Stanley Surrey devoted five decades to shaping and elucidating the structures of the income tax, to decrying its use as a mechanism to grant unwarranted financial favors to select interest groups, and to training generations of students and lawyers for leadership in government, in academia, and in private practice in the U.S. and internationally. Surrey served as an advisor and Tax Legislative Counsel to the Department of Treasury from 1937 to 1947, as the Assistant Secretary of the Treasury from 1961 to 1969, and as a professor of law at the University of California, Berkeley School of Law and at Harvard Law School, where he founded the International Tax Program. Surrey saw himself as an activist scholar. In their introduction to their edited edition of Surrey’s memoirs, Larry Zelenak and Ajay Mehrotra survey Surrey’s extraordinary career as largely one of unified thought and action in service to fairness, equity, the integrity nation’s tax system, and its effectiveness in securing the federal fisc.
Surrey envisioned the Department of the Treasury as the guardian of these values and institutions. Had that vision held sway over time, perhaps we would see less need for investigations of the revolving door between big accounting firms and key policy positions in Treasury, and we would be subject to fewer expensive administrative agency-made loopholes, such as the one for carried interest (as well as to Congress’s periodic display of attempts to close them).
While taking a pragmatic approach to measuring income, given the tools of his day, Surrey developed the concept of tax expenditures, deviations from the structures necessary to calculate net income that provide financial benefits to special interest groups. He paved the way for Congress to require that the Joint Committee on Taxation and the Department of Treasury prepare annual tax expenditure budgets. Zelenak and Mehrotra note the irony that, despite Surrey’s stated concerns and extensive efforts, both tax expenditures and the complexity of the tax system ballooned during his two stints at Treasury. Apparently, by drawing attention tax expenditures, Surrey enhanced their profile and expanded the number of politicians interested in deploying them.
Mehrotra and Zelenak also wonder at Surrey’s championing of the Investment Tax Credit (ITC), a seven percent tax credit for business investments in machinery and equipment, as part of the Revenue Act of 1962. While Surrey acknowledges structural mistakes early in the history of the income tax and his first tenure at Treasury, his memoirs provide no clear explanation for the ITC. Zelenak and Mehrotra suggest that Surrey may simply have acquiesced to President Kennedy’s request for support, in view of concerns about falling American productivity and competitiveness during the Cold War. To the extent Surrey was willing to countenance a tax expenditure, he maintains in his writings that horizontal equity, treating like taxpayers in a like manner, is a key goal. Tax credits, specifically refundable tax credits, provide the same financial benefit to all taxpayers undertaking specified actions. Nonrefundable tax credits also provide the same benefit so long as the tax liability equals or exceeds the credit. In contrast, structures used to calculate net income, such as tax exclusions, exemptions, and deductions yield “upside-down” subsidies. Their dollar value to a taxpayer increases based on the taxpayer’s marginal tax rate, the rate imposed on the taxpayer’s highest level of income. Therefore, higher income taxpayers will enjoy much greater tax savings for exactly the same transaction undertaken by lower income taxpayers. Furthermore, Surrey might condone a tax expenditure so long as it was temporary and could be segregated from the structures for calculating net income. Tax credits accomplish this, since they are appended to the front of the code and are applied after the calculation of income and tax, rather than integrated with the tax structures necessary to calculate income and tax. Of course, if Surrey sought to provide a key policy example to advocate for a broader effort to convert existing tax expenditures to credits, as several top tax scholars have since advocated for specified tax expenditures, he lost this battle. While tax expenditures used to generate public goods and positive externalities, such as affordable housing and renewable energy, have remained in the form of tax credits and have, for the most part, been subject to sunsets, most subsidies are now imbedded within the structures for calculating income. Sadly, this integration of subsidy and structure provides cover for public figures and officials, such as former Exxon chief and Secretary of State Rex Tillerson, to deny that the oil and gas industry receives any federal subsidies through the tax system, when in fact, the tax system is littered with such financial benefits.
Surrey’s memoir has a curious provenance. The manuscript that Zelenak and Mehrotra have edited and published is based on a polished, typed draft from a loose-leaf binder that Harvard Professor Daniel Halperin discovered cleaning out his office as he transitioned to emeritus status in 2015. Halperin surmised that when Professor Ollie Oldman, Surrey’s long-time colleague and successor in directing the International Program in Taxation, may have given him the manuscript when he himself retired in 1990. As an aside, this find alone would justify dispatching Marie Kondo and a phalanx of archivists and legal historians to Langdell Hall to help with the tidying up… Following his discovery, Halperin transferred the manuscript to the Harvard Law School Library, Historical and Special Collections Division, to which a number of scholars, including Reuven Avi-Yonah, Nir Fishbien, Gianluca Mazzoni, Dennis Ventry, and George Yin, have made the trek to gain access. Fortunately, thanks to the wonderful efforts and dedication of Ajay Mehrotra and Larry Zelenak, Surrey’s memoir and reflections are now available for all of us to pursue our scholarly investigations without leaving home. A Half Century with the Internal Revenue Code, The Memoirs of Stanley S. Surrey is available from Carolina Academic Press and from Amazon.