TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, April 27, 2005

Viva Las Vegas: Tax Panels at Law & Society Annual Meeting

Lsa The Law & Society Association will hold its Annual Meeting in Las Vegas on June 2-5, 2005.  Scheduled tax panels include:

Changing Society through Large-Scale Redistribution: Political Economy in the Second Bush Administration:

  • Steve Johnson (UNLV), Chair:

Of the many tools available to policymakers in changing society, the U.S. government has increasingly come to rely on its fiscal tools--spending and taxing--to achieve its goals. The Bush Administration's plans for its second term continue and intensify this trend. This panel focuses on three fundamental areas in which recent and proposed changes in policy could have profound effects on American Society: changes in the Social Security system, changes in the income tax system, and changes in the tax incentives for business activity.

  • Neil Buchanan (Rutgers-Newark), Progressive Income Taxation and a Simplified System in the United States:

    Current proposals in Congress would replace the federal income tax with one of a variety of consumption taxes. I argue in this paper that a better plan would be to simplify the current income tax system, relieving 90% of all taxpayers from having to file returns, and set a progressive rate structure on high-income earners. This plan would include a method for smoothing variations in year-to-year income, eliminating a source of significant loss for many low-income workers.

  • Lee Anne Fennell (Illinois) & Kirk Stark (UCLA), Taxation Over Time:

Tax schedules typically do not take into account the age of the taxpayer or the taxpayer’s pattern of earnings over time, except implicitly in the form of deductions, credits, or progressive tax schedules that may correlate with age or position in the life cycle. Scholars have begun to address, from different angles, the possibility of explicitly conditioning taxes on age or of altering the applicable taxation period to take better account of taxpayers’ earning patterns over time. In this piece, we draw together these divergent threads in the literature to analyze the idea of adding a component to the tax system that contextualizes earnings within a taxpayer’s life cycle through mechanisms like age-basing or averaging. Our analysis includes traditional efficiency and equity perspectives, as well as the insights of behavioral law and economics with respect to time preferences.

The tax code systematically treats equity-based returns on human capital (often subject to deferral and capital gains) more favorably than ordinary salary payments. This effectively subsidizes compensation schemes that are structured as equity-based payments (stock options, stock, profits interests in a partnership) rather than salary or salary-like payments. Is it sensible for the tax code to subsidize risky compensation schemes?

My proposal is that all persons at least ten years from retirement be required to invest the FICA tax on the first $1000 of monthly earnings in private, broad-based, stock and bond index funds. These funds could be withdrawn only as an annuity and only when Social Security would pay out (retirement, disability, or death with dependents). Withdrawals would be credited against Social Security entitlements, with only the excess being paid by Social Security. This propposal would not allow individual control over private accounts in Social Security (such control would risk unwise investment and premature dissipation), but it would provide the returns of compound interest, thus in the long run assuring Social Security's solvency.

Gaming and Law: Strategic Manipulation In and Around Law

  • Susan Silbey (MIT), Chair

Probably as long as there have been rules, people have tried to game them. With the clamoring for transparency and accountability in public institutions and the recent wave of corporate scandals, gaming-- the strategic manipulation of rules, laws, or measures, with the intent to gain some advantage has been much in the news of late. Nevertheless, gaming is a regular, perhaps fundamental, feature of social life. Gaming is one way that people exert agency, resist authority, express power, avoid compliance, subvert intentions, alleviate boredom or gain a competitive advantage. Gaming is of special interest to socio-legal scholars since it is one of the processes that helps to produce the gap between law on the books and law in action. Our panel will investigate gaming practices in different institutional settings in order to help us understand better which conditions motivates or curtail gaming, its consequences, and how people legitimate gaming or evaluate its legality.

As traditionally understood, the task of a tax professional is to play games with tax law. Whether accountant or lawyer – a tax practitioner’s job is to find loopholes for clients to minimize their taxes. This paper considers whether different types of tax professionals in the United States play distinct games with the law. It argues that traditionally, tax lawyers and accountants have played in different fields. More specifically, it suggests that in tax – an area governed by the same formal knowledge – lawyers and accountants historically have engaged in different knowledge practices, which are tied to different professional epistemologies, ideologies, and cultures. It also considers the extent to which, as competition among accounting and law firms has increased, the lines between the games tax professionals play are blurring.

Interdisciplinary Perspectives on Funding the Government: Gender, Economics, and International Perspectives

  • Darlene Kennedy (Catholic), Chair

The process of funding public programs has always been a source of confusion and controversy. The authors on this panel take various interdisciplinary perspectives in their work. They will discuss the current U.S. system of progressive taxation, its intended and unintended effects on women, the use of economic concepts by judges in their rulings, and the national basis for international taxation.

In recent years, many of the most vocal proponents of law and economics have been appointed to the bench, including Richard Posner, Guido Calabresi, and Frank Easterbrook. They have been strong advocates of the judicial use of economic analysis as a tool to help decide cases. This paper explores the ways in which Judge Posner has used economic analysis in his tax decisions, with the goal of identifying the ways in which he has used such analysis and then assessing its effectiveness. In highlighting and evaluating the ways in which Judge Posner has used economic analysis to decide tax cases, I hope to provide insights and guidance on the strengths and limitations of this approach to others who may be urged or tempted to follow suit. I conclude that Judge Posner uses economic analysis - and in particular simplified models - in two key ways: to draw inferences from evidence and to construe statutes. While the results he obtains appear to be objectively derived, judicial discretion remains a far more integral part of the decision making process than might initially be apparent. Thus, while the tools of economics may be helpful to a judge skilled in their application, economics analysis should not supplant the traditional tools of judicial decision making.

Tax law is political, not neutral or mechanical. This paper critically examines the way in which tax law reinforces gender stereotypes. Close analysis of the laws governing the transmission of wealth reveals the law's bias in favor of traditional male-female relations. Although taxation in general has not been of traditional interest to feminist scholars (and feminism has not been of traditional interest to tax scholars), feminist jurisprudential theories and methodology illuminate the tax system's fundamental assumptions about men, women, children and families. Specifically, the tax law embraces inconsistent constructions of the family that will result in the imposition of the greatest amount of tax . This paper argues that the stated goals of tax policy require recognition of the economic desirability (and social reality) of non-traditional and alternate family structures.

Replacing the Federal Income Tax with a VAT or a retail sales tax would amount to adopting a scheme under which the Federal government would become a forced joint investor in all private investments. Moreover, the taxpayer would choose the investment and the larger the private investment, the larger the government's forced participation. This is problematic because it helps wealthier investors scale up and gain entry to the highest return investments (hedge funds, IPOs, etc.) from which small savers are excluded.

This Article proposes a conceptual foundation for the field of international taxation: the institutional competence of nations in global economic development. The institutional competence of nations in global economic development consists of their authority to make decisions in pursuit of our collective goal of global economic development, an authority subject to a number of standards and limitations. The Article first constructs the institutional competence of nations from several areas of institutional economics, including the theory of complex organizations. On the basis of this foundation, the Article suggests limitations on a nation’s prescriptive jurisdiction under international law over business income and portfolio income. The Article then turns to collective action problems encountered by nations in the taxation of international income. The Article recasts anti-deferral regimes as anti-abuse regimes and suggests appropriate secondary social norms to enforce the limitations on prescriptive jurisdiction over international income. The foundation proposed by the Article would coordinate international taxation with the regulation of international trade. The Article concludes that multilateral cooperation in several areas of international taxation is desirable and suggests that such cooperation be addressed through the GATT complex of treaties.

Laws of Commerce: Financial Markets' Croupier or Are They Just Craps?

  • Christian Day (Syracuse), Chair

In this session we explore identifiable areas of “business law” where rules of risk allocation have emerged as a result of some topically cohesive body of law to create a coherent system or “game”. Using the language of gambling, we explore the cultural practices of 'gaming the market' and 'playing the system' in commercial law. We explore a variety of market contexts and analyze the house odds with respect to the rules governing particular market relationships. We are interested in the extent to which accepted legal rules provide for an orderly game, with fair play and uniform results, as opposed to “stacking the deck” against certain 'players'. Moreover, we investigate the extent to which these respective legal structures act as a facilitator or “croupier” of their purported markets, or function to “fix” the game from its inception. With this in mind, we look first at how the laws of collateralization impact the players of the secured transactions game in Cuba. Second, we examine the logic and fairness of the tax-preferred investment game in the United States. And, third, we examine the roulette wheel of state insurance laws to see if there is some reliability to pay outs when players spin for their chance to recover on an insured claim. Finally, we also examine Tulip Mania, and the South Sea and Mississippi Bubbles, several early bubbles that have come to stand for manipulation, cupidity and corruption.

Numerous tax-preferred investment opportunities have been created by Congress and implemented by Treasury. Many of these tax rules mandate the amount of investment risk to which investors may be exposed and attempt to keep investors from acting in an economically risky manner (e.g., through diversification requirements and penalty taxes for early withdrawals). Congress has yet to create a coherent structure for government intervention in risk management within the context of tax-preferred investments. The present administration has urged expansion of tax-preferred savings devices and the introduction of investment risk and “ownership” into Social Security. My presentation will review possible approaches to risk management that Congress could take to create a more unified approach for tax-preferred products.

Paragons of diseconomic irrationality, U.S. and Cuban laws severely constrain the ability of international asset holders to extend credit to Cuban governmental and private actors, i.e. to make “bets” by assuming credit exposure to Cuban borrowers. This presentation considers two alternatives available to potential trade or financial creditors interested in gaining credit exposure to Cuban counterparties: (1) non-market rent-seeking from either the U.S. or Cuban governments in order to place a “special bet” (for example, U.S. agricultural interests have successfully obtained rents from the U.S. government through exceptions to the Cuban embargo which allow U.S. farmers to trade with Cuba without any credit risk); and (2) a market mechanism using collateral as a “hostage” to reduce the creditor’s risk of loss in a transaction (for example, the Cuban government has conducted one receivables-backed debt issuance using airport tax inflows).

Insurance law is the ultimate legal arbiter in the games of risk. Nowhere are the stakes higher than in the financial market where risk itself is the ultimate commodity. Yet, unlike most any other financial market or instrument, private insurance law is not subject to any Federal statute or Uniform Act. This presentation will discuss the manner in which the insurance industry seeks and requires standardization, how state law has led to a fragmenting of agreed upon definitions and trade practice and how this disorder creates unbargained for increases in risk by and between the parties. It will review the history of standardization in other fields of law, specifically the story of Karl Llewellyn’s Legal Realism movement and the eventual emergence of the Uniform Commercial Code. Extrapolating from these movements, we will then ask if such types of standardized rules have led to a perception of more certainty in result and whether such result directs that a revision of the rules of the insurance law game is required.

Tulip Mania (1634-1637), and the South Sea Bubble and Mississippi Bubble (1719-1720) are often held out to be examples of crooked markets and reprehensible behavior in capitalist markets. The truth is somewhat different and more fascinating. Tulip Mania was a brief and unimportant gyration in a newly fashioned futures market. The paper notes the Dutch reliance on futures and their use in the tulip market. It demonstrates that overall the market functioned well. Its failures arose from “design flaws” in market entry and the settlement process. The South Sea and Mississippi Bubbles represented ambitious schemes that reached too far. The South Sea Company attempted to refund the English national debt, to the advantage of itself and the government. Corruption and manipulation played considerable roles in the bursting of the bubble. Neither was unusual for the era. Refunding was valid. Soon thereafter the Bank of England completed the refunding, providing England with a monetary system that was to support the British Empire. The Mississippi Company Bubble was nothing less than an audacious attempt to takeover French government finance and French foreign colonies. Modern monetary policy was key to the scheme. Cupidity, corruption and inadequate financial and legal institutions all played a role in that bubble’s collapse. The financial and economic importance of these schemes is emphasized. It concludes the experiments were worthy and ultimately more important to finance and economics than the long-lived reputations for manipulation, corruption and lapsed legality.

Lawyers and Doctrines: Some Ethical and Empirical Explorations of the Practice of Tax Law:

  • Richard Painter (Illinois), Chair

Recent highly-publicized scandals have reminded us of the importance of ethics and standards in the tax law. The papers in this panel will discuss the importance of anti-abuse doctrines as well as provide empirical explorations of the importance of doctrines such as "substance dominates form" and of the impact that lawyers' strategies have on their clients' cases. The panel will be chaired by a scholar who specializes in professional responsibility who will guide the discussion from the perspective of legal ethics.

Academic lawyers invest intellectual firepower on constraining judicial discretion, but tread lightly on questions about the power of individual attorneys to shape the law through their client interactions. This paper considers one aspect of that power—the ethical standards, including the attorney-client privilege, applicable to customized tax planning. Ethical standards designed best to prevent government intrusion into important discussions between attorneys and clients in adversarial litigation operate less perfectly in the tax planning context. The minimal risk that a taxpayer’s return will be selected for audit (the “audit lottery”) can be a significant factor in an aggressive taxpayer’s cost-benefit analysis of the stakes. The view that there is nothing wrong with customized tax planning (supported by the penalty provisions in the tax code and Learned Hand’s famous statement that “[a]nyone may so arrange his affairs so that his taxes shall be as low as possible”) pushes clients to gamble aggressively. The bottom-line reward to tax avoidance clinches the bet on aggressiveness. The IRS and Congress have begun to require more disclosure and to question the role of privilege in certain potentially abusive “tax shelters,” but have raised few concerns about customized tax planning outside that context. Using tax and ethics norms, this paper questions whether a privilege for tax planning advice at the stage of structuring a transaction is appropriate, in the context of the audit lottery and the significant information asymmetry between taxpayers and the government.

In the United States Tax Court (Tax Court), where most federal tax cases are litigated, the United States always is represented by Internal Revenue Service attorneys but a large portion of the taxpayers proceed pro se. A prior study found that, although cases docketed in the Tax Court are not randomly selected for trial, the presence of counsel for the taxpayer did not have a statistically significant effect on whether or not the case settled. But do attorneys affect the length of time the case takes to resolve or the financial outcome of the case, in settled cases, tried cases, or both? The article examines those questions, which have both theoretical and empirical components. First, the article analyzes what factors might impact the timing of settlements and trials. Second, it suggests that there are three principal ways in which represented litigants differ from unrepresented litigants and the theoretical impact of each of those differences on case outcomes, particularly the timing of case resolutions. Finally, it tests empirically the theory that attorneys may impact case resolutions, using data on a random sample of Tax Court cases, some of which settled after being docketed in Tax Court and some of which went to trial. The study controls for such factors as the amount at stake in the case, the type of taxpayer (individual, estate or corporation), and the complexity of the case. The results should provide insight into the contribution representation by an attorney may make to case resolution.

This paper empirically examines judicial doctrines used in recent federal tax decisions made by trial courts. Are these doctrines (e.g., substance over form, business purpose, economic substance) by the government invoked only by the government, or does the taxpayer or the court assert them as well? Other questions analyzed include which party prevails and areas in which the doctrines are most used.

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