Paul L. Caron

Friday, December 8, 2023

Weekly SSRN Tax Article Review And Roundup: Saito Reviews Bearer-Friend’s Paying For Reparations

This week, Blaine Saito (Ohio State; Google Scholar) reviews a new work by Jeremy Bearer-Friend (George Washington; Google Scholar), Paying for Reparations: How to Capitalize a Multi-Trillion Reparations Fund, 67 How. L.J. __ (2024).

Blaine saitoEven well-meaning liberals who support the idea in concept find reparations for slavery a difficult issue because question where we would get the money. The costs of paying the descendants of those enslaved, even on a conservative estimate, stems in the trillions of dollars. In his piece, Paying for Reparations, Jeremy Bearer-Friend proposes a novel solution; we can pay for it through a proportionate equity share of large businesses in the U.S. The piece builds on his prior work on in-kind taxation. The article produces a thoughtful outline toward quickly capitalizing a trillion-dollar reparation fund.

Professor Bearer-Friend does not seek to justify reparations. But he shows how in-kind transfers work well with two of the key justifications for reparations: distributive justice and corrective justice. Having a fund of in-kind transfers can address the distributive justice concerns because of the strong correlations between race and wealth. It also serves the goals of corrective justice because it provides redress for a significant economic harm upon which a great deal of the U.S. economy was built.

Bearer-Friend then works through the different options for funding reparations. He shows why taxation is one appropriate mechanism. Taxation is a key part of the state’s financing of spending for its various ends. He rejects two counterarguments here. First, there is the concern that the innocent are paying for these sins. He response though that government always satisfies judgements for wrongs from taxpayer money and reparations are functionally working in that matter. Second, he rejects the notion that the beneficiaries may also be harmed by a broad tax base. The reason is that the people who are benefit will have a greater benefit that they receive than the incidence of any taxation. Indeed, this too happens with other taxes.

The heart of the piece is the outline of the tax and fund. The basic notion is that to capitalize a reparation fund quickly, a one-time remittance of corporate equity at a rate of 2.2% or greater could raise over $1 trillion in one year. The tax would be assessed on publicly listed companies on U.S. exchanges. The liability would also be assessed either once for current firms or once for current firms and retained for any newly created firms. Assessment once on current firms recognizes that almost every part of our economic system and society is based on the ill-gotten gains of slavery. If one decided to extend it to newer firms, one recognizes the fact that these debts are almost unrepayable as well as serving as an anti-abuse measure to firms waiting for the assessment period to close before doing an IPO.

For the character of the shares, the shares remitted to the fund should match the proportions and character of outstanding shares. The shares the fund would then have s similar proportions of common to preferred stock, convertible to nonconvertible stock, restricted to unrestricted stock, and stock with buyback options to those without. Additionally, par values of shares should match the par value of the stock on the market in proper proportions or be set to zero. The goal of all of these is to have the tax used to fund reparations truly hold a representative sample of the market.

The rate should be based on the size of the fund. But a relatively low rate can achieve significant ends. A rate of 2.2% would create fund of over $1 trillion. Because it is low, a rate of 2.2% or slightly higher, would limit distortion.

Since the fund is a large fund, there are also governance issues. The key is to create a board that allows for self-determination for the fund beneficiaries. The reason is that this is important is that it directly counters the harm of slavery where such self-determination was disallowed.

Bearer-Friend points out that this mechanism and fund is not radical. First, within the private sector, companies are often issuing and buying back shares. Shares are also often used for “payment” like with stock plans for employees to stock-for-stock mergers.

Additionally, having government entities running such a fund mimics a sovereign wealth fund. That structure is also quite common, and the fund can build off of the best design principles here.

Bearer-Friend also deftly responds to numerous critiques. Perhaps most important, at least in terms of practicalities, are avoidance and market effects. With respect to avoidance, the fact that what the fund holds is proportional to all outstanding shares limits some gaming. Additionally, there could be complementary taxes on non-publicly traded firms and exit taxes on firms that choose to leave U.S. exchanges.

As for market effects, the tax does create an incentive for firms to go private and de-list. That said, there are ways to create parity between private firms and public firms. Some options include Brian Galle, David Gamage, and Darien Shanske’s ULTRA proposal, a similar mirroring of ownership interests in non-public firms, or a cash payment. Additionally, while it could hamper future listings, the draw of U.S. capital markets is still quite strong.

What this piece does well is to take seriously that we need to talk about practical matters now if we even want to think about reparations. As noted above, one of the primary objections to reparations is where we will get the money. By providing such a proposal, Bearer-Friend addresses those concerns head on. He shows that with careful thought to design and institutions a tax can create a fund of sufficient size at sufficient speed.

The piece then forces us to address the question that many of us would rather avoid—do we provide reparations for the original sin of slavery? That question, which Bearer-Friend takes as a given and answers with a yes, is likely far more uncomfortable for most people. It forces us to confront unsavory facts about the American past. It makes us question how we are all complicit in perpetuating this legacy. It forces us to reckon with the past and ongoing problems of the unique contours of race in American society.

But ultimately, even in this polarized environment, I remain hopeful by work like Bearer-Friend’s. By removing a key objection, it makes us lay our priors clearly on the table. We can then engage in what is a more open and honest debate and dialogue on these matters. After all, the only way to move forward on these issues is to talk and work through them. And that is a bigger contribution of this piece. It forces us to have an honest conversation and asks us to act in reckoning with our original sin.

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

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