Tuesday, April 24, 2012
This week I'm planning to write about various widespread but in my view mistaken beliefs regarding the intensifying crisis in American legal education. I'm going to start with this one:
The biggest problem with American legal education is that it fails to produce practice-ready graduates.
This claim has been made by critics of the legal academic establishment for roughly a century now (every 15 years or so some sort of quasi-official report reiterates it). It was a topic of discussion at a law school symposium this weekend on the future of the legal profession, and is apparently a theme of Jim Molitenrno's forthcoming book, A Profession in Crisis, which argues that the fundamental problems with legal education today are in large part products of the fact that more than a century ago "medical schools decided that their mission would be to turn out doctors, while law schools decided that their mission would be to turn out law professors."
Now the claim that law schools remain largely indifferent to the fact that law school teaches law students almost nothing about the practice of law is itself quite true. What isn't the case is that this fact has in itself much to do with the increasingly unacceptable relationship between the cost of a law degree and the economic benefits it confers. Making graduates practice-ready is a fine idea in theory -- why else are law students going to law school anyway? -- but if such reforms do nothing about, or worse yet exacerbate, the crumbling cost-benefit structure of legal education they will do nothing about this fundamental structural problem. ... Any reform that doesn't make legal education less expensive while reducing the number of new attorneys is doing nothing about the real crisis, which is that law school costs far too much relative to the number of jobs available for attorneys.
After all, given the basic structure of American legal education, making that education more clinically intensive would be even more expensive than maintaining the present model, which remains centered on tenure-track law professors teaching classes with 50 and 75 and 120 students in them. (The simplest way to drive down the cost of legal education would be to make the tenure-track faculty teach the same number of classes their predecessors were teaching in the 1970s. It's true this might result in 5000 rather than 10,000 law review articles being published per year, but under the circumstances this might be a price worth paying). ... And doing so would certainly not do anything about the fact that ABA-accredited law schools are producing (at least) two law graduates for every legal job. ... The problem, as these statistics illustrate, is that it appears essentially the same number of real legal jobs that existed 25 years ago are now being pursued by literally twice as many lawyers.
Former Saturday Night Live cast member Jon Lovitz, a registered Democrat who voted for Barack Obama in 2008, criticizes the President's tax policy (language warning: many f-bombs):
Alan Auerbach (UC-Berkeley; visiting at NYU) presents The Mirrlees Review and The Mirrlees Review: A U.S. Perspective at NYU today as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU):
The recently completed Mirrlees Review was a considerable undertaking, resulting in two thick volumes. The first volume, Dimensions of Tax Design (2010), is a compilation of specially commissioned chapters dealing with different aspects of the tax system, and also includes the comments of discussants from the 2007 conference at which with these chapters were originally presented. The second volume, Tax by Design (2011), was written by the project’s editors and sets out the conclusions of the Mirrlees Review, including concrete proposals for reform. Although the Mirrlees Review formally focused on the UK tax system, its analysis and conclusions have much broader value, especially for advanced countries, like the United States, that have many of the characteristics and face many of the same issues of tax policy design. Like the Meade Committee’s review of the UK tax system undertaken over three decades ago (Institute for Fiscal Studies 1978), the Mirrlees Review, also done under the aegis of the Institute for Fiscal Studies, aimed to evaluate the UK tax system and consider potential reforms in light of the most recent economic developments and findings in the literature.
Yale Daily News, Law School Battles Gender Imbalance:
Men are 16% more likely to speak in class than women in Yale Law School courses, according findings in a study released by a Law School student group last week.
The group, Yale Law Women, replicated a study of gender dynamics it conducted at the school in 2002. The 93-page study — which included interviews with 54 of 83 non-visiting faculty members, observations of student participation in 113 sessions of 21 Law School courses and a survey of 62 percent of the student body — found that women are 1.5% more likely to speak up in class now than they were 10 years ago, among several other observations. The majority of students and faculty interviewed by the News said gender imbalances are an endemic problem in the legal profession and are not unique to the Law School, though many were disappointed by the lack of substantial improvement over the decade.
“What we found is that participation by women in the classroom has improved, but the rate is very slow,” said Fran Faircloth LAW ’12, a Yale Law Women co-chair for the study. “If we continue at the same rate, the gender gap won’t close until 2083.”
The report, titled Yale Law School Faculty and Students Speak Up about Gender: Ten Years Later, assesses students’ interactions with faculty both in and out of the classroom, and compiled recommendations on how to minimize gender differences in the Law School community based on survey and interview responses. Recommendations to faculty include practicing more “conscientious classroom management” — for example, waiting for five seconds rather than calling on the first student to raise his or her hand — while recommendations to students include being more proactive in interacting with professors.
Law School professor Lea Brilmayer, who has taught at Yale “off and on” for 30 years after becoming one of the first female professors at the Law School, said she found the study depressing because it contradicted her feeling that gender dynamics at the school have improved in recent years. Brilmayer pointed to several institutional changes she said contribute to her attitude, including the greater prevalence of women on the faculty, all of whom she described as “first-rate intellectual heavyweights.” For the 2011-’12 academic year, 22 out of 104 Yale Law School professors were women, according to the survey.
- Wall Street Journal Law Blog, Yale Law Study Finds Gender Imbalance in Student Participation
Tax Foundation, State Tax Collections Rising in Post-Recession Recovery:
After two years of falling revenue, total state government tax collections increased by nearly 9% during 2011, according to data released by the United States Census Bureau. Total collections were $757 billion last year, still slightly less than 2007 levels prior to the recession. ... All major types of state taxes saw increased collections in 2011. ... Individual income and corporate income tax collections had the largest increases, increasing by 9.8% and 9.4%, respectively.
Roger Williams University School of Law has updated its per capita publication study of the faculties at "'non-elite' law schools" -- those schools ranked outside the 2012 U.S. News Top 50. The study covers the 1993-2011 period and uses methodology developed by Brian Leiter, with one change: although Brian focused exclusively on the Top 20 journals, this study examines the Top 50 journals, defined as the general law reviews published by the 54 schools receiving the highest U.S. News peer assessment scores (2.8 or higher) in the 2008 U.S. News rankings, plus an additional 13 journals that appeared in the Top 50 of the Washington & Lee Law Journal Combined Rankings in 2007. (See here for an alphabetical listing of those journals.)
U. St. Thomas (MN)
The Roger Williams study does not individually rank the 82 non-U.S. News Top 50 law schools that did not place in the Top 40 of the productivity study. They instead are listed in two bands:
Prior years' faculty productivity studies:
Omri Y. Marian & Andrew D. Moin (both of Sullivan & Cromwell, New York), Taxation of Structured Debt in a Low-Rate Environment, 135 Tax Notes 323 (Apr. 16, 2012):
Low market rates call for special types of debt instruments. This report discusses the tax questions presented by several of those instruments, including fixed-to-floating rate instruments, range accrual debt instruments, and callable step-up instruments. The authors note several ambiguities in the regulations regarding variable-rate and contingent payment debt instruments and call for clarification. They also explore some counterintuitive results of the technical operation of the regulations and argue that a possible explanation may be that the regulations were drafted during times of different market characteristics.
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David L. Schwartz (Chicago-Kent) & Lee Petherbridge (Loyola-L.A.), An Empirical Assessment of the Supreme Court’s Use of Legal Scholarship, 106 Nw. U. L. Rev. ___ (2012):
Derogating legal scholarship has become something of a sport for leading figures in the federal judiciary. Perhaps the chief antagonist in recent years has been none other than the Chief Justice of the U.S. Supreme Court, John G. Roberts Jr. His most recent salvo includes the claim that because law review articles are not of interest to the bench, he has trouble remembering the last law review article he read. This claim, and others by the Chief Justice, may represent the end of an uneasy détente concerning the topic of the utility of legal scholarship to the bench and bar. At a minimum, Justice Roberts’s recent comments represent a vigorous invitation to a discussion, which this article accepts. To that discussion we contribute an empirical study that is based on an original and unprecedented body of data derived from every Supreme Court decision over the last sixty-one years. This article presents several surprising results and makes two major novel contributions. The first is evidence describing the amount and patterns of the Supreme Court’s use of legal scholarship over the last sixty-one years. The second, and perhaps most striking contribution of this article, is empirical evidence on the nature and quality of the Court’s use of scholarship. This article provides the first report, as far as we can determine, of evidence that the Supreme Court not only often uses legal scholarship, it also disproportionately uses scholarship when cases are either more important or more difficult to decide. It thus presents results strongly counterintuitive to claims that scholarship is useless or irrelevant to judges and practitioners. The article also discusses areas for future work.
- David L. Schwartz (Chicago-Kent) & Lee Petherbridge (Loyola-L.A.), The Use of Legal Scholarship by the Federal Courts of Appeals: An Empirical Study, 96 Cornell L. Rev. 1345 (2011)
The Enterprise Blog: Obama’s Inequality Argument Just Utterly Collapsed, by James Pethokoukis:
President Barack Obama has a theory of the case, yes he does. For the past 30 years, the living standards of middle-class Americans have gone nowhere even as the overall U.S. economy has grown markedly. The Obama explanation: Wealthier Americans grabbed all the money. Time to raise their taxes for the sake of “fairness.” ...
Underlying Obama’s entire thesis is the work of two economists, Thomas Piketty and Emmanuel Saez. According to them, median American incomes rose just 3.2% from 1979 through 2007. ...
So what happened to the rest of the dough? The top 10%, 1% and 0.1% grabbed all the money. Or pretty much most of it. Time to crank up taxes on the rich and spend more on the middle class. It’s not overstating things to say that the findings of Piketty and Saez form the very heart of Obamanomics, giving a powerful economic rationale for Obama policies such as ending the upper-end Bush tax cuts to Obamacare to the Buffett Rule.
But it’s just not true, according to a new study in National Tax Journal from researchers at Cornell University. The academics, led by economist Richard Burkhauser, don’t say the findings of Piketty and Saez are wrong — just incredibly, massively incomplete. According to the Cornell study, median household income – properly measured – rose 36.7%, not 3.2% like Piketty and Saez argue. That’s a big miss. ...
And all income levels got richer. Yes, the very rich did exceptionally well, mostly due to technology and globalization. Incomes rose 63% for the top 5%, 56% for the top 10% and 52.6% for the top 20%. But everyone else made out pretty well, too. Incomes rose 40.4% for households between the 60th and 80th percentiles, 36.9% for the next quintile, 25.0% for the next, and 26.4% for the bottom 20%. There’s the “shared prosperity” Obama says he wants, right in front of his eyes. ...
So the tax and regulatory polices of the past three decades did not lead to stagnation for the middle class at the hands of the rapacious rich. Claims to the contrary — such as those made by Obama, the Occupy movement, and many liberal economists — never really passed the sniff test of anyone who lived through the past few decades. And now we know why: The inequality and stagnation alarmists were wrong. And so, therefore, is the economic rationale of the president’s class-warfare economic policies. Not that economics ever had much to do with them anyway.
Because Saez and Piketty do not take into account welfare payments, food stamps, Medicare, Medicaid, Social Security and employer-provided health insurance (which are not reported to the I.R.S. as income), they arguably overstate inequality trends. A second caveat to bear in mind is that the Saez-Piketty findings are based on pre-tax income, which is more unequally distributed than after-tax income. ...
In October, the non-partisan Congressional Budget Office, issued a 47-page report, Trends in the Distribution of Household Income Between 1979 and 2007.
At the moment, there is considerable agreement that the CBO analysis of overall income shares is the gold standard.
Paying tax on unrealized capital gains has some advocates, but it is ultimately unworkable.
Late last year, I attended a hearing of the congressional Joint Committee of Taxation on the taxation of financial products. One of the four speakers testifying that day was attorney David S. Miller, who put forth the idea that really rich people should mark their assets to market at year-end and pay tax on unrealized profits every year. A professor from Columbia University testifying at the hearing also thought that an annual tax on unrealized profits wasn't a bad idea. Tax lawyer Andrea Kramer was the lone voice of skepticism, having thought through the practical problems with such an idea.
On April 1, the blog TaxProf reported that Warren E. Buffett liked Mr. Miller's idea so much that he would start the ball rolling by paying a 15% tax on his unrealized appreciation in Berkshire Hathaway Inc. The blog reported that Mr. Buffett had sent a check for $1.2 billion to the IRS voluntarily. Thankfully, on later inspection, I found out that his largess was only an April Fools' Day hoax. But the drumbeat for mark-to-market taxation can still be heard.
In looking for literature on the subject, I found that every 20 or 30 years, Congress toys with the idea of changing the realization-based capital gains taxation model. A few of these forays ended after pretty much everyone came to the conclusion that asking people to pay tax on phantom profits just isn't fair. Others got past the fairness issue but got bogged down on the problems that taxpayers would face trying to find the money to pay the tax on the unrealized appreciation. ... If the analysis gets past these hurdles, the practical realities of administering the tax come into play. ...
Mr. Miller's answer is to apply this concept only to those publicly traded securities that have easily ascertained year-end values. ...In the case that publicly traded securities were singled out for harsh tax treatment, there would be an evolution of new financial products. These investments wouldn't fit within the definition of marked-to-market securities, yet would mimic direct holdings as best they could.
Most studies and testimony on the subject of timing capital gains taxes conclude that realization-based taxation is the right way to go. In addition, even if it were preferred philosophically, the mark-to-market method couldn't be levied on all assets and thus wouldn't work. Like democracy, a realization-based taxation system may not be perfect, but it is still the best method that exists.
Monday, April 23, 2012
this Article offers a new alternative for copyright reform: tax law. I call this approach the “tax fix” for copyright law, in that tax law is used to fix problems or inefficiencies in our copyright system. Using the tax system as a way to modernize our copyright system offers several advantages. Most important, tax law can fix problems in our copyright system without violating the Berne Convention or TRIPS Agreement, and without requiring amendment to either treaty. Tax law can also be used to incentivize the copyright industries to adopt new, innovative approaches to copyright in ways that voluntary reforms like Creative Commons cannot. The tax fix has the added benefit of offering, beyond the “one size fits all” approach, greater tailoring of copyrights by both industries and individuals—which may, in turn, lead to greater efficiency.
Stanley Veliotis (Fordham University Schools of Business), Sweating the Small Stuff: The Cost of Immaterial Tax Law Provisions, 3 Wm. & Mary Pol'y Rev. 36 (2011):
The United States federal income tax law has been the subject of decades of study due to its burgeoning level of detail and complexity, including many calls to scrap the income tax and replace it with new approaches, such as a consumption tax. This Article argues that a more manageable and pragmatic approach to improving the tax law, itself a creature of incrementalism, is to reverse its complexity through an incrementalist approach. The tax code contains many immaterial provisions, including two provisions applicable to millions of individuals (the $100 floor on personal casualty and theft deductions, and the up-to-$250 deduction for educators). Such provisions have trivial budget implications and negligible, if any, incentive effects on taxpayer behavior. These provisions add unnecessary complexity and thus inflate transaction costs for the government and taxpayer. For the immaterial provisions residing within tax expenditures, such as the educator deduction, an institutional economics analysis reveals such tax expenditures are ideal candidates for removal from the tax code, to instead be directly expended by the government. The Article offers recommendations as to how to identify and eliminate tax law clutter.
"I am a firm believer that the true progress of an institution such as the IRS is achieved by standing on the shoulders of those who have preceded us,” [IRS Commissioner] Shulman told a Washington audience. You could almost hear the contrived catch in his throat....
The accountants who prepare millions of tax returns, however, hear something else. They see the IRS standing not on “the shoulders of those who have preceded us,” but on the necks of everyone else. “We’ve been instructed to show no mercy this year, to disallow everything,” says one IRS compliance officer. “It’s frightening.”
Stung by the reluctance of Congress to raise taxes, the Obama administration has obviously set out to use the IRS to do the dirty deed. President Obama has big plans for expanding the federal government once he achieves “flexibility” after the November election. The coming schemes will cost money. Since Congress won’t cooperate and the Treasury is overdrawn at the Bank of China, the only solution is confiscation. There’s still standing room on the necks of taxpayers - even widows, orphans, the disabled and the infirm, some even sick unto death.
One avenue to more revenue (more a boulevard, actually, than an avenue) is the closing of loopholes in the tax law. Everyone in Congress -- Republicans and Democrats, liberals and conservatives -- agrees this is a good idea, as far as it goes. The tax code, as Jimmy Carter said, resembles Swiss cheese, with holes for handouts, carve-outs, subsidies and loopholes for the many, and justice and mercy for the few. Mr. Obama made a show of declaring war on loopholes months ago. “Get rid of loopholes,” he demanded in his State of the Union address last year. “Level the playing field.”
Loopholes are the evasions that everybody in Congress loves to hate, but Congress creates new ones in every tax bill. It’s the love that dare not speak its name, but it’s the way of Washington, where inconsistency is a virtue. Some loopholes are cuter than others, and anyone who wants one must hire an effective (and expensive) lobbyist. An author, poet, sculptor or screenwriter, for an artistic example, must pay taxes on “ordinary income” at rates up to 35%. The Nashville Songwriters Association knows how to lobby, and a songwriter who sells a catalog of songs gets a better deal. The songwriter can report the income as a capital gain and claim a rate of 15%. Sobbing, singing and sighing about disappointment, blighted hopes and hard times is only a pose.
Congress and the IRS are dancing partners in a carefully choreographed ballet. Occasionally a congressional committee will call in a commissioner to make him squirm about abuses of taxpayers, arrogance of the agency and its high-handed interpretation of tax law. But it’s only a ballet, and the IRS is eager to perform a passable pas de chat. The ballet terrifies taxpayers like “Peter and the Wolf” terrifies small children, and there’s a spike in compliance, craven or otherwise. So be grateful for that helpful foot on your neck, and hurry down to the post office.
(Hat Tip: Arlene Holen.)
- In this analysis we look primarily at high-tech companies, a sector of the economy that has boomed despite the recession, with a focus on 30 top tech companies listed in the Fortune 500. Many of these companies are presently supporting a repatriation campaign that would allow foreign profits to be brought back to the U.S. at a drastically reduced tax rate.
- The amount of cash held overseas by these companies shot up by 21% from 2010 to 2011, to just under $430 billion. Apple and Microsoft had the biggest increases in cash held offshore.
- Simultaneously, the tax rate paid by these companies has plunged – from 23.6% in 2009 to 19.9% in 2010 and 16% in 2011. The hypothetical top corporate tax rate of 35% is almost entirely a fiction.
- The tax rate paid by Apple, the world’s most valuable company with a stock valuation that passed $500 billion in March 2012, has dropped even more dramatically. With profits soaring past $34 billion last year, the company’s tax rate fell from 24.8% in 2009 to 14.7% in 2010 and 9.8% in 2011. Apple’s tax rate over the last three years was less than that of middle-income Americans with average household incomes of $64,500 per year; its 2011 tax rate was lower than that of American households making an average of $42,500 per year.
- These 30 tech companies added a net total of 51 foreign subsidiaries from 2010 to 2011. Nineteen of these were in tax haven jurisdictions as identified by the GAO. Sixteen of the companies had 10 or more subsidiaries in tax haven countries.
- Despite claims being made in an aggressive lobbying campaign, repatriation is unlikely to create U.S. jobs or boost the economy. The 2004 repatriation law, which allowed companies to return profits to the U.S. at a sharply discounted 5.25% tax rate, cost the Treasury billions in revenues, while the top 15 repatriating companies actually cut U.S. jobs in the aftermath. The money appears to have gone to investors and executives through stock buybacks, increased compensation to executives and other devices, not into expanded U.S. production or employment. Since the 2004 holiday, the corporations that repatriated substantial sums have built up their offshore funds at a greater rate than before it was enacted, suggesting that the law encouraged the shifting of more corporate dollars and investments offshore in anticipation of another tax holiday.
Bradley T. Borden (Brooklyn), The Overlap of Tax and Financial Aspects of Real Estate Ventures, 39 J. Real Est. Tax'n 67 (2012):
This article examines the effect partnership tax law has on financial aspects of real estate ventures. It introduces the relevance of the aggregate and entity views of tax partnerships and demonstrates how those views can greatly affect financial projections for each of the members of a real estate venture. It also demonstrates how financial calculations can vary significantly depending upon how closely analysts track a tax partnership’s allocation method. Finally, the article serves as a primer for tax practitioners who are unfamiliar with the financial tools that are so prevalent in real estate analysis.
Martin A. Sullivan (Tax Analysts), U.K. Road to Competitiveness Is Paved With Tax Increases, 135 Tax Notes 390 (Apr. 23, 2012):
It has been the stated policy of the United Kingdom's Conservative-led coalition government "to create the most competitive corporate tax regime in the G20." Chancellor of the Exchequer George Osborne reiterated this policy -- expanded to include all noncorporate business -- in his 2012 budget speech delivered on March 21.
The flagship provisions of the policy are a large reduction in the corporate tax rate, exemption of most foreign profits from tax, and the introduction of a patent box. But these high-profile tax cuts have been accompanied by offsetting tax increases on business and -- by far the most significant tax change since the new government came to power -- an increase in the VAT rate. How the Conservatives have implemented tax reform has important lessons for U.S. policymakers who are considering the same path.
All Tax Analysts content is available through the LexisNexis® services.
Law schools across the country seem to share a common belief: That if their faculty publish more academic scholarship, and place it in better journals, then the U.S. News ranking of the school will improve. Schools have expended great time and expense on this project, and reshaped their faculties in pursuit of this goal. In hiring and at tenure review, most places view scholarship as being more important than teaching, in part for this reason. This belief has played a role not only in restructuring our institutions, but our values.
Is it a myth?
Looking back over several years of rankings, I have trouble identifying schools for whom this tactic was successful. After all, if scholarship can result in a long-term improvement in the rankings, shouldn't there be success stories?
So tell me-- where are they? What are the schools that managed, through increased scholarship rather that other factors, to significantly improve their rankings over the long-term (as opposed to brief jumps)?
Anyone? Anyone? Bueller?
Pepperdine certainly fits the bill: the school has made the biggest move I am aware of in the U.S. News rankings, rising over 50 spots in recent years, from the unranked Tier 3 in 2004 at the start of Ken Starr's deanship to #49 this year (seventh among the twenty California law schools, after Stanford (2), UC-Berkeley (7), UCLA (15), USC (18), UC-Davis (29), and UC-Hastings (44)). Although many factors undoubtedly contributed to Pepperdine's rapid ascent, a number of high profile lateral faculty hires over the past decade likely played a major role, including:
- Robert Pushaw (2001, from Missouri)
- Kristine Knaplund (2002, from UCLA)
- Douglas Kmiec (2003, from Catholic (Dean) and Notre Dame)
- Edward Larson (2006, from Georgia)
- Thomas Stipanowich (2006, from CPR Institute and Kentucky)
- Grant Nelson (2007, from UCLA)
In addition, Pepperdine is the only law school to earn Order of the Coif membership betweem 2004 - early 2012 (when Richmond earned membership). For more on Pepperdine's growing scholarly profile, see Brian Leiter's Law School Reports, In Fairness to Pepperdine.
Wall Street Journal: The Inequality Obsession, by Walter Jenkins:
Income inequality is a strange obsession, at least to the extent the obsessives focus their policy responses on trying to adjust the condition of the top 1% rather than improving the opportunities of everyone else.
Income inequality could be a sign of real pathology in authoritarian societies where entrenched groups use government-granted privileges to protect themselves from competition. By and large, that's not the case in the U.S., where most see the market actually increasing the competitive advantages of the educated, skilled, hardworking and talented.
Though it's always good to be on guard against political favoritism, the U.S. exhibits mostly a giddy process of wealth creation by people from middle-class backgrounds who start companies or become Wall Street traders or CEOs or celebrity performers in entertainment and sports.
Generalizing about the distribution of incomes is an academic specialty seemingly incapable of freeing itself from tendentiousness. Take a popular study by Thomas Piketty and Emmanuel Saez, two French-born researchers, claiming U.S. income inequality is higher than anytime since the 1920s.
Their result comes from choosing to look at income that leaves out transfers. Unlike the 1920s, Americans today have the opportunity partly to live off Social Security and Medicare. They can decide to do without reportable income. Also left out of the calculation is the large share of compensation accounted for by untaxed health insurance.
Too, the tax code has changed. Income is realized under today's code that wouldn't have been realized under previous tax codes. Owners of capital buy and sell much more easily, and the tax system creates much less incentive for them to sit on their holdings and report less income.
For the record, so sensitive are the inequality generalizations to how you define income, and whether household size is taken into account, that the claimed shift toward greater inequality can be made easily to disappear, especially when consumption rather than income is measured.
And, as always, the solution to income inequality amounts to persuading the rich to report less income. As CNBC's John Carney has shown, Facebook founder Mark Zuckerberg could avoid ever reporting any income simply by borrowing against his assets to meet his living expenses. "Perhaps most bizarrely, Zuckerberg might be eligible for an Earned Income Tax Credit if he keeps his personal income under $13,000," writes Mr. Carney.
This would make America a better place how? Yet, at bottom, such cosmetic fixes are the main outcome from using higher tax rates to "correct" income inequality. ...
Ditto the return of tax reform to the agenda. Tax reform promises to improve the opportunities of all while sponsoring less tax evasion, less distortion of investment priorities and less politically corrupting pursuit of loopholes, all of which are the certain and inevitable corollary of high tax rates enacted to salve inequality neuralgia. ...
As Freud put it, "Everyone must be the same and have the same. Social justice means we deny ourselves many things so that others may have to do without them as well."
As their final projects, students were asked to design a platform that solved a problem in legal practice, either by making practice more efficient or increasing access to law and legal services (or both). The class culminated in an Iron Tech Lawyer Competition where student teams presented their apps to a panel of judges, two Georgetown colleagues and two outside tech law experts.
- Confidence Games: Lawyers, Accountants and the Tax Shelter Industry (MIT Press, 2012)
- Travails in Tax: KPMG and the Tax Shelter Controversy, in Legal Ethics Stories 89-117 (David Luban & Deborah L. Rhode eds., Foundation Press 2006)
- Sheltering Lawyers: The Organized Tax Bar and the Tax Shelter Industry, 23 Yale J. on Reg. 77 (2006))
- Legal Education's Original Sin
- A 50-State Tax Lesson for President Obama
- President Obama and House GOP: 'Walking Advertisements for Tax Reform'
- Tamanaha: What Is Going on at the LSAC?
- The Death Spiral of Law Firms (and Law Schools)
- Tax Prof Pie
- Top 5 Tax Paper Downloads
- Former SUNY-Buffalo Law Prof Sues Dean for Wrongful Termination
Sunday, April 22, 2012
This month, the legal industry has been fixated on the gathering storm clouds around Dewey & LeBoeuf, a high-end international law firm based out of New York. The issue is not so much whether Dewey is in trouble -- that much is obvious -- but whether the firm is in the midst of an accelerating death spiral. About 20% of its partners have defected to other firms this year. More may be jumping ship. Former partners are speculating about whether the firm will merely shrink, or be "busted up into a bunch of little pieces."
But no matter what Dewey's final fate may be, its travails are a sign of something larger, which Bloomberg Businessweek calls out in a new article this week: Slowly but surely, the rarefied world of corporate law appears to be coming apart at the seams.
Last year saw the collapse of Howrey, a venerable Washington, D.C. firm that had once been among the most powerful forces in corporate litigation. In the last decade, Businessweek notes, a dozen major firms have crumbled, and more may be in trouble. ...
There are any number of ways to interpret the crisis in Big Law, as the top tier of the industry is known, but the story, at its core, is a simple cautionary tale. (Disclaimer: I worked on the business side a firm for about a year and a half.) During the early and mid aughts, firms built unsustainable business models that survived off the froth flying from Wall Street. Now, many have become too bloated to change course and adapt to a new era in business.
It starts with the two graphs below, from a report this year by Citi, which is a major law firm lender, and the Hildebrandt Institute. Do yourself a favor and ignore the acronyms. In essence, it shows the growth in profits at top law firms pre- and post-recession. The left axis on each is a measure of profitability. The bottom axis is the percentage growth of profits over time. And here is the upshot for our purposes: Before the economy crashed, business was plentiful growth was easy. After the economy crashed, business was lean and growth became very, very hard.
You might notice that a few firms still appear to be producing stellar results. In fact, they seem to be doing better than ever. And it's true -- a few are. These are the metaphorical 1% of the legal industry, the elite firms based mostly in New York that have been able to maintain their performance by focusing on the most expensive, sophisticated work. For everyone else, the wrenching changes that followed the recession have disrupted their business. ...
[R]ather than finding ways to innovate and improve profits, much of the legal world has turned to cannibalizing itself. Dewey may be the victim today, but there'll probably be others tomorrow. This is what happens when an industry can't see past the good times, then gets sacked by the bad.
Dewey LeBoeuf, like the Howrey firm which failed slightly over a year ago, are almost certainly on the lefthand side of the 2007 to 2010 profitability chart. Weissman's conclusion is pretty simple: the industry is running out of gas. More failures are likely. Unfortunately, I agree.
For the record, legal education's problems are no less severe. There are not enough qualified students to fill the number of 1L seats, so as an industry, our revenues (akin to law firm profits) are going to go down. The entire legal services and legal education industry is undergoing a major disruption. All of this talk of structural change is going to move from the abstract, where we contest its existence, to the concrete, which induces panic in the unprepared. It is going to be very tough. Our character is going to be tested.
At the annual Dean's Cup basketball game between Temple and Villanova law schools, Tax Prof Alice Abreu was pied by her husband:
The back story from Tax Prof Keith Fogg:
When she and her husband were students at Cornell and just beginning to date, Alice snuck up behind him and pied him with a banana cream pie. He had never gotten her back. To raise money for students to engage in public interest work, which is the point of the basketball game and an auction that occurs before the game, Temple students paid money to vote for their favorite professor. Alice won and her husband was given the honor of hitting her with the pie in order to even the score from their college years. He talked about the history and lulled Alice into complacency before coming up behind her swiftly and surprising her with the banana cream pie.
For more on law professors and pies, see:
- Cornell Law School Faculty Pie-Eating Contest (Mar. 21, 2011)
- 2d Annual Cornell Law School Faculty Pie-Eating Contest (Mar. 16, 2012)
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 #1 and #5:
1. [1447 Downloads} There’s No There There: Low Tax Rates and Economic Growth, by Filip Spagnoli (National Bank of Belgium)
3. [339 Downloads] Retirement Assets to a Surviving Spouse – Rollovers and Portability are Your First Choice, by Christopher R. Hoyt (UMKC)4. [273 Downloads] 2011 Developments in Connecticut Estate and Probate Law, by Jeffrey A. Cooper (Quinnipiac) & John R. Ivimey (Reid and Riege, Hartford)
5. [137 Downloads] Recent Developments in Federal Income Taxation: The Year 2011, by Martin J. McMahon, Jr. (Florida), Ira B. Shepard (Houston) & Daniel L. Simmons (UC-Davis)
The Spectrum, Law School Dean Mutua Faces Civil Suit:
On March 23, former UB Law Professor Jeffrey Malkan filed a civil rights lawsuit against Law School Dean Makau W. Mutua in the federal District Court of Buffalo. The suit alleges that two months after Mutua became dean in 2008, he illegally fired Malkan by violating Malkan’s right to due process under the 14th Amendment and barring Malkan access to a mandatory faculty review procedure.
Malkan, former director of the law school’s Legal Research and Writing program (LRW), alleges that Mutua failed to follow non-discretionary faculty review procedures required under Malkan’s contract with the school. The lawsuit also names the current vice dean for legal skills, Charles P. Ewing, who allegedly worked in conspiracy with Mutua to block Malkan’s access to a mandatory faculty grievance process, thus allowing Ewing to become director of the LRW soon after Malkan was fired.
Malkan was fired from the law school because Mutua planned on eliminating the LRW program from the school’s curriculum, a position Malkan had maintained since 2000, the lawsuit alleges. In a letter to Malkan informing him of his termination, Mutua said the new Skills Program (created after the LRW’s termination and awarded Ewing) was an appropriate and legal substitution. ...
UB Law Professor Martha T. McCluskey said Malkan’s dismissal and the administration’s unwillingness to settle his case have contributed mistrust among the faculty. “I understand that in part the administration argued that the program for which [Malkan] worked was terminated, but this argument seems dubious,” McCluskey said in an email. “The legal writing program in which he worked was replaced with a program with a different title, but without that much substantive difference.”
Soon after he left UB three years ago, Malkan was in line for a position at the Charlotte School of Law in North Carolina. Because of rules set by the Association of American Law Schools, the school was obligated to ask for UB’s permission to recruit Malkan. Mutua blocked Malkan from the job by denying the school’s request.
Malkan, who currently lives on Long Island, has been unemployed since leaving UB in 2008. “Many faculty have concerns that the administration gave short shrift to contractual rights, as well as basic decent treatment of [Malkan] and to the process by which his contract was terminated…this firing contributed to fear and low morale among other faculty,” McCluskey said. ...
Malkan says both Mutua and the school have failed to make any indication that they will settle out of court for any of the lawsuits. Malkan is suing for approximately $1.3 million in breach of contract damages.
Upon arriving at UB, Mutua sought specific faculty changes that Malkan referred to as a “hit list.” Along with Malkan, Mutua fired the director of the Baldy Center, Lynn Mather; the director of the law school information technology department, Alexander Dzadur; and, according to Malkan, forced the resignation of the director of the law library, Jim Millis.
Malkan also said the law school faculty called a meeting to vote “no-confidence” in Mutua being the dean back in November 2010. The faculty was apparently upset, believing that Mutua had been forced on them as the new dean of the Law School.
“They never wanted [Mutua] to be the dean…[UB President and former Provost Satish K.] Tripathi and [former UB President John B.] Simpson came over and told the faculty that they better get in line and shut up,” Malkan said. “There’s a lot of unhappiness with the way Mutua was chosen and basically imposed on the faculty. The faculty have voiced their disapproval, but Tripathi and Simpson were very firm that they better learn to live with him.”
(Hat Tip: Dan Filler.)
Saturday, April 21, 2012
I spent a delightful day yesterday at the Pepperdine Law Review symposium on The Lawyer of the Future. I moderated the closing panel on Training Future Lawyers, which focused on a presentation by Jim Moliterno (Washington & Lee) based in part on his forthcoming book, A Profession in Crisis (Oxford University Press, 2013). I was particularly struck by Jim's observation that the root cause of the troubles facing legal education today can be traced to a fateful choice made 130 years ago: medical schools decided that their mission would be to turn out doctors, while law schools decided that their mission would be to turn out law professors. Jim described Washington & Lee's attempt to better equip students for legal practice through its innovative third year curriculum:
In these courses, students are urged to make the transition from student to lawyer. Students continue to learn law, but now do so as lawyers do, with a client’s need as the driver, rather than as students do, with a three hour exam as the driver. In such circumstances, students transition to the thought processes of lawyer-problem-solver and away from learning for no more reason than acquiring knowledge. This kind of third year can be a year with one foot in the academy and one in the practice. Far from exclusively skills courses, these courses develop habits of the lawyer’s mind that are not developed in the traditional courses aimed at appellate legal analysis.
During the ensuing roundtable discussion, Paul Carrington (Duke) challenged us all to work to reduce the cost of law school and the debt load borne by our students in a time of declining job opportunities amidst structural contraction in the legal profession (as chronicled by Bill Henderson (Indiana) in the earlier panel on Lawyers in Modern Practice).
Barack Obama is asking Americans to gamble that the U.S. economy can be taxed into prosperity. That's the message of his campaign for the Buffett Rule, which raises income-tax rates on millionaires to a minimum of 30%, and for the expiration of the Bush tax cuts. He wants to raise the highest income tax rate by 20%, double the rate on capital gains, add a new 3.8% tax on all capital earnings, and nearly triple the dividend tax rate.
All this will enhance "economic efficiency," insists a White House economic report. As for those who disagree, says President Obama, they're just pushing "the same version of trickle-down economics tried for much of the last century. . . . But prosperity sure didn't trickle down."
Mr. Obama needs a refresher course on the 1920s, 1960s, 1980s and even the 1990s, when government spending and taxes fell and employment and incomes grew rapidly.
But if the president wants to see fresher evidence of how taxes matter, he can look to what's happening in the 50 states. In our new report Rich States, Poor States, prepared for the American Legislative Exchange Council, we compare the economic performance of states with no income tax to that of states with high rates. It's like comparing Hong Kong with Greece or King Kong with fleas.
Every year for the past 40, the states without income taxes had faster output growth (measured on a decadal basis) than the states with the highest income taxes. ... Over the past decade, states without an income tax have seen 58% higher population growth than the national average, and more than double the growth of states with the highest income tax rates. ... The transfer of economic power and political influence from high-tax states toward low-tax, right-to-work ones is one of America's most momentous demographic changes in decades. Liberal utopias are losing the race for capital. The rich, the middle-class, the ambitious and others are leaving workers' paradises such as Hartford, Buffalo and Providence for Jacksonville, San Antonio and Knoxville.
Illinois, Oregon and California are state practitioners of Obamanomics. All have passed soak-the-rich laws like the Buffett Rule (plus economically harmful regulations, like California's cap-and-trade scheme), and all face big deficits because their economies continue to sink. ...
Taxes aren't all that matters, to be sure, and low-tax states don't always outperform high-tax ones. Often people who smoke don't get cancer, and sometimes people who don't smoke do get cancer, but that doesn't mean it's smart to smoke. It's a dangerous gamble to raise taxes on capital and businesses to nearly the highest rates in the world and hope that nothing bad will happen.
Wall Street Journal editorial, Bipartisan Tax Gimmickry:
Senate Democrats lost their latest attempt at tax flim-flam on Monday when their 30% minimum tax (the Buffett rule) went down to easy defeat. House Republicans plan to counter as early as today with their own tax gimmick, albeit a business tax cut. They are both walking advertisements for tax reform. ...
Republicans are calling their bill a one-year "bridge to tax reform," but they would do more for the economy and their political prospects if they began to educate the country about sensible tax policy.
A major reason the Obama program has been such a failure is that it has been filled with temporary, targeted policies that add to economic uncertainty: Cash for clunkers, the first-time home buyer's tax credit, tax credits for left-handed investors who weather-strip their windows and buy an electric car but make under $100,000 a year. We exaggerate only a little.
The economy works best when investors and companies can operate under predictable policies that allow them to better judge their risks for the long term. Reagan-era officials understood this, but too many Republicans have forgotten. The U.S. economy doesn't need another tax gimmick. It needs a tax reform that includes a permanent cut in individual and business tax rates for everyone.
Following up on Thursday's post, LSAC Jacks Up Fees 15-31% to Students in Light of Decline in LSAT Test Takers: Balkinization, What is Going On at Law School Admission Council (LSAC)?, by Brian Tamanaha (Washington U.):
When a business is faced with declining demand, the usual course is to cut price (and reduce expenses), but LSAC is doing the opposite. LSAC is not a "business," of course. It is a non-profit organization that was created by law schools to administer the LSAT--with equal voting shares held by every ABA accredited law school. It doesn't need to cut price because it holds a monopoly, and the decline is not owing to the price of its service but to a dampening of interest in attending law school. There is no point in cutting price, they probably reason, because that won't lead to more applicants.
That's true enough, but it still doesn't explain why fee hikes are necessary given that LSAC is sitting on nearly $200 million in assets, and revenues exceed expenses.
Here is another curiosity: the officers of this non-profit are extremely well compensated. In 2009, the President earned $635,000 (with what looks like a $200,000 forgivable loan upon hiring)--compared to the previous president who earned $442,000 in 2007. The next highest officers earned $375,000, $322,800, $299,2000, $282,000, $252,500, $237,400, $231,912, and so on. In 2008, the four highest officers below the President also received one time supplemental payments of $100,000, $100,000, $85,000, and $70,000.
This a lot of money to pay people for what amounts to running a money machine. They do not engage in any fundraising. Their income stream is unrelated to anything they do: revenue goes up when more people apply to law school and goes down with the reverse.
I have previously raised questions about LSAC and its role in connection with law schools. There is no doubt that it can provide a much better service--in particular by supplying the ABA the data on LSAT and GPA medians for every law school. It has this information in its data bank and providing this directly to the ABA would avoid errors as well as false reporting.
Law schools elect the Board of Trustees that oversees LSAC. It is time to elect people who will take a hard look at its operation. What are LSAC's priorities? Why is it amassing a huge pile of money? Why is it raising fees when it is not losing money? Why are the officers paid so much? Why is there a general counsel and assistant general counsel, with a combined salary of half a million dollars, along with legal fees to outside law firms totaling another half a million dollars? Why is a million dollars spent each year on lobbying? Why does LSAC pay for "guests" to accompany staff members to two board meetings a year? ...
I am not saying that there is anything wrong with LSAC. There may be good answers to all of this. But it doesn't hurt to ask.
Friday, April 20, 2012
Is Mitt Romney's Plan to Release Only Two Years of Tax Returns Consistent With John Kerry's Approach?
New York Times, Was Romney Right About John Kerry?:
George Romney released 12 years of income tax returns when he ran for president in 1968. George Romney’s son, Mitt, plans to release just two, so his campaign’s looking outside the family for precedent.
Eric Fehrnstrom, a Romney spokesman, told The Huffington Post: “John Kerry released two years.” In a CNBC interview with Larry Kudlow on Tuesday night, Mr. Romney said: “John Kerry released two years of taxes…I’ve released one already, put the estimate out for the next year. We’ll have two years of taxes.”
There’s a slight problem with this claim: It’s not accurate.
As the Huffington Post notes, Mr. Kerry made a habit of releasing tax returns to the Massachusetts press during his senate campaigns
Daily Caller, ThinkProgress Misleads on Romney vs. Kerry Tax Comparison:
During a recent CNBC interview with Larry Kudlow, presumptive Republican nominee Mitt Romney asserted that John Kerry had only “released two years of taxes” when he ran for president.
ThinkProgress quickly accused Romney of lying, noting that Kerry actually released twenty year’s worth of tax returns. The HuffPost dialed it back a little, calling Romney’s assertion “misleading,” and explaining the confusion (Kerry had also released tax returns during his previous Senate races.)
When he ran for president in 2004, Kerry released his ’03 tax return, showing an income of $395,338. However, the Kerry-Heinz net worth was estimated between “at least $900 million and possibly as much as $3.2 billion” in 2004.
Theresa Heinz Kerry never really released her tax returns – at first refusing, and then in October 2004 just weeks before election day, releasing (as the HuffPost notes) just two pages of only her 2003 tax return.
So, for all of the John Kerry tax returns that he may have released over the years when he was a senator, there was never a full release of their household income — because Theresa’s were never released.
This paper addresses three questions:
- Is there evidence that the tax systems of different countries have converged (i.e., become more similar) in the period 1980-2010?
- If so, what is the explanation for this convergence?
- Is convergence a positive of negative development?
Terrence Revere recently discovered that he is part of a notorious group that includes hip-hop star Damon Dash and financial institutions American Express and Cantor Fitzgerald. As of Friday, the eclectic bunch had been identified as delinquents on New York's tax department website, which publishes a list of the top individual and corporate tax evaders, by amount owed. ...
Welcome to cyber-shaming, the public listing of individuals and companies who don't pay their taxes. The practice is gaining popularity as states struggle to find revenue in a weak economy. New York, New Jersey, Nebraska and Oklahoma in the past three years have joined the ranks of the roughly 30 states that publish "shame lists." The phenomenon gained ground globally in January when Greece, in severe financial distress, decided to publish its list of top tax delinquents.
On Friday morning, California published a new version of its list of those delinquent in paying income tax, the first since its legislature passed a law in October requiring the state to post the names of the 500 owing the most. California's previous list had only 250 names. This listing now includes the names of corporate officers of any businesses listed. Soon, the state will also be able to revoke the driver's and occupational licenses of those listed, according to Denise Azimi, a spokeswoman for the state's Franchise Tax Board. Included on California's list is actress Pamela Anderson who said she is working with the state to pay back the money. ...
The lists don't apply to companies that employ aggressive tax strategies to reduce their bills or that fight audits in court, said Joshua Blank, a professor of tax law at New York University who has written an article on the efficacy of public shaming. They also don't include anyone in bankruptcy or working with the state to try to settle a case through a payment plan.
Compared with other measures, like raising taxes, cyber-shaming has proved a relatively noncontroversial way for strapped states to raise money. California collected $27.9 million as a result of its list last year.
The debate over whether tax privacy—a set of statutory rules that prohibits the federal government from publicly releasing any taxpayer’s tax return— promotes individual tax compliance is as old as the income tax itself. It dates back to the Civil War and resurfaces often, especially when the government seeks innovative ways to collect tax revenue more effectively. For over 150 years, the tax privacy debate has followed predictable patterns. Both sides have fixated on the question of how a taxpayer would comply with the tax system if he knew other taxpayers could see his personal tax return. Neither side, however, has addressed the converse question: How would seeing other taxpayers’ returns affect whether a taxpayer complies? This Article probes that unexplored question and, in doing so, offers a new defense of individual tax privacy: that tax privacy enables the government to influence individuals’ perceptions of its tax-enforcement capabilities by publicizing specific examples of its tax-enforcement strengths without exposing specific examples of its taxenforcement weaknesses. Because salient examples may implicate well-known cognitive biases, this strategic-publicity function of tax privacy can cause individuals to develop an inflated perception of the government’s ability to detect tax offenses, punish their perpetrators, and compel all but a few outliers to comply. Without the curtain of tax privacy, by contrast, individuals could see specific examples of the government’s tax-enforcement weaknesses that would contradict this perception. After considering this new defense of individual tax privacy in the context of deterrence and reciprocity models of taxpayer behavior, I argue that the strategic-publicity function of tax privacy likely encourages individuals to report their taxes properly and that it should be exploited to enhance voluntary compliance.
Dean since 2007, Chen plans to take one year of administrative leave. He will retain his appointment as a member of the law faculty. "It's been the privilege of my professional life to serve as dean of the UofL law school," Chen said.
University Provost Shirley Willihnganz credited Chen with several key accomplishments, including converting the night school to a part-time program, establishing a legal clinic and improving fundraising. "Dean Chen has a strong legal background," Willihnganz said. "We hope he will agree to share his extensive knowledge of commerce and health law to help us move forward with key initiatives in other areas of the university."
Jim is a perceptive observer of legal education:
- Mission: Impossible? (Jan. 26, 2008)
- The Role of Collegiality in Faculty Hiring and Promotion (Feb. 16, 2009)
- A Dean's Lament: I Wish I Had Never Gone to Law School (Aug. 23, 2011)
- Legal Education and the Heir of Slytherin (Nov. 9, 2011)
- The Better Angels of Our Profession (Jan. 15, 2012)
Update: Above the Law
I am delighted to be moderating the closing roundtable discussion at today's Pepperdine Law Review symposium on The Lawyer of the Future:
The Lawyer of the Future Symposium will showcase the lawyers of the past and present, the variety of roles they serve within American society, and what their experiences and models teach us about who the lawyers of the future can and should be. From public servents to philanthropists, government officials to business entrepreneurs, the symposium will focus on the role of lawyers as working models of the rule of law.
Each symposium presenter will articulate the role that he or she sees lawyers serving in society. Given the cacophany of public and political rhetoric concerning the practice of law, the symposium will address a new form of lawyer for the future - modeling civil discourse, orderly resolution of conflict, and informed public discussion and debate.
The underlying purpose of the symposium is to gain a better understanding of the role that American lawyers have played in the past, what challenges and opportunities they face in the present, and how lawyers will best be equipped in the future to meet the needs and expectations of their clients.
Opening Address: Deanell Reece Tacha (Dean, Pepperdine)
Panel #1: Lawyers of the Past
Keynote Address: Christopher Cox (Bingham McCutchen; former Chair, SEC and Member, U.S. House of Representatives)
Panel #2: Lawyers as Philanthropists
Panel #3: Lawyers in Modern Practice
Panel #4: Training Future Lawyers
Washburn hosts its annual Tax Law Colloquium today:
Each year the Business and Transactional Law Center at Washburn University School of Law hosts a tax law colloquium. The colloquium provides the opportunity for tax scholars from around the country to meet and discuss scholarly projects on which they are working. In an informal setting the participants share ideas, provide feedback regarding scholarly works-in-progress, and enjoy the company of other tax scholars.
- Lori A. McMillan (Washburn), An Empirical Examination of the Noncharitable Nonprofit Subsector in Canada
- Tracy A. Kaye (Seton Hall), Innovations in the War on Tax Evasion
- Johnny Buckles (Houston), The Federalization of Fiduciary Obedience Norms in Tax Law Governing Charities
- Leandra Lederman (Indiana-Bloomington), The Use of Voluntary Disclosure Initiatives in the Battle Against Offshore Tax Evasion
- William E. Foster (Washburn), Political Partisanship in the Tax Code
- Faye Woodman (Dalhousie University Schulich School of Law), Fifty Years After Carter: How Shall We Tax the Baby Boomers?
- Khrista McCarden (Pepperdine), The Charitable Deduction Games: Are the Laws in Your Favor?
Prior years' Washburn tax colloquia:
Festschrift in Honor of Paul McDaniel: The Proper Tax Base--An International and Comparative Perspective
The Proper Tax Base: Structural Fairness from an International and Comparative Perspective - Essays in Honour of Paul McDaniel (Yariv Brauner & Martin J. McMahon Jr., eds. Wolters Kluwer 2012):
Virtually all objections to taxation schemes spring from perceptions of unfairness. Is tax fairness possible? The question is certainly worth investigating in depth, and that is the purpose of this book. Today, as governments are busily making new tax rules in the wake of staggering budget deficits, is perhaps an appropriate time to pay heed to fairness so it can be incorporated as far as possible into tax reform. With twelve contributions from some of the world’s most respected international tax experts—including the late Paul McDaniel, in whose honor these essays were assembled—this invaluable book focuses on tax expenditure analysis, the quest for a just income tax, and division and/or harmonization of the income tax base among jurisdictions. Among the areas of taxation ripe for reform from a fairness point of view the authors single out the following:
- tax expenditure reporting
- modern welfare economics as a driver of tax reform
- grantor trust rules
- the notion of “horizontal equity”
- the international tax norm of “income source”
- transfer pricing
- jurisdictional application of VAT
Specific ongoing reforms in the United States, Australia, and other countries—as well a detailed analysis of the EU’s proposed common consolidated corporate tax base (CCCTB)—are also examined for fairness. As a timely, high-quality resource that effectively tackles an array of salient issues, this is a book that will be read and studied by tax practitioners, corporate tax experts, government tax policy makers, advisers and consultants on the reform and design of tax systems, and international organizations involved in standard setting related to tax administration, as well as academics and researchers.
Part I: Tax Expenditures
Ch. 1: The Staff of the Joint Committee on Taxation Revision of Tax Expenditure Classification Methodology: What Is To Be Made of a Change That Makes No Changes?, by Paul R. McDaniel
Ch. 2: Taxing Tax Expenditures?, by Martin J. McMahon, Jr. (Florida)
Ch. 3: The Tax Expenditure Concept Globally, by Miranda Stewart
Ch. 4: Tax Reform and Tax Expenditures in Australia, by Richard J. Vann
Ch. 5: Tax Reform Paul McDaniel Style: The Repeal of the Grantor Trust Rules, by Laura E. Cunningham & Noel B. Cunningham
Part II: The Fair Tax Base and International Tax Reform
Ch. 6: Horizontal Equity Revisited, by James Repetti & Diane Ring
Ch. 7: What Is This Thing Called Source?, by Lawrence Lokken
Ch. 8: Formula Based Transfer Pricing, by Yariv Brauner
Part III: A Comparative Perspective
Ch. 9: The EU proposed CCCTB—Some Tax Treaty Issues, by Kees van Raad
Ch. 10: Shared Legal Orders: Some Thoughts about the Influence of EU Case Law on International Tax Law Rules of the EU Member States, by Irene J.J. Burgers
Ch. 11: Intra Group Loans—A Swedish Perspective, by Bertil Wiman
Ch. 12: European VAT and Jurisdiction to Tax, by Antonio Vázquez del Rey.
Following up on my prior post, Tax Court to Decide: Are Documentaries Hobbies for Tax Purposes?: Forbes, Maker of 'Up With People' Movie Knocks Down IRS, by Janet Novack:
In a big win for documentary filmmakers, a U.S. Tax Court Judge Thursday ruled that Lee Storey, the producer and director Smile `Til It Hurts: The Up with People Story, can write off hundreds of thousands of losses from her filmmaking against her substantial income as a Phoenix lawyer, even though she failed to make a profit for six straight years. ... In her 46-page decision, [Judge] Kroupa not only accepted documentary filmmaking as a legitimate business, but also recognized it is one where the unprofitable start-up phase may be longer than normal and allowed Storey ever penny of her claimed losses. [Storey v. Commissioner, T.C. Memo. 2012-115.]
See also Double Taxation.
New York Times, Room for Debate: Do Wealthy Colleges Deserve Their Tax Breaks?:
In a recent op-ed column, Richard Vedder of the Center for College Affordability and Productivity ... pondered the fairness of tax breaks for a wealthy university like Princeton, while a state institution like the College of New Jersey begs for funding. His comments raise a good question: Should government change its tax exemption policies for universities as a way of equalizing educational resources in America?
- Sandy Baum (George Washington University) & Michael McPherson (Spencer Foundation), Why the Wealthy Few?
- Anthony P. Carnevale (Georgetown University), Colleges Provide a Public Good
- Andrew J. Coulson (Cato Institute), Why Perpetuate a Bad Policy?
- Barbara Gitenstein (The College of New Jersey), It’s Not About the Tax Breaks
- Frederick M. Hess (American Enterprise Institute), Tax Deductions Have a Purpose
- Osamudia R. James (University of Miami), Let’s Fix Our Budget Priorities
Business Insider, 10 Faces Behind The Incredible Law School Underemployment Crisis:
With law firms cutting back, thousands of law school graduates are still unemployed while stuck with six-figure student loan debt. Some students have filed class-action law suits against more than a dozen schools alleging that officials misled them about their job prospects after graduation.
"The system of legal education is completely broken now," former Chicago-Kent College of Law student Richard Komaiko told us. "Almost everyone I know from law school is unemployed or seeking alternative employment."
We wanted to hear the truth behind the crisis, so we interviewed several recent graduates [from Albany, Chicago-Kent, Colorado, Florida, George Washington, Houston, Loyola-New Orleans, Michigan, and Villanova].
(Hat Tip: Above the Law.)
[W]e examine the progressivity of the U.S. tax code and highlight two facts: the current U.S. tax system is less progressive than the tax systems of other industrialized countries, and considerably less progressive today than it was just a few decades ago.
The figure below shows how much influence taxes and transfers have in reducing inequality (measured using a common metric called the “Gini coefficient”) in various countries around the world. As indicated in the chart, the U.S. tax and transfer system does less to counteract pre-tax income inequality than the tax systems of most of our peer countries, meaning that our system is actually less progressive.
In addition to being less progressive relative to other countries, the U.S. tax system has also become less progressive over time. Over the last fifty years, tax rates for the wealthiest Americans have declined by 40 percent, while tax rates for average Americans have remained roughly constant. This is illustrated in the figure below.
Thursday, April 19, 2012
Ellen P. Aprill (Loyola-L.A.) delivers the Norman A. Sugarman Memorial Lecture in Nonprofit Law at Case Western today on Political Activities of Exempt Organizations: Do's and Don'ts During an Election Cycle:
Every time we turn around these days, it seems, we are hearing about PACs, Super PACs, and the role of § 501(c)(4) organizations in the current presidential campaign. Section 501(c)(4) organizations have attracted particular attention. Many commentators have charged that politically active § 501(c)(4) organizations are violating their requirements for tax exemption. Others have been advocating a change to the law to require public disclosure of donors to politically active §501(c)(4) organizations. Professor Aprill will evaluate the current controversy. After describing the rules that now govern the political activities of § 527 organizations and § 501(c)(4) organizations as well as other § 501(c) organizations, she will describe the activities of some specific organizations, to the extent public information is available, and evaluate proposed changes to the law.
Many people—perhaps most—want to make money and lower their taxes, but few want to unabashedly break the law. These twin desires have led to a range of strategies, such as the use of “paper corporations” and off-shore tax havens, that produce sizable profits with minimal costs. The most successful and ingenious plans do not involve shady deals with corrupt third-parties, but strictly adhere to the letter of the law. Yet the technically legal nature of the schemes has not deterred government lawyers from challenging them in court as “nothing more than good old-fashioned fraud.”
In this Article, we focus on the government challenges to corporate financial plans—often labeled corporate shams—in an effort to understand how and why courts draw the line between legal and fraudulent behavior. Quite a few scholars and commentators have investigated this question and nearly all agree: judicial decision making in this area of the law is erratic and unpredictable. We build on the extant literature with the help of a large dataset—the first of its kind—and uncover important and heretofore unobserved trends. Indeed, courts have not produced a confusing morass of outcomes as some have argued, but have generated more than a century of opinions that collectively highlight the point at which ostensibly legal planning shades into abuse and fraud. After discussing our empirical results, we show how they can be exploited by both government and corporate attorneys and explore how they bolster many of normative views set forth by the scholarly and policymaking communities.
The figure below denotes three groups of US Supreme Court tax cases examined in the study. The grey area denotes the superset of 919 federal tax cases; the dark grey area denotes the set of 364 corporate tax cases; finally, the black area indicates the subset of 137 corporate tax abuse cases.
The House Committee on Oversight and Government Reform held a hearing this morning on Problems at the Internal Revenue Service: Closing the Tax Gap and Preventing Identity Theft:
- J. Russell George (Treasury Inspector General for Tax Administration)
- Steven Miller (Deputy Commissioner of Service and Enforcement, IRS)
- Nina Olson (National Taxpayer Advocate, IRS)
- James White (Director, Strategic Issues, U.S. Government Accountability Office)
National Law Journal, LSAT Volume is Down, So Fees Are Going Up, by Karen Sloan:
Taking the Law School Admission Test is getting more expensive. The Law School Admission Council, which administers the test, has raised the testing fee from $139 to $160 — a 15% increase.
A significant decline in LSAT test takers in recent years prompted the increase for the 2012-13 testing cycle, Daniel Bernstine, the council's president [2009 salary: $635,694], announced in a newsletter. The council typically raises the fee in line with inflation, with the annual increases during the past 10 years falling between 2% and 5%. "It is now time for us to correct our fees in light of new volume realities, and to align them more closely with the true value of those services to law schools and their applicants....,"
The number of tests administered peaked during the 2009-10 cycle at 171,514. It fell by nearly 10% the following year, and by another 16% during the 2011-12 cycle.
The LSAT fee isn't the only cost going up. The cost to applicants of using the council's Credential Assembly Service, a centralized system that allows law school applicants to easily apply to a number of schools, is going from $124 to $155 — a 20% increase. Past increases have ranged from zero to 3%.
Additionally, applicants will pay $21 for each school applied to — an increase from the current $16 [an increase of 31%].
Council administrators said that the level of service provided to applicants has grown over time — making the process more convenient and worth the extra money.
[LSAC reported $51,298,416 of revenue on its 2009 Form 990.]
LSAT Blog, LSAT Test Registration Fee Increase: Why?:
In a normal, well-functioning market, when demand decreases, prices drop accordingly. However, when it comes to the fees associated with attending law school, the reverse is happening. What's going on? ...
Now that interest in law school is dropping (from an all-time high of 602,252 applications in 2010 to a projected 484,576 in 2012), LSAC needs more money in order to fulfill the purpose for which it exists. Rather than trying to get that money primarily from law schools, or by attracting new applicants, LSAC's squeezing it from the applicants who've chosen to stick around.
However, "the beatings will continue until morale improves" may not be the most effective strategy. While LSAC is the only game in town when it comes to law school admissions, applicants do have other options for post-undergraduate opportunities.
(It's worth noting that top business schools began accepting scores from the relatively cheaper GRE as a GMAT alternative in 2006. The Graduate Management Admission Council hasn't raised the price of the GMAT since 2005. Perhaps the competition has kept the price from rising.)
In a shrinking market, both LSAC and law schools are in desperate need of more law school applicants to stay afloat. Law schools, in particular, are looking to maintain their admission standards and keep the tuition dollars coming in. They can make far more money per student than LSAC can.
Maybe, just maybe, law schools should be picking up more of LSAC's expenses, rather than law school applicants.
Cara Griffith, Amy Hamilton & Jennifer Carr (all of Tax Analysts), Transparency in State Taxation — Part I: Discretionary Authority, 64 State Tax Notes 189 (Apr. 16, 2012):
Founded by Tom Field, Tax Analysts was created to foster an open and informed debate about taxation. But Tax Analysts quickly realized that these activities required access to information — information that federal tax authorities did not want disclosed. Tax Analysts has fought to obtain access to key documents in tax policy and administration, including private letter rulings and technical advice memoranda. But the need for openness does not end with federal tax law. State taxing authorities should be held to the same standards. Transparency is vital to a dynamic debate on tax issues.
This article is the first in a series that will examine transparency at the state tax level, showing where states are doing things right and where there is room for improvement. This first installment focuses on how states use their discretionary authority and how states provide guidance to taxpayers in circumstances in which states can use that discretionary authority. Later articles will address transparency in the legislative process and how states issue and make available private letter rulings.
All Tax Analysts content is available through the LexisNexis® services.
The Atlantic: America's Dumbest Tax Loophole: The Florida Rent-a-Cow Scam, by Jordan Weissmann:
Some junk in the tax code ... isn't merely odd. During a visit to Florida this month, I became acquainted with the state's own notoriously strange loophole which ... costs untold millions of dollars every year. ...
It's known as Florida's greenbelt law. The statute is meant to preserve farmland by taxing it at special, low rate. But some of the act's biggest beneficiaries are deep-pocketed developers, who often take advantage of it by literally renting cows. ... To qualify for the exemption, property owners are required to use their land for "bona fide" agricultural purposes. But what does "bona fide" mean? That's far from clear. Aided by lax court rulings, developers have seized on that ambiguity by leasing out their land to cattle ranchers while they prepare to build, often shaving hundreds of thousands of dollars off their tax bills.
What does it take to qualify for the exemption? Often just a few underfed animals roaming around a mud patch. Property owners must submit a form to the government and provide evidence that they are engaged in "good-faith commercial agriculture." They don't have to generate an income from their operations. Many have been allowed to claim the exemption even after rezoning their land for non-agricultural purposes. Others have received the break after starting construction. In its unsparing, 2005 investigation of the greenbelt law, reporters from the Miami Herald visited so-called farmland where they encountered cows eating trash in grassless fields and dead animals decomposing in the dirt.... [B]eneficiaries of the law have included Walt Disney World ($1.5 million in savings), as well as U.S. Senator Bill Nelson ($43,000 in savings), who keeps about six cows on 55 acres of land near the Indian River, courtesy of a cattle ranching operation that leases the property for free. Like Nelson, some developers simply offer their land to ranchers for no charge. Others, as the Herald noted, actually pay the ranchers -- hence the loophole's nickname, "rent-a-cow."
The total cost of these abuses isn't clear, but there are hints that it may be significant. According to a 2006 Associated Press article, the law costs Florida $950 million a year total. Some of the breaks go to legitimate commercial farms. But according to the Herald's 2005 investigation, more than two-thirds of the loophole's top 60 beneficiaries in South Florida weren't farmers.
(Hat Tip: Ed Kleinbard.)
Omri Y. Marian (Sullivan & Cromwell, New York), Meaningless Comparisons: Corporate Tax Reform Discourse in the United States, 32 Va. Tax Rev. ___ (2012):
This article examines the role that international comparisons play in current corporate tax reform discourse in the United States. Citing the need to make the U.S. corporate tax system more competitive, comparisons are frequently used to assess other jurisdictions’ tax-competitiveness, and many legislative proposals are supported by such comparative arguments. Examining such discourse against the background of several theoretical approaches to comparative law, this article argues that to the extent that comparisons are aimed at providing guidance for prospective reform, this purpose is not well served. Participants in the corporate tax reform discourse, from both sides of the aisle, lack any comparative methodological discipline. They execute comparisons in an incoherent way, often ignoring important differences between the United States and the jurisdictions it is compared to. The result is proposals that are based on misperceptions of the way that corporate tax laws operate in the compared jurisdictions. The article further suggests that a coherent methodology, if explicitly harnessed to promote a well-defined agenda, could make international comparison a constructive instrument of tax-policy making.
The Pew Center on the States, Evidence Counts: Evaluating State Tax Incentives for Jobs and Growth:
In their quest to strengthen their economies, particularly in the wake of the Great Recession, states continue to rely heavily on tax incentives, including credits, exemptions, and deductions, to encourage businesses to locate, hire, expand, and invest within their borders. Yet half the states have not taken basic steps to produce and connect policy makers with good evidence of whether these tools deliver a strong return on taxpayer dollars.
Research by the Pew Center on the States concludes 13 states are leading the way in generating much-needed answers about tax incentives’ effectiveness. Twelve states have mixed results. The other 25 states, along with Washington, D.C., are trailing behind.