Thursday, May 29, 2014
- Panel #1: The Theory of Taxation
- Panel #2: Nonprofits and TaxationPanel #3: Higher Education, Sports, and Taxation
- Panel #4: From Local to Global Issues in Taxation
- Panel #5: International Taxation
Today's paper presenters, topics, and abstracts are below the fold:
Panel #1: The Theory of Taxation (Roberta Mann (Oregon), Chair & Discussant)
- Jennifer Bird-Pollan (Kentucky), Utilitarianism and Wealth Transfer Taxation: "This article will be the third in a series that examines the wealth transfer taxes from the perspective of particular philosophical positions. In this presentation I will explore the theory of utilitarianism and ask what consequences the theory has in thinking about wealth transfer taxation in the United States."
- Neil Buchanan (George Washington), Forced Labor and Taxation as Theft: Debunking Some Confused Philosophical Attacks on the Income Tax: "This paper examines the artificial separation in tax analysis between equity and efficiency, questioning in particular the idea that efficiency has to be achieved first in time, with attempts to improve equity possibly coming later. This is especially problematic because policies that purport to increase efficiency (as that concept is typically understood -- no matter how incorrectly) can worsen equity, and because the second step is often forgotten or abandoned as "'political unrealistic.'"
- Charlotte Crane (Northwestern), What Should be the Criteria for Tax-base Design?: "Several generations of tax scholars, both inside and outside of law schools, have assumed that the choice of tax instrument should be dictated by ideal rather than pragmatic concerns. This paper will examine this premise with reference to historical as well as contemporary situations. "
- Diane Ring (Boston College), Sovereign Harmony, Domestic Discord: Democracy and the Gap Between International Tax Cooperation and Domestic Politics: "Among the most significant developments in international tax law, policy and practice in the past decade has been the rise of "information exchange." Changes in country practices, laws, and treaties mark a notable shift in tax law. But what are the limits of information exchange? What problems does it most realistically address -- and which remain a serious challenge? What will it take to tackle those international tax problems as well -- and can we learn anything from the surprising reversal of states' policies regarding information exchange? "
Panel #2: Nonprofits and Taxation (Harry Ordower (St. Louis), Chair & Discussant)
- Ray Madoff (Boston College), Loophole or Lifeline: Closing the Gap Between the Rhetoric and the Reality of the Charitable Deduction: "The charitable deduction has long been criticized by tax scholars for providing disproportionate advantage to wealthy donors. However, current debates over the charitable deduction have produced push-back over this framing of the issue. Under the banner: -"it isn't a loophole, it's a lifeline" proponents of the charitable deduction have argued that the real beneficiaries of the charitable deduction are not donors, but instead are the poor who receive the ultimate benefits of the charitable dollars. Nonetheless, the current operation of the rule belies this characterization. This paper explores what the charitable deduction should look like if it's true focus is on recipients. "
- Leonel Pessôa (Universidade Nove de Julho), Taxation of Nonprofits: The Main Problems in Brazil: "The aim of this paper is to analyze the main problems in the taxation of the nonprofit organizations in Brazil and the impact of these problems on their activities. "
Panel #3: Higher Education, Sports, and Taxation (Neil Buchanan (George Washington), Chair & Discussant)
- John Brooks (Georgetown), Income-Based Repayment and the Public Financing of Higher Education: "Because of Baumol's cost disease and other factors, the costs of higher education continue to rise faster than inflation. This has serious distributional consequences, given that higher education is arguably a quasi-public good that should be consumed widely. Public financing is an obvious answer to the distributional problem, but the budgetary impact makes that close to politically impossible. Except that the federal government has, to a first approximation, already created a system of public financing of higher education, paid for with progressive taxation: The Income-Based Repayment Program. As of 2010, the federal government provides essentially all student loans, and as of 2012, students are required to pay no more than 10% of discretionary income to service those loans, and after a maximum of 20 years, all remaining debt is forgiven--for any borrower, regardless of degree, career, or debt load. Thus higher education costs are paid by the government, and funded with something that looks very much like a tax on income. This framing raises important questions. Is this structure appropriate? How tax-like is IBR, and can it be made more (or less) so? And can this sort of "cost sharing" model apply to other publicly provided goods and services (as it arguably also does to health care under the ACA)?"
- Shu-Yi Oei (Tulane), Taxing Human Equity: "In the past year, a number of new financial transactions (such as the Fantex, Upstart and Pave transactions) have emerged that allow individuals to raise funds by offering a percentage interest in their future earnings. Unlike traditional lending arrangements, these structures essentially enable the funding provider to take a percentage of the recipient’s future return on their human capital for a specified time period, effectively getting the upside if earnings are higher and the downside risk if earnings are lower than anticipated. Such transactions represent a significant departure from traditional forms of lending and pose serious questions for the legal system. In this essay, we survey some of the issues raised by these new transactions, and suggest some possible ways in which the law can approach their regulation. In particular, we think that debt-equity analysis, a concept currently employed in the corporate tax and business context to distinguish lenders from true owners, is an exceptionally powerful frame through which these arrangements may be analyzed. The debt-equity frame compels us to examine the uncomfortable possibility that these arrangements are, in substance, ownership interests in human persons created via financial contract."
- Nancy Shurtz (Oregon), Inequality and Higher Education: Unintended Consequences of U.S. Tax Loan Policy: "The costs of higher education in America are increasing and a significant portion of those costs are born by student loans. The U.S. tax system provides a number of post-college loan benefits through above-the-line deductions for student loan interest and discharge of indebtedness for public interest work. Unfortunately, these tax subsidies are inadequate. Furthermore, the tax system unfairly subsidizes savings and groups of taxpayers with large discretionary income, creates marriage penalties, and distorts post-college employment. Direct subsidies, like tax subsidies, also have unintended consequences, such as causing tuition to rise, and preventing low income individuals from pursuing higher education. Several state within the U.S., such as Florida, do a good job of integrating tax and non-tax. This paper explores the various state programs that could help provide models for the federal government for effective change."
- Kevin Wall (Harvard), When is a “Sale” not a Taxable “Sale”? The Use of Leveraged Partnerships in the Sale of the Chicago Cubs: "Three Strikes and You’re Out. This article will examine the continued viability of an entity titled a leveraged partnership as a device to reduce or defer federal income taxes. In the Cubs sale in September 2009, the team's owner, the Tribune Company, transferred the team to a limited liability company (LLC) taxed as a partnership. The Buyer, Ricketts contributed some cash. The LLC borrowed cash, essentially equal to the purchase price of the team. The cash was distributed to the Tribune basically monetizing its interest in the team without selling the team. When the dust settled, the Buyer owned 95% of the LLC. The Tribune retained 5% and all the cash. On its face, this is a taxable sale. However due to some nuances in partnership taxation found in Treas. Reg. 1-707, if the debt resulting from the LLC's borrowing the purchase price is allocable to the Tribune, the transaction may not be considered a sale. Therefore, the Tribune guaranteed the loan. Problem is however, that the Tribune is bankrupt. It had also used the technique when it sold, Long Island's Newsday a year earlier. The IRS has scrutinized both these deals very closely and has previously attacked leveraged partnerships under the anti-abuse provisions and where the guaranteeing party is undercapitalized. Additional tools may have been recently added to the IRS's arsenal in the government's effort to treat these transactions as sales rather than monetization. One tool, is a recent case (possibly the third strike) Canal Corp. v. Commissioner, 135 T.C. No.9 (August 5, 2010), that concluded in a case using a leveraged partnership with a very similar fact pattern, that the transaction was a taxable sale resulting in a $524 million capital gain. The taxpayer was also assessed a $37 million accuracy related penalty. The Tax Court was extremely critical of the "should" tax opinion provided to the taxpayer by PricewaterhouseCoopers (PwC) for a flat fee of $800,000 describing it as "cavalier, "dubious" and "haphazard". Ironically, it appears that PwC was also the Tribune's CPA firm. Another possible tool that may be of value to the IRS in attacking the transaction is the "economic substance doctrine" which states that a transaction must have a business purpose beyond mere tax savings if the transaction and tax results are to be respected. This doctrine was included as a revenue provision as part of the Patient Protection and Affordable Care Act that was challenged in the federal courts and reviewed by the United States Supreme Court (USSC). Since the USSC determined the underlying Act to be constitutional, the codification of the economic substance doctrine would appear to have been sustained as well."
Panel #4: From Local to Global Issues in Taxation (Neil Buchanan (George Washington), Chair & Discussant)
- Mona Hymel (Arizona), Fighting for Water: Can Federal Market Instruments Create a National Trading System in the United States?: "The nation behaves well if it treats the natural resources as assets which it must turn over to the next generation increased, and not impaired, in value." Water likely stands first as the resource requiring national attention and protection. Water has been and continues to be wasted as though the earth's supply is endless. Yet, our usable supplies of water are diminishing or, in some cases, being exhausted. Currently, water in the United States is free for all. Yet, as water's scarcity begins to sink in, water battles are being fought in courts all over the country. Depending on where you live, you may or may not have water supplies. Local water trading schemes have evolved, but no nation-wide program exists. Other countries, Australia, for example, have instituted national water trading schemes. Water trading systems illustrate how using market forces can facilitate the highest use of water in the local economy. However, water rights issues are becoming larger geographically and economically, and current water trading schemes can only facilitate local or regional problems. The United States must consider implementing a national system to deal with water rights contests. This article considers whether a federal water trading scheme is an option for the United States and how market instruments, such as tax incentives, can facilitate the creation of such a market. Because water issues tend to be local or regional, creating and implementing a federal water trading program will be a complex task. How the U.S. federal government can feasibly implement a nation-wide water trading scheme may require innovative solutions, but tax incentive have successfully created national markets in the past. For example, the creation of a national water trading scheme through the use of federal market instruments can be analogized with the creation of the market for ethanol. None existed before the enactment of federal tax incentives. This article discusses existing mechanisms to deal with water rights issues and analyzes the implementation of a national water rights system. Ultimately, the solution to water scarcity issues in the United States will likely stem from many regimes working in tandem. A national water trading market, however, stands as a viable beginning for addressing water issues in the United States."
- Borbála Kolozs (Corvinus University, Budapest), Taxes and Disasters: "Natural disasters such as earthquakes and storms can cause enormous personal and financial losses. The introduction of tax measures might be among the many responses of governments to natural disasters. This paper surveys tax-related measures used during or after natural and environmental disasters in various countries. The first part of the paper will briefly introduce the most common instruments used by countries to face damages caused by natural disasters and environmental disasters (caused by human error). Many of these are legal provisions aiming at maintaining public order and securing the safety of the citizenry, for example the prevention of robbery in case of turmoil or the introduction of mandatory sanitary precautionary measures. Other legal provisions include, for example, measures to clean and reconstruct an area hit by the disaster. The introduction of new tax provisions generally takes place only after all those other measures are taken. In most cases these tax provisions mean tax expenditures to help people whose property was demolished during the disaster or companies, which are unable to function without state intervention. The second part of the paper will list the most frequently used forms of tax expenditures in case of a disaster. Rarely, when the government did not prepare a separate entry in the budget for unexpected expenses, it might also introduce new taxes to raise extra revenue. The second part will also cover those exceptional cases when a government introduced a new tax because of a disaster. The third part of the paper will deal with the hardship in introducing tax measures on disasters. In most countries the provision of tax expenditures is a simple decision made by the Parliament. The situation is slightly more complicated in the European Union where these expenditures have to meet the requirements set out by the regulations of the European Union on state aid and the state aid practice of the European Commission in case of natural disasters. State aid is provided by a government to promote economic development and within the European Union the introduction of a state aid in a member state requires the prior approval of the European Commission according to the Treaty on the Functioning of the European Union. A tax concession to provide assistance for victims of natural disasters could also be treated as the equivalent of state aid, therefore even if a country is able to support its citizens, the tax concession might not be approved by the EU."
- Roberta Mann (Oregon), International Tax Reform and the Global Environment: "Nearly everyone agrees that the United States' system of taxing multinational corporations is broken. While nominal U.S. corporate tax rates rank near the top among developed countries, the taxes actually paid by U.S. corporations are the lowest among those countries. Debates over corporate reform are intensifying. The U.S. asserts its taxing authority over all the income earned by its citizens and residents. This type of taxing system is called a "worldwide" system. The foreign income of foreign corporations and residents is not taxed unless it is repatriated to the United States, for example, by means of a dividend paid to the U.S. corporate parent by a foreign subsidiary. U.S. corporations and residents are allowed to reduce their U.S. tax liability by foreign tax credits for taxes paid to foreign governments. By holding foreign income overseas, U.S. multinationals avoid U.S. tax. Other countries use a "territorial" system of taxation. Those countries tax only the income attributable to activities within their borders. Some countries have used their tax systems to attract business by low tax rates. Reformers assert that the U.S. should adopt a territorial tax system to improve global competitiveness of U.S. multinational corporations. A seldom-asked question is whether a worldwide or territorial system is best for the world's environment? This paper will attempt to answer that question. Focusing on manufacturing activities, I will compare environmental rules in the United States with those in emerging manufacturing economies such as Brazil, Russia, India and China. I will compare the tax rules applicable to manufacturing concerns in those countries. I will also consider whether examining international tax reform through an environmental lens could have other beneficial side effects, such as slowing harmful tax competition and improving compliance with trading norms. Ultimately, the question is whether economic competition and capitalism can be good for the environment. Perhaps international tax reform can move the world in a sustainable direction."
- Darien Shanske (UC-Davis), The Role of Local Finance in a Federal System: "There are numerous points of contact between local finances and the finances of higher-level governments, including the federal government. For instance, there is the state and local tax deduction, the tax exemption for local borrowing and numerous federal grants. In all of these instances, the question is: how should higher-level governments aid local governments? This question has been fairly well explored. In this paper, I will ask the converse question: how should lower-level governments aid higher-level governments? In short, my answer is that lower-level governments should operate as a kind of filter, taking on local projects and parts of regional projects, thereby relieving unnecessary fiscal stress on higher-level governments."
Panel #5: International Taxation (Diane Ring (Boston College), Chair & Discussant)
- Elizabeth Chorvat (Chicago), "Looking Through" Corporate Expatriations for Buried Intangibles: "The expatriation of U.S. multinationals represents a puzzle. U.S. tax law is designed to impose a penalty greater than the benefits to expatriation, yet a number of companies continue to reorganize outside of the United States. The thesis of this article is that share prices are undervalued at the time of the expatriation, allowing corporate managers to exploit the underpriced penalty to inversion if they believe that the benefits to expatriation outweigh the cost. The mispricing associated with corporate inversion announcements is evidenced by abnormal returns amounting to 200 percent above the S&P average in the years following the inversion transaction. My hypothesis is that corporate managers' cost-benefit analyses result in expatriation when they believe they have asymmetric information about the value of future income growth attributable to intangibles. Moreover, in choosing to invert, these managers have exploited a gap in the international tax rules relating to the taxation of intangibles developed in lower-tier foreign subsidiaries. "
- J. Clifton Fleming, Jr. (BYU), Getting Serious About Earnings Stripping: "Deductible payments made by U.S. resident corporations to foreign related parties substantially erode the U.S. tax base and create an incentive for U.S. corporations to expatriate or be acquired by foreign corporations. The U.S. tax system imposes a weak limitation on such payments when they are characterized as interest. This restriction needs to be strengthened and extended to payments of royalties, rents, and services fees. The proposed paper will explain the preceding points in detail and discuss ways of imposing appropriate restrictions. "
- Julie Manasfi (Whittier), The Global Shadow Bank — Systemic Risk and Tax Policy Objectives: The Uncertain Case of Foreign Hedge Fund Lending to U.S. Borrowers and Transacting in U.S. Debt Securities: "I will take a look at how tax laws lag behind financial innovation in the case study of foreign persons lending to U.S. borrowers or transacting in U.S. debt securities. Most of the U.S. federal income tax law governing this area was written before complex shadow banking transactions and sophisticated debt products were even contemplated. This leaves a great deal of uncertainty about how the tax laws should be interpreted and applied. Particularly problematic is that the taxation outcome depends on a mushy standard of whether a foreign person is engaged in a U.S. trade or business of lending. In order to analyze these uncertainties and their potential effects in more detail, I will concentrate on financial innovation in the hedge fund industry, focusing on transactions in which foreign hedge funds lend money into the U.S., either directly to U.S. borrowers or by purchasing debt securities. I will look at this area and it's adaptations since I last looked at this issue in a 2010 article.
- Omri Marian (Florida), The Role of Corporate Tax-Residence in a Territorial System: "Under the U.S. global (or "residence-based") tax system, domestic corporations are taxed on their worldwide income from whatever the source derived, but foreign corporations are only taxed on income derived within the U.S. Recently, many have suggested reforming the U.S. international tax system by adopting a territorial system, in which taxpayers are only taxed on income from sources within the jurisdiction, regardless of the domestic or foreign status of the taxpayers. Adherents of territoriality reason that because corporate-residence is anyway meaningless (as corporations cannot have "real" residence) a territorial system is justified, among others, because it avoids the "meaninglessness" of corporate tax-residence determination. As I have argued in a recent article, reforming the U.S. tax system from a global to a territorial system will not cause corporate tax residence to be any "less important", and the "meaninglessness" of corporate residence would not be avoided. This piece completes the previous article by questioning what role does corporate residence determination play in territorial systems. I ask how should tax-residence of corporations be constructed assuming a U.S. territorial reform does materialize. The argument I advance is that unlike our current global system-in which the question of residence is a jurisdictional threshold issue-in a territorial system corporate residence is an anti-tax-avoidance mechanism. Borrowing from the experience of other countries that have recently reformed their systems from global to territorial, particularly the U.K. and Japan, the article demonstrates how corporate tax-residence constructs can successfully support, or miserably fail, the efforts to curb tax avoidance in territorial systems."