June 7, 2008
NYU Hosts 2008 Junior Tax Scholars Conference
The 2008 Junior Tax Scholars Conference concludes today at NYU:
Panel #5 (9:45 a.m. - 11:15 a.m.):
- Brian Galle (Florida State), Are Hidden Taxes More Efficient?: On Salience and Optimal Taxation
- David Gamage (UC-Berkeley), Salience and Taxes or Perceptions of Horizontal Equity
- Susan Morse (Santa Clara), Using Salience and Influence to Close the Tax Gap
Panel #6 (11:30 a.m. - 1:00 p.m.):
- Lily Batchelder (NYU), Savings Incentives and Social Insurance: A Dysfunctional Relationship?
- Tom Brennan (Northwestern), Cash Flow and Market Response to Repatriation
- Victor Fleischer (Illionis), Taxing Sovereign Wealth Funds:
Panel #7 (2:00 p.m. - 3:00 p.m.):
- Rebecca Kysar (Brooklyn), Listening to Congress: Earmark Rules and Statutory Interpretation
- Adam Rosenzweig (Washington University), The Expressive Function of International Tax Law
See below the fold for abstracts of the papers:
Victor Fleischer (Illionis), Taxing Sovereign Wealth Funds:
Section 892 of the tax code grants sovereign wealth funds an exemption from tax. This anachronistic provision offers an unconditional tax exemption when a foreign sovereign conducts any non-commercial activity. Because portfolio investing is not considered a commercial activity, such investments are tax-exempt, even when a fund acquires a substantial equity stake. The financial world has changed since that code section was enacted in 1917: These state-controlled investment funds impact our economy in new, potentially harmful ways. This Article argues that we should no longer offer sovereign wealth funds blanket immunity from U.S. tax. When sovereign wealth funds buy stock in U.S. companies, we should tax the return on those investments at a 35% rate as if the income was, in the parlance of tax, "effectively connected" with a U.S. trade or business.
Sovereign wealth funds invest here on the implicit understanding that the investment is motivated by financial interests, not political concerns. The international law principle of sovereign immunity on which the tax exemption is based is therefore inapposite. We should instead tax sovereign wealth funds with an eye towards ensuring that private investment competes with state-controlled investment on a level playing field. Because foreign governments may be willing to accept lower financial returns than private investors, we may want to tax equity investment by sovereign wealth funds at a higher tax rate than private investors.
It is appropriate to view this proposal not primarily as a revenue-raiser, but rather as a Pigouvian tax intended to influence behavior. Specifically, the tax will encourage sovereign wealth funds to shift their investments into other, more lightly-taxed forms of portfolio investment, such as debt, which do not so dangerously encroach on the autonomy of U.S. industrial and foreign policy.
Brian Galle (Florida State), Are Hidden Taxes More Efficient?: On Salience and Optimal Taxation
This preliminary idea draft offers a critical review of the economic literature on the efficiency of low-salience taxes. In particular, I explore the possibility that hidden taxes may in fact be more efficient than others. Since the entire field comprises only a handful of papers, the review is devoted mostly to identifying gaps in our present understanding. For example, the literature so far omits any consideration of the impact of hidden taxes on fiscal federalism, and gives only glancing attention to possible distributive consequences, both topics I attempt to highlight here. Additionally, I attempt to integrate with the tax literature some recent developments in our understanding of bounded rationality in consumers more generally.
In the wake of recent scandals involving lobbying and special interest spending on Capitol Hill, each of the houses of the 110th Congress adopted unprecedented legislative, procedural rules that require broad disclosure of spending earmarks and tax provisions that benefit special interests. Recognizing the strong incentives for members of Congress to hide special interest deals within complex tax and spending legislation and through ambiguous drafting, scholars have long sought to bring such deals into the open in order to promote congressional deliberation and public accountability. Although the new reforms appear designed to address that laudable goal, the efficacy of the rules is doubtful given their self-referential status; that is, they rely upon the foxes to govern administration of the henhouse.
This Article begins by describing various tactics legislators have used or will likely use to evade the new disclosure regime, as well as deficiencies in the regime's design. The piece then explores the value of enlisting a force external to Congress as a response to the inherent weakness of endogenous, procedural rules. It concludes that although direct judicial review of legislation for compliance with the rules likely raises constitutional difficulties, judicial involvement through statutory interpretation offers a potential solution. Specifically, when interpreting ambiguous legislation that falls within the ambit of the disclosure rules, judges should assume the rules have functioned correctly; in other words, if no special interest beneficiary has been disclosed, judges should assume that none was intended and interpret the ambiguous provisions accordingly. The proposal thus strengthens congressional adherence to the rules by imposing costs upon defecting lawmakers, as well as the special interests they support. It does so, however, without offending the constitutional mandate that lawmakers have purview over such rules. Hence it offers a counterpoint to the entrenched view that Congress cannot truly precommit itself through procedural rules. Furthermore, because this method of statutory interpretation is guided by Congress's own remedy to the problem of special interests, it differs in an important respect from prior scholarly proposals for narrow interpretation of special interest legislation, making it more resilient to the critique that the interpretive mode exceeds the judicial function.
Most self-employed and small business taxpayers cheat on their taxes. In fact, in the aggregate, they fail to pay about half the tax they owe to the government, and this unpaid tax amounts to about $150 billion annually. This amount is about half the "tax gap," or the amount of tax due that the federal government does not collect.
This paper argues that more salient government communications and greater attention to principles of influence would improve existing and proposed policies to encourage self-employed and small business taxpayers to pay their taxes. Reversing the widespread tax evasion among self-employed and small business taxpayers requires changing the existing social norm of noncompliance, which in turn demands a better connection between the government's message and the experience of taxpayers. Policymakers should recraft their anti-tax-gap messages so that they grab the attention of the target audience and take advantage of established influence tools to leverage predictable taxpayer heuristics such as conformity to the compliance behavior of similar peers and availability bias.
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