Tag: Tax Law

The Timing of Tax Transparency – Article by Joshua D. Blank

From Volume 90, Number 3 (March 2017)
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Fairness in the administration of the tax law is a subject of intense debate in the United States. As myriad headlines reveal, the Internal Revenue Service (“IRS”) has been accused of failing to enforce the tax law equitably in its review of tax-exempt status applications by political organizations, international tax structures of multinational corporations, and estate tax returns of millionaires, among other areas. Many have argued that greater “tax transparency” would better empower the public to hold the IRS accountable and the IRS to defend itself against accusations of malfeasance. Mandatory public disclosure of taxpayers’ tax return information is often proposed as a way to achieve greater tax transparency. Yet, in addition to concerns regarding exposure of personal and proprietary information, broad public disclosure measures pose potential threats to the taxing authority’s ability to enforce the tax law.

Given the competing values of accountability and enforcement, what tax return information should be observable by the public? This Article considers the role of timing. The IRS continually engages in enforcement actions ex post—after taxpayers pursue transactions and claim tax positions—such as by conducting audits or negotiating settlements. But it also frequently engages in actions ex ante—before taxpayers pursue transactions and claim tax positions—by issuing advance tax rulings to, and entering into agreements with, specific taxpayers. While current law appears to require public disclosure of certain types of ex ante tax administration, many forms of ex ante tax administration remain concealed from public view. This Article argues that documents related to a specific taxpayer’s tax affairs that reflect ex ante tax administration should be publicly accessible as a means of accountability, but that documents that reflect ex post tax actions should remain private in order to preserve effective tax enforcement. Further, this Article proposes that the public should have access not only to ex ante tax administration actions where the taxing authority grants taxpayers’ requests, but also to those actions where the taxing authority denies such requests, even if it does so without issuing an official written determination, a concept it defines as “dual tax transparency.”

The Article then applies this analysis to several types of ex ante tax administration that are currently obscured by the curtain of tax privacy: withdrawn private letter ruling requests, adverse tax-exempt determination letters, and advance pricing agreements. It concludes by exploring approaches to improving the accountability of the IRS regarding its ex post tax enforcement other than public disclosure of tax return information.

 

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Capital Taxation in an Age of Inequality – Article by Edward D. Kleinbard

From Volume 90, Number 3 (March 2017)
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The standard view in the U.S. tax law academy remains that capital income taxation is both a poor idea in theory and completely infeasible in practice. But this ignores the first-order importance of political economy issues in the design of tax instruments. The pervasive presence of gifts and bequests renders moot the claim that the results obtained by Atkinson and Stiglitz in 1976 counsel against taxing capital income in practice.

Taxing capital income is responsive to important political economy exigencies confronting the United States, including substantial tax revenue shortfalls relative to realistic government spending targets, increasing income and wealth inequality at the top end of distributions, and the surprising persistence of dynastic wealth. It also responds to a new strand of economic literature that argues that “inclusive growth” leads to higher growth.

A flat-rate (proportional) income tax on capital imposed and collected annually has attractive theoretical and political economy properties that can be harnessed in actual tax instrument design. As a proportional tax, it applies at the same marginal and effective rates to both income and losses, thereby preserving the symmetry on which rests the theoretical analysis of returns to risk. A progressive consumption tax, by contrast, abandons this, and in doing so can burden the returns to waiting. Moreover, a flat-rate capital income tax is a progressive tax in application: because only high-ability taxpayers or those who are the beneficiaries of gifts and bequests can afford to defer consumption indefinitely, the increasing “tax wedge” on savings over time introduces a measure of top-bracket progressivity along the margin of time. In other words, what some see as the fatal flaw of capital income taxation in fact is a feature, not a bug.

The separation of a taxpayer’s income into capital and labor components, and the application of separate rate schedules to each, are hallmarks of “dual income tax” instruments, of the sort explored in practice most comprehensively by several Nordic countries. Building on earlier work on dual tax systems and capital income tax structures, I propose a novel and reasonably accurate flat-rate tax on capital income that builds on well-understood tax policies, that achieves integration between corporate and investor income, and that successfully distinguishes capital from labor income. I term this tax instrument the Dual Business Enterprise Income Tax, or Dual BEIT. Its virtues include minimizing the relevance of the realization doctrine, eliminating distinctions across different forms of capital investment, and offering business enterprises a profits (consumption) tax environment in which to operate.

To make the project more tractable, the two themes just advanced—the why and the how of the Dual BEIT—are each the subject of a separate article. This is the “why” Article. Together, the two demonstrate that the Dual BEIT satisfies theoretical concerns, once those are filtered through the political economy imperatives of the quotidian world, and is straightforward to implement and administer.

 

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Citizen Taxation – Article by Ruth Mason

From Volume 89, Number 2 (January 2016)
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The United States is the only country that taxes its citizens’ worldwide income, even when those citizens live indefinitely abroad. This Article critically evaluates the traditional equity, efficiency, and administrability arguments for taxing nonresident citizens. It also raises new concerns about citizenship taxation, including that it puts the United States at a disadvantage when competing with other countries for highly skilled migrants.

 

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The Stamp Act and the Political Origins of American Legal and Economic Institutions – Article by Justin DuRivage & Claire Priest

From Volume 88, Number 4 (May 2015)
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The American colonial protest against Parliament’s Stamp Act was a landmark event in the history of the Founding Era, propelling the colonies toward independence. To date, scholars have focused on colonists’ constitutional objections to the Stamp Act. Yet, the Stamp Act taxed legal and institutional services and, as this Article describes, the opposition to the Stamp Act also focused on defending low-cost institutions that served local communities. It examines the arguments for and against the Stamp Act as revealing two distinct visions of the role for institutions in economic growth. It suggests that American independence affirmed colonists’ commitment to low-cost locally managed institutions within their developing economy.

 

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The Good, the Bad, and the Ugly: The Political Economy and Unintended Consequences of Perpetual Trusts – Note by Daniel J. Amato

From Volume 86, Number 3 (March 2013)
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President Obama’s 2012 and 2013 budget proposals contained similar provisions to tax perpetual trusts ninety years after their creation at the maximum Generation-Skipping Tax rate of 55 percent—a move consistent with arguments by law professors and the American Law Institute. These proposals went little noticed except by investment publications, which advised individuals to create perpetual trusts before they could be taxed. Despite the support of the legal academy, the president’s proposal stands little chance of success. Nor should it come as a surprise that a tax proposal with little chance of success was proposed at the beginning of an election cycle—instead, as this Note explains, it should be expected.

Perpetual trusts, facilitated by the 1986 enactment of the Generation-Skipping Tax Exemption (“GST Exemption”) and the subsequent repeal of the rule against perpetuities (“RAP”) in most states, allow individuals to place money into trusts where it grows free of intergenerational transfer taxes forever. Prior to the 1986 tax reform, individuals could use successive life estates in trust to transfer money to their grandchildren without triggering the estate tax. To close this loophole, Congress enacted the Generation-Skipping Tax (“GST”) in 1986 to tax transfers to individuals more than one generation removed, and the GST Exemption to soften the taxpayer burden.

 

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The State of Treasury Regulatory Authority After Mayo Foundation: Arguing for an Intentionalist Approach at Chevron Step One – Note by Joana Que

From Volume 85, Number 5 (July 2012)
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On January 11th, 2011, the Supreme Court unanimously held in Mayo Foundation for Medical Education and Research v. United States that all agency regulations, including Treasury regulations, should be afforded the standard of deference set out in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc, a case that prescribed how courts should review agency regulations. Before Mayo, Chevron did not have very much influence in the tax world–Chevron had been cited in only a few Supreme Court tax cases, and the Tax Court continued to cite pre-Chevron authority when evaluating whether to defer to the Treasury’s construction of the Internal Revenue Code (“Tax Code”). Thus, the Mayo decision superseded a line of tax cases, including National Muffler Dealers Ass’n v. United States, which had established a less deferential, tax-specific standard of review.

 

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Taxing Youth: Health Care Reform Writes a Costly Prescription that Leaves the Young and Healthy Paying the Bill – Note by Charles P. Litchfield

From Volume 85, Number 2 (January 2012)
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With the American health care system facing a looming crisis due to unsustainable rates of medical cost inflation, the government has reacted by passing the Patient Protection and Affordable Care Act. While the present ubiquity of third-party payers in the form of health insurance or government programs spawns inefficiencies and perverse incentives that drive market forces to work against, rather than toward, maximum social welfare, the reform bill threatens to exacerbate the very inefficiencies it seeks to avoid. Rather than focusing on controlling medical cost inflation, the bill seeks to include high-risk groups that are normally priced out of the insurance market, thus placing more stress on the payment model. The individual mandate—making health insurance mandatory—ensures that the low-risk young and healthy demographic will bear the cost of this increased burden on the insurance system. This Note examines how the recent health reform bill proposes to restructure the insurance market itself and analyzes the inadequacies of the individual mandate. Further, it briefly explores the constitutional challenges to the mandate and discusses whether the health reform bill is salvageable in light of its deficiencies.

 

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Whose Office Is This Anyway? A Look at the IRS’s New Position on Offshore Lending – Note by William A. Kessler II

From Volume 84, Number 6 (September 2011)
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“Banks don’t lend anymore. Hedge funds have stepped in.” Lee Sheppard wrote these words in 2005, but the financial crisis starting in 2008 has shone a spotlight on this significant change in the reality of modern finance. What role hedge funds may have played in causing the financial crisis is debatable, but few will dispute that U.S. businesses have had trouble finding capital even as the economy, on the whole, has started to recover.

There are many possible contributors to the onset of the capital crunch. Among them are banks, which had difficulties meeting capital requirements, in part because their balance sheets were weighed down by mortgage-backed securities that proved to be less valuable than initially thought, and in part because of changes in accounting rules, as well as increases in minimum capital reserve requirements. The U.S. government and the Federal Reserve responded by combining to invest trillions of dollars to purchase “toxic” securities, guarantee loans, provide additional loans, and make direct capital injections into troubled financial institutions.

 

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