Paul L. Caron

Saturday, July 16, 2022

Today's Law, Society, And Taxation Panels

Today's Law, Society, and Taxation panels at the virtual 2022 Law & Society Association Annual Meeting:

Session #18:  Teaching Taxation: A Pittsburgh Tax Review Symposium (Diane Klein (Southern), Chair/Discussantl Author, Teaching Critical Tax: What, Why, & How, 19 Pitt. Tax Rev. 143 (2022)):
In its Spring 2022 issue, the Pittsburgh Tax Review published a symposium issue dedicated to teaching taxation. The idea behind the special issue is to collect in one place the insights of leading tax teachers as a service for all who are interested in and devoted to educating current law students and future tax lawyers. This roundtable session includes several of the contributors to this special issue who will describe their contributions and lead a discussion regarding tax teaching in an interactive format with the audience. The contributions featured here include using a VITA program to put a face on tax policy, incorporating critical perspectives in the tax classroom, teaching tax through film, and lessons from teaching tax during the pandemic.

Session #14:  Directions and Strategies for Future Tax Reforms (in Europe) (Yvette Lind (Copenhagen; Google Scholar), Chair/Discussant & Patrik Emblad (Gothenburg), Discussant):

Given the global importance of ensuring a sustainable future, a bold approach to taxation, and indeed to the rights of citizens, is perhaps now more urgent than ever before. This call aims to attract critical tax scholars that want to discuss new tax issues in the light of pressing demands on achieving sustainability and fairness in future tax reforms. What new approaches to taxation can be expected? What function ought tax laws have in processes of democratization and transformation? Is there a common ground for right-based tax reforms to ensure a sustainable future? Can we present innovative tax design to target new sources of revenue? How should tax governance be adjusted to new tax reforms? Our hope is that we can discuss some of these and other related topics during the LSA-meeting in Lisbon.

Patrik Emblad (Gothenburg), The Law of Housing Inequality:

For the last decade, housing prices in Sweden have soared. At the beginning of the Corona pandemic, many feared a dramatic downturn. However, the central bank of Sweden (Riksbanken) began to purchase large amounts of housing bonds in order to keep the interest rates on private mortgages at a low level. The predicted downturn was not only prevented, but the rate of return on properties even increased during this period. Since housing prices have escalated, so too has private indebtedness. The fear of increased vulnerability in the financial system has caused the Authority for Financial Supervision in Sweden to respond by enacting credit restriction rules that prohibit people with lower income and lower savings from qualifying for house loans.

The measures mentioned above focus on the need to prevent a crisis in the housing market. However, issues of social exclusion, income segregation, and inequality are not adequately addressed. The escalation of housing prices limits the accessibility to the housing market for people from lower socio-economic groups. Since there’s a considerable variation in housing prices in different parts of the country, the escalation of housing prices not only affects how but also where people from different socio-economic groups are able to live. Another consequence is increased economic inequality between those who own their homes and those who do not.

How does tax law play into this? My paper uses the concept of housing inequality as a theoretical foundation for analyzing and suggesting adjustments to Swedish housing taxation. The concept of housing inequality, as formulated by Danny Dorling, illuminates that the problem isn’t a shortage of housing, but a shortage of housing that’s affordable for all. To do this analysis, it’s not enough to just look at tax law itself but to look at the combined function of tax law and the extra-legal measures mentioned above.

Pernilla Rendahl (Gothenburg; Google Scholar), Tax Fairness through Contextualisation?:

Tax fairness through contextualisation is a question of how tax fairness is perceived and understood through the context in which it is presented and discussed. Using fairness as an argument to introduce legislative changes has been successful with the G20/OECD work on changing the principles for how to tax the digital economy (OECD, BEPS project, WP 1). The critical question is, however, what the fairness used for these changes covers and how it can be understood as it is an underlying value for introducing shifts in taxation at both national and regional levels. Which role does contextualisation of the value of fairness play in the social contract that taxation in an international arena holds? The objective of the paper is not to give an answer to what fairness actually means, but how it can be understood from different contextual viewpoints and which critical questions may arise from such a contextualisation. The paper is written with funding from the Torsten Söderberg foundation, Sweden.

Åsa Gunnarsson (Umeå), Right-based Tax Reforms - The New Deal:

This paper argues for a right-based approach to taxation, based on the idea that tax fairness an important precondition for fiscal sustainability. The perspective pinpoints a basic ethical precondition for mobilizing revenue. Social justice ought to be a basic political issue for every nation that has a democratic constitution, and the interest of social stability. Instead of making tax law into a technical, de-humanized issue, detached from moral or welfare state responsibilities, future tax reforms ought to recognize citizens’ social rights and the protection against social risks. This recognition ought to correlate with an obligatory common responsibility to generate the public funding needed to pay for social rights. In that way, the obligation of the citizens is based on the legitimate demand that they support certain social needs. From this perspective social justice, on an aggregated collective level, is related to a fair and just connection between social burdens and benefits. In conclusion, the interpretation of tax laws should embrace the democratically determined reasons to tax, which is what most tax systems have in common.

Joana Pedroso (Gothenburg), The Cop26 Measures, Environmental Taxes, and the EU State Aid Rules as Potential Legal Barriers to Environmental Concerns:

In the COP26, world leaders gathered to negotiate precise targets and economic support to ensure net-zero emissions of greenhouse gases within the timeframe science warned us. They agreed to direct a large sum of financial help to ensure the success of this target and to cease the financial support for unsustainable energy sectors and products. The COP26 agreements are one step towards the net-zero emissions targets. Each country still needs to implement such measures domestically, which could be "easier said than done". For instance, within the European Union (EU), Member States' domestic financial aids are subjected to the control of the EU through the State aid rules established in Article 107, TFEU. The State aid rules safeguard the level playing field of the internal market of the EU and tackle the EU Member States' anticompetitive and protectionist actions. Article 107(1) of the TFEU, which forbids State aids, has been developed since 1974 to taxation in Italy v. Commission case (C-173/73). However, this Article's interpretation and application to environmental taxes have only started in 2001 with the Adria-Wien Pipelines ruling (C_143/99). These two decades of State aid development concerning environmental taxes, and five decades of development to taxation, have considerably improved this rule's adaptability to environmental issues. However, there are still strong economic foundations within the State aid main rule that could represent a potential legal barrier to the EU Member States' success at achieving the COP26 targets. Economic concerns should not prevail over the environmental and social ones when the global community strives to survive climate change. I propose to discuss some aspects of the current stage of development of Article 107(1) of the TFEU interpretation to environmental taxes, which I understand as potential barriers to the COP26 targets and any other non-economic concerns of the EU and global community.

Session #15: The Impact of New Technological Developments on the Relationship "Taxpayers-Tax Administrations"  (Yvette Lind (Copenhagen; Google Scholar), Chair/Discussant):
In the light of new technological developments, there have been significant changes in the way tax administrations and taxpayers interact. In critically analysing the impact of new technological solutions on the relationship "tax administrations-taxpayers", this panel’s contribution is threefold: first, it aims to shed light on the role of technology in tax law (i.e. AI) and the role of transparency when digitization renders existing procedures more opaque to citizens; second, it offers a comparative discussion of how the use of new technologies in the area of taxation and social benefits need to take into account the needs of vulnerable categories of taxpayers and also allow leniency measures in case of mistakes; thirdly, it looks at the use of new technologies in co-operative compliance programs.

Wouter Dister (Antwerp; Google Scholar), Can Co-operative Tax Compliance Programs Increase Tax Certainty? Evidence from the Belgian Co-Operative Tax Compliance Pilot Project:

In Belgium – as well as in most, if not all, other countries – the relationship between the tax administration and large corporate taxpayers has traditionally been based on a conflict model. In this model, the tax administration focuses on the detection and punishment of violations of the tax code to obtain taxpayer compliance. However, previous research has identified several issues arising from this conflictual relationship, ultimately leading to a substantial level of tax uncertainty. Also, recent behavioural insights show that a more consensual and co-operative approach towards this relationship results in an increased level of taxpayer compliance, obtained in a more cost-effective manner.

To that end, the Belgian tax administration started a pilot project on co-operative tax compliance (CTC) for these taxpayers in 2018, aimed at making these relationships more co-operative. Whereas this pilot project is certainly not the first program of its kind, similar initiatives are still shrouded in uncertainty with regards to their effectiveness.

This paper will look into the impact this project has on tax certainty and the question whether any legislative changes are necessary to facilitate the further achievement of this objective. To that end, four enterprises participating in the program and their counterparts at the tax administration are followed for a period of approximately two years. The data for this research is collected through regular semi-structured interviews and a document study.

The presentation sets of with an overview of the traditional relationship and how it leads to tax uncertainty. Then, the manner in which CTC programs aim to reduce tax uncertainty will be discussed, followed by the results of the field-research. This research is expected to show whether and how the Belgian program has an impact on tax certainty, whether these findings should lead to legislative changes, and how these insights can be translated beyond the Belgian borders.

David Hadwick (Antwerp/FWO; Google Scholar), Transparency in the Context of Algorithmic-Based Tax Risk Assessments in the EU:

A majority of tax administrations in the EU are leveraging machine-learning (ML) technology to perform their fiscal prerogatives. ML risk-scoring tools are now widely used to segment taxpayers based on predicted risks of fraud or non-compliance. Few information has been disclosed about these models, the underlying data inputted, the risk-factors learned by the machine, and the overall accuracy or fairness of their outputs. The use of ML by tax administrations is highlighting an inherent lack of transparency regarding the collection of taxes. The case of SyRI and the toeslagenaffaire in the Netherlands have shown how taxpayers are not afforded sufficient verifiable insights regarding the data used in these models or the way it is processed, and how such regime poses a threat to citizens’ fundamental rights.

Despite these risks, tax administrations in the EU enjoy a literal carte blanche regarding the use of data for the development of risk-scoring models. In complete antithesis to the principle of transparency, EU Member States have codified that secrecy should be the status quo, to protect the collection of taxes. In a context where the use of ML is proliferating at a rapid pace, this regime of secrecy is constantly reducing the leverage of individuals in the social contract between the administration and the administered. This raises the question: to what extent is secrecy necessary for the tax administration and how can transparency be upheld without jeopardizing the collection of taxes?

This presentation will be structured in three parts. First, the current and future state of use of machine-learning will be established. Second, it will be shown how secrecy regarding the collection of taxes is common practice in the EU. Third, this presentation will attempt to strike a balance between the effective collection of taxes and the necessity to afford transparency to taxpayers in the context of algorithmic governance.

Luisa Scarcella (Antwerp), Errare Humanum Est: “Right to Make a Mistake” and Leniency Measures in Digital Tax Environments:

Taxpayers interact with the tax administration on various occasions and for different purposes: to understand their tax obligations, when submitting their tax return and eventually, during tax audits when challenging accusations of fraud and evasion. However, the rapid digitization of tax forms and administrative procedures throughout Europe has overlooked that millions of citizens have limited digital literacy, financial means, and willingness to engage with digital technology. Administrative mistakes often result from a combination of socioeconomic and cultural factors rather than from the intent to commit tax fraud. At the same time, mistakes can have significant legal consequences for citizens, even when they are acting in good faith. In an attempt to improve citizens' trust in digital governments, some first experimental solutions have started to see the light. They aim to take into account citizens’ good faith in the context of digital government when making a mistake. An example is the French “right to make a mistake” which allows citizens to commit “one administrative mistake in good faith in their lives” without being sanctioned. This article compares this perspective to other less systematic approaches to mistakes and citizens’ good faith adopted in Italy and The Netherlands. It reflects on possible leniencies measures that can be adopted and that consider the needs and difficulties faced by vulnerable taxpayers groups when interacting with the tax agency.

Rita de la Feria (Leeds; Google Scholar) & Amparo Grau (Complutense Madrid; Google Scholar), AI and Tax Law Enforcement: The Fallacy of Unconstrained Success:

The developments over the last decade in the use of AI in the enforcement of tax law have been nothing short of outstanding. Not only are taxpayers are increasingly making use of automated systems in tax compliance, but perhaps more importantly, tax administrations are increasingly reliant on new technologies as compliance-enhancing tools. However, whilst the use of AI brings very significant advantages to both the efficiency and the equity of tax systems, it also carries significant risks. This paper identifies the development of a new AI fallacy within the tax policy sphere, namely that of unconstrained success: that the use of AI in tax compliance and enforcement can compensate for the deficiencies of the tax law. The paper considers the rationale behind the development of this fallacy, in particular, the political and institutional dynamics involved in the approval of new tax legislation. It concludes that maximizing the benefits of the use of AI in tax compliance and enforcement requires a departure from this fallacy and the recognition of the wider dynamics of the tax policy-administration symbiosis.

Session #16:  The Tax Gap & Social Policy (Rita de la Feria (Leeds; Google Scholar), Chair/Discussant):
The application of the tax laws may seem stark and technical at first glance, but a rich understanding of the tax laws makes clear that much complex social policy is implemented through the tax laws. The papers on this panel consider a variety of ways that state and federal tax laws and other benefit transfer provisions facilitated by the government operate in practice. The authors consider both the design inherent in the proposed tax scheme and the consequences of the various provisions in practice.

Lotta Björklund Larsen (Exeter; Google Scholar) & Lynne Oates (Exeter), Hidden in Plain Sight. Imaginaries of Measuring Tax Rule Breaking and Its Impact on Policy-Making:

The tax gap is an increasingly common mechanism for assessing the mismatch between tax that theoretically should be collected, and tax that is actually collected. Many are the countries that attempt to estimate what can be conceived of as a ‘revenue loss’ and where rule breaking looms large. The work of quantifying the tax gap has assumed almost a mythical status, presumed to be an accurate reflection of a real phenomenon. Simple in theory, full of caveats in practice is this a number that causes quite a stir when published: “Imagine the good policies that could be implemented if all due tax was collected”! Politicians and public administrators steer compliance policies according to the development of the tax gap, tax administrations see a shrinking tax gap as a sign of success, and media and stakeholders make all sorts of comparison based on this fickle number.

This paper revisit the work with recent quantifications and calculations of the tax gap in Sweden and the United Kingdom . We use the concept of imaginaries (cf. Taylor 2002, Salazar 2012, Jasanoff 2015) that relate ideas within the public sphere, economy and self-governance to current practices in modern society. Using imaginaries allow us to consider how these tax gap calculations are politically framed and how the appropriation of the tax gap ‘number’ by the commentariat has important implications for the management of tax rule breaking.

Theodore Seto (Loyola-L.A.; Google Scholar), Justifying Social Safety Nets:

Every developed country provides some form of social safety net. Such programs focus on ameliorating the more extreme consequences of poverty, commonly providing benefits in kind or subject to restriction. The prevailing theory of public finance does not justify such programs. It tells us instead that the proper role of government is to support the legal infrastructure that makes markets possible, internalize externalities to the extent possible, and supply public goods in contexts in which externalities cannot be internalized. Redistributive tax theory – as developed by Mirrlees and his successors – moves closer but does not fully fit or justify current practice either.

This paper suggests two modifications to the existing theory. First, existing theory explores the welfare consequences of redistribution using well-behaved labor-leisure indifference curves. It does so not because the relevant real-world curves are in fact well-behaved, but rather to make the mathematics tractable. In the real world, utility curves for critical necessities are not well-behaved.

Second, existing redistributive theory incorporates a common welfarist presumption: that cash transfers are normatively superior to transfers in kind. Welfare economists generally assume that, given cash, rational actors will spend so as to maximize their own welfare. Giving recipients aid in kind rather than in cash may therefore be suboptimal. Unfortunately, in the context of social safety nets, neither voters nor legislators have been persuaded by this argument; the presumptive superiority of cash is plausible primarily to welfare economists – again, at least in part because it makes the mathematics more tractable.

If we are willing to abandon the use of well-behaved curves and the presumptive superiority of cash, however, existing social safety nets become relatively easy to fit and justify within a welfarist frame.

Henry Ordower (St. Louis; Google Scholar), Repealing the Anachronistic Payroll Tax to Limit Continuing Harm to Workers:

This paper will argue that the payroll tax has become obsolete and harmful. In addition to the fundamentally regressive structure of payroll taxes, they resemble a non-sustainable pyramid scheme. Public retirement systems are firmly embedded in and critical to modern, even moderately welfare-based economies that characterize the developed world and should be funded with general revenue rather than a limited, targeted tax that cannot be adequate to the job as the size of the retired population grows. Public retirement payments will not cease when payroll tax funding fails to maintain the pyramid. Yet, failure of payroll taxes to fund will support political arguments for diminished benefits and privatization that might leave many retirees without resources for their retirement. Separating public retirement benefits from connection with the narrow payroll tax is essential to preserving a broad-based public retirement system.

Originally, the separate funding mechanism of a separate tax may have been necessary to secure political support for a public retirement system. When first enacted, however, the payroll tax rate was low relative to the progressive income tax rates imposed on high income taxpayers and high-rate value added taxes had not become ubiquitous yet. Progressivity in the income tax has retreated and value added taxes advanced shifting tax burdens from capital to labor. Like the payroll tax, value added taxes are regressive relative to income and favor high income taxpayers. It is time to abandon payroll taxes to diminish artificial income and wealth disparities caused by anachronistic taxes.

Session #17:  Tax Law and Inequalities (Blaine Saito (Northeastern; Google Scholar), Chair/Discussant):
This session discusses mainly the relationship between tax law and social inequalities, a topic tackled by the three first papers presented. In loose connection to this topic, another paper discusses the possible impact of an international taxation framework on national systems of revenue allocation, in a context shaped by inequalities between countries. Coming back to the national contexts, the last paper focusses of the relevance of the fairness ideal in the construction of a trust relationship between citizens and national tax systems.

Jaimy Rippe (RSM US LLP), Horizontal Inequity: Section 213 of the United States Internal Revenue Code and the Disparate Federal Income Tax Treatment of Black Women During Childbirth:

The US Internal Revenue Service (IRS) does not ask taxpayers their race or ethnicity on their income tax return, otherwise known as a Form 1040. This may make it seem like US Congress is trying to be race neutral. In reality, it makes racism worse. Provisions of the tax code operate to sustain and frequently intensify racial disparities stemming from historic and ongoing discrimination within areas such as property ownership and housing, education, employment, and medical care.

Deeply rooted inequities from historic racial rules remain prevalent in the health disparities seen in Black Americans as they experience worse outcomes than any other racial or ethnic group. One of the most concerning outcomes is disparate healthcare and medical attention. This outcome is against traditional American values of marriage and family when mothers are dying while giving birth to her next generation, and more often than not a Black woman who suffers from these fatal and injurious complications during childbirth.

The U.S. federal income tax medical expense deduction exacerbates this problem. The entire purpose of a deduction in our tax system is to aid all taxpayers, but a Caucasian and Black mother are not in an equal position in the United States of America; their experiences, from the medical attention to the financial burden, of child delivery are incomparable. IRC Section 213 offers a false sense of relief to Black mothers as they risk their lives giving birth to their newborn child(ren). Statutory modification is necessary to begin closing the gap in medical treatment and its accompanying expenses disproportionately borne by Black mothers across the U.S. Tax policy can initiate reparation for racialized disparate treatment through equity, if justice is out of reach.

The medical expense deduction under US IRC Section 213 is an intersection of post-slavery turned gender and racial disparity in economic circumstances of medical attention, catastrophe, and taxation.

Patrick Zancolli (Temple), Closing the U.S. Tax Gap with Participatory Budgeting:

This paper addresses the staggering U.S. Tax Gap in the federal income tax. Estimated at hundreds of billions of dollars, the Tax Gap indicates that voluntary compliance is not as high as it should be, which undermines the foundational principles on which the income tax system is designed. This paper argues in favor of participatory budgeting, a process that allows citizens to provide their input on how public dollars are spent, into its federal income tax system. Participatory budgeting would allow the United States to increase taxpayer buy-in and yield tax outcomes that are more like those enjoyed by the Nordic countries of Sweden, Norway, Denmark, Finland, and Iceland. While these countries impose higher levels of taxation, they have higher voluntary compliance because of the strong sense of trust held by their citizens that the government uses their tax dollars efficiently.

Because citizens of these Nordic countries are more inclined to voluntarily pay their taxes, the government can, in turn, dedicate less of its resources to ensuring compliance. Americans on the other hand are less likely to willingly comply because they believe that their tax system is unfair. While the U.S. federal income tax system was built on the idea that a citizen’s tax liability should be consistent with their ability to pay, this fairness ideal is undermined by this issue. To address this disconnect, the United States must change public perception regarding its tax system. It can do so by adopting participatory budgeting to redesign its tax system in a way that can function more similarly to those implemented in the Nordic countries.

Neil Buchanan (Florida; Google Scholar), Generational Aspects of Social Policy:

Policymakers and politicians frequently appeal to concerns about "our children and grandchildren" to justify policy choices. Too often, such invocations are offered cynically, or at least perfunctorily, to dress up a policy preference in the garb of moral responsibility. This presentation continues my work exploring what it truly would mean to move the interests of future generations to the forefront of our social and economic policy discussions.

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