Paul L. Caron

Monday, October 2, 2023

Raghavan & Herrine Present Two Papers Today At Loyola-L.A.

Vijay Raghavan (Brooklyn) and Luke Herrine (Alabama) present two papers at Loyola-L.A. today as part of its Tax Policy Colloquium hosted by Ted Seto. 

Raghavan-herrineVijay Raghavan, The Case Against The Debt Tax, 91 Fordham L. Rev. 1849 (2023): 

Americans are increasingly agitating for debt relief. In the last decade, there have been national campaigns to cancel student debt, credit card debt, and mortgage debt. These national campaigns have paralleled local efforts to cancel taxi medallion debt, carceral debt, and lunch debt. But as the public increasingly pursues broad-scale debt relief outside bankruptcy, they face an important institutional obstacle: canceled debt is generally taxable.

The taxability of canceled debt is often raised by opponents as an objection to broad debt cancellation and potentially discounts the value of any debt relief.  The conventional account for why we tax canceled debt is that debt incurred in one year and canceled in a later year reflects an accession to wealth that ought to be taxable.  The conventional account naturalizes the tax in a way that obscures its present function and history.  This Article seeks to clarify its present function and recover its history.

Modern credit markets grew, in part, because of policy decisions in the 1970s and 1980s to manage distributional conflict with credit. As Professor Abbye Atkinson has argued, easy access to credit and a shrinking welfare state meant that credit replaced direct transfers of cash as our primary form of social provision. One consequence of these decisions is that the modern tax on canceled debt functions less as a measure of wealth and more as a punitive tax on excessive debt. This Article situates this shift within the context of larger political changes. In the 1980s and 1990s, Congress made changes to tax administration that operationalized the tax in a way that would primarily affect individual debtors. These changes corresponded to a broader shift in the policymaking landscape toward the redistribution of burdens and risk in society.

This Article suggests that the tax on canceled debt is the product of these broader political forces and not just the internal logic of tax. This reorientation enriches and deepens existing critiques of our tax and financial systems by revealing how the tax on canceled debt contributes to the regressivity and racial inequity of our federal income tax and contributes to what some scholars term the acoustic separation of credit and debt in federal policy. It also suggests that it is time to reconsider the wisdom of taxing canceled debt. And this Article concludes by proposing changes to tax administration and the tax code that would circumscribe the scope of the tax.

Vijay Raghavan & Luke Herrine, Reconsidering the Tax Treatment of COD Income

Under federal tax law, cancelling or abolishing debt generates income, which may be subject to tax. That treatment potentially discounts the value of any debt forgiveness program. As an example, consider the case of New York taxi drivers who went on a 21-day hunger strike for debt relief in the fall of 2021. The drivers were protesting debts incurred because of a bubble in taxi medallion prices. Their action resulted in a program for debt relief but any debt forgiven under the program might be subject to tax. This issue is not unique to the taxi drivers’ campaign. The tax treatment of cancelled debt has posed a problem for campaigns over the past 15 years to cancel mortgage debt, student debt, medical debt, and credit card debt, and countless individual settlements to relieve burdensome debt.

This policy paper makes the case for reconsidering the tax treatment of cancelled debt. The tax on cancellation of indebtedness or COD income is commonly traced to the Supreme Court’s 1931 decision in United States v. Kirby Lumber. For almost a century, scholars have debated the logic and wisdom of Kirby Lumber, its progeny, and Congress’ codification of the tax. These critiques mainly raise theoretical concerns about the justifications for the tax but tend to ignore how the assumptions underlying the tax are inconsistent with the development of debt markets and the way debt functions in the modern economy. Contextualizing the tax reveals how it functions today less as a measure of wealth and more as a punitive tax on excessive debt.

This paper contends both the tax and non-tax critiques of COD income suggest it is time for a more holistic reconsideration of the tax on COD income. This paper offers a few reforms, but also seeks to spur further discussion. The changes include eliminating the information reporting rules for cancelled debt and expanding and simplifying the exemptions for COD income. This paper concludes by considering how these changes might be implemented administratively and legislatively.

Commentator: Shu-Yi Oei (Duke; Google Scholar)

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