Friday, November 8, 2013
Omri Marian (Florida) presents Consult Your Own Tax Advisor: Rethinking Tax Disclosure in Registered Offerings at Tennessee today:
Issuers in registered securities offerings are required to disclose, among other tax items, the expected tax consequences to investors that result from investing in the offered securities (“nonfinancial tax disclosure”). I advance three arguments in this regard. First, current nonfinancial tax disclosure practice, as sanctioned by the SEC, is largely meaningless and performs little regulatory function. Nonfinancial tax disclosure provides irrelevant information, fails to provide relevant information, creates unnecessary transactions costs, and diverts valuable regulatory resources to the enforcement of a pointless regime. Second, I suggest the practical reason behind this regulatory failure is an unsuccessful attempt by the market and the SEC to address investors’ heterogeneous tax preferences. Nonfinancial tax disclosure practice assumes the existence of a “reasonable investor” and equates it with a market-created construct of the “average taxpayer”. I demonstrate, however, that the concept of the “average taxpayer” is not theoretically or empirically defensible. Third, the theoretical reason for the dysfunctionality of the regulatory regime is a misguided reliance on mandatory disclosure theory in the tax context. I argue that given the special nature of tax law, mandatory disclosure theory—even if accepted at face value—does not support the current regulatory framework. To remedy this failure, I describe the types of nonfinancial tax related disclosures that could be supported by mandatory disclosure theory. Under my suggested regulatory reform, nonfinancial tax disclosure will only include issuer-level tax items, (namely, items at the company level not otherwise disclosed in the financial statements), that affect how “reasonable investors” calculate their own tax liabilities. Under such a regime, there is no need to rely on the “average taxpayer” construct.