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Thursday, June 14, 2007

Schizer on Enlisting the Tax Bar

David M. Schizer (Columbia) has published Enlisting the Tax Bar, 59 Tax L. Rev. 331 (2006). Here is the abstract:

Tax shelters and aggressive planning derive in part from a structural imbalance in our tax system that has not been adequately explored: In important respects, the private tax bar outmatches their counterparts in government. Although a strong policy case can be made for remedying this mismatch, this Article emphasizes two institutional barriers that complicate any solution, rooted in the political economy of taxation and the economics and professional norms of the legal profession. First, although it would be enormously helpful to dramatically increase the staffing levels and pay of government tax administrators, this is a politically daunting task. Second, a fallback strategy is to look to the private bar for help, but they face a significant conflict. Both market pressure and professional norms motivate them to serve their clients, who generally do not have an interest in improving government tax enforcement.

In light of these two challenges, what can be done to mitigate the mismatch between the government and private bar? This Article offers two sets of proposals. First, a number of suggestions focus on the government, offering ways to improve recruiting and reinforce the expertise at their disposal without dramatically increasing funding or raising pay substantially across the board. For example, the government should focus on recruiting senior lawyers out of retirement (whose financial demands will be limited) and having them mentor junior lawyers directly from law school (whose private sector pay is high, but not nearly as high as it will become in later years). The government should also consider a loan forgiveness program for these recent graduates, and should also enlist academics to assist with discrete projects. The government should also retain private law firms to litigate tax controversies with extraordinary precedential value.

Second, this Article offers guidance about the right way (and the wrong way) to tap the expertise and information possessed by the private bar. It is more effective, whenever possible, to ask lawyers to help the government in a way that also helps their clients. Using this principle, this Article identifies promising opportunities that have been overlooked, and critiques unpromising initiatives that have attracted significant government support. For example, clients do not want their own tax deals shut down, but they feel differently about their competitor's deals, so the government should make more systematic use of this opportunity. Likewise, although clients are less motivated to help the government identify bad transactions that are inadvertently permitted, they are highly motivated to identify good transactions that are inadvertently prohibited. As a result, the government can look to the private bar for help in narrowing overbroad anti-abuse measures. On the other hand, in asking tax advisors to disclose their clients' aggressive transactions - in effect, to “rat” on their clients - the government is asking for something that clearly is not in the clients' interest. This reality is likely to undercut this initiative, which has been one of the centerpieces of the government's efforts to date.

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Comments

I only recently found out at a rooftop party in Red Hook, Brooklyn, that the Dean of Columbia Law School was a tax law professor. And then I saw this article on the TaxProf Blog! Being a law student on the brink of graduation, I wanted to quickly comment on it.

Dean Schizer’s article focuses on the mismatch of resources between the private and public tax bar. This has caused an under-enforcement of our tax laws, which in turn render the complex rules unable to have their intended effect: “to capture the economic nuance” of sophisticated financial transactions. I think this is his essential premise. I only read the article once. The first half focuses on upgrading the manpower of the service, while the second explores areas of possible cooperation between the private and public sector.

On the plus side, this paper is full of good ideas and almost more importantly the optimism to champion their potential. Among his best ideas:

- taking retired partners out of retirement and having them train junior lawyers in government service
- forgiving student loans for years in public service
- collective confessions of tax professionals via bar association publications
- taking advantage of rivalries amongst tax professionals
- stapling tax opinions to tax returns (actually Michel Schler’s idea)

What is equally telling in Schizer’s article, is his description of the underlying problems which enable the mismatch to be the apparent cause of dysfunction: tax shelters, or more politely, “aggressive tax planning”. He calls them “transactions that rely on a strained reading of the relevant tax provision.”

In that respect our professionalism is a bit of a mixed bag, isn’t there? There are two forces at work. First, there is this admiration for this man-made, often well-intentioned body of laws, which attempt to advance intelligent economic and even social governance of the world’s freest and most powerful nation. Second, there is this intense, intellectual desire to make the system prove its worth. In a way, this impulse fleshes out every nuance and ambiguity in our code, eventually assuring each part is as articulate a piece of legislation a democracy should produce. But in the interim, huge sums of money go untaxed.

I suppose the real enlistment of the tax bar would be summed up in one word: refrain!

In any event, such thinking might be unrealistic but I think it sets the background to the discussion Dean Schizer is advancing.

On another note, his argument that “I caught the tax cheats is an appealing reelection slogan” is wrong, and he essentially points that out on the next page, writing: “the political support for tax enforcement is even more ambivalent.” The reason? Probably because everyone in this country thinks they would the target of such investigations. Dean Schizer basically makes that point on page 17.


Also, on page 22, he slightly alters his thesis, when writing “ to sum up, the government does not have enough people working on tax administration and the people it has are not all up to the task”. Why are these people not up the task? The article did not question the competence or professionalism of public service officials until this point.

Finally, I wish the paper would illustrate how Dean Schizer is personally spearheading the enlistment. Debt relief should begin at the institutions which cause the debt in the first place. Furthermore, a quick search on the Columbia Law School website did not reveal any adjunct faculty currently a member of the public tax bar, in contrast to other New York law schools. This would go a long way to exposing students to the need for competent tax professionals in public service. Enlistment is a two way street.

In sum, it was an enlightening and refreshing piece of tax scholarship. I really enjoyed reading it!

Posted by: Philip Cleary | Jun 15, 2007 9:00:47 AM