richard C. Morris (both of Robert W. Wood, P.C., San Francisco) have published Boomerang Bonus Payments: Tax Effects When You Get It but Give It Back, also available on the Tax Analysts web site as Doc 2005-8676, 2005 TNT 79-27. The article discusses the tax consequences when a bonus has to be repaid.
- Steve Johnson (UNLV), Chair:
Of the many tools available to policymakers in changing society, the U.S. government has increasingly come to rely on its fiscal tools--spending and taxing--to achieve its goals. The Bush Administration's plans for its second term continue and intensify this trend. This panel focuses on three fundamental areas in which recent and proposed changes in policy could have profound effects on American Society: changes in the Social Security system, changes in the income tax system, and changes in the tax incentives for business activity.
Neil Buchanan (Rutgers-Newark), Progressive Income Taxation and a Simplified System in the United States:
Current proposals in Congress would replace the federal income tax with one of a variety of consumption taxes. I argue in this paper that a better plan would be to simplify the current income tax system, relieving 90% of all taxpayers from having to file returns, and set a progressive rate structure on high-income earners. This plan would include a method for smoothing variations in year-to-year income, eliminating a source of significant loss for many low-income workers.
- Lee Anne Fennell (Illinois) & Kirk Stark (UCLA), Taxation Over Time:
Tax schedules typically do not take into account the age of the taxpayer or the taxpayer’s pattern of earnings over time, except implicitly in the form of deductions, credits, or progressive tax schedules that may correlate with age or position in the life cycle. Scholars have begun to address, from different angles, the possibility of explicitly conditioning taxes on age or of altering the applicable taxation period to take better account of taxpayers’ earning patterns over time. In this piece, we draw together these divergent threads in the literature to analyze the idea of adding a component to the tax system that contextualizes earnings within a taxpayer’s life cycle through mechanisms like age-basing or averaging. Our analysis includes traditional efficiency and equity perspectives, as well as the insights of behavioral law and economics with respect to time preferences.
- Victor Fleischer (UCLA), Subsidizing Risky Compensation:
The tax code systematically treats equity-based returns on human capital (often subject to deferral and capital gains) more favorably than ordinary salary payments. This effectively subsidizes compensation schemes that are structured as equity-based payments (stock options, stock, profits interests in a partnership) rather than salary or salary-like payments. Is it sensible for the tax code to subsidize risky compensation schemes?
- Michael Waggoner (Colorado), Private Accounts in Social Security:
My proposal is that all persons at least ten years from retirement be required to invest the FICA tax on the first $1000 of monthly earnings in private, broad-based, stock and bond index funds. These funds could be withdrawn only as an annuity and only when Social Security would pay out (retirement, disability, or death with dependents). Withdrawals would be credited against Social Security entitlements, with only the excess being paid by Social Security. This propposal would not allow individual control over private accounts in Social Security (such control would risk unwise investment and premature dissipation), but it would provide the returns of compound interest, thus in the long run assuring Social Security's solvency.
- Susan Silbey (MIT), Chair
Probably as long as there have been rules, people have tried to game them. With the clamoring for transparency and accountability in public institutions and the recent wave of corporate scandals, gaming-- the strategic manipulation of rules, laws, or measures, with the intent to gain some advantage has been much in the news of late. Nevertheless, gaming is a regular, perhaps fundamental, feature of social life. Gaming is one way that people exert agency, resist authority, express power, avoid compliance, subvert intentions, alleviate boredom or gain a competitive advantage. Gaming is of special interest to socio-legal scholars since it is one of the processes that helps to produce the gap between law on the books and law in action. Our panel will investigate gaming practices in different institutional settings in order to help us understand better which conditions motivates or curtail gaming, its consequences, and how people legitimate gaming or evaluate its legality.
- Tanina Rostain (New York Law School), Playing with the Rules: Tax Games of Accountants and Lawyers:
As traditionally understood, the task of a tax professional is to play games with tax law. Whether accountant or lawyer – a tax practitioner’s job is to find loopholes for clients to minimize their taxes. This paper considers whether different types of tax professionals in the United States play distinct games with the law. It argues that traditionally, tax lawyers and accountants have played in different fields. More specifically, it suggests that in tax – an area governed by the same formal knowledge – lawyers and accountants historically have engaged in different knowledge practices, which are tied to different professional epistemologies, ideologies, and cultures. It also considers the extent to which, as competition among accounting and law firms has increased, the lines between the games tax professionals play are blurring.
- Darlene Kennedy (Catholic), Chair
The process of funding public programs has always been a source of confusion and controversy. The authors on this panel take various interdisciplinary perspectives in their work. They will discuss the current U.S. system of progressive taxation, its intended and unintended effects on women, the use of economic concepts by judges in their rulings, and the national basis for international taxation.
- Adam Chodorow (Arizona State), Economic Analysis in Judicial Decision Making: An Assessment Based on Judge Posner's Tax Jurisprudence:
In recent years, many of the most vocal proponents of law and economics have been appointed to the bench, including Richard Posner, Guido Calabresi, and Frank Easterbrook. They have been strong advocates of the judicial use of economic analysis as a tool to help decide cases. This paper explores the ways in which Judge Posner has used economic analysis in his tax decisions, with the goal of identifying the ways in which he has used such analysis and then assessing its effectiveness. In highlighting and evaluating the ways in which Judge Posner has used economic analysis to decide tax cases, I hope to provide insights and guidance on the strengths and limitations of this approach to others who may be urged or tempted to follow suit. I conclude that Judge Posner uses economic analysis - and in particular simplified models - in two key ways: to draw inferences from evidence and to construe statutes. While the results he obtains appear to be objectively derived, judicial discretion remains a far more integral part of the decision making process than might initially be apparent. Thus, while the tools of economics may be helpful to a judge skilled in their application, economics analysis should not supplant the traditional tools of judicial decision making.
- Bridget J. Crawford (Pace), Death, Taxes, and the Family: How the Internal Revenue Code Reinforces Gender Stereotypes:
Tax law is political, not neutral or mechanical. This paper critically examines the way in which tax law reinforces gender stereotypes. Close analysis of the laws governing the transmission of wealth reveals the law's bias in favor of traditional male-female relations. Although taxation in general has not been of traditional interest to feminist scholars (and feminism has not been of traditional interest to tax scholars), feminist jurisprudential theories and methodology illuminate the tax system's fundamental assumptions about men, women, children and families. Specifically, the tax law embraces inconsistent constructions of the family that will result in the imposition of the greatest amount of tax . This paper argues that the stated goals of tax policy require recognition of the economic desirability (and social reality) of non-traditional and alternate family structures.
Replacing the Federal Income Tax with a VAT or a retail sales tax would amount to adopting a scheme under which the Federal government would become a forced joint investor in all private investments. Moreover, the taxpayer would choose the investment and the larger the private investment, the larger the government's forced participation. This is problematic because it helps wealthier investors scale up and gain entry to the highest return investments (hedge funds, IPOs, etc.) from which small savers are excluded.
- Eric Laity (Oklahoma City), A Foundation for International Taxation: The Institutional Competence of Nations:
This Article proposes a conceptual foundation for the field of international taxation: the institutional competence of nations in global economic development. The institutional competence of nations in global economic development consists of their authority to make decisions in pursuit of our collective goal of global economic development, an authority subject to a number of standards and limitations. The Article first constructs the institutional competence of nations from several areas of institutional economics, including the theory of complex organizations. On the basis of this foundation, the Article suggests limitations on a nation’s prescriptive jurisdiction under international law over business income and portfolio income. The Article then turns to collective action problems encountered by nations in the taxation of international income. The Article recasts anti-deferral regimes as anti-abuse regimes and suggests appropriate secondary social norms to enforce the limitations on prescriptive jurisdiction over international income. The foundation proposed by the Article would coordinate international taxation with the regulation of international trade. The Article concludes that multilateral cooperation in several areas of international taxation is desirable and suggests that such cooperation be addressed through the GATT complex of treaties.
- Christian Day (Syracuse), Chair
In this session we explore identifiable areas of “business law” where rules of risk allocation have emerged as a result of some topically cohesive body of law to create a coherent system or “game”. Using the language of gambling, we explore the cultural practices of 'gaming the market' and 'playing the system' in commercial law. We explore a variety of market contexts and analyze the house odds with respect to the rules governing particular market relationships. We are interested in the extent to which accepted legal rules provide for an orderly game, with fair play and uniform results, as opposed to “stacking the deck” against certain 'players'. Moreover, we investigate the extent to which these respective legal structures act as a facilitator or “croupier” of their purported markets, or function to “fix” the game from its inception. With this in mind, we look first at how the laws of collateralization impact the players of the secured transactions game in Cuba. Second, we examine the logic and fairness of the tax-preferred investment game in the United States. And, third, we examine the roulette wheel of state insurance laws to see if there is some reliability to pay outs when players spin for their chance to recover on an insured claim. Finally, we also examine Tulip Mania, and the South Sea and Mississippi Bubbles, several early bubbles that have come to stand for manipulation, cupidity and corruption.
- Charlene Luke (Florida State), Governing Risk in Tax-Preferred Investment Products:
Numerous tax-preferred investment opportunities have been created by Congress and implemented by Treasury. Many of these tax rules mandate the amount of investment risk to which investors may be exposed and attempt to keep investors from acting in an economically risky manner (e.g., through diversification requirements and penalty taxes for early withdrawals). Congress has yet to create a coherent structure for government intervention in risk management within the context of tax-preferred investments. The present administration has urged expansion of tax-preferred savings devices and the introduction of investment risk and “ownership” into Social Security. My presentation will review possible approaches to risk management that Congress could take to create a more unified approach for tax-preferred products.
- Jose Gabilondo (Florida International), Collateral as Risk Manager: A Comparative Analysis of US-Cuban Regimes:
Paragons of diseconomic irrationality, U.S. and Cuban laws severely constrain the ability of international asset holders to extend credit to Cuban governmental and private actors, i.e. to make “bets” by assuming credit exposure to Cuban borrowers. This presentation considers two alternatives available to potential trade or financial creditors interested in gaining credit exposure to Cuban counterparties: (1) non-market rent-seeking from either the U.S. or Cuban governments in order to place a “special bet” (for example, U.S. agricultural interests have successfully obtained rents from the U.S. government through exceptions to the Cuban embargo which allow U.S. farmers to trade with Cuba without any credit risk); and (2) a market mechanism using collateral as a “hostage” to reduce the creditor’s risk of loss in a transaction (for example, the Cuban government has conducted one receivables-backed debt issuance using airport tax inflows).
- Aviva Abramovsky (Syracuse), The Regulation of Risk: Analysis of Current Structure of Insurance Law and Proposal for a Unified Act:
Insurance law is the ultimate legal arbiter in the games of risk. Nowhere are the stakes higher than in the financial market where risk itself is the ultimate commodity. Yet, unlike most any other financial market or instrument, private insurance law is not subject to any Federal statute or Uniform Act. This presentation will discuss the manner in which the insurance industry seeks and requires standardization, how state law has led to a fragmenting of agreed upon definitions and trade practice and how this disorder creates unbargained for increases in risk by and between the parties. It will review the history of standardization in other fields of law, specifically the story of Karl Llewellyn’s Legal Realism movement and the eventual emergence of the Uniform Commercial Code. Extrapolating from these movements, we will then ask if such types of standardized rules have led to a perception of more certainty in result and whether such result directs that a revision of the rules of the insurance law game is required.
- Christian Day (Syracuse), Gambling with the Future? Tulips, Futures, and World Empire:
Tulip Mania (1634-1637), and the South Sea Bubble and Mississippi Bubble (1719-1720) are often held out to be examples of crooked markets and reprehensible behavior in capitalist markets. The truth is somewhat different and more fascinating. Tulip Mania was a brief and unimportant gyration in a newly fashioned futures market. The paper notes the Dutch reliance on futures and their use in the tulip market. It demonstrates that overall the market functioned well. Its failures arose from “design flaws” in market entry and the settlement process. The South Sea and Mississippi Bubbles represented ambitious schemes that reached too far. The South Sea Company attempted to refund the English national debt, to the advantage of itself and the government. Corruption and manipulation played considerable roles in the bursting of the bubble. Neither was unusual for the era. Refunding was valid. Soon thereafter the Bank of England completed the refunding, providing England with a monetary system that was to support the British Empire. The Mississippi Company Bubble was nothing less than an audacious attempt to takeover French government finance and French foreign colonies. Modern monetary policy was key to the scheme. Cupidity, corruption and inadequate financial and legal institutions all played a role in that bubble’s collapse. The financial and economic importance of these schemes is emphasized. It concludes the experiments were worthy and ultimately more important to finance and economics than the long-lived reputations for manipulation, corruption and lapsed legality.
- Richard Painter (Illinois), Chair
Recent highly-publicized scandals have reminded us of the importance of ethics and standards in the tax law. The papers in this panel will discuss the importance of anti-abuse doctrines as well as provide empirical explorations of the importance of doctrines such as "substance dominates form" and of the impact that lawyers' strategies have on their clients' cases. The panel will be chaired by a scholar who specializes in professional responsibility who will guide the discussion from the perspective of legal ethics.
- Linda Beale (Illinois), Big Stakes, Little Gambles: Audit Lottery and Attorney-Client Privilege in an Age of Customized Taxes:
Academic lawyers invest intellectual firepower on constraining judicial discretion, but tread lightly on questions about the power of individual attorneys to shape the law through their client interactions. This paper considers one aspect of that power—the ethical standards, including the attorney-client privilege, applicable to customized tax planning. Ethical standards designed best to prevent government intrusion into important discussions between attorneys and clients in adversarial litigation operate less perfectly in the tax planning context. The minimal risk that a taxpayer’s return will be selected for audit (the “audit lottery”) can be a significant factor in an aggressive taxpayer’s cost-benefit analysis of the stakes. The view that there is nothing wrong with customized tax planning (supported by the penalty provisions in the tax code and Learned Hand’s famous statement that “[a]nyone may so arrange his affairs so that his taxes shall be as low as possible”) pushes clients to gamble aggressively. The bottom-line reward to tax avoidance clinches the bet on aggressiveness. The IRS and Congress have begun to require more disclosure and to question the role of privilege in certain potentially abusive “tax shelters,” but have raised few concerns about customized tax planning outside that context. Using tax and ethics norms, this paper questions whether a privilege for tax planning advice at the stage of structuring a transaction is appropriate, in the context of the audit lottery and the significant information asymmetry between taxpayers and the government.
- Leandra Lederman (Indiana), Do Attorneys Affect Outcomes in Tax Court Cases? An Empirical Study:
In the United States Tax Court (Tax Court), where most federal tax cases are litigated, the United States always is represented by Internal Revenue Service attorneys but a large portion of the taxpayers proceed pro se. A prior study found that, although cases docketed in the Tax Court are not randomly selected for trial, the presence of counsel for the taxpayer did not have a statistically significant effect on whether or not the case settled. But do attorneys affect the length of time the case takes to resolve or the financial outcome of the case, in settled cases, tried cases, or both? The article examines those questions, which have both theoretical and empirical components. First, the article analyzes what factors might impact the timing of settlements and trials. Second, it suggests that there are three principal ways in which represented litigants differ from unrepresented litigants and the theoretical impact of each of those differences on case outcomes, particularly the timing of case resolutions. Finally, it tests empirically the theory that attorneys may impact case resolutions, using data on a random sample of Tax Court cases, some of which settled after being docketed in Tax Court and some of which went to trial. The study controls for such factors as the amount at stake in the case, the type of taxpayer (individual, estate or corporation), and the complexity of the case. The results should provide insight into the contribution representation by an attorney may make to case resolution.
- Dan Schneider (Northern Illinois), Empirical Research about the Use of Judicial Doctrines in Recent Federal Decisions by Trial Courts:
This paper empirically examines judicial doctrines used in recent federal tax decisions made by trial courts. Are these doctrines (e.g., substance over form, business purpose, economic substance) by the government invoked only by the government, or does the taxpayer or the court assert them as well? Other questions analyzed include which party prevails and areas in which the doctrines are most used.
Stuart Levine of Tax & Business Law Commentary takes me to task for my post yesterday about the Wall Street Journal editorial citing a recent study by Michael Strudler, Tom Petska & Ryan Petska purporting to show that:
the overall tax burden grew more progressive from 1979 to 1999. And while that burden became a tad less progressive after the Bush tax cuts of 2001 and 2003, the rich and upper middle class continued to pay far and away the bulk of U.S. taxes.
As Mr. Levine notes, the WSJ editorial tells only part of the story -- the WSJ ignores data from the study and elsewhere that the growth in the income received by the very wealthy far exceeded the growth in the taxes they bore during this period:
- Between 1979 and 2002, the threshold for the top 0.1% grew from $321,679 for 1979 to $710,661 for 2002, an increase of 121%. Similarly, the threshold for taxpayers in the 1% group rose from $109,751 for 1979 to $175,618 for 2002, an increase of just over 60%. However, the thresholds for each lower percentile class show smaller increases in the period; the top 20% threshold increased only 5.6%, and the 40% and all lower thresholds declined. In other words, over the period studied, the rich got a whole lot richer than everyone else and began to put real distance between themselves and the middle class.
- The share of income accounted for by the top 1% of the income distribution has climbed steadily from a low of 9.58% (3.28 for the top 0.1%) for 1979 to a high of 21.55% (10.49% for the top 0.1%) for 2000. To put it another way, the rich have become real hogs with respect to the portion of the total economic pie they consume.
This article first examines in detail the increasing concentration of income and wealth in the top 1%, and particularly within much narrower cohorts near the top of the top 1%, that has occurred over the past twenty-five years. It demonstrates the strong Matthew effect in incomes in the United States over that period. The super-rich are pulling away from everyone by so much and at a rate so fast that the fact that incomes of many households at the bottom and in the middle have stagnated, or even fallen in constant dollars, has been obscured by ever increasing per capita income....Finally, the article suggests that its time for the tax system to address these problems by substantially increasing progressivity at the top of the income pyramid. Future tax legislation ought to mitigate the Matthew effect, rather than enhance it.
Among the many interesting tables in the articles is this (p.1013):
Average After-Tax Income (2000 Dollars)
Allison Christians (Northwestern) has posted Tax Treaties For Investment And Aid To Sub-Saharan Africa: A Case Study on SSRN. Here is the abstract:
Tax treaties are believed to increase cross-border trade and investment by reducing international tax burdens. The pursuit of tax treaties is therefore advanced as an integral component of U.S. foreign aid policy, which increasingly favors indirect assistance in the form of fostering trade and investment over traditional direct assistance in the form of donor funding. The importance of tax treaties is especially advanced in the context of U.S. relations with Sub-Saharan Africa, where poverty-related conditions are extreme and foreign trade and investment minimal. Yet despite many years of consistent promotion there are currently no tax treaties between the United States and the developing countries of Sub-Saharan Africa. This article explains the apparent contradiction by presenting as a test case a hypothetical tax treaty between the U.S. and Ghana. The case study illustrates that in today’s global commercial climate, traditional tax treaties provide few tax benefits to and indeed may negatively impact private investors. Consequently, the continuing absence of tax treaties can be explained by the lack of incentives for private investors to pressure the U.S. government to conclude these agreements. This article concludes that means other than increasing the international network of tax treaties must be pursued if the goal to increase trade and investment to developing countries is to be achieved.
Tuesday, April 26, 2005
Postlewaite Presents Anachronisms in Subchapter K: Is It Time for § 736 To Go? at University of Washington
Philip F. Postlewaite (Northwestern) presented Anachronisms in Subchapter K of the Internal Revenue Code - Is it Time for Section 736 To Go? yesterday at the University of Washington as part of its Distinguished Scholars Series Showcasing Prominent Tax Academics and Commentators. Here is the abstract:
A partner can withdraw from a partnership either by selling his or her interest to another person or by receiving a liquidating distribution from the partnership. Section 736 classifies payments in liquidation of a partner's interest in a continuing partnership by dividing them into two broad categories: (1) payments that will be treated as regular distributions from the partnership, and (2) payments that will be treated as either a distributive share of partnership income (if based on partnership profits) or as a guaranteed payment (if determined without reference to partnership income). It's not the easiest Code provision through which to navigate, and perhaps it is outdated given other specific Code provisions enacted after §736's birth in 1954.
Professor Postlewaite asks how a provision like §736, "with its limited utility, devastating complexity, and confusing (at best) policy implications accompanied by multiple calls for its repeal" can remain in the Internal Revenue Code. He will also discuss "the steps, both specific and structural, that can be taken to prevent similar statutory atrocities from happening in the future."
The New York State Bar Association Tax Section has submitted a report to the IRS on Disguised Sales of Partnership Interests Responding to Reg-149519-03
This report responds to a Notice of Proposed Rulemaking (REG-149519-03) relating to the treatment of transactions between a partnership and its partners as disguised sales of partnership interests between the partners under § 707(a)(2)(B) (the "Proposed Regulations"). We submitted our Report No. 1027 (the "2003 Report") in response to the IRS's request, in Notice 2001-64, 2001-1 C.B. 316, for comments on the scope and substance of proposed regulations relating to disguised sales of partnership interests....
One of the major recommendations of the 2003 Report was that a "directly related" test, in addition to a "but for" test, should be applied in determining whether a transaction constitutes a disguised sale of a partnership interest. Although the Preamble accompanying the Proposed Regulations states, "The IRS and the Treasury Department agree that because many more transactions may potentially be subject to the proposed regulations [relating to disguised sales of partnership interests], it is appropriate that the proposed regulations be narrower than the existing regulations [relating to disguised sales of property between a partnership and a partner]," the Proposed Regulations did not adopt our recommendation that a disguised sale be found only when a "directly related" test was satisfied. Because we believe thata "but for" test may lead to inappropriate results in many ordinary cases and may treat as disguised sales nonabusive partnership contributions and distributions that ought not to be so recharacterized, we reiterate our view that a "directly related" test should be adopted.
Jeffrey Kahn (Santa Clara) has published Beyond the Little Dutch Boy: An Argument for Structural Change in Tax Deduction Classification, 80 Wash. L. Rev. 1 (2005). Here is part of the abstract:
One of the most active disputes in tax law today is the question of the proper treatment of a plaintiff, a portion of whose taxable damage award is paid to his attorney pursuant to a contingent fee arrangement....
Regardless of how the Supreme Court resolves the discrete issue that is before it, what is alarming is that the current dispute is just one small example of a much larger problem. Instead of dealing with the root cause of the problem, the focus (both in the courts and in Congress) has been on whether to provide a "fix" for the specific plight of the taxpayers who have raised the issue in the context of a suit for damages. The Supreme Court and Congress, like The Little Dutch Boy, may be willing to plug one hole, but the broader problem is a structural fault in the "dam" of the tax law system - namely, the improper classification of a significant number of expenditures as itemized deductions. This Article argues that, instead of plugging one hole at a time, it is time to replace the dam.
The thesis of this Article is that the current list of nonitemized deductions wrongly excludes a number of items, especially some that are directly connected to the production of income. This wrongful exclusion imposes an unwarranted and severe tax burden in far more circumstances than the attorney fee problem on which Congress exclusively focused. The harsh consequences resulting from the misclassification of a number of items are exacerbated by the stringent limitations currently imposed on many itemized deductions; but even the repeal of those limitations, which is unlikely to occur, will not cure all of the harm that a wrongful classification causes. The author hopes that highlighting several examples of misclassification will induce Congress to implement a commission to study the entire classification system rather than to rest on its laurels for solving one small part of the problem in the 2004 Act.
Today's Wall Street Journal has an interesting editorial, Who Pays What. The conclusion:
An IRS study by a trio of tax wonks shows that, even after including Social Security taxes, the overall tax burden grew more progressive from 1979 to 1999. And while that burden became a tad less progressive after the Bush tax cuts of 2001 and 2003, the rich and upper middle class continued to pay far and away the bulk of U.S. taxes.
The study in question, by Michael Strudler and Tom Petska of the IRS and Ryan Petska of Ernst and Young, reports this data:
Share of Taxes (Income & Social Security) Paid By Income Classes
Category of Earners
1999 (at 2003 rates)
Joseph J. Thorndike (Director of Tax History Project and Contributing Editor, Tax Analysts) has published What You Don't Know Can Hurt You, 107 Tax Notes 429 (Apr. 25, 2005), also available on the Tax Analysts web site as Doc 2005-7230, 2005 TNT 79-30, which addresses tax withholding and the benefits of tax consciousness.
The last four months of corporate, partnership and high net-worth individual tax returns has wreaked havoc on my playa activities. And two Fridays ago, it was high time for David to get his groove back.
After work, I stopped off at a local watering hole that was conveniently located right across the street from a Post Office that was open all night for the last-minute filers. I figured that this would be a target rich environment for my legendary pick-up line: “Your tax shelter or mine?” I wasn’t wrong. After spending an average of 26.5 hours completing their returns, the honeys were primed for a little no-strings-attached loving and I was just the single filer to give it to them.
Shortly after I arrived at the bar, Mrs. Right Now walked into the bar. This chick was built like a brick REIT and had a face to match. I decided right then and there that she was going to be tonight’s lucky recipient of the famous Huang early withdrawal with no penalties … if you know what I mean.
In recognition of National Small Business Week, the IRS yesterday announced the availability on the IRS web site of a Small Business and Self-Employed One-Stop Resource to assist the nation’s 45 million small business and self-employed taxpayers with their tax responsibilities. The site allows small business owners to:
- Learn about employment tax requirements
- Make tax payments
- Find out how to set up and distribute retirement plans
- View a streaming video of a small business tax workshop
- Order free products like a tax calendar or small business resource guide
Monday, April 25, 2005
Citizens for Tax Justice has published International Tax Comparisons, 1965-2003 (Federal, State & Local), with data on:
- Overall Taxation
- Corporate Income Taxes (here and here)
- Personal Income Taxes
- Social Insurance Taxes
- Sales, Excise and Other Consumption Taxes
- Property and Wealth Taxes
For the full data, see here.
Nina J. Crimm (St. John's) has published Democratization, Global Grant-Making, and the Internal Revenue Code Lobbying Restrictions, 79 Tul. L. Rev. 587 (2005). Here is the abstract:
The U.S. government is committed to spreading democracy throughout the world. This goal has become particularly urgent in recent years. To achieve success in this challenge requires the peaceful creation of the necessary conditions for, and attributes of, democracy within other countries, including legitimate and representative governments backed by laws and policies designed to support democratic ideals and values.
The shaping of appropriate laws and policies to govern emerging and developing democracies abroad depends on lawmakers' and policymakers' hearing the pluralistic voices of their citizens. Foreign nongovernmental organizations (NGOs) can be critical mediating actors in this endeavor, representing peoples' voices and contributing to the democratic formulation of their countries' laws and policies. But, the few success stories of foreign NGOs' crucial and effective participation in the democratizing legislative processes of their countries suggest that outside financial resources often are required.
Political circumstances may militate against the U.S. government directly providing pecuniary support to the foreign NGOs. On the other hand, for many years, U.S. public charities and private foundations have been influential figures in promoting democracy abroad. It now is time for the U.S. government to encourage our philanthropic institutions to aid financially foreign NGOs that, through their own legislative activities, can be crucial in the development of the necessary conditions for, and attributes of, democracy in their respective countries. The current federal tax regime, however, deters U.S. philanthropies from making such financial commitments. That need not continue. The old justifications for the Internal Revenue Code (I.R.C.) lobbying restrictions were formed in the preglobalization era. The lobbying restrictions do not advance the complex democratization processes in foreign countries transitioning from oppressive or repressive governments. Moreover, there are venerable theoretical and practical political notions of democracy that suggest, and justify in the specific circumstances of global grant-making addressed in this Article, liberalization of the relevant I.R.C. lobbying restrictions. This Article thus urges reform of the I.R.C. provisions so that our domestic tax policy will better support our foreign policy in the twenty-first century.
With government litigation success rates climbing, the Justice Department's Tax Division is ramping up to take on the son-of-BOSS cases.
This sentence caught my eye:
[T]he government is winning more of the cases on appeal from the Tax Court. Last year it won 77% of the cases appealed by the government . . . . That figure represents a significant increase over the 44% of those cases brought two years ago.
From an historical perspective, the government's 77% success rate in appeals from the Tax Court is nothing to brag about. In an early article, Tax Myopia, or Mamas Don't Let Your Babies Grow Up To Be Tax Lawyers, 13 Va. Tax Rev. 517 (1994), I compiled the government's success rate in appeals from the Tax Court over a 25-year period:
Government’s Success Rate in Appeals from Tax Court
Viewed in this light, the government's 77% success rate in Tax Court appeals in 2004 is below the historical average, and its 44% success rate in 2002 was shockingly low.
An interesting thing briefly suggested here is the extent to which tax problems force people into bankruptcy (usually, however, not because they just "forgot" to pay their taxes). There aren't many good studies on this, but some have concluded that as much as 10% of bankruptcy filings are caused by tax liabilities (and that doesn't count those who would have alot more money available to pay their debts but for having to pay their taxes or pay their taxes because they are generally nondischargeable in bankruptcy). For those keeping score at home, this exceeds the number of bankruptcies traditionally thought to be caused by health problems, death in the family, college expenses, and gambling.
Given that most lawyers I talk to report that they often see tax problems as a primary cause of consumer bankruptcy, it certainly would be useful if someone had access to data to look at this question. For some reason, however, empirically-minded bankruptcy scholars seem to be largely uninterested in investigating the extent to which bankruptcies are caused by tax liabilities or excessive tax burdens.
(Thanks to InstaPundit for the tip.)
- The Tax Law As Diet Scold (4/22)
- Timing Is Everything (4/22) (Dippel v. U.S., rejecting discharge of tax liability because taxpayers filed for bankruptcy more than 3 years after they filed their tax return but less than 3 years after the due date of the return following the taxpayers request for an extension)
- Bad Idea for a Good Cause (4/20) (criticizing proposals (here and here) to replace estate tax by giving all inherited property a zero basis and taxing inherited cash as income)
- Fat Tax: The California Strategy (4/22)
- Pratt on the Fat Tax (4/20)
- The Google IPO as a Branding Event (4/20)
Interesting editorial in Friday's Wall Street Journal, An IRS Cover-Up?:
Perhaps you remember Henry Cisneros. He's the former Secretary of Housing and Urban Development who pleaded guilty in 1999 to lying to FBI investigators during his pre-appointment background check about hush payments to a former mistress, on which it also happens he hadn't paid the requisite taxes.
Well, the special counsel report investigating all this still hasn't been made public, thanks largely to procedural roadblocks by Mr. Cisneros's attorneys. And now, all of a sudden, a rash of news stories and editorials are urging Independent Counsel David Barrett to wrap up his investigation forthwith, without releasing his findings.
Then there's the amendment that North Dakota Senator Byron Dorgan and co-sponsors John Kerry and Richard Durbin are trying to attach to the latest supplemental war appropriations bill that would de-fund Mr. Barrett immediately. This would have the practical effect of making sure that Mr. Barrett's report never sees the light of day. After 10 long years and $21 million, don't they think taxpayers deserve to see what the special counsel has learned?...
Abuse of the taxing power is about as serious as corruption can get in our democracy, and it should be of bipartisan concern. In the 1990s, conservative critics of the Clinton Administration such as the Heritage Foundation had to endure suspicious audits. And of course the Nixon Tapes reveal that the former Republican President ordered tax investigations of Democratic opponents and donors. These columns recently raised doubts about an IRS probe of the tax status of the NAACP.
Yet now three highly partisan Democrats want to de-fund this probe and prevent publication of the report. "There is no other way to characterize this but as obstruction of justice," a source tells us, noting that Congress has never before tried to step on an Independent Counsel investigation like this. Surely given the ethical history of the Clinton years, the public deserves to see the report and judge for itself whether the IRS and Justice Department were misused for political purposes.
- Top 5 Tax Paper Downloads
- Buying Law Review Articles on Amazon.com
- Tax Analysts: Zarlenga & Spencer on The New Anti-Morris Trust Proposed Regulations
- Georgia State Seeks Assistant Director for Tax Law Clinic
Sunday, April 24, 2005
There is a bit of movement on this week's list of the Top 5 Tax Paper Downloads on SSRN, with a new paper debuting at #2 and a new #1:
4. Taxes, Estate Planning and Financial Theory: New Insights and Perspectives, by Robert M. Dammon (Carnegie Mellon University, Tepper School of Business), Chester S. Spatt (Carnegie Mellon University, Tepper School of Business) & Harold H. Zhang (University of North Carolina, Kenan-Flagler Business School)
5. Statistical, Identifiable and Iconic Victims and Perpetrators, by George Loewenstein (Carnegie Mellon University, Department of Social and Decision Sciences), Deborah Small (University of Pennsylvania, Wharton School) & Jeff Strnad (Stanford Law School)
Lisa M. Zarlenga & Thomas Kevin Spencer (both of Steptoe & Johnson, Washington, D.C.) have published Who Proceeds and Who Succeeds: New Anti-Morris Trust Proposed Regulations, 107 Tax Notes 351 (2005), also available on the Tax Analysts web page as Doc 2005-5261, 2005 TNT 74-52:
This article explores recently proposed regulations that define "predecessor" and "successor" for purposes of § 355(e). The proposed regulations, although seemingly complex, appropriately tailor the definitions to the purposes behind § 355(e).
Orin Kerr and Larry Ribstein have flagged what I think is a pernicious development in our profession: Amazon.com is now selling law review articles for $5.95 per shot. Their inventory of articles for now appears to be incomplete -- for example, Amazon.com lists for sale on my author page not only six of my books but just one of my articles, Affirmative Refraction: Grutter v. Bollinger Through the Lens of The Case of the Speluncean Explorers, 21 Constitutional Commentary 63 (2004) (with Rafael Gely)(previously blogged here).
As one who fights with law reviews to retain the right to post my articles on SSRN so they can be downloaded for free, I am worried that the new amazon venture will give law reviews yet another reason to try to restrict the ability of authors to post their work on SSRN. As many readers know, Lawrence Lessig recently publicly pledged that he will no longer publish law review articles until the reviews stop insisting on the exclusive right to authorize the publication, reproduction, and distribution of articles, which they in turn sell to Lexis and Westlaw. I do not know the business deal Amazon has worked out for the sale of articles, but the system is seriously broken when professors are denied the right to make their scholarship freely available and everyone else in the distribution chain is making a buck off of their intellectual property.
Salary: $60,000 - $65,000 (75%Time)
Job Description: Assist with overall management of the Tax Law Clinic, including instructional program development, client services, supervision of students in their representation of clients, and Clinic coursework. May also have limited teaching responsibilities.
Saturday, April 23, 2005
Danshera Cords (Capital)
- B.A. 1991, University of Washington
- J.D. 1998, Seattle
- LL.M. (Taxation) 2000, NYU
My path to law school and the academy as a tax professor was indirect. From the time I was in grade school and we visited the Washington State Supreme Court and met with one of the justices on a field trip, I knew that when I grew up I wanted to be a lawyer. The only times I didn’t want to be a lawyer was when I wanted to be a teacher.
Having started college at a very young age meant that I graduated from college at 19. I had taken the LSAT and GMAT and was completing my joint JD/MBA applications, when I was presented with an opportunity to take a management role in a transportation business. It occurred to me that I would get a lot more out of my law school experience if I took a little time off and later returned to school. Well, most people can guess where the story goes from here – one year led to several. However, the experiences I had during those years were very valuable.
Working in small businesses both during and after my undergraduate education made me see two things about tax law. First, it was a challenging, interesting, ever-changing area of law. Second and perhaps more important, my experience showed that solid tax and business planning advice could make all the difference to an enterprise, determining whether it failed or succeeded.
I entered law school, now about the average age of a law student, declaring that I wanted to be a tax lawyer. As most will understand, my family, friends, and classmates thought I was crazy. However, that didn’t stop me or even slow me down.
After graduating from law school, I worked at a small firm doing bankruptcy and civil litigation. Still wanting to be a tax lawyer, I started my LL.M. at NYU a year later. While I was there, I thought that I would see the other side of tax practice and worked for KPMG in their state and local practice group. I then had the incredible opportunity to clerk for Tax Court Judge Maurice B. Foley.
I have now been teaching tax at Capital for 3 years. My teaching areas include corporate tax, partnership tax, business entities taxation, and tax policy. This year, I have had the opportunity to become the Academic Director for Graduate Law Programs, which means working closely with the students and faculty in our LL.M. in Tax, LL.M. in Business, and LL.M. in Business and Tax.
My recent publications are:
- How Much Process is Due? I.R.C. Sections 6320 and 6330 Collection Due Process Hearings, 29 Vt. L. Rev. 51 (2004) [blogged here]
- Collection Due Process: The Scope and Nature of Judicial Review, 73 U. Cin. L. Rev. ___ (2005) (forthcoming)
Given the diversions along the way, it often seemed that my goals and dreams of becoming a lawyer and teaching would be unattainable. However, I have ended up fulfilling all my dreams, something that unfortunately few people can claim.
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.
Stephanie R. Hoffer (NYU Tax LL.M. 2005) has published Give Them My Regards: A Proposal for Applying the COD Rules to Disregarded Entities, 107 Tax Notes 327 (2005), also available on the Tax Analysts web page as Doc 2005-5259, 2005 TNT 74-50. Here is the abstract:
This article discusses application of the COD rules to disregarded entities and concludes that the IRS should regard disregarded entities for that purpose. Hoffer argues that to do otherwise would not only engender uncertainty in lending transactions with single-member LLCs but would also distort the federal tax system's comprehension of underlying state law business arrangements.