Saturday, July 8, 2006
Law, Society, and Taxation IV: States, Nations, and Taxes (8:15 a.m. - 10:00 a.m.):
Every government's tax policies interact with the policies of other levels of government within a federal system as well as with the policies of other countries. Participants in this session will discuss state and international tax issues from historical, comparative, and international perspectives.
Chair/Discussant: David Gamage (Texas)
- The Factories of Fiscal Reform: American State Government and Fiscal Innovations in the Progressive Era, by Ajay Mehrotra (Indiana-Bloomington):
Throughout the twentieth century taxation has played a pivotal role in the formation of the modern American administrative and regulatory social-welfare state. Indeed, tax laws, and the revenues that they generated, underwrote the emergence of a new liberal vision of governance in the early decades of the twentieth century. During the height of the Progressive Era, state governments, in particular, used their taxing powers to transform the social, political, and economic relations between state and society. This paper explores how different state governments, given their existing institutional and social arrangements, implemented tax reform in a variety of ways. More specifically, this paper analyzes how political activists and government actors in California, Wisconsin, and New York responded to the calls for tax reform in shaping the trajectory of legal change in their state. Using Wisconsin as an anchor, this paper shows not only how state-level reform presaged national changes, but how different state governments, given their existing institutional and social arrangements, implemented reformist ideas in a variety of ways. By exploring how diverse states like California, New York, and Wisconsin responded to the popular calls for tax reform, this paper develops a rough typology of the different tax reform strategies undertaken at the state level.
- Harnessing the Costs of International Tax Arbitrage, by Adam Haim Rosenzweig (Northwestern):
International tax arbitrage strategies generally arise from conflicts between the tax regimes of different countries. With respect to the United States, arbitrage opportunities may arise from the conflict of domestically efficient tax rules (including, for example, check the box) with tax rules from other jurisdictions (including entity classification, but also income sourcing, residency status, etc.). This paper will argue that the United States may be able to affirmatively capture some of the costs of international tax arbitrage as a means to further the development of the international tax regime, without sacrificing the efficiency of the domestic tax rule.
- Rich States, Poor States, by Kirk J Stark (UCLA):
Among industrialized nations, the United States is an extreme outlier with regard to the efforts undertaken by the national government to equalize the taxing capacity of subnational governments. Australia, Canada and several European countries have in place a complex system of "equalization grants" whereby the central government makes fiscal transfers to ensure that taxable resources available to state/provincial governments do not exhibit significant variation. The United States has no such system. As a consequence, some U.S. states have very low fiscal capacity (e.g., Mississippi) while other states have high fiscal capacity (e.g., Connecticut). These differences have significance for the level and quality of public goods provision by state and local governments. This paper will provide an overview of (i) the theoretical justifications for national-subnational equalization grants, (ii) the political-historical context of the current ("no equalization") U.S. system of fiscal federalism and its policy implications, (iii) the experience with fiscal equalization in Australia, Canada and Europe, and (iv) the prospects for federal-state equalization grants in the United States.
Law, Society, and Taxation V: Ethics and Taxes (10:15 a.m. - 12:00 p.m.):
Recent scandals have exposed a large and growing disrespect for tax law, both by taxpayers and tax practitioners. Participants in this session will discuss the fundamental role of taxes in the formation of modern democracies and then examine the prevalance of tax cheating that apparently emanates from a profound misunderstanding of the purposes of government and the rule of law. The discussion will focus in particular on recent attempts to crack down on such cheating.
Chair/Discussant: Charlotte Crane (Northwestern)
- Brave New World after the Jobs Act: Changing Roles of Tax Professionals, Tax Administration, and the Courts, by Linda M. Beale (Illinois):
In an earlier article, I argued that a tax minimization norm, prevalent in both “tax shelter” transactions and customized tax planning, encourages taxpayers to engage in overly aggressive tax transactions. Instead of guiding clients towards compliance, the tax bar often develops structures to provide an arguable basis for the benefit under a literalist legal interpretation or deflect government investigation into tax avoidance. I suggested that the norm reflects inadequate statutory and ethical standards in a context of too weak penalties. While recent tax law modifications represent progress, I urged two further steps: uniformly higher tax reporting standards and denial of evidentiary privileges in the tax planning context. This article explores some ancillary consequences of the two proposals in respect of changing roles for tax administration, the courts and the tax bar. Under the proposed regime, advisers will more readily seek administrative guidance in rapidly developing areas and expedited review of post-audit disagreements to avoid multiple, lengthy court battles over interpretations. Accordingly, procedural changes will need to emphasize timely guidance from tax administrators on difficult issues and pragmatic rules for contesting administrative determinations where the law is not clear. The proposed regime would also impact the source of changes in ethical rules, moving it from an exclusive province of the bar to a shared governance with Congress. Finally, the proposed regime should buttress the role of courts in monitoring taxpayer and practitioner compliance by applying substance-over-form doctrines.
- How Tax Law Created the Modern World, by Arthur John Cockfield (Queen's University):
Fear of arbitrary taxation, not theoretical concerns about individual liberty, provoked the passage of the most important laws in the Anglo-American world, which influenced our current conception of the relationship between the individual and the state. The paper traces these developments, from the Magna Carta to the English Bill of Rights to the Declaration of Independence. These documents restricted the power of the sovereign to impose taxes by promoting democratic constraints on the use of state power to assess and collect taxes. Over time, the idea that individuals are entitled to equal treatment under the law, and possess inalienable human rights, emerged as a result of these tax laws.
- When Is It Appropriate to Use Taxes to Regulate Behavior?, by Joel S Newman (Wake Forest):
A survey of serious and not so serious laws and proposals to tax cigarettes, alcohol, gasoline, obesity, Twinkies, stupidity, bachelorhood, etc. Which sorts of behavior are appropriately regulated by government, and in which of those cases is taxation the appropriate mechanism?
- Circular 230 and the KPMG Indictments: A Chilling Effect on Tax Practice, by Russell J. Pinilis (O'Melveny & Myers):
The recent finalization of IRS Circular 230, and the criminal indictment of former senior partners of KPMG have made clear to tax practitioners that they may not take lightly their ability to exempt clients from tax penalties through the issuance of written advice. However, this raises the question of whether it is appropriate to have this exemption at all, or whether tax practitioners should simply be responsible to clients if their advice proves to be wrong? The course that the Service and Treasury department have taken have to potential to chill the ability of tax advisors to render meaningful advice without fear or serious repercussions, which in turn can undermine the administration of the tax system as much as giving bad advice. The goal of the government should be for tax advisors to feel free to give honest advice, which may, and often is an aggressive interpretation of the tax law, without fear of serious consequences. However, this must be balanced against the government's concern that advice is often not honest, but rather seeks to avoid tax payments in an unjustifiable way.
Law, Society, and Taxation VI: Obedience to Law and the Administration of Taxes (2:30 p.m. - 4:15 p.m.):
The collection of taxes and the enforcement of tax laws are timeless sources of conflict between government and citizens. Participants in this session will discuss current controversies in tax administration and ideas for improvements in the collection of taxes.
Chair/Discussant: Kimberley Ruth Brooks (University of British Columbia)
- The Corporation as Administrative Agency: Tax Preferences and Institutional Design, by Eric T. Laity (Oklahoma City):
The paper analyzes tax preferences in light of institutional economics and suggests that tax expenditures for employee welfare might be a useful way, under specified circumstances, to delegate the administration of public programs to the private sector and to reduce the burden of transaction costs inherent in collective action.
- Does the Tax Court Need Oversight?, by Leandra Lederman (Indiana-Bloomington):
The United States Tax Court, unlike Article III courts, is not subject to the Administrative Office of U.S. Courts or the Judicial Conference and, unlike administrative agencies, is not subject to the Freedom of Information Act and generally does not consider itself subject to the Administrative Procedure Act. Thus, for example, until recently, the Tax Court's process for developing its rules of practice and procedure was one that did not involve notice and comment. We will argue that the insularity of the Tax Court provides a breeding ground for events like those described in the litigation in Ballard v. Commissioner and Kanter v. Commissioner. The ultimate disclosure in those cases, after years of litigation, of a report by the Special Trial Judge who presided over the trial containing credibility determinations that were the opposite of those later "adopted" by the reviewing judge can undermine confidence in the Tax Court as a judicial body. The paper will argue that the Tax Court should be subject to no less oversight than Article III courts.
- A New Era of Tax Enforcement Polic: From "Big Stick" to Responsive Regulation, by Sagit Leviner (Michigan):
This paper explores the major developments of the United States and foreign (predominately Australian) tax enforcement policy in addressing the problem of tax compliance following the rise of the Allingham-Sandmo model. Applying the tools of economic analysis--particularly economic and behavioral models--to the tax enforcement problem, the paper investigates the reasoning behind the different enforcement strategies used in recent years and looks into available compliance improvement data to highlight their key strengths and shortcomings. A significant portion of the paper focuses on the latest reforms in tax administration in the United States and other parts of the western world and the way in which these reforms interface with the enforcement problem. After drawing on the extensive literature in the area of tax compliance and innovative regulatory work, the paper proposes a multi-faceted model of tax compliance to help guide the development of tax enforcement policy in the United States that will meet the compliance needs of the 21st century. The proposed model, patterned after the hierarchical Australian Compliance Pyramid, incorporates principles of 'responsive tax regulation' that step away from the 'big stick' approach and embrace a more comprehensive, strategic, and forward-looking method of enforcement. The main focus of the paper is on personal income tax compliance although much of the discussion can apply to other areas of tax enforcement.
In the name of increasing trade and investment to developing countries, particularly in Sub-Saharan Africa, various international organizations have advocated a number of diverse tax reforms. Trade and investment-oriented organizations (such as the WTO and the OECD) focus on eliminating tariffs to reduce the drag on cross-border trade and decreasing income taxes to reduce the drag on cross-border investment. On the other hand, international lending organizations (such as the IMF and the World Bank) focus on introducing national sales or consumption taxes to support government’s fiscal requirements as the other forms of taxation decline. This research asks whether these diverse tax reform proposals, when implemented simultaneously, have the desired effect: do they increase trade and investment while adequately supporting government functions? The research will focus on a group of countries in Sub-Saharan Africa. Sub-Saharan Africa is the geographic area of focus not only because it is a region that is associated with extreme poverty-related conditions and persistently low levels of foreign trade and investment, but also because the United States (a leading member of all of the international organizations discussed above) has consistently proclaimed its commitment to increasing opportunities for economic growth in these countries through the elimination of trade and investment barriers. With economic growth the driving force of the various tax reforms, this research examines whether the United States and the international organizations have enabled or can enable the subject countries to experience gains in the global economy while simultaneously supporting their own fiscal infrastructures.