February 23, 2012
Romney, Marriott, and the Son of BOSS Tax Shelter
Bloomberg, Romney as Audit Chair Saw Marriott Son of BOSS Shelter Defy IRS, by Jesse Drucker:
During Romney’s tenure as a Marriott director, the company repeatedly utilized complex tax-avoidance maneuvers, prompting at least two tangles with the IRS, records show. In 1994, while he headed the audit committee, Marriott used a tax shelter known to attorneys by its nickname: “Son of BOSS.”
A federal appeals court invalidated the maneuver in a 2009 ruling, siding with the U.S. Department of Justice, which called Marriott’s transaction and attempted tax benefits “fictitious,” “artificial,” “spectral,” an “illusion” and a “scheme.” Marriott had argued the plan predated government efforts to close such shelters.
Employing another strategy, Marriott legally avoided hundreds of millions of dollars in income taxes thanks to a federal tax-credit program criticized and allowed to expire by Congress. Marriott has also shifted profits to a Luxembourg shell company. During Romney’s years on the board, Marriott’s effective tax rate dipped as low as 6.8%, compared with the federal corporate statutory rate of 35%.
ataxingmatter, Romney's Association with Corporate Tax Shelter Schemes, by Linda Beale (Wayne State):
First, as the Bloomberg.com article points out, Romney claims that his business experience is the primary reason that Americans should want to see him in the White House. Contrary to his claim, it seems to me that the more we hear about his business experience the less I think he is suited to the White House....
Second, major corporations aren't paying enough--much less too much --in taxes these days.
Camp Presents Taxation of Electronic Gaming Today at San Diego
This paper examines the practical relationship between income and consumption in the context of electronic gaming, which I define as wagers made using some electronic accounting device, either in the form of a casino player card or an on-line player account. My thesis is that only those amounts that taxpayers ultimately transfer from their player cards or online accounts into some form of governmental currency or credit should count as “gross income.” Amounts merely credited to taxpayers’ cards or accounts should not qualify. Cutting against my thesis is a long-standing tax doctrine called “constructive receipt.” That doctrine applies when a taxpayer has the ability to accept income but declines. I argue that applying the constructive receipt doctrine to electronic gaming converts what should be a tax on income into a tax on consumption. This paper continues an exploration of the relationship between the economic and legal concepts of income which I began in The Play's the Thing: A Theory of Taxing Virtual Worlds, 59 Hastings L.J. 1 (2008). Examining the problem of taxing electronic gaming illustrates how the legal and economic concepts of income are and must be different, and illuminates the boundaries between the concepts.
Bruce Bartlett Talks Tax Reform With Jon Stewart
Arthur Laffer's Tax Cut Snake Oil
- Citizens for Tax Justice, Arthur Laffer's Tax Cut Snake Oil
- Citizens for Tax Justice, Arthur Laffer's Bad Data Misleads Lawmakers
- Institute on Taxation and Economic Policy, Arthur Laffer Regression Analysis is Fundamentally Flawed, Offers No Support for Economic Growth Claims
- Institute on Taxation and Economic Policy, “High Rate” Income Tax States Are Outperforming No-Tax States Don’t Be Fooled by Junk Economics
Smith: Standards for Tax Court Review in Equitable Innocent Spouse Cases
Patrick J. Smith (Ivins, Phillips & Barker, Washington, D.C.), Standards for Tax Court Review in Equitable Innocent Spouse Cases, 134 Tax Notes 981 (Feb. 20, 2012):
In a case pending in the Ninth Circuit [Wilson v. Commissioner, No. 10-72754 (9th Cir. 2011)], the government argues that the Tax Court has applied overly restrictive standards of review to IRS denials of equitable innocent spouse relief under § 6015(f). However, the government accepts that those standards of review are proper under the same grant of jurisdiction when applied to IRS denials of relief under § 6015(b) and (c). There is no satisfactory justification for this inconsistency. There is an equally unjustified inconsistency in the government’s position that the Administrative Procedure Act (APA) dictates less restrictive standards of review for denials of relief under § 6015(f) than for denials under § 6015(b) and (c). Moreover, the government’s APA argument is based on a fundamental misunderstanding of the provisions of APA § 559 on the relationship between the APA and other law.
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Mitt Romney's New Tax Plan
Mitt Romney’s Bold, Pro-Growth Tax Cut Proposal
Reducing and stabilizing federal spending is essential, but breathing life into the present anemic recovery will also require fixing the nation’s tax code to focus on jobs and growth. To repair the nation’s tax code, marginal rates must be brought down to stimulate entrepreneurship, job creation, and investment, while still raising the revenue needed to fund a smaller, smarter, simpler government. The principle of fairness must be preserved in federal tax and spending policy.
Part One: Jumpstart Pro-Growth Changes In Individual Taxation
America’s individual tax code applies relatively high marginal tax rates on a narrow tax base. Those high rates discourage work and entrepreneurship, as well as savings and investment. With 54 percent of private sector workers employed outside of corporations, individual rates also define the incentives for job-creating businesses. Lower marginal tax rates secure for all Americans the economic gains from tax reform.
- Make Permanent, Across-The-Board 20 Percent Cut In Marginal Rates. This bold stroke reduces the tax on the next dollar of income earned for all taxpayers. The new top rate of 28 percent returns to the top rate signed by President Reagan in 1986.
- Pro-Growth. These tax cuts – relative to President Obama’s proposal to raise the tax rates on the most successful business owners – will increase wages in non-corporate businesses by 6 percent, increase investment by 10 percent, and increase business receipts by 16 percent. (Robert Carroll et al., “Income Taxes and Entrepreneurs’ Use of Labor,” Journal Of Labor Economics, 4/2000; Robert Carroll et al., “Entrepreneurs, Income Taxes, and Investment,” in Does Atlas Shrug? The Economic Consequences Of Taxing The Rich, 2002; Robert Carroll et al., “Personal Income Taxes and the Growth of Small Firms,” Tax Policy And The Economy, 2001)
- Fiscally Responsible. Government cannot continue to increase irresponsibly the size of annual deficits. Stronger economic growth and reductions in spending will help to ensure that these tax cuts do not expand deficits. In addition, higher-income Americans in particular will see limits placed on deductions, exemptions, and credits that are currently available. The result will be a pro-growth tax code that still raises the necessary revenue, retains the existing progressivity, and ensures that middle-income Americans see real tax relief.
- Environment For Job Creation. President Obama has presided over endless debates about temporary tax provisions that have consumed Washington and left businesses and workers uncertain of what they will owe the government. The tax system must not only be flatter, fairer, and simpler, but also stable. Returning policy certainty to pre-Obama levels could create 2.5 million additional jobs in less than two years. (Scott R. Baker et al., “Policy Uncertainty Is Choking Recovery,” Bloomberg News, 10/5/11)
- Promote Savings And Investment For The American People. Mitt Romney will maintain the current 15 percent rate on income from qualified dividends and capital gains. He will cut taxes further on lower- and middle-income Americans by ensuring that families with an annual income below $200,000 will pay no taxes on income from capital gains, interest, and qualified dividends. These low tax rates will create powerful incentives for Americans to save and invest, while spurring business investment and economic growth.
- Compare President Obama. The President’s proposal raises dividend tax rates from 15 percent to more than 43 percent and capital gains tax rates from 15 percent to almost 24 percent with adverse effects on Americans’ equity investments and on business investment.
- Abolish The Death Tax. Eliminating the death tax will allow families to pass assets between generations without complicated tax avoidance schemes and without breaking up family businesses.
- Compare President Obama. Under Obama, the death tax is slated to rise from 35 percent to 55 percent in 2013.
- Repeal The Alternative Minimum Tax (AMT). The AMT was originally implemented in the 1970s with the purpose of ensuring that the wealthiest of Americans could not artificially reduce their tax burden. But if Congress fails to pass the annual AMT patch, many middle-income Americans will become ensnared in the AMT trap. It should be repealed immediately to eliminate harmful distortions in the tax code, and replaced with a simpler tax system that reduces tax avoidance schemes.
Part Two: Make The Corporate Tax System Globally Competitive
The U.S. economy’s 35 percent corporate tax rate is among the highest in the industrial world, reducing the ability of our nation’s businesses to compete in the global economy and to invest and create jobs at home. By limiting investment and growth, the high rate of corporate tax also hurts U.S. wages.
- Cut The Corporate Rate To 25 Percent. It is vital that the U.S. move to quickly reduce the corporate tax rate and put American companies on a level playing field. The high U.S. corporate tax rate handicaps the nation’s overall economy in competition with the rest of the world.
- Pro-Growth. High corporate income taxes have been shown to have a particularly high negative effect on GDP and economic growth rates. Reducing the corporate tax rate will not only create jobs, but also boost wages. A 10 percent rate cut raises wages by an estimated 9 percent. (Scott A. Hodge, “Ten Benefits of Cutting the Corporate Tax Rate,” Tax Foundation, 5/2011)
- Fiscally Responsible. Broadening the corporate tax base, accompanied by greater revenue from increased economic activity and greater corporate investment in the U.S., will cover the cost of the reduction in the corporate tax rate.
- Strengthen And Make Permanent The R&D Tax Credit. This credit promotes innovation in both manufacturing and non-manufacturing industries, and helps businesses plan their innovation spending. With a strong, permanent credit, companies will now be able to invest for the future with confidence.
- Switch To A Territorial Tax System. The United States taxes income on a worldwide basis, regardless of where it is earned. This worldwide system of taxation sets the U.S. apart from most other OECD countries, which have converted to territorial systems of taxation. Japan and the United Kingdom are two countries that recently traded their worldwide tax systems for territorial systems. This switch will promote U.S. interests in two key ways:
- Encourages Domestic Investment Of Foreign Profits. The U.S. system of worldwide taxation (particularly when coupled with the U.S.'s high corporate rate) has the perverse effect of making reinvestments of foreign profits in the U.S. more costly than reinvestments made abroad. A territorial system will avoid the threat of further taxation from precluding a decision to reinvest profits at home.
- Makes U.S. Companies More Competitive In The World Market. The worldwide system burdens the foreign operations of U.S. companies with an added layer of tax not borne by their foreign competitors that are headquartered in the local markets or in other countries with territorial tax systems. This second layer of tax makes U.S. companies less competitive in foreign markets. A territorial system that helps U.S. companies compete in foreign markets will create jobs in the U.S. as well.
- Repeal The Corporate Alternative Minimum Tax (AMT). One major drawback of the Corporate AMT is its effect of penalizing companies that invest in capital equipment. A growing economy depends on robust capital investment. Unfortunately, corporations that are subject to the Corporate AMT are unfairly hit by strict depreciation rules. Due to this chilling effect on capital investment, the corporate AMT must be fully repealed. Investment will no longer be penalized, spurring labor productivity, an increase in American incomes, and greater economic prosperity.
Press and blogosphere coverage:
- Enterprise Blog
- New York Times
- Dan Shaviro (NYU) (here and here)
- Wall Street Journal
- Wall Street Journal editorial
- Washington Post (Ezra Klein)
- Washington Post (Jennifer Rubin)
Bloomberg: 20 More Law Schools to be Sued Over Placement Data
Chris Christie to Warren Buffett: 'Write a Check and Shut Up'
National Jurist: The Truth About Employment for Law School Grads
The Truth About Employment, National Jurist, Feb. 2012, at 24:
On the one hand, critics point out that this is the worst job market in years and law schools mask the depth of the problem with inaccurate or misleading job data. On the other hand, some law schools point out that law has the lowest unemployment rate among professional professions and long-term career satisfaction.
So is it a horrible job market or a very stable profession? The answer, it seems, is 'yes' to both. ...
[T]he percentage of graduates who had employment for which bar passage was required dropped from 74.7% in 2008 to 68.4%. But many in legal education say this does not mean that the other 31.6% of law school graduates made a poor choice. "Law is a generalist education," said Susan Poser, dean at the University of Nebraska College of Law. "It teaches important critical thinking skills. All the ways you can be a lawyer is broader than what we've been able to articulate to the public. ... You are more likely to get a job now if you go to law school than get a Ph.D. in history, where you'd be in worse shape," she said. "It's tough, but still, a very good bet."
February 22, 2012
President Obama Releases Framework for Business Tax Reform
President Obama and the Treasury Department today released a 23-page Framework for Business Tax Reform:
President Obama's Five Elements of Business Tax Reform
- Eliminate dozens of tax loopholes and subsidies, broaden the base and cut the corporate tax rate to spur growth in America: The Framework would eliminate dozens of different tax expenditures and fundamentally reform the business tax base to reduce distortions that hurt productivity and growth. It would reinvest these savings to lower the corporate tax rate to 28%, putting the United States in line with major competitor countries and encouraging greater investment in America.
- Strengthen American manufacturing and innovation: The Framework would refocus the manufacturing deduction and use the savings to reduce the effective rate on manufacturing to no more than 25%, while encouraging greater research and development and the production of clean energy
- Strengthen the international tax system, including establishing a new minimum tax on foreign earnings, to encourage domestic investment: Our tax system should not give companies an incentive to locate production overseas or engage in accounting games to shift profits abroad, eroding the U.S. tax base. Introducing a minimum tax on foreign earnings would help address these problems and discourage a global race to the bottom in tax rates.
- Simplify and cut taxes for America’s small businesses: Tax reform should make tax filing simpler for small businesses and entrepreneurs so that they can focus on growing their businesses rather than filling out tax returns.
- Restore fiscal responsibility and not add a dime to the deficit: Business tax reform should be fully paid for and lead to greater fiscal responsibility than our current business tax system by either eliminating or making permanent and fully paying for temporary tax provisions now in the tax code.
Press and blogosphere coverage:
Sanchirico Presents Optimal Tax Policy and the Symmetries of Ignorance Today at Penn
Chris Sanchirico (Pennsylvania) presents Optimal Tax Policy and the Symmetries of Ignorance at Pennsylvania today as part of its Center for Tax Law and Policy Speaker Series:
What government-observable characteristics should determine the taxes that an individual pays and/or the transfers that she receives? This article focuses on a specific aspect of this fundamental question of tax policy: the implications of policymakers’ uncertainty regarding the outcomes of tax policy choices. The article identifies and questions two implicit premises in policy-uncertainty-based arguments against including taxable attributes other than labor earnings in the base. The first is that greater uncertainty surrounds the optimal taxation of non-labor-earnings attributes than surrounds the optimal taxation of labor earnings. The second is that tax policymakers ought to follow a kind of precautionary principle under which uncertainty regarding an attribute counsels base exclusion. The article explains why both premises are flawed.
8th Circuit Denies Accountant's Use of 'John Edwards Sub S Tax Shelter' -- Is Warren Buffett Next?
The Eighth Circuit yesterday affirmed the district court's denial of an accountant's attempted use of the 'John Edwards Sub S tax shelter' and required him to treat $91,044 per year as his compensation (and thus subject to the 15.3% Social Security and Medicare taxes), rather than the $24,000 he claimed as wages. (During the years in question, the accountant treated $175,470 and $203,651 as Sub S distributions.) David E. Watson, P.C. v. United States, No. 11-1589 (8th Cir. Feb. 21, 2012):
(1) Watson was an exceedingly qualified accountant with an advanced degree and nearly 20 years experience in accounting and taxation; (2) he worked 35-45 hours per week as one of the primary earners in a reputable firm, which had earnings much greater than comparable firms; (3) LWBJ had gross earnings over $2 million in 2002 and nearly $3 million in 2003; (4) $24,000 is unreasonably low compared to other similarly situated accountants; (5) given the financial position of LWBJ, Watson's experience, and his contributions to LWBJ, a $24,000 salary was exceedingly low when compared to the roughly $200,000 LWBJ distributed to DEWPC in 2002 and 2003; and (6) the fair market value of Watson's services was $91,044. Based on the record, the district court did not clearly err.
Warren Buffett famously draws only a $100,000 salary from Berkshire Hathaway -- although he does not avoid the 12.4% Social Security tax because this is roughly the amount of the FICA wage base ($110,000 in 2012), Buffett is avoiding the 2.9% Medicare tax on the value of his services in excess of $100,000. (Hat Tip: Monty Meyer.) Prior TaxProf Blog coverage:
- 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)
- Schwidetzky: Musings on Watson and the John Edwards Sub S Tax Shelter (June 5, 2011)
- Newt Gingrich Used 'John Edwards Sub S Tax Shelter' to Save $50k in Medicare Taxes (Jan. 23, 2012)
Fleischer Presents Tax and the Boundaries of the Firm Today at Duke
How does tax policy affect the behavior of corporations? In the midst of national debates about the corporate tax rate, job creation, and international competitiveness, the dizzying complexity of the tax code can make it difficult to see the jungle through the vines. Does tax policy make U.S. firms grow or shrink? Do firms respond mainly to economic forces or tax incentives? This Essay goes back to foundational ground—Coase’s inquiry into why firms exist at all—to gain some traction on these important questions. I make two main claims. First, tax law incentivizes firms to expand the boundaries of the firm beyond what we would observe in a world without taxes. Tax policy favors larger firms. Second, firms often respond to this pressure by expanding the legal boundaries of the firm while leaving the underlying economic relationships largely undisturbed. What we observe is an expansion of the legal boundaries of firms and a smaller distortion of economic production.
WSJ: Obama's Dividend Assault
Wall Street Journal editorial, Obama's Dividend Assault:
President Obama's 2013 budget is the gift that keeps on giving—to government. One buried surprise is his proposal to triple the tax rate on corporate dividends, which believe it or not is higher than in his previous budgets.
Mr. Obama is proposing to raise the dividend tax rate to the higher personal income tax rate of 39.6% that will kick in next year. Add in the planned phase-out of deductions and exemptions, and the rate hits 41%. Then add the 3.8% investment tax surcharge in ObamaCare, and the new dividend tax rate in 2013 would be 44.8%—nearly three times today's 15% rate.
Keep in mind that dividends are paid to shareholders only after the corporation pays taxes on its profits. So assuming a maximum 35% corporate tax rate and a 44.8% dividend tax, the total tax on corporate earnings passed through as dividends would be 64.1%.
In previous budgets, Mr. Obama proposed an increase to 23.8% on both dividends and capital gains. That's roughly a 60% increase in the tax on investments, but at least it would maintain parity between taxes on capital gains and dividends, a principle established as part of George W. Bush's 2003 tax cut.
With the same rate on both forms of income, the tax code doesn't bias corporate decisions on whether to retain and reinvest profits (and allow the earnings to be capitalized into the stock price), or distribute the money as dividends at the time they are earned.
Of course, the White House wants everyone to know that this new rate would apply only to those filthy rich individuals who make $200,000 a year, or $250,000 if you're a greedy couple. We're all supposed to believe that no one would be hurt other than rich folks who can afford it.
The truth is that the plan gives new meaning to the term collateral damage, because shareholders of all incomes will share the pain. Here's why. Historical experience indicates that corporate dividend payouts are highly sensitive to the dividend tax. ...
Who would get hurt? IRS data show that retirees and near-retirees who depend on dividend income would be hit especially hard. Almost three of four dividend payments go to those over the age of 55, and more than half go to those older than 65, according to IRS data.
But all American shareholders would lose. Higher dividend and capital gains taxes make stocks less valuable. ...The question is how this helps anyone. According to the Investment Company Institute, about 51% of adults own stock directly or through mutual funds, which is more than 100 million shareholders. Tens of millions more own stocks through pension funds. Why would the White House endorse a policy that will make these households poorer?
Seldom has there been a clearer example of a policy that is supposed to soak the rich but will drench almost all American families.
Bartlett: What Is the Revenue-Maximizing Tax Rate?
Barack Obama has proposed raising taxes on the well-to-do, both for revenue and distributional reasons. This raises, anew, the question of what the revenue-maximizing top rate is. Conservatives continually assert that the United States is always on the wrong side of the "Laffer Curve," such that a tax rate reduction will increase revenues. A review of recent literature on this subject, however, indicates that the top tax rate could rise very substantially before a further increase would lead to lower revenues. Estimates suggest that this rate is at least 63% and probably much higher.
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National Jurist: When Is Law School a Wise Investment?
When Is Law School a Wise Investment?, National Jurist, Feb. 2012, at 24:
What if your legal education were a stock or bond. Would you buy it?
What if your education debt were treated like a home mortgage -- would your future earnings potential allow you to get the loan?
While most students don't use such standards to gauge whether they want to be a lawyer, two law professors argue that they should -- so long as one of their goals is to make money. ...
Jim Chen, dean at University of Louisville Louis D. Brandeis School of Law, ... and Herwig Schlunk, a tax professor at Vanderbilt University Law School, both share their views on whether law school is a wise investment in recent papers. In both cases, the authors go to great lengths to apply a financial investment strategy to the decision of whether to pursue a law degree.
- [Jim Chen, A Degree of Practical Wisdom: The Ratio of Educational Debt to Income as a Basic Measurement of Law School Graduates’ Economic Viability, 38 Wm. Mitchell L. Rev. ___ (2012)
- Herwig Schlunk, Is a Law Degree a Good Investment Today?]
So is it always unwise to go to law school given these studies? The ABA addressed this issue in 2009 with a report by its Commission on the Impact of the Economic Crisis:
The lack of a financial return does not mean that it is not valuable to go to law school. ... Many lawyers receive intrinsic benefits from a satisfying career that cannot be easily quantified. It does mean, however, that students should think twice before going to law school simply for the money. All too often, students who bank on reaping a positive financial return from law school lose out.
Fogg: How the IRS Should Foster Innovation in Its Agents
Keith Fogg (Villanova), Go West: How the IRS Should Foster Innovation in Its Agents, 55 Vill. L. Rev. ___ (2012):
The IRS faced a serious problem in the 1990s with taxpayers hiding their money offshore to avoid federal taxes. An International Revenue Agent, in New Jersey, Joe West, audited an individual engaged in hiding assets offshore and gained access to the offshore information through the use of a summons. The work of Joe West on that case caused him to “invent” a method for obtaining the names of individuals investing offshore who would not otherwise be known to the IRS. The article discusses the case that led Joe West to his discovery, the technique he developed for locating the names of U.S. citizens placing their money offshore, and the implications to the IRS of the type of creative thinking exhibited by Joe West.
Rasmusen: Three Years or Six to Audit?
Eric B. Rasmusen (Indiana University, Kelley School of Business), Three Years or Six to Audit? Substance and Procedure in Intermountain:
In the 2011 Intermountain case the IRS wished to interpret “omits from gross income” to mean “reports but understates gross income” and extend the period for audit of understated capital gains from three years to six. It took that position without notice-and-comment and in the context of the hot pursuit of a particular tax shelter. After losing in tax court special review, with all 13 Tax Court judges concurring, the IRS made the motions of going through notice-and-comment to get Chevron deference on appeal. Neither the IRS nor anybody else seems to have paid much attention to why Congress might choose one statute of limitations over another. Rather than looking at costs and benefits, the lawyers have been looking at the meaning of words and at how much deference is owed to unargued assertions. There exist obvious reasons why Congress would choose a shorter audit time for understatements than for omissions, however, reasons which are crucial to the interpretation of the statute and whose neglect bears heavily on the question of whether the IRS has devoted more resources to study, used more expertise, listened more to outside comment, and been equally as impartial as the courts. The case provides good reason for not providing even Chevron’s level of deference to Treasury interpretations of statutes, much less to expand Chevron deference to interpretation adopted to win particular lawsuits.
Tax Foundation Video: Winning on Corporate Taxes
The Tax Foundation has released its fourth tax video:
February 21, 2012
More on Presidential Charity
Following up on yesterday's post, Which of the Presidential Candidates Is Most Charitable?: Len Burman (Syracuse), Stingy Rich People, Santorum-Gingrich Edition:
Bartlett: Current Tax Code Violates Horizontal and Vertical Equity
It is clear that the rising inequality of wealth and income and how the wealthy should be taxed will be major issues in the political campaign. ... One problem that undoubtedly will arise is how to generalize about any particular income class’s tax burden. ...
[A] tax system that lightly taxes capital and heavily taxes labor is necessarily going to benefit the wealthy. As this chart illustrates, federal tax rates on the wealthy have been falling since 1978, when Congress cut the maximum capital gains rate to 28% from 35%.We rationalize this mainly on the grounds that increasing the stock of capital is good for everyone. For example, it will raise productivity, which in the long run will raise wages for all workers.
The empirical question of whether sharply lower taxes on capital, and hence the wealthy, has actually raised saving, investment and productivity is one I will revisit. Suffice it to say that since 2003, when the current tax rates on capital gains and dividends were instituted, the economy offers little, if any, evidence on this score. (Before 2003, capital gains were taxed at a maximum rate of 20% and dividends were taxed like wages and salaries.)
The point I want to make here is that differential tax rates on different forms of income mean that tax burdens will vary not only between income classes but within them as well. The latest Economic Report of the President has an interesting table that illustrates this point.
For the wealthy, we can see effective tax rates vary between 12% for those at the lower end of the top quintile and 29% for those at the upper end. Among the top 1%, effective rates vary between 9% and 35%. Those paying the highest effective rates are, no doubt, those such as doctors and lawyers with large incomes consisting mostly of salaries.
Thus we see that the bottom tenth of those in the top 1% pay well less in federal taxes as a share of their income than at least 25% of those in the bottom income quintile. And 25% of those in the top 1% pay less than substantial numbers of households in the upper three quintiles. ...
We can see, then, that the tax system in the United States violates the fundamental principles of income taxation. Those are “vertical equity,” which says that those with upper incomes should pay a higher effective tax rate than those with modest incomes — as far back as Adam Smith, ability to pay has always been a core principle of taxation — and “horizontal equity,” which says that those with roughly the same income ought to pay roughly the same taxes.
Ray Charles Foundation Demands Return of $3 Million Donation; University Says Gift was Unrestricted
Morse: The Future of Global Tax Reporting
Susan C. Morse (UC-Hastings), Ask for Help, Uncle Sam: The Future of Global Tax Reporting, 55 Vill. L. Rev. ___ (2012):
The emerging U.S. Foreign Account Tax Compliance Act or “FATCA” system provides an innovative model for the future of offshore information reporting. But its bank-to-residence government, or B2G, model lacks a good enforcement mechanism, because the U.S. lacks jurisdiction over the non-U.S. banks and other foreign financial institutions targeted by the FATCA rules. In contrast, European nations’ approach to the problem of offshore information reporting takes a bank-to-bank governing jurisdiction-to-residence government, or B2G2G approach. This puts banking jurisdiction governments squarely in the middle of the reporting system.
The FATCA implementation project should seek non-U.S. government cooperation. Despite the possibility that FFIs or local auditors might adopt FATCA for reputational signaling reasons, the U.S. should open the possibility of successful traditional enforcement by presenting FATCA as a model for automatic global information reporting and building other nations’ cooperation in the project. The greater involvement of non-U.S. governments could take several forms, including direct assumption of reporting responsibility, assistance in the project of reconciling FATCA’s requirements with client confidentiality rules, inclusion of FATCA compliance in criteria for government inspection of non-U.S. banks or auditors, or adoption of parallel due diligence and/or reporting requirements.
U.S. administrators of FATCA can use several tactics to persuade non-U.S. governments to cooperate with the global information reporting project of FATCA. First, they should keep FATCA implementation as simple as possible. Second, they should offer similar reporting on non-U.S. holders of U.S. accounts at least on a reciprocal basis, and perhaps in the treaty context. Finally, they could consider side payments to non-U.S. governments to induce them to support the FATCA project.
NY Times: Stanley Fish Reviews Brian Tamanaha's New Book, Failing Law Schools
Uneasiness about the state of legal education has been around for some time, but in the wake of the financial meltdown of 2008, uneasiness ripened into a conviction that something was terribly wrong as law school applications declined, thousands of lawyers lost their jobs, employers complained that law school graduates had not been trained to practice law, and law school graduates complained that they had been led into debt by false promises of employment and high salaries. And while all this was happening, law schools continued to raise tuition, take in more and more students, and construct elaborate new facilities.
That at least is the story told in a book to be published later this year, Failing Law Schools, by Brian Tamanaha. Tamanaha is a law professor, a former law school dean, a prolific legal theorist and, by his own account, a malefactor who in the past did some of the things he now criticizes. Having seen the light, he feels compelled to spread and document the bad news. ... He catalogs a large number of failings on the part of law schools, but his emphasis is less on particular bad actors (although he names more than a few) than on the structural conditions — conditions put in place by no one, but affecting everyone — that generate and drive their behavior.
Two such conditions can be colloquially named “the ABA made me do it” and “the rankings made me do it.” ...
Tamanaha does not spare the internal practices of law schools and is particularly distressed about the amount of debt incurred by those least able to get out from under it — graduates of lower-ranked schools. He also takes aim at the claim of law professors that their high salaries and low teaching loads (relative to other academics) are justified by the revenue they forgo when they enter the academy. No, he replies. Not only is “our pay far better than that of other professors,” not only do we have lifetime security and hours of work that are “whatever we want them to be,” but “our quality of life is far better than that of lawyers and we make more money than most lawyers.”
Will these fortunate conditions persist? Can law schools keep doing what they’re doing? Not according to the statistics Tamanaha marshals, statistics that show, among other things, that while law schools produce annually 45,000 new graduates, only 25,000 openings for lawyers are projected “each year through 2018.” ...
[T]he solution? In a word, differentiation. Don’t let the ABA and U.S. News call the tune. Instead, take a good look at the educational landscape, at the market, at the costs, at the demographics and come up with a flexible system that matches law school graduates to needs. ...
Will it happen? Tamanaha is not optimistic, and he cites the (to him) discouraging example of the new law school at the University of California at Irvine, which, he says, chose “elite status” over “affordability,” chose to enter the “ranking sweepstakes” rather than opting for a “different design.” Still, he finds hope in a number of public law schools that do “charge tuition well below $20,000.” He’s just not generally hopeful.
(Hat Tip: Bill Turnier.)
Recent State Legislative Tax Changes in the Face of Recession
Robert Buschman & David L. Sjoquist (both of Georgia State University, Andrew Young School of Policy Studies), Recent State Legislative Tax Changes in the Face of Recession, 63 State Tax Notes 623 (Feb. 20, 2012):
The period from 1990 to 2011 witnessed three recessions and two spells of substantial economic growth, conditions that are reflected in fluctuations in state tax revenue. Basic accounting implies that a state government can respond to decreases in revenue by reducing its expenditures, drawing down on reserves, or increasing taxes or fees. States varied in how they responded to the recent changes in revenue they faced during the Great Recession, with some states enacting substantial tax and fee increases, and others relying more heavily on cuts in expenditures and on use of reserves. In this report we explore the variation across states in legislative tax changes during the period 1999 to 2010, with a particular focus on changes made in the face of the Great Recession.1 In the next section, we describe the legislative changes that states made to their revenue system during the past decade. In Section III we present a simple framework that suggests what factors may explain differences in states' legislative tax changes, while Section IV presents some evidence of how the factors are related to legislative tax changes in 2009-2010.
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Lawyer Who Wrote Bulletproof Asset Protection Book Pleads Guilty to Tax Evasion
A suspended Colorado lawyer who authored the book Bulletproof Asset Protection pleaded guilty in federal court in Las Vegas on Monday to multiple tax-related charges. William S. Reed, 61, of Santa Barbara, Calif., was indicted in July, along with two other defendants, on accusations he participated in a business scheme between 1998 and 2006 that helped others hide assets from creditors and the IRS, the Las Vegas Review-Journal reports.
He pleaded guilty to conspiracy to defraud the United States, attempted tax evasion and aggravated identity theft, and agreed to pay about $40 million to the IRS and the Federal Trade Commission.
The company allegedly sold the business opportunity training program to at least 1,000 people for about $10,000 each, created roughly 2,500 disguised ownership corporations in Nevada for $795 each, opened more than 900 disguised ownership corporate bank accounts, and prepared more than 400 fraudulent liens. ...
In September 2010, Reed stipulated in U.S. Tax Court that he owed more than $13 million to the IRS. Between then and late 2011, IRS Criminal Investigation agents determined that Reed made numerous false statements about his assets, income, and place of residence. In December 2010, Reed transferred money from a secret offshore account to an account controlled by Reed but held in the name of his father. Between December 2010 and May 2011, Reed made deposits into his son's bank account.
In July 2011, following Reed's arrest in southern California, agents discovered that he had hidden more than $70,000 in cash in his vehicle. In September 2011, Reed told the IRS he had offshore accounts containing more than $1 million in Lichtenstein, Luxembourg and the Turks & Caicos Islands. IRS agents that month also found $427,900 in a Las Vegas storage unit that Reed held under a false name.
Heritage: Nearly Half of All Americans Don’t Pay Income Taxes
Heritage Foundation: Chart of the Week -- Nearly Half of All Americans Don’t Pay Income Taxes:
National Jurist: Dean Sager's $4.65 Million in Forgivable Loans to Law Profs 'Ripped Apart' Texas Faculty
Following up on my prior posts (links below): A Talent Race Turned Ugly, National Jurist, Feb. 2012, at 16:
Larry Sager's departure as Dean of the University of Texas School of Law at Austin has left many in legal education with their mouths agape. But not because it was surprising that the New Yorker ruffled feathers or even that he was giving out forgivable loans to attract top professorial talent. What surprised the rest of legal academia was the size of the gifts. ... Sager, who was dean for the past five years, handed out 22 loans totaling $4.65 million:
- Larry Sager: $500,000
- Ronen Avraham: $450,000
- Mark Spitzer: $350,000
- Robert Bone: $300,000
- Robert Chesney: $300,000
- Dan Rodriguez: $300,000
- Abraham Wickelgren: $300,000
- David Adelman: $250,000
- Oren Bracha: $250,000
- Justin Driver: $250,000
- Linda Mullenix: $250,000
- Gerald Torres: $200,000
- Willie Foorbath: $200,000
Law professors were outraged over the loans, and the divisiveness over the issue was tearing the faculty apart. ...
Linda Mullenix, who had been at Texas for 20 years, sued the school in 2010, alleging sex discrimination over unfair compensation. An overwhelming majority of the top salaries were dished out to men over women in the 2010 to 2011 school year. ... [O]ut of the top 25 salaries, which ranged from $351,715 down to $281,077, just four of the top 25 salaries went to female faculty members.
The university settled with Mullenix and agreed to boost her annual compensation by $20,000 per year and provide her with a one-time loan of $250,000. She earned $327,205 in 2010-11.
Prior TaxProf Blog coverage:
- University of Texas Law School Dean Resigns Immediately in Wake of Faculty Division Over Compensation (Dec. 9, 2011)
- University of Texas Chancellor Orders Review of Use of Foundation Funds to Pay 19 Law Faculty Over $300,000 (Dec. 12, 2011)
- Leiter on the Turmoil at the University of Texas School of Law (Dec.13, 2011)
- More on the Turmoil at the University of Texas School of Law (Dec. 16, 2011)
Why It Matters That Our Politicians Are Rich
Boston Globe, Why It Matters That Our Politicians Are Rich, by Britt Peterson:
As the presidential primary race has unfolded over the last few months, curious Americans have angled for a look at the candidates’ wallets—and observed that they are bulging. ... Politicians would like us to believe that all this money doesn’t matter in a deeper sense—that what matters is ideas, skills, and leadership ability. Aside from a little extra business savvy, they’re regular people just like the rest of us: They just happen to have more money.
But is that true? In fact, a number of new studies suggest that, in certain key ways, people with that much money are not like the rest of us at all. As a mounting body of research is showing, wealth can actually change how we think and behave—and not for the better. Rich people have a harder time connecting with others, showing less empathy to the extent of dehumanizing those who are different from them. They are less charitable and generous. They are less likely to help someone in trouble. And they are more likely to defend an unfair status quo. If you think you’d behave differently in their place, meanwhile, you’re probably wrong: These aren’t just inherited traits, but developed ones. Money, in other words, changes who you are.
As voters consider which presidential candidate to support in November, one thing is for sure: Whoever wins is going to have money and power to spare. In a world where our politicians are inevitably better off than most of the people they govern, the new research sheds fresh light on the nature of our elected leaders—and offers insight into why they so often seem oblivious to our problems. ...
What are the implications of realizing that our wealthy leaders may be more callous, self-absorbed, and self-justifying than the people they represent? For one thing, it suggests that the constant calls for candidates to release tax returns and disclose their assets are not so petty after all.
- Linda Beale (Wayne State), Politicians' Wealth and the Tax Policies They Support
February 20, 2012
Tax Prof's Worst Law School Grade: Tax
Harvard Law School Record, Before You Feel Anxiety About Your Grades…:
Tax Law Professor Daniel Halperin received his worst law school grade in: tax.
(Hat Tip: Law Librarian Blog.)
Suspended Lawyer Lied to Get on Daugerdas Tax Shelter Jury
Following up on my prior posts (links below): a suspended lawyer says that she lied to get on the jury in the tax shelter trial of former Jenkens & Gilchrist partner Paul Daugerdas (featured in The American Lawyer December 2003 cover story, Helter Shelter):
- ABA Journal, Ex-Juror in Tax Fraud Trial Is Arrested After Failing to Show Up for Hearing into Hidden Legal Past
- American Lawyer, Defense Lawyers Grilled on Their Knowledge of Juror Misconduct in Daugerdas Case
- Bloomberg, Ex-Juror Says She Lied to Be ‘More Marketable' in Tax Case
- JD Journal, Juror Lied to Get Onto Jury
- New York Daily News, Catherine Conrad Apologizes for Lying Her Way Onto a Jury
- Reuters, Lawyers Deny Cover-up in Juror Misconduct Affair
- Wall Street Journal Law Blog, Woman Says She Lied to Get on Jury in Tax-Shelter Case
Prior TaxProf Blog coverage:
- Daugerdas, Three Others Convicted in Criminal Tax Shelter Case (May 16, 2011)
- Daugerdas Seeks New Trial in Tax Shelter Case Based on Juror Misconduct (Aug. 16, 2011)
- Judge Grants Daugerdas Hearing on Juror Misconduct in Tax Shelter Conviction (Nov. 15, 2011)
(Hat Tip: Ann Murphy.)
Payroll Tax Extension Eliminates Recapture Tax on Those Earning > $110,100
Future of Capitalism, Payroll Extension Eliminates Recapture Provision, by Ira Stoll:
One of the little-noticed features of December's two-month extension of the payroll tax cut was a "recapture provision" that actually raised the income tax on those earning more that $110,100 a year. [See this IRS Press Release.] ... This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. ...
I was curious what would happen to this provision in the payroll tax cut extension legislation, so I looked at the text of the bill. Sure enough, there it is:
b) Conforming amendments.—Section 601 of such Act (26 U.S.C. 1401 note) is amended by striking subsections (f) and (g).
These aren't actually "conforming amendments" as the term is usually used in legislation to tidy up language. Subsections (f) and (g) were precisely the sections that added that recapture tax, and striking those subsections not only means the recapture provision won't be extended for the remaining ten months of 2012, but also, at least as I read it, that those who would have owed the tax for January and February now won't have to pay it for those two months, either. If this language striking subsections (f) and (g) survives Congress, it's a significant win for the pro-growth side.
The Benefits of a Capital Gains Exemption for Investments in Startups
Robert E. Litan & Alicia Robb (both of the Kauffman Foundation), A Market-Based Approach for Crossing the Valley of Death: The Benefits of a Capital Gains Exemption for Investments in Startups:
Without making any bold claim of a “free lunch,” there is nonetheless a compelling case to be made that permanently exempting investments in start ups from any capital gains taxes for five years would come reasonably close. It would conservatively boost annual equity investment in start ups by 50% more than the annual revenue loss to the federal Treasury. Such investments also likely would be disproportionately channeled to potential high-growth firms, which also punch well above their weight in terms of job creation potential as compared to other start ups. Given the need for additional jobs in this anemic recovery, the case for inducing additional start up investment through the capital gains tax exemption is strong.
Likhovski: Cultural Histories of Tax Law
Assaf Likhovski (Tel-Aviv University, Faculty of Law), Chasing Ghosts: On Writing Cultural Histories of Tax Law, 1 UC Irvine L. Rev. ___ (2012):
This article discusses the use of arguments about “culture” in two debates about the imposition, application and abolition of income tax law: A debate about the transplantation of British income taxation to British-ruled Palestine in the early twentieth century, and a debate about tax privacy in late eighteenth-century and early nineteenth-century Britain. In both cases, “culture,” or some specific aspect of it (notions of privacy) appeared in arguments made by opponents of the tax. However, it is difficult to decide whether the use of cultural arguments in these debates simply reflected some “reality” that existed prior to these debates, whether “culture” was actively constituted in these debates to further the specific interests of the participants, or whether the cultural arguments that appeared in the debates combined reflection and constitution in some determinable way. Using legal debates to learn something about culture, the article concludes, is sometimes problematic. The article therefore suggests an additional approach to the study of law and culture, one which focuses on the rhetorical level, seeking to map the ways in which arguments about “culture” (and related terms referring to the traditional and particular), appeared in tax law debates.
The 10 Best Websites for Law Students
For law students who know what legal field they are interesyted in Law Professor Blogs is a great resource. Broken down by specialty, the blogs on the site are created by law professors, for law professors. The blogs contain links to recent news in their fields, as well as abstracts of newly published papers.
The other sites in the Top 10 are:
- ABA Journal
- Above the Law
- The Careerist
- Jurisprudence on Slate.com
- Legal Blog Watch
- Lowering the Bar
- The Prime Time Crime Review
- Wall Street Journal Law Blog
WaPo: Which of the Presidential Candidates Is Most Charitable?
President Obama and his wife, Michelle, despite having the second-lowest income of the four candidate/spouse combos, gave the highest percentage of their $1.8 million income to charity in 2010. ... He and Michelle gave 14.2% of their AGI, while the Romneys gave 13.8%. ... Santorum and Newt Gingrich, by comparison, gave very little of their income to charity. Gingrich and his wife, Callista, gave 2.6% of their $3.2 million income in 2010. Santorum and wife Karen, who made the least in 2010 (less than $1 million), also gave the lowest percentage of their income to charity, at 1.8%.
Here is a fuller picture of the charitable contributions of the four candidates:
99 to 1: How Wealth Inequality Is Wrecking the World
Chuck Collins (Institute for Policy Studies), 99 to 1: How Wealth Inequality Is Wrecking the World and What We Can Do About It? (Berrett-Koehler Publishers (April 2, 2012)):
The focus of the worldwide Occupy protests is creating a world that works for 99% of people and businesses, not just the richest and most powerful 1%. But who are the 99%? Who are the 1%? How extensive and systemic is inequality in different areas of society? What are its causes and consequence? How is inequality changing in our world? And what can be done about it?
For many years Chuck Collins has been a top leader in studying, speaking about, and writing about these questions. In this book he brings together in one place, for the first time, information that has been widely scattered in many different articles, reports, and websites. He provides revealing and powerful information about inequality in all realms of today’s world, including individual wealth and power, corporate wealth and power, media control, political influence, and other areas. He then describes the functioning of the Wall Street Inequality Machine and describes how inequality wrecks everything we care about. And he tells how people and groups are pushing back against inequality and taking action to reduce inequality and create a world that works for the many and not just the few.
Sullivan: Obama's Tax Deform and the Top 0.1% by Zip Code
As it is trying to promote tax reform, the Obama administration is defying the logic of real tax reform -- the economic logic that tax neutrality is best for growth and job creation except in extraordinary circumstances. What administration incentives hinder true tax reform efforts? A conversion of the already complicated section 199 manufacturing deduction into a two-tiered incentive. A temporary incremental wage credit for small business. A tax credit for investment in communities that have experienced a job loss event. A tax credit for moving expenses when companies move jobs to the United States. New tax credits for alternative energy to replace the existing ineffective and outdated ones.
This is big government through tax policy. The complexity of these new tax breaks is extraordinary even by the standards of our tax code. These items are small potatoes that are unlikely to ever become law anyway. Geithner should file them away. It subtracts and distracts from his main goals of raising revenue by eliminating loopholes and making the tax system more progressive. And as for the coming corporate tax reform, there is no more place for them there than there is for a fox in the henhouse. ...
2008 was economic hell. The markets crashed. The economy tanked. Jobs disappeared by the millions. But at the choice locations listed below, folks were doing fine. ...
Top 0.1 Percent ZIP Codes
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TaxProf Blog Weekend Roundup
- NY Times: The Tax Rate of the 400 Richest Americans
- ABA Tax Section Midyear Meeting
- The Facts About Tax Progressivity
- Fair Share Tax Reform
- Candy Man (Tax Edition)
- Top 5 Tax Paper Downloads
- IRS Extends Deadline to File Estate Tax Portability Election
- Low Income Taxpayer Grant Recipients
February 19, 2012
Candy Man (Tax Edition)
(Hat Tip: Jim Maule.)
Top 5 Tax Paper Downloads
This week's list of the Top 5 Recent Tax Paper Downloads is the same as last week's list:
1. [347 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)
2. [274 Downloads] Scriveners’ Errors, Drafting Errors, Operational Failures, Retroactive Amendments, Reformations, ERISA, and the Tax Qualification of Pension Plan Trusts, Part II, by Albert Feuer (Law Offices of Albert Feuer, Forest Hills, NY)
3. [215 Downloads] Important Developments in Federal Income Tax (2010-11), by Edward A. Morse (Creighton)
4. [198 Downloads] From Here to Eternity: The Folly of Perpetual Trusts, by Lawrence W. Waggoner (Michigan)
5. [173 Downloads] Accepting the Limits of Tax Law and Economics, by Alex Raskolnikov (Columbia)
IRS Extends Deadline to File Estate Tax Portability Election
IR-2012-24 (Feb. 17, 2012), IRS Extends Deadline for Estates to File Estate Tax Return to Make Portability Election Benefiting Surviving Spouses:
The IRS today issued guidance that allows certain estates of married individuals who died during the first six months of 2011 an extension of the deadline to make the portability election.
The portability election passes along a decedent’s unused estate and gift tax exclusion amount to a surviving spouse. An extension is available to estates of married individuals with assets of $5 million or less, but only if the decedent died in the first six months of 2011, and the executor files Form 4768 requesting an extension no later than 15 months after the decedent's date of death.
The extra time is available to an estate even if the estate did not request an automatic six-month filing extension on Form 4768 prior to the regular nine-month filing deadline. As a result, these estates will now have until 15 months after the date of death, rather than the usual nine months, to make the election by filing an estate tax return on Form 706. Thus, the first estate tax returns for estates eligible to make the portability election (because the date of death is after Dec. 31, 2010) are now due on Monday, April 2, 2012.
Affected estates should submit both a properly-prepared Form 4768 and Form 706 to the IRS no later than 15 months after the decedent’s date of death. Further details are in Notice 2012-21.
Low Income Taxpayer Grant Recipients
The IRS announced on Friday (IR-2012-25) that it has awarded over $9 million in matching grants to Low Income Taxpayer Clinics (LITCs) for the 2012 grant cycle (Jan. 1, 2012 through Dec. 31, 2012). Through the LITC program, the IRS awards matching grants of up to $100,000 a year to qualifying organizations. For the 2012 grant cycle, the IRS awarded LITC grants to 156 organizations. For the full list of grant recipients, see here. For a list of the 36 law school tax clinic grant recipents, and the amount of their grants, see below the fold:
- Albany ($90,000)
- American ($85,000)
- Arkansas-Little Rock ($90,000)
- Chapman ($90,000)
- Connecticut ($87,857)
- Denver ($100,000)
- District of Columbia ($80,000)
- Drake ($75,000)
- Fordham ($90,000)
- Georgia State ($100,000)
- Gonzaga ($90,000)
- Idaho ($90,000)
- Kansas ($50,000)
- Lewis & Clark ($85,000)
- Loyola-Chicago ($83,000)
- Maryland ($59,439)
- Michigan ($55,000)
- Michigan State ($90,000)
- Minnesota ($92,000)
- Missouri-Kansas City ($100,000)
- New Mexico ($60,000)
- North Carolina Central ($75,000)
- Northern-Kentucky ($70,000)
- Ohio State ($72,000)
- Pittsburgh ($85,000)
- Quinnipiac ($85,000)
- Rutgers-Newark ($92,000)
- San Diego ($85,000)
- Santa Clara ($75,000)
- Southern ($65,000)
- Syracuse ($95,000)
- Texas Tech ($75,000)
- Utah ($70,000)
- Villanova ($100,000)
- U. Washington ($100,000)
- Washington & Lee ($60,000)
See also Publication 4134: Low Income Taxpayer Clinic List. For a list of the law school tax clinic grant recipients for prior years, see
February 18, 2012
NY Times: The Tax Rate of the 400 Richest Americans
I thought Mr. Romney’s 13.9% federal tax rate would be hard to beat. But among the 400 Americans with the highest adjusted gross incomes in 2008, 30 of them paid less than 10% and another 101 paid less than 15%. ... The top 400 paid an average of $49 million, or 18.1% of their AGI, in federal tax — lower than taxpayers in the $200,000 to $500,000 bracket. They reported an average $14.1 million in state and local taxes, bringing their total income tax level to about 23% of AGI, far below my rate. And not one of them paid more than 35% of their AGI in federal tax. ...
I’ve never minded paying my taxes. I’ve always been proud of it. But when people making hundreds of millions a year are paying a substantially lower rate than I and the many people who wrote to me do, something has gone haywire.
Prior TaxProf Blog coverage of the Top 400 taxpayers:
- The Top 400 Taxpayers, 1992-2006: Income Up, Tax Rate Down (Jan. 30, 2009)
- IRS Releases 2007 Tax Return Data on Wealthiest 400 Americans: Income Soared 31% (to $345m), Tax Rate Fell 3.2% (to 16.6%) (Feb. 18, 2010)
- More Tax Return Data on the Richest 400 Americans (Feb. 24, 2010)
- The Top 400 Taxpayers: Incomes Fell 21.5%, Tax Rates Rose 8.2% in 2008 (May 11, 2011)
- Johnston: Beyond the 1 Percent (Oct. 26, 2011)
- The 99% and the 1%: Income Mobility and Income Inequality (Nov. 7, 2011)
(Hat Tip: Bill Turnier.)
ABA Tax Section Midyear Meeting
- Low Income Taxpayers: Introductory Remarks and Administrative Issues -- Keith Fogg (Villanova) (Chair)
- Low Income Taxpayers: Innocent Spouse – We Won, but Where Are We Now?-- Carl Smith (Cardozo)
- Pro Bono -- Francine Lipman (Chapman)
- Sales, Exchanges & Basis: Build-to-Suit or Full-of-Boot: Analyzing Exchanges Involving Leasehold Improvements Constructed by a QI or EAT -- Bradley Borden (Brooklyn)
- Sales, Exchanges & Basis: Current Developments in Sales, Exchanges and Basis Other Than Sections 1031 & 1033 -- Erik Jensen (Case Western)
- Section Program: Current Developments in Individual, Corporate, Partnership and Estate & Gift Taxation -- Elaine Hightower Gagliardi (Montana), Martin J. McMahon Jr. (Florida) (moderator), Ira B. Shepard (Houston), Daniel L. Simmons (UC-Davis)
- Tax Policy and Simplification: Perspectives on Tax Reform: Charitable Contributions and the Nonprofit Sector -- Roger Colinvaux (Catholic), Miranda P. Fleischer (Colorado), Jonathan B. Forman (Oklahoma) (moderator), Brian Galle (Boston College)
- Tax Policy and Simplification: Perspectives on Tax Reform: Taxation of Capital Gains and Dividend Income -- Len Burman (Syracuse), Ed Kleinbard (USC), Roberta Mann (Oregon) (moderator), Sam Thompson (Penn State)
- Tax Practice Management, Diversity and Young Lawyers Forum: Get Inspired! Motivational Stories of Success from Tax Professionals -- A Presentation of Inspiring Personal Stories, Focusing on How Difficult Challenges Were Overcome and the Beneficial Life Lessons Learned -- Michael Lang (Chapman) (moderator)
- Teaching Taxation: Tax and the First Amendment -- Ellen Aprill (Loyola-L.A.), Adam Chodorow (Arizona State), Donald Tobin (Ohio State)
The Facts About Tax Progressivity
[T]he question of how progressive the system is an empirical question. In fact, the system of taxation in the United States is relatively progressive. What makes this fact surprising is that tax progressivity and fiscal redistribution (the reduction of inequality by government action) are often conflated, and it remains true that redistribution in the US is low, due mainly to the relatively small size of the US government.
(Hat Tip: Greg McNeal.)
Fair Share Tax Reform
1. Federal Income Tax: All income and compensation is taxed at a 20% rate except:
- Income under a realistic poverty line (eg $15,000 for single), which is taxed at 2% instead
- Income used to pay for large medical expenses (>10% of income) is tax-free
- Income placed into tax-free education-retirement savings account (with modest caps)
- No other adjustments, deductions, or exemptions
- Effective rates: 10% on $60,000; 15% on $160,000; 19% on $1,000,000.
- Totals about 65% of federal revenue.
2. Federal Net-Worth Tax:
- All net worth (accumulated wealth), except the first ~$800,000, is taxed at a progressive 1-1.7% rate.
- This tax replaces property, capital gains & estate taxes. Net-worth is the best measure of how much a household has profited from the economic infrastructure governments (all taxpayers) provide.
- Effective rates: 0.2% on $1million; 1.0% on $3million; 1.7% on $27million and over
- Totals about 20% of federal revenue.
3. Federal War Tax: Everyone contributes to any war effort: A 6% surcharge increases a federal taxes bill of $10,000 to $10,600 while the nation is at war.
4. Eliminate all these taxes:
- Social Security Taxes – Social Security & Medicare funded from general revenue instead
- Estate Taxes & Capital Gain Taxes – Replaced by more efficient and fair Net-worth Tax
- State Income Taxes in their current form – Replaced by more efficient and fair surcharge – See #5
- Property (real estate) taxes – Replaced by more efficient and fair surcharge – See #5
- Sales taxes, tolls, etc. – Replaced by more efficient and fair surcharge – See #5
- Corporate Taxes – Profits distributed to corporate owners and taxed as income.
5. All states and local governments eliminate all their current taxes and instead set and collect a surcharge on a household’s combined Federal Income and Net-worth Tax.
6. Excise taxes only on products that have a cost to society that is not reflected in their price … e.g. cigarettes, gasoline. Totals only about 10% of federal revenue.
Update: The post should have stated that the proposal is by Peter Gloor (details here).
February 17, 2012
Zelenak Presents Tax and Non-Tax Delivery Mechanisms for Health Insurance Subsidies Today at Kentucky
Lawrence Zelenak (Duke) presents The Choice Between Tax and Non-Tax Health Insurance Subsidies in the 2010 Health Care Reform Legislation at Kentucky today as part of its Randall Park Colloquium Series:
Two companion provisions of the 2010 health care reform legislation provide subsidies (beginning in 2014) for low- and moderate-income individuals and families purchasing health insurance through state health insurance exchanges. One of the provisions, codified at § 36B of the Internal Revenue Code, subisidizes health insurance premiums through a refundable premium tax credit (PTC). The other enactment, a non-tax provision codified at 42 U.S.C. § 18071, subsidizes the health insurance cost-sharing burden by covering a portion of the deductibles and copayments of qualifying individuals and families. ... I am aware of no precedent for the simultaneous enactment (in adjacent sections of the same enactment) of such closely-related subsidies, one designed as a tax credit and the other as a direct spending program. ...
[T]his article considers whether there is any justification for the legislative choice of different methods of administration for the two subsidies, and concludes that the choice of different methods for the two peograms is almost certainly misguided. Finally, the article considers what lessons the two new health insurance subisides might offer for legislators choosing between tax expenditures and direct expenditures in other contexts.
Best Law Schools for Bar Exam Preparation
National Jurist, Best Schools for Bar Exam Preparation:
To identify the schools that are outperforming what their LSAT scores predict, The National Jurist did a statistical analysis using incoming LSAT scores and bar pass rate ratios. We created a polynomial model using each school's LSAT at the 25th percentile for 2010 (to account for the students most likely to fail the bar exam), and the ratio of graduates who passed the bar exam compared to the state average for 2009 and 2010. The result is a clear curve. We then computed the difference between the average pass rate ratio and what the curve would predict for each school and computed a probability distribution to determine the most extreme deviations.
- Wake Forest
- North Carolina Central
- U. Washington
- Wayne State
- George Washington
- Florida Coastal
- California Western
- North Carolina
- South Carolina
- Florida International
- South Dakota
- George Mason
- San Francisco
- William & Mary
- Texas Tech
- Seton Hall
- Mississippi College
Lang: Canal Corp. and Tax Lawyer Discipline, Malpractice
In Canal Corporation v. Commissioner, 135 T.C. 199 (2010), the taxpayer's subsidiary entered into a leveraged partnership arrangement pursuant to which it transferred its business assets to an LLC for a 5% interest in the LLC and a distribution of $755 million from the LLC that was financed by a loan to the LLC from an unrelated bank. Repayment of the loan was guaranteed by the “purchaser,” which had acquired the remaining interest in the LLC. The sub indemnified the purchaser with respect to the loan guarantee. As a result, the taxpayer argued that under the partnership tax regulations the sub's basis in the LLC was increased by the amount of the liability so that the distribution did not produce current recognition of the $524 million gain otherwise realized on the business assets transfer. The leveraged partnership structure had been suggested by PWC, an accounting firm, and was conditioned on PWC providing a “should” opinion to the effect that the structure would defer recognition of the gain, for which the court found that the taxpayer agreed to pay PWC $800,000, contingent on the transaction closing. However, modifications to the indemnity agreement (largely at the taxpayer’s request) so limited its potential application as to weaken the transaction’s tax viability. As a result, the court held that the transaction was a disguised sale of the sub's business assets and upheld imposition of a substantial understatement penalty on the taxpayer. The court rejected the taxpayer’s reliance on the PWC opinion as supporting a reasonable cause, good faith defense against imposition of the penalty, stating that PWC had an “inherent and obvious” conflict of interest and that the opinion was based on unreasonable assumptions. Matters within the ordinary business judgment of the taxpayer’s executives, under this view, are the taxpayer’s responsibility, such as an “obvious” conflict of interest and unreasonable assumptions at odds with the taxpayer’s own view of the indemnity agreement.
Canal Corp’s approach to the reasonable cause, good faith defense -- placing the burden on the taxpayer to be wary of a conflict on the tax advisor’s part -- is at odds with how both ethical rules and the law governing lawyers address conflict situations. Both the ethical rules and the applicable law require the tax advisor to inform the client of any significant conflict between the professional's personal interest and the client's interest, to determine whether the conflict is consentable, and to obtain the client's informed consent before proceeding with the engagement. Under either approach, the conflict of interest in Canal Corp was magnified by modifications to the indemnity agreement sought by the taxpayer, modifications which probably should have caused PWC to rethink its commitment to provide a “should” opinion. In this respect, the case illustrates how important it is for a tax advisor to exercise independent judgment when client suggested changes to a transaction may undermine its tax viability, even if the deal (and large fee) may fall through. If further reason for caution is needed, the conflict of interest may also indicate to a trier of fact in a malpractice action against the tax advisor a possible motive for the advisor to have provided advice that breached the duty of care to the taxpayer, making it easier for the trier of fact to find such a breach. The bottom line may well be that the taxpayer's loss of the reasonable cause, good faith defense may be the foundation for a malpractice action and/or a disciplinary proceeding against the tax professional.