Andrea Monroe, Making Tax Law Work: Improvisation and Forgotten Taxpayers in Partnership Tax
, 55 U. Mich. J. L. Reform
(forthcoming), available on SSRN
Andrea Monroe’s article, Making Tax Law Work: Improvisation and Forgotten Taxpayers in Partnership Tax, boldly calls on partnership tax experts to understand their role in normalizing dysfunction within partnership tax law and to support reform that is mindful of all partnerships.
Although millions of business entities are taxed as partnerships, assets and income are concentrated in a small number of them. As Monroe notes, drawing on IRS data from 2018, “less than 1 percent of partnerships held greater than 76 percent of partnership assets, and approximately 73 percent of partnerships held roughly 1 percent of partnership assets.” This suggests great differences among tax partnerships, yet, as partnership income and deductions are taxed to the partners and not the partnership, all tax partnerships must allocate their income and deductions to their owners.
Because Congress prized economic flexibility, the statutory framework allows partners to decide by agreement how to allocate the partnership’s income and deduction items. This flexibility is constrained by the requirement that such allocations have “substantial economic effect,” and if they lack such substantial economic effect, the allocations must conform to the “partner’s interest in the partnership.” Regulations provide detailed allocation rules implementing these concepts.
As Monroe notes, the regulatory allocation rules are at the core of the partnership tax regime. Yet, as Monroe argues, these allocation rules are dysfunctional both for elite partnerships and for “forgotten” partnerships. (Indeed, these rules are so difficult that even a superficial description would put this review well over the allotted space; please see Monroe’s article for an excellent overview.)
Monroe identifies as “forgotten” partnerships those entities that lack the resources to acquire the expertise necessary to engage meaningfully with the allocation rules and concepts. As Monroe highlights, and has written about more extensively elsewhere, IRS publications currently do not provide adequate assistance in navigating the allocation rules.
Monroe compellingly argues that because the law is functionally illegible to a large number of taxpayers, such taxpayers are consigned to rely on intuition, chance, and instinct, instead of on law. Monroe points out that tax experts often simply do not think about these taxpayers (hence, “forgotten”), or, less benignly, tax experts normalize the forgotten partnerships’ situations by assuming, or even arguing, that for less economically complex partnerships, instinct will often be good enough for compliance.
Monroe argues with compassion and eloquence that even if the tax returns of forgotten partnerships end up largely where they would have if technical partnership tax law had been accessible, that does not mean there is no harm. Instead, there is great harm to the impacted taxpayers’ dignity as well as to their trust in and access to the tax system. These taxpayers are forced to improvise and to do so without an understanding of the technical rules around which the improvision is taking place, which means that the process will almost certainly be more stressful, more unequal, and less nuanced.
With respect to elite partnerships, Monroe points to growing anecdotal evidence that such partnerships also do not rely on the allocation rules, but not because they are illegible to such partnerships. Instead, it is because the rules fail to reflect the economic priorities of elite partnerships.
With their resources and access to expertise, elite partnerships are, however, able to interact creatively with the allocation rules by creating workarounds in the form of allocations designed to yield greater certainty about economic distributions. They also have the capacity to assume the risk that such workarounds may technically fail to comply with the rules.
Thus, as Monroe explains, the allocation rules are also dysfunctional for elite partnerships, but in a completely different way. That is, like forgotten partnerships, elite partnerships also improvise, but they do so by choice and with expert guidance on how their improvision harmonizes (or clashes) with the allocation rules.
Monroe’s article calls out partnership tax experts who, with understandable pride in their intellectual and technical abilities in navigating partnership tax, embrace complexity and use it to benefit their clients without considering how what is often a rewarding and engaging puzzle for them is instead a meaningless pile of jargon to so many others. As Monroe indicates, dividing partnerships into “elite” and “forgotten” is a “blunt” categorization, but that does not detract from her overall message, which is a sharp and insightful critique of the “normal” practice of partnership tax.
In a nod to political realities, Monroe does not urge abandonment of the central flexibility of the partnership tax system, although she notes that “[i]f one were writing on a clean slate, reimagining partnership allocations entirely would surely be an intriguing option.” Monroe does present two concrete proposals for reform: she proposes that small partnerships have a more streamlined regime and that the Treasury add a safe harbor for target allocations. As she acknowledges, these two proposals, at least in their broad outlines, build on the work of other tax scholars.
More importantly, she issues a call to tax experts that they critically examine their role in the current dysfunction and that they apply their expertise not only to helping elite partnerships but also to using their creativity and insight to transform partnership tax law so that forgotten partnerships are able to engage fully with the tax system.
The dual-track reform examples offered in the article highlight that Monroe is not saying all partnerships need the same rules. Instead, she emphasizes that all entities organized as partnerships should be able to rely on law that is intelligible and that does not require improvisation.
Andrea Monroe’s article is a critical and timely reminder that the tax system, including the highly difficult portion applicable to tax partnerships, “only works if the vast majority of [taxpayers]—whether rich or poor, forgotten or elite—can participate.”
“Don’t sweat the small stuff” was one of my father’s favorite sayings. It’s the thought that has always come to my mind whenever thinking about, and teaching, de minimis rules in the tax code. De minimis rules keep the IRS from seeming petty, for example by allowing an employer that provides free bagels in the break room from having to report the bagels as income to its employees. De minimis rules also allow taxpayers to avoid complexity and hassle when the dollar amounts at stake are small, for example by permitting taxpayers to immediately deduct many small capital expenditures, rather than having to amortize or depreciate them over several years. In short, I have always thought of de minimis rules as making a hugely complicated tax system just a little easier to navigate, and perhaps just a little kinder. At worst, de minimis rules have always seemed fairly harmless — “the equivalent of rounding errors in the design of the tax law.” Reading The Surprising Significance of De Minimis Tax Rules by Leigh Osofsky and Kathleen DeLaney Thomas has forced me to rethink these long-held intuitions.
Osofsky and Thomas begin their analysis of de minimis tax rules with an overview and a typology of sorts. Functionally, some de minimis tax rules indeed eliminate taxpayer burdens and protect unsophisticated taxpayers from finding themselves ensnarled in complexity. The IRS also benefits in these instances, by avoiding enforcement and other administrative costs. Other de minimis tax rules, however, are simply the result of rent-seeking behavior and benefit only sophisticated taxpayers pursuing complicated transactions. While de minimis tax rules can protect taxpayers from complexity, they also create complexity. And sometimes, de minimis tax rules that seem small turn out not to be so small after all, whether due to unintended consequences or interpretative choices that expand their scope.
One particularly interesting categorical observation by Osofsky and Thomas: although some de minimis tax rules come from Congress, others are adopted by Treasury and the IRS in rules and regulations. At least in some instances, these nonstatutory de minimis tax rules are simply the equivalent of administrative nonenforcement policies, albeit with more transparency. Yet, Osofsky and Thomas question whether Treasury and the IRS possess the authority to craft their own de minimis tax rules. For example, Osofsky and Thomas cite non-tax cases rejecting agency authority to adopt de minimis rules that undermine benefits provided by statutes. Osofsky and Thomas acknowledge that the benefits provided by the tax laws often may be less obvious than in some other regulatory contexts. But Osofsky and Thomas suggest that raising revenue itself is a form of public benefit that Treasury and the IRS undermine when they adopt nonstatutory de minimis tax rules. Of course, all agency enforcement officials must make choices regarding which cases to pursue, and a less transparent administrative nonenforcement policy could have the same effect as a de minimis tax rule, without the benefit of certainty that an authoritative rule or regulation provides. Regardless, contemplating more carefully the authority of Treasury and the IRS to adopt de minimis tax rules is worthwhile, especially given how often Congress revisits the tax laws. Perhaps if Treasury and the IRS believe a de minimis tax rule is warranted, they ought to suggest as much to Congress rather than adopting the rule themselves.
Finally, Osofsky and Thomas offer several suggestions for designing de minimis tax rules. For example, having explained why de minimis tax rules are not costless, Osofsky and Thomas suggest such rules “should be the product of a careful weighing of costs and benefits.” Osofsky and Thomas also contend that Treasury and the IRS should contemplate the downsides as well as the upsides of adopting such rules in regulatory form, rather than merely exercising nonenforcement discretion in cases involving small dollar amounts. Regulations benefit from the public participation process, but enforcement discretion offers more flexibility for distinguishing subsets of taxpayers or transactions. In particular, Osofsky and Thomas suggest that Congress and Treasury should scrutinize with particular care de minimis tax rules that benefit sophisticated parties and may be the product of political lobbying. Osofsky and Thomas also suggest indexing de minimis tax rules for inflation.
In summary, The Surprising Significance of De Minimis Tax Rules carefully examines, and calls into question, a practice that I suspect most tax professors and policymakers take for granted. Osofsky and Thomas do not argue that we should get rid of all de minimis tax rules. But Osofsky and Thomas demonstrate very effectively that we need to pay more attention to de minimis tax rules and not think of them merely as “the small stuff.”
Ruth Mason, The 2021 Compromise
, 172 Tax Notes Fed.
569 (2021), available at SSRN
Only a fraction of tax law professors teach the course usually called “international tax.” For the rest of us teaching tax at a law school, the effort that technical competency in international tax requires is unsustainable, especially given the instability of that part of the law that most affects US multinational business. But every tax professor should understand at least a little bit about the ways that international tax law is changing. I recommend reading Ruth Mason’s work, most recently The 2021 Compromise, as a great way to gain competency regarding this evolution.
Mason’s goal in this piece is to contextualize recent developments in the OECD/G20’s BEPS project against the backdrop of her extensive prior work on the subject (see especially The Transformation of International Tax), and to put into perspective the changes currently underway in the international tax space. On July 1, 2021, 130 countries reached agreement in principle to Pillars 1 and 2 of the G20/OECD Base Erosion and Profits Shifting (BEPS) project. Pillar 1 concerns the allocation of taxing authority after the emergence of the digital economy and Pillar 2 is a proposal for a global minimum tax. This two-Pillar OECD project represents a second phase of the G20/OECD work on BEPS.
Mason is particularly anxious to point out that the ultimate impact of the developments under the first phase of the BEPS project should not be underestimated. Other scholars have complained that this first phase of negotiations fell far short of the policy changes that must be embraced to achieve anything like a fair and sensible system for the taxation of multinational enterprise, but Mason’s view is that, however short the project’s pre-2020 stages may have fallen, that activity has set the stage for Pillars 1 and 2, and it is unlikely that international tax will ever be the same. Everything is now open to change — from the processes and participants in the making of international tax policy, to the content of the consensus that will emerge for the allocation of tax shares, to the multilateral tools that are likely to become available to implement that allocation.
Mason’s article provides a high-level summary of the technicalities of the Pillar 1 and Pillar 2 proposals in second phase of BEPS project. Pillar One of that project aims at reallocating taxing rights to source or market countries; and Pillar Two aims at establishing a minimum tax that would provide some self-regulation of tax competition. The fact that the outline of this second phase has been revealed (and appears to have been taken seriously enough that implementing steps may take place as early as the first quarter of 2022) makes Mason’s analysis in prior work of the forces that led to the first phase, and the significance of that phase, all the more important.
Mason’s article starts with the relatively familiar institutional development of the international tax regime that dominated in the twentieth century. The “1920s compromise” reflected the role of the US as an exporter of capital with the dominant goal of avoiding double taxation of its enterprises and with the arm’s length standard as the primary weapon against tax avoidance. Then, this old regime became destabilized. As Mason’s prior work explains, this destabilization was in part the result of the changing nature of economic global enterprise (especially the changes in the nature of cross-border economic activity that rendered useless the concept of permanent establishment). But it was also the result of other smaller fissures in the traditional system (especially the tax arbitrage made possible by the US check-the-box rules and other innovations that we non-international specialists may too often look at only from the domestic point of view). These fissures were exploited in ways that no one institution had the power or even the incentive to block.
In Mason’s account, the situation changed with the 2008 financial crisis and increased publicity surrounding the failures of the old regime. Politicians around the world felt increased pressure to look harder at the problems of international tax. The result was a shift in the identity of the participants in international tax policy, including EU institutions and a more energized G20. With that shift in participants came the possibility of cooperation that in turn led to the emerging norm of full taxation, developed in the first and second phases of the BEPS project. This norm, although not yet fully specified (and in the earliest implementation likely to reach only the very largest taxpayers), will displace the old emphasis on minimizing double taxation. This expansion of cooperative participants also makes possible agreement rejecting unilateral actions (including digital taxes) and embracing multi-lateral enforcement mechanisms. Among these mechanisms are more transparent reporting and what Mason calls “fail-safe” devices that reduce the incentive for jurisdictions to cede their right to tax by providing a contingent right to tax in others.
In sum, Mason’s new article, paired with her prior work on the subject, will be valuable to those of us teaching tax in law schools who have a vague sense of the way the old regime was supposed to work, but have not paid much attention either to the ways in which the old regime has failed on its own terms, or to the ways in which it falls short of the needs of an increasingly globalized economy. Those who read Mason’s work to understand the political economy behind the introduction of these changes will find the effort well spent.
Leslie Book, Tax Administration and Racial Justice: The Illegal Denial of Tax Based Pandemic Relief to the Nation’s Incarcerated Population
, 72 S. Carolina L. Rev.
__ (2021), available at SSRN
In Tax Administration and Racial Justice: The Illegal Denial of Tax Based Pandemic Relief to the Nation’s Incarcerated Population, Leslie Book tells the remarkable story of the Coronavirus Aid, Relief, and Economic Security (CARES) Act emergency relief payments and the incarcerated population. In addition to having numerous plot twists and turns, the story underscores an important, underexamined issue: when the government administers the law, it imposes burdens (or frictions) on the public. These burdens may be borne disproportionately by different groups, including along racial dimensions. Anyone interested in agencies, tax administration, or race and the law would benefit from reading Book’s paper.
As Book describes, when Congress passed the CARES Act, it authorized the IRS to pay out economic relief payments of $1,200 (for adults) and $500 (for dependent children) as “rapidly as possible.” The IRS dutifully did so, including by making approximately $100 million in payments to federal, state, and local prisoners by April 2020. However, the IRS then inexplicably reversed course, deciding that prisoners were not eligible to receive the economic relief payments, but not providing any basis or explanation for its reversal. The IRS tried to recover the payments it had previously made to prisoners as allegedly erroneous and issued a Frequently Asked Question (FAQ) on the IRS website indicating that any incarcerated individual who had received a payment needed to return it to the IRS. Leiff Cabraser, a public interest law firm, brought a class action lawsuit on behalf of incarcerated individuals and eventually won in district court. The court ordered the IRS to change its position regarding prisoners’ entitlement to the payments and ensure that eligible, incarcerated individuals received their payments. Notwithstanding this court victory for incarcerated individuals, difficulties in the IRS’s administrative process prevented many from receiving the payments in 2020, undermining the IRS’s ability to meet Congress’s mandate of making the payments “as rapidly as possible.”
The story Book tells is remarkable on a number of levels. First, it illustrates the power (and limitations) of the IRS’s ability to effectively make law through tax administration, including through informal FAQs. Second, Book explains how the IRS’s actions had a disproportionate impact on Black and Latino individuals, who comprise a disproportionate share of the prison population. He points out that the IRS’s actions, which occurred in the wake of George Floyd’s murder, are yet another example of how our laws systemically subordinate people of color. In so doing, he underscores how even technical corners of the law can be important sources of inequity.
In perhaps the most powerful part of his paper, Book describes, at a theoretical level, how the administration of the law in general can create racialized burdens. Book draws on the work of sociology and public administration scholars to explain that, as a general matter, individuals experience frictions, or burdens, when attempting to collect benefits from or otherwise interact with the government. This insight may be particularly interesting to tax scholars, who have long paid attention to frictions in the substantive tax law, but have paid less attention to how they also operate in tax administration. Even more importantly, as it turns out, these burdens in the law’s administration are not equally distributed across the population, but rather tend to be concentrated on groups with fewer resources and less power, including groups that fit into these categories on the basis of race. Moreover, the government’s decisions can affect the amount and incidence of the burdens that people face. For instance, shortening voting hours in certain communities can raise the burdens incident to voting in such communities. Likewise, as Book powerfully demonstrates, publicly stating that incarcerated individuals were not eligible for economic impact payments, demanding repayment, requiring them to bring a lawsuit challenging the IRS’s position, and even making receipt of payments difficult after they won the lawsuit, created high burdens for incarcerated individuals to receive such payments. While it is remarkable that prisoners were ultimately able to overcome such frictions in the story that Book tells, the broader lesson he draws is a sobering one: in its administration of the law, the IRS, like all other agencies, has an awesome power to increase burdens that can subordinate the goals of the law that Congress passes. In the process, agencies can marginalize communities of color in ways that compound existing power imbalances.
However, another lesson we can take away from Book’s story is a more optimistic one. By recognizing the role of agencies in creating burdens in the administration of the law, we also can see a path to decreasing them. Book offers a number of good suggestions for the IRS at the end of his article, including that the IRS should use transparent and accountable guidance, the IRS should be mindful of the burdens that its administration of the law creates, and that the IRS should be particularly careful in considering how any such burdens disproportionately impact communities of color. Book’s suggestions merit serious consideration by the IRS. Carefully considering frictions in tax administration, and being alert for racialized burdens, will make the agency better. Beyond tax administration, Book’s article offers a useful, detailed story of why the details of the administration of the law matter, and how careful attention to the details of such administration can be critical to a more just society.
Cite as: Leigh Osofsky, Racialized Frictions in Tax Administration
(September 23, 2021) (reviewing Leslie Book, Tax Administration and Racial Justice: The Illegal Denial of Tax Based Pandemic Relief to the Nation’s Incarcerated Population
, 72 S. Carolina L. Rev.
__ (2021), available at SSRN), https://tax.jotwell.com/racialized-frictions-in-tax-administration/
Almost twenty-five years ago, Professor Dorothy Brown started writing law review articles (such as here, here and here) in which she applies critical race theory to tax law. This year, she published The Whiteness of Wealth, a book that not only claimed waves of popular and media attention but also provides a definitive statement of her longstanding scholarly project. The book offers a detailed case study of structural racism in law. It merits sustained attention from teachers and researchers, tax and otherwise.
Brown’s project has a descriptive component and a normative component. The descriptive component is based in cold logic, though made more accessible with stories from original interviews and from Brown’s family history. The logical equation is this: facially neutral tax law doctrine plus empirically different experiences based on race equals disparate impact that systematically favors white taxpayers and white wealth. In 2016, the median wealth of Black households was $17,100; of Latinx households, $20,600; of white households, $171,000. (P. 18.) Brown explains that tax law–not personal choice–explains a large part of this wide and persistent divide. She further argues that as a normative matter, equity and fairness require tax policy to reject rules that disadvantage “black families’ financial and social structures.” (P. 41.)
Here are three illustrative examples from Brown’s book: First, marriage. Brown presents data that shows that Black married couples are systematically less likely to be single-earner couples and more likely to be dual-earner couples, each as compared to white couples. The gap is eight percentage points at household income of $50,000 and grows with income. (P. 51.) This means that, holding income constant, white married couples disproportionately and systematically benefit from the exclusion of imputed income from household services and from the marriage bonus that produces lower tax bills for a single earner when he marries. Black adults who are single (a larger proportion compared to white adults) do not benefit from the marriage bonus either. (P. 57.)
Next comes homeownership. The tax law does not tax imputed rental income from owner-occupied real estate, and it allows deductions (subject to some limits) for mortgage interest and property taxes. These tax breaks increase the value of existing residential real estate. But only 44 percent of Black households are homeowners as compared to 73 percent of white households. (P. 85.) And among Black homeowners, Brown explains that “the average black homeowner lives in a neighborhood that is 51 percent black [and] property values start falling when black presence in the neighborhood exceeds 10 percent.” (P. 81.) Based on these data, homeownership is not a safe investment for a Black household, but rather a risky bet that could well produce a loss. On the other hand, most white homeowners will see their homes’ value increase over time. Yet the tax law disallows losses and exempts most gains on sale of owner-occupied real estate.
The third example is retirement savings. Brown explains that Black Americans “consistently [say] they prefer to invest in housing and life insurance,” not in the stock market (P. 179) and that “[w]hite middle-class families are more than twice as likely as black middle-class families to own stock.” (P. 175.) Thus, the retirement and other savings preferences in the tax law that begin at the starting point of an investment account help white taxpayers more than Black taxpayers.
Brown explains that race discrimination supports the results in each of these examples. Black couples are more likely to be dual earners in order to mitigate the job insecurity and lower wages that result from labor market discrimination. (P. 41.) White homeowners’ current preferences for avoiding neighborhoods with any significant proportion of Black families–in addition to the legalized segregation and redlining of the past–drives disparate housing market results. (P. 87.) Risk aversion in investing is a predictable outcome of systemic racism, which produces more risk, and thus more risk aversion, for Black families in nearly every aspect of life. (P. 181.)
The normative portion of Brown’s argument rests on a broad foundation. She argues that equity and fairness require the tax law to reject rules that disadvantage “black families’ financial and social structures.” (P. 41.) Brown’s argument finds a parallel in recent work in law and political economy (for instance here, here and here) that argues that part of law’s task is to address structural inequities, including those that appear because of the interaction between the market and the law.
Brown follows the logic of her normative claims to their full conclusions and recommends sweeping changes to core individual income tax provisions of the Code. As to marriage, Brown would adopt single filing. (P. 61.) As to homeownership, she would allow loss on sale, tax gain on sale and disallow deductions for property taxes and mortgage interest. (Pp. 89, 93.) (Brown does not propose the taxation of imputed income from household services and homeownership.) As to retirement savings, she would repeal all incentives–although in a later section she also points out that so long as these and other incentives exist, Black Americans should consider taking advantage of them, for instance by investing in the stock market. (P. 212.)
Indeed, Brown would repeal all exclusion and deductions and special rates, including the deduction for state and local taxes and lower rates for capital gain. The reason is simple: these disproportionately benefit wealthy Americans, and thus white Americans. (Pp. 206-07.) Instead she would enact a living allowance deduction and a refundable tax credit paid to those with less wealth. (P. 209.)
Brown writes that the idea of a refundable wealth-based credit is second-best compared to the first-best idea of paying reparations. (P. 216.) Brown’s support for reparations aligns with the view expressed in Boris Bittker’s seminal 1973 book. Her analysis not only explains the tax law’s role in producing racially disparate wealth (which Bittker does not mention) but also provides a modern tax expenditure design twist. How might her first-best choice of reparations payments be delivered? Through a refundable tax credit available to all Black Americans. (P. 216.)
Brown is well aware of counterarguments to her proposals. Take transition costs, such as the reduction in home values that would result from the repeal of residential real estate tax advantages. As she writes, this would reduce home values for a large majority of American households, including for the 44% of Black households who own homes, and including for Brown herself. (Pp. 90-91.) But Brown’s goal is simply bigger and more important than avoiding pricing disruptions in the housing market.
The proposals Brown makes for broad-based income tax reform generally draw support for other reasons, including economic efficiency and administrability. Eliminating special deductions and exclusions and tax rates tends to reduce excess burden distortions, and also tends to reduce tax law complexity. But to the extent there is any tension between Brown’s fairness claims, on one hand; and efficiency or administrability concerns, on the other hand, Brown does not accept any caveats. She has a clear and different goal, and that goal is grounded in vertical and horizontal equity and based on race. Her point is that the tax law should reverse its history of quietly and inexorably increasing the racial wealth gap because that is the fair and right thing to do.
Brown’s book is an instant classic. This is so both because of what it reveals about tax law and because of Brown’s method of marshaling statistics to reveal disparate impact in a technical area of law. Read it!
Justice Louis Brandeis famously described U.S. states as “laboratories” in which citizens can authorize their sub-national governments to “try novel social and economic experiments.” His logic surely also applies to nations as well, with countries around the world offering a wealth of real-world experiments from which we can all draw valuable insights.
Kim Brooks knows quite a lot about comparative legal scholarship (tax studies in particular), but she understands that most people have only passing familiarity with that vast body of literature. She also understands that most every scholarly enterprise could profit from a comparative perspective but that most scholars do not have the time or inclination to become full-on comparativists. What to do?
Brooks’s answer is to offer what she cheekily refers to as a hitchhiker’s guide, by which she means a practical immersion into just enough of the concepts of comparative scholarship to allow relative novices (like most of us) to enhance our analyses by looking beyond our own countries. She demonstrates, in short, that it is not necessary to become a Comparative Legal Scholar to engage usefully in comparative scholarship, and she shows how to do so carefully and with sufficient sophistication for any particular project.
She argues, moreover, that allowing scholars who do not view themselves as comparativists nonetheless to engage in the field strengthens the overall project, rather than weakening it.
The best way to understand comparative scholarship, as Brooks explains, is to understand the different purposes that it serves. She therefore sets out a taxonomy of those purposes (a total of eight), helpfully grouped into three categories. For example, the most basic group is “doctrinal” studies, which can have three purposes: better understanding one’s own country, better understanding another country, and drawing general conclusions about an area of law.
Brooks uses tax law as her framework throughout; but because she is surely correct that her analysis extends beyond tax into other areas of legal scholarship–and beyond law as well–I am paraphrasing her analysis by omitting specific reference to tax law. (This is why I put the word “tax” in parentheses in the title of this jot.)
Brooks offers five additional purposes of tax law, three under the category “normative” and two under “explanatory” scholarship, but the first category (“doctrinal”) alone shows how richly rewarding even a small amount of comparative scholarship can be. For example, a large amount of my own scholarly work explores the U.S. Social Security system. Although various American states do offer various types of retirement benefits, there simply is no way for a national pension system like Social Security to leave room for a “laboratory of the states” approach to policy. That is, because Social Security is by design (nearly) universal and constitutes a legal minimum below which no state’s government will be permitted to allow its citizens to fall, any innovation in the states will be limited to possibly supplementing the federal system.
Other countries, however, can and do run retirement systems with different financing mechanisms and eligibility rules. Comparative scholarship, then, allows us to ask questions about how retirement systems are–or could be–structured. Although I have never for even a moment considered myself a comparativist, I did have the opportunity a few years ago to spend time in Australia, devoting some of my efforts to studying their “superannuation” system (commonly just called super). Super is a particularly helpful comparator to the U.S. system, because Australia’s system is–at least as a matter of form–entirely individualized, in contrast to our collective pay-as-you-go system of intergenerational support.
A comparative study limited to those two countries alone, then, can provide avenues to achieve at least two of the three doctrinal purposes that Brooks lays out: better understanding the U.S. Social Security system, and better understanding Australia’s super system. Moreover, it allowed me (a la Brooks’s third purpose) to draw certain important conclusions about retirement law – among the more important of them being that Australia’s political system has had to respond to the risks of an individualized system by putting up safety nets so significant that they begin to mirror our universal system, and that the administrative costs of an individualized system dwarf the modest costs in the U.S.
Again, these insights are available even after dipping only a few toes into the comparative scholarship pool. That is, it was not necessary to become a comparative law expert to compare the legal frameworks of the two countries’ systems, and only a bit of very basic investigation into the stated legislative purposes offered by the countries’ lawmakers offered helpful insights, allowing an observer to achieve at least the first two purposes in Brooks’s taxonomy.
Moreover, Brooks notes that the decision about how many countries to include in a comparison is itself very specific to context and scholarly purpose. If, for example, I wanted to claim that the U.S. Social Security system is superior to all others, or even to claim that our system works relatively well, I would need to study additional countries, chosen on the basis of the details of their systems (financing mechanisms, eligibility, whether the systems are public or private or a hybrid, and so on) so that it would at least be plausible to make such broad (if tentative) assessments. On the other hand, studying only two countries still allowed me to draw the more limited conclusion that a nominally individualized system ends up functioning surprisingly similarly to a collective system–an observation that is striking because it is so counterintuitive.
As Brooks is very much aware, there is a certain amount of artificiality to her eight discrete purposes of comparative scholarship, and there is thus inevitable overlap when thinking about any particular comparative inquiry. In the case of retirement policy, for example, Brooks’s seventh purpose–“To Explain Why a Country’s Laws Are the Way They Are (and Why They Differ or Are the Same as Other Countries)”–inevitably overlaps with the third purpose–drawing general conclusions about an area of law. Why does Australia limit investment options? Why does the U.S. not offer opt-outs? Finding the answers to these questions is easier when comparing the two countries than when analyzing either one on its own.
Brooks is surely right, then, in arguing that having non-comparativists engage in comparativism–but only as much as is necessary, and with context in mind–enhances any legal or policy analysis. And because even amateur comparativism is nonetheless comparativism, having more people engaging in it can only help the overall enterprise. We can all, then, better evaluate the quality of our own and each other’s work, once we bear in mind how and why Brooks’s taxonomy disciplines the inquiry.
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Too much of a good thing can sometimes be not so good. A case in point is reliance on optimal income tax scholarship, dating back to James Mirrlees’ Nobel Prize-winning work, to treat the generally assumed declining marginal utility of income as the only reason (apart from egalitarian preferences) for favoring progressive tax and other fiscal policies. As I wrote in a recent book (Literature and Inequality): “Declining marginal utility is important, but it falls far short of capturing the full significance and effects of … inequality in human society. We are not just isolated consumers, growing increasingly more sated as we fill up on pizza slices, or ever more jaded as we push further towards the frontiers of fine living. Rather, we are an intensely social species, and often a rivalrous one, prone to measuring ourselves in terms of others, and often directly against others.” On that ground, if one believes (as I do) that extreme high-end inequality has pervasive adverse effects, one may reasonably support imposing tax burdens on the rich going well beyond those that would be deemed to have a positive net effect if one were focusing solely on the marginal utility of own consumption and leisure.
So far, so good. But while evaluating issues of class, tax scholars (myself included) have often given far too little distinct attention to issues of race. Poisonously entwined though class and race are in the United States, it has become ever clearer that “racial disparities [are not just] … economic inequalities in disguise.” Thus, we should not think that “if we address class issues, we can fix racism.”
Like class issues, race issues show both the inadequacy of declining marginal utility from own consumption as a full psychological (or normative) model, and the importance of status considerations to social behavior and preferences. Racism is not just about animus, but also about the impulse to feel that one is better than other people. Understanding the impact and implications of racial, no less than class, inequality requires a broad sociological inquiry. For U.S. racism today, I know of no better recently published starting point to such an inquiry than Isabel Wilkerson’s Caste: The Origins of Our Discontents.
In this book, Wilkerson explores startling, yet to me highly persuasive, comparisons between American racism and both (1) the caste system in India, and (2) anti-Semitism in Nazi Germany. She also examines such topics as the psychological appeal to poor and middle class whites of being able to think of themselves as above someone else in the hierarchy, potentially causing them to view it as in their self-interest to support white supremacist plutocrats, even if this comes at the cost of their own economic immiseration. Plus she helps to show the extreme difficulty, verging on impossibility, of avoiding the contamination of one’s own mind and behavior by racist beliefs and attitudes, when one lives in a society where they are so fundamental and prevalent, even if one consciously tries to reject them. There is no COVID mask for the racism in our social environment.
Bringing Wilkerson’s work into the tax policy realm raises a host of tax policy issues, both normative and empirical, that will occupy scholars for some time. Suppose one started out by modifying the standard model, based on declining marginal utility, solely by recognizing that people’s experiences of subjective wellbeing may reflect their concerns about relative status, along with their animus towards others. Does this imply counting positively such sources of subjective utility as racists’ enjoyment of hurting people in disfavored groups, and of feeling superior to them? But if we decline to attach positive weight to utility that reflects such sentiments, where and how do we draw the needed lines?
These sorts of questions are familiar in the philosophical literature concerning welfarism. In the tax policy realm, however, they could be treated as tangential, or even as effectively irrelevant, so long as analysts were focusing solely on the marginal utility of own consumption. With our improved understanding and focus on both racism and classism, we will no longer always have the luxury of thus simplifying the analysis.
Another standard chestnut in debates over welfarism concerns the choice between focusing on utility today, as opposed to over the long run. Even if one accepts a long-run focus philosophically, there may be prudential reasons for downplaying it analytically, given the difficulty of predicting the future accurately, and the scope that relying on it may give, for example, to totalitarian scoundrels who use the promise of a future paradise to rationalize injustice today. To me, however, Wilkinson’s work makes it clear that we need to focus on eradicating white supremacy in the United States, even if there are bumps along the way. This includes, although of course it is not limited to, aggressively addressing racial economic inequality.
Other work further shows the interaction of tax and caste. Dorothy Brown’s work emphasizing, demonstrating, and particularizing race’s fingerprints all over U.S. tax law is especially helpful. In the wake of her important new book, The Whiteness of Wealth (which is the subject of its own forthcoming JOT), this work is finally getting the attention and influence that it deserves. She shows, for example, how tax rules concerning home ownership, retirement saving, and household or filing status both increase racial wealth disparities (adjusting for class) and reflect racial power imbalances.
How should a given tax rule’s disparate racial impact affect our overall judgment about it? Directionally, it is strongly adverse. As to the above items, even without considering racial disparity there is ample ground for disfavoring our tax system’s (1) treating home ownership preferentially; (2) relying so heavily on voluntary saving, much of it through employer plans (and with tax benefits that rise with marginal rates), to address inadequacies in retirement saving; and (3) treating traditional one-earner married couples so much more favorably than singles and two-earner couples. These rules’ adverse racial impacts add substantially to the already strong cases against them.
This short review is not the right place to begin considering in depth just where a sociological grasp of racism (drawing on Wilkerson’s work), allied with an empirical understanding of how existing tax laws affect racial inequality (drawing on Brown’s work), and supplemented as well by further normative analysis, might lead the still-nascent literature on taxes and racism. But this is a key direction in which we need to go. Wilkerson and Brown have performed a huge service in helping to point the way.
One of the hottest issues in fiscal policy today is how to reduce economic inequality. Louis Kaplow and Steven Shavell have famously asserted (here and here) that redistribution should be limited to the tax system. Edward Kleinbard urged a more expansive consideration of tax and transfer systems, admitting the possibility of regressive taxation to fund progressive spending. Daniel Hemel has raised the possibility of considering distributive consequences in cost-benefit analysis generally, not merely in the tax and transfer context – a move that President Biden authorized on his first day in office. I have argued that we cannot understand inequality without understanding a society’s nontax extractive rules – what I call “implicit taxation.” A recent Wall Street Journal op-ed claims, by contrast, that: “Not only is income inequality in America not growing, it is lower today than it was 50 years ago.” The op-ed reports a current U.S. income Gini index, after federal taxes and transfers, of less than 0.34, lower than the corresponding figure for 1970, when the top marginal income tax rate was 71.75%. (The Gini is a measure of inequality. A Gini of 0 means perfect equality; a Gini of 1 means perfect inequality.)
To date, this debate has been based primarily on data from the 19th and 20th centuries. In Economic Inequality in Preindustrial Times: Europe and Beyond, Guido Alfani reviews a new and rapidly expanding literature on wealth and income inequality in earlier eras and explores implications of that literature for existing theories of the causes and sources of inequality.
Alfani reports that Athens in its heyday boasted an income Gini of 0.4 – 0.45. The early Roman empire clocked in at 0.364 – 0.394, becoming more unequal (0.413) at its apogee, and declining to close to complete equality (0.13 – 0.15) by 600 or 700 CE, after its collapse. (Ginis tend to decline as societies approach Malthusian limits.) In its early years, the United States suffered from significantly more income inequality than it does today, 0.441 in 1774 rising to 0.511 in 1860, although the U.S. was more egalitarian than much of Europe at the time of the Revolution. In the late 1700s, the Gini coefficient of England and Wales was 0.52 – 0.53, of Holland 0.63, and of the southern Low Countries 0.57 – all higher than in the United States.
For theorists, however, the core finding that emerges from Alfani’s literature review is that European income inequality rose consistently and linearly from about 1450 (upon the recovery from the bubonic plague in the 14th century) to the First and Second World Wars. It did so regardless of whether economies were growing, stagnating, or shrinking, and regardless of what populations were doing. For half a millennium, bracketed by two great catastrophes – the bubonic plague and the two World Wars – income inequality grew consistently.
This presents a tension with the view that wealth and income inequality is a relatively benign side-effect of increasing prosperity. Some who take this view rely on a portion of the argument made by Simon Kuznets and depicted in his famous inverted U curve. But perhaps the Kuznets theory is an artifact of the two World Wars. Alfani argues that “the idea that preindustrial inequality growth was just a side effect of economic growth, and maybe even supported such growth, does not fit well the cumulative evidence of the tendency of preindustrial inequality to grow even in phases of stagnation or decline.” (P. 20.)
More recently, Thomas Piketty has argued that income and wealth inequality result from the fact that the rate of return on capital (r) is higher than the growth rate of national income (g), if wealth is highly inheritable. Alfani notes that the emerging literature does not always support Piketty’s proposed relationship between inequality and r > g. During the period from 1450 to about 1900, even when the growth rate was greater than the rate of return, inequality still increased.
Alfani’s analysis of other economic theories of inequality merits close reading. He concludes, however, that multiple factors have affected the history of economic inequality – among the most important, regressive taxation and changes in inheritance rules. The rise of strong fiscal-military states led to increases in the per capita fiscal burden, concentrated at lower income and wealth strata: “the increase in per capita taxation in the presence of a regressive fiscal system can be taken as a general explanation for the tendency toward inequality growth that characterized the early modern period.” (P. 27.) Moreover, “changes in the degree of inheritability of wealth seem to explain much of the variation in inequality levels detected both through prehistory and when analyzing the conditions experienced by different kinds of small-scale societies today.” In other words, when it is easier to bequeath wealth, inequality increases.
One need not be persuaded by his analysis to find great value in Alfani’s work. I, for one, suspect that there is a political economy story to be told, a story of how those already wealthy shift society’s extractive ground-rules in their favor. Regardless, the paper catalogues an extraordinary number of new articles in the field – each of which adds its own insights to our understanding of economic inequality. For tax scholars interested in equality or the history of the relationship between tax and economics, Alfani’s article is an invaluable resource.
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.