TaxProf Blog

Brooks Presents The Standard Deduction, Progressivity and Simplification Today at the Treasury Department

John R. Brooks II (Georgetown) presents Doing Too Much: The Standard Deduction and the Conflict Between Progressivity and Simplification, 2 Colum. J. Tax. L. 203 (2011), at the Treasury Department's Office of Tax Analysis today:

In U.S. federal income tax, the standard deduction, along with the personal exemptions, provides taxpayers with a minimum amount of untaxed income, effectively creating a “zero bracket amount.” For historical and political reasons, however, the standard deduction also operates as a simplified substitute for the itemized deductions, such as the deductions for extraordinary medical expenses, charitable contributions, and home mortgage interest. This seemingly reasonable compromise in fact leads to substantial, and surprising, conceptual complexity. In particular, close analysis of each of the two roles shows that their effects, and related criticisms, are often contradictory, which in turn makes it difficult to have coherent debates regarding the proper roles of the standard deduction and the personal deductions.

This article argues that, while the standard deduction is worse than we think it is, it is also easier to fix than we think it is. We can replace the standard deduction with a true, independent zero bracket amount and a floor under the itemized deductions while staying revenue-and distribution-neutral. This would effectively divorce the two roles of the standard deduction – zero bracket amount and simplification of the itemized deductions – leading to more coherence in individual income taxation and giving more flexibility to policymakers. This article proposes further to disaggregate the single floor under the itemized deductions into multiple, independent floors under each itemized deduction. This also would lead to greater coherence and flexibility in tax system design. While creating multiple floors would marginally increase complexity for some taxpayers, the costs of such complexity are overstated relative to the benefits of more accuracy and coherence.

Chetty Presents Active vs. Passive Decisions and Retirement Savings Today at NYU

Raj Chetty (Harvard University, Department of Economics) presents Active vs. Passive Decisions and Crowd-Out in Retirement Savings Accounts: Evidence from Denmark at NYU today as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU) and William Gale (Tax Policy Center; visiting at NYU):

Do retirement savings policies -- such as tax subsidies or employer-provided pension plans -- increase total saving for retirement or simply induce shifting across accounts? We revisit this classic question using 45 million observations on savings for the population of Denmark. We find that a policy's impact on total savings depends critically on whether it changes savings rates by active or passive choice. Tax subsidies, which rely upon individuals to take an action to raise savings, have small impacts on total wealth. We estimate that each $1 of tax expenditure on subsidies increases total saving by 1 cent. In contrast, policies that raise savings automatically even if individuals take no action -- such as employer-provided pensions or automatic contributions to retirement accounts -- increase wealth accumulation substantially. Price subsidies only affect the behavior of active savers who respond to incentives, whereas automatic contributions increase savings of passive individuals who do not reoptimize. We estimate that 85% of individuals are passive savers. The 15% of active savers who respond to price subsidies do so primarily by shifting assets across accounts rather than reducing consumption. These individuals also offset changes in automatic contributions and have higher wealth-income ratios. We conclude that automatic contributions are more eective at increasing total retirement savings than price subsidies for three reasons: (1) subsidies induce relatively few individuals to respond, (2) they generate substantial crowdout conditional on response, and (3) they do not influence the savings behavior of passive individuals, who are least prepared for retirement. 

Grinberg Presents Emerging Countries and the Taxation of Offshore Accounts Today at NYU

Itai Grinberg (Georgetown) presents Emerging Countries and the Taxation of Offshore Accounts at NYU today as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU) and William Gale (Tax Policy Center; visiting at NYU):

A new international regime in which financial institutions function as cross-border tax intermediaries is emerging. The contours of that regime will be established during a narrow window of opportunity over the span of the next few years. The resulting regime will have especially important consequences for emerging countries. A uniform, multilateral automatic information exchange system would improve both these jurisdictions’ ability to tax the offshore accounts of their residents and their capacity to tax certain domestic-source income from capital.

Interestingly, multinational financial institutions’ and emerging countries’ concerns with the emerging international regime are largely aligned. As a result, they may find that they are improbable allies in the battle over taxing offshore accounts. With the G-20 as an agenda-setter and international financial law as the model, a governance structure for an automatic information exchange regime that could be useful to emerging countries’ tax administrations and lower multinational financial institutions’ compliance costs could materialize. The paper explores the necessary architecture, as well as steps emerging countries may take to help that architecture develop.

Dean Delivers FATCA Lecture Today at the University of Antwerp

Steven Dean (Brooklyn) delivers a lecture at the University of Antwerp (Netherlands) today on FATCA’s Unanswered Questions:

Like an asteroid passing close to Earth, the threat of FATCA's implementation has caused great anxiety and much activity. Despite the existence of important questions about FATCA's implementation, it has caused even some of the most reluctant foreign governments to embrace information reporting obligations. Tracing FATCA's origins offers useful insights regarding its likely effects. Even if it ultimately "misses" as a commitment device, FATCA will have a lasting impact on global tax administration.

Leff Presents Tax Planning for Marijuana Dealers Today at Harvard

Benjamin Leff (American) presents Tax Planning for Marijuana Dealers at Harvard today as part of its Tax Policy Seminar hosted by Stephen Shay:

In recent years, many states have legalized marijuana while the federal government continues to consider all marijuana sales and use illegal. But marijuana industry insiders consider not federal criminal law but federal tax law to be the biggest impediment to the development of a legitimate marijuana industry. State-sanctioned marijuana sellers are required to pay federal income taxes pursuant to § 280E, a formerly largely symbolic provision that Congress enacted to punish drug dealers, but which now could potentially drive legitimate marijuana sellers underground.

This paper proposes a tax strategy that enables state-sanctioned marijuana sellers to avoid the impact of § 280E by qualifying as a tax-exempt organization. The IRS has already stated that a marijuana seller cannot be exempt under § 501(c)(3) because the so-called “public policy doctrine” does not permit a charity to have purposes that are contrary to law. This paper proposes that a state-sanctioned marijuana seller could qualify as tax-exempt under § 501(c)(4), since the public policy doctrine only applies to charities, and § 501(c)(4) organizations are not charities. The organization would have to be operated to improve the social and economic conditions of a neighborhood blighted by crime or poverty, by providing job training, employment opportunities, and improved business conditions for commercial development in the neighborhood, just like many existing community economic development corporations that run businesses.

This novel argument is more than just a clever strategy – a “tax loophole” so to speak – to avoid the impact of § 280E. Rather, IRS recognition of tax-exempt status for marijuana sellers could actually provide a mechanism to resolve the federalism issues raised by the conflict between state and federal marijuana laws. A federal policy that incentivizes marijuana sellers to be non-profit, neighborhood-based organizations whose primary purpose is improving the neighborhood in effect ties federal approval to local support. By following this policy, the IRS would promote state and local policy harmonization by permitting community-based nonprofits to sell marijuana, but only when local community groups favored it. This would surely be better for the IRS than its current role as a lightning rod of the conflict between state and federal policy objectives.

Bartels Presents Inequality as a Political Issue in the 2012 Election Today at NYU

Larry M. Bartels (Vanderbilt University, Department of Political Science) presents The Class War Gets Personal: Inequality as a Political Issue in the 2012 Election at NYU today as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU) and William Gale (Tax Policy Center; visiting at NYU):

The issue of inequality contributed significantly to Barack Obama’s reelection in 2012; I estimate that the net effect of the issue was to increase his vote share by two or three percentage points, and by about one percentage point in battleground states. However, that advantage had little to do with public support for more progressive tax policy or broad concerns about the social and political ramifications of economic inequality; indeed, those considerations seem to have cost Obama more votes than they won him. Rather, Obama benefited specifically and substantially from a widespread perception that Mitt Romney cared more about the wealthy than about the poor. Although these perceptions intensified somewhat over the course of the campaign, they were already well established in January, before the Republican primary season, Obama’s negative ad blitz focusing on Romney’s career at Bain Capital and his offshore wealth and secret tax returns, and Romney’s own much-publicized remark that “my job is not to worry about” the 47 percent of Americans who pay no income tax. If this was a “class war,” it was a circumstantial battle reflecting the background and image of the Republican nominee—not a frontal assault by the American electorate on “the defining issue of our time.”

Gamage Presents The New Fiscal Politics at Kentucky

David Gamage (UC-Berkeley) presented The New Fiscal Politics, Government Shutdowns, and the Case for Default Budgets at Kentucky last week as part of its Faculty Brown Bag Workshop Series hosted by Jennifer Bird-Pollan:

At both the federal and state levels, the U.S. is in the midst of a dysfunctional era of budgetary politics. Budget negotiations are increasingly characterized by partisan brinkmanship and acrimony, game-of-chicken negotiations, and strong anti-tax sentiment, with the threat of government shutdowns lurking whenever new budget agreements cannot be reached. Drawing on political science work on legislative negotiation theory and several historical case studies of recent government shutdowns, this Article explains how the combination of trends that we label as the New Fiscal Politics results in regular budget negotiation failures, greatly increasing the risk of costly government shutdowns or near-shutdowns. Then, drawing on this diagnosis of budgetary dysfunctions, this Article advocates for the adoption of default budgets policies—automatic continuing appropriations which maintain government operations in the event that legislators fail to pass a budget on time. This Article explains how default budgets policies might be implemented to avert shutdowns and to stabilize the budget making process. Properly enacted, default budgets policies have the potential to mitigate the harmful consequences of budget negotiation failures and to restore order to our New Fiscal Politics.

Lawsky Presents Modeling Uncertainty in Tax Law Today at NYU

Sarah B. Lawsky (UC-Irvine) presents Modeling Uncertainty in Tax Law, 65 Stan. L. Rev. ___ (2013), at NYU on today as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU) and William Gale (Tax Policy Center; visiting at NYU):

Each year, the government faces a massive shortfall in tax collections: the annual difference between the amount taxpayers owe the government and the amount the government actually receives is nearly $400 billion dollars. The questions of when and why taxpayers choose to comply with the tax law are thus pressing ones for scholars and policymakers. Many legal scholars rely on economic models better to understand these issues. However, none of the models that legal scholars use can accommodate the reality that taxpayers face unknown probabilities when they decide whether to comply. A taxpayer does not know, for example, the probability that he will be selected for audit, the probability that the government will identify a particular questionable position on his tax return, or the probability that the IRS or a court will strike the position down.

This Article presents a formal model of tax compliance that, unlike other models of tax compliance used in legal scholarship, takes unknown probabilities into account. The model presented incorporates both the extent of a taxpayer’s uncertainty and the taxpayer’s attitude toward uncertainty, and thus provides new insights into problems as disparate as how the government should reveal information about its approach to audits, whether the government should use antiabuse rules to attack tax shelters, and whether tax professionals should be subject to penalties for providing certain kinds of tax advice.

Dan Shaviro blogs the workshop here.

Gamage Presents Double-Distortion and the Optimal Tax Mix Today at UC-Berkeley

David Gamage (UC-Berkeley) presents On Double-Distortion Arguments, Distribution Policy, and the Optimal Tax Mix at UC-Berkeley today as part of its Economics Department Public Finance Workshop Series:

How should we tax the wealthy? Should non-tax legal rules promote distributional equity, or focus solely on efficiency? An influential position in the law and economics and tax policy literatures concludes that—with some limited exceptions —only a federal tax on labor income should be used for distribution. Variations on this position are sometimes called “double-distortion” arguments.

A double-distortion argument underlies Kaplow and Shavell’s influential claim that non-tax legal rules should be designed solely based on efficiency, leaving all distributional considerations to the tax system. Within the tax literature, double-distortion arguments have led many scholars to conclude that we should only tax either labor income or consumption -- that we should not tax wealth, capital income, or bequests. Following similar logic, with respect to state and local governments, the dominant models of fiscal federalism imply that subnational governments should leave most distributive concerns to the federal government. In these, and a variety of other policy contexts, double distortion models have been used to argue that nearly all distribution policy should be conducted through a federal tax on labor income, such that most other tax instruments and non-tax legal rules should be designed solely to promote efficiency.

This Article begins with the observation that double-distortion models typically assume the existence of a near-perfect labor-income tax. Specifically, most double-distortion models assume that a labor-income tax can accurately measure taxpayers’ ability to earn labor income with only a single limitation: that taxpayers can shift from labor to leisure in order to replace taxed monetary consumption with untaxed leisure consumption and thereby reduce their labor-income-tax liabilities. Very few double-distortion models account for the possibility of taxpayers reducing their labor-income-tax liabilities by engaging in tax avoidance, tax evasion, or other tax-reduction techniques other than by shifting from labor to leisure.

In contrast to the assumption that the possibility of labor-to-leisure distortions is the sole flaw of the labor-income tax, the empirical literature suggests that taxpayers engage in wide variety of diverse techniques for reducing their labor-income-tax liabilities. This appears to especially be true with respect to high-income taxpayers, for whom distributional considerations are particularly relevant. Indeed, there is essentially no evidence that high-income taxpayers significantly reduce their labor effort in response to taxation. In contrast, there is a plethora of evidence documenting that high-income taxpayers engage in a variety of other tax minimization strategies.

This Article analyzes how double-distortion models can be generalized to account for the possibility of tax-reduction techniques other than labor-to-leisure distortions. Under plausible assumptions, this Article argues that generalizing double-distortion models in this fashion yields significantly different policy implications.

Sanchirico Presents Optimal Tax Policy and the Symmetries of Ignorance Today at UC-Berkeley

Chris William Sanchirico (Pennsylvania) presents Optimal Tax Policy and the Symmetries of Ignorance, 66 Tax L. Rev. 1 (2012), at UC-Berkeley today as part of its Center for Law, Business and the Economy:

What government-observable characteristics should determine the taxes that an individual pays and/or the transfers that she receives? This article focuses on a specific aspect of this fundamental question of tax policy: the implications of policymakers’ uncertainty regarding the outcomes of tax policy choices. The article identifies and questions two implicit premises in policy-uncertainty-based arguments against including taxable attributes other than labor earnings in the base. The first is that greater uncertainty surrounds the optimal taxation of non-labor-earnings attributes than surrounds the optimal taxation of labor earnings. The second is that tax policymakers ought to follow a kind of precautionary principle under which uncertainty regarding an attribute counsels base exclusion. The article explains why both premises are flawed.

Zelenak Presents Learning to Love Form 1040 Today at Florida

Lawrence Zelenak (Duke) presents Learning to Love Form 1040: Two Cheers for the Return-Based Mass Income Tax (University of Chicago Press, 2013) today at the University of Florida College of Law Graduate Tax Program Tax Colloquium:

In Learning to Love Form 1040, Lawrence Zelenak argues that filing taxes can strengthen fiscal citizenship by prompting taxpayers to reflect on the contract they have with their government and the value—or perceived lack of value—they receive in exchange for their money. Zelenak traces the mass income tax to its origins as a means for raising revenue during World War II. Even then, debates raged over the merits of consumption-based versus income taxation, as well as whether taxes should be withheld from payroll or paid at the time of filing. The result is the income tax system we have today—a system whose maddening complexity, intended to accommodate citizens in widely different circumstances, threatens to outweigh any civic benefits.

If sitcoms and political cartoons are any indication, public understanding of the income tax is badly in need of a corrective. Zelenak clears up some of the most common misconceptions and closes with suggestions for how the current system could be substantially simplified to better serve its civic purpose.

Shay Presents Designing a U.S. Exemption System for Foreign Income at Northwestern

Stephen E. Shay (Harvard) presented Designing a U.S. Exemption System for Foreign Income When the Treasury is Empty, 13 Fla. Tax Rev. 397 (2012) (with J. Clifton Fleming Jr. (BYU) & Robert J. Peroni (Texas)), at Northwestern yesterday as part of its Advanced Topics in Taxation Colloquium Series hosted by Herbet Beller, Thomas Brennan, David Cameron, Philip Postlewaite, and Robert Wootton:

This article springs from two concurrent phenomena. First, U.S. federal deficit spending projections indicate that any feasible deficit reduction plan will require substantial additional revenue. Second, the U.S. system for taxing foreign-source income is so badly flawed that if the United States were to adopt a principled exemption or territorial system under which eligible foreign source income is taxed at a zero rate, the fisc would actually gain revenue with which to ease the deficit problem. To realize its revenue raising potential, however, an exemption system will require the following characteristics (or comparable analogues): 1) A robust subject-to-tax requirement (to foreclose use of low-tax foreign regimes) and continued current taxation of passive and mobile income under an updated Subpart F regime; 2) Disqualification from exemption for royalties (including deemed royalties from a foreign branch), interest, services payments and other foreign-source items that do not bear a significant foreign tax; 3) Elimination of the current tax exemption for 50 percent of the income from U.S. export sales; 4) Allocation of domestic expenses to foreign-source income to protect the U.S. tax base from “deduction dumping” in a more realistic way than an inadequate 5 percent “haircut” and 5) A prohibition against deducting foreign losses from U.S.-source income.

To the extent that an exemption system deviates from these five characteristics, it creates revenue transfers to a relatively small group of mostly prosperous U.S. multinational corporate taxpayers at a time when the Treasury is in distress. This ought not to be allowed unless the transfers can pass a rigorous cost/benefit test.

Fleischer Presents The Supercharged IPO Today at Indiana

Victor Fleischer (Colorado; moving to San Diego) presents The Supercharged IPO, 66 Vand. L. Rev. ___ (2013) (with Nancy Staudt (USC)), at Indiana today as part of its Tax Policy Colloquium hosted by Leandra Lederman:

A new innovation on the IPO landscape has emerged in the last two decades, allowing owner-founders to extract billions of dollars from newly-public companies. These IPOs—labeled supercharged IPOs—have been the subject of widespread debate and controversy: lawyers, financial experts, journalists, and Members of Congress have all weighed in on the topic. Some have argued that supercharged IPOs are a “brilliant, just brilliant,” while others have argued they are “underhanded” and “bizarre.”

In this article, we explore the supercharged IPO and explain how and why this new deal structure differs from the more traditional IPO. We then outline various theories of financial innovation and note that the extant literature provides useful explanations for why supercharged IPOs emerged and spread so quickly across industries and geographic areas. The literature also provides support for both legitimate and opportunistic uses of the supercharged IPO.

With the help of a large-N quantitative study—the first of its kind—we investigate the adoption and diffusion of this new innovation. We find that the reason parties have begun to supercharge their IPO is not linked to a desire to steal from naive investors, but rather for tax planning purposes. Supercharged IPOs enable both owner-founders and public investors to save substantial amounts of money in federal and state taxes. With respect to the spread of the innovation, we find that elite lawyers, especially those located in New York City, are largely responsible for the changes that we observe on the IPO landscape. We conclude our study by demonstrating how our empirical findings can be used to 1) advance the literature on innovation, 2) assist firms going public in the future, and 3) shape legal reform down the road. 

Galle Presents Regulation from the Inside Out at NYU

Brian Galle (Boston College) presented Regulation from the Inside Out: Nudges and Price Instrument Theory for Internalities and Externalities at NYU on Tuesday as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU) and William Gale (Tax Policy Center; visiting at NYU):

This Article compares for the first time the relative merits of “nudges” and other forms of behaviorally-inspired regulation against more common policy alternatives, such as taxes, subsidies, or traditional quantity regulation. Environmental economists and some legal commentators have dismissed nudge-type interventions out of hand for their failure to match the revenues taxes can provide. Similarly, writers in the law and economics tradition argue that fines are generally superior to non-pecuniary punishments. Drawing on prior work in the choice-ofinstruments literature, and contrary to this popular wisdom, I show that nudges may out-perform fines, other Pigouvian taxes, or subsidies in some contexts. I also add to the existing literature by extending choice-of-instrument theory to the regulation of internalities---instances where individuals do harm to their own future selves. I then apply these lessons to a set of contemporary policy controversies, such as New York City’s cap on beverage portion sizes, cigarette labeling, retirement savings, and charitable contributions. 

Dan Shaviro blogs the workshop here.

Raskolnikov Presents Irredeemably Inefficient Acts: A Threat to Markets, Firms, and the Fisc Today at Toronto

Alex Raskolnikov (Columbia) presents Irredeemably Inefficient Acts: A Threat to Markets, Firms, and the Fisc, 101 Geo. L.J. ___ (2013), at Toronto today as part of its James Hausman Tax Law and Policy Workshop Series hosted by Ben Alarie:

This article defines and explores irredeemably inefficient acts — a conceptually distinct and empirically important category of socially undesirable conduct. While inefficient behavior is, no doubt, pervasive, the standard view holds that inefficient conduct may be converted into efficient one by forcing actors to internalize the external harms of their decisions. For some acts, however, such conversion is impossible. These acts are not just inefficient forms of otherwise socially beneficial activities — they are not just contingently inefficient. Rather, they are inefficient at their core; they reduce social welfare no matter what the regulator does. These irredeemably inefficient (or just irredeemable) acts are private, intentional, non-consensual transfers of money. While this definition certainly describes theft, it also covers churning and price fixing, market manipulation and option backdating, insider trading and tax shelters, to name just some examples. All these acts are socially undesirable in any form and at any level, yet all may be overdeterred if enforcement is imperfect. Overdeterrence is possible for two reasons. First, enforcement increases the costs of irredeemable acts that remain undeterred. Second, enforcement burdens efficient conduct that yields outcomes indistinguishable from those produced by irredeemable acts. These considerations (along with no need for the standard cost-benefits comparison) underlie the unique optimal deterrence analysis of irredeemable acts. Antitrust law, corporate law, and criminal law largely reflect the divide between contingently and irredeemably inefficient acts, as well as some of the more specific prescriptions following from this article’s inquiry. Securities and commodities regulation fails to recognize the same distinction despite a wide variety of irredeemable acts among securities and commodities law violations. While the tax policy implications of the proposed framework are limited, this framework helps to resolve a long-standing debate about tax shelter regulation.

Viard Presents Progressive Consumption Taxation: The Choice of Tax Design Today at NYU

Alan D. Viard (American Enterprise Institute) presents Progressive Consumption Taxation: The Choice of Tax Design at NYU today as part of its Pathways to Tax Reform Series:

Progressive consumption taxation offers a way to raise revenue in a progressive manner without harming economic growth. This paper provides a comparative evaluation of the two leading proposed progressive consumption taxes, the personal expenditure tax (PET) and the Bradford X tax. One politically appealing and economically reasonable option that has been embraced by a number of previous proposals combines a PET and a business cash flow tax.

Viard Presents Progressive Consumption Taxation: The Choice of Tax Design Today ay NYU

Alan D. Viard (American Enterprise Institute) presents Progressive Consumption Taxation: The Choice of Tax Design at NYU today as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU) and William Gale (Tax Policy Center; visiting at NYU):

Progressive consumption taxation offers a way to raise revenue in a progressive manner without harming economic growth. This paper provides a comparative evaluation of the two leading proposed progressive consumption taxes, the personal expenditure tax (PET) and the Bradford X tax. One politically appealing and economically reasonable option that has been embraced by a number of previous proposals combines a PET and a business cash flow tax.

Washington U. Hosts Colloquium Today on A New Framework for International Taxation

Washington University hosts a mini-colloquium today on Conceptualizing a New Institutional Framework for International Taxation:

• Allison Christians (McGill)
• Itai Grinberg (Georgetown)
• Michael Lennard (UN Financing for Development Office)
• Diane Ring (Boston College)
• Adam Rosenzweig (Washington University)
• Lee Sheppard (Tax Analysts)

Ryan Presents EITC as Income (In)Security? Today at Florida

Kerry Ryan (St. Louis) presents EITC as Income (In)Security? at Florida today as part of its Tax Policy Workshop Series hosted by Yariv Brauner and Omri Marian:

Although the two income security benefits of the EITC are related, they are usefully analyzed separately. The income insurance effect of the EITC is forward-looking - it operates to reduce income risk before labor is supplied. In contrast, the EITC‟s stabilization effect is backward-looking, offsetting realized earnings losses. Furthermore, stabilization applies to all earnings shocks; whereas, insurance operates only on unexpected earnings drops. Finally, only actual recipients of the EITC enjoy stabilization effects; whereas, all taxpayers facing uncertain future income realize risk reduction from the existence of the EITC. ...

As an income security mechanism the EITC has some serious drawbacks. From an insurance perspective, the EITC does not insure against the risk of long-term unemployment. The timing of the EITC is problematic from an income stabilization standpoint. All EITC recipients receive the credit as part of their annual tax refund check in the year following the year in which they earned the income entitling them to the credit. This has two implications. First, the EITC is not responsive to short-term (intra-annual) earnings fluctuations. Second, the EITC payment is not received until the year following the year of the earnings loss. In other words, the payment is temporally dislocated from the need that precipitated it. This tempers the claim above that the EITC "offsets" a particular year‟s income loss.

Prescott Presents Taxing Luck Today at Indiana

Peter Prescott (Butler University, College of Business) presents Taxing Luck at Indiana today as part of its Tax Policy Colloquium hosted by Leandra Lederman:

Luck, income, wealth, and taxation have always been, and still are, inexorably intertwined. The connection between the latter three is obvious and driven by practical necessity—one cannot collect a tax from someone who has nothing to pay it with. Taxing previously-acquired wealth or current income solves the collectability problem. Luck enters the picture as one of a handful of important factors contributing to acquiring wealth and to earning income. Like just about everything else in life, that luck-generated economic success has federal income tax consequences for the lucky recipient. But does the current income tax treatment of that success hold up under scrutiny? If not, then how should the federal government tax “lucky” income? And, how should Congress and the IRS decide which income is “lucky” and which is not? This Article wrestles with those thorny questions using the traditional tax policy considerations of economic efficiency, equity and distributive justice concerns, and practical administrative issues related to increasing legal complexity before concluding that taxable income attributable to luck should be segregated from other types of income and subjected to a fixed tax rate that exceeds the top marginal tax rates on ordinary income earned by individuals.

Morse Presents Startup Ltd.: Tax Planning and Initial Incorporation at Boston College

Susan C. Morse (UC-Hastings) presented Startup Ltd.: Tax Planning and Initial Incorporation, 13 Fla. Tax Rev. ___ (2013), at Boston College yesterday as part of its Tax Policy Workshop Series hosted by Jim Repetti and Diane Ring:

This Article, consistent with previous literature and with the support of additional informal interview results, presents the default norm of U.S. incorporation, in particular Delaware incorporation, for U.S.-based startups. The Delaware incorporation structure dominates despite the fact that it exposes firms to possible future disadvantages under U.S. tax law, including possible future tax law changes. However, there are exceptions to the general rule, for example in the insurance and marine transportation industries and in isolated cases where current investors or future acquirors appear to prefer a non-U.S. incorporation structure. Factors that drive the decision to incorporate outside the U.S. include tax advantages, non-tax legal advantages, business links to the incorporation jurisdiction and investor preferences. These factors have different levels of importance in different situations.

Robinson Presents Internal Ownership Structures of Multinational Firms Today at NYU

Leslie A. Robinson (Dartmouth College, Tuck Business School) presents Internal Ownership Structures of Multinational Firms at NYU today as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU) and William Gale (Tax Policy Center; visiting at NYU):

This paper is the first comprehensive analysis of the foreign ownership structures of U.S. multinational firms. Though the vast majority of foreign subsidiaries are ultimately wholly-owned by their U.S. parents, we show that the way these subsidiaries are arranged within ownership structures varies considerably from simple to highly complex, and that much of this variation cannot be explained by basic firm characteristics, such as size, age, industry, or diversification. Though the structures received much public attention in recent years, especially because of their role in tax planning by U.S. multinationals, no academic study to date investigates the different trade-offs involved in designing them jointly. This paper begins to fill this gap. After establishing a basic taxonomy and set of key facts about the structures, we look inside the black box of complex firms to investigate what forces drive internal ownership choices. We find strong evidence of several distinct tax motives, but also uncover a number of non-tax factors, including internal financing costs, expropriation risks, and legal liability.

Johnson Presents The Shelf Project: Revenue Raising Proposals to Defend the Tax Base at San Diego

Calvin H. Johnson (Texas) presented The Shelf Project: Revenue Raising Proposals to Defend the Tax Base at San Diego yesterday as part of its Tax Law Speaker Series:

The Shelf Project is a coalition of tax professionals to develop proposals that will raise revenue, when Congress is ready, by improving the fairness and efficiency fo the income tax.  We have published 69 projects over the last 5 years, some big and some with modest revenue impact.   To do the least damage to the private sector per dollar of revenue raised, the tax base needs to broad and firm.  Tax avoided is a lose-lose proposition.  It neither pays for the Marine or closes the deficit and taxpayers do themselves damage in avoidign the tax.  Shelf projects attack departures from tax on pretax internal rate of return.

• Calvin H. Johnson, How to Raise $1 Trillion Without a VAT or a Rate Hike, 128 Tax Notes 101 (July 5, 2010)

Grinberg Presents The Battle Over Taxing Offshore Accounts Today at UCLA

Itai Grinberg (Georgetown) presents Improbable Bedfellows: Emerging Countries and Financial Institutions in the Battle Over Taxing Offshore Accounts at UCLA today as part of its Tax Policy and Public Finance Colloquium hosted by Jason Oh and Kirk Stark:

A new international regime in which financial institutions function as cross-border tax intermediaries is emerging. We are in a narrow window of time—a span of perhaps only a few years—in which the contours of that regime are being established. The outcome will have important consequences for the tax administrations of developing and emerging economies. A uniform, multilateral automatic information exchange system would improve both these jurisdictions’ ability to tax offshore accounts of their residents and their capacity to effectively implement taxation of portfolio income from capital.

Interestingly, multinational financial institutions and emerging countries’ concerns with the emerging international regime are in many ways aligned. As a result, they may find that they have improbable allies in each other as they navigate the battle over taxing offshore accounts. With the G-20 as an agenda setter and international financial law as the model, a governance structure for an automatic information exchange regime that could be useful to emerging countries and lower multinational financial institutions’ compliance costs could emerge. The paper explores the necessary architecture.

Walker Presents Stakeholder Outrage Constrains University President Pay Today at North Carolina

David I. Walker (Boston University) presents Does Stakeholder Outrage Constrain Executive Compensation? Evidence from University President Pay (with Brian D. Galle (Boston College)) at North Carolina today as part of its Faculty Speaker Series:

We analyze the determinants of the compensation of private college and university presidents from 1999 through 2007. We find that the fraction of institutional revenue derived from current donations is negatively associated with compensation and that presidents of religiously-affiliated institutions receive lower levels of compensation. Looking at the determinants of contributions, we find a negative association between presidential pay and subsequent donations. We interpret these results as consistent with the hypotheses that donors to nonprofits are sensitive to executive pay and that stakeholder outrage plays a role in constraining that pay. We discuss the implications of these findings for the regulation of nonprofits and for our broader understanding of the pay-setting process at for-profit as well as nonprofit organizations.

Blank Presents Collateral Compliance Today at Vienna

Joshua D. Blank (NYU) presents Collateral Compliance, 162 U. Pa. L. Rev. ___ (2013), at the Institute for Austrian and International Tax Law at the Vienna University of Economics and Business today in Vienna, Austria:

As most of us are aware, the failure to comply with the tax law can lead to civil and criminal tax penalties. But tax noncompliance has other consequences as well. Collateral sanctions for tax noncompliance, which are imposed on top of tax penalties and are often administered by agencies other than the taxing authority, increasingly apply to individuals who have failed to obey the tax law. They range from denial of hunting permits to suspension of driver’s licenses to revocation of passports. Further, as the recent Supreme Court case Kawashima v. Holder demonstrates, some individuals who are subject to tax penalties for committing tax offenses involving “fraud or deceit” may even face deportation from the United States. Criminal law scholars have written dozens of articles on the collateral consequences of convictions. Yet tax scholars have virtually ignored collateral tax sanctions, even though their use by the federal and state governments is growing.

This Article offers a comprehensive analysis of collateral consequences in the taxation context. While many criminal law scholars have proposed ways to alleviate collateral consequences, this Article argues that, when applied in connection with violations of the tax law, collateral consequences may offer previously unappreciated social benefits. In many cases, collateral tax sanctions can promote voluntary tax compliance more effectively than additional monetary tax penalties, especially if governments increase public awareness of collateral tax sanctions. Governments should therefore embrace these sanctions as a means of tax enforcement and taxing authorities should publicize them affirmatively.

After considering the effects of collateral tax sanctions under each of the predominant theories of voluntary compliance, I propose principles that governments should consider when designing collateral tax sanctions. These principles suggest, for example, that initiatives to revoke driver’s licenses from individuals who have failed to pay outstanding taxes or professional licenses from individuals who have failed to file tax returns would likely promote tax compliance. However, whether the sanction of deportation for tax offenses involving fraud or deceit will have positive compliance effects is far less certain. Finally, I suggest how taxing authorities should publicize these sanctions to foster voluntary compliance.

Shanske Presents Modernizing the Property Tax Today at UCLA

Darien Shanske (UC-Hastings; moving to UC-Davis) presents Modernizing the Property Tax at UCLA today as part of its Tax Policy and Public Finance Colloquium hosted by Jason Oh and Kirk Stark:

It is commonly and correctly claimed that our national tax on income systematically undertaxes the income derived from owner-occupied housing. It is a truism of the fiscal federalism literature that the real property tax should be assigned to the lowest level of government. Because the real property tax is (largely) a tax on the income derived from owner-occupied housing, it appears that, in practice, our federal government has appropriately ceded this part of the income tax base to local governments.

This theoretically satisfying ex post rationalization for our current system has become increasingly frayed as the local real property tax has declined and the federal housing subsidy has, if anything, increased.

This decline in the property tax has had other unfortunate consequences, such as increasing state and local revenue volatility. But, even if unfortunate, perhaps the relative decline of the property tax was inevitable, caused, for instance, by shifts in the property tax base? It seems too early to be so pessimistic. After all, the taxes that have increased as the property tax has declined are collected much more efficiently. For instance, both the sales tax and the income tax utilize third parties (e.g., employers report one’s income), and the income tax also uses withholding. Withholding is of particular import given the well-known difficulties that most of us have budgeting.

There is little reason that property taxes could not be withheld from income, especially in the majority of states with income taxes -- indeed this is a service essentially already provided by many mortgage providers (through escrow). A property tax withholding regime instituted more broadly would not only ease budgeting for both taxpayers and local governments, but administering the property tax along with the income tax could improve the property tax. Specifically, withholding in connection with income allows for the property tax to respond effectively to the liquidity and progressivity concerns that plague the property tax. For instance, circuit breaker-type protections could be instituted directly through the income tax. Such a regime of incorporating income tax elements into the property tax would let “homevoters” respond directly to the relative merits of proposed projects without concern that they must insure themselves against future liquidity problems. These reforms could thus lead to increased local funding of good projects. In short, states and localities have allowed a revenue source to wither because it is collected poorly even though it is one that could possibly significantly mitigate their revenue problems, particularly as to volatility. The federal government should be concerned with the decline of the property tax not only because of this increase in state and local revenue volatility, but because of the reduced ability of the local property tax to serve as a complement to the federal income tax.

Dan Shaviro (NYU) comments on the paper here.

Morse Presents Startup Ltd.: Tax Planning and Initial Incorporation Today at Denver

Susan C. Morse (UC-Hastings) presents Startup Ltd.: Tax Planning and Initial Incorporation,13 Fla. Tax Rev. ___ (2013), at Denver today as part of its Faculty Workshop Series:

This Article, consistent with previous literature and with the support of additional informal interview results, presents the default norm of U.S. incorporation, in particular Delaware incorporation, for U.S.-based startups. The Delaware incorporation structure dominates despite the fact that it exposes firms to possible future disadvantages under U.S. tax law, including possible future tax law changes. However, there are exceptions to the general rule, for example in the insurance and marine transportation industries and in isolated cases where current investors or future acquirors appear to prefer a non-U.S. incorporation structure. Factors that drive the decision to incorporate outside the U.S. include tax advantages, non-tax legal advantages, business links to the incorporation jurisdiction and investor preferences. These factors have different levels of importance in different situations.

Loutzenhiser Presents The Sham Doctrine in Canadian Tax Cases Today at Toronto

Glen Loutzenhiser (University of Oxford, Faculty of Law) presents Trompe-l’oeil: The Sham Doctrine in the Canadian Tax Courts, in Sham Transactions (Oxford University Press, 2013) at Toronto today as part of its James Hausman Tax Law and Policy Workshop Series hosted by Ben Alarie:

In Part II of this chapter, I review the leading Canadian tax cases on sham. As will be evident, for the most part sham has proven to be quite ineffective for the Canadian tax authorities in their fight against tax avoidance. Fortunately for the Canada Revenue Agency (CRA) they have a number of other anti-avoidance weapons at their disposal, including since 1988 a statutory general anti-avoidance rule (GAAR). Although one might expect that in a tax system with a GAAR the sham doctrine would have an even smaller role to play—perhaps relegated to the sidelines completely—interestingly, this has not proved to be the experience in Canada. In fact a renewed judicial interest in sham is clearly evident in two relatively recent decisions of the Federal Court of Appeal that involved taxpayers from the predominantly French-speaking province of Quebec. These two decisions—Faraggi v R4 in 2009 and Antle v R5 in 2010—are examined in Part III.

Canadian cases typically are reported in both official languages—English and French. In the French version of the reported Canadian tax cases the expression sometimes used for sham is ‘trompe-l’oeil’—literally meaning to deceive or trick the eye. This phrase is more commonly associated with visual illusion in art, as in painted detail meant to convey the illusion of a three-dimensional object. Unlike in the art world, the deception involved in tax law is not meant to amuse, impress, thought-provoke or entertain, but is undertaken in an attempt to minimise or escape tax. It is this deception element of sham, and in particular the level of deception necessary to give rise to a sham, that has been at issue in the recent cases. In addition to demonstrating a renewed interest in sham, these cases also may signal a more lasting expansion of the traditional boundaries of the sham doctrine as it applies in Canadian tax law.

Dharmapala Presents Competitive Neutrality Among Debt-Financed Multi-national Firms Today at NYU

Dhammika Dharmapala (Illinois), Competitive Neutrality Among Debt-Financed Multi-national Firms (with Mihir A. Desai (Harvard)) at NYU today as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU) and William Gale (Tax Policy Center; visiting at NYU):

Debt plays an important role in the financing of multinational corporations (MNCs). Interest expenses are typically tax-deductible in most corporate income tax systems, and there has been a growth of interest in recent years in the tax treatment of debt and its consequences. This paper discusses the optimal form that interest deductibility and associated restrictions should take in a multi-jurisdictional setting. We straightforwardly extend existing neutrality norms in international taxation to serve as a benchmark. Our simple notion of competitive neutrality (CN) entails that all multinational firms competing for the same investment face the same after-tax cost of debt, regardless of their country of residence. We first show using a simple three-country framework that when MNC investments are debt-financed, the potentially differential deductibility of debt entailed by various tax law provisions leads in general to violations of CN. We also show that a multilateral formula apportionment system would not generally satisfy CN, unless all MNCs’ assets are distributed across countries in the same proportions. Moreover, we also show that MNCs’ ability to establish “multiple-dip” financing structures (in which the same third-party debt is deducted in multiple countries) generally exacerbates these violations of CN. 

We suggest – more as a thought experiment than as a serious policy proposal – a regime that satisfies CN under a general set of conditions. This involves countries imposing a worldwide debt cap that restricts a multinational affiliate’s deductible interest to (some arbitrary fraction of) the total worldwide third-party interest payments of its multinational group. We argue that if all countries adopt this rule, and do not impose any other restrictions on interest deductibility for multinational affiliates, then CN will be satisfied if firms earn sufficient income in each country. This regime relies on harnessing rather than restricting MNCs’ “multiple-dip” financing structures. We also review various proposed explanations for why interest is tax-deductible, and conclude by revisiting the arguments for the tax deductibility of debt in a multi-jurisdictional setting. 

Blank Presents Collateral Compliance Today at Florida

Joshua D. Blank (NYU) presents Collateral Compliance, 162 U. Pa. L. Rev. ___ (2013), at Florida today as part of its Tax Policy Workshop Series hosted by Yariv Brauner and Omri Marian:

As most of us are aware, the failure to comply with the tax law can lead to civil and criminal tax penalties. But tax noncompliance has other consequences as well. Collateral sanctions for tax noncompliance, which are imposed on top of tax penalties and are often administered by agencies other than the taxing authority, increasingly apply to individuals who have failed to obey the tax law. They range from denial of hunting permits to suspension of driver’s licenses to revocation of passports. Further, as the recent Supreme Court case Kawashima v. Holder demonstrates, some individuals who are subject to tax penalties for committing tax offenses involving “fraud or deceit” may even face deportation from the United States. Criminal law scholars have written dozens of articles on the collateral consequences of convictions. Yet tax scholars have virtually ignored collateral tax sanctions, even though their use by the federal and state governments is growing.

This Article offers a comprehensive analysis of collateral consequences in the taxation context. While many criminal law scholars have proposed ways to alleviate collateral consequences, this Article argues that, when applied in connection with violations of the tax law, collateral consequences may offer previously unappreciated social benefits. In many cases, collateral tax sanctions can promote voluntary tax compliance more effectively than additional monetary tax penalties, especially if governments increase public awareness of collateral tax sanctions. Governments should therefore embrace these sanctions as a means of tax enforcement and taxing authorities should publicize them affirmatively.

After considering the effects of collateral tax sanctions under each of the predominant theories of voluntary compliance, I propose principles that governments should consider when designing collateral tax sanctions. These principles suggest, for example, that initiatives to revoke driver’s licenses from individuals who have failed to pay outstanding taxes or professional licenses from individuals who have failed to file tax returns would likely promote tax compliance. However, whether the sanction of deportation for tax offenses involving fraud or deceit will have positive compliance effects is far less certain. Finally, I suggest how taxing authorities should publicize these sanctions to foster voluntary compliance.

Infanti Presents LGBT Families, Tax Nothings at Iowa

Anthony C. Infanti (Pittsburg) presented LGBT Families, Tax Nothings at the University of Iowa College of Law on Thursday as part of the Journal of Gender, Race & Justice symposium on Modern Families: Changing Families, Challenging Laws:

The federal tax laws have never been friendly territory for LGBT families. Before the enactment of the federal Defense of Marriage Act (DOMA), the federal tax laws turned a blind eye to the existence of LGBT families by tacitly embracing state law discrimination against same-sex couples. When it enacted DOMA in 1996, Congress ensured that it would be able to continue to turn a blind eye to LGBT families even if one or more states were to legally recognize families headed by same-sex couples. In a real sense, LGBT families have been, and continue to be, tax outlaws.

This overt discrimination has not, however, proven to be an insurmountable hurdle for enterprising LBGT families wishing to obtain (at least in some measure) the same tax treatment as “traditional” families. The federal income tax laws provide tax benefits to relationships of dependency in many (though not all) of the same circumstances in which they afford benefits to married different-sex couples. These relationships of dependency are typically between the taxpayer, in the role of parent or caregiver, and a child or other person who cannot care for himself/herself. Often, the only means for same-sex couples to avoid otherwise discriminatory and burdensome tax consequences is for one spouse to qualify as the “dependent” of the other.

Despite its inevitability, dependency is stigmatized in the United States. Take, for example, Republican presidential candidate Mitt Romney’s comments regarding the “47%” (i.e., those who, he claimed, pay no income tax and are dependent on government). Against this rhetorical background, the dependency provisions in the tax laws realign “lucky” LGBT families so that we do not see a family headed by two same-sex spouses working together to care and provide for their children, but only a taxpayer who has a number of dependents that he or she must support. From this perspective, no matter how great the actual contribution of the “dependent” same-sex spouse, that contribution counts for nothing. Thus, the price imposed upon LGBT families for obtaining tax benefits that “traditional” families take for granted is a reconfiguration of the family structure that paints an inaccurate picture of LGBT families and deprecates the “dependent” spouse’s contribution to the family and society while simultaneously stigmatizing him or her.

In contrast, the marriages of different-sex spouses are both legally recognized and valued for tax purposes. No matter how great or small the financial contribution of each spouse to the marriage, the tax laws are based on the assumption that both different-sex spouses are actively contributing to the relationship (and, in turn, to society) because, by definition, a taxpayer’s different-sex spouse cannot qualify as his/her dependent. This treatment stands in stark contrast to that of LGBT families and highlights the privileging of the traditional family in and through the federal tax laws.

It is worth noting that the repeal or invalidation of the portion of DOMA that applies to the federal tax laws would not redress this disparate treatment. It would have an effect only on a subset of LGBT families—those whose relationships would be legally recognized for federal tax purposes in the absence of DOMA, which is in no way a self-defining group but instead itself a complicated question with no clear answer. The repeal or invalidation of DOMA would be of no help either to the many same-sex couples whose relationships would still not be recognized for purposes of federal law or to those couples who choose not to seek legal sanction of their relationships. In other words, this is a problem that cannot be solved simply by eliminating DOMA; it is a problem that requires a more fundamental rethinking of how the tax laws approach questions of family status.

Manoli Presents The Earned Income Tax Credit Goes to College Today at UCLA

Day Manoli (UCLA, Department of Economics) presents The EITC Goes to College: Evidence Based on Income Tax Data and Policy Nonlinearities at UCLA today as part of its Tax Policy and Public Finance Colloquium hosted by Jason Oh and Kirk Stark:

This paper presents new evidence on the effects of disposable income (cash-on-hand) on college enrollment decisions. We use population-level, administrative data from United States income tax returns to estimate the effects of refundable tax credits, most notably the Earned Income Tax Credit (EITC), on college enrollment. The sample includes over 15 million dependent children during their senior year of high school from 2001-2010. We use a Regression Kink Design to estimate the effects of tax refunds on enrollment. This research design exploits kinks in the schedule of refundable credits by income and relates the change in the slope of the refund-income profile to a corresponding change in the slope of enrollment-income profile. We present nonparametric graphical evidence illustrating changes in the probability of enrolling in college at the same earnings levels that correspond to the kinks in the refundable credit schedule. Regression results indicate that a $1,000 increase in tax refunds around the first kink in the EITC schedule leads to an increase in college enrollment by 1-2 percentage points (5-10 percent). 

Sheffield Presents Spinoffs, Corporate Capital Structure, and Disguised Sales Today at Northwestern

Jeffrey T. Sheffield (Northwestern) presents Spinoffs, Corporate Capital Structure, and Disguised Sales, 91 Taxes 119 (Mar. 2013), at Northwestern today as part of its Advanced Topics in Taxation Colloquium Series hosted by Herbet Beller, Thomas Brennan, David Cameron, Philip Postlewaite, and Robert Wootton:

The IRS is currently studying under what circumstances a distributing corporation (P) should be permitted to distribute stock or securities of the distributed corporation (S) in exchange for P debt, tax-free as part of a Code § 355 spinoff of S. Consideration of this issue, and related issues regarding debt assumptions, should begin by distinguishing between (i) internal restructurings, where in preparation for the spinoff existing assets and liabilities are allocated between P and S; and (ii) external dispositions, where as part of the spinoff P exchanges an interest in the S business for cash or its equivalent. Spinoff-related internal restructuring activities generally should be considered simple readjustments of continuing property interests that do not trigger corporate-level gain recognition. Code § 357(c) (which can cause P to recognize gain to the extent liabilities assumed by S exceed the tax basis of assets transferred to S), and analogous gain-triggering Code provisions such as those governing the distribution of S debt and securities, should generally not apply to spinoffs. On the other hand, spinoff-related external disposition activities are more properly viewed as sale transactions and generally should trigger corporate-level gain recognition. The concept of a disguised sale -- developed most thoroughly to date as part of the partnership provisions in subchapter K -- could be used to help identify spinoff-related external disposition activities that should be treated as sales, and to measure the amount of any related corporate-level gain recognition.

Luke Presents The Scope of the Codified Economic Substance Doctrine Today at Indiana

Charlene Luke (Florida) presents The Relevance Games: Congress’s Choices for Economic Substance Gamemakers, 65 Tax Law. ___ (2013), at Indiana today as part of its Tax Policy Colloquium hosted by Leandra Lederman:

The main textual hint as to the intended scope of the codified economic substance doctrine is ambiguous. It provides “The determination of whether the economic substance doctrine is relevant to a transaction shall be made in the same manner as if this subsection had never been enacted.” This Article argues that this language should be read in light of the codification history, which stretches back over ten years prior to enactment. This history suggests that the relevance provision is primarily about maintaining the pre-codification balance of decision-making between tax agencies and courts. The history also indicates that the provision reflects congressional concurrence in the pre-codification trajectory of the doctrine, particularly in terms of the types of transactions that were being litigated.

The movement from the common law to codified statute brought with it the potential application of a complex web of authority regarding interactions between tax agencies and courts in their administration, enforcement, and interpretation of the Internal Revenue Code. Included in this web is the general ability of the tax agencies to obtain strong deference from the courts as to the agencies’ authoritative, reasonable interpretations of textual ambiguities. The economic substance legislative history acknowledges the general interpretive authority of the tax agencies but does not suggest a specific path for reconciling that authority with the preference that development of the doctrine continue “in the same manner” as under the common law. This Article proposes that the various strands in the legislative history can be reconciled by interpreting the relevance provision as adding two directions to tax agencies and courts: (1) The statute does not apply to transactions that are clearly consistent with the form and purpose of claimed tax benefits and (2) the courts have final discretion over whether a specific, litigated transaction ultimately fails the requirements of the economic substance doctrine.

Thuronyi Presents Supplemental Expenditure Tax Today at NYU

Victor Thuronyi (International Monetary Fund) presents Supplemental Expenditure Tax at NYU today as part of its Pathways to Tax Reform Series:

The U.S. urgently needs tax reform and substantial deficit reduction. The Supplemental Expenditure Tax (SET) can be an important building block of a tax reform package that reduces the deficit. The SET should have appeal to Democrats because it is a fair tax on upper-income individuals. It should appeal to Republicans because it is business- and investment-friendly. It should be attractive to anyone interested in a simpler and less distortionary tax system which will act as less of a drag on the economy and hence facilitate sustained economic recovery. Sure, there will be aspects of the SET that some people will not like, as there are with any tax. But in an environment where some tough choices need to be made, the downsides of the SET are far outweighed by the advantages. Because the SET is an additional tax, it will involve additional complexity and compliance burden. This is one of the major downsides of the SET. On the other hand, the SET will enable the AMT to be eliminated and will facilitate simplifications to the income tax. On balance, a package should be able to be designed that is substantially simpler than current law. 

Commentators:

• David Miller (Partner, Cadwalader, Wickersham & Taft, New York)
• Daniel Shaviro (Wayne Perry Professor of Taxation, NYU)

Update:  Dan Shaviro blogs the workshop here.

Shanske Presents Modernizing the Property Tax Today at NYU

Darien Shanske (UC-Hastings) presents Modernizing the Property Tax at NYU today as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU) and William Gale (Tax Policy Center; visiting at NYU):

It is commonly and correctly claimed that our national tax on income systematically undertaxes the income derived from owner-occupied housing. It is a truism of the fiscal federalism literature that the real property tax should be assigned to the lowest level of government. Because the real property tax is (largely) a tax on the income derived from owner-occupied housing, it appears that, in practice, our federal government has appropriately ceded this part of the income tax base to local governments.

This theoretically satisfying ex post rationalization for our current system has become increasingly frayed as the local real property tax has declined and the federal housing subsidy has, if anything, increased.

This decline in the property tax has had other unfortunate consequences, such as increasing state and local revenue volatility. But, even if unfortunate, perhaps the relative decline of the property tax was inevitable, caused, for instance , by shifts in the property tax base? It seems too early to be so pessimistic. After all, the taxes that have increased as the property tax has declined are collected much more efficiently. For instance, both the sales tax and the income tax utilize third parties (e.g., employers report one’s income), and the income tax also uses withholding. Withholding is of particular import given the well-known difficulties that most of us have budgeting.

There is little reason that property taxes could not be withheld from income, especially in the majority of states with income taxes -- indeed this is a service essentially already provided by many mortgage providers (through escrow). A property tax withholding regime instituted more broadly would not only ease budgeting for both taxpayers and local governments, but administering the property tax along with the income tax could improve the property tax. Specifically, withholding in connection with income allows for the property tax to respond effectively to the liquidity and progressivity concerns that plague the property tax. For instance, circuit breaker-type protections could be instituted directly through the income tax. Such a regime of incorporating income tax elements into the property tax would let “homevoters” respond directly to the relative merits of proposed projects without concern that they must insure themselves against future liquidity problems. These reforms could thus lead to increased local funding of good projects. In short, states and localities have allowed a revenue source to wither because it is collected poorly even though it is one that could possibly significantly mitigate their revenue problems, particularly as to volatility. The federal government should be concerned with the decline of the property tax not only because of this increase in state and local revenue volatility, but because of the reduced ability of the local property tax to serve as a complement to the federal income tax.

Update:  Dan Shaviro blogs the workshop here.

Shaviro Presents Should Social Security and Medicare be More Market Based? Today at Illinois

Daniel N. Shaviro (NYU) delivers the Ann F. Baum Memorial Lecture on Elder Law at Illinois today on Should Social Security and Medicare be More Market Based?:

Contemporary political debate about Social Security and Medicare often conflates the issue of the programs’ long-term fiscal sustainability with that of whether their design should be made more market-based, such as by transforming Social Security into a private accounts program and Medicare into a voucher-based program. In fact, the sustainability and design issues are fundamentally separate.

This article assesses the case for making the programs more market-based by using two main conceptual vehicles: (1) the model for understanding the programs’ substantive features and rationales that I offered in my books, Making Sense of Social Security Reform and Who Should Pay for Medicare?, and (2) Paul Samuelson’s classic description of Social Security as providing what we would now call an implicit financial instrument that reflects an intergenerational compact. In the end, it reaches largely skeptical conclusions about altering the programs to use either private accounts or vouchers.

Diamond Presents The Case for a Progressive Tax at NYU

Peter Diamond (MIT, Department of Economics) presented The Case for a Progressive Tax: From Basic Research to Policy Recommendations at NYU yesterday as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU) and William Gale (Tax Policy Center; visiting at NYU):

This paper presents the case for tax progressivity based on recent results in optimal tax theory. We consider the optimal progressivity of earnings taxation and whether capital income should be taxed. We critically discuss the academic research on these topics and when and how the results can be used for policy recommendations. We argue that a result from basic research is re levant for policy only if (a) it is based on economic mechanisms that are empirically relevant and first order to the problem, (b) it is reasonably robust to changes in the modeling assumptions, (c) the policy prescription is implementable (i.e., is social ly acceptable and is not too complex). We obtain three policy recommendations from basic research that satisfy these criteria reasonably well. First, very high earners should be subject to high and rising marginal tax rates on earnings. Second, low income families should be encouraged to work with earnings subsidies, which should then be phased - out with high implicit marginal tax rates. Third, capital income should be taxed. We explain why the famous zero marginal tax rate result for the top earner in the M irrlees model and the zero capital income tax rate results of Chamley-Judd and Atkinson-Stiglitz are not policy relevant in our view.  

• Dan Shaviro, Tax Policy Colloquium, Week 5: Should We Raise High-End Tax Rates to 70 Percent?

Brody Presents Corporate Change in Charitable Purpose at Brooklyn

Evelyn Brody (Chicago-Kent) presented Corporate Change in Charitable Purpose: Who Decides? at Brooklyn last week as part of its Faculty Workshop Series:

The American Law Institute is developing Principles of the Law of Charitable Organizations, for which I serve as Reporter. This workshop addresses a key question that remains unaddressed in nonprofit corporate law: How should a corporate charity be able to change its charitable purpose, and which, if any, accumulated assets can the charity use for the new purpose? A similar issue can arise in other corporate restructurings (including dissolution). In particular, what is – and should be – the role of the state, specifically the attorney general (who represents charities’ beneficiary classes) and the courts?

My current draft § 270 distinguishes between amending a charitable trust, for which the law generally requires notice to the attorney general and court approval, and amending the purposes of a corporate charity (the predominant organizational form for U.S. charities). I propose that a corporate charity need only amend its organizational documents in accordance with state law – that is, the purpose amendment is left to the charity’s board, with the approval of voting members (if any) – although the charity must separately make provision for any restricted gifts.

Moreover, unless otherwise required by state law or the organizational documents, I do not require the charity’s governing board to determine that the current purpose of the charity has failed, and the board’s determination is subject to judicial review only for abuse of discretion. This approach, however, obviously raises the question of whether the project should set forth standards for determining abuse of discretion. The classic concern is that “[t]hose who give to a home for abandoned animals do not anticipate a future board amending the charity’s purpose to become research vivisectionists.” But who decides, for example, if the decision of a woman’s college to go co-ed is an enlargement of its purpose, or a betrayal?

Separately, draft § 290 discusses the effect of a change in charitable purpose on the corporation’s existing assets. If the standard for amending purpose is the cy pres standard, then almost by definition the old assets will have to be redirected somewhere – either to the new purpose of the original charity, or transferred to another charity with the same purpose as the old one. Under a more liberal change of purpose regime, the question of appropriate uses for pre-amendment assets is more controversial. Some courts have held that even unrestricted gifts, as well as earned and investment income, are impressed with the pre-amendment purposes of a donee charity. Elsewhere, however, the Principles reject that the view that unrestricted gifts are restricted to purposes of the charity at the time the gift was made. Accordingly, my draft provides that while a restricted gift must be used only for purposes permitted by the gift instrument, the charity may generally use any other asset for any charitable purpose set forth in its current organizational documents.

Besides reflecting what I believe is already current corporate law (at least in most states), my approach reflects a general policy favoring flexibility to changes in purpose. As is true with the longstanding debate under trust law over the “dead hand” and cy pres reform, the law must balance historical purpose against current need. I worry about unduly encouraging the expectation that charity managers must honor the original purposes of the charity. Fiduciaries might reasonably believe that it is legally safer to stay the course while the organization stagnates, if not deteriorates. Elsewhere, the Principles take the position that, rather than having a “duty of obedience” to a particular purpose, the board members have a duty to keep the purpose of the charity current and useful.

I have been discussing these draft provisions (among others) with the project’s Senior Consultant, Marion Fremont-Smith, and its Associate Reporters, Dana Brakman Reiser and Jill Horwitz. Because of our differing views, the Preliminary Draft of Chapter 2 – to be presented later this year to the project’s Advisers and Members Consultative Group – could also present the argument for the alternative view that a corporate change of charitable purpose must generally follow the trust law approach of consultation with the attorney general and judicial approval.

Of course, none of this material set out below reflects the views of the Council or membership of the American Law Institute.

Mann Presents Economists are from Mars, Lawyers are from Venus Today at UCLA

Roberta F. Mann (Oregon) presents Economists are from Mars, Lawyers are from Venus: The Tax Policy Implications of Communication Failure at UCLA today as part of its Tax Policy and Public Finance Colloquium hosted by Jason Oh and Kirk Stark:

This article will first explore the development of the relationship between lawyers and economists by briefly examining the “law and economics” movement. The next section will contrast the training of economists with the training of lawyers. The following section will focus on the income tax system and the role economists and lawyers play in its development and implementation, including options for tax reform and its effect on in equality. Finally, the article will delve into behavioral research and the psychology of “numbers,” and the implications for the tax and fiscal systems.

Blank Presents Collateral Compliance Today at Boston College

Joshua D. Blank presents Collateral Compliance, 162 U. Pa. L. Rev. ___ (2013), at Boston College today as part of its Tax Policy Workshop Series hosted by Jim Repetti and Diane Ring:

As most of us are aware, the failure to comply with the tax law can lead to civil and criminal tax penalties. But tax noncompliance has other consequences as well. Collateral sanctions for tax noncompliance, which are imposed on top of tax penalties and are often administered by agencies other than the taxing authority, increasingly apply to individuals who have failed to obey the tax law. They range from denial of hunting permits to suspension of driver’s licenses to revocation of passports. Further, as the recent Supreme Court case Kawashima v. Holder demonstrates, some individuals who are subject to tax penalties for committing tax offenses involving “fraud or deceit” may even face deportation from the United States. Criminal law scholars have written dozens of articles on the collateral consequences of convictions. Yet tax scholars have virtually ignored collateral tax sanctions, even though their use by the federal and state governments is growing.

This Article offers a comprehensive analysis of collateral consequences in the taxation context. While many criminal law scholars have proposed ways to alleviate collateral consequences, this Article argues that, when applied in connection with violations of the tax law, collateral consequences may offer previously unappreciated social benefits. In many cases, collateral tax sanctions can promote voluntary tax compliance more effectively than additional monetary tax penalties, especially if governments increase public awareness of collateral tax sanctions. Governments should therefore embrace these sanctions as a means of tax enforcement and taxing authorities should publicize them affirmatively.

After considering the effects of collateral tax sanctions under each of the predominant theories of voluntary compliance, I propose principles that governments should consider when designing collateral tax sanctions. These principles suggest, for example, that initiatives to revoke driver’s licenses from individuals who have failed to pay outstanding taxes or professional licenses from individuals who have failed to file tax returns would likely promote tax compliance. However, whether the sanction of deportation for tax offenses involving fraud or deceit will have positive compliance effects is far less certain. Finally, I suggest how taxing authorities should publicize these sanctions to foster voluntary compliance.

Zolt Presents Inequality in America: Challenges for Tax and Spending Policies Today at Duke

Eric M. Zolt (UCLA) presents Inequality in America: Challenges for Tax and Spending Policies at Duke today as part of its Tax Policy Workshop Series hosted by Lawrence Zelenak:

This article examines some basic issues related to taxing and spending policies and how different distributions of income or wealth in a society may influence these basic choices. It seeks to provide a guide to addressing tax and spending policies in an era of increasing inequality. This is challenging because it requires a good understanding of inequality and economic mobility, the changing role of taxes and government social spending, the constraints on policy options, and the possible misconceptions that may influence tax and spending policies.

Inequality in the United States has increased dramatically over the last 30 years, whether measured before or after government tax and transfer policies. Perhaps even more troubling than the rise in inequality may be the decline in economic mobility. The American dream of working hard to get ahead may be more fiction than fact.

The same thirty-year period during which inequality has increased and economic mobility has decreased has seen major changes in fiscal policy. Tax law changes have altered the relative tax rates, the relative revenue contributions from different tax instruments, and the tax burdens of different income groups. Government spending on social programs has increased substantially, but perhaps not in ways one might expect. The United States likely has a smaller percentage of government social spending going to the needy than other developed countries. An increasingly larger percentage of social spending is directed at the elderly (without regard to need) and through tax subsidies to the upper half of the income distribution rather than those at the bottom of the income distribution or to low and middle income single-parent households with children.

If one really wants to use fiscal policy to reduce inequality and poverty or increase economic mobility, one needs a new approach. The first step is to identify clearly the relative priorities among reducing inequality, reducing poverty, and increasing economic mobility. Tax and spending policies will differ depending on the weight given each of these objectives, and in a world of relatively limited resources, the government needs to make difficult choices. One key insight is that it may be useful to stop thinking about increasing the income tax burden on the wealthy as the only, or perhaps even the primary, way to increase social spending programs. The U.S. may need less progressive (or even regressive) taxes to fund more progressive spending programs.

Hines Presents Rational Intestacy and Probate Reform Today at Chicago

James R. Hines, Jr. (Michigan) presents Rational Intestacy and Probate Reform at Chicago today as part of its Law & Economics Workshop Series:

Many people die intestate (without wills), leaving property to be allocated by law among potential heirs. Probate reforms that more closely align intestacy allocations with preferences are designed to make property pass at death in a manner that better approximates what decedents intended. This goal is frustrated by the voluntary nature of intestacy. If individuals are rational, probate reforms that better match intestacy allocations to decedent intent encourage greater numbers of individuals to do without wills. This economizes on costs, and improves efficiency, but generally reduces the extent to which property dispositions correspond to intentions. With rare exceptions, it is impossible for the following three conditions simultaneously to hold: that individuals act rationally, an intestacy regime is efficient, and an intestacy regime supports the closest possible match between property dispositions and decedent intent. Indeed, there exists an important range of conditions under which the most efficient intestacy regime supports the worst possible match between property dispositions and decedent intentions. Consequently, if individuals behave rationally then it will generally be necessary to choose between reforms that promote efficiency and those that make property pass in a manner that corresponds to decedent intent. The goal of supporting efficient outcomes by adhering to decedent intent requires that individuals have rational preferences that they express in wills, but also requires that they make irrational or uninformed decisions about whether or not to have wills.

Hickman Presents Unpacking the Force of Law at Illinois

Kristin Hickman (Minnesota) presented Unpacking the Force of Law at Illinois yesterday as part of its Faculty Lecture Series:

In 2011, in Mayo Foundation for Medical Education and Research v. United States, the Supreme Court held that general authority Treasury regulations adopted using notice-and-comment rulemaking carry the force of law and thus are eligible for Chevron deference. In the wake of Mayo, courts and scholars are now struggling with its implications for whether temporary Treasury regulations and IRB guidance documents (revenue rulings, revenue procedures, and notices) that lack notice and comment but are enforceable through civil penalties are likewise eligible for Chevron deference and, relatedly, whether these formats are in fact subject to APA notice-and-comment rulemaking requirements. Currently prevailing judicial tests for evaluating these questions do not offer clear or easy answers for the tax context. Ultimately, both questions turn on whether the agency actions in question carry “the force of law.” The purpose of this article is to take a step back from existing doctrinal standards and to sort through the basic administrative law principles and Supreme Court precedents that drive those standards in an effort to develop a coherent approach to Treasury and IRS rulemaking and judicial review thereof.

Shaviro Presents Should Social Security and Medicare be More Market Based? Today at Tulane

Daniel N. Shaviro (NYU) presents Should Social Security and Medicare be More Market Based? at Tulane today as part of its Faculty Workshop Series.  Shu-Yi Oei is the discussant.

Contemporary political debate about Social Security and Medicare often conflates the issue of the programs’ long-term fiscal sustainability with that of whether their design should be made more market-based, such as by transforming Social Security into a private accounts program and Medicare into a voucher-based program. In fact, the sustainability and design issues are fundamentally separate.

This article assesses the case for making the programs more market-based by using two main conceptual vehicles: (1) the model for understanding the programs’ substantive features and rationales that I offered in my books, Making Sense of Social Security Reform and Who Should Pay for Medicare?, and (2) Paul Samuelson’s classic description of Social Security as providing what we would now call an implicit financial instrument that reflects an intergenerational compact. In the end, it reaches largely skeptical conclusions about altering the programs to use either private accounts or vouchers.

Lawsky Presents How Tax Models Work Today at UCLA

Sarah B. Lawsky (UC-Irvine) presents How Tax Models Work, 53 B.C. L. Rev. 1657 (2012), at UCLA today as part of its Tax Policy and Public Finance Colloquium hosted by Jason Oh and Kirk Stark:

Unlike many social and physical sciences, legal scholarship includes little or no discussion of what models mean, how they are connected to the real world of law and policy, or how they should, and should not, be used by legal scholars. This void exists notwithstanding legal scholarship’s increasing reliance on explicit modeling in fields such as law and economics. This article uses the example of economic modeling in tax scholarship to investigate how legal scholarship uses models, and how models in legal scholarship work. The article lays out a path between two extremes. At one extreme is scholarship that employs models without either reflection or self-consciousness to make real-world recommendations; at the other is scholarship that rejects models because their assumptions are too far from reality. This article argues that neither approach is correct. Models are useful and important for legal scholarship, but not in the way that some critics and proponents seem to believe. Drawing from literature in the philosophy of science, this article argues that we reason from economic models through a mix of deductive and ampliative logic, through leaps, creativity, and intuition. Models cannot provide certainty about what the law should be; rather, economic models are merely one kind of voice in an ongoing and necessarily inconclusive conversation. This article concludes by drawing on this deeper understanding of models and modeling to propose ways that legal scholarship can and should use economic models.

Faulhaber Presents Charitable Giving, Tax Expenditures and the European Union Today at NYU

Lilian Faulhaber (Boston University) presents Charitable Giving, Tax Expenditures and the Fiscal Future of the European Union at NYU today as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU) and William Gale (Tax Policy Center; visiting at NYU):

In the wake of the recent economic crises in Europe, policymakers, academics, and other commentators spoke repeatedly about the fiscal future of the European Union. Had the fact that the twenty-seven Member States of the European Union lacked a harmonized fiscal policy lessened or worsened the impact of the economic crises? Did these crises and the outcry that surrounded them mean that fiscal harmonization was now more or less likely than before? Would Member States forever shy away from fiscal union, or was it even more necessary after the Greek bailout to tie together the taxing and spending policies of the European Union?

This Article argues that these current debates have ignored a significant development in the European Union, and that this development means that the budgets of the Member States are already more closely linked than has previously been recognized. This development, which this Article identifies as a “cross-subsidization effect,” has emerged out of the tax expenditure jurisprudence of the Court of Justice of the European Union, where the Court struck down revenue-reducing direct tax provisions. By striking down these tax provisions, the Court did more than just require the Member States to amend their tax law. The Court effectively gave Member States a choice: either stop using your tax laws to subsidize your own residents, or extend that subsidy to residents of all the other Member States. Member States that chose the latter option end up subsidizing other Member States, thus linking the budgets of the European Union together.

In order to illustrate the cross-subsidization effect, this Article focuses on four recent cases in which the Court considered charitable giving incentives, such as tax exemptions for charitable organizations and deductions for charitable donations. These charitable giving cases illustrate the cross-subsidization effect, and the Member State responses to these cases illustrate both the benefits and the costs of this development. The cross-subsidization effect may offer hope to policymakers interested in pushing the European Union toward greater fiscal harmony in that it suggests that Member States, including those outside the Eurozone, are closer to this goal than has previously been recognized, in that certain elements of their budgets are now interdependent. The Member State responses, however, hold a warning to policymakers. Although the revenue effects of the charitable giving cases are relatively small compared to recent amounts lost and spent in the economic crises, Member States have still pushed back strongly against the cross-subsidization effect that emerged out of these cases. This Article argues that policymakers must consider the Member State responses to this effect, as well as the possible motivations underlying those responses, as they consider their next steps toward European fiscal union.

Update:  Dan Shaviro blogs the workshop here.

Buchanan Presents The Debt Ceiling Should be a Dead Letter in Spending/Tax Negotiations Today at Kentucky

Neil H. Buchanan (George Washington) presents Bargaining in the Shadow of the Debt Ceiling: When Negotiating Over Spending and Tax Laws, the President and Congress Should Consider the Debt Ceiling a Dead Letter (with Michael C. Dorf (Cornell)) at Kentucky today as part of its Faculty Brown Bag Workshop Series hosted by Jennifer Bird-Pollan:

If the debt ceiling is inconsistent with existing spending and taxing laws, what must the President do?  In earlier work, we argued that when Congress creates a “trilemma” – making it impossible for the President to spend as much as Congress has ordered, to tax only as much as Congress has ordered, and to borrow no more than Congress has permitted – the Constitution requires the President to choose the least unconstitutional path.  In particular, he must honor Congress’s decisions and priorities regarding spending and taxing, and he must issue enough debt to do so.  Here, we extend the analysis in two ways. First, we rebut several recently-advanced arguments that purport to dissolve the trilemma.  Second, we ask whether our original analysis changes if both Congress and the President, when they pass the annual appropriations measures, knowingly create a trilemma.  We conclude that the answer does not change, that is, that spending and taxing laws must still take precedence over the debt ceiling.  This means that the debt ceiling is effectively a dead letter, and both Congress and the President should treat it as such.

Rosenzweig Presents A Corporate Tax for the Next 100 Years Today at Indiana

Adam H. Rosenzweig (Washington U.) presents A Corporate Tax for the Next 100 Years, 108 Nw. U. L. Rev. ___ (2013), at Indiana today as part of its Tax Policy Colloquium hosted by Leandra Lederman:

The United States has included some form of income tax on corporations since the enactment of the Sixteenth Amendment one hundred years ago. Notwithstanding its long lineage, however, surprisingly little is known about who actually ends up bearing the cost of the tax, whether it be shareholders, workers, or customers. Perhaps in simpler economic times such as 1913, or 1932, or even 1980, this might have been acceptable. But the country finds itself in vastly different economic times than the ones it has faced in the past, requiring a new way to understand and implement the corporate tax. This Article will do so, taking into account, for the first time, the fact that macroeconomic conditions, such as high unemployment, can impact who bears the cost of the corporate tax. This insight into who actually bears the cost of the corporate tax can fundamentally alter the landscape of the corporate tax policy debate, whether it be using corporate taxes to increase progressivity or abolishing the corporate tax through integration. Only by explicitly incorporating the realities of the modern economy into fiscal policy in this manner can any real progress be made towards building a modern corporate income tax robust enough to survive the next one hundred years.

This Article will consider one specific example – the impact of the corporate tax on employment decisions – by proposing a Dynamic Self-Adjusting Tax, or DST for short, to replace the existing corporate income tax. The DST will take into account the fact that specific macroeconomic conditions, such as high unemployment, can create incentives for employers to shift the cost of the corporate tax onto labor. The DST offsets this by charging employers (through higher marginal tax rates) when they do so, while also rewarding employers (through lower marginal tax rates) when they make new investments in labor. In this manner, a proposal like the DST would permit policymakers to more closely tailor the real-world effects of the corporate tax with its intended policy goals.