January 31, 2012
Raskolnikov Presents The Limits of Tax Law and Economics Today at NYU
Alex Raskolnikov (Columbia) presents Accepting the Limits of Tax Law and Economics at NYU today as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU):
This Article explores the limits of tax law and economics. The inquiry is comparative. The Article argues that outside of the tax context two pivotal insights account for the general success of law and economics in explaining and possibly shaping the law. First, accepting just a few fairly simple and plausible assumptions yields clear, intuitive, powerful and widely applicable policy prescriptions. Second, the normative strand of law and economics benefits greatly from a substantial similarity between several theoretically optimal legal regimes and the corresponding actual systems of rules and sanctions. Neither insight applies in the tax setting because the tax optimization problem is uniquely complex. The optimal tax system must account for the impossibility of deterring socially undesirable behavior, provide for redistribution, and accomplish all of that on the basis of assumptions that are laden with deeply contested value judgments, pervasive empirical uncertainty, or both. Given these challenges, it is hardly surprising that the welfarist theory has a much weaker connection to the content of our tax laws and their enforcement than it does to the content and enforcement of many other legal regimes. This weakness has a profound effect on the debates about the fundamental features of our tax system. It affects many familiar arguments about anti-avoidance rules and sanctions. And it extends to evaluating outright tax evasion. In sum, every aspect of tax policy is affected by the limits of tax law and economics. At the same time, accepting these limits shifts focus to several broad research agendas where tax law and economics will continue to yield invaluable contributions to the project of improving our tax system.
CBO: Tax Revenues to 'Shoot Up' 30% by 2014
Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2012 to 2022:
[U]nder current law, revenues will rise considerably as a share of GDP—from 16.3% in 2012 to 20.0% in 2014 and 21.0% in 2022. In particular, between 2012 and 2014, revenues in CBO’s baseline shoot up by more than 30%, mostly because of the recent or scheduled expirations of tax provisions, such as those that lower income tax rates and limit the reach of the AMT, and the imposition of new taxes, fees, and penalties that are scheduled to go into effect. Revenues continue to rise relative to GDP after 2014 largely because increases in taxpayers’ real (inflation-adjusted) income are projected to push more of them into higher tax brackets and because more taxpayers become subject to the AMT.
Tax Prof at the Supreme Court
Gonzaga University School of Law professor Ann Murphy wrote in to us last week about how she had an opportunity to talk with U.S. Supreme Court Justice Sonia Sotomayor in her chambers.
"This came about due to a rather embarrassing mistake I made two years ago, when I included Justice Sotomayor in a 'reply all' email," Murphy wrote. "When I realized I had made an error, I apologized and she could not have been nicer about it." The two began swapping emails, and Sotomayor invited Murphy to see her at the Supreme Court when Murphy was in Washington, D.C. for a conference.
Contingency Fees and Capital Gains
Stephen T. Black (New Hampshire), Katherine D. Black (Utah Valley University), Michael D. Black (Parr Waddoups Brown Gee & Loveless, Salt Lake City), A Capital Gains Anomaly: Commissioner v. Banks and the Proceeds from Lawsuits, 43 St. Mary's L.J. 113 (2011):
When a litigant receives an award of damages or agrees to a settlement of a lawsuit for which the litigant and her attorney have agreed to a contingent fee, a portion of those damages or the settlement is paid to the attorney. For income tax purposes, there is a question of whether the litigant should include the portion paid to her attorney as her own income. The question is not merely academic. In a tax system that does not always allow the litigant to deduct her attorney's fees, the litigant may end up paying tax on money that she never sees. In some cases, that tax can exceed the amount of money she gets from the lawsuit – making the litigant poorer by having pursued the suit at all.
The U.S. Supreme Court heard two cases regarding inclusion in income of contingent attorney’s fees, Commissioner v. Banks and Commissioner v. Banaitas. Although the cases seemed to resolve the question of including the fee paid to the attorney, the Court created an anomaly when they stated that the "income-generating asset is the cause of action that derives from the plaintiff's legal injury." Taking their words at face value, it appears the Supreme Court has made it possible to characterize all income from lawsuits or settlements as capital gain.
The Onion: Abusive Tax Lawyer-Father Spurs Artistic Creativity in His Children
Describing the years of psychological torment he has inflicted upon his two children James, 14, and Amber, 9, local tax attorney Ted Sheehan told reporters Thursday he couldn't wait to see what kind of art his abuse would inspire them to create when they grow up.
The 37-year-old father said he could only imagine how his son and daughter's unstable upbringing might manifest itself in future writings, paintings, or music, given the way he routinely ridicules their achievements, yells at their mother in drunken fits of rage, and threatens the family with physical violence.
IRS Clarifies Tax Treatment of Frequent Flier Miles
Following up on last week's post, Why Does Citibank, But Not the IRS, Treat Frequent Flyer Miles as Taxable Income?:
- Press Release, Sen. Brown Calls on Citibank to End Deceptive Frequent Flier Tax Practice
- The Hill, Senate Dem Calls Out Citibank on Airline Miles
- L.A. Times, IRS Clarifies its Stand on Whether Airline Miles Are Taxable
- MSNBC, Some Frequent Flier Miles Are Taxable, Citibank Says
- Time, Income Taxes On Frequent Flyer Miles?!
For more, see The Tax Treatment of Frequent Flyer Miles: An Update. (Hat Tip: Alice Abreu, Dave Hoffman.)
Senate Holds Hearing Today on Extenders and Tax Reform: Seeking Long-Term Solutions
The Senate Finance Committee holds a hearing today on Extenders and Tax Reform: Seeking Long-Term Solutions:
- Rosanne Altshuler (Professor and Chair of the Economics Department, Rutgers University)
- Jason J. Fichtner (Senior Research Fellow, Mercatus Center, George Mason University)
- Caroline L. Harris (Chief Tax Counsel and Director of Tax Policy, U.S Chamber of Commerce)
- Calvin H. Johnson (Andrews & Kurth Centennial Professor of Law, University of Texas School of Law)
In connection with the hearing, the Joint Committee on Taxation has released Legislative Background of Expiring Federal Tax Provisions 2011-2022 (JCX-6-12).
Tax Foundation: Income Inequality Is Lower Now Than It Was Under Clinton
The most recent published studies on income inequality use 2006 or 2007 as their end point, without fully correcting for the business cycle. ... It is deeply misleading to talk about income inequality without properly taking into account the business cycle. Since the peak of the business cycle in 2007, personal incomes have collapsed to a degree not seen since the Great Depression. The most dramatic collapse has been in high incomes, as the most recent IRS data shows. For example, since 2007 the number of millionaires has dropped 40%, while income reported by millionaires has dropped in half. ...
Figure 1 illustrates how the Great Recession has dramatically reduced measures of income inequality. It shows the share of income attributable to the top 1% of income earners from 1980 to 2009. The top 1% income share peaked in 2007 at 22.8% and declined precipitously to 16.9% by 2009. This is about where it was in 1996-1997. ...
[Figure 5 shpws] a measure of progressivity that takes into account income shares, where progressivity is defined as the ratio of the top 1%'s share of taxes paid over their share of income. Progressivity by this measure is now higher than at any time since 1986, though it has mainly fluctuated with the business cycle without any long-run trend. The fact that progressivity has increased since Clinton was in office may be partly explained by the fact that the Bush tax cuts not only lowered top marginal rates, but also introduced the 10% bracket, expanded the 15% bracket, expanded the child credit, and made many tax credits refundable.
Income inequality has completely changed since the Great Recession began in late 2007. The long established upward trend has abruptly reversed itself, such that inequality is back where it was in about 1997. Moreover, inequality over the last decade is characterized by extreme volatility, owing to extreme volatility in capital gains, the stock market, and the economy. It is therefore no longer legitimate--if it ever was--to simply draw a line between two years and claim a trend in income inequality.
As a result, it is not evident that the Bush tax cuts in either the top marginal rate or capital gains rate had any long-term effect on inequality. If anything, they appear to have reduced inequality. Therefore, a return to Clinton-era tax rates would not necessarily reduce inequality. The Clinton- and Bush-era tax cuts n the capital gains rate may have resulted in more volatility in capital gains realizations, and thus affected volatility in the stock market, but this remains speculative.
Tax Mascot Chases Suspects
Toledo Blade, Tax Mascot Chases Suspects:
Isaac Underwood may not know how to deal with complicated tax issues, but he does know a thing or two about trying to right an injustice. Mr. Underwood’s job with Liberty Tax Service is to wear a Statue of Liberty costume and stand along Monroe Street near Auburn Avenue to advertise the service, directing those with complex tax questions inside the store. But Thursday evening, he found himself chasing a man and a woman who police say held up Mr. Underwood’s employer with a curling iron concealed in a washcloth.
Rankings Scandal at Claremont McKenna
Claremont McKenna President (and former Tax Prof and Duke Law School Dean) Pamela Gann reports that the school's Office of Admission has inflated the SAT scores of its incoming class for the past six years by an average of 10 to 20 points each year. SAT scores count 7.5% in the U.S. News rankings methodology, and Claremont McKenna rose to 9th in the 2012 U.S. News Liberal Arts College Rankings, after being ranked 11th for the prior four years.
- Inside Higher Ed, Claremont McKenna Inflated SAT Scores for Rankings
- L.A. Times, Claremont McKenna College Inflated Freshman SAT Scores, Probe Finds
- New York Times, College Says It Exaggerated SAT Figures for Ratings
- New York Times Blog, Claremont McKenna Admits Exaggerating Students’ SAT Scores
- Wall Street Journal, College Says It Submitted False SAT Scores
January 30, 2012
Lederman Presents Voluntary Disclosure and Offshore Tax Evasion Today at Florida
Leandra Lederman (Indiana-Bloomington) presents The Use of Voluntary Disclosure Initiatives in the Battle Against Offshore Tax Evasion, 55 Vill. L. Rev. ___ (2012), at Florida today:
The federal government has engaged in a number of well-publicized enforcement efforts in an attempt to collect back taxes owed on offshore bank account and other offshore assets. Among those efforts are special offshore “voluntary disclosure” initiatives—essentially tax amnesties—offered by the Internal Revenue Service . One such program closed in September 2011, and another opened in January 2012. After discussing the history of voluntary disclosure programs, particularly the offshore initiatives of 2003, 2009, 2011, and 2012, this essay evaluates the government’s approach to voluntary disclosure of offshore evasion in light of the literature on optimal tax amnesties. The essay concludes that the offshore tax amnesties meet some but not all of the elements of an optimal amnesty.
Frank: Higher Taxes Help the Richest, Too
If wealthy taxpayers would be happier to drive slightly less expensive vehicles on better roads, why are so many of them vehemently opposed to the higher taxes needed for improved infrastructure? One possible explanation is that they suffer from a simple cognitive illusion when they think about how higher taxes would affect them.
If you pay higher taxes, you obviously have less money to spend on what you want. So the prospect of a tax increase naturally inclines people to think that they’ll be less able to satisfy their desires.
But once incomes rise beyond a modest absolute threshold, many of the things that people want are what economists call positional goods. These may be things that are inherently in short supply, like gorgeous waterfront property; or things whose value depends heavily on context, like precious stones or sure-footed sports cars. Because positional goods are in short supply, they go to the highest bidders. The tendency to overlook that fact distorts how people think about the effects of higher taxes.
The cognitive illusion occurs because most financial setbacks that people experience in life stem from events that affect them alone. They may suffer health emergencies, for instance, or problems at work. Marriages may fail, jewelry may be stolen, and floods may damage homes. In each case, the effect is to limit the ability to bid for positional goods.
Because an overwhelming majority of financial setbacks occur for such idiosyncratic reasons, it’s natural to think that the income decline from higher taxes would have similar effects. But a tax increase is different. It affects all participants in the bidding for positional goods. And because it leaves everyone with less to spend, it has essentially no effect on the outcomes of those contests. The same paintings and the same marina slips end up in the same hands as before.
(Hat Tip: Marty McMahon.)
Russell Osgood Named Dean Finalist at Brooklyn
Tax Prof Russell K. Osgood, former President of Grinnell College (1998-2010) and former Dean of Cornell Law School (1988-98), is one of four finalists for the Brooklyn Law School deanship. The other finalists are
- Nicholas Allard (Partner, Patton, Boggs, Washington, D.C.)
- Janet Levitt (Dean, University of Tulsa College of Law)
- Lawrence Solan (Don Forchelli Professor of Law, Brooklyn Law School)
Welcome to the Tax Blogosphere: Nina Olson
Welcome to the National Taxpayer Advocate’s blog about taxpayer rights and taxpayer burden. For starters, let me explain that I use the term “taxpayer rights” here to mean not only statutory rights but also the unstated “agreement” underlying our system of voluntary tax compliance. That is, the government expects and requires taxpayers to pay the correct amount of tax due under the laws, and in return commits to treating taxpayers fairly, with dignity and respect, and providing them with the necessary assistance and guidance to comply with the tax law. In short, taxpayer rights incorporate the government’s obligation to minimize taxpayer burden.
Why a blog about taxpayer rights, and why now? As I said in my preface to the 2011 Annual Report to Congress, the IRS has experienced a huge increase in its workload while its resources have declined over the last two years. This trend increases the risk that the IRS will take shortcuts that, perhaps unintentionally, deprive taxpayers of their ability to dispute effectively an IRS action or achieve a reasonable resolution to their tax problems.
The imbalance between work and resources drives the IRS to use automation to increase the productivity of its employees. While on the surface this observation may seem like a good thing, further analysis yields a number of areas of concern.
The Politics of Envy Is Contrary to the Bible
As the Ten Commandments instruct, envy is corrosive to the individual and to those societies that embrace it.
Who would have expected that in a Republican primary campaign the single biggest complaint among candidates would be that the front-runner has taken capitalism too far? As if his success and achievement were evidence of something unethical and immoral? President Obama and other redistributionists must be rejoicing that their assumptions about rugged capitalism and the 1% have been given such legitimacy.
More than any other nation, the United States was founded on broad themes of morality rooted in a specific religious perspective. We call this the Judeo-Christian ethos, and within it resides a ringing endorsement of capitalism as a moral endeavor.
Regarding mankind, no theme is more salient in the Bible than the morality of personal responsibility, for it is through this that man cultivates the inner development leading to his own growth, good citizenship and happiness. The entitlement/welfare state is a paradigm that undermines that noble goal.
The Bible's proclamation that "Six days shall ye work" is its recognition that on a day-to-day basis work is the engine that brings about man's inner state of personal responsibility. Work develops the qualities of accountability and urgency, including the need for comity with others as a means for the accomplishment of tasks. With work, he becomes imbued with the knowledge that he is to be productive and that his well-being is not an entitlement. And work keeps him away from the idleness that Proverbs warns leads inevitably to actions and attitudes injurious to himself and those around him. ...
No country has achieved such broad-based prosperity as has America, or invented as many useful things, or seen as many people achieve personal promise. This is not an accident. It is the direct result of centuries lived by the free-market ethos embodied in the Judeo-Christian outlook. ...
The motive of capitalism's detractors is a quest for their own power and an envy of those who have more money. But envy is a cardinal sin and something that ought not to be. God begins the Ten Commandments with "I am the Lord your God" and concludes with "Thou shalt not envy your neighbor, not for his wife, nor his house, nor for any of his holdings." Envy is corrosive to the individual and to those societies that embrace it. Nations that throw over capitalism for socialism have made an immoral choice.
Hickman: Impressions From the Home Concrete Oral Argument
In this article, Hickman, who filed an amicus brief in Home Concrete, discusses the case, the history of litigation leading up to it, and the oral argument; she believes the case is too close to call for either party.
All Tax Analysts content is available through the LexisNexis® services.
- Tax Appellate Blog, Home Concrete Argument Preview
- Tax Appellate Blog, Lively Oral Argument in Home Concrete Leaves Outcome in Doubt.
The Buffett Rule Won't Apply to Warren Buffett
Wall Street Journal, Will Buffett Avoid the Buffett Rule? The Sage of Omaha Is Already Positioned to Shield Most of His Rising Wealth From Such a Tax, by James Freeman:
Billionaire Berkshire Hathaway CEO Warren Buffett is once again thrilling the political class by volunteering other people to pay higher taxes. Long-time observers recall his opposition to former President George W. Bush's efforts to reduce the tax rate on dividends. Since Berkshire pays no dividends, Mr. Buffett had little at stake but enjoyed the opportunity to pose as if he were a rich guy eager to cough up more dough to Washington.
In the current debate, President Obama is pushing the "Buffett Rule" to ensure that high-income earners pay higher tax rates. But even if it's enacted, don't expect the Buffett Rule to have much impact on Mr. Buffett. By an amazing coincidence, the sage of Omaha is already positioned to shield most of his rising wealth from such a tax. ...
[T]he Buffett Rule ... at its heart is a way to raise taxes on dividends and capital gains. Berkshire still doesn't pay a dividend, and as for capital gains taxes, well, Mr. Buffett has already made clear that he'll largely avoid them by transferring his fortune to the Gates Foundation and to charitable trusts controlled by his family.
Lawyers Can Advertise on Groupon
Lawyer may market legal services on a “deal of the day” or “group coupon” website provided that the advertising is not misleading or deceptive and makes clear that no lawyer-client relationship will be formed until the lawyer can check for conflicts and competence to provide the services. ... For example, a participating lawyer might offer the preparation of a simple will, for which the lawyer normally charges $500, for $250
WSJ: Mitt Romney and the Tax Treatment of Payments to Former Partners
The application of a favorable tax treatment to some of Mitt Romney's income from Bain Capital, which drew attention when he released his tax returns this past week, is a source of debate among tax lawyers sifting through murky reaches of the tax code.
The issue is whether the Republican presidential candidate—who left Bain in 1999—continued to provide "services" to his former firm, at least as far as that concept is defined by a 1993 IRS pronouncement [Rev. Rul. 83-155, 1983-2 C.B. 38].
If he doesn't qualify under that policy, a remote possibility, tax lawyers say he might not be entitled to the 15% tax rate claimed on a portion of his "carried interest," which are rights to profits from Bain Capital investments. In the complex accounting of Mr. Romney's income, that could land him with a bill for back taxes. ...
The tax rules for this area are complex and unsettled. Lee Sheppard, a tax attorney who writes for the journal Tax Notes, said it could be argued a retired partner isn't entitled to favorable treatment because he didn't provide any services to the newer funds.
Ms. Sheppard said lawyers, however, have generally treated this language as though it applies to retired partners, which may aid Mr. Romney's argument. The question hasn't been tested in court or administratively.
David S. Miller, a tax attorney at Cadwalader Wickersham & Taft in New York, said he didn't think the IRS would challenge Mr. Romney on the issue, and "if it did, he'd win," because the income is related to prior services he provided to Bain.
TaxProf Blog Weekend Roundup
- Kleinbard: Mitt Romney's Marvelously Unburdened Income
- NY Times: Mitt Romney Paid More Taxes Than He Owed
- A Comparative Critique of the U.S. Marital Deduction
- The Tenure Tax
- Top 5 Tax Paper Downloads
- Lawsky: Law Review Submission Tracker
- WSJ: What You Can Learn From Mitt Romney's Tax Return
- Over 279,000 Federal Workers Owe $3.4 Billion in Back Taxes
January 29, 2012
Top 5 Tax Paper Downloads
There is quite a bit of movement in this week's list of the Top 5 Recent Tax Paper Downloads, with a new #1 paper and new papers debuting on the list at #2 and #5:
1. [550 Downloads] Offshore Accounts: Insider’s Summary of FATCA and its Potential Future, by J. Richard (Dick) Harvey (Villanova)
2. [303 Downloads] Scriveners’ Errors, Drafting Errors, Operational Failures, Retroactive Amendments, Reformations, ERISA, and the Tax Qualification of Pension Plan Trusts, Part I, by Albert Feuer (Law Offices of Albert Feuer, Forest Hills, NY)
4. [144 Downloads] Social Security Benefits: Windfall Elimination Provision, Francine J. Lipman (UNLV) & James E. Williamson (San Diego State University, College of Business Administration)
5. [143 Downloads] From Here to Eternity: The Folly of Perpetual Trusts, by Lawrence W. Waggoner (Michigan)
Lawsky: Law Review Submission Tracker
Click here to download a spreadsheet to help you track your law review submissions during the upcoming law review submission cycle, and thus to create an illusion of control over the process.
The spreadsheet has two worksheets. The main sheet, "S12," gives you information about journals and lets you enter your own information. The second sheet, "Data," automatically calculates, based on your entries on the main sheet, the number of journals that have made a decision about your piece (by response), and the number of journals from which there is not yet a final resolution.
For the main journal of each school, the spreadsheet lists (1) the name of the school, (2) the date the journal starts accepting submissions (if I could find this information), (3) the most recent US news ranking, (4) the most recent Washington & Lee journal ranking (based on the number of citations to the journal), and (5) the preferred method of submission. (It's Expresso for almost all the journals, except that a few top journals strongly prefer that you submit through their website.) The spreadsheet also includes a handful of specialty journals.
There are blank cells for you to add information such as the date you submitted it, the date the journal acknowledged it received, the date you expedited and the method by which you expedited, and the date it was accepted, rejected, and so forth (If you enter the date in the regular format in those columns, the "Length" column will automatically calculate for you the length of time between when you submitted it and when you heard back from the journal.) There is also a "Notes" column where you can enter things like the ID number some journals assign to entries.
WSJ: What You Can Learn From Mitt Romney's Tax Return
Wall Street Journal, What You Can Learn From Mitt's Tax Return, by Laura Saunders:
[Mitt Romney's tax returns] lift the veil on how the wealthy can use the tax code to their advantage. Here are some lessons the experts have gleaned:
- Avoid salary, wages and tips to the extent possible
- Muni-bond interest isn't the be-all and end-all
- Strive for "qualified" dividends
- If you have a "Schedule C" business, think twice before claiming a home-office deduction
- Generate income from long-term capital gains
- Know the score on itemized deductions
- Capital gains and dividends can help trigger the AMT
- Beware of small benefits requiring large tax-prep efforts
- Offshore investments can save onshore taxes
Over 279,000 Federal Workers Owe $3.4 Billion in Back Taxes
Over 279,000 federal workers and retirees owed more than $3.4 billion in back income taxes in 2010 (up from $3.3 billion in 2009, $3.0 billion in 2008, and $2.7 billion in 2007).
The cabinet departments with the largest percentages of employee/retiree tax deadbeats are:
- Housing & Urban Development: 3.89%
- Education: 3.88%
- Army: 3.83%
- Veterans Affairs: 3.78%
- Commerce: 3.54%
- Health & Human Services: 3.51%
- Defense: 3.19%
- Air Force: 3.11%
- Navy: 3.05%
- State: 2.94%
Other departments and agencies:
- U.S. Office of Government Ethics: 6.49%
- Federal Reserve Board: 4.86%
- U.S. House of Representatives: 4.24%
- U.S. Senate: 3.08%
- SEC: 2.50%
- U.S. Tax Court: 2.25%
- Treasury Department: 0.96% (the lowest delinquency rate among cabinet departments)
January 28, 2012
Kleinbard: Mitt Romney's Marvelously Unburdened Income
Presentations like Romney and the Burden of Double Taxation, by John Berlau and Trey Kovacs in the op-ed page of the Wall Street Journal on January 24th, have suggested that it is wrong to conclude that Governor Romney's effective tax rate in 2010 was 13.9%, as widely reported. Instead, they argue, his true tax rate was "as much as 44.75%." And the Editorial Board of the Wall Street Journal repeated this argument in an editorial on January 27th (The Buffett Ruse). They all reach this conclusion by arguing that Romney suffers the burden of double taxation on his considerable income in the form of capital gains and dividend income. ...
Romney's investments generally are not burdened by a significant corporate tax expense.
First, the investment funds in which Romney and other affluent Americans invest are not themselves taxpayers: instead, those funds are organized as partnerships (which are "pass-through" vehicles for tax purposes, so only their partners are taxed on their profits) or as offshore corporations beyond the reach of the corporate income tax. ...
Second, the whole point of PE deals is to wipe out the corporate tax liability of portfolio companies with interest expense from new borrowings at the operating company level -- that's the leverage that drives the high returns to PE funds from successful deals. ...
Third, at least some PE portfolio companies are turned into nontaxable operating partnerships. You can see circumstantial evidence of that on the Romney returns. ...
Fourth, what about unrelated non-PE investments that the Romneys may have acquired, in big public US companies? Even there the 44.75% tax rate story falls apart. The real life effective tax rates enjoyed by most publicly-held US multinational firms in which the Romneys might have invested are far below the statutory rate, and the more multinational the firm, the lower that all-in (federal and foreign) tax rate is likely to be. ...
So for all the above reasons, the assumption that there is a 35% corporate tax being paid on Romney's investments is not consistent with the reality of how his portfolio was created, or the actual tax rates enjoyed by the most sophisticated U.S. public companies. But regardless of the effective tax rates imposed on Romney's portfolio investments, it is an entirely separate leap of faith to attribute that corporate tax burden to Mr. Romney in his capacity as a shareholder. Economists refer to this as the question of corporate tax "incidence." The corporate income tax ultimately burdens one or more groups of human beings, but which ones? ... [T]here is no consensus at all as to who ultimately bears the corporate income tax. The principal candidates are all owners of capital (not just shareholders), through market mechanisms that bring returns in different investment markets back into a relative equilibrium when one form of capital is nominally subject to tax, or employees, on the theory that a corporation must yield returns that are set by the world market for capital, and high corporate income taxes reduce investment in that country, which leads to lower wages.
The corporate tax incidence debate is endless, and certainly can't be resolved here. But it is ironic, to put it kindly, that the Wall Street Journal's op-ed pages have featured a consistent slant on this debate, by featuring economists who urgently argue the need to reduce the corporate income tax rate, on the theory that the corporate tax actually burdens labor income. Now the same editorial board has turned around and published a piece that argues that shareholders alone suffer the burden of the corporate income tax. Whatever the ultimate resolution of the academic debate (which has gone on for decades), no one seriously thinks that shareholders alone suffer the incidence of the corporate income tax.
NY Times: Mitt Romney Paid More Taxes Than He Owed
New York Times, Romney Paid More Than He Owed, by Floyd Norris:
Mitt Romney’s tax returns tell us some things about him. They tell us a lot more about the sad state of the tax laws in this country.
When the candidate released his tax returns this week, the fact most noted was the low 14% effective tax rate paid by one of the wealthiest people in America, one with income of more than $20 million in both 2010 and 2011. Others were surprised to see how easy it was for Mr. Romney to effectively transfer millions of dollars each year to his children, tax-free, thus escaping estate and gift taxes.
But what really stands out is the mind-numbing complexity of tax laws, and about how hard it seems to have been for even the high-priced help Mr. Romney can afford to get things right.
In one case, the trustee for one of the Romney trusts sent two letters to the IRS electing to use an apparently irrelevant section of the tax code, and in the process misstated the facts involved.
That mistake did not affect the taxes owed, but another error was more significant. It appears that the return filed by that trust overstated capital gains realized by nearly $300,000, causing Mr. Romney and his wife to pay about $44,000 more in taxes than they owed.
A Comparative Critique of the U.S. Marital Deduction
Sara Burns (J.D. 2010, Temple), Comment. Expanding the Marital Deduction: An Analysis of International Systems of Transfer Taxation, Their Treatment of the Taxable Unit, and the United States' Inadequate Marital Deduction, 25 Temp. Int'l & Comp. L.J. 247 (2011):
The US' definition of the “taxable unit” should be expanded for purposes of transfer taxation. After reviewing the country's changing economic and social realities, the policies behind the current marital deduction, and the unpersuasive Congressional reasons for limiting the concept of an insulated taxable unit to the heterosexual married couples, it is clear that the U.S. marital deduction is unjustifiably limited.
This Comment began by explaining how the pending sunset of the EGTRRA/2010 Tax Relief Act makes the coming years a perfect opportunity for Congress to reevaluate the American transfer tax system and, most importantly, the concept of the marital deduction. As demonstrated, the systems of transfer taxation used in the United Kingdom and Zurich, Switzerland are sufficiently similar to the American model to justify Congressional reliance on the concepts used by its European counterparts. The United Kingdom offers a step in the right direction by allowing same-sex partners to qualify for its spouse/partner exception.
However, the UK system does not go far enough to insulate other relationships that may not approximate to marriage, such as economically dependent minors or elders, from transfer tax liability. On the other hand, the Canton of Zurich extends its definition of the insulated taxable unit too far by exempting all descendants from transfer tax liability. In doing so, this system fosters the possibility of wealth-concentration in family dynasties, which is an undesirable outcome that the current U.S. system inhibits. Regardless of whether the United States creates an insulated taxable unit that mirrors either of these European models exactly, there is something to be learned from each of them. Both systems utilize a definition of the taxable unit that is more realistic in light of the multitude of interdependent relationships that now exist in society. They are also more consistent with the stated policy objectives that justify the existence of transfer tax exemption. If Congress is to remain true to its own stated policy objectives, it must take this prime opportunity to extend the concept of the transfer taxable unit to more closely resemble economic and social realities.
The Tenure Tax
Christopher Meskill (J.D. 2010, St. John's), Comment, The Tenure Tax: Social Security Withholdings on Academic Retirement After University of Pittsburgh v. United States, 25 J. Civ. Rts. & Econ. Dev. 937 (2011):
Part I of this Comment lays out the university‟s and the government‟s arguments, as stemming from the vagueness of the Internal Revenue Code and the conflicting revenue rulings that attempted to clarify that vagueness. To do this, Part I discusses the revenue rulings that supported the “wages” argument, as adopted by the Third and Sixth Circuits. Part I also discusses the revenue ruling that supported the “contractual purchase” argument, as adopted by the Eighth Circuit. Part II of this Comment introduces the controversy through the history and policy concerns related to the two interested parties. First, Part II provides the history of Social Security and FICA, the purposes served by Social Security, and the potential problems that face the system in the future. Then, Part II discusses the nature of academic employment in the university, the emphasis placed on tenured employment, the criticism of this system and the long-term status of tenure in American higher education.limit its scope to preclude university tenure purchase agreements based upon substance and policy concerns. Finally, Part III suggests that the IRS revise Revenue Ruling 2004-110 to limit its scope to preclude university tenure purchase agreements based upon substance and policy concerns.
January 27, 2012
The Legal Whiteboard
I am thrilled to welcome The Legal Whiteboard: Trends, Facts and Ideas on Law and Legal Education, edited by Bill Henderson (Indiana) and Andy Morriss (Alabama), to our Law Professor Blogs Network. From Bill's inaugural post:
According to a lot of reputable media outlets, the sky is falling for both legal education and legal services. I understand the basis for this conclusion. A lot of lawyers, young and old, are unemployed or underemployed. The debt loads of graduating students are staggering. The established “brand” law firms are doing something they have never done before—shrink, or at least not grow. This puts lawyers on edge and has a tendeny to spawn unhealthy, short-sighted behavior. The federal government, through the direct lending of the Department of Education, continues to fuel the lawyer production machine. So things may get worse before they get better.
Despite the fact that I am one of the go-to people on the speaker circuit when it comes time to talk about structural change, I am not in the sky-is-falling camp. Instead, I see a lot of opportunities for lawyers, law students and legal educators to do very important and creative work. What is most exciting about this work is that it will make society better off—law will become better, faster and cheaper. Many legal services will become more standardized, productized and commoditized. I realize that these words will rankle some of the old guard, particularly those still making a good living. But clients—including corporations, government and ordinary citizens—will love it. Professional ideals will remain the cornerstone of successful legal enterprises, but denying the exigencies of the marketplace is, to my mind, unprofessional.
Because clients and society want better, faster and cheaper law, I believe lawyers (including legal educators) have a professional duty to ardently pursue this goal. The hardest part of this assignment—and the most vexing and interesting—is how to parlay this transformation into a decent living.
Many people assume that the new paradigm means lawyers working longer hours for lower wages. That is one future business model. But I think it utterly lacks imagination. Lawyers are problem solvers. To my mind, the growing price elasticity for legal services and legal education is just a very difficult problem. And whenever I am faced with a very difficult problem, I typically start writing out my thoughts on a massive whiteboard. (I am told it is quite a spectacle to behold.) I am also someone who loves to collaborate. With an outward facing Legal Whiteboard, I am hoping to elicit the genius of my fellow travelers.
Lederman Presents Measured Tax Enforcement Today at Miami
Governments rely largely on tax revenues. Traditional economic models of tax compliance typically assume that it is in the government’s best interest to maximize the amount of tax due that it actually collects. In these models, enforcement is costly and imperfect, and the resulting “probabilistic” enforcement scheme is assumed to decrease social welfare by reducing overall tax revenues. More recent models suggest that the negative effects of imperfect enforcement may be less pernicious than previously believed. Yet, like the early models, the newer models often assume that perfect enforcement remains the ideal, and turn upon taxpayer risk-aversion or apply only in narrow circumstances. We show that even if perfect enforcement were costless, it would not always be socially optimal. Specifically, when uniform tax laws are suboptimal, and the legislative or regulatory costs of differentiated lawmaking are high, the enforcement agency can create de facto changes in the substantive law by raising or lowering (i.e., “measuring”) its overall level of enforcement in specific contexts. Importantly, by fostering a suitable level of noncompliance, measured enforcement can increase overall social welfare by reducing deadweight losses, while maintaining or increasing tax revenues in a wide variety of circumstances. This result does not depend on the risk profile of the taxpayer. Moreover, the benefits from measured enforcement cannot be easily replicated by traditional modifications to the tax laws, such as adjustments to the rate schedule or base of a given tax. As such, measured tax enforcement potentially offers substantial benefits that cannot be readily obtained otherwise.
Howard Abrams Named Dean Finalist at Emory
Emory Law announced its dean search on Jaunary 12, 2012 with a call for nominations of tenured Emory faculty. Based on the timeline set out in this document, it's not even clear the committee was considering outside candidates at all. Indeed, the committee has apparently already identified three finalists -- all from the existing Emory faculty and one the current interim dean. There's nothing wrong with doing an internal dean search; it's just unusual for a search committee to be so open about it.
When Higher Marginal Tax Rates Helped the Economy
Nicholas Paleveda (CEO, National Pension Partners; Adjunct Professor, Northeastern Graduate Tax Program), Professor Paleveda's Paradox: When Higher Marginal Tax Rates Helped the Economy:
This paper reviews the time where higher marginal tax rates actually helped the economy. In some cases lowering the marginal tax rate, the economy did not improve. An optimal tax rate is also suggested
Walker: A Tax Response to the Executive Pay Problem
Many observers believe that that the public company executive labor market is deficient and results in systematically excessive compensation. This Article accepts that premise and considers potential regulatory responses. Specifically, this Article proposes and analyzes a two-pronged tax response to the problem of excessive executive pay – the imposition of a surtax on executive pay in excess of a threshold combined with investor tax relief. These two prongs respond to the chief concerns raised by excessive executive pay. The imposition of a surtax would reduce the after-tax income of executives, which would directly address the unfairness of excessive pay and the effect of excessive pay on inequality of resources. Investor tax relief would tend to reverse the inefficient distortion in capital allocation that results from excessive pay and would ensure that these distortions were not exacerbated by companies increasing executive pay to offset the surtax.
Kollman and the IRS's Power Over a Taxpayer's Method of Accounting
Deborah K. Jones & Albert D. Spalding Jr. (both of Wayne State University, School of Business Administration), Finding the Outer Limits of IRS Accounting Discretion: The Kollman Case, 4 Acc't & Tax'n 109 (2012):
The statutory language of the Internal Revenue Code gives cognizance to the methods of accounting used by taxpayers for their financial reporting. The 1979 U.S. Supreme Court opinion of Thor Power acceded to the IRS a significant amount of discretion in its attempt to require taxpayers to change and adapt their accounting methods to its satisfaction. In particular, the Commissioner's seemingly absolute authority to prohibit lower of cost or market inventory valuation was upheld. Until the recent Tax Court decision in the case of United States v. Kollman, in fact, there were few guidelines that helped to delineate the outer limits of the IRS’s discretion in demanding taxpayer adherence to its preferred tax accounting methods. This paper considers how the parameters for a taxpayers’ ability to challenge this discretion have been significantly clarified, if not changed, by the Kollman case. We discuss the clear reflection of income doctrine as it has evolved over time and examine the impact of recent judicial decisions – especially Kollman – on this standard and consider whether or not there is need for revision on the law in this area. We conclude that the Commissioner’s authority to arbitrarily require specific methods of accounting is in fact limited, and that the Kollman case serves as a helpful marker of the outer limits of such authority.
Olivas: Ask Not For Whom The Law School Bell Tolls
It is a fact universally acknowledged that law faculty are in want of purpose. It takes a lot to get us riled, and even more to call us to the barricades. But the current state of financing legal education is just such a burning theater, and we all should be troubled by the fast-churning events. Because most of us went to law school during the Golden Age, which I situate as having ended about five years ago at the top of the application apex and the height of the modern-day job markets for law graduates, most of us are blissfully unaware of recent developments that literally threaten the enterprise. I write to discuss these many moving parts and to call us to action as a community, for threats to the universe of legal education will affect us all to our collective detriment....
[A]ll of us similarly have a dog in this fight of cost containment and in making legal education accessible and affordable to our students. We cannot simply hope that the problems will resolve themselves. We have erected a substantial system of training lawyers, one that is a spectacular success by any measure, notwithstanding the cracks in the infrastructure. We all need to keep up with these developments, counter challenges to our existence, and work harder to explain why our system is worth saving at its core. We also need to do a better job of explaining the large role of lawyers in the world society, not only as technicians with attention to detail but as defenders of important core values and democratic principles. I do not view the migrating role of lawyers to civilian life across non-law fields as evidence of our declining competence, as some commentators have in analyzing legal employment figures, but rather this as robust evidence of the growing value of being a lawyer and applying our skills to the many societal problems in need of our multifaceted talents. It is no accident that a disproportionate number of lawyers serve in business enterprises, as well as in positions of governmental leadership and civic participation, giving generously of our time and talent.
Perhaps most importantly, we need to be cheerleaders for legal education writ large and our way of life, and to be critics that hold it to high standards. In many countries, law faculty are entirely part-time, and widespread student access is limited by a filter of counterproductive and inefficient attrition. This is not the path we have chosen, and it is our glory. At the least, we should not weaken our chosen profession by inattention, avarice, or acrimony. Speaking out against lawyers is an ugly habit, yet I have witnessed law teachers do it in public venues. Others will attempt to diminish both the rule of law and its means of transmission, so we need not add to this chorus. We should not belittle law’s accomplishments, just as we should not overlook its weaknesses or inefficiencies or inequities. The bell will toll for all of us, even if we do not always hear its loud peals.
Stone: Lessons From the Energy Crisis
In celebration of the 40th anniversary of the publication of its inaugural issue, Tax Notes is re-publishing memorable articles from its archives. Lawrence M. Stone (UC-Berkeley), Lessons From the Energy Crisis, 134 Tax Notes 431 (Jan. 23, 2012):
This article was originally published on July 22, 1974. Lawrence M. Stone was a professor at the University of California, Berkeley, a partner in the Los Angeles firm Irell & Manella LLP, and a member of the IRS commissioner's advisory group. During his career, he served as tax legislative counsel in Treasury's Office of Tax Policy and on the president's nominating commission for appointments to the U.S. Tax Court. Stone argued that tax policies regarding the oil and gas industry contributed heavily to the energy crisis of the early 1970s and he presented proposals for how Congress could pare back or eliminate some of those benefits.
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NY Times' David Segal: 'Business of Law Schools Is Crazy'
- Is Law School a Losing Game? (Jan. 9)
- Law Students Lose the Grant Game as Schools Win (May 1)
- Law School Economics: Ka-Ching! (July 17)
- What They Don’t Teach Law Students: Lawyering (Nov. 20)
- For Law Schools, a Price to Play the ABA's Way (Dec. 18)
(Hat Tip: Volokh Conspiracy.)
The Case Against the Tax Exception to the Six-Year Bar on Claims Against the Government
Adam R.F. Gustafson (Law Clerk, Judge Janice Rogers Brown, U.S. Court of Appeals for the D.C. Circuit), An “Outside Limit” for Refund Suits: The Case Against the Tax Exception to the Six-Year Bar on Claims Against the Government, 90 Or. L. Rev. 191 (2011):
Longstanding judicial precedent and the official position of the IRS agree that federal tax refund suits are limited only by the two-year statute of limitations of § 6532(a)(1) of the Internal Revenue Code, which is triggered only when the IRS mails the claimant a notice of disallowance. This Article contends that tax refund litigation is also governed by the six-year limitation of 28 U.S.C. § 2401(a) on “every civil action commenced against the United States,” which is triggered upon the accrual of a claim. The Supreme Court alluded to this dual- limitation scheme in 2008 in United States v. Clintwood Elkhorn Mining Co., stating in dicta that the six-year bar places an “outside limit” on the tax-specific limitation.
Applying the six-year bar as a backstop to tax refund suits would enforce its plain meaning, would accord with multiple canons of statutory construction, would promote timely resolution of tax refund claims, and would bring tax refund litigation into line with the rest of federal claims jurisprudence, thereby eliminating one manifestation of the tax exceptionalism that the Supreme Court criticized last term in Mayo Foundation for Medical Education & Research v. United States.
Even while abandoning its tax-exceptional doctrine, the IRS may be able to soften the blow to potential claimants’ reliance interests by systematically granting extensions of the limitation period pursuant to § 6532(a)(2). This would buy time for attentive taxpayers to file suit while putting future claimants on notice that they must pursue their claims in court within six years of accrual.
An Empirical Analysis of the Tax Gap
Richard Cebula (Jacksonville University, Davis College of Business) & Edgar L. Feige (University of Wisconsin), America’s Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S.:
This study empirically investigates the extent of non compliance with the tax code and the determinants of federal income tax evasion in the U.S. Employing the most recent data we find that 18-19% of total reportable income is not properly reported to the IRS, giving rise to a “tax gap” approaching $500 billion dollars. Three time periods are studied, 1960-2008, 1970-2008, and 1980-2008. It is found across study periods that income tax evasion is an increasing function of the average effective federal income tax rate, the unemployment rate, public dissatisfaction with government, and per capita real GDP (adopted as a measure of income), and a decreasing function of the Tax Reform Act of 1986 (during its first two years of being implemented). Modest evidence of a negative impact of IRS audit rates on tax evasion is also detected.
January 26, 2012
Barnes Presents Political Fragmentation and Taxation Today at Indiana
Lucy Barnes (Nuffield College, Oxford University) presents When Does Tax Reform Occur and What Shapes its Distributional Effects? Coalition Politics in the United States at Indiana-Bloomington today as part of its Tax Policy Colloquium Series hosted by Ajay Mehrotra:
What explains variation in the progressivity of taxation across countries andover time? Most existing explanations highlight the relationship between spending levels and the structure of tax- ation, arguing that the efficiency constraints associated with larger government size lead to less progressive tax structures. However, this literature overlooks the political determinants of tax policy choices. Thus I consider the role that political parties play in determining the progressiv- ity of taxation, testing the `conventional wisdom' that left parties should adopt more progressive stances than right against theories highlighting credible commitment which suggest the opposite (Timmons 2010). However, these results are inconsistent with the partisan evolution of tax structures within countries (rather than between them).
Given the systematic association of left governments with dierent electoral systems and thus types of government, I investigate whether it is these dierences driving the cross-national asso- ciations. Detailed case studies of the United States, United Kingdom and France at the origins of modern taxation (1890 - 1914) reveal that the degree of political fragmentation -- manifested in both multiparty parliamentary systems and coalition governments -- affects the structure of taxation. Greater political fragmentation leads to less progressive systems of taxation. Combined with the large literature on the eect of fragmentation in generating larger welfare states, this implies that in addition to the direct economic link between larger welfare states and regressive tax structures, there is also a link that stems from their common political causes.
WSJ: The Buffett Tax Ruse
Wall Street Journal editorial, The Buffett Ruse: Obama's Ploy Means the Highest Capital Gains Tax Rate Since 1978:
Remember the moment in 2008 when Charlie Gibson of ABC News asked Senator Barack Obama why he would support raising the capital gains tax even though "revenues from the tax increased" when the rate fell? Mr. Obama's famous reply: "I would look at raising the capital gains tax for purposes of fairness." Well, we were warned. ...
Here we are four years later, and President Obama on Tuesday night ... endorsed the political ruse he calls the Buffett rule, which asserts as a matter of moral principle that millionaires should not pay a lower tax rate than middle-class wage earners. Specifically, Mr. Obama is proposing that anyone earning more than $1 million pay at least 30% of that income to Uncle Barack.
The White House says that if a millionaire household's effective tax rate falls below 30%, it would have to pay a surcharge—in essence a new Super Alternative Minimum Tax—to bring the tax liability to 30%. For those facing this new Super AMT, all deductions and exemptions would be eliminated except for charity.
The Buffett rule is rooted in the fairy tale that taxes on the wealthy are lower than on the middle class. In fact, the Congressional Budget Office notes that the effective income tax rate of the richest 1% is about 29.5% when including all federal taxes such as the distribution of corporate taxes, or about twice the 15.1% paid by middle-class families. ...
[W]ealthy tax filers make most of their income from investments. Such income is taxed once at the corporate rate of 35% and again when it is passed through to the individual as a capital gain or dividend at 15%, for a highest marginal tax rate of about 44.75%.
This double taxation is one reason the U.S. has long had a differential tax rate for capital gains. Another reason is because while taxpayers must pay taxes on their gains, they aren't allowed to deduct capital losses (beyond $3,000 a year) except against gains in the current year. Capital gains also aren't indexed for inflation, so a lower rate is intended to offset the effect of inflated gains.
One implication of the Buffett rule is that all millionaire investment income would be taxed at the shareholder level at a minimum rate of 30%, up from 15% today. The tax rate on investment income from corporations would rise to 54.5% from 44.75%, a punitive tax on start-up or expanding businesses.
The new 30% capital gains rate would be the developed world's third highest behind only Denmark and Chile. ...
Mr. Obama isn't setting himself apart merely from conservatives with this Buffett ploy. He is rejecting 35 years of bipartisan tax policy that began with the passage of the Steiger Amendment by a Democratic Congress that cut the capital-gains rate to 28% from 35% in 1978. As the nearby chart shows, the rate has never since risen above 28%, and the last time it moved that high was in 1986 as part of the Reagan-Rostenkowski tax reform that also cut the top marginal income tax rate to 28% from 50%.
A decade later Bill Clinton agreed to cut the rate back to 20% as part of the balanced-budget deal with Newt Gingrich. Capital gains revenues soared, helping to balance the federal budget. Nearly every study estimates that the revenue-maximizing tax rate from the capital gains tax is between 15% and 28%. Doug Holtz-Eakin, the former director of the Congressional Budget Office, says that a 30% tax rate "is almost surely above the rate that maximizes tax revenues." So it's likely the Buffett trick would lose revenue for the government.
Yet in a time of the highest deficits since World War II, Mr. Obama wants to double the capital gains tax rate even as he raises the top income-tax rate to 42% or so. Mr. Obama really is taking us back to the worst habits of the 1970s. And not because he thinks higher rates will raise revenue, but merely so he can score points against Mitt Romney and stick it to the successful.
This isn't tax fairness. It's tax folly.
Morse: Important Developments in Federal Income Tax (2010-11)
This outline covers significant developments in federal income taxation along with related topics that the author finds interesting, curious, or worthy of comment. It is not intended to provide exhaustive coverage, but it offers a selective treatment of items likely to interest practitioners and advisers within a broad range of professional practices. Information discussed includes events from the prior year through November 14, 2011.
Gutting: The Meaning of 'Limited Partner' in the Internal Revenue Code
Kristin Balding Gutting (Charleston), Keeping Pace with the Times: Exploring the Meaning of Limited Partner for Purposes of the Internal Revenue Code, 60 U. Kan. L. Rev. 89 (2011):
This article explores the use of the term “limited partner” within the passive loss rules of § 469 and the corresponding Treasury Regulations in light of the always changing business environment. The passive loss rules of § 469 turn on whether a taxpayer materially participated in the loss generating activity. The preferential nature of several Code provisions turns on whether a person is a limited partner, the majority of these references being codified within the Code prior to the creation of many new types of entities, including the LLLC, the LLP, and the LLLP (collectively referred to as a Limited Liability Entities). The term was placed in to the Code when the only entities taxed as partnerships were general partnerships and limited partnerships. At such time, a limited partner was essentially prohibited from participating if the limited partner wanted to maintain his limited liability status. However, this article asserts that in today’s business environment, a trend is developing where the distinctions between an individual’s ability to participate in Limited Liability Entities and maintain limited liability has become blurred. Under the special rule of § 469(h)(2), if a taxpayer is a limited partner, deducting certain losses is subject to more stringent rules. For almost twenty years, the IRS has been asserting in audits that an interest in Limited Liability Entities should be treated as a limited partner for applying § 469. In late 2009, however, the Tax Court held that an LLC member and an LLP partner were not limited partners for purposes of the passive loss rules. Shortly thereafter, the Court of Federal Claims reaffirmed that for purposes of the passive losses rules LLC members were not limited partners. The Court of Federal Claims, nevertheless, did not address the application of § 469(h)(2) to an LLP. Accordingly, it is still unclear whether under § 469(h)(2) a partner in an LLP and/or an LLLP is considered a limited partner. Essentially, this has led to the belief by scholars and practitioners that the issue is resolved concerning an LLC. Yet, in December 2010, the Service commented that it would issue guidance in this area. Furthermore, both the Tax Court and the Court of Federal Claims hinted that the Service could amend the Treasury Regulations to explicitly include Limited Liability Entities as being subject to the more stringent rule of § 469(h)(2). This article proposes that the Service should not amend the regulation, but, instead Congress should revoke § 469(h)(2), as in today’s business world there has been a change of circumstances, and the Code must advance to keep pace with the times.
Brown: An Equity-Based, Multilateral Approach for Sourcing Income Among Nations
Fred B. Brown (Baltimore), An Equity-Based, Multilateral Approach for Sourcing Income Among Nations, 11 Fla Tax Rev. 565 (2011):
The source of income rules used in the United States and elsewhere in large part establish the contours of tax jurisdiction exercised by countries. The source rules play a vital role in the foreign tax credit system applicable to U.S. persons with foreign investment or business activities. The source rules also play a central role in the United States’ exercise of source taxation over foreign persons with U.S. businesses or investments. Other countries likewise use source rules or their equivalent in applying foreign tax credit or territorial systems to their residents and exercising source taxation over nonresidents.
The current approach for sourcing income suffers from two related problems. First, the source rules lack coherence in that they fail to advance a consistent normative tax policy. More fundamentally, the rules fail to reflect the consistent application of the key principle appropriate for allocating nations’ primary taxing rights – namely, the benefits principle. The second problem is the variation in the source rules used worldwide. This may produce double taxation or non-taxation.
This article addresses both of these problems by offering an approach for sourcing income that has the potential for being adopted by countries on a multilateral basis. The article develops an equity-based standard for sourcing that would allow for the derivation of source rules for various types of income. The core idea underlying the proposed sourcing standard is the benefits principle: income should be sourced to the country that provides the taxpayer with significant governmental benefits related to the income. Specifically, the article develops a standard that would devise source rules by evaluating the source of income on the basis of three factors: the destination of the services, property or capital giving rise to income; the location(s) of the activities giving rise to income; and the residence of the person receiving income. Based on this evaluation, the rule for a given type of income may divide the source of the income among multiple locations. By basing the source rules on an equity-based standard that allows source to be divided when appropriate, this article seeks to rationalize and harmonize the provisions used to source income for purposes of taxing cross-border investment and business activities.
2012 Business Tax Climate: Chilliest in Blue States
The Tax Foundation yesterday released the 2012 State Business Tax Climate Index (9th ed.) which ranks the fifty states according to five indices: corporate tax, individual income tax, sales tax, unemployment insurance tax, and property tax. Here are the ten states with the best and worst business tax climates:
Interestingly, all ten of the states with the worst business tax climates voted for Barack Obama in the 2008 presidential election, and five of the ten states with the best business tax climates voted for John McCain (and eight of the ten voted for George Bush in 2004).
Pew, TPC Analyze Graetz VAT Plan
A sweeping reform of the federal tax system has been proposed by Michael J. Graetz, Professor Emeritus of Law at Yale University and currently Professor of Law at Columbia University. The proposal is intended to simplify the tax system, improve economic incentives, and maintain fairness. To achieve these goals, Graetz’s plan would remove most current taxpayers from the income tax rolls, reform the corporate income tax, significantly reduce the top individual and corporate rates, and adopt a value-added tax (VAT) as the principal tax paid by most Americans. Payroll, estate and gift taxes would not change.
This paper describes the Graetz proposal in detail and analyzes its effects on federal revenues, spending and the deficit, the distribution of the tax burden, marginal tax rates and other incentives, and the tax system’s administrative and compliance costs. The proposal is analyzed relative to the Tax Policy Center Current Policy Baseline, which assumes permanent extension of the 2001, 2003, and 2010 tax cuts (except for the one-year payroll tax reduction), continuation of the 2011 AMT exemption amounts (indexed for inflation) and extension of the 2011 estate tax exemption of $5 million (indexed for inflation) and top rate of 35%. The analysis assumes the proposal will be effective in 2015 and be deficit neutral. ...
TPC found that fully implementing a VAT in 2015, with a corporate income tax rate of 15%, that leaves both the deficit and the distribution of the tax burden among income groups substantially unchanged would require:
- A broad-based VAT with a rate of 12.3%
- A marginal income tax rate of 16% for single filers making between $50,000 and $100,000 and joint filers with incomes between $100,000 and $200,000
- A marginal income tax rate of 25.5% for single filers earning more than $100,000 and joint filers with income greater than $200,000
Warren Buffett's Secretary Likely Makes Between $200,000 - $500,000/Year
Warren Buffet’s secretary, Debbie Bosanek, served as a stage prop for President Obama’s State of the Union speech. She was the President’s chief display of the alleged unfairness of our tax system – a little person paying a higher tax rate than her billionaire boss.
Bosanek’s prominent role in Obama’s “fairness” campaign piqued my curiosity, and I imagine the curiosity of others. How much does her boss pay this downtrodden woman? So far, no one has volunteered this information.
We can get an approximate answer by consulting IRS data on tax rates by adjusted gross income, which would approximate her salary, assuming she does not have significant dividend, interest or capital-gains income (like her boss). ... The IRS publishes detailed tax tables by income level. The latest results are for 2009. ... Taxpayers earning adjusted gross incomes of $200,000 to $500,000, pay an average tax rate of nineteen percent. Therefore Buffet must pay Debbie Bosanke a salary above two hundred thousand.
Senate Holds Hearing Today on Taxation of Mutual Fund Commodity Investments
The Senate Permanent Subcommittee on Investigations holds a hearing today on Taxation of Mutual Fund Commodity Investments to examine the issuance of over 70 private letter rulings by the IRS allowing mutual funds to make unlimited indirect investments in commodities through controlled foreign subsidiaries or commodity-linked notes, despite longstanding statutory restrictions on mutual fund investments in commodities. (For more, see press release and letter from Sens. Coburn and Levin to IRS.)
- Douglas H. Shulman (Commissioner, IRS)
- Emily McMahon (Acting Assistant Secretary for Tax Policy, U.S. Treasury Department)
Update: Bloomberg, IRS Should End Commodity Mutual-Fund Runaround, Levin Says
Jensen: The Individual Mandate and the Taxing Power
This article, prepared for a symposium at the Salmon P. Chase College of Law, Northern Kentucky University, considers whether the Taxing Clause provides an alternative constitutional basis, as some have recently argued, for the individual mandate in the Patient Protection and Affordable Care Act of 2010 - the requirement, going into effect in 2014, that most individuals acquire satisfactory health insurance or pay a penalty. The article concludes that the Taxing Clause arguments are misguided. At best, the Clause can provide authority for the penalty, not for the mandate as a whole. Furthermore, the article questions whether the penalty will be a tax at all - if not, the Taxing Clause is obviously irrelevant - or, if it will be a tax, whether constitutional limitations on the taxing power will be satisfied. In particular, the article takes seriously whether the penalty might be a capitation tax, a form of direct tax that would have to meet an onerous apportionment rule to be valid. And the article argues that the penalty will not be a “tax on incomes” exempted from apportionment by the Sixteenth Amendment. The bottom line is this: relying on the Taxing Clause makes the analysis of the individual mandate more complicated than it needs to be, and the focus of constitutional analysis should return to where it has always belonged: the Commerce Clause.
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