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.
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.