Category Archives: Tax Law
Jul 3, 2024 Dorothy BrownTax Law
Professor Richard Winchester’s Essay, A Simple Tax Case Complicated by Race, is a very enlightening and quick read. His Essay details a Tax Court decision about whether a sale of land by a real estate developer is eligible for favorable tax treatment. And while most law students who have taken a single individual income tax class would rightly tell us the answer is no, Professor Winchester takes us through an opinion that finds otherwise—because of race! First, a primer for my non-tax-geek readers.
For most of our modern income tax history, the gain applicable to the sale of capital assets like stock or real estate held by investors, has been eligible for a low, preferential tax rate. Sales of inventory, or property “primarily for sale to customers” on the other hand are taxed at the highest ordinary income tax rates available. Real estate developers therefore are selling property they hold for sale to customers and generally ineligible for the lower, preferential tax rate. Except, Tax Court Judge Withey did not get the memo. Why? Professor Winchester argues that it is because of race. Continue reading "Capital Gains and Race: Through A Different Lens"
Jun 7, 2024 Jon ChoiTax Law
John R. Brooks & David Gamage,
The Original Meaning of the Sixteenth Amendment, __
Wash. Univ. L. Rev. __ (forthcoming), available at
SSRN (February 23, 2024).
The Sixteenth Amendment is one of the most thoroughly studied texts in U.S. federal tax law—economists, historians, and luminaries of constitutional law and taxation have all sliced and diced its meaning for more than a century. Making an original discovery about the historical meaning of the Amendment has consequently taken on the dimensions of a mythic quest, like discovering an Eleventh Commandment or the secret dryer compartment containing all those lost socks.
Remarkably, this is exactly what John R. Brooks and David Gamage accomplish in their timely forthcoming article, The Original Meaning of the Sixteenth Amendment. Brooks and Gamage marshal a wide variety of evidence, including new historical evidence on the technical meaning of “income,” to argue that the income taxable without apportionment under the Sixteenth Amendment includes unrealized gains. This has huge implications for policy, given that many current and proposed taxes are imposed on unrealized gains, including some of the most important recommendations to tax the very rich. Brooks and Gamage’s work is especially timely given that the Supreme Court will rule on Moore v. United States in the next month or so, possibly deciding the constitutionality of taxes on unrealized capital gains—although Brooks and Gamage’s contribution goes far beyond the current case, especially if it is decided on narrow grounds. Continue reading "An Original Take on the Original Meaning of the Sixteenth Amendment"
Apr 19, 2024 Adam ThimmeschTax Law
The stark contrast between the United States’ widespread prosperity and the deep-seated poverty afflicting many of its people and communities underscores the nation’s complex economic landscape. Equally complex are the political and legal landscapes surrounding our nation’s anti-poverty efforts. States currently have much of the responsibility for administering federal anti-poverty programming and for directly serving the people and places suffering from economic hardship. Simultaneously, however, states are restricted in their abilities to pursue social welfare goals because of the mobility of capital and labor within the United States. States have responded to these challenges by turning to investment-based tax credits to drive development, but that approach has been disfavored by many progressives and often fails to deliver help to the in-state people and places in need.
Michelle D. Layser offers a unique assessment of this difficult situation in her recent article, Removing Barriers to State Tax Incentive Reform. In that piece, Layser weaves together her knowledge of the political economy of community development, place-based tax incentives, and the federal constitutional restrictions under which states operate to argue that tax incentives likely remain the best path forward states under current conditions. However, states will need help to overcome some key barriers, including the dormant Commerce Clause, to ensure the success of those programs. Continue reading "Opportunity and Obstacle: State Tax Incentives and the Fight Against Poverty"
Mar 8, 2024 Susan MorseTax Law
Ariel Jurow Kleiman and Shayak Sarkar & Emily Satterthwaite, Taxing Nannies, Loyola Law School, Los Angeles Legal Studies Research Paper No. 2024-03, available at
SSRN (January 26, 2024).
Workers who provide child care in children’ homes—that is, nannies—should almost always be “formal” workers based on existing law. But in fact they are almost always treated as “informal” workers paid off the books and not as employees. Formality would mean more work law protection – that is, from labor, employment, and social insurance law. But it would also mean more income and payroll taxes.
Is going formal worth it?
In Taxing Nannies, Ariel Jurow Kleiman, Shayak Sarkar, and Emily Satterthwaite consider this question from an obvious yet original perspective. They focus on the preferences and welfare of nannies, not hirers. Their empirical work shows that some nannies strongly prefer formality. It also suggests that the market assumes informality and quotes compensation on an after-tax basis. A tax incidence negotiation between nannies and hirers results over how to split the tax burden of going formal, and diverse solutions follow. Continue reading "Going Formal: The Tax Lives of Nannies"
Feb 9, 2024 Charlene D. LukeTax Law
Luís Calderón Gómez,
Whose Debit Is It Anyway?, 76
Tax L. Rev. 159 (2022) availible on
SSRN.
Luís Calderón Gómez asks the question, “Whose Debt Is It Anyway?,” to frame his analysis of a situation that, while common, remains understudied and undertheorized: the tax treatment of debt co-obligors.
Calderón Gómez’s initial contribution is to demonstrate that there is, in fact, a problem. Co-obligated debt offered by corporate issuers alone is “in the hundreds of billions” of dollars under a “conservative estimate” based on SEC documentation. Yet, tax law generally assumes a conceptual paradigm “where one creditor lends money to one borrower.” Calderón Gómez begins the article by illustrating the inconsistent and incoherent tax treatment that results when a loan arrangement departs from this paradigm. Continue reading "The Taxing Puzzle of Co-Obligated Debt"
Jan 12, 2024 Charlotte CraneTax Law
The recent work of David Weisbach and Daniel Hemel, including the Legal Envelope Theorem, engages with traditional questions about tax systems in important new ways. Legal tax scholarship has long explored the interactions between tax law and taxpayer behavior and has often used intuitions from economics in doing so. But only haphazardly has this work touched on the effects of nontax institutions on the functioning of tax systems. The Legal Envelope Theorem looks at these interactions in very deliberate ways.
At the risk of oversimplifying, Weisbach and Hemel’s thesis is that changes in non-tax legal rules and institutions that at first might appear to be undesirable can be desirable when their effects on tax systems are taken into account. More precisely, a nontax change that makes almost no change in overall well-being can make a significant after-tax increase in overall well-being if the non-tax change increases taxable income, increases collection of taxes, or increases potential for redistribution. Continue reading "Identifying and Exploiting the Relationship between Legal Rules and Tax Systems"
Nov 24, 2023 Leigh OsofskyTax Law
Natasha Sarin & Mark J. Mazur,
The Inflation Reduction Act’s Impact on Tax Compliance—and Fiscal Sustainability (2023), available on
SSRN (May 15, 2023).
In the Inflation Reduction Act, Congress made a monumental investment in the IRS, reversing a decades-long trend of inadequate funding. A critical question is: how much was this investment worth? Government scorekeepers came up with a number of about $200 billion (yielding a $120 billion net amount, after taking into account the cost of the increased funding). But, in a new paper, The Inflation Reduction Act’s Impact on Tax Compliance—and Fiscal Sustainability, Natasha Sarin and Mark Mazur argue that these official estimates significantly understate the return on investment in the IRS. They estimate that the funding would enable the IRS to raise at least $560 billion ($480 billion, net) over the next ten years, and that, depending on taxpayers’ behavioral response, it is possible the return may actually be closer to $1 trillion.
Sarin and Mazur’s analysis is compelling for a number of reasons. Sarin and Mazur are highly qualified experts, with a blend of extensive government, as well as academic, and other, experience, including recent stints in the Treasury Department in the Biden Administration, during formulation of the Inflation Reduction Act. Their analysis reflects this deep well of experience and training, in that it draws on government data as well as academic work regarding compliance. The result is a particularly nuanced picture of how the Inflation Reduction Act funding will affect the IRS and its collection capacity. Their conclusion – that the return on IRS funding could be approximately $500 billion in the first decade and $1 trillion in the ten years thereafter – is an important one; so is their description of all the particular ways that the IRS will improve, and why this improvement is an essential part of good governance. Continue reading "Estimating the Return on Investment in the IRS"
Oct 25, 2023 Emily SatterthwaiteTax Law
Following the January release of a groundbreaking study by Hadi Elzayn, Robin Fisher, Jacob Goldin, Thomas Hertz, Daniel E. Ho, Arun Ramesh, and Evelyn Smith and the resulting media, Congressional, and IRS attention, it is now well-known that Black taxpayers are audited at rates three to five times the rates of non-Black taxpayers. The audit study is a landmark both for its results (which contradict past IRS statements) and also for its novel methodology, which uses individually-estimated taxpayer race probabilities to obtain informative bounds on the racial audit rate disparity. In addition to illuminating problematic patterns in current IRS audit selection procedures, the study’s methodology offers promise for the future in investigating other race-based patterns in tax enforcement.
In what non-audit enforcement areas might such patterns arise? Here is where the prescient work of Jeremy Bearer-Friend (as cited in the audit study, P. 41) comes in, building on the work of other scholars working at the intersection of race and tax. In “Colorblind Tax Enforcement,” Bearer-Friend refutes on first principles the now-debunked claim that because the IRS does not collect race data, it cannot discriminate by race when enforcing tax laws. He points out that, for IRS agents, making inferences about the race of a taxpayer on the basis of the information provided on the return (names of taxpayer, spouse, and children, address including zip code, family structure, and occupation) is plausible and probable: “[e]ach of these datapoints can lead to inferences of racial identity in the mind of the relevant IRS personnel, with the combination of data points creating a stronger likelihood of inference” (P. 19). Moreover, at many points in the enforcement process there are telephonic or in-person conferences that allow for further racial inferences. Continue reading "Beyond Audits: Investigating the Role of Race in Various Tax Enforcement Settings"
Sep 27, 2023 Daniel ShaviroTax Law
Bradford DeLong’s career opus, Slouching Towards Utopia, is a very long – although, in my view, consistently illuminating and entertaining – work of economic history that only very briefly, for a few pages here and there, touches on the history of taxation. Why, then, do I regard it as offering a highly suitable subject for a Jotwell Tax column?
The broader answer to this question is that historical context is vital to understanding tax (like other) institutions and ideas and yet often is ignored, other than by tax historians. The narrower answer, illustrating this broad proposition, pertains to the particular context of the great intellectual shifts that have occurred over the last thirty-plus years, not just in legal academic thinking, including in tax, but in American intellectual and political life more generally. Continue reading "The Rise (And Fall?) of Neoliberalism In Tax"
Aug 29, 2023 Adam ThimmeschTax Law
The fiscal federalism literature has long recognized that the mobility of capital and labor counsel toward the use of benefits taxes, like property taxes and fees, at local levels to avoid distortions in the location and amount of economic activity. The strength of this accepted wisdom on tax assignment has changed slightly since the so-called “first-generation theory” of fiscal federalism, but the general notion remains strong that local jurisdictions should not impose income taxes on local business activity, because of the risk of losing tax base. And in an era where workers and businesses are more mobile than ever, a tax on local workforces and business income would seem to be on a particularly poor footing.
In The Surprisingly Strong Case for Local Income Taxes in the Era of Increased Remote Work, Erin Scharff and Darien Shanske provide a compelling counter narrative to this accepted wisdom. In doing so, Scharff and Shanske contribute significantly to the fiscal federalism literature and to the current debates about how the ease with which labor and capital can move in the modern world should shape how governments fund their operations, both within the United States and globally. Continue reading "Taxing the Value of Being Together"
