Handbooks are the best. A good one tells you something about how the discipline is organized, identifies major debates, showcases thoughtful researchers, and captures the momentum of the field. Brauner’s editorial work on the Research Handbook on International Taxation achieves all those advantages.
The volume has twenty chapters, organized in five parts. Part I, Fundamentals, digs into some of the issues that situate the discipline as a whole. Is there such a thing as international tax law? How did we get here? Who is responsible? And is there an international doctrine of tax fairness that can serve as a platform for constructive engagement?
Part II samples some of the major doctrinal building blocks. Given the breadth of possible topics, selection was necessary, and it would be impossible to do more than tease the reader in this part. Naturally there are chapters on the taxation of employment and services. The collection focuses in on the major challenges introduced by the transfer of goods and services between related entities (transfer pricing). And because everyone is always interested, Part II concludes with a chapter on the high-stakes game of taxing international entertainers and sportspersons.
In Part III four chapters pick up thorny and contested international tax issues of the day. Should countries work together to reduce tax arbitrage and competition? Have our stylized assumptions about how to measure and allocate value outlived their usefulness? Do we have a shared understanding of how tax treaties should be read and interpreted? And are there ways to resolve disputes between countries that adequately address the power imbalances between the country-players?
Part IV is a creative and unexpected addition – external perspectives that inform the international tax system. These perspectives are labelled “feedback systems”. The chapters look to political science, international trade law, international environmental law, and comparative law to see how those systems affect international tax law. How do we explain global tax governance? How do international tax and international trade law co-exist and are the destined to work at cross-purposes? Is there a role for international taxation in environmental protection? And what is the potential for the study of international tax systems in comparative context?
Not surprisingly, the collection ends with four chapters that stare into the future. Is there hope for greater multilateralism? How should we deal with illicitly obtained information? What is the effect of a rise in and changes to the type of human movement between countries? And – everyone’s favorite – are tax robots part of the solution?
After reading the collection, you’ll know something of the distinctions of the discipline. It continues to suffer from some lack of identity and its history of political maneuvering and power imbalance has created path dependencies that resonate through modern debates. International tax systems cannot be abstracted from other major social, economic, ecological and political systems. We struggle to come to grips with a shared sense of what is fair. And it’s definitely clear that scholars of international tax ask rich, juicy, seemingly unsolvable questions as part of their daily bread.
On showcasing thoughtful researchers, the collection is a tour de force. Brauner is a brilliant curator. Chapters were contributed by scholars in the US, Spain, Canada, Israel, Germany, Brazil, Italy, the UK, Australia, Serbia, Austria, and Poland. The list is not quite half women, but it’s not far from it. And although most of the contributors are distinguished senior scholars – leaders in their fields – there are a few emerging voices that showcase the promise of the field.
As for momentum, when I first started reading work on international tax in the mid-1990s, it felt like you could read almost everything written in a couple of devoted years. Now it’s impossible to keep up with the research and policy reports that are produced each year. The world of international tax is exploding with new players and new ideas. The stakes are higher than ever. And so is the need for a handbook. Especially one this good.
Ethan LaMothe & Donna Bobek, Are Individuals More Willing to Lie to a Computer or a Human? Evidence from a Tax Compliance Setting
, 167 J. Business Ethics
157 (2020), available at ResearchGate
Imagine your accountant asks you if you earned any income that wasn’t reported on a 1099 or W-2 this year, and you know that you have an extra $5000 of such income. Do you tell her? Probably. For starters, you might be worried that she is going to be suspicious if you lie to her. Something in your voice might give it away, or perhaps your income this year is lower than last year and she wants to know why. Further, you might have developed a rapport with your accountant, and lying to her might cause psychological discomfort.
Now imagine that you are debating whether to report the same income without an accountant’s help, using tax return preparation software. The software isn’t suspicious of your omission and doesn’t harbor any ill feelings about whether you are telling it the truth. In that case, you might be more likely to lie and not report the income. A fascinating new study by Ethan LaMothe and Donna Bobek confirms this intuition. In a survey of 211 participants, LaMothe and Bobek find that individuals may be more willing to lie to tax preparation software than they are to a human tax return preparer.
Survey respondents were presented with a hypothetical scenario where a taxpayer had earned $5000 of unreported income and was asked, by either a tax software program or a human preparer, if she had any additional income to report. The subjects were then asked how likely they thought it would be for the taxpayer to report all or none of the income. Those presented with the tax software scenario were significantly more likely to think the income would go unreported as compared to the human tax return preparer scenario.
LaMothe and Bobek posit two explanations for this increased willingness to lie to tax preparation software. First, people may perceive that human tax return preparers are more likely to detect a lie than tax software, noting that tax software programs are not designed to try to detect deception. Second, the authors hypothesize that individuals will feel greater “social presence” if they are dealing with a human, which may deter them from lying. The idea of social presence is that the salience of the relationship with the other person may make the psychological cost of lying higher. In other words, it may be harder to lie to a human in a social interaction than it is to lie to a cold, unfeeling machine. Further survey questions confirmed that participants generally believed that a human tax preparer would be more likely to detect deception than software, and there was higher social presence in the interaction with the human preparer as compared to the software. Social presence was gauged by asking participants Likert-scale questions rating whether the interaction with the preparer/software was cold-warm, impersonal-personal, passive-active, as well as asking whether there was rapport with the preparer/software and whether there was anonymity.
The study, like any survey, is not without limitations (as acknowledged by the authors). Survey participants answered questions about a hypothetical taxpayer, which may not accurately reflect real world behavior. It’s possible, for example, that many taxpayers report cash income on tax software regardless of whether the software can detect the omission or regardless of personal interaction. On the other hand, the effects of human interaction on taxpayer’s willingness to lie may be even stronger than the survey results suggest. This is because survey participants read about a fictional email interaction with a return preparer, whereas actual taxpayers often have live conversations with their tax return preparers.
This article should be of great interest to tax compliance scholars and those interested in the impact of technology on the tax system. As LaMothe and Bobek note, policymakers “should consider the tradeoffs inherent to tax software usage and perhaps view preparation method as a relevant risk factor when developing enforcement strategies.” The study also has interesting implications for tax software design. While it may be impossible to replicate true human interaction, software designers could consider ways to compensate. For example, the author’s findings arguably support proposals to make ethics more salient when individuals use tax software (such as those found here, here, and here). While automated tax preparation has tremendous efficiency advantages, the potential compliance costs of using tax software should not be overlooked.
Cite as: Kathleen DeLaney Thomas, Your Tax Software Doesn’t Know You’re Lying
(March 11, 2021) (reviewing Ethan LaMothe & Donna Bobek, Are Individuals More Willing to Lie to a Computer or a Human? Evidence from a Tax Compliance Setting
, 167 J. Business Ethics
157 (2020), available at ResearchGate), https://tax.jotwell.com/your-tax-software-doesnt-know-youre-lying/
Jeremy Bearer-Friend, Should the IRS Know Your Race? The Challenge of Colorblind Tax Data
(Nov. 18, 2020), available on SSRN
The summer of 2020 opened the eyes of many to the concept of systemic racism, and some even started looking in unlikely places – like tax law. Senator Sherrod Brown (D-Ohio) acknowledged in a June 2020 hearing that “Congress writes the tax laws. If there are ways that our current tax code exacerbates racial inequity, then it’s our job to fix it.”
Senator Brown’s articulated vision will be difficult to achieve because the Internal Revenue Service (“IRS”) does not collect or publish statistics by race. I confirmed this fact in a telephone interview with an IRS employee when I was writing one of my first pieces about systemic racism and tax policy over two decades ago. I was most interested in the distribution question – whether or not taxpayers were treated differently by race. (The answer is yes — they are treated differently. I write about this in a forthcoming book, The Whiteness of Wealth: How the Tax System Impoverishes Black Americans—And How We Can Fix It.) But equally important questions were asked and answered by George Washington University Associate Professor of Law Jeremy Bearer-Friend, in his article: Should the IRS Know Your Race? The Challenge of Colorblind Tax Data.
Those questions included: (i) how the IRS came to ignore statistics on race; (ii) why is tax colorblind?; and (iii) how did tax become colorblind? In other words, how is it that our federal government that collects and publishes an enormous amount of information by race has never published tax statistics by race, whether we are talking about the IRS Statistics of Income Division (“SOI”), the Treasury Office of Tax Analysis (“OTA”), or the Joint Committee on Taxation (“JCT”)? I had glided over these.
It is a brilliant work of legal scholarship documenting the long history of the federal government’s fairly consistent failure to provide tax statistics by race. His painstaking research included not only combing through a myriad of forms and reports looking for race and ethnic data, but also using freedom of information act requests. (P. 16.) But the article’s most important contribution lies in the even-handed approach he takes as he provides potential explanations for the colorblind policy and that policy’s equally “troublesome consequences.” (P. 66.)
Professor Bearer-Friend’s research documents the history of the federal government’s colorblind approach in its publication of tax data. Here he becomes a world-class detective, scouring through a hundred years of tax reports, forms, etc. to document the exceptional nature of how tax data is treated when compared with non-tax data where publishing race and ethnicity have been the long-established norm. He highlights the serious problem that the lack of data brings – namely that it renders invisible any racially disparate impact of our tax laws, which means the likely continuance of such disparities. For example, he compares the tax treatment of race by the SOI, OTA, and JCT with other government agencies like the United States Census Bureau that has included questions on race since 1790, or the Social Security Administration which began collecting such data in 1936. In short, other agencies collect data on race, but the IRS does not. In 1977, the Office of Management and Budget issued a directive to “standardize federal statistics and administrative reporting on race collected and ethnicity.” (Pp. 3-4.) But this did not trickle down to our tax administrators.
Professor Bearer-Friend points out how the lack of racial and ethnic data collection and/or publication is all the more exceptional given how the SOI, OTA, and/or JCT have included published analyses based on gender and age. He observes how their tax staff have ironically “described their own awareness of the importance of racial and ethnic inequality in the same tax analysis publications in which they omit race and ethnicity.” (Pp. 8-9.) The one consistent exception on race and the IRS is when it comes to reporting statistics of its own workforce. The IRS began this practice in 1962. Professor Bearer-Friend points out the leadership of the IRS in the 1960s was actively trying to integrate its southern offices. The IRS collected data on race of its personnel to comply with Title VII of the Civil Rights Act of 1964. Yet it wasn’t until 2015 that the IRS proposed regulations implementing Title VI of the same Civil Rights Act and those regulations were finalized in 2016.
Two contrasting examples demonstrate Professor Bearer-Friend’s thesis that colorblindness was a choice. One JCT project that studied future taxable estates drew on census data which included population estimates by race and ethnicity but then did not include race or ethnicity in its published projections. The JCT had the race data but didn’t do anything with it. The second example comes from an OTA working paper in 1977 on income averaging that did include race data.
The harm done by not unpacking effects of tax policy on different racial and ethnic groups is staggering given the ubiquitous nature of tax policy and the “breadth of the taxing power” (P. 38.) And as Professor Bearer-Friend correctly observes, the government’s failure to deal with race has not stopped racially discriminatory harms. Many of these harms have been documented by scholars.
Professor Bearer-Friend concludes that there are three reasons why the colorblind approach continued for over 100 years: (i) privacy requirements afforded individual tax return data; (ii) path dependence, meaning that once colorblindness got a good head of steam, a course correction was difficult; and (iii) the belief long held by tax administrators in the “racial neutrality of tax laws.” (P. 66.)
Professor Bearer-Friend discusses the pros and cons of the different ways of collecting race and ethnicity tax data. Should a box be added to the 1040? Should existing collectors of race data add 1040 questions to their surveys? Should the IRS add race and ethnicity questions to their existing surveys?
Making race and tax data publicly available is a choice whose time has come. In January President Biden signed an executive order requiring that racial equity become a focus of all government agencies. Professor Bearer-Friend’s path-breaking article can serve as a guide in the area of tax administration.
Cite as: Dorothy Brown, Race and Tax: Colorblind No More
(February 25, 2021) (reviewing Jeremy Bearer-Friend, Should the IRS Know Your Race? The Challenge of Colorblind Tax Data
(Nov. 18, 2020), available on SSRN), https://tax.jotwell.com/race-and-tax-colorblind-no-more/
Clint Wallace’s short essay, The Troubling Case of the Unlimited Pass-Through Deduction: Section 2304 of the CARES Act, is well worth a read for tax scholars, non-tax scholars, and non-scholars alike. The essay addresses what may be thought of by some as one of the “esoteric” provisions of the CARES Act. The upshot is that, by using the very esoteric nature of the provision as cover, Congress slipped costly, regressive, unjustifiable legislation into the CARES Act, which was sold to the public as progressive, emergency relief from the COVID-19 disaster.
The essay is important for a number of reasons. First, it educates readers about how the CARES Act resurrects an unlimited pass-through deduction for high-income taxpayers. Second, by doing so, it helps readers understand how the CARES Act was actually regressive in important ways. Third, it more broadly cautions readers about some of the unseemly aspects of legislation, in which legislators benefit favored groups in ways that the public is unlikely to understand. Finally, by writing this short essay, Wallace models how scholars have a duty to shine a light on these aspects of the legislative process.
As Wallace describes, section 2304 of the CARES Act suspends section 461(l) of the tax Code. Passed as part of the Tax Cuts and Jobs Act in 2017, section 461(l) of the tax Code limited the ability of high-income taxpayers to use losses from pass-through businesses to offset other income. While not free from doubt, section 461(l) seemed to have been passed as a way to pay for other tax breaks for businesses enacted as part of the Tax Cuts and Jobs Act, including the qualified business income deduction. In any event, section 461(l) was clearly costly for high-income taxpayers and increased the overall progressivity of the Tax Cuts and Jobs Act. But section 2304 of the CARES Act undid such progressivity, and at a high cost. As Wallace details, congressional staff estimated that the revenue loss from section 2304 of the CARES Act was $70.3 billion in 2020. By definition, this lost revenue to the government all benefitted very high-income taxpayers, who were earning more than $1 million.
By exploring these details about section 2304 of the CARES Act, Wallace undermines the myth that the CARES Act was progressive legislation that helped low and middle-income individuals survive the COVID-19 economic disaster. The CARES Act did include large cash payments to struggling Americans, increased unemployment payments, and offered a forgivable loan program. However, Wallace describes that the over $70 billion in direct payments to some of the highest-income taxpayers as a result of section 2304 of the CARES Act exceeded the payments made to any other income band.
By unearthing this more nuanced story about the CARES Act, Wallace shares a broader cautionary tale about how legislation actually works. Even at the height of an international health crisis that threatened homelessness, hunger, and many other problems that would be felt most acutely by the nation’s most needy, Congress found a way to slip in a provision to help some of its most powerful constituents. While this is an old story, it merits remembering again and again. In this case, the fact that the Tax Cuts and Jobs Act contained a progressive provision designed to limit deductions for some of the highest income taxpayers predictably set the stage for well-connected taxpayers lobbying Congress to eliminate the provision at one of the first possible opportunities. Emergency legislation, combined with esoteric tax provisions that few would understand, provided just that chance. The fact that the change happened so predictably makes it no less important. Rather, understanding the natural tendencies for congresspeople to use emergency and complexity as cover to help favored constituents remains important for the very reason that it so predictably happens and will happen again.
Wallace isn’t the only person to have noticed what section 2304 of the CARES Act accomplished. The New York Times, for instance, ran an article, Bonanza for Rich Real Estate Investors, Tucked Into Stimulus Package. Americans for Tax Fairness lambasted the “millionaires giveaway.” And other media and advocacy sources chimed in as well. But the fact that Wallace wrote a scholarly essay about the provision is significant. In so doing, Wallace modeled how it is the job of scholars, and not just reporters or advocates, to examine and critique the work that Congress is actually doing. By engaging in this work in this short but consequential essay, Wallace contributes to scholars’ understanding of what is really happening in the world, as well as the public’s understanding of scholars’ place in it.
Cite as: Leigh Osofsky, Troubling Legislation
(February 11, 2021) (reviewing Clint Wallace, The Troubling Case of the Unlimited Pass-Through Deduction: Section 2304 of the CARES Act
, Univ. of Chi. L. Rev. Online
Heather M. Field’s Tax MACs: A Study of M&A Termination Rights Triggered by Material Adverse Changes in Law presents information and insights about tax-specific material adverse change provisions in publicly filed mergers and acquisitions (M&A) agreements from May 2014–May 2019. Field identified and primarily focused on 13 agreements with “Tax MAC Out” provisions, meaning that these agreements provided an exit right that could be exercised unilaterally because of adverse tax law changes. Field also located 6 agreements that contained express Tax MAC provisions but that did not provide a unilateral ability to exit; most in this group were in the form of requiring the parties to work to address the tax change through restructuring, with termination expressly not following from an inability to complete such restructuring.
The article highlights the bespoke nature of Tax MAC provisions; while Field found that some boilerplate language recurred, there were also substantial differences among the agreements, and the article suggests explanations for the variability, tied to specific instances of difference. As Field notes, the heterogeneity suggests ample “opportunities for nuanced bargaining and value-added lawyering.”
The small number of agreements (dictated by the realities of public filings) means that the article’s qualitative analysis is heavily dependent on the particular transactions and parties (and their legal counsel). But this does not make the article overly narrow; rather, the agreements provide a foundation from which Field is able to reach several audiences, and those audiences will be able to use Field’s information and analysis to engage productively and creatively within their respective areas of tax interest. This reach makes the article much more than a wonderfully clear description (which it also is) of what Field uncovered in this group of M&A agreements.
First, the article will undoubtedly be instructive to taxpayers and their counsel, and this is the primary audience identified by Field: “[T]his Article provides insights into both strategies for empowering taxpayers to proceed with desirable transactions that might otherwise by stymied by uncertainty about possible future tax reforms and deal-making practices when tax laws may change.” At a practical level, taxpayers could use the article to develop tax-change risk-assessment procedures, including checklists for assessing the completeness of proposed agreement terms.
For example, Field highlights how the agreements vary in how they define “tax law,” from those that are highly detailed—containing some evidence of discussion and thought about how to handle IRS notices, proposed regulations, and similar early stage or informal “law”—to those that contain no specific definition, thereby requiring reliance on a general, potentially inadequate, definition of “law.” The agreements also were highly varied with respect to identifying whether a particular confidence level about the effects of a tax law change would be required to trigger the Tax MAC Out. This is particularly surprising, as Field notes, given the availability of a framework (albeit one subject to critique) for expressing levels of confidence (e.g., substantial authority, more likely than not) in tax opinion letters. Further, some of the agreements contained both a Tax MAC Out and a requirement for a tax opinion letter as a condition to closing. These and other examples highlighted by Field suggest areas where attorneys in advising taxpayers may need to take additional care in ensuring the tax provisions of the agreement function as intended when taking into account the entirety of the deal agreement and the larger context of tax practice.
Second, the article could be used not only to assist taxpayers and their counsel but also could be used in the classroom to facilitate the type of excellent, research-based tax teaching that Field has championed elsewhere (e.g., Heather M. Field, A Tax Professor’s Guide to Formative Assessment, 22 Fla. Tax Rev. 363 (2019), available at SSRN). While tax LL.M. programs, including the one at which I teach, rely on a cadre of practitioners to provide practical, cutting-edge tools and examples for students who need to learn how to think like a tax lawyer, it is also critical that the courses taught by those of us many years out from practice draw on real-world, current examples that are accessible to students—and professors.
For those teaching classes on business entity tax (especially tax aspects of M&A) or on tax planning more generally, Field’s article and the agreements listed in its appendices could be used as the backbone of a module to facilitate student learning about the different types of tax authorities, the impact of mid-deal changes in these authorities, the inherent difficulties in handling tax uncertainty and tax risk, and the intersection of tax uncertainty and tax risk with other types of deal uncertainties and risks—and then how to weigh all of that in advising clients.
Third, this article could be used to inform and suggest new avenues of tax scholarship. Field has, for example, used the Tax MAC research to inform portions of a second, companion article about the use of private contracts to manage tax transition risk (Heather M. Field, Allocating Tax Transition Risk, 73 Tax L. Rev. __ (forthcoming 2020), available at SSRN). The agreements gathered by Field might also provide insight into how taxpayers and their attorneys weigh the differences among proposed, temporary, and final (but unpopular) regulations, which could inform theorizing about administrative guidance.
The tax changes that worry taxpayers, as evidenced by these agreements, could suggest new approaches to anti-tax avoidance policies, standards, or rules (which also suggests a fourth audience: government actors charged with issuing guidance and enforcing tax law, a possibility Field touches on in her companion article). The variance among the agreements could prove useful in considering whether there is equitable access to understanding (and exploiting) the complexity inherent in the tax system.
Field’s method provides a useful roadmap for advancing tax research grounded in taxpayers’ revealed preferences. To be sure, Field is not the first to consult public filings in tax scholarship, but it is a reminder that there is a considerable opportunity to advance tax scholarship by using this approach.
In my experience, the hallmark of a good article is that, after struggling through a few close reads, I eventually (at times somewhat begrudgingly) conclude I learned something new and valuable. The hallmark of a great article, on the other hand, is when I reach the same conclusion but after a single, almost effortless feeling, read. The difference is a precision and clarity in writing, structure, and organization that only the confidence instilled from a deep understanding of a subject affords. Yet at the same time a small part thinks to myself – “it seems so obvious, why didn’t I think of it?” But of course, to paraphrase a famous movie line, “if I really had come up with the idea, then I would have written it.” But, as I eventually admit to myself, I didn’t.
Such was my experience reading When Data Comes Home: Next Steps in International Taxation’s Information Revolution (“When Data Comes Home”) by Shu-Yi Oei and Diane Ring. Oei and Ring are frequent co-authors, writing on subjects ranging from taxation of the sharing economy like Uber and AirBnB, to the role of large scale financial information leaks like the Panama Papers, to the impact of the Tax Cuts and Jobs Act on reshaping the workplace environment. I mention this only to emphasize what emerges as the particular strength of Oei and Ring’s collaborations – they combine backgrounds and methodologies and apply them to areas of common interest to uncover patterns or trends that otherwise might remain hidden. When Data Comes Home represents another successful example.
The article begins with a survey of recent developments in information sharing in the international tax regime. Importantly it rejects a myopic focus on multinational efforts such as the OECD Harmful Tax Competition project and the Base Erosion and Profit Shifting (BEPS) projects and instead also incorporates unilateral efforts such as the US Foreign Accounts Tax Compliance Act (FATCA), bilateral agreements such as Tax Information Exchange Agreements (TIEAs), and even data leaks such as the Panama Papers. While the article refers to these as Historical Events, in actuality the nominal survey of the past cleverly foreshadows the conceptual taxonomy to come, which the article refers to as Intersecting Forces. Allowing the reader to discover how the Intersecting Forces seem to emerge inexorably from the Historical Events proves both effective and compelling.
The article would make a valuable contribution if it stopped there, but it moves on to take the important but challenging step of incorporating state-level interests and strategic interactions into the substantive taxonomy developed earlier. While I admit to potential hyperbole, I believe this is the first article I have read (including my own) to pull off this move successfully. The article deftly avoids two of the most common traps when doing so, neither resigning itself to a slippery slope of the inevitable failure of any international tax regime overwhelmed by the insatiable demands of each country’s domestic politics nor proposing another one-size fits all normative solution if countries agree. While it may sound trivial at first, these common traps matter because an issue is one of international tax only if there are two or more sovereign states with potentially valid but competing claims to tax an item of income or taxpayer. Absent two or more states, an issue nominally or appearing to be one of international tax ultimately collapses into one of domestic tax.
That said, no matter how persuasive the article, one might be skeptical of their ultimate conclusion that data produced by international tax reporting rules and agreements will reshape domestic law. In particular, I am not fully convinced that the revolution they describe is a function of reforms in the international tax regime instead of a symptom of introducing Big Data into law more generally. For example, many proponents of big data claimed it could help root out implicit bias from hiring decisions by replacing human managers, many of whom may not identify or acknowledge their implicit bias, with algorithms that mine data which they claim would only include factors relevant to job performance. While this is appealing on its face, unfortunately the problem is that it turns out Big Data also incorporates any implicit or systemic bias within the system generating the data. Much like TwitterBots that quickly become racist in response to the data they receive on Twitter, neutral algorithms can spit out biased results if the society in which they are built is biased.
If indeed the effect identified in the article turns out to be caused by the rise of Big Data and not the other way around, I suspect the problems of Big Data in other areas may soon follow as well. By drawing a bright line between “domestic politics” and “global information sharing” I question whether the article runs the risk of missing whether and to what extent one could be influencing or biasing the other or whether a confounding factor exists. In fairness, however, this ultimately is an empirical question implicated by but not directly within the scope of this article.
Even if my empirical concern proves correct, if the primary reason it came to mind in the first place was the taxonomy of the article itself, that only further proves the importance of the contribution. Any article that can survive the scrutiny of its own analysis in this manner is robust enough to survive any scrutiny I could apply to it. In this respect, When Data Comes Home is a success.
Editor’s Note: Jotwell’s Contributing Editors choose what articles they review. Shu-Yi Oei had no role in the editing of this review.
Mention the IRS, and for most, the first thought to come to mind is not alleviating poverty. Most people think of the IRS as the nation’s tax collector, processing tax returns and enforcing the tax laws to finance the government. Yet, for many years now, the IRS also has served as one of the federal government’s most significant antipoverty agencies. The IRS administers the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC), providing billions of dollars of social welfare benefits each year to millions of families and individuals. The EITC and CTC are very popular, at least in part because they are perceived by Congress as especially efficient relative to other antipoverty programs. Consistent with that popularity, both programs have grown a lot since their inception. But their administration by the IRS, while efficient, presents its own set of difficulties—including for the very beneficiaries these programs are intended to help. In her book, Tax Credits for the Working Poor: A Call for Reform, Michelle Drumbl takes a deep dive into the challenges as well as the benefits of giving the IRS responsibility for administering these important social welfare programs.
The comprehensiveness of Drumbl’s treatment alone makes this book a valuable addition to the tax policy literature. She offers plenty of statistics; a thorough survey of pros, cons, and policy alternatives; and a wonderful synthesis of existing scholarship. But the book’s true strength is the human story that it tells. Too often, discussions of the EITC and CTC focus wonkishly on economic efficiency, comparisons of bureaucratic expertise, and statistics alone. Drumbl’s account does not neglect that side of the equation. But she also draws upon her experience running a low-income taxpayer clinic to tell the stories of EITC and CTC beneficiaries, who often suffer the downside consequences of relying on tax officials to administer social welfare programs on the cheap.
The book opens with a short history of the EITC and CTC programs, demonstrating the huge role that the IRS now plays in federal anti-poverty efforts. In 2016, 27 million families and individuals received $67.9 billion in EITC benefits, and 19 million families received $25.7 billion in CTC benefits. Because program beneficiaries self-identify and self-declare their eligibility by filing tax returns and calculating for themselves the benefits they are due, the EITC and CTC are less expensive to administer than other federal antipoverty programs. Drumbl also reports studies documenting that EITC and CTC beneficiaries as experiencing pride rather than shame from their participation in those programs, contrasting being treated by commercial tax preparers as “a client, a taxpayer” with the stigma and “dread associated with a trip to see the welfare caseworker.” Perhaps for this reason, the EITC and CTC enjoy higher participation rates than many other federal social welfare programs.
But determining EITC and CTC eligibility is complicated. That complexity makes it easy for EITC and CTC claimants to commit unintentional errors. It also drives most program participants to rely on professional tax return preparers or commercial tax return preparation software to claim their benefits. Thus, EITC and CTC claimants are placed “in the unusual position of paying money to receive an anti-poverty cash payment.” Many return preparers are not licensed. Others offer refund anticipation loans or other arguably predatory financial products to EITC and CTC recipients. Fraud and identity theft are common. High error rates attributable to complexity and fraud mean that EITC and CTC claimants are subject to much higher IRS audit rates than middle-income taxpayers. The IRS enforcement apparatus is oriented toward pursuing tax scofflaws for nonpayment of taxes and “does not differentiate between intentional and unintentional overclaims” for benefits. IRS audits follow a paper process, conducted by mail, that can be difficult to navigate for taxpayers with limited resources. Cryptic, computer-generated audit letters fail to explain clearly what the taxpayers who receive them are expected to do. Financial penalties for mistakes are high. As Drumbl concludes, “this is a very sad way to administer a social benefit program. The United States can do better.”
And with that, Drumbl turns to ideas for reform. Many countries have programs that are similar conceptually to the EITC and CTC. Drumbl documents case studies of similar tax credit programs in New Zealand and Canada. She acknowledges that no approach is perfect and “the grass is always greener on the other side.” Drawing from those case studies, however, she argues that “Congress can and should reform both the EITC and the [CTC] to better serve low-income families.”
Some of Drumbl’s suggested reforms are small. For example, Congress can simplify the definition of who is a qualifying child. At present, parents can claim children for EITC purposes until they reach nineteen years of age, or twenty-four if the child is a full-time student. For the CTC, parents can only claim that same child until the age of seventeen irrespective of student status. No policy rationale exists for the difference. The different cutoffs merely create more opportunity for inadvertent errors. She also suggests dividing the EITC into separate work support and family support credits—not a new idea, but one for which she offers more detailed proposals. Other of Drumbl’s proposed reforms are more substantial. For example, she suggests relying on household income rather than marital status in calculating credits and transitioning to year-round, periodic payments rather than annual lump sum payments.
Whether or not one agrees with all of Drumbl’s proposed reforms, everyone who is interested in tax policy and antipoverty programs should read this carefully-researched and thoughtfully-developed book. Federal efforts to alleviate poverty among the working poor are laudable when they work, but perhaps less so when poorly designed legislation and administration place heavy additional burdens on families that are already struggling. As Drumbl’s book demonstrates, the latter is all too common.
Level-headed approaches are rare in discussions of how the administration of tax law should fit into the larger body of administrative law. Alice Abreu and Richard Greenstein’s Tax: Different, Not Exceptional is one of those rare exceptions. All too often, advocates have portrayed the question as having an all or nothing answer, coded as whether tax is “exceptional.” If yes, then the norms of administrative law don’t apply; if no, then they all apply. (And, for many, if these norms all apply, the vast bulk of the work product of the Treasury and the IRS is tainted and should be questioned by the courts.) Abreu and Greenstein persuasively point out that this approach is simply useless.
Careful observers should always have appreciated that neither position is supported by the existing statutory framework. For some aspects of tax administration, there are exceptions in the Administrative Procedure Act itself, and additional exceptions are provided in other titles of the United States Code. But as Abreu and Greenstein point out with reference to Sorites Paradox, a heap of exceptions is often only just that, a heap of discrete exceptions. Even if each of those exceptions is well-founded, they do not necessarily mean anything about the other items that could be removed from the pile, or even about the nature of the pile itself. The questions that remain, given this reality, relate to how these discrete exceptions should be interpreted, and whether these exceptions have any implications for items not covered by their specifics. Tax: Different should go a long way toward establishing this approach to answering these administrative law questions.
Abreu and Greenstein usefully outline some of the sources that would treat tax law as exceptional. One of the best features of their presentation is that the reader cannot always anticipate the context or implications of the original assertions, such as when Erwin Griswold advocated a separate tax court. At the time, he was motivated not by cases in which taxpayers bamboozled federal district courts, but by the fact that the Supreme Court had in recent cases all too readily succumbed to the government’s arguments in cases like Higgins v. United States, 312 U.S. 212 (1941), which prompted an immediate Congressional response on behalf of taxpayers. As a result of this historical context argument, the reader is likely to understand many well-known assertions about the tax law in unexpected ways.
One strand they emphasize seems to have dominated recent discussions. This is the possibility that tax law should be all and only about revenue-raising. This approach finds support in many older authorities establishing some of the different treatments of tax matters (especially the judicial and statutory authorities severely limiting the courts’ ability to provide pre-enforcement relief). Ironically, this source of exceptionalism has been turned inside out. Since tax law has been recognized more and more as a legitimate tool in the pursuit of other legislative goals, the revenue imperative should no longer be accepted as a reason for tax exceptionalism.
Another strand identified by Abreu and Greenstein is the pervasiveness of tax law; virtually everyone is affected by the tax law, and as a result even the most prosaic issues can be the basis for a politically charged challenge. This aspect of tax law cannot be overestimated. To be sure, the institutions through which the roots of tax exceptionalism were established were concerned about revenue raising. Their own salaries and budgets depended upon it. But they also were protective of their own capital as political institutions. Therefore they were careful not to act in ways that would be perceived as anti-taxpayer—and did not let themselves be drawn into disputes that could be resolved through other acceptable procedures. They also were concerned for their own resources, and thus looked for ways to avoid being pulled into the maelstrom that tax politics can generate. The judiciary need not worry too much about the executive getting out of hand given the scrutiny that the legislature will almost certainly eventually provide.
Recession-Ready: Fiscal Policies to Stabilize the American Economy
(Heather Boushey, Ryan Nunn & Jay Shambaugh eds., 2019), available at The Hamilton Project
Legal scholars, in tax and elsewhere, have increasingly recognized the need for countercyclical policy instruments. (An important example is Yair Listokin’s Law and Macroeconomics: Legal Remedies to Recessions.) Much of the tax system, of course, automatically responds to economic slowdowns, such as by generating less revenue when economic activity declines. In severe recessions, however, non-tax instruments become indispensable to delivering adequate stimulus and individual support.
In this regard, the Great Recession of 2007-2009 taught us several important things the hard way. One was that down business cycles are likely to be a recurrent feature of modern economic life. A second was that austerity makes absolutely no sense as a response to economic slowdowns. A third was that the political system cannot be trusted to respond adequately through discretionary policy changes.
The political economy concern used to be that Congress would simply act too slowly – as in the metaphor of a home heating system that has a six-month time lag, and hence that responds to a January deep freeze by turning on the boiler in July. But now there is also the threat of deliberate obstruction by Republicans whenever there is a Democratic president, alongside a rigid, non-reality-based ideology that tamps down responsiveness even when Republicans control both Congress and the White House. This creates an urgent need for the Democrats, if they win in 2020, to design automatic countercyclical fiscal policy changes that do not require any further discretionary enactment of legislative changes.
Luckily, an important recent book – Recession-Ready: Fiscal Policies to Stabilize the American Economy, edited by Heather Boushey, Ryan Nunn, and Jay Shambaugh and published by the Hamilton Project – offers a wide-ranging set of suggestions. These suggestions would merit serious consideration as cornerstones of a Biden Administration legislative agenda in January 2021.
Authors may sometimes, to their distress, find that their recently published books have lost timeliness with startling rapidity, as economic or political circumstances change. Here, however, it is the other way around. When Recession-Ready was published in May 2019, the editors and authors cannot possibly have known that the United States was only months away from entering from entering a downturn that would be vastly worse, and potentially more long-lasting, than the Great Recession of just over a decade ago that helped to inspire their work. Now, however, that we are in the midst (or early stages?) of the COVID Recession, their suggestions have only become timelier than ever. Consider the six main proposals that Recession-Ready offers:
1) Claudia Sahm’s chapter, Direct Stimulus Payments to Individuals, anticipates many of the problems that arose in 2020. It therefore proposes legislating in advance that Congress provide that such payments, in amounts defined relative to GDP, are automatically issued whenever certain objective economic markers of a recession (such as a sufficient rise in unemployment) are met. The proposal would also provide for automatic follow-up payments, on an annual basis, absent the meeting of objective markers of economic recovery. Among other salient points, Sahm notes that having such a rule on the books would permit advance preparation with regard to the administrative challenges faced by reaching non-income tax filers.
2) Matthew Fiedler, Jason Furman, and Wilson Powell III’s chapter, Increasing Federal Support for State Medicaid and CHIP Programs in Response to Economic Downturns, addresses what has proven to be among Congress’s worst failures in responding to the COVID Recession: its not addressing adequately the fiscal strains faced by state governments. It would cause the federal share of Medicaid and Children’s Health Insurance Program (CHIP) costs to increase automatically during recessions (again, as measured by objective criteria). The rise in federal contributions would automatically be tailored to particular states’ unemployment rates, and would phase down automatically as states’ economies recovered.
3) Andrew Haughwout’s chapter, Infrastructure Investment as an Automatic Stabilizer, would give states incentives to denominate shovel-ready programs that could then be started automatically, under specified criteria, based again on objective economic markers of recession. This as well could have mitigated one of the Trump Administration’s and 2020 Congress’s egregious policy failures in response to the COVID Recession.
4) Gabriel Chodorow-Reich and John Coglianese’s chapter, Unemployment Insurance and Macroeconomic Stabilization, could have mitigated another 2020 policy failure that was spearheaded by Republicans. It would automatically provide for suitable extension, enhancement, and federal funding of unemployment insurance when severe economic downturns (again, defined objectively) make this desirable.
5) Indivar Dhutta-Gupta chapter, Improving TANF’s Counter-Cyclicality Through Increased Basic Assistance and Subsidized Jobs, proposes providing for increased cash, voucher and emergency assistance provision, along with direct and indirect employment aid (such as wraparound support services) when recessions strike.
6) Hilary Hoynes and Diane Whitmore Schanzenbach’s chapter, Strengthening SNAP as an Automatic Stabilizer, would both limit or eliminate work requirements for receiving Food Stamps, and automatically increase their levels by 15 percent during recessions.
The precise details of all of these proposals are reasonably debatable, as all of the authors recognize. However, the need to provide for countercyclical fiscal policy changes automatically, such as the above six, is beginning to verge on being not reasonably debatable. We cannot afford to risk more of the policy malfeasance that needlessly immiserated millions of Americans in 2009, and then again, more gravely, in 2020 – with, perhaps, worse still to follow.
Mark Gergen, A Securities Tax and the Problems of Taxing Global Capital
(June 2, 2020), available at SSRN
The federal government’s spending to try to contain the economic fallout from the COVID-19 pandemic already approaches $3 trillion. It will cause U.S. national debt to exceed GDP for the first time since World War II. The current crisis has emphasized deep distributive justice concerns and raised calls for more public spending to help address them. Such public spending is important and necessary, but there is a question of how to pay for it. Taxing wealth and capital income can be part of the solution. These are systematically undertaxed, even though careful analysis demonstrates that wealth taxation would not create an unacceptable drag on the economy.
Within the broad wealth and capital income tax literature, Mark Gergen’s work offers a particularly clever and tidy approach to taxing capital. He proposes a securities tax to reach capital touched by the public market. This tax would be collected and remitted by market participants like public corporations. A complementary tax on imputed normal returns would reach private capital. Gergen recently posted A Securities Tax and the Problems of Taxing Global Capital, which describes international issues raised by his proposal. This paper follows on a 2016 article, How to Tax Capital, which covers the fundamentals of his idea.
Gergen’s proposal would:
- Enact a “securities tax” on all assets touched by public markets – including publicly traded equity, publicly traded debt, and securitized assets such as mortgages, car loans, and student loans. It is estimated that this tax would apply to about 80 percent of the value of income-producing wealth in the U.S., excluding owner-occupied housing.
- Require remittance of the securities tax not by individual taxpayers, but rather by public market entities, like publicly traded corporations and mutual funds.
- Impose a complementary tax on imputed normal return from privately held assets.
- Allow rebates to individuals to accomplish preferences e.g., a lower tax burden on retirement or other preferred savings accounts. Consider allowing rebates of half the securities tax to nonprofit shareholders.
- Apply a low tax rate, such as 0.8%, which would raise an estimated $350 billion or more annually assuming the rebates listed above.
- Use a credit mechanism to avoid double-counting assets such as securities held through mutual funds.
- Minimize the incentive to invest privately because private-market disadvantages of illiquidity and higher fees would often exceed burden of tax at a low rate.
- Allow rebates to refund tax to foreign shareholders not subject to U.S. tax, assuming robust proof of beneficial ownership.
The most attractive part of Gergen’s proposal is that that remittance by public corporations and other large public market participants would actually work. It is like the tax administration change that took place in the 1940s, which was the last time that national debt exceeded GDP. Then, the public finance solution included the innovation of third-party reporting and withholding. The law enlisted employers to withhold and remit payroll and income taxes. This made possible the broad “Class Tax to Mass Tax” expansion of the personal income tax. In the 21st century, employer remittance results in 99% compliance for taxes on wages.
In contrast, other capital and wealth taxation proposals imagine rich individuals filling out tax returns and sending in large checks to the government. Expected compliance with such a system is low compared to wage withholding. Indeed, underreporting could be a fatal weakness for some wealth tax proposals. One paper suggests that a tax on the “ultra-wealthy” would resemble the estate tax and “approac[h] a voluntary tax.”
Gergen’s design attends to efficiency as well. Since the proposed securities tax is determined by reference to the value of outstanding securities, its incidence should fall directly on those securities and reduce their value directly. It would be a tax on capital in fact as well as in law. This contrasts with the perennial uncertainty over how much of the corporate income tax burdens capital as opposed to workers or consumers. Also, an innovative credit mechanism would ensure that publicly held capital is taxed just once. For instance, a public company would pay tax on the publicly traded equity and publicly traded debt issued by that company. If the company in turn owned public securities in another issuer, the company would receive a credit for the securities tax remitted by that issuer.
The proposed securities tax remitted by public market entities would not reach privately held assets, such as rent-producing real estate, interests in investment partnerships, and physical commodities. Gergen’s solution to this problem is a tax on an imputed normal return to capital that is an element of a proposal developed by Edward Kleinbard. (We are mourning Ed now, after his passing on June 28.) As Gergen acknowledges, planning opportunities result from the difference between the imputed income tax on privately held capital versus the securities tax on publicly intermediated capital. But he argues that it is still better than a wealth tax that requires taxpayers to report asset values.
Gergen writes that his proposal raises concerns about the global taxation of multinational corporations. If the U.S. repealed its corporate income tax in connection with adopting the securities tax, then the change would encourage companies to shift taxable income and economic activity into the U.S. However, this distortion could be mitigated by continuing to impose corporate income tax on foreign multinationals’ U.S. income.
A final issue is constitutionality. Although the Sixteenth Amendment permits taxation of income, the Constitution elsewhere requires the apportionment of “direct” taxes. Would Gergen’s securities tax risk violating the requirement of apportionment? Gergen does not spill much ink on this issue. But the risk would be reduced if the structure avoided explicit connections between a corporation’s obligation to remit securities tax and an individual’s obligation to pay tax on wealth held through public markets. The Supreme Court has treated corporate taxes as excise taxes, not direct taxes. Congress might also enact “fallback” provisions that would apply in the event of a successful apportionment challenge.
Gergen’s proposal for taxing capital is ambitious. It would be a big change and raises political economy and transition questions. But it is also a clever and above all administratively practical way to tax capital broadly and effectively. It should be on the table as we consider our pressing and increasing need for public revenue.