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Editor: Paul L. Caron
Pepperdine University School of Law

Tuesday, March 3, 2015

President Obama Is 'Very Interested' in Raising Taxes Through 'Executive Action'

Sen. Bernie Sanders (D-VT) on Friday sent this letter to President Obama calling on him to use unilateral executive action to raise over $100 billion in taxes by closing six "loopholes":

  1. The Check the Box Loophole
  2. The Hewlett-Packard Loophole
  3. The REIT Loophole
  4. The Corporate Inversion Loophole
  5. The Carried Interest Loophole
  6. The Valuation Discount Loophole

There are undoubtedly more loopholes that the Administration could close on its own. This list is not intended to be exhaustive but rather to illustrate that if Congress fails to act, the Administration can act to resolve some of the problems with our tax code.

White House Press Secretary Josh Earnest on Monday stated that President Obama is "very interested" in the idea of raising taxes through unilateral executive action.

Press and blogosphere coverage:

http://taxprof.typepad.com/taxprof_blog/2015/03/president-obama-is-very-interested-.html

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Comments

If executive action can erase immigration laws, why can't it also create tax laws? I'm sure this can all be found somewhere in our living Constitution.

Of course if a future President decided to stop enforcing some tax laws, that would be completely unacceptable. That's also in the living Constitution.

Posted by: AMTbuff | Mar 3, 2015 6:33:22 AM

AMTbuff may not have taken a tax course recently. Each of the "loopholes" listed exists because of a flaw in regulations issued by the Treasury Department, not because of anything necessarily in the Internal Revenue Code. Problems created by the Treasury Department can be solved by the Treasury Department. There's nothing unconstitutional or novel about doing so.

Posted by: Theodore Seto | Mar 3, 2015 7:22:58 AM

No laws are being changed are they? It's funny how people are crying so hard about a power the president has. As if all he is is some guy who's there to sign on to whatever congress or senate wants. Sometimes he's going to exercise his power of executive action. As it stands he's used fewer than most presidents. Not particularly popular actions except for the people it helps. This tax one is to close loopholes that republicans have no issues letting their donors exploit. What is wrong with closing loopholes in taxation for coorporations? especially when the taxes are intended to be used to help the middle class?

Its uncomfortable, but not necessarily terrible

Posted by: Temi | Mar 3, 2015 7:44:12 AM

Revenue rulings can be reversed. Leave it to Fox to put the most inflammatory spin on it possible.

All we've been hearing lately from those quarters is how awful those pettifogging bureaucrats at the IRS are; they should welcome executive action reversing IRS rulings. Even the pro-taxpayer ones.

Posted by: Jim harper | Mar 3, 2015 7:45:34 AM

Memo for Bernie Sanders: if a President can unilaterally raise taxes, then what's the point of you being a senator? Just clear out your desk, shut off the lights, and go back home to Vermont.

Posted by: MarkJ | Mar 3, 2015 7:49:12 AM

Is there no check on this executive? When will he simply abolish Congress. After all, he has a pen and a sword (sorry, I meant phone). So he can just say "Middle Class" and the President can do whatever he wants, whenever he wants?

The courts are the not the answer. We have two choices: Congress exercises its Article I powers as set forth in the Constitution and stands up and preserves Separation of Powers, or we use the second part of Article V and fight this with state amendments and bypass the courts and DC altogether. If not, we lose our Republic.

It is that simple. And yes, we are that close to losing all we have worked and fought for these last two+ centuries. I am almost glad my father and step-fathers are not alive to see what they risked their lives fighting for in the jungles of the Pacific and in the skies over Europe.

I weep for my children.

Posted by: tps | Mar 3, 2015 8:10:44 AM

I think many Democrats ( I am one of them) believe that there will never be another Republican president, and with Obama's royal immigration decree (blatant vote grab), maybe that's true, but its naive. This executive action stuff is setting a scary precedent, and I wish we were farsighted enough to realize that...One can only imagine the executive actions a president from the side might take...Dems, republicans and everyone in between ought to be concerned.

Posted by: anon | Mar 3, 2015 8:42:34 AM

I seem to remember that some 240 years ago we fought a war against one of the superpowers of the era...and won. If I recall correctly, one of the ideals that we fought against was that of a sovereign who was taxing us without the benefit of representation of our own choosing. It seems to me that if Mr. Obama chooses to go that path, he will open a can of worms that he won't be able to close again. Going that path will he will sew the seeds of his own destruction and thus reap the whirlwind...

Posted by: Rich Vail | Mar 3, 2015 8:49:45 AM

No doubt somebody made the case along the line to justify these regulations being written as they are and outlined some bad consequences if Sen. Sanders' preferred interpretation were adopted. So what are the bad consequences in each case?

Posted by: TMLutas | Mar 3, 2015 9:21:33 AM

anon, don't worry. The IRS will rediscover its independence and become fiercely non-partisan the moment a Republican becomes President.

Theodore is correct about these being revenue rulings. However there have been some very expensive recent revenue rulings on ACA that conflict with the letter of the law. Not to mention the ruling allowing people not legally present in the country to collect tax refunds. On that issue nothing has changed except the President's mind.

The President has no business dictating revenue rulings either way. These should be governed by legal considerations, not politics.

Posted by: AMT buff | Mar 3, 2015 11:18:10 AM

anon, don't worry. The IRS will rediscover its independence and become fiercely non-partisan the moment a Republican becomes President.

Theodore is correct about these being revenue rulings. However there have been some very expensive recent revenue rulings on ACA that conflict with the letter of the law. Not to mention the ruling allowing people not legally present in the country to collect tax refunds. On that issue nothing has changed except the President's mind.

The President has no business dictating revenue rulings either way. These should be governed by legal considerations, not politics.

Posted by: AMT buff | Mar 3, 2015 11:30:16 AM

0bama is using any and all discretionary language in the law to push it in the direction he favors. If Congress doesn't like what he's doing badly enough they should change the law.

"Three of the breaks were created through administrative actions or regulation, which means President Barack Obama could use executive powers to void them. The other three could be closed through regulatory powers delegated to the Treasury Department, Mr. Sanders said."

and

"Tax laws tend to give more flexibility to the Treasury Department to implement changes because it can be tricky to get the language right in the statute."

and the punch line:

"And there’s the risk that Congress could react angrily and curb the flexibility it delegates to the Treasury to implement tax laws in the future."

--

Maybe we should reboot and simplify the tax code.

Posted by: cbunix23 | Mar 3, 2015 11:51:07 AM

MTLutas asks a very good question: Why were these "loopholes" put into the regulations in the first place? Each has a different explanation. But Loophole #5 (carried interest), which I taught in my partnership tax class this morning, is a good example. (You may recall that this loophole was the one that allowed Mitt Romney to pay taxes at an effective rate of under 14%.)

Congress tried to close this loophole in 1984 by enacting Code sec. 707(a)(2)(A), which called upon the Treasury to issue regulations pursuant to which disguised payments for services would be taxed as ordinary income. 31 years later, the Treasury still has not done so. Unfortunately, the statute is not self-executing -- that is, it doesn't become effective until the regulations are issued. So 31 years after Congress commanded that it be closed, the carried interest loophole is still around.

Why, you might ask? My class this morning explored, among other things, why the required regulations are hard to write. (And they are very hard to write.) But the fact remains that if President Obama were to order the Treasury Department to write something -- almost anything! -- we could close a loophole that Congress has already commanded the Treasury to close. The President would not have to become involved in the details. All he would have to do is to tell his subordinates what bosses generally tell their subordinates: Do your job. Ronald Reagan didn't. GHW Bush didn't. Bill Clinton didn't. Dubya didn't. And now, when Sen. Sanders suggests that Barack Obama do so, cries of "Tyrant!" erupt. Ridiculous.

Posted by: Theodore Seto | Mar 3, 2015 2:09:03 PM

Well I've not taken a tax course recently Professor Seto, but back in the old days we had this idea that a revenue ruling was supposed to represent the Service's honest appraisal of what the law is, not an Administration's view of what the law should be. And it would be unthinkable for an administration to substitute its conclusion grounded in the tax policy it prefers for the Service's grounded in the law as it actually exists.

Posted by: Mike Petrik | Mar 3, 2015 3:46:44 PM

Mike, the principled, apolitical approach you describe still exists, but only when a Republican is President. Everybody in Washington DC seems to know this implicitly.

The current administration has pushed the IRS farther into partisan territory than ever before with questionably legal modifications of ACA and immigration law, and the IRS has yet to push back as they did against Nixon. The IRS hasn't even asked the courts to opine on the administration's many unauthorized giveaways. The Service just plays lap dog, time after time.

Since ACA passed, partisan operatives in the IRS have demolished its reputation for non-partisan administration of tax laws, in exchange for fleeting political advantage. This was not a good bargain for the country or even for the Democrats. Some might even suspect that it's a right wing conspiracy to destroy the IRS, but stupidity on the left is the simpler explanation.

We need an honest IRS, not an agency that half the population will see as its partisan enemy. We can't afford to become Greece, where tax evasion is a sport. I wonder when Democrats will wake up to that fact.

Posted by: AMTbuff | Mar 3, 2015 10:20:11 PM

The IRS has long flouted the law with its regulations, as Prof. Seto explains above in his comments. Whether this is because of political pressure from above or just because the IRS thinks it knows better than Congress is not at all clear. If the President wants to crack down on it, though, I'm all in favor. The people who'd pay more taxes (e.g., Mitt Romney) can file suit, and we'll finally get a judge to decide who's right. The problem now is that if the IRS decides to give someone an illegal tax break, there's no way for the rest of us to challenge that in court.

Posted by: Eric Rasmusen | Mar 4, 2015 6:48:03 AM

How did Mitt end up here?

Posted by: taxtaxtax | Mar 4, 2015 11:29:14 AM

Since when is check the box a loophole? It is sound tax administration that has exploded the small business sector. It's rare to see so forward-thinking an idea from any federal bureaucracy.

REITS have their own section of Code. Explicit law isn't a loophole.

Posted by: Bob Smith | Mar 6, 2015 1:28:47 AM