TaxProf Blog

Abrams Presents Exiting a Partnership and Making Gain Disappear Today at Northwestern

Howard E. Abrams (Emory), Now You See it, Now You Don't: Exiting a Partnership and Making Gain Disappear (2009) 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:

In this Article, three methods of exiting are partnership are examined. Each exit strategy offers significant tax advantages to the nonexiting partners. In two of the exit strategies, well-known defects in Subchapter K are exploited, and I conclude that the strategies cannot be attacked successfully by the government using either the detailed rules of Subchapter K or by resort to the partnership anti-abuse rules. However, the third of the exit strategies seeks to exploit language in a treasury regulation in a manner plainly not contemplated by the drafters and which yields a result inconsistent with the structure of subchapter K. I conclude that this exit strategy can be attacked successfully by the government. The two successful strategies show that in many cases the exit of a partner can be used to defer significant amounts of income.

Galle Presents Does Federal Spending 'Coerce' States? Today at Toronto

Brian Galle (Boston College) presents Does Federal Spending “Coerce” States? Evidence from State Budgets at Toronto today as part of its James Hausman Tax Law and Policy Workshop Series hosted by Ben Alarie:

According to a recent plurality of the U.S. Supreme Court, the danger that federal taxes will “crowd out” state revenues justifies aggressive judicial limits on the conditions attached to federal spending. Economic theory offers a number of reasons to believe the opposite: federal revenue increases may also float state boats. To test these competing claims, I examine for the first time the relationship between total federal revenues and state revenues. I find that, contra the NFIB plurality, increases in federal revenue -- controlling, of course, for economic performance and other factors -- are associated with a large and statistically significant increase in state revenues. This version of the study additionally provides extensive background explanations of underlying economic concepts for readers unfamiliar with the prior public finance literature.

Brooks Presents Taxation, Risk, and Portfolio Choice Today at NYU

John Brooks (Georgetown) presents Taxation, Risk and Portfolio Choice: The Treatment of Returns to Risk Under a Normative Income Tax, 66 Tax L. Rev. ___ (2013), 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):

Many articles in the legal and economic literature claim that a pure Haig-Simons income tax cannot effectively tax investment income. This is because an investor can use leverage to gross up her investments in risky assets such that the increased gain (or loss) exactly offsets any income tax (or deduction) on the returns to risk-taking. This article argues, however, that while it is possible for an investor to make such portfolio shifts, she almost certainly will not because of the increased risk of doing so.

Central to any discussion of the effects of taxation on investment risk-taking is the meaning of risk itself. The central claim of this article is that a better conception of investment risk is the risk of loss and not merely the variance of returns. Applying this notion of risk—one that is well supported in the finance literature but new to the taxation-and-risk literature— to an investor’s portfolio choice question shows that an investor will not increase her investment in risky assets by enough to offset the tax. As a result, there is an effective tax on investment risk-taking under a normative income tax. 

Update:  Dan Shaviro blogs the workshop here.

Blank Presents Collateral Compliance Today at UCLA

Joshua D. Blank (NYU) presents Collateral Compliance at UCLA today as part of its Tax Policy and Public Finance Colloquium hosted by Jason Oh and Kirk Stark:

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.

Brown Presents Addressing International Inequality Through Tax Law at San Diego

Karen B. Brown (George Washington) presented Addressing International Inequality Through Tax Law: The Caribbean Example at San Diego yesterday as part of its Tax Law Speaker Series:

This chapter examines the virtual absence in the policy debates relating to reform proposals of consideration of measures that accord importance to the development needs of poorer nations. Most tax reform options under discussion hold little promise because they seek to either tax multinationals too lightly or to ignore the burdens that rich country policies place on poor nations. Proposals to move to an exemption-type system are destined to promote investment in highly developed countries (offering the benefits of attractive infrastructure) with low tax rates (such as Ireland and more recently Canada, Japan, and other nations), foreclosing the ability of developing countries to compete. On the other hand, a U.S. move to worldwide taxation without the possibility of deferring of tax on foreign source income would shut down strategies developing countries have employed to attract investment. One promising scheme to institute worldwide formulary apportionment—by which net income of multinationals is allocated to taxing jurisdictions on the basis of selective factors—which would accord some measure of fiscal autonomy to developing nations has been largely unexplored by legislators. A second proposal, which would require high-income nations to acknowledge the roles their tax systems play in undermining the viability of developing country economies, has not been embraced by policymakers.

As a practical matter, worldwide long-term interests are served only if the potential of developing regions—both human and economic—is allowed to develop at a rate sufficient to sustain the growth of their populations. Part II of this chapter offers a critique of efficiency-based reform proposals, while Parts III and IV explore ways in which the needs of the developing world may be addressed.

Using the Estate Tax to Curb Inequality and Spur Economic Growth

Amy S. Elliott, Raising the Estate Tax Will Spur Economic Growth, Caron Argue, 138 Tax Notes 552 (Feb. 4, 2013):

Paul L. Caron, Pepperdine University visiting law professor and author of the TaxProf blog, said he has a proposal that will please right-leaning deficit hawks and left-leaning redistributionists, all while spurring economic growth. He suggests raising the federal estate tax.

Presented January 30 as the luncheon keynote address to tax practitioners attending estate planning sessions at the University of Southern California's annual tax institute in Los Angeles, the proposal was not roundly embraced. But its foundation -- that inequality hinders economic growth -- is intriguing.

The proposal is outlined in a paper by James Repetti of Boston College and Caron that was first presented at a January 18 symposium cosponsored by Pepperdine and Tax Analysts on tax advice for the second Obama administration. (Prior coverage here. The paper -- Occupy the Tax Code: Using the Estate Tax to Reduce Inequality -- is available here.)

In the paper, Caron and Repetti review 36 studies examining the relationship between concentrations of income and economic performance. Nineteen of the empirical studies examined a period of at least 15 years. All were published between 1992 and 2012. Thirty of the studies and all of the 19 long-term studies found a negative correlation between inequality and economic growth. In one study of 16 industrialized countries, the two countries with the highest inequality in 1980 (Australia and the United States) were also the two countries with the lowest labor productivity growth in the ensuing decade.

"We're hopeful that we can somehow get the left and the right to agree that it's in both of their interests to decrease inequality," Caron said. Doing so would not only reduce adverse health and social consequences such as low life expectancy, illiteracy, homicides, imprisonment, mental illness, and obesity, but would also contribute to economic growth, he said, adding that more tax revenue could help decrease the nation's debt. "Using the tax law -- especially the estate tax -- is the least painful way to achieve that," Caron said.

The paper cites a study suggesting that as inherited wealth (as opposed to self-made wealth) constitutes a larger fraction of a country's GDP, per capita GDP grows more slowly. Using IRS Statistics of Income data, it provides evidence suggesting that the estate tax significantly reduces the size of the nation's largest estates and therefore their ability to pass down that wealth to heirs. U.S. estates exceeding a value of $20 million transferred more than 13 percent of their gross values to the federal government in 2010.

The paper debunks the commonly held notion that the estate tax discourages savings, saying it isn't supported by either economic theory or empirical evidence. And it provides estimates by Massachusetts Institute of Technology economics professor James Poterba showing that the effective impact of the federal estate tax is very low -- between 0.1 and 0.5 percent -- during the period when a person is likely to create most of his wealth (under age 70).

While the paper does not specify how to raise the estate tax, Caron told practitioners that the most effective reforms would be those that are "grand and ambitious" -- like taxing capital gains at death and repealing section 1014 to eliminate stepped-up basis at death.

"Recent evidence would suggest that the time isn't right for that kind of a big deal," Caron said. "So a more modest approach would instead deploy what we already have with the estate tax and just go back to 2009, where the exemption was $3.5 million and the top rate was 45 percent."

Caron said that while that "more modest and perhaps more doable" approach would raise only about $125 billion over 10 years, "that's at least a start on both the revenue front and also the equality front."

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Raskolnikov Presents Are Graduated Tax Penalties Efficient? Today at Columbia

Alex Raskolnikov (Columbia) presents Are Graduated Tax Penalties Efficient? at Columbia today as part of its Faculty Workshop Series:

This essay searches for an efficiency-based justification of graduated tax penalties and finds none. The optimal deterrence approach successfully used in many areas of economic regulation is unhelpful in designing the real-life tax rules and sanctions because the ideal tax system is so different from the real one. More limited inquires focusing on various partial tradeoffs for assessing tax rules and penalties are incomplete, indeterminate, or implausible. Arguments suggesting that graduated tax sanctions are efficient for the reasons unrelated to the efficiency of the underlying substantive rules are mistaken or lack empirical support crucial for their validity.

McMahon Presents The Comings and Goings of Disregarded Entities Today at Northwestern

Martin J. McMahon, Jr. (Florida) presents Now You See It, Now You Don’t: The Comings and Goings of Disregarded Entities, 65 Tax Law. 259 (2012), 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:

While state law recognizes an LLC as a distinct type of entity, an LLC is not a distinct entity for federal tax purposes. An LLC that has two or more owners is treated as either a corporation or a partnership, while an LLC with a single owner will be disregarded for federal income tax purposes unless it elects to be treated as a corporation. In addition to single-member LLCs, the Code and Regulations recognize a second type of disregarded entity — the qualified subchapter S subsidiary (commonly called a QSub). The first part of this Article examines the tax consequences of (1) the formation and dissolution of single member LLCs, (2) check-the-box elections and revocations for a single member LLC, (3) the addition of a second member to an LLC, which converts a disregarded entity into a partnership, (4) the reduction of the number of members of an LLC from two or more to one, which converts the LLC from a partnership into a disregarded entity, (5) the election by a LLC to be taxed as a corporation — including “check and sell” and “check and merge” transactions — and the revocation of an election by an LLC to be taxed as a corporation, (6) the merger of a single member LLC into another LLC or a partnership, and (7) the merger of an LLC into a corporation. The second part of the Article examines the treatment of QSub elections, revocations, and terminations, in various contexts, including merger and acquisition transactions.

Sanchirico Presents Optimal Tax Policy and the Symmetries of Ignorance Today at Duke

Chris William Sanchirico (Pennsylvania) presents Optimal Tax Policy and the Symmetries of Ignorance, 66 Tax L. Rev. ___ (2012), at Duke today as part of its Tax Policy Workshop Series:

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

McCaffery Presents Bifurcation Blues: The Problems of Leaving Redistribution Aside Today at NYU

Edward McCaffery (USC) presents Bifurcation Blues: The Problems of Leaving Redistribution Aside 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 short and in sum, the strategy of bifurcation, so elegant and attractive in theory, has been a disaster for advocates of greater redistribution in practice. Now it seems as if the redistributive ship has sailed. Politicians faced with a status quo largely of their own making – illustrating the importance of agenda setting and timing in politics7 – now joined and encouraged by the media and many academics, are considering more changes that will not add much if at all to furthering the goal of economic equality, and certainly will not address wealth inequality. Fiscal policy in times of crisis tends to pit the middle class against the poor, with middle-class tax increases – such as the national-level consumption or valueadded tax (“VAT”) that seems to be slouching ever closer towards us – being needed to save entitlement and other spending programs that help all, including the poor. The changes get scored or perceived as “progressive” because the middle class has more economic resources than the poor. Meantime, the rich get left off the hook – and the really rich stay off it altogether.

If we are serious about changing this situation – and there comes a time when we might just have to admit that we are not serious about doing so – it is time to change the way we do things, fiscally, beginning with the way we think about things. We need a cure for the bifurcation blues.

Update:  Dan Shaviro blogs the workshop here.

Raskolnikov Presents Are Graduated Tax Penalties Efficient? Today at UCLA

Alex Raskolnikov (Columbia) presents Are Graduated Tax Penalties Efficient? at UCLA today as part of its Tax Policy and Public Finance Colloquium hosted by Jason Oh and Kirk Stark:

This essay searches for an efficiency-based justification of graduated tax penalties and finds none. The optimal deterrence approach successfully used in many areas of economic regulation is unhelpful in designing the real-life tax rules and sanctions because the ideal tax system is so different from the real one. More limited inquires focusing on various partial tradeoffs for assessing tax rules and penalties are incomplete, indeterminate, or implausible. Arguments suggesting that graduated tax sanctions are efficient for the reasons unrelated to the efficiency of the underlying substantive rules are mistaken or lack empirical support crucial for their validity.

Ryan Presents EITC as Income Security Today at Indiana

Kerry Ryan (St. Louis) presents EITC as Income Security at Indiana today as part of its Tax Policy Colloquium hosted by Leandra Lederman:

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.

Sanchirico Presents Optimal Tax Policy and the Symmetries of Ignorance Today at Boston College

Chris William Sanchirico (Pennsylvania) presents Optimal Tax Policy and the Symmetries of Ignorance, 66 Tax Law Rev. ___ (2012), at Boston College today as part of its Tax Policy Workshop Series hosted by Jim Repetti and Diane Ring:

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.

Taylor Presents Payroll Taxes Today at San Diego

Willard Taylor (Sullivan & Cromwell, New York) presents Payroll Taxes — Why Should We Care? What Should Be Done?, 137 Tax Notes 983 (Nov. 26, 2012), at San Diego today as part of its Tax Law Speaker Series:

Federal employment and self-employment taxes are critical for several reasons, including their significant contribution to federal revenues and their effect on an individual's tax burden. Despite the importance of payroll taxes, and the clear defects in the rules, legislative proposals for change are limited, addressing primarily the lack of parity between a small service business carried on by an S corporation and one carried on directly or through a partnership. This report argues for more fundamental reform, such as the integration of payroll taxes and the personal income tax.

Kamin Presents A Path to Close America's Long-Run Deficit Today at NYU

David Kamin (NYU) presents Are We There Yet?: On a Path to Closing America's Long-Run Deficit, 137 Tax Notes 53 (Oct. 1, 2012) 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):

Many decry the fact that policymakers are nowhere close to addressing the longterm fiscal shortfall and as evidence they point to the Congressional Budget Office’s projection of enormous long-term deficits under current policy. This report contends that the minimum deficit reduction incorporated in leading progressive and conservative budgets can put us on a path toward closing the long-term deficit. A significant gap would remain even if consensus were fully realized. However, this report describes a plausible path for further cutting the long-term deficit, as well as important revenue and spending backstops. Finally, it explains that while the country can and should try to reach a fiscally sustainable path, because of the uncertainty surrounding many of those reforms — especially the restructuring of the healthcare system — we cannot expect an immediate solution. 

Update:  Dan Shaviro blogs the workshop here.

Staudt Presents The Supercharged IPO Today at UCLA

Nancy Staudt (USC) presents The Supercharged IPO (with Victor Fleischer (Colorado)) at UCLA today as part of its Tax Policy and Public Finance Colloquium hosted by Jason Oh and Kirk Stark:

In this article, we investigate a new and widely discussed financial innovation: the supercharged initial public offering (IPO). A supercharged IPO differs from a conventional IPO because it involves a contract provision that enables the original owners of a firm to extract large amounts of money from the company in the post-IPO period. Supercharged IPOs have generated substantial debate and controversy but no scholar or team of scholars has investigated why the supercharged IPO emerged and how it has spread across industries and geographic areas. We amassed a large dataset of IPOs and empirically investigate these questions. We find the motivation for pursuing this new deal structure relates to the parties’ desire to take advantage of tax arbitrage opportunities, and not to a devious plan by owner-founders to steal from unknowing public investors as many critics have argued. Our results also suggest, contrary to the existing literature, that while innovation in the IPO context is an on-going process—it tends to spike when the economy performs poorly. With respect to the process of use and diffusion, we find that the earliest innovators are firms widely viewed to be aggressive and flexible, such as those organized in tax havens. Over time, however, the diffusion process is best explained by two factors: elite lawyers and professional networks—especially those located in the New York City region. Owner-founders who seek to go public with the help of an IPO, tend to supercharge their IPO when their hire elite New York City lawyers.

Kane Presents Tax Treaties as Novel Tools for Development Finance Today at Northwestern

Mitchell Kane (NYU) presents Bootstraps and Poverty Traps: Tax Treaties as Novel Tools for Development Finance, 29 Yale J. on Reg. 255 (2012), 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:

Current shortfalls in financing required for full achievement of the Millennium Development Goals have led to calls for consideration of novel means of development finance. This Article describes such a novel means of development finance based on a radical rethinking of the typical allocation of tax entitlements in bilateral income tax treaties. The central proposal is for a developing country to surrender, by tax treaty, a portion of its taxing authority in exchange for an upfront capital transfer from the developed country. The developed country would then recoup some portion of the upfront capital transfer through the exercise of the expanded authority secured under the treaty. The Article describes a number of ways in which the proposal represents an advance over existing forms of development finance, including for example, effects on administrative burdens, tax competition, and risk shifting. The Article also addresses a number of potential criticisms of the proposal, relating especially to issues of sovereignty and enforceability.

Listokin Presents Tax Expenditure Salience Today at Toronto

Yair Listokin (Yale) presents Tax Expenditure Salience (with Jacob Goldin (Ph.D. Candidate (Economics), Princeton) at Toronto today as part of its James Hausman Tax Law and Policy Workshop Series hosted by Ben Alarie:

We provide survey evidence regarding taxpayer perceptions of two important tax expenditures — the charitable contribution deduction (CD) and the home mortgage interest deduction (HMID). We find that taxpayers have a flawed understanding of both programs. Taxpayers underestimate their eligibility for tax benefits for giving charitable gifts. Conditional on being eligible for CD, taxpayers also underestimate the size of the tax benefits. For the HMID, there are many eligible taxpayers who do not believe they receive a benefit, and many ineligible taxpayers who falsely believe they receive one. Conditional on qualifying for HMID, taxpayers underestimate the size of the tax benefits. Errors are prevalent even in the highest income categories. The results cast doubt on conventional understandings of the elasticity of charitable giving and home purchasing to tax expenditures. Moreover, the results suggest that even salient tax expenditures may be a particularly flawed means of subsidizing desirable behavior. 

Osofsky Presents Frictions as Screening Mechanisms Today at Toronto

Leigh Osofsky (Miami) presents Frictions as Screening Mechanisms at Toronto today as part of its James Hausman Tax Law and Policy Workshop Series hosted by Ben Alarie:

Tax planning can be highly problematic. It can reduce revenue, produce inefficiency, and allocate tax burdens in an inequitable fashion. As a result, scholars have examined how the tax code often incorporates costs designed to deter tax planning. An influential line of tax scholarship has dubbed these costs “frictions.” In examining and judging frictions, scholars have focused on the central question: When do frictions do a better job at deterring tax planning than causing it to continue in a more costly fashion? However, as I display in this Article, this question is necessary, but not sufficient, to analyze whether frictions are functioning well in the tax system. Just as important is a preliminary set of questions: Does the friction systematically track characteristics of taxpayers engaging in tax planning relative to groups that are not? Does the friction systematically track characteristics other than likelihood of tax planning and how, if at all, does this affect the friction’s desirability? These preliminary questions provide new, analytically important tools for evaluating and designing a whole host of tax provisions. Specifically, I argue that frictions serve as screening mechanisms, meaning that they screen between different groups of taxpayers and impose different costs on different groups. Understanding how frictions are screening between taxpayers and imposing different costs on different groups of taxpayers across the tax system is essential to evaluate both if frictions are deterring tax planning as intended and if they are doing so in an equitable fashion.

While a large economics literature discusses screening mechanisms in optimal tax theory, scholars have not made connections between this literature and the examination of existing tax law frictions. In this Article, I draw on optimal tax theory to explain how frictions inherently serve as screening mechanisms, by tracking various underlying characteristics of taxpayers and imposing different burdens on different taxpayers. I then display how frictions can serve as screening mechanisms on tax planning by tracking relative tax planning motivation and imposing relatively higher costs on tax planners. Recognizing how frictions fill this role can help make them better tailored to do so. Moreover, viewing frictions as screening mechanisms also reveals how existing frictions screen taxpayers based on characteristics other than the likelihood of engaging in tax planning. Understanding how frictions function as screening mechanisms reveals perverse, disparate impacts of such screening and suggests constructive ways to modify frictions so as to eliminate such perversities.

Frictions are as important as tax scholars have long said they are. They impose significant costs on taxpayers and shape behavior. But they are doing more than scholars have recognized. It is time to push beyond the predominant view of frictions as deterrence vehicles and recognize their additional role as screening mechanisms. Doing so raises difficult, but important, questions about how frictions across the tax system differentially affect taxpayers, and how we can better use frictions to better the tax system.

Hubbard Presents Three Health Insurance Tax Papers Today at Columbia

R. Glenn Hubbard (Dean, Columbia Business School) presents three papers at Columbia today as part of its Tax Policy Colloquium Series hosted by Alex Raskolnikov, David Schizer and Wojciech Kopczuk:

• Reforming the Tax Preference for Employer Health Insurance
• The Effect of Tax Preferences on Health Spending
• The Effect of Medicare Coverage for the Disabled on the Market for Private Insurance

Gergen Presents Harnessing Conflict and Distrust as Drivers for Tax Compliance at Today Washington U.

Mark Gergen (UC-Berkeley) presents Harnessing Conflict and Distrust as Drivers for Tax Compliance at Washington University today as part of its Tax Colloquium Series hosted by Adam Rosenzweig:

Tax enforcement strategies that target third parties (e.g., reporting requirements, third party penalties, and whistle blower awards) create what is from the perspective of the taxpayer and the third party an agency problem for there will be a positive joint net payoff from misreporting a transaction. Distrust can make it difficult to solve this problem and so can make efficacious enforcement strategies that target third parties. However, such enforcement strategies can also breed distrust, imposing private losses by reducing the value of a transaction. This paper presents a simple model for analyzing the problem. The model uses a contract for home improvements in which a contractor can induce a homeowner not to report the transaction by revealing he is a tax cheat but at the cost of diminishing the homeowner's trust the contractor will perform as promised.

Keen Presents Presents Revenue Mobilization in Developing Countries Today at Columbia

Michael Keen (Deputy Director, Fiscal Affairs Department, International Monetary Fund) presents Revenue Mobilization in Developing Countries at Columbia today as part of its Tax Policy Colloquium Series hosted by Alex Raskolnikov, David Schizer and Wojciech Kopczuk:

The Fund has long played a lead role in supporting developing countries’ efforts to improve their revenue mobilization. This paper draws on that experience to review issues and good practice, and to assess prospects in this key area.

Blank Presents Collateral Compliance Today at Columbia

Joshua D. Blank (NYU) presents Collateral Compliance at Columbia today as part of its Tax Policy Colloquium Series hosted by Alex Raskolnikov, David Schizer and Wojciech Kopczuk:

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.,/p>

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.

Yin Presents The Creation of the Joint Committee on Taxation Today at Boston College

George K. Yin (Virginia) presents James Couzens, Andrew Mellon, the 'Greatest Tax Suit in the History of the World,' and Creation of the Joint Committee on Taxation and Its Staff at Boston College today as part of its Tax Policy Workshop Series hosted by Jim Repetti and Diane Ring:

In early 1924, James Couzens was a Republican Senator from Michigan and reportedly the richest member of Congress. Andrew Mellon was beginning his fourth year as Secretary of the Treasury — a service that would eventually span 11 years under three Republican Administrations — and one of the wealthiest persons in the entire country. This article describes how a feud between these two men, an ensuing investigation led by Couzens of the Bureau of Internal Revenue (BIR) (predecessor to the modern-day IRS), and a tax case against Couzens that was described as the “greatest tax suit in the history of the world,” helped lead to creation of the U.S. Joint Committee on Taxation (JCT) and its staff. The events — filled with political intrigue, backstabbing (real or imagined), and unintended consequences — antagonized Congress’s relationship with the executive branch, but improved cooperation between the House and Senate, and both were instrumental in the JCT’s creation. The story also provides insight on the unique role the JCT has played in Congress for over 85 years. Finally, the article explains how creation of the JCT became entangled with two of the most contentious tax issues of the day — the publicity of tax return information and the depletion allowance for oil and gas production — and played a role in changing the law in both areas.

Sanchirico Presents Optimal Tax Policy and the Symmetries of Ignorance Today at Washington University

Chris Sanchirico (Pennsylvania) presents Optimal Tax Policy and the Symmetries of Ignorance, 66 Tax Law Rev. ___ (2012), at Washington University today as part of its Tax Colloquium Series hosted by Adam Rosenzweig:

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.

Dean Presents A Hybrid Financial Instrument for Social Enterprise Today at Toronto

Steven Dean (Brooklyn) presents Hunting Stag with FLY Paper: A Hybrid Financial Instrument for Social Enterprise (with Dana Brakman Reiser (Brooklyn)) at Toronto today as part of its James Hausman Tax Law and Policy Workshop Series hosted by Ben Alarie:

Social entrepreneurs and socially motivated investors share a belief in the power of social enterprise, ventures that pursue a “double bottom line” of profit and social good.  Unfortunately, they also share a deep mutual suspicion.  Recognizing that social ventures—just like traditional for- and nonprofit enterprises—need capital to flourish, this Article offers a financing tool to transform that skepticism into commitment.  Unlike the array of new entities that have emerged in recent years—including L3Cs, benefit corporations and flexible purpose corporations—the hybrid financial instrument it describes provides a robust and transparent solution to the puzzle that lies at the heart of every social enterprise: how to blend a profit motive with a social mission.  Recognizing their shared dilemma as an example of what economists call a stag hunt, FLY Paper strikes that elusive balance by allowing investors and entrepreneurs to credibly signal a reciprocal commitment to the pursuit of a dual bottom line.

Shanske Presents Property Tax Withholding Today at Loyola-L.A.

Darien Shanske (UC-Hastings) presents Property Tax Withholding: What, How, Why Now? at Loyola-L.A. today as part of its Tax Policy Colloquium Series:

The decline in the use of the general real estate property tax at the state and local level is well-known, as is the relation of this decline to the rise of revenue volatility. Yet is the relative decline of the property tax entirely inevitable, caused, for instance, by shifts in the property tax base? It seems too early to say for sure. 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, and the income tax also uses withholding. Related private charges, e.g., for a home alarm system or private school tuition, are also generally collected much more efficiently.

There is little reason that property taxes could not be withheld from income, especially in the vast 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 by state governments would not only smooth cash flows 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 would let “homevoters” respond directly to the relative merits of proposed projects without concern that they must insure themselves against future liquidity problems. Prima facie, this should 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.

Kirk Stark (UCLA) is the commenter.

Bird-Pollan Presents Nozick, Libertarianism, and the Estate Tax at Harvard

Jennifer Bird-Pollan (Kentucky) presented Nozick, Libertarianism, and the Estate Tax at Harvard yesterday as part of its Tax Policy Colloquium, organized by Daniel Halperin and Stephen E. Shay:

Contemporary policy discussions of taxes in general, and of the estate tax in particular, are often dominated by arguments that start from libertarian premises.  However, these libertarian views are rarely fully unpacked, and, as a result, the conclusions of these arguments often extend beyond what can be justified by those libertarian premises.  With regard to the estate tax, many libertarians argue that government interference with the free transfer of assets after death is an immoral violation of the property rights of the deceased.  In this Article, I work through the libertarian arguments of Robert Nozick in his seminal work, Anarchy, State, and Utopia, with special attention to his views of property and inheritance rights.  By demonstrating that libertarianism cannot justify property rights that extend beyond death, I show that, in fact, libertarianism is entirely consistent with a robust estate tax.  While this does not mean that the libertarian views of property rights require an estate tax, those views do not, on moral grounds, preclude the imposition of the tax.

Stark Presents Bribing the States to Tax Food Today at Columbia

Kirk J. Stark (UCLA) presents Bribing the States to Tax Food at Columbia today as part of its Tax Policy Colloquium Series hosted by Alex Raskolnikov, David Schizer and Wojciech Kopczuk:

In Part I, I provide an empirical snapshot of food consumption in the United States based on data published by the Bureau of Labor Statistics in the Consumer Expenditure Survey (CEX) and the U.S. Department of Agriculture’s Economic Research Service (ERS). The CEX/ERS data, published annually, contain estimates of amounts spent on food purchased away from home (typically taxable) and food purchased for home consumption (typically exempt). Of particular interest to the question of how or whether states should tax food are data relating to (i) how food consumption as a percentage of disposable income varies by income level, and (ii) how food consumption varies for all households over the business cycle for all households.

In Part II, I provide an overview of the state sales tax treatment of food. The approach followed by the majority of states (31 out of 45)—i.e., exempting from the sales tax base food purchased for home consumption—is then critiqued in Part III on several grounds, including its effect on revenue volatility, efficiency, and administrative complexity. These considerations support a strong prima facie case for taxing food, which must then be weighed against the costs of that approach, which are outlined in Part IV of the paper.

Finally, Part V considers the possibility of a federal tax subsidy, most likely delivered via a refundable tax credit, that would be made available only to residents of states that tax food purchased for home consumption. Such a subsidy might be modeled after the refundable food tax credits currently available in a handful of states, such as Hawaii and Kansas, that currently tax food. The proposal considered in this paper can be viewed as an expansion and federalization of the food tax credits currently in place in these states. In addition to enabling the states to remedy the flaws associated with exempting food, this policy is consistent with standard principles of normative fiscal federalism, which hold that redistributive programs like food tax credits should generally be assigned to the central government rather than residing with subnational jurisdictions.

Kamin Presents Federal Taxes and Redistribution Today at Loyola-L.A.

David Kamin (NYU) presents Poverty, Not Inequality: Federal Taxes and Redistribution at Loyola-L.A. today as part of its Tax Policy Colloquium Series:

The federal tax system, and the income tax in particular, is often held out as a key—perhaps the key tool—for combatting income inequality. Especially given the rapid rise in inequality seen over the last 30 years, it is natural to look to the tax code and ask what can be done in response. However, this article’s answer to that question is “not much,” because of the practical constraints on policymaking. Put simply, the effect of the federal tax system on income inequality is—and is likely to continue to be—decidedly limited. When it comes to the distribution of the tax burden, this suggests that other concerns, beyond overall inequality, should take precedence. This article offers an alternative—that of poverty. For even as the tax system can do relatively little to change the overall income distribution within the practical bounds of policymaking, it can do more, sometimes much more, when it comes to the welfare of those toward the bottom of the income spectrum. To sum up, this is a practical argument with the following practical conclusion: when it comes to the distribution of the tax burden, what matters most is poverty, not inequality.

Sarah Lawsky (UC-Irvine) is the commenter.

Graetz Presents Technological Innovation, International Competition, and International Taxation Today at Columbia

Michael Graetz (Columbia) presents Technological Innovation, International Competition, and the Challenges of International Income Taxation, 113 Colum. L. Rev. ___ (2013), at Columbia today as part of its Tax Policy Colloquium Series hosted by Alex Raskolnikov, David Schizer and Wojciech Kopczuk:

No one today doubts the fundamental importance of technological development to economic growth. And there is a consensus that research and development, which is crucial to ongoing technological advances, is underproduced in the absence of government support. Substantial government support of technological advances is ubiquitous. Technological innovation — the development of intellectual property (IP) — has become the key element in building national wealth.

Policymakers throughout the world have enacted tax benefits for both R&D and the gains from innovation. Designing cost-effective methods of supporting technological innovations has, however, become substantially more difficult as the world economy has become more interconnected. Labor and capital mobility, along with cross-border trade, complicate matters substantially: they allow the location where R&D is performed and the location where income is earned to change in response to the nature and level of government support. Adding to the mix, the flexibility of MNEs to shift across national borders the locations of production of their IP, the ownership of their IP, and the locations of the income from IP, along with their ability to establish new corporations resident in tax-favorable jurisdictions, renders designing cost-effective incentives even more difficult. Devising appropriate tax rules for the costs of developing IP and for IP income has become the central challenge for international income taxation.

Fashioning appropriate national policies to further technological innovation has become herculean for governments that support such advances primarily to increase the wellbeing of their own citizens and residents. It is hardly surprising, therefore, that the variety of public policies that have emerged from contests among nations to capture many or all of these benefits for its citizens and residents sometimes have beggar-thy-neighbor aspects and often are hard to fathom, much less defend. The difficulties in evaluating such public policies are compounded when, as here, any such effort is fraught with empirical uncertainties.

Tax policies have taken center stage in national policy efforts to stimulate and attract R&D and to capture a share of the income from technological innovations. Here we examine the three primary tax policies supporting innovation: (1) incentives for R&D, (2) so-called patent boxes, and (3) proposals for tax benefits for “advanced manufacturing.” We begin by describing the current smorgasbord of incentives and the economic evidence concerning their efficacy. We then briefly describe common techniques used by MNEs to lower the income taxes on income from IP. After that, we assess the soundness of the various incentives and offer our recommendations about how the United States might respond to the challenges it now faces in promoting technological innovation. Based on our extensive examination of the economic evidence, we conclude that, at most, only R&D incentives are justified.

We also summarize the current proposals for limiting opportunities for USMNEs to shift IP income to low or zero-tax jurisdictions. In that connection, we offer new proposals for change that emphasize imposing U.S. tax based on U.S. sales. These kinds of proposals merit serious consideration when the U.S. Congress takes up business reform.

Perkins Presents Salience and Sin: Designing Taxes in the New Sin Era at Washington U.

Rachelle Holmes Perkins (George Mason) presented Salience and Sin: Designing Taxes in the New Sin Era at Washington University as part of its Tax Colloquium Series hosted by Adam Rosenzweig:

Tax salience reflects the extent to which consumers take into account the after-tax cost of a good or service prior to making their consumption decision. Recent empirical work on tax salience has revealed something that is perhaps intuitive, but nevertheless important to the design of sin taxes. Taxpayers are more likely to make consumption decisions based on pre-tax rather than post-tax prices when the salience, or visibility, of a tax is diminished. Thus, consumers are less likely to change their demand for a particular product if shelf prices are tax-exclusive rather than tax-inclusive. Economically, this makes low salience taxes mimic some of the benefits of taxes on inelastically demanded goods. Because a taxpayer’s demand change in response to a tax price increase is diminished, the deadweight loss generated by the imposition of the tax can be reduced. Notwithstanding the potential for efficiency gains, politicians and academics alike have expressed various fairness, distributional, and normative concerns regarding the use of low salience taxes. A number of countries already require tax-inclusive pricing for consumer products in order to purportedly preserve consumer awareness and transparency.

I argue that lawmakers should be able to exploit the benefits of low salience taxes. To the extent they are able to minimize economic distortions the concerns that have been expressed are not fatal. The appropriate use of a low salience design for any particular sin tax is dependent on a number of factors, including the price elasticity of demand, the potential for countervailing income effects, and whether the tax is intended to raise revenue or modify taxpayer behavior. I find that while selectively implemented low salience taxes can be beneficial, as a normative matter, I do not believe they should be universally implemented in sin tax design. In fact, in certain situations I argue that lawmakers will best benefit from more salient taxes. I propose that these taxes may have efficiency benefits when lawmakers are seeking to influence taxpayer behavior. Ultimately, while it is difficult to draw definitive conclusions regarding the optimal use of tax salience given that many empirical and theoretical aspects of salience have yet to be developed, the empirical work done to-date suggests that the impact of tax salience on tax design may be significant and is worth exploring.

Phillips Presents Income Splitting and Gender Equality Today at McGill

Lisa Philipps (Osgoode) presents Income Splitting and Gender Equality: The Case for Incentivizing Intra-household Wealth Transfers at McGill today as part of its Tax Policy Colloquium Series hosted by Allison Christians:

In this chapter, I examine the problem of income splitting under an individual tax unit and Canadian legal developments that have expanded the scope for such tax planning by spouses. Income splitting poses a dilemma for tax policy analysts concerned with gender equality because, left unchecked, it opens a back door to joint taxation, with its troubling impact on labour-market incentives for secondary earners, who are mainly women. Yet ignoring intra-familial transfers in order to prevent income splitting may disrespect women’s individual agency over property to which they hold legal title, and it may close off a potential source of economic power for those who do the bulk of the unpaid work in a household. This tax policy dilemma engages fundamental, normative debates about the meaning of gender equality and whether it is possible to enhance women’s access to markets while also valuing and compensating their unpaid contributions.

Battacharya Presents Obesity and the Redistributive Effects of Medicare Today at Loyola-L.A.

Jay Battacharya (Stanford University School of Medicine, Center for Primary Care and Outcomes Research) presents Obesity and the Redistributive Effects of Medicare at Loyola-L.A. today as part of its Tax Policy Colloquium Series:

Should [the] widespread obesity epidemic be a cause for alarm? From a personal health perspective, the answer is an emphatic “yes.” Obesity has been linked to increased incidence of several chronic diseases, like diabetes and heart disease, and to lower life expectancy. But when it comes to justififications of public policy for reducing obesity, the analysis becomes more complex. A common starting point in such discussions is the assertion that those who are obese impose higher health costs on the rest of the population — a statement which is then taken to justify public policy interventions. But the question of who pays for obesity is an empirical one, and it involves analysis of how obese people fare in labor markets and health insurance markets. We will argue that the existing literature on these topics suggests that obese people on average do bear the costs and benefifi ts of their eating and exercise habits. We begin by estimating the lifetime costs of obesity. We then discuss the extent to which private health insurance pools together obese and thin, whether health insurance causes obesity, and whether being fat might actually cause positive externalities for those who are not obese. If public policy to reduce obesity is not justififi ed on the grounds of external costs imposed on others, then the remaining potential justififi cation would need to be on the basis of helping people to address problems of ignorance or self-control that lead to obesity. In the conclusion, we offer a few thoughts about some complexities of such a justifification.

Dana Goldman (USC School of Public Policy) is the commenter.

Marian Presents Jurisdiction to Tax Corporations Today at Kentucky

Omri Marian (Florida) presents Jurisdiction to Tax Corporations at Kentucky today as part of its Faculty Brownbag Workshop Series:

Deciding whether a country can exert tax jurisdiction over corporations is an issue grounded in a dichotomy between formal and factual considerations. Justifications for one approach or the other are for the most part normative. However, this dichotomy provides little guidance for formulating workable corporate tax-residency tests. Dichotomy-driven corporate tax-residency arguments cannot be rationalized in the context of theories justifying corporate taxation to begin with. Indeed, comparative histories demonstrate that corporate tax-residency tests were instrumentally-, rather than normatively, rationalized when created. Changes in historical circumstances but stagnant tax-residency tests resulted in meaningless corporate tax-residence concepts. Instead, I develop what I believe to be the first cohesive functional-model for corporate tax-residency determination. Under the model, corporate tax-residency tests support the policy purposes for which different jurisdictions tax corporations. The model is versatile enough to recognize the possibility of multiplicity of such purposes, both among and within jurisdictions. Finally, I use the developed model to review corporate tax-residence determination in the United States. I conclude that under a functional approach the United States should reform the way it defines “domestic” corporations and adopt a two-pronged corporate tax-residency rule: place of management-and-control or place of public listing.

Kotlikoff Presents On the General Relativity of Fiscal Language Today at Loyola-L.A

Lawrence Kotlikoff (Boston University, Department of Economics) presents On the General Relativity of Fiscal Language at Loyola-L.A. today as part of its Tax Policy Colloquium Series:

A century ago, everyone thought time and distance were well defined physical concepts. But neither proved absolute. Instead, measures/reports of time and distance were found to depend on one’s reference point, specifically one’s direction and speed of travel, making our apparent physical reality, in Einstein’s words, “merely an illusion.”

Like time and distance, standard fiscal measures, including deficits, taxes, and transfer payments, depend on one’s reference point/reporting procedure/language/labels. As such, they too represent numbers in search of concepts that provide the illusion of meaning where none exists.

This paper, dedicated to our dear friend, David Bradford, provides a general proof that standard and routinely used fiscal measures, including the deficit, taxes, and transfer payments, are economically ill-defined. Instead these measures reflect the arbitrary labeling of underlying fiscal conditions. Analyses based on these and derivative measures, such as disposable income, private assets, and personal saving, represent exercises in linguistics, not economics.

Edward Kleinbard (USC) and Arnold Harberger (UCLA, Department of Economics) are the commenters.

Villanueva Presents International Double Taxation in Spain Today at Florida

Antonio Vázquez del Rey Villanueva (University of Navarra (Spain)) presents International Double Taxation in Spain today at Florida's Tax Policy Colloquium hosted by Yariv Brauner:

In order to avoid international double taxation on business income, the Spanish Corporate Tax basically combines the tax credit (and eventually the indirect credit) with the exemption of foreign active business income (derived through permanent establishments abroad or repatriated as dividends or capital gains). The exemption was originally intended not just to avoid international double taxation but with the aim of fostering the internationalization of resident companies, in order to promote their competitive position in a global market.

Some of the most sensitive areas in which international double taxation may arise relates to the source and nature of income and the allocation of expenses. Apparently, the non-existence of source rules for the purposes of the tax credit leads to a situation in which foreign income taxes are always credited. No evidences can be found in practice that the tax credit is rejected when the State of Source applies his own domestic legislation. To the contrary, when a tax treaty applies, the nature and the source of income play a key role and eventually the tax credit is denied. On the other hand, the domestic legislation does not rule the allocation of expenses to foreign income. This is a common issue to both the tax credit and the exemption. In practice those economically related expenses are allocated to the foreign income, in order to protect the primary right to tax domestic income and the residual right to tax foreign income.

Another sensitive topic makes reference to the foreign taxes which can be credited (basically any personal and direct tax on income qualifies). The exemption relies on a subject-to-tax clause which apparently on a similar requirement. However, caution must be exercised when bringing any conclusions out of the more detailed subject-to-tax clause.

The ordinary tax credit is subject to a per-country limitation (except for business profits obtained through permanent establishment which are subjected to a “per PE limitation”) which provides with a greater simplicity to the cost of a limited crosscrediting. From CEN, the result is inferior as the taxpayer may still find an incentive to invest abroad (rather than domestically). On the other hand, in order to protect the domestic tax base a recapture rule applies (also when the exemption) when any losses from foreign permanent establishments have been previously offset. Traditionally, tax credit has been regarded as a more complex solution; however, the current implementation of the exemption also involves a great complexity which reflects on tax compliance. 

Alm Presents Socio-Economic Diversity, Social Capital, and Tax Filing Compliance Today at Columbia

James Alm (Tulane University, Department of Economics) presents Socio-Economic Diversity, Social Capital, and Tax Filing Compliance in the United States at Columbia today as part of its Tax Policy Colloquium Series hosted by Alex Raskolnikov, David Schizer and Wojciech Kopczuk:

In this paper we present a rare empirical study of the determinants of tax filing compliance in the United States. We use county level data for the tax year 2000 and a panel of county and state level data for the tax years 2000 to 2006. We include explanatory variables identified in the rational compliance framework, including an enforcement index against identified non-filers, the audit rate of filers, and the average penalty rate for both filers and nonfilers. We also examine the role of social capital on tax compliance. In particular, we test whether heterogeneity in household income, language, race, or religion can explain variation in filing rates. We find that non-filing rates tend to fall in the enforcement index in 2000 cross section analysis, but instead rise in the audit rate of filers in panel analysis. Non-filing rates also fall in the share of a county’s population that is married or residentially stable, and rise in the share of county income from self-employment or public assistance and in the share of owneroccupied housing. Regarding social capital, non-filing looks to be increasing in heterogeneity by race, though not income or language. Non-filing may also be decreasing in heterogeneity by religious membership, though we have only cross-section evidence.

Kroft Presents Optimal Unemployment Insurance in a Screening Model Today at Toronto

Kory Kroft (University of Toronto, Department of Economics) presents Optimal Unemployment Insurance in a Screening Model at Toronto today as part of its James Hausman Tax Law and Policy Workshop Series hosted by Ben Alarie:

This paper studies the role of employer behavior in generating "negative duration dependence" -- the adverse effect of a longer unemployment spell -- by sending fictitious resumes to real job postings in 100 U.S. cities. Our results indicate that the likelihood of receiving a callback for an interview significantly decreases with the length of a worker's unemployment spell, with the majority of this decline occurring during the first eight months. We explore how this effect varies with local labor market conditions, and find that duration dependence is stronger when the labor market is tighter. We develop a theoretical framework that shows how the sign of this interaction effect can be used to discern among leading models of duration dependence based on employer screening, employer ranking, and human capital depreciation. Our results suggest that employer screening plays an important role in generating duration dependence; employers use the unemployment spell length as a signal of unobserved productivity and recognize that this signal is less informative in weak labor markets

Raskolnikov Presents The Limits of Tax Law and Economics Today at Loyola-L.A.

Alex Raskolnikov (Columbia) presents Accepting the Limits of Tax Law and Economics at Loyola-L.A. today as part of its Tax Policy Colloquium Series:

This Article explores the limits of tax law and economics. The inquiry is comparative. The Article argues that outside of the tax context two pivotal insights account for the general success of law and economics in explaining and possibly shaping the law. First, accepting just a few fairly simple and plausible assumptions yields clear, intuitive, powerful and widely applicable policy prescriptions. Second, the normative strand of law and economics benefits greatly from a substantial similarity between several theoretically optimal legal regimes and the corresponding actual systems of rules and sanctions. Neither insight applies in the tax setting because the tax optimization problem is uniquely complex. The optimal tax system must account for the impossibility of deterring socially undesirable behavior, provide for redistribution, and accomplish all of that on the basis of assumptions that are laden with deeply contested value judgments, pervasive empirical uncertainty, or both. Given these challenges, it is hardly surprising that the welfarist theory has a much weaker connection to the content of our tax laws and their enforcement than it does to the content and enforcement of many other legal regimes. This weakness has a profound effect on the debates about the fundamental features of our tax system. It affects many familiar arguments about anti-avoidance rules and sanctions. And it extends to evaluating outright tax evasion. In sum, every aspect of tax policy is affected by the limits of tax law and economics. At the same time, accepting these limits shifts focus to several broad research agendas where tax law and economics will continue to yield invaluable contributions to the project of improving our tax system.

Carlos Berdejo (Loyola-LA) and Nancy Staudt (USC) are the commenters.

Chodorow Presents Charity with Chinese Characteristics Today at San Diego

Adam Chodorow (Arizona State) presents Charity with Chinese Consequences, 30 UCLA Pac. Basin L.J. ___ (2012), at San Diego today as part of its Tax Law Speaker Series:

Over the past 30 years, scholars and activists have called on the Chinese government to ease the registration and oversight rules governing non-governmental organizations (NGOs) and to increase funding for such organizations by, among other things, broadening the charitable deduction. While China has made significant progress in this regard, the government continues to throw up roadblocks for NGOs, suggesting that it has not fully embraced this path.

This article considers the extent to which the justifications for a broad charitable deduction adduced in the West make sense in China. The goal is to develop a normative basis consistent with Chinese values and interests that Chinese authorities would find compelling and which might lead to additional efforts to develop China’s civil sector. This article also considers the extent to which China’s political and social culture may affect such efforts, concluding that, even if China were to adopt Western-style laws governing NGOs and provide for a broad charitable deduction, China’s culture would shape both how government officials implement the laws and how the Chinese people respond to them, leading to a system of charity, but one with Chinese characteristics.

Pomeranz Presents Deterrence and Self-Enforcement in the VAT Today at Columbia

Dina D. Pomeranz (Harvard Business School) presents No Taxation Without Information: Deterrence and Self-Enforcement in the Value Added Tax at Columbia today as part of its Tax Policy Colloquium Series hosted by Alex Raskolnikov, David Schizer and Wojciech Kopczuk:

Tax evasion generates billions of dollars of losses in government revenue and creates large distortions, especially in developing countries. A growing, mostly theoretical literature argues that information flows are central to understanding effective taxation. This paper analyzes the role of information for tax enforcement in the case of the Value Added Tax (VAT) through two randomized field experiments with over 445,000 Chilean firms. Claims that the VAT facilitates tax enforcement by generating a paper trail on transactions between firms have led to widespread VAT adoption worldwide, but there is surprisingly little evidence. I find that the paper trail leads to spillovers that create important multiplier effects in tax enforcement. The impact of a random audit announcement is transmitted up the VAT chain, increasing compliance by firms' suppliers. A second experiment finds that the paper trail acts as a substitute to a firm's own audit risk. A message announcing increased tax enforcement has a much smaller effect on reporting of transactions that are already covered by a paper trail. These findings confirm that when evasion is taken into account, significant differences emerge between taxes that are equivalent in standard models but generate different information on taxable transactions.

Staudt Presents The Supercharged IPO Today at Toronto

Nancy Staudt (USC) presents The Supercharged IPO (with Victor Fleischer (Colorado)) at Toronto today as part of its James Hausman Tax Law and Policy Workshop Series hosted by Ben Alarie:

In this article, we investigate a new and widely discussed financial innovation: the supercharged initial public offering (IPO). A supercharged IPO differs from a conventional IPO because it involves a contract provision that enables the original owners of a firm to extract large amounts of money from the company in the post-IPO period. Supercharged IPOs have generated substantial debate and controversy but no scholar or team of scholars has investigated why the supercharged IPO emerged and how it has spread across industries and geographic areas. We amassed a large dataset of IPOs and empirically investigate these questions. We find the motivation for pursuing this new deal structure relates to the parties’ desire to take advantage of tax arbitrage opportunities, and not to a devious plan by owner-founders to steal from unknowing public investors as many critics have argued. Our results also suggest, contrary to the existing literature, that while innovation in the IPO context is an on-going process—it tends to spike when the economy performs poorly. With respect to the process of use and diffusion, we find that the earliest innovators are firms widely viewed to be aggressive and flexible, such as those organized in tax havens. Over time, however, the diffusion process is best explained by two factors: elite lawyers and professional networks—especially those located in the New York City region. Owner-founders who seek to go public with the help of an IPO, tend to supercharge their IPO when their hire elite New York City lawyers.

McCarden Presents The Charitable Hunger Games Today at Loyola-L.A.

Khrista McCarden presents The Charitable Hunger Games: Are the Laws in Your Favor? at Loyola-L.A. today as part of its Tax Policy Colloquium Series:

In the New York Times bestseller The Hunger Games, two representatives selected from each of twelve oppressed districts compete for survival in a televised game that only one may win (“the Games”). To win, heroine Katniss Everdeen must earn the support of wealthy sponsors who have the ability to provide her with life-saving resources. What if after Katniss had succeeded in garnering favor and compassion from sponsors, obstacles were placed in the path of their aid? That outcome seemed too harsh for the author to attribute to even the devious Gamemakers, who govern the rules of the dreadful Games, yet current US charitable law in the context of cross-border giving results in that reality and should be revised.

Today, individuals suffering from oppression and extreme poverty must compete for access to limited resources in the form of international grants and gifts. This article examines a major impediment in the path of US donors desiring to help them and the recent decision of the European Court of Justice to remove the obstacle for European Union Member States in the landmark 2006 case Persche v. Finanzamt Ludenscheid. US charitable laws currently impede the ability of US donors to engage in international giving. As the number of global issues, such as human trafficking, clean water, and extreme poverty, rises, the US must consider an alternative approach. The European Union is moving rapidly toward an approach that would free US donors to use their philanthropic funds to combat global ills.

The main impediment to international giving in U.S. charitable laws is captured in the term “notion of territoriality.” The notion of territoriality is the restriction of an income tax deduction to domestic charities, i.e., those formed within a given country’s borders. The charitable laws of EU countries have historically embodied this notion as well. An examination of the US legislative history associated with the notion of territoriality reveals a lack of justification. Those desiring to keep the notion intact have argued that an alternative approach would be too difficult to implement, which upon consideration proves false. The notion of territoriality is inconsistent with other US charitable giving provisions. These observations, combined with the practical and ideological problems associated with the notion of territoriality, should lead the US to step away from its current approach and to adopt an alternative one.

Europe has made this decision as a result of Persche, which held the notion of territoriality results in a clear violation of freedom of movement of capital under the European Commission Treaty. The cross-border giving model the UK has adopted in the wake of Persche shows that approaches, other than the current US one, are possible and feasible. In fact, the recently revised charitable laws of many EU Member States evince a move away from the notion of territoriality. Although the Netherlands has shown resistance in adopting a new model under Persche, its charitable laws initially placed little emphasis on the notion of territoriality and thus may serve as another example of an alternative approach the US could adopt. US charitable laws should encourage, rather than restrict, the ability of US donors to engage in cross-border giving, and recent changes within the European Union and the historic practice of the Netherlands are instructive. In this article, I will argue for less primacy being afforded to the “notion of territoriality” as an over-arching concept within the legal framework governing cross-border giving in the US, the UK, and the European Union (“EU”) through examining (1) the historical reasons for the notion of territoriality, (2) why territoriality is problematic, and (3) recent solutions to associated problems.

Ingrid Mittermaier (Adler & Colvin, San Francisco) is the commenter.

Cockfield Presents The International Tax Regime as a Commitment Projector Today at McGill

Arthur Cockfield (Queen’s University, Faculty of Law) presents The Limits of the International Tax Regime as a Commitment Projector at McGill University, Faculty of Law today as part of its Tax Policy Colloquium Series hosted by Allison Christians:

The paper examines how transaction cost approaches (as developed by North and Williamson) can inform international tax law and policy discussions.  The international tax regime evolved institutions and institutional arrangements to address transaction costs such as the risk that two countries might doubly tax the same cross-border business profits.  It mainly sought to reduce this risk by serving as a ‘commitment projector’ that enables governments to make credible political promises to taxpayers, other members of the public and other governments that they will not overtax these cross-border profits.  As a result of these political commitments, taxpayers do not need to incur transaction costs they would otherwise have to sustain to identify and protect their global tax liabilities. In other areas, however, the international tax regime does not facilitate credible commitments.   The talk will focus on one such challenge to the regime, namely the 2010 U.S. proposal to create a global tax reporting system via the Foreign Account Tax Compliance Act or FATCA.  By eschewing traditional bilateral and multilateral cooperation when it introduced FATCA, the United States subverted its ability to offer credible commitments and raised transaction costs for economic participants.  The talk will review the impact of FATCA on U.S. expatriates (and others) in Canada as well as potential options available to the Canadian government to resist FATCA.

Kahng Presents Undertaxed Business Owners and Overtaxed Workers Today at Washington U.

Lily Kahng (Seattle) presents Costly Mistakes: Undertaxed Business Owners and Overtaxed Workers, 80 Geo. Wash. L. Rev. ___ (2012) (with Mary Louise Fellows (Minnesota)), at Washington University today as part of its Tax Colloquium Series hosted by Adam Rosenzweig:

This article advocates for fundamental changes in the federal income tax base by systematically challenging conventional understandings of consumption and investment. As signaled by our title, “Costly Mistakes,” our thesis has to do exclusively with the deductibility of expenditures by business owners and workers. Where the current tax law treats a business owner’s expenditure as investment, we sometimes find consumption and question why the law should allow the expenditure to be deducted. Where the tax law treats a worker’s expenditure as consumption, we sometimes find investment and question why the law does not allow at least a partial deduction. Through an historical analysis of the development of the modern tax law with special attention to Justice Cardozo’s 1933 U.S. Supreme Court opinion in Welch v. Helvering and a review of Welch’s judicial and legislative progeny, the article demonstrates that the deference the tax law traditionally has accorded business owners results in their being undertaxed. Through an analysis of the tax law’s treatment of workers, it further shows how its structural and substantive rules treat workers primarily as consumers, rather than as producers, and why that results in their being overtaxed. The article then investigates the economic inefficiencies produced by the tax law’s generous treatment of business owners’ outlays and its unduly restrictive treatment of workers’ outlays. It goes on to suggest an analytical framework for scrutinizing and reforming the tax treatment of workers and how that same framework could be extended to business owners with far-reaching implications. Finally, the article relates the undertaxation of business owners and the overtaxation of workers to the broader social policy discussions concerning the high rate of unemployment in the private sector and the escalating deficits in the public sector. It concludes that the success of the U.S. economy in the twenty-first century requires the tax law to treat both business owners and workers as producers. It further concludes that the tax law’s continuing failure to acknowledge that business owners and workers are both consumers and producers undermines the goals of efficiency and fairness.

Brooks Presents Taxation, Risk, and Portfolio Choice Today at Columbia

John Brooks (Georgetown) presents Taxation, Risk, and Portfolio Choice: The Treatment of Returns to Risk Under a Normative Income Tax, 66 Tax L. Rev. ___ (2013), at Columbia today as part of its Tax Policy Colloquium Series hosted by Alex Raskolnikov, David Schizer and Wojciech Kopczuk:

Consumption tax proponents often assert that a pure Haig-Simons income tax imposes nearly the same burden as a consumption tax, since both largely exempt capital income. Under an income tax, an investor can shift her portfolio toward risky assets so that the increased gain (or loss) exactly offsets any income tax (or deduction) on the returns to risktaking. This article argues, however, that while it is em>possible for an investor to make such portfolio shifts, she almost certainly will not because of the increased risk of doing so.

Central to any discussion of the effects of taxation on investment risk-taking is the meaning of risk itself. The central claim of this article is that a better conception of investment risk is the risk of loss and not merely the variance of returns. Applying this notion of risk -- one that is well supported in finance literature but new to the taxation-and-risk literature -- to an investor’s portfolio choice question shows that an investor will not shift her portfolio toward risky assets by enough to offset the tax. As a result, there is a material tax burden on investment risk-taking under a normative income tax.

Benshalom Presents Taxing Cash Today at University of British Columbia

Ilan Benshalom (Hebrew University, Faculty of Law) presents Taxing Cash at the University of British Columbia today as part of its National Centre for Business Law Speakers Series hosted by David Duff:

Nobody likes to pay taxes, so collecting taxes is never easy. Indeed, when it comes to cash transactions, collection is more difficult because cash enables, or at least significantly simplifies, many tax evasion schemes. The article provides an original proposal that goes beyond the classic paradigm to reduce tax evasion by investing more in audit-based enforcement. While the public finance literature emphasizes the need to deter and detecting tax-evading cash transactions, this Article argues for a tax on the usage of cash (that does not distinguish legitimate from illegitimate tax evasion transactions). Taking behavioral responses into account, the paper argues that taxing cash transactions on a crude fault-free basis could significantly help to minimize the revenue loss, inefficiencies, and inequities of income underreporting (in developed economies).

Abrams Presents Taxation of the Cost of a Professional Education Today at San Diego

Howard E. Abrams (Emory) presents Taxation of the Cost of a Professional Education at San Diego today as part of its Tax Law Speaker Series:

The cost of a professional education such as law school or medical school is almost always incurred as an investment in a future career. And like any investment, the cost ought to be recoverable over time against the income the investment generates. While the useful life of a professional career is indeterminate, Congress has now provided an arbitrary 15-year period over which to recover the costs of intangibles as well as pro-opening expenditures, two categories each describing the cost of a professional education. Accordingly, just as tax theory suggests, the current statutory scheme authorizes the amortization of the cost of a professional education. I conclude that a court should invalidate Treasury Regulation 1.262-1(b)(5) insofar as it establishes a conclusive presumption that all educational expenditures incurred by a taxpayer in anticipation of entering a new trade or business are "personal" and therefore nondeductible. In response, the government should revise Treasury Regulation 1.162-5 to provide that some educational expenditures are personal and therefore nondeductible and nonamortizable, some educational expenditures are immediately deductible, and some educational expenditures are nondeductible but amortizable. The first category of educational expenditures would include the cost of classes taken primarily for non-profit-seeking motives such as the occasional art history class or an evening class on home gardening; it might also include the cost of a college education in most circumstances. The second category of educational expenditures would include the cost of classes primarily taken for use in the taxpayer's trade or business or other profit-seeking activity and as to which the benefit of the education largely will be short-term. This category might include annual CLE classes taken by a lawyer to familiarize herself with current cases and rulings that seem important initially but generally wane in importance quickly. The third category would include educational expenditures incurred primarily in connection with profit-seeking activities but whose value will extend in large measure across multiple taxable years. This would include not only start-up professional education expenditures but also the cost of obtaining an LLM in taxation by a practicing attorney.

Marian Presents Jurisdiction to Tax Corporations at University of British Columbia

Omri Marian (Florida) presented Jurisdiction to Tax Corporations at the University of British Columbia yesterday as part of its National Centre for Business Law Speakers Series hosted by David Duff:

Deciding whether a country can exert tax jurisdiction over corporations is an issue grounded in a dichotomy between formal and factual considerations. Justifications for one approach or the other are for the most part normative. However, this dichotomy provides little guidance for formulating workable corporate tax-residency tests. Dichotomy-driven corporate tax-residency arguments cannot be rationalized in the context of theories justifying corporate taxation to begin with. Indeed, comparative histories demonstrate that corporate tax-residency tests were instrumentally-, rather than normatively, rationalized when created. Changes in historical circumstances but stagnant tax-residency tests resulted in meaningless corporate tax-residence concepts. Instead, I develop what I believe to be the first cohesive functional-model for corporate tax-residency determination. Under the model, corporate tax-residency tests support the policy purposes for which different jurisdictions tax corporations. The model is versatile enough to recognize the possibility of multiplicity of such purposes, both among and within jurisdictions. Finally, I use the developed model to review corporate tax-residence determination in the United States. I conclude that under a functional approach the United States should reform the way it defines “domestic” corporations and adopt a two-pronged corporate tax-residency rule: place of management-and-control or place of public listing.