January 25, 2012
Buchanan Presents Lessons From the 2011 Debt Ceiling Standoff Today at Duke
Neil H. Buchanan (George Washington) presents When Constitutional Obligations Conflict: Lessons of the 2011 Debt Ceiling Standoff (with Michael C. Dorf (Cornell)) at Duke today as part of its Tax Policy Seminar hosted by Lawrence A. Zelenak:
The current successor to a federal statute first enacted in 1917, and widely known as the “debt ceiling,” limits the face value of money that the United States may borrow. Congress has repeatedly raised the debt ceiling to authorize borrowing to fill the gap between revenue and spending, but in the summer of 2011, a political standoff nearly left the government unable to borrow funds to meet obligations that Congress had affirmed earlier that very year. Some commentators urged President Obama to ignore the debt ceiling and issue new bonds, in order to comply with Section 4 of the Fourteenth Amendment, which forbids “question[ing]” “[t]he validity of the public debt.” Others responded that such borrowing would violate the separation of powers and therefore that the President instead ought to refuse to spend funds that Congress had appropriated. In the end, eleventh-hour legislation averted the crisis, at least for the moment, but absent a substantial political realignment, there is reason to believe that a similar standoff could occur again.
This Article analyzes the choice the President nearly faced in summer 2011, and which he or a successor may face again, as a “trilemma” in which he had three unconstitutional options: Ignore the debt ceiling and unilaterally issue new bonds, thus usurping congressional power to borrow money; unilaterally raise taxes, thus usurping congressional power to tax; or unilaterally cut spending, thus usurping congressional power to make spending decisions and arguably violating Section 4 of the Fourteenth Amendment as well. We argue that faced with this choice among unconstitutional options, the President should choose the “least unconstitutional” course—here, ignoring the debt ceiling. We argue further, though more tentatively, that if the bond markets would render such debt inadequate to close the gap, the President should unilaterally raise taxes rather than unilaterally cut spending. We then use the debt ceiling impasse to develop general criteria for political actors to choose among unconstitutional options. Although we offer no algorithm, we emphasize three guiding principles: 1) Minimize the unconstitutional assumption of power; 2) preserve, to the extent possible, the ability to undo or remedy constitutional violations; and 3) minimize sub-constitutional harm.
Raskolnikov: Accepting the Limits of Tax Law and Economics
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.
Capital Gains Tax Rates: 2012 v. 2013
From TaxVox Blog:
More on Mitt Romney's Tax Returns
- Atlanta Journal-Constitution, Romney’s Tax Returns Show Extent, Complexity of Wealth
- Linda Beale (Wayne State), Obama's State of the Union vs Romney's Tax Returns
- Chris Bergin (Tax Analysts), Romney’s Returns: Wrong Point
- Beltway Confidential, Romney Needs No Apology on Tax Returns
- Don't Mess With Taxes, Romney Releases 2010, 2011 Tax Returns
- Going Concern, What Are People Saying About Mitt Romney's Tax Returns?
- David Cay Johnston (Reuters), Tax Advice for Those Who Want to be Like Mitt
- Dan Shaviro (NYU), Romney's 2010 and 2011 Tax Returns
- L.A. Times, Romney Tax Returns Highlight Tax Code's Breaks for Rich
- TaxGrrrl, Romney's Tax Returns are Remarkably... Unremarkable
- Tax Lawyer's Blog, Pro-Tax Candidate John Kerry’s Tax Rate Lower Than Anti-Tax Candidate Mitt Romney’s
- Tax Update Blog, Mitt's 203-Page Tax Return
- Wall Street Journal editorial, Romney's Fair Share: The Candidate's Tax Return Is an Argument for Tax Reform
- WSJ Total Return Blog, Mitt Romney’s Tax Return: Yes, the Rich Are Different
Mullane: Tax-Based Congressional Regulation of Executive Compensation
Joy Sabino Mullane (Villanova), The Unlearning Curve: Tax-Based Congressional Regulation of Executive Compensation, 60 Cath. U. L. Rev. 1045 (2011):
Congress has repeatedly enacted tax penalties on executive compensation, and threatens to continue doing so. Congress’s stated goals in enacting the various tax penalties were to rein in and shape executive compensation packages. Although each of the tax penalty provisions is superficially different in numerous ways, they ultimately operate in fundamentally the same manner. In each instance, the relevant provision aims to increase the after-tax cost of engaging in the targeted conduct. In theory, the increased costs would deter companies and their executives from engaging in those practices. However, time and time again, companies and their executives have shown Congress that they are immune or indifferent to the increased cost.
This Article considers why Congress continues to enact the same types of tax penalties on executive compensation, when such provisions are ineffective, inefficient, and inequitable. It explores, in particular, whether such legislation serves a meaningful instrumental or expressive function, as a possible justification for the repeated use of the tax system to attempt to influence executive compensation practices. It reveals that none of the various tax penalty provisions has a meaningful instrumental or expressive effect. They have, however, generated significant negative consequences. Accordingly, the Article concludes that the tax code is a particularly poor legislative tool for trying to regulate executive compensation practices, something Congress has seemingly failed to learn from its experiences in using the tax code. If Congress wants to effectively alter corporate and executive behavior, it needs to do something different than what has already been tried and failed.
President Obama Calls for 30% AMT on 'Millionaires and Billionaires'
In last night's State of the Union Address and accompanying Blueprint for an America Built to Last, President Obama proposed to "make sure millionaires and billionaires follow the Buffett Rule by paying at least 30% in income taxes."
- Bruce Bartlett (Financial Times)
- Linda Beale (Wayne State)
- L.A. Times
- David Leonhardt (New York Times)
- New York Times
- Wall Street Journal
The Coming Crash in Legal Education
Richard W. Bourne (Baltimore), The Coming Crash in Legal Education: How We Got Here, and Where We Go Now, 45 Creighton L. Rev. ___ (2012):
This paper will first track the ways in which the legal services market has grown and changed over the past forty years. It will then track the major changes that have attended legal education during the same period and the increasing dependence of the legal education industry on student debt. The paper will then explore why, at long last, the boom-times may have run their course and why, at some point, painful changes will likely occur. Though they cannot be described in detail, the author will attempt to outline the likely nature of the changes that will occur. Finally, the paper will briefly explore how the predicted reckoning may yet lead to an improvement in the marketing of legal services and an enhanced role for law schools in preparing new attorneys for the new bar they will be joining.
Mitt Romney's True Tax Rate: 44.75%
When double taxation of investment income is taken into account, Mr. Romney most likely underestimated his effective tax rate on the campaign trail. The former Bain Capital CEO and Massachusetts governor caused a brouhaha last week when he estimated the tax rate on his investment income at 15%. "How unfair!" pundits exclaimed, noting that the top marginal rate for wage income is more than 30%.
The tax rate on investors is unfair, but for the opposite reason. Our tax code layers taxation of dividends and capital gains on top of a top corporate tax rate of 35%—which even President Obama acknowledges is one of the highest in the world.
This is ironically the embodiment of the "corporate personhood" legal doctrine otherwise so decried by the left. The law taxes corporations as if they were separate beings from the shareholders who own them and then levies a separate tax on shareholder payouts and gains. This double taxation brings the effective tax rate on investment income to as much as 44.75%.
In other words, after the combined top tax rates hit $100 of corporate income, $55.25 remains for the investor. And this figure doesn't even include various state and local taxes, or the death tax. ...If the traditional disclosure of tax returns is elevated into a "teachable moment" about the burdens of double taxation, all Americans could be winners.
Grad School Scam
(Hat Tip: Above the Law.)
NYSBA Tax Section Panel: Tax Reform -- What’s All the Noise About?
Several Tax Profs spoke at yesterday's NYSBA Tax Section Annual Meeting on a panel on Tax Reform: What’s All the Noise About?:
- Steven A. Dean (Brooklyn) (Panel Chair)
- Joseph Bankman (Stanford)
- Michael Graetz (Columbia)
- Stephen Shay (Harvard)
January 24, 2012
Lawsky Presents How Models Work Today at Toronto
Unlike many social and physical sciences, including economics, biology, and physics, legal scholarship includes little or no discussion of what models mean, how they are connected to the real world of law and policy, or how models should and should not be used by legal scholars and policymakers. This void exists notwithstanding legal scholarship’s increasing reliance on explicit modeling, including, for example, work in law and economics. This article uses the example of economic modeling in tax scholarship to investigate how legal scholarship uses models, and how models in legal scholarship work.
The article lays out a path between two extremes. At one extreme is scholarship that employs models without either reflection or self-consciousness to make real-world recommendations; on the other, scholarship that rejects models because their assumptions are too far from reality. I argue that neither approach is correct. Models are useful and important for legal scholarship, but not in the way that both critics and proponents seem to believe.
Drawing from literature in the philosophy of science, the article argues that we reason from models the same way that we reason from common law cases: through a mix of deductive and inductive logic, through leaps, creativity, and intuition. Models cannot provide certainty about what the law should be; rather, economic models are one kind of voice in an ongoing, necessarily inconclusive conversation. The article then uses this deeper understanding of models and modeling to propose ways that legal scholarship can and should use models.
Why Does Citibank, But Not the IRS, Treat Frequent Flyer Miles as Taxable Income?
Los Angeles Times, Citibank Deems Frequent-Flier Miles Taxable, but Does the IRS?, by David Lazarus:
Frequent-flier miles clearly have value — why else would people want them? But do they also represent taxable income? Citibank seems to think so. It's sending tax forms to people who received thousands of miles as a reward for opening a checking or savings account. Those forms value each mile at about 2.5 cents and list the total dollar amount as miscellaneous income.
This is news to tax pros. "I've been practicing for 25 years and I've never had an instance where miles have been treated as taxable," said Gregg Wind, a West Los Angeles certified public accountant. But he said that because Citi is reporting this as people's income to the Internal Revenue Service, customers may be on the hook for paying the taxes. "Otherwise," Wind said, "your chances of being audited could go up." ...
Larry Fechter, 66, of Palm Springs was among numerous Citi customers who received a Form 1099 in recent days. He opened a checking and a savings account with the bank last summer after being promised 25,000 American Airlines miles. ... Fechter said it was a big surprise to get the form in the mail informing him that he has to pay taxes on $645 worth of miles. If he were in the 28% tax bracket, that would mean a payment of $180.60 owed to Uncle Sam. ...
In 2002, the IRS issued a policy brief [Announcement 2002-18,] noting that because there are "numerous technical and administrative issues" relating to miles, such as how they're valued and used, the agency "has not pursued a tax enforcement program with respect to promotional benefits such as frequent-flier miles." "Consistent with prior practice," it said, "the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent-flier miles or other in-kind promotional benefits attributable to the taxpayer's business or official travel." ...
Catherine Pulley, a Citi spokeswoman, cited the 2012 instructions for Form 1099-MISC, which state that income tax must be paid if at least $600 in "prizes and awards" is received.
For more, see The Tax Treatment of Frequent Flyer Miles: An Update. (Hat Tip: Ann Murphy.)
Monahan Presents Will Employers Undermine ObamaCare by Dumping Sick Employees? Today at NYU
Amy Monahan (Minnesota) presents Will Employers Undermine Health Care Reform by Dumping Sick Employees?, 97 Va. L. Rev. 125 (2011), at NYU today as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU):
This Article argues that federal health care reform may induce employers to redesign their health plans to encourage high-risk employees to opt out of employer-provided coverage and instead acquire coverage on the individual market. It shows that such a strategy can reduce employer health care expenditures without substantially harming either high-risk or low-risk employees. Although largely overlooked in public policy debates, employer dumping of high-risk employees may threaten the sustainability of health care reform. In particular, it potentially exposes individual insurance markets and insurance exchanges to adverse selection caused by the entrance of a disproportionately high-risk segment of the population. This risk, in turn, threatens to indirectly increase the cost to the federal government of subsidizing coverage for qualified individuals and to exempt more individuals from complying with the so-called individual mandate. The Article concludes by offering several potential solutions to the threat of employer dumping of high-risk employees.
Response: David A. Hyman (Illinois), PPACA in Theory and Practice: The Perils of Parallelism, 97 Va. L. Rev. In Brief 83 (2011).
Best Use of Mitt Romney's Tax Return
On the day when candidate Mitt Romney releases his tax returns (well, OK, tis’ a stretch), I turn the spotlight on Northwestern Law’s terrific tax program. Anchored by a prestigious graduate tax program and the valuable scholarly work of our distinguished tax faculty, Northwestern is a fertile home for cutting-edge teaching and research in the area of tax law and policy.
2d Circuit Rejects GE's $62 Million Castle Harbour Tax Shelter
TIFD III-E Inc. v. United States, No. 10-70-CV (S.D.N.Y. Jan. 24, 2012):
The United States appeals from a judgment of the United States District Court for the District of Connecticut (Underhill, J.) invalidating two notices of Final Partnership Administrative Adjustments issued by the Internal Revenue Service. The district court so ruled because it concluded that the taxpayer-plaintiff’s characterization of two tax-exempt Dutch banks as its partners in Castle Harbour LLC was proper under Internal Revenue Code § 704(e)(1). The district court also concluded that, even if the banks did not qualify as partners under § 704(e)(1), the government was not entitled to impose a penalty pursuant to § 6662. The Court of Appeals (Leval, J.) holds that the evidence compels the conclusion that the banks do not qualify as partners under § 704(e)(1), and that the government is entitled to impose a penalty on the taxpayer for substantial understatement of income. The judgment of the district court is REVERSED....
We appreciate and have benefitted from the District Court’s conscientious, thoughtful and comprehensive analysis on remand. Ultimately, however, the issue whether the term “capital interest” in § 704(e)(1) includes an interest that is overwhelmingly in the nature of debt is one of law, which of course we review de novo. We respectfully disagree with the district court’s analysis. As we now review the question arising under § 704(e)(1), we conclude that the same evidence which, on our last review, compelled the conclusion that the banks’ interest was so markedly in the nature of debt that it does not qualify as bona fide equity participation also compels the conclusion that the banks’ interest was not a capital interest under § 704(e)(1)....
The taxpayer has failed to point to substantial authority supporting its treatment of the banks as partners. We find that a penalty for substantial understatement of income was therefore properly assessed.
National Paralegal College Seeks to Hire Graduate Tax Director
National Paralegal College seeks to hire a tax instructor to help develop and administer a graduate-level tax program:
We are seeking a tax professional knowledgeable in federal income tax, corporate tax, and preferably other upper-level courses such as estate and gift tax, tax research, financial accounting, etc. JD required. LLM preferred. Significant teaching experience preferred. Significant professional experience preferred.
All qualified candidates are encouraged to apply. Arizona residents will be given priority.
National Paralegal College was founded in 2002 and introduced synchronous learning format to online schooling by running a real time audio/visual online platform to deliver instruction. The mission of National Paralegal College is to provide quality Internet-based education and training for students seeking careers in the paralegal field. NPC seeks to enable those students whose lifestyles lead them to opt for distance education to obtain comprehensive paralegal training and meet their educational goals without having to compromise on interactivity and academic quality.
Applicants should send a letter of introduction and curriculum vitae via email to Program Director Matthew Bycer or by mail to: National Paralegal College Attn: Matthew Bycer 6516 N. 7th Street, Suite 103 Phoenix, Arizona 85014.
Mitt Romney Releases 2010 Tax Return, 2011 Estimate
- Romney 2011 Tax Estimate
- Romney 2010 Tax Return
- Future of Capitalism
- L.A. Times
- New York Times
- New York Times
- Wall Street Journal
- Washington Post
Update: New York Times, The Candidates' Tax Returns
Greece Publishes List of 4,000 Tax Scofflaws
New York Times, Greece Publishes List of 4,000 Tax Scofflaws:
In a name-and-shame campaign aimed at getting tax evaders to pay up, the Greek government published a list of more than 4,000 people, including several household names, who owe a total of $19 billion to the cash-strapped state. The list published late Sunday includes the veteran crooner Tolis Voskopoulos with debts of nearly $650,000; Pavlos Psomiadis, the owner of a defunct insurance firm, with arrears of nearly $2 million; and Giorgos Batatoudis, a former soccer club president who owes more than $3 million.
- The Guardian, Greece Names and Prosecutes Celebrity Tax Evaders
- Reuters, Greece Publishes Tax Dodger List to Name and Shame
(Hat Tip: Joshua Blank.)
Field: Experiential Learning in Tax Courses
Heather Field (UC-Hastings), Experiential Learning in a Lecture Class: Exposing Students to the Skill of Giving Useful Tax Advice, 9 Pitt. Tax Rev. ___ (2012):
As our students continue to enter a legal profession that is changing and as the models for the delivery of legal services continue to evolve, so should our pedagogy. Thus, the modest objective of this piece is to share my experience, and offer some thoughts, about developing and integrating practice-oriented experiential modules into tax lecture courses. This article explains and reflects upon two exercises that I have used to provide students with opportunities to play the role of a lawyer in transactional tax planning settings. Both exercises are intended to help students begin to see how they can turn their growing substantive knowledge into “useful tax advice.” By “useful tax advice,” I mean informative and understandable advice that comprehensively addresses the client’s economic objectives (including, but not limited to the client’s tax objectives) and that gives the client a clear appreciation of the benefits and risks of a tax-related business decision; as a result of this advice, the client should be able to make an educated choice.
I hope that others can use, and hopefully improve upon, the exercises discussed herein. Moreover, I hope that, when creating and implementing experiential modules in their classes, others can use my reflections to avoid my mistakes and build on my successes. Ultimately, I hope that I can make even a small contribution to the development of the professoriate and to our collective endeavor of helping law students become lawyers.
OECD: Using Tax Policy to Reduce Income Inequality, Boost Economic Growth
[S]ome policy options that could promote growth and reduce inequality:
- Re-assess tax expenditures that benefit mainly high-income groups (e.g. tax relief on mortgage interest). Cutting back such tax expenditures is likely to be beneficial both for long-term GDP per capita, allowing a reduction in marginal tax rates, and for a more equitable distribution of income. Lowering tax expenditures would also reduce the complexity of the tax system, and thus tax compliance and collection costs.
- Reduce distortions in taxing capital income. Tax relief – such as reduced taxation for capital gains from the sale of a principal or secondary residence – often distorts resource allocation without boosting aggregate savings and growth, and benefits mainly high-income groups. Specific tax relief may also provide tax avoidance instruments for top-income earners. In particular, there is little justification for tax breaks for stock options and carried interest. Raising such taxes would increase equity and allow a growth-enhancing cut in marginal labour income tax rates.
Press and blogosphere coverage:
- Huffington Post, Income Inequality Can Be Fought With Policies That Simultaneously Spur Growth, Report Finds
- Wall Street Journal, OECD Targets Tax Relief on Mortgages
- WSJ Real Time Economics Blog, OECD Urges Tax Changes to Boost Growth, Reduce Inequality
Jaffke Posts Tax Papers on SSRN
Cheyanna Jaffke (Western State) has posted several of her tax papers on SSRN:
- Death, Taxes, and Now Divorce: The Unavoidable Dyad Expanded to a Trilogy: ERISA's Social Policy Harms Women's Rights, 35 U.S.F.L. Rev. 255 (2001).
- Stock Redemptions in the Marital Corporation: What Happens When The Love Is Gone?, 54 Rutgers L.J. 487 (2002).
- Sleeping with the Enemy? The IRS' Advanced Notice of Rule Making for Regulations on Capitalization, 32 U. Balt. L. Rev. 51 (2002)
- The "Existing Indian Family" Exception to the Indian Child Welfare Act: The States' Attempt to Slaughter Tribal Interest in Indian Children, 66 La. L. Rev. 733 (2006).
- Judicial Indifference: How Does the 'Existing Indian Family' Exception to the Indian Child Welfare Act Continue to Endure in the Age of Obama?, 38 W. St. U. L. Rev. 127 (2011)
January 23, 2012
Crane Presents Can Congress Retroactively Tax Distributions From Roth IRAs? Today at Case Western
Charlotte Crane (Northwestern) presents Legitimate Expectations in Tax Transitions: Are Roth IRA Conversions Different? at Case Western today as part of its Faculty Workshop Series:
Congress has rarely been tempted to test its power to adversely change tax treatments of investments in ways that would have substantial retroactive effects, despite the assurance from academia (most notably in the writings of Graetz and Kaplow) that there are few if any limits on such power beyond the limits of pragmatic politics. If, however, substantial numbers of high-wealth taxpayers have taken advantage of the ability to convert from traditional IRAs to Roth IRAs, future Congresses may feel pressure to reneg on the promises made to Roth converters, and make tax law changes that affect the exemption of distributions from such Roth IRAs. Roth converters may be especially vulnerable if it turns out that such high wealth converters were able to selectively transfer investments likely to have particularly high returns into Roth IRAs.
This paper explores whether Roth IRA converters have claims so qualitatively different from those of other investors in tax-affected positions that their expectations should be honored. It concludes with a caution against the deep entrenchment of tax exemptions, because of the obstacles such entrenchment creates for the evolution of the federal taxes. Roth converters will be among those with the highest interest in preserving the income tax, since it is that tax that they have pre-paid.
California, Other States Consider Tax Hikes on 'Millionaires'
- Wall Street Journal editorial, California's Millionaire Tax Mirage: A New Report Says Jerry Brown's Revenue Projections Are Fanciful:
Governor Jerry Brown insisted in his State of the State speech last week that California is "still the land of dreams." He's certainly right if he's referring to his latest fantasy that raising taxes on the upper middle-class will generate an additional $5 billion annually over the next five years, eliminate the state's chronic budget deficits and pay down a large portion of its debt. Fortunately, the state's Legislative Analyst's Office, of all unlikely Sacramento institutions, has checked in from realityville.
In a new report, the office warns that the initiative that Mr. Brown wants to put on the November ballot to raise taxes on top earners might not generate as much revenue as he projects because their income is extremely volatile. Mr. Brown wants to increase the rates on individuals making between $250,000 and $300,000 to 10.3% from 9.3% and to 10.8% for those earning up to $500,000. The "millionaires" earning more than $500,000 would pay 11.3%.
The top 1% of earners already pay about 40% of the state's income taxes, a large chunk of which is on capital gains that are taxed at the same rate as wages. In the past, changes in the economy and stock prices have caused huge fluctuations in capital gains income and tax revenue. ...
Mr. Brown's plan has little to do with economic reality. It's all about the politics of dreams, pretending that higher rates will produce more revenue in order to spend more, and hoping the economy booms again to bail him out. The Governor is also betting that his proposal to trigger $5 billion of education spending cuts if the tax hikes don't pass will scare the 99% enough to sock it to the 1%. If voters fall for it, they'll get the economy and deficits they deserve.
- California Legislative Affairs Office, Overview of the Governor's Budget:
We are concerned that the administration's current method of forecasting high–income filers' income—especially capital gains—tends to overestimate state revenue growth from the PIT over the next few years, including revenue growth that would result from the Governor's tax initiative. Figure 7 shows historical net capital gains of California resident tax filers, as well as both our office's November 2011 estimates and DOF's current estimates. ...
- Wall Street Journal, California's Brown Pushes Tax Boost:
On Wednesday, Mr. Brown briefly talked up his tax measure, which calls for increasing income taxes for people making $250,000 and up by as much as two percentage points from 2012 through 2017, and boosting the sales tax of 7.25% by half a percentage point from 2013 through 2017.
Mr. Brown described as "fair" a combination of tax increases and cuts in his proposed budget for the fiscal year ending in June 2013. The administration expects the tax changes to generate $6.9 billion by the end of the 2013 fiscal year to help close a budget gap of $9.2 billion.
- Los Angeles Times, In New Jersey, Chris Christie takes a shot at Jerry Brown:
Across the country in New Jersey, Gov. Chris Christie took shots at Brown’s tax hike proposal while pushing for a cut in his state’s income tax.
“California’s governor has proposed to raise the top rate, already among the highest in the nation, by up to two percentage points,” said Christie, a Republican. He added, “In this environment, the best way to compete is to show a different direction. Let others choose tax increases. We choose responsible tax cuts to give our overburdened citizens real relief.”
- Huffington Post, State Tax Hikes On Wealthy Proposed By California, Maryland Governors:
This week, a pair of governors called for something that just two years ago might have been politically untenable: permanent targeted state tax increases on the rich.
First, Maryland Gov. Martin O'Malley called on the state legislature Tuesday to approve a tax hike on individuals earning $100,000 or more and couples taking in above $150,000.
Then on Wednesday, California Gov. Jerry Brown said his administration will attempt to place on the ballot a measure that could raise income taxes on those earning more than $250,000.
The governors' proposals are still far from becoming state tax policy. But their pitches might mark a turn toward strategies to shore up state budgets by imposing new taxes rather than the drastic cuts or temporary surcharges on the well-to-do that were commonplace during the recession, state finance experts say.
"It's early, but there does seem to be a bit of an uptick in governors proposing tax increases on the rich," said Jon Schure, director of state fiscal strategies at the Center on Budget and Policy Priorities, a Washington think tank. "The public is more receptive to that idea now. They have seen a few years of what cuts look like. They know what college costs after budget cuts are made. They know that there are certain days of the week you can’t go to the library or ... how many kids are in their child's class at school. And they don’t like it."
As the "tax the rich" debate rages in Washington D.C., some states are turning to their wealthiest residents to bring in much-needed revenue. The governors of the two largest Democratic states want rich folks to help close budget gaps. And Democratic lawmakers elsewhere are preparing to do battle with Republican leaders to blunt budget cuts by instituting a millionaire tax. This marks a shift from last year, when state leaders largely shied away from raising taxes in general. Several cash-strapped states, including Maryland, New Jersey and Oregon, let their millionaire taxes lapse.
- Bloomberg, California’s $500K Earners Dwindle
- Bloomberg, ‘Facebook Effect’ Could Boost California Budget Through Capital-Gains Tax
- Bloomberg, Millionaires Back Buffett Tax If They’re Exempt
Journal of Taxation of Investments Publishes New Issue
- Yoram Keinan (Greenberg Traurig, New York), The Uneasy Case of Assignment of “Underwater” Derivative Positions, 29 J. Tax'n Inv. 3 (Winter 2012)
- Michael R. Pieczonka (Handler Thayer, Chicago), Catching the Wave: Reassessing Wealth Transfer Plans in Light of Current Economic Conditions, 29 J. Tax'n Inv. 23 (Winter 2012)
- Gerald R. Nowotny (Long Gray Line Consulting, New York), Private Placement Group Variable Annuity Contracts—A Market Overview for Tax-Exempt and Foreign Investors, 29 J. Tax'n Inv. 49 (Winter 2012)
- Robert N. Gordon (Twenty-First Securities Corp., New York), Trader or Investor? Massachusetts Weighs in and the After-Tax Return of Investing Hangs on the Answer, 29 J. Tax'n Inv. 69 (Winter 2012)
- Erik M. Jensen (Case Western), Business Versus Nonbusiness Bad Debts: Dagres v. Commissioner Presents New Variations on an Old Theme, 29 J. Tax'n Inv. 73 (Winter 2012)
- Michael McGowan, Nicolas de Boynes & Andrew Thomson (all of Sullivan & Cromwell, New York), The European Commission Draft Directive on Financial Transaction Tax and its Implications, 29 J. Tax'n Inv. 83 (Winter 2012)
Shaviro: The Financial Transactions Tax versus (?) the Financial Activities Tax
The 2008 financial crisis has provoked widespread interest in developing new taxes to apply to the financial sector. In particular, the Staff of the International Monetary Fund has suggested enactment of a financial activities tax (FAT), while the European Commission has proposed a financial transactions tax (FTT). This article discusses the FAT and FTT models that have featured in historical and more recent discussion, and evaluates them in light of the objectives stated by the European Commission, along with broader tax policy considerations. It concludes that there is a strong case for enacting an FAT, and that two alternative versions of this tax have competing pluses and minuses. With respect to the FTT, it concludes that the rationales advanced by the European Commission are unpersuasive, but that an argument could perhaps made for the tax – subject to concern about its clear inefficiency at certain margins – based on the goal of discouraging the socially excessive pursuit of trading profits (or if better instruments for raising revenue and increasing progressivity are politically unavailable).
For more, see here.
Bocconi University Seeks to Hire a Tax Prof
Bocconi University seeks to hire an Associate Professor in Tax Law:
The Department of Legal Studies invites applications from outstanding Associate Professors who can contribute to its growing School in the field of Tax Law. Successful candidates will be able to provide clear evidence of intellectual excellence and will have several important publications in the leading journals in their field; moreover, they will have a consolidated experience of teaching at undergraduate or postgraduate level.
Salaries, research funds and teaching loads are competitive with leading academic international institutions. Statement of interest and CV should be submitted via e-mail by writing in the subject line "Law - Senior Hiring". Applications will be considered until January 31st, 2012.
Newt Gingrich Used 'John Edwards Sub S Tax Shelter' to Save $50k in Medicare Taxes
Forbes, Gingrich Used Payroll Tax Ploy Often Attacked By IRS, by Janet Novack:
Newt Gingrich avoided tens of thousands of dollars in Medicare payroll taxes in 2010 by using a technique the IRS has consistently and successfully attacked. Republican Presidential candidate Gingrich and his wife, Callista, treated only $444,327 of what they got from Gingrich Holdings. Inc. and Gingrich Productions as compensation to them, while reporting a whopping $2.4 million of their earnings from these corporations as profits or dividends. Medicare taxes are levied at a rate of 2.9% on an unlimited amount of compensation and self-employment income (say, from a consulting contract, speeches or a book) but not on profits from a business.
“It appears that he is not paying his fair share of Medicare tax,’’ Robert E. McKenzie, a partner in the Chicago law firm of Arnstein & Lehr LLP concluded, in an email to Forbes, after reviewing Gingrich’s 2010 tax return. McKenzie, a past chairman of the Employment Tax Committee of the American Bar Association Tax Section and a member of the IRS’ Advisory Council, added: “There are a multitude of cases where the IRS has successfully challenged the improper tax strategy of this candidate and his accountants. Service businesses are only allowed to distribute a fair return on investment from an S corp. as profits exempt from Medicare taxes. The remainder of profits must be paid as salary subject to a 2.9% Medicare tax levy.”
Since Gingrich released his 2010 tax return Thursday night during the Republican debate, news coverage has focused on his hefty income tax rate—he paid tax equal to 31.5% of his adjusted gross income of $3.14 million. By contrast, former Massachusetts Gov. Mitt Romney, who earned a fortune at Bain Capital and gets most of his income from investments, acknowledged last week that he pays closer to 15%. ...
Neither a Gingrich spokesman nor his accountant returned requests for comment.
President Barack Obama reported all of his $1.4 million in 2010 book profits as subject to Medicare taxes. Still, Gingrich’s strategy, while frowned upon by the IRS, is hardly unusual. High-earning self-employed individuals have had an incentive to form S corps. and report big profits instead of big wages since 1993, when Congress lifted the cap on the amount of earnings subject to the 2.9% (combined employer and employee) Medicare tax. Back in 1998, when he was a trial lawyer, John Edwards, the former North Carolina Senator and Democratic presidential candidate who is now awaiting trial for alleged campaign violations, reported a salary of $360,000 and profits of $5 million from his S corp. law practice. Congress’ Government Accountability Office, in a report released two years ago, estimated that in 2003 and 2004, S corps. underpaid wages to their owners by $24 billion, skirting payroll taxes on that amount.
- Court Gives IRS Rare Win in 'John Edwards Sub S Tax Shelter' Case (Jan. 24, 2011)
- More on the 'John Edwards Sub S Tax Shelter' (Feb. 6, 2011)
- More on the 'John Edwards Sub S Tax Shelter' Case (June 5, 2011)
- Schwidetzky: Musings on Watson and the John Edwards Sub S Tax Shelter (June 5, 2011)
Sullivan: Romney's Other Tax Break
Was it creative destruction or vulture capitalism? Whatever you call what Mitt Romney did at Bain Capital, it is now a multi-pronged challenge to his presidential aspirations. Just the mention of investment shops like Bain can stir up resentment with the voters still looking for jobs and seething over the collapse of 2008.
Then there is the tax angle. When he left Bain in 1999, Romney negotiated a retirement package that gave him a share of the company's skyrocketing profits for at least a decade after his departure (Buyout Profits Keep Flowing to Romney, The New York Times, Dec. 18, 2011). The bulk of those profits were carried interest -- consulting fees paid to managing partners conditioned on upside gain for investors. The payouts were likely taxed at 15 percent. For a man with an estimated net worth of a quarter-billion dollars, a tax rate lower than middle-income families' does not sit well with voters who are daily reminded of increasing inequality, especially when Romney is proposing a plan that cuts taxes on the rich and raises taxes on the poor (Tax Policy Center, The Romney Tax Plan, Jan. 5, 2012).
Just as many Wall Streeters feared, Romney's rising presidential fortunes are threatening their monetary fortunes. The long-simmering debate about the tax treatment of carried interest is being reignited. On January 18 House Ways and Means Committee ranking minority member Sander M. Levin, D-Mich., announced his plans to reintroduce legislation to treat carried interest as ordinary income rather than capital gains. This is just the opening salvo. If Romney wins the Republican nomination, the president's populist reelection campaign will ensure that the carried interest controversy goes prime time.
Despite the media coverage of everything Romney and Bain, there is another significant tax policy issue concerning the business that has been left unmentioned. Like all investment houses that do leveraged buyouts, Bain created value for its investors by increasing debt levels and reducing taxes of its target companies. Bain profited from a dangerous flaw in our corporate tax that subsidizes destabilizing financial structures.Distribution of $40 Million of Operating Income Before and After a Leveraged Buyout
Source: Example from Joint Committee on Taxation, Present Law and Background Relating to Tax Treatment of Business Debt, JCX-41-11, July 11, 2011, p. 70.
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Mitt Romney to Release 2010 Tax Return, 2011 Tax Estimate, on Tuesday
- Linda Beale
- Financial Times
- The Hill
- David Cay Johnston
- New York Times
- Wall Street Journal
- Washington Post
Villanova Seeks to Hire Two VAPs
Villanova seeks to hire two VAPs for the 2012-13 academic year:
Villanova University School of Law, a Catholic and Augustinian institution, invites applications for its Visiting Assistant Professor (VAP) Program. Visiting Assistant Professors will be hired for a one-year term, beginning in the summer of 2012. The Law School anticipates hiring two VAPs for the 2012-2013 academic year.
At Villanova, VAPs will have the opportunity to participate fully in the intellectual life of the Law School, including faculty workshops and symposia, and will be offered mentoring and other institutional support to develop their scholarship and teaching skills. Each VAP will teach one class each semester. Course assignments will be made by the administration based upon academic needs and the individual VAP’s research and teaching interests. The salary and benefits will be nationally competitive and commensurate with qualifications and experience.
Applications should include a cover letter, curriculum vitae, brief description of the applicant’s scholarly agenda, list of classes that the applicant is willing to teach, and list of references. Applications will be accepted until March 1, 2012, or until the positions are filled. Applications should be submitted via e-mail to the Chair of the Faculty Appointments Committee, Professor Jennifer O’Hare,
TaxProf Blog Weekend Roundup
- Law School Applications Fall 15%
- Smith: The APA's Reasoned-Explanation Rule and IRS Deficiency Notices
- O'Donnabhain: Tax Policy and Gender Identity Disorder
- The Need for a Tax Subsidy for Bicycle Commuting Expenses
- Mankiw: Four Steps to a Better Tax System
- Top 5 Tax Paper Downloads
- NFL Final Four: Boston, New York, and San Francisco Trump Baltimore in Lower Taxes
- AEI: Pro-Growth, Progressive Tax Reform
January 22, 2012
Mankiw: Four Steps to a Better Tax System
New York Times op-ed, A Better Tax System (Assembly Instructions Included), by N. Gregory Mankiw (Harvard University, Department of Economics):
It's that time again. Start filing all those W-2s, 1099s and scraps of paper you’ll need for your annual tax return. No doubt, this isn’t your favorite activity. At some point, you may ask yourself whether there’s a better way.
There is. Economists who study public finance have long agreed with William E. Simon, the former Treasury secretary, who said that “the nation should have a tax system that looks like someone designed it on purpose.” Here are four principles of tax reform that most of those economists would endorse:
- Broaden the Base and Lower the Rates
- Tax Consumption Rather Than Income
- Tax Bads Rather Than Goods
- Keep It Simple, Stupid
Filling out tax returns will never be a delight. But if reform included simplification, the task might become a bit less onerous. And if a few accountants and tax lawyers were induced to become engineers and doctors instead, society will have moved a big step in the right direction.
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 new papers debuting on the list at #4 and #5:
1. [741 Downloads] Nine Bean-Rows LLC: Using the Limited Liability Company to Hold Vacation Homes and Other Personal-Use Property, by J. William Callison (Faegre & Benson, Denver)
2. [559 Downloads] Offshore Accounts: Insider’s Summary of FATCA and its Potential Future, by J. Richard (Dick) Harvey (Villanova)
4. [96 Downloads] Wills for Everyone: Helping Individuals Opt Out of Intestacy, by Reid K. Weisbord (Rutgers-Newark)
5. [87 Downloads] 'Early-Bird Special' Indeed!: Why the Tax Anti-Injunction Act Permits the Present Challenges to the Minimum Coverage Provision, by Michael C. Dorf (Cornell) & Neil Siegel (Duke)
NFL Final Four: Boston, New York, and San Francisco Trump Baltimore in Lower Taxes
Wall Street Journal op-ed, How Sunday's NFL Cities Became Champs, by Steve H. Hanke & Stephen J.K. Walters (both of Johns Hopkins):
This Sunday's NFL championship games have it all: future Hall-of-Famers in abundance, jet-fueled offenses, bone-crushing defenses, and even a pair of coaches vying to bring a sibling rivalry to Super Bowl Sunday in two weeks.
And if you're a fan of cities more than their sports teams, you know that these games feature genuine superstars: Boston, New York and San Francisco are magnets to residents and employers, engines of prosperity, and league leaders on any quality-of-life measure.
Then there's our hometown. Baltimore is in need of a strategy for urban revival—the type of elixir that turned the other three cities around.
Some historical perspective is in order. Three decades ago, none of these cities worked very well and all were losing residents. Between 1950 and 1980, New York's population declined 10%, San Francisco's 12%, Baltimore's 17% and Boston's an astounding 30%. ...
Then, around 1980, some cities that had been in decline enjoyed dramatic reversals of fortune. Between 1980 and 2010, Boston's population grew 10%, New York's 16%, and San Francisco's 19%. But Baltimore continued its descent, losing another 21% of its residents....
All these cities had long pursued progressive political agendas with pride. But the problem with redistributive policies at the local level is that the donor classes might move out as fast as beneficiary classes move in—or, as the population figures cited earlier show, even faster. ...
San Francisco and Boston were rescued from their folly by statewide tax revolts. ... New York City taxpayers did not revolt, but state legislators rationalized the Big Apple's chaotic property tax system in 1981; it now enjoys property tax rates that average about one-third of those in its surrounding suburbs (though its other taxes are certainly punishing).
While no single factor explains any city's destiny, it is not a mere coincidence that Boston, New York and San Francisco reversed their declines at the exact moment they became favorable environments for private investment in residential and business capital.
Baltimore has blithely ignored basic property-rights theory. When high property taxes chased many residents and business owners to the suburbs, the city raised rates further. When grandiose slum-clearance and transit plans destabilized neighborhoods, Baltimore's one-party establishment arranged eminent-domain seizures and pushed even more "big footprint" renewal projects.
The results leave no doubt about which strategy is more effective. Baltimore's real, median household income has been stagnant for the last three decades. New York's has risen 22% while Boston's and San Francisco's have soared by half. Baltimore's 2009 homicide rate was 4.7 times Boston's and 6.7 times New York's and San Francisco's.
Baltimore is no different from other cities wedded to policies that repel investment. All try to make up for this deficiency via capital allocation by government—and all show disappointing results. As this weekend's championship cities demonstrate, greater respect for private capital and some protections for the property rights of its owners can have miraculous effects. Someday, even Baltimore might call that play.
AEI: Pro-Growth, Progressive Tax Reform
Following up on last week's post on the American Enterprise Institute's program on Taxing Innovation in a Global Economy (video here): AEI has released A Pro-Growth, Progressive, and Practical Proposal to Cut Business Tax Rates:
The US tax code has eroded over time with the explosion of endless special provisions, such as distortionary deductions and ineffective credits. Now is the time to take a good look at reforming it. This Outlook outlines six simple—and bipartisan—changes to the tax code that can help the country move toward a tax code aimed towards economic growth and away from complex regulations and political favoritism. While containing the types of compromises necessary for political achievement, this plan provides a pro-growth solution by broadening the tax base and reducing the tax rate on business investment.
January 21, 2012
Law School Applications Fall 15%
- Applicants: 31,815, down 16.7% from last year
- Applications: 233,361, down 15.3% from last year
Smith: The APA's Reasoned-Explanation Rule and IRS Deficiency Notices
Patrick J. Smith (Ivins, Phillips & Barker, Washington, D.C.), The APA's Reasoned-Explanation Rule and IRS Deficiency Notices, 134 Tax Notes 331 (Jan. 16, 2012):
The D.C. Circuit’s confirmation in Cohen that the Administrative Procedure Act (APA) applies to the IRS raises the question of what that application will mean. The APA’s arbitrary and capricious standard for judicial review of agency action incorporates a requirement that agencies provide contemporaneous reasoned explanations for their actions, which clearly applies to IRS regulations. This report contends that the APA’s reasoned explanation requirement also applies to IRS deficiency notices. Pre- APA case law held that IRS deficiency notices need not contain any explanation, but this conclusion has not been reexamined in light of the act’s arbitrary and capricious standard. The pre-APA conclusion that IRS deficiency notices need no explanation cannot stand when reconsidered in light of the APA’s reasoned explanation requirement.
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O'Donnabhain: Tax Policy and Gender Identity Disorder
Alesdair H. Ittelson (J.D. 2011, UC-Berkeley), Recent Development, Trapped in the Wrong Phraseology: O'Donnabhain v. Commissioner--Consequences for Federal Tax Policy and the Transgender Community, 26 Berkeley J. Gender L. & Just. 356 (2011):
The U.S. Tax Court's 2010 decision in O'Donnabhain v. Commissioner reinterprets the scope of the medical expense deduction by authorizing the deduction of surgical treatment for Gender Identity Disorder (GID). After explaining the tax framework upon which the O'Donnabhain decision rests, this Recent Developments piece describes the decision and examines its consequences for the U.S. federal budget and the medicalization of the transgender community. The author concludes that O'Donnabhain will not significantly widen the pool of deductible medical care outside of sexual reassignment surgery and hormone therapy. The author applauds O'Donnabhain as a victory for those seeking to deduct expenses incurred in the treatment of GID but cautions that the decision may enforce a homogenous, medicalized model of the “ideal” transgender body.
The Need for a Tax Subsidy for Bicycle Commuting Expenses
Jennifer L. Shoulberg (J.D. 2011, St. Louis), Comment, Pedaling Toward a More Equitable Tax-Ride for Cyclists, 55 St. Louis U. L.J. 423 (2010):
Through the discussion of the historical treatment of similar employee commuting benefits and the application of a tax expenditure analysis, this comment sought to highlight the inequities and negative social policies reflected in our Tax Code. After looking back at the historical treatment of similar employee commuting benefits, it is clear that as we go forward into the next decade, we must change the current treatment of transportation fringe benefits under the Tax Code.
As stated in the introduction, our tax laws reflect our vision of who we are as a society and how we perceive ourselves. Under our current tax laws, the generous parking subsidies reward fuel consumption and pollution, while concurrently discouraging commuting by mass transit, carpools, and bicycles. To more accurately reflect our nation’s commitment to resolving the global energy crisis and to reducing our nation’s dependence on fuel, the Tax Code needs to be reformed. Specifically, the maximum nontaxable reimbursement for bicycle commuting expenses should be increased. Further, employees should be permitted to receive nontaxable benefits for bicycle commuting expenses and commuter highway vehicle and transit pass benefits concurrently. Such changes would not only eliminate the bias existing in the current code in favor of parking benefits which encourage socially undesirable behavior, but would also act as an incentive for employees to choose alternative methods of transportation.
January 20, 2012
Kleinbard Presents Reimagining Capital Income Taxation Today at San Diego
This PowerPoint presentation outlines a larger project to define a practical and intellectually coherent system for the taxation of capital income. The project rejects the "ideal" income tax as not in the least bit ideal, but also rejects exclusive reliance on consumption taxes. Instead, the project embraces dual income tax principles -- the idea that capital income (or at least normal returns on capital) should be taxed at one relatively low rate, while labor income is taxed at progressive rates with a higher maximum. The presentation suggests how dual income tax principles can be married to the author's Business Enterprise Income Tax work to produce a robust and reasonably accurate measure of capital income and then to tax that income separately from labor income.
Johnston: Honey, They Shrunk the IRS
Congress will spend a trillion dollars more than it levies this year, so how do Washington’s politicians respond to the 11th consecutive year of federal budgets in red ink? They plan to shrink the IRS.
Go figure. Cutting the IRS budget by more than 5% in real terms makes as much sense as a hospital firing surgeons or a car dealer laying off salespeople when customers fill the showroom.
Shrinking the IRS makes sense if you believe government is too big and that cutting everywhere is the best way to shrink government. But this is the staff that generates revenue, and there is easy money to be made.
Congress should listen to the national taxpayer advocate, a position it created to make sure taxpayers had a voice in how the IRS operates. In her annual report, released last week, advocate Nina Olson said Congress needed to “ensure that the IRS continues to be effective, either by reducing the IRS’ workload or by providing adequate funding to enable it to accomplish its assigned mission.”
Instead of cutting, we should be expanding the revenue-generating staff because there is plenty of tax money to be had, even in this awful economy. ...It makes no economic sense to trim the ranks of auditors who generate more than a hundred times their annual salaries. Run a business that way and you go broke. ... Two decades ago, when the economy was a third smaller, the IRS staff numbered about 118,000. Now it numbers 95,000 and is on the way to about 90,000. The likelihood of a big company being audited has plummeted 50 percentage points from 72% in 1990 to 22% in 2010. ...
Whether you like the corporate income tax or think it is an abomination, failing to enforce it with the same rigor as taxes on wage earners and most investors is indefensible on economic, budget deficit and moral grounds.
IRS budget cuts worsen budget deficits and send a corrosive signal that only chumps file honest tax returns. So you have a choice. Do nothing and suffer the consequences or call your congressman, senators and the White House — today — and then vote in politicians who support, rather than undermine, tax law enforcement.
More on Mitt Romney's Tax Returns
Following up on this morning's post, Caron: Romney Is Surprisingly Ill-Prepared on Tax Issue:
- Bloomberg, Harvard MBA Degree Earns Romney ‘C-’ on Tax Plan, by Caroline Baum
- Forbes, Mitt Romney's Teachable Moment on Capital Gains, by Len Burman
- The Hill, Romney Says He Won’t Release His Tax Returns Just Because His Dad Did
- New York Daily News, Mitt Romney Booed at GOP Debate in South Carolina on Taxes
- New York Times, Opinionator: Can I See Your Tax Return?, by David Brooks & Gail Collins
- New York Times, Romney Shares Some Tax Data; Critics Pounce
- New York Times, Why Taxes Aren’t as High as They Seem, by David Leonhardt
- Politico, Mitt Romney Tax Returns Issue Causes Him to Battle Plutocrat Image
- Start Making Sense, Romney Caymans Tax Planning Follow-up, by Dan Shaviro
- Start Making Sense, What is Mitt Romney's Effective or Average Tax Rate?, by Dan Shaviro
- Tax Policy Blog, Romney’s Tax Returns and Effective Tax Rates of the Rich, by Scott A. Hodge
- Wall Street Journal editorial, How Much the Rich Pay Mitt Romney, the 1% and Taxes
Vodafone Wins $2.2 Billion Tax Case in India
- New York Times
- Press Trust of India
- Tax Justice Network
- The Times of India
- Wall Street Journal
Does Tax Deferral Enhance Firm Value?
Recent research provides evidence that corporate tax departments and tax directors have incentives to reduce financial statement effective tax rates, but little or no incentive to reduce cash taxes paid. The lack of managerial incentives to reduce cash taxes paid provides a stark contrast to the benefits of tax deferral espoused by tax professionals and academics, raising the question: Does tax deferral actually enhance firm value? We examine whether the difference between financial statement tax expense and current taxes paid (i.e., current year tax deferral) is associated with a firm’s change in future profitability and market returns. We find positive associations between current year tax deferral and both the change in next period profitability and stock returns in months around the Form 10-K release date. We also find that these associations increase for firms with greater investment opportunities, financial constraints, and, to a lesser extent, strong corporate governance. These results suggest both profitability and market return benefits associated with tax deferral, consistent with tax deferral enhancing firm value.
Caron: Romney Is Surprisingly Ill-Prepared on Tax Issue
One of the lessons of modern American presidential history is that there is nothing more devastating than turning a candidate's supposed strength into a weakness. Karl Rove masterfully made John Kerry's distinguished military service a liability through a series of Swift Boat attacks in the 2004 campaign.
Mitt Romney's fumbling response to questions about his tax returns similarly threatens to destroy the central premise of his candidacy that his business acumen will help him lead the country out of its current economic troubles.
For someone who has been running for president for six years, Romney is surprisingly ill-prepared to discuss his tax returns.
AEI Hosts Conference Today on Taxing Innovation in a Global Economy
The American Enterprise Institute hosts a program today on Taxing Innovation in a Global Economy:
In today's global economy, countries must constantly compete for corporations' research activities. However, U.S. tax policy lags behind many other developed countries in attracting firms' research and development (R&D) centers, a key source of jobs and economic growth. The OECD's Science and Technology Scoreboard ranked the U.S. as 24th lowest out of 38 countries in terms of tax incentives per dollar of R&D. Recognizing the economic importance of the innovation R&D fosters, six European Union member countries in the last decade have adopted reduced tax rates for income derived from patents and certain other intellectual property. And the United Kingdom recently released details of a 10 percent rate on income derived from new innovations, to take effect in 2013. With the increased mobility of research activities and intellectual property, this conference will focus on how countries should tax innovative activities, answering important questions for countries that seek to promote economic growth through innovation.
- John Samuels (General Electric), Kevin A. Hassett (American Enterprise Institute)
Panel #1: Innovation Tax Policy Around the World:
- Michael Graetz (Columbia) (moderator)
- Rebecca Lei Wang (PricewaterhouseCoopers), China's Innovation Tax Policy
- James Shanahan (PricewaterhouseCoopers), R&D Tax Incentives)
Panel #2: How Effective Are Tax Incentives at Encouraging R&D?
- Mihir Desai (Harvard) (moderator)
- Nirupama Rao (NYU)
- Comments: Rosanne Altshuler (Rutgers)
Panel #3: Corporate Tax Policy and the Location of Innovative Activity:
- Matthew Slaughter (Dartmouth) (moderator)
- Rachel Griffith (University of Manchester), Helen Miller (Institute for Fiscal Studies)
- Comments: C. Fritz Foley (Harvard University)
Panel #4: How Should the United States Tax the Returns to Innovation?
- James Hines (Michigan) (moderator)
- Alan Auerbach (UC-Berkeley)
- Michael Graets (Columboa),
- Paul Oosterhuis (Skadden)
- Stephen Shay (Harvard)
Tax Analysts Hosts Conference Today on Taxes and Small Business
Tax Analysts hosts a roundtable discussion today on Taxes and Small Business:
- George Assimakopoulos (Founder and CEO, Eye Traffic Media)
- Christopher E. Bergin (President and Publisher, Tax Analysts) (moderator)
- John L. Buckley (Professor, Georgetown Graduate Tax Program)
- Martin A. Sullivan (Contributing Editor, Tax Analysts)
- Don Williamson (Professor and Executive Director, Kogod Tax Center)
Thomson Reuters to Sell Foundation Press, West
Earlier today, Thomson Reuters announced that it is exploring strategic options for its Law School Publishing (LSP) business consisting of the West Academic Publishing, Foundation Press and Gilbert imprints, including a potential sale. Although LSP is an outstanding business with a long history of serving law school faculty and students, the company has made the decision to focus on growing from its core of subscription-based research and reference products, workflow solutions, software and services.
We are just beginning the divestiture process and do not expect any potential sale to be completed until the second quarter of 2012 at the earliest. In the meantime, we will operate our business as usual. We will continue to deliver our products and honor our ongoing commitment to providing the quality and service you have come to expect throughout the business's long and successful history.
A Financial Transactions Tax: Inefficient or Needed Systemic Reform?
Ross P. Buckley & Gill North (both of the University of New South Wales, Faculty of Law), A Financial Transactions Tax: Inefficient or Needed Systemic Reform?:
The European Commission has included a Eurozone financial transaction tax in its longterm budget, as a first step towards a global tax. This move was taken despite negative European Commission and International Monetary Fund staff reports, which concluded that a tax would reduce the efficiency of capital markets, and raise the cost of capital. The efficiency frameworks used in the staff reviews were unduly narrow. Markets work best when there are strong links between market trading and real economic activity. Of late, these links have become increasingly tenuous and latent market and financial system risks are mounting. Carefully calibrated legal and tax responses are required to change market behaviour. Such a tax as part of an integrated policy framework would reduce short-term momentum trading and promote longer-term investment that would better reflect underlying economic fundamentals. So we argue the European Commission is correct in proposing to adopt such a tax.
January 19, 2012
Mason Presents Federal-State Tax Base Conformity Today at Duke
Congress uses the income tax to regulate. Because states impose their own income taxes on the federally-defined income tax base, rather than on separately determined state tax bases, states automatically import federal policies into their own tax systems. But federal tax policies reflect national, not local, political choices. This Article calls attention to the practice of tax base conformity and to its advantages and drawbacks. Conformity conserves legislative, administrative, and judicial resources, and it reduces taxpayers’ compliance burdens. At the same time, however, conforming states cede tax autonomy to the federal government, thereby exposing themselves to revenue volatility stemming from the ever-changing federal tax law. Additionally, conformity jeopardizes the values served by federalism, including regulatory competition, diffusion of power, promotion of local values and policy preferences, and policy experimentation. Conformity also imports the defects of the federal tax base into state tax law. While the significant administrative and compliance advantages of federal-state tax base conformity suggest that it is here to stay, this Article makes recommendations for reducing its adverse impacts and for further study.