Paul L. Caron

Friday, July 15, 2022

Weekly SSRN Tax Article Review And Roundup: Eyal-Cohen Reviews Shaviro's Stanley Surrey And The Public Intellectual Practice Of Tax Policy

This week, Mirit Eyal-Cohen (Alabama; Google Scholar) reviews Daniel Shaviro (NYU; Google Scholar), ‘Moralist’ Versus ‘Scientist’: Stanley Surrey and the Public Intellectual Practice of Tax Policy (July 2022).

Mirit-Cohen (2018)

The dichotomy of tax—as pure scientific neutral field versus encompassing a moral and social agenda—received much attention with recent years’ renewed spotlight on critical tax theory. In an interview in 1974 Firing Line TV Dialog, Stanley Surrey was confronted with this dichotomy when host William Buckley blamed Surrey that although he asserts relying on scientific observations, he is truly a tax moralist who aims to improve the world based on his own personal value principles. Following A Half-Century with the Internal Revenue Code: The Memoirs of Stanley S. Surrey (Lawrence Zelenak (Duke) & Ajay Mehrotra (Northwestern; Google Scholar) eds. Carolina Academic Press 2022), in this Essay, Shaviro explores Surrey’s tax moralism as it is self-professed in this autobiographical collection and evaluates the effect it has on the tax expenditure analysis.

Shaviro describes one of Surrey’s attitudes toward tax as a quest to find meaning and aversion to boredom. It started as a law student in Columbia University when Surrey disliked “dullness” of certain subjects (or “dryness” of some professors) and continued as a junior associate and in the U.S. Navy. Surrey desired profound intellectual meaning and significance. He looked for theoretical, logical, and legal patterns in concepts and structures. While working with Professor Magill on a common project with Carl Shoup and Robert Haig (co-originator of “Haig-Simons income”, Surrey became tremendously fascinated with income taxation and the idea of tax—not as a random body of rules but—as an internally consistent framework. He found meaning and purpose in taxation and viewed the tax system as needing to possess logic and purpose (accepting some errors that he later tried to correct while at Treasury).

Surrey’s background, Shaviro informs us, is of tremendous importance to his moral views.  Growing up in a Russian Jewish immigrant family during the Great Depression, New Deal era, and experiencing pervasive anti-Semitism in America, surely affected his ideological sentiments that later guided his tax policy views. Although the word “Jewish” never appears in his memoirs, Shaviro reveals that it was not a coincidence that Surrey’s brief law firm experience post-graduation was at a traditional Jewish law firm focused on personal, family, and real estate—legal areas of prominent use for Jewish families.  Shaviro infers from Surrey’s undergraduate, and immediately thereafter, successful legal graduate and professional career, a classic American immigrant family’s faith in education and upward mobility for Surrey and his brother Walter, a renowned international lawyer. Although his educational and professional achievements may indicate growing up as an American native, Shaviro contends that his moral outlook and tax policy views have been shaped seeing (and surely experiencing) biases, anti-Semitism, and social injustice. For once, he achieved his undergraduate degree in the City College of New York (CCNY) as few Jews were admitted to Ivy League institutions. Such educational apartheid, Shaviro postulates, inevitably became engrained in Surrey’s mind. In fact, Shaviro asserts that the same anti-Semitism in Wall Street was what pushed Surrey towards his alternative career path in government service and academia.

During the New Deal era, Surrey worked as a government lawyer in an environment with young, mostly liberal leaning, professionals hired based on merit, not influence, and shielded from interest group politics. Thereafter, he worked at the U.S. Treasury, which contributed to his strong sense of public service. Surrey’s elitism and belief in meritocracy informed his position that only expertise and intellect are the proper tools for advising legislative action and improving public policy analysis and design. He believed that with fortune comes social responsibility and viewed elite tax bar members as ought to act as social agents rather than aiming to game the system for their wealthy clients.

As a self-professing liberal and “good Democrat” Surrey liked the liberals’ preference to treat people equally and support a progressive income tax. Accordingly, he viewed his support for broadening the base and lowering the rates as a liberal position, even if it was at times “too neutral” for some liberals. “Conservatives” in Surrey’s memoirs were all those who opposed tax reform and emphasized incentives for capital formation and the business community. Surrey considered basic human decency to push one towards liberalism, and away from conservatism such as in the case of providing “upside-down” subsidies to taxpayers in higher marginal rate brackets. In his academic career, Surrey demonstrated a wider aversion to bias by fighting the exclusion of women from law school classes and faculties, all the while voicing early support for racial equality and affirmative action. Shaviro attributes this as naturally relating to Surrey’s deeming bias as fundamentally unfair when some people are treated better than others because “insiders” are selectively taking special care of their own.

Aligned with liberal moralism, “tax equity” in Surrey’s eyes was only in horizontal terms of fairness using market pretax economic returns as a normative baseline. Moreover, congressional legislative intent was important to Surrey in the battle against lobbying and providing favors to certain politically powerful taxpayers. Surrey’s view of free market was limited to achieving a broad-based, lower-rate tax system. His “concern” for the freedom of management and investors was to the sole extent they relate to tax neutrality, i.e., “free” to make decisions based on economic efficiency, rather than tax consequences determined by political influence, favoritism, or special privilege. While not calling out the rent-seeking process straight-forwardly as corrupt, Surrey described such practice as the ways of congressmen to be sympathetic to just one private group one-sided position. He viewed such inherent favoritism, though, as capable of destroying the integrity of the tax system. Nevertheless, Shaviro claims that Surrey’s political legacy puts him, rather unexpectedly, as a centralist.

Yet, one of Surrey’s unexplained episodes was his support for the most notorious of tax preferences—the investment tax credit (“ITC”). As I have argued here, this tax instrument was not only a direct subsidy for business investors, but a failed experiment in cyclical fiscal policy. Its on-and-off use by the government also contributed to much uproar and dislike from the business community and eventually to its ephemeral faith. The official reason why a liberal such as Surrey will support this controversial tax break was offered by Richard Musgrave – Surrey’s close colleague and friend—that labeled Surrey’s support of the ITC as viewing it as a form of accelerated depreciation. Yet, in their book, Zelenak & Mehrotra criticize Surrey’s “weak” response when confronted with such cognitive dissonance explaining the ITC “has nothing to do with the tax system”. Yet, as I have demonstrated, the ITC was a government instrument use the tax system to spur economic stimulus and counteract recessions and economic recessions. A deliberate departure from income measurement, the ITC was an unsuccessful experiment to fiscally control against economic cycles. It provided a vivid illustration that the tax system is not the tool to reverse the effects of business downturns.

Indeed, Surrey’s utmost legacy is identified with his work on the tax expenditure analysis, (although some also noted his work on tax reform as base broadening and rate cutting measure as highly influential). Yet, the academic response to the tax expenditure project has been mixed. Some saw it as a successful academically induced legislative action that possess conceptual merit. On the other hand, others considered it a disappointing failure that did not achieve its intended aim of reducing the vast use of tax expenditures. Moreover, Surrey’s determination with the tax expenditure analysis seemed too obsessive, and at time, theological.

According to Shaviro, Surrey’s moralistic perspective and high policy ambitions made him oversell his tax expenditure analysis. He postulates that had Surrey stuck to a scientist approach regarding the tax expenditure project serving as purely analytical tool it might have received less academic pushback (especially from consumption tax advocates) and would have had a more practical effect. For example, David Bradford noted that labeling the concept of tax expenditures as deviations from an ideal or “normal” tax design was futile because it was interpreted normatively as ideological agenda about optimal distributional policy, thus attracting much unnecessary controversy. Douglas Kahn and Jeffrey Lehman bluntly dismissed the tax expenditure project owing to Surrey’s regard of all tax expenditure provisions as somehow corrupt, dangerous, and evil, while provisions not constituting tax expenditures as somehow pure, safe, and good. Shaviro attributes such criticism to Surrey’s rhetorical failure and meritocratic approach that viewed experts as the only ones capable of, and appropriate for, establishing the tax system basic conceptual categories. Surrey hoped that, with the proper presidential leadership, Congress will allow Treasury experts to guide the tax legislative process. Alas, the Carter Administration, to which Surrey served as a consultant, is an illustration of the contrary as it chosen in 1977 to prioritize energy legislation over tax reform and proposed hefty energy tax credits (which later failed to pass). Surrey reported in his memoirs that Treasury department was barely consulted.

Shaviro concludes that is it Surrey’s scientific—rather than his moralist—approach that accredited the tax expenditure analysis as Surrey’s major intellectual contribution to tax policy. He is regarded today as one of the most influential figures in tax history that established the relationship between distributional and allocative objectives. There is no doubt today that Surrey’s renowned reputation, nearly forty years after his death, is in advancing tax policy thinking, as reinforced in his memoirs, amongst other sources.

Here's the rest of this week's SSRN Tax Roundup:

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