Category Archives: Tax Law

Morality and the 2017 Tax Act

Mar 4, 2019 Susan MorseTax Law

Susan Morse

I am on alert for tax law changes as I teach Federal Income Tax this semester for the first time since the passage of the 2017 tax act. They seem to appear out of nowhere, rather than as part of a predictable pattern. What can explain seemingly disconnected provisions, scattered throughout the Code and enacted without an explicit policy explanation?

Linda Sugin takes on this question in The Social Meaning of the Tax Cuts and Jobs Act, published in 2018 at the Yale Law Journal Forum. Her critical perspective makes an effort to divine the worldview embedded in the TCJA based on the content of the enacted law. Sugin’s engineering effort shows the following “American priorities and values revealed by the TCJA:

1. The traditional family is best;
2. Individuals have greater entitlement to their capital than to their labor;
3. People are autonomous individuals;
4. Charity is for the rich; and
5. Physical things are important.” (P. 404.)

Sugin reviews dozens of provisions to support her arguments. A sampling follows to offer a sense of her argument. Continue reading "Morality and the 2017 Tax Act"

Increasing EITC Take-up in the Age of TurboTax

Feb 15, 2019 Kathleen DeLaney ThomasTax Law

Kathleen DeLaney Thomas

One dilemma for policymakers is how to get people to take advantage of social welfare programs. In the case of the Earned Income Tax Credit (“EITC”), the goal is to encourage eligible individuals to claim the credit on their tax return. Take-up rates for the EITC are quite good (about 80% overall), but ideally would be higher. Typically the approach to increasing EITC take-up is information campaigns, like EITC awareness day. The conventional wisdom has been that the more people know about the EITC, the more likely eligible recipients are to claim it. But is it right that advance notice is important? If people use tax software that will automatically calculate the EITC for them, how important is it that they are made aware of the benefit ahead of time? Perhaps not very, as suggested by Jacob Goldin in his forthcoming article, Tax Benefit Complexity and Take-up: Lessons from the Earned Income Tax Credit.

The key insight from Goldin’s article is that in the modern age, virtually anyone who files a tax return is presented with the opportunity to claim the EITC. This is because the vast majority of taxpayers—96 percent in 2015 according to Goldin—use assisted preparation methods (“APMs”) such as self-preparation software or a tax return preparer. Using either of those methods, it is extremely unlikely to fail to claim the credit accidentally. (Though, as Goldin notes, some taxpayers may consciously choose not to claim the credit even though they are eligible.) The paper’s main conclusion is logical yet important: people who are eligible for the EITC but who fail to claim it are generally people who fail to file returns at all. Thus, if policymakers want to increase EITC take-up, they must increase the filing rate. Continue reading "Increasing EITC Take-up in the Age of TurboTax"

Bridging Exceptionalism and Anti-Exceptionalism with the JCT Canon

Dec 10, 2018 Kristin HickmanTax Law

Kristin Hickman

In its 2011 decision in Mayo Foundation for Medical Education and Research v. United States, the Supreme Court held that most if not all general authority Treasury regulations carry the force of law and, thus, are eligible for judicial review and deference under the Chevron standard. In reaching that conclusion, the Court reiterated its general presumption in favor of “maintaining a uniform approach to judicial review of administrative action” and, correspondingly, rejected “an approach to administrative review good for tax law only.” But the Court qualified that presumption at least a bit—noting the taxpayer’s failure to “advance[] any justification for applying a less deferential standard of review to Treasury Department regulations,” and thereby suggesting that good reasons for tax exceptionalism might exist on another occasion. With Congressional Control of Tax Rulemaking, Clint Wallace advocates at least some amount of tax exceptionalism in judicial review of Treasury/IRS regulatory interpretations of the Internal Revenue Code. Or does he?

In the wake of Mayo, scholars writing about tax administration have divided loosely into exceptionalist and anti-exceptionalist camps. The exceptionalists may not reject Mayo’s particular holding, but they otherwise prefer the pre-Mayo status quo and seek to justify tax exceptionalism from one or many administrative law requirements, doctrines, or norms. The anti-exceptionalists see independent value in bringing tax administration more into line with general administrative law, so they would impose a higher bar—e.g., an affirmative statement of congressional intent—before permitting tax exceptionalism. Obviously, this characterization is over-generalized, as it is more accurate to portray exceptionalism and anti-exceptionalism as two ends of a continuum rather than a pure binary choice. Still, much scholarship in this area adopts a tone and reflects assumptions and preferences that clearly lean one way or the other. And yet, although Wallace’s article advances an exceptionalist argument, to the eye of this anti-exceptionalist writer, his reasoning and analysis suggest that the two camps may not be so far apart after all—at least not with respect to statutory interpretation. Continue reading "Bridging Exceptionalism and Anti-Exceptionalism with the JCT Canon"

Learning from Our Mistakes

Nov 13, 2018 Charlotte CraneTax Law

Charlotte Crane

The income tax is a formidable institution in American political life. Understanding the many facets of its current form is a challenge, given the myriad forces that have interacted in its evolution. Larry Zelenak, in his book Figuring Out the Tax, published in January 2018 as part of the Cambridge Tax Law Series, offers the reader substantial insights into these forces through a close examination of the early history of the income tax in the United States.

Zelenak does not attempt to outline the entire history of the income tax, or even its complete history during the two decades following 1913, with which he deals most completely. Zelenak instead has chosen to provide the history of a number of discrete aspects of the income tax: the use of withholding for income streams other than wages, the step-up of basis at death, the use of value rather than basis to define the charitable deduction, the allowance of investment losses, the special treatment afforded families, the omission of imputed rental values enjoyed by homeowners and the surprisingly favorable treatment of earned income. These topics are not intended to be exhaustive or even representative; instead they were chosen because they had not, in Zelenak’s view, been the subject of adequate earlier treatments. Continue reading "Learning from Our Mistakes"

Fleshing Out Centralized Review of Tax Regulations

Oct 11, 2018 Leigh OsofskyTax Law

Leigh Osofsky

In a new article, Centralized Review of Tax Regulations, Clinton Wallace addresses the timely question of whether and how tax regulations should be subject to centralized review by the Office of Information and Regulatory Affairs (“OIRA”) in the Office of Management and Budget (“OMB”). While OMB review has become standard for “significant” or “economically significant” agency regulations, tax regulations have long avoided review even when they meet this standard, raising, yet again, the question of whether tax should be different than other areas of administrative law. In addition to helping us understand the historical lack of centralized review of tax regulations, Wallace’s paper does the important job of showing the inadequacy of the new framework for centralized review, and pushing us to recognize the complex questions that have to be answered to develop objective criteria for review.

Wallace first describes how the history of tax regulations not being subject to OIRA review is tied in with the long and much discussed (at least in tax circles) story of tax exceptionalism. Historically, Treasury and the IRS have taken the view that most of their regulations were merely interpretive and thus not subject to various requirements such as notice-and-comment or centralized review. This has resulted in the anomaly of tax regulations not being subject to the various stages of OIRA review even in cases in which other agencies, with joint drafting responsibility, have subjected that very same set of regulations to centralized review. Wallace also describes how the anti-inversion rule, the one tax regulation that has been subject to centralized review recently, was only reviewed in a relatively superficial way, lacking the type of rigorous analysis prescribed by OIRA’s own rules. Continue reading "Fleshing Out Centralized Review of Tax Regulations"

How Inevitable Is Corporate Tax Competition?

Sep 12, 2018 Daniel ShaviroTax Law

Daniel Shaviro

How much profit-shifting, from high-tax to low-tax countries, do multinational companies (MNCs) engage in? The question is hard to answer, for both theoretical and empirical reasons. The “true” geographical source of profits earned by MNCs on their global production and sales activities would often be theoretically ambiguous even if their actions and decisions were completely transparent. In addition, however, not only is there a large gulf between what they know and what we (or the tax authorities) know, but relevant economic data may either be unavailable or reflect formalistic reporting conventions.

A recent literature review by Dhammika Dharmapala reports that, in the “more recent empirical literature, which uses new and richer sources of data, the estimated magnitude of [profit-shifting] is typically much smaller than that found in earlier studies.” ¹ James R. Hines goes further, asserting that profit-shifting is “notably small in magnitude,” and that any public (or even scholarly) impressions to the contrary merely reflect journalistically-driven over-excitement in response to a few “distasteful anecdotes of crass tax avoidance.” ²

But what if such conclusions—which are not, however, universal ³ —reflect data limitations? An important new National Bureau of Research Working Paper by Thomas Tørsløv, Ludvig Wier, and Gabriel Zucman (“Zucman et al”) makes novel use of macroeconomic data, comparing the wages and profits of MNCs’ foreign affiliates to those of local companies, both in tax havens and high-tax countries, to reach very different conclusions. Zucman et al find that forty percent of MNC profits are shifted to low-tax countries in a typical year, and that this estimate is conservative given the likely impact of statistical gaps. (P. 26.) Continue reading "How Inevitable Is Corporate Tax Competition?"

A Challenge to Optimal Tax Orthodoxy

Jul 30, 2018 Theodore P. SetoTax Law

Theodore P. Seto

In “Is Efficiency Biased?,” Zachary Liscow explores the canonic optimal tax claim—sometimes known as the “double distortion premise”—that non-tax rules should be structured efficiently, without regard to distributional consequences, and that tax and transfer rules should then be used to offset any resulting negative distributional consequences and make such further distributional adjustments as are necessary to maximize aggregate social welfare. This standard claim assumes that “if the tax system achieves the appropriate distribution of income, then the distributive impacts of non-tax policies do not matter.” Ultimately, claim proponents conclude, “everyone can be made better off through efficient non-tax policies, plus taxes and transfers.” The foregoing paraphrases are Liscow’s; for a defense of the claim itself, see Louis Kaplow & Steven Shavell, Should Legal Rules Favor the Poor? Clarifying the Role of Legal Rules and the Income Tax in Redistributing Income and Why the Legal System Is Less Efficient than the Income Tax in Redistributing Income.

Liscow asks the reader to consider a different possibility: that for a variety of reasons the tax system may not actually achieve an optimal distribution of income. If so, Liscow notes, then policies consistent with the double distortion premise will not maximize aggregate social welfare—indeed, they may produce markedly suboptimal results. Part of the problem, he observes, is that efficient non-tax policies are not generally “legal entitlement neutral”—that is, equally likely to favor rich and poor. This follows from the fact that Kaldor-Hicks efficiency “measures the willingness to pay of the parties affected by a policy and then chooses the policy that maximizes the sum of the willingness to pay of those parties” and that the wealthy tend to be willing to pay more for public goods and other legal entitlements. Continue reading "A Challenge to Optimal Tax Orthodoxy"

The Ability-to-Pay Principle and the Counterintuitive Distributive Justice Analysis of Alimony Payments

Jul 2, 2018 Neil H. BuchananTax Law

Neil H. Buchanan

The tax bill that Republicans in Congress passed, and that Donald Trump signed in December 2017, might end up being one of the shortest-lived tax laws in U.S. history. Not only are large elements of it explicitly temporary, but the political moment that led to its passage seems already to be passing, quite likely to be followed by a time when progressive tax policy will once again be politically viable.

However, even if this bill lapses or is repealed (in whole or in part), Alice Abreu provides an important contribution to our understanding of what just happened in Tax 2018: Requiem for Ability to Pay. The title of the article telegraphs the importance of the issue that she identifies as the most unfortunate aspect of the new tax law. Whereas objective analysts knew that the bill’s changes would make the tax system less progressive than it had been, Abreu explains that seemingly unrelated elements of the bill add up to a repudiation of the very idea of progressive taxation. Continue reading "The Ability-to-Pay Principle and the Counterintuitive Distributive Justice Analysis of Alimony Payments"

Rules vs. Standards

Jun 7, 2018 Alice Abreu & Richard GreensteinTax Law

Alice Abreu

Richard Greenstein

Professor Sarah Lawsky (Northwestern) has written a fascinating and thought-provoking essay on the logic of statutory interpretation—specifically as it applies to the Internal Revenue Code. Notwithstanding a long tradition of scholarship addressing the interpretation of legislative texts in general, careful attention to interpretation of the Code has received comparatively little attention. An important reason for this, as we have argued in previously published articles, has been the tendency to frame Code provisions as rules and to apply them deductively to the facts of particular cases. Such a practice pushes in the direction of a more-or-less mechanical interpretation of the Code, which in turn makes questions regarding statutory interpretation seem fairly uninteresting. Professor Lawsky’s essay engages directly and critically with this practice.

Professor Lawsky argues that while the application of statutes involves “rule-based reasoning,” it is “not best understood as merely deductive.” Rather, the proper logical model for understanding statutory reasoning is what Professor Lawsky calls “default logic.” She argues that application of the Internal Revenue Code does not proceed as the direct, deductive application of an individual statutory provision to a set of facts; rather, the structure of the Code comprises two different orders of rules: (1) “default rules” (if-then rules) and (2) priority rules (rules that establish the “relationship between” and the “relative priority of” the default rules). As an example, Professor Lawsky applies this more complex rule structure to Section 163(h) of the Code (which permits a deduction for home mortgage interest), and argues that default logic “more accurately reflects rule-based legal reasoning as actually practiced by lawyers, judges, and legislative drafters.” Continue reading "Rules vs. Standards"

Understanding Tax Provisions in M&A Agreements

May 9, 2018 Andrew HayashiTax Law

Andrew Hayashi

In Private Benefits in Public Offerings, Prof. Shobe describes the emergence and evolution of a fascinating term in initial public offerings: tax receivable agreements (TRAs). These agreements reserve for the pre-IPO owners of the business the economic value of certain tax attributes that are either created in the course of the IPO or which were created over a course of years before the IPO. TRAs are contracts between the post-IPO corporation and the pre-IPO owners, pursuant to which the corporation makes distributions to those pre-IPO owners as tax assets are used. In one variation, pre-IPO owners receive the economic benefit of basis step ups that arise in certain “turbocharged” IPOs, and in other variations the pre-IPO owners receive the economic benefit of net operating losses and historical basis in the corporation’s assets.

Shobe then goes on to evaluate the fairness of these agreements. One view that motivates her discussion is that tax assets are underpriced in IPOs, and that TRAs are one way of ensuring that the pre-IPO owners receive a “fair price” for these assets. The opposing view is that the tax assets are properly valued in IPOs already, so that the TRAs allow pre-IPO owners to extract a greater purchase price from new investors than they otherwise would, and perhaps should.

One important contribution of the paper is to describe how these agreements work, and to document how they have both proliferated and mutated into different forms. Shobe teaches the reader a great deal about this feature of IPOs and make some important observations about how they operate. Her work raises the question of why certain variants of the TRA were adopted in some IPOs and other variants were adopted in others, and why TRAs that convey the benefits of net operating losses and historical basis have become increasingly popular over time. Exploring the relationship between the form of the TRA and other characteristics of the IPO might help explain what function they serve.

Continue Reading “Understanding Tax Provisions in M&A Agreements”