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The Upside of Investigating Taxpayers’ Approaches to the Downside Risks of Tax Law Change

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.

Cite as: Charlene D. Luke, The Upside of Investigating Taxpayers’ Approaches to the Downside Risks of Tax Law Change, JOTWELL (January 12, 2021) (reviewing Heather M. Field, Tax MACs: A Study of M&A Termination Rights Triggered by Material Adverse Changes in Law, 73 The Tax Lawyer 823 (2020)), https://tax.jotwell.com/the-upside-of-investigating-taxpayers-approaches-to-the-downside-risks-of-tax-law-change/.

Big Data and Small Politics: What is the Future of International Tax Law?

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.

Cite as: Adam Rosenzweig, Big Data and Small Politics: What is the Future of International Tax Law?, JOTWELL (December 4, 2020) (reviewing Shu-Yi Oei & Diane Ring, When Data Comes Home: Next Steps in International Taxation’s Information Revolution, 64 McGill L. Rev. 707 (2019)), https://tax.jotwell.com/big-data-and-small-politics-what-is-the-future-of-international-tax-law/.

Pursuing Good Rather than Harm with the EITC and CTC

Mention the IRS, and for most, the first thought to come to mind is not alleviating poverty. Most people think of the IRS as the nation’s tax collector, processing tax returns and enforcing the tax laws to finance the government. Yet, for many years now, the IRS also has served as one of the federal government’s most significant antipoverty agencies. The IRS administers the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC), providing billions of dollars of social welfare benefits each year to millions of families and individuals. The EITC and CTC are very popular, at least in part because they are perceived by Congress as especially efficient relative to other antipoverty programs. Consistent with that popularity, both programs have grown a lot since their inception. But their administration by the IRS, while efficient, presents its own set of difficulties—including for the very beneficiaries these programs are intended to help. In her book, Tax Credits for the Working Poor: A Call for Reform, Michelle Drumbl takes a deep dive into the challenges as well as the benefits of giving the IRS responsibility for administering these important social welfare programs.

The comprehensiveness of Drumbl’s treatment alone makes this book a valuable addition to the tax policy literature. She offers plenty of statistics; a thorough survey of pros, cons, and policy alternatives; and a wonderful synthesis of existing scholarship. But the book’s true strength is the human story that it tells. Too often, discussions of the EITC and CTC focus wonkishly on economic efficiency, comparisons of bureaucratic expertise, and statistics alone. Drumbl’s account does not neglect that side of the equation. But she also draws upon her experience running a low-income taxpayer clinic to tell the stories of EITC and CTC beneficiaries, who often suffer the downside consequences of relying on tax officials to administer social welfare programs on the cheap.

The book opens with a short history of the EITC and CTC programs, demonstrating the huge role that the IRS now plays in federal anti-poverty efforts. In 2016, 27 million families and individuals received $67.9 billion in EITC benefits, and 19 million families received $25.7 billion in CTC benefits. Because program beneficiaries self-identify and self-declare their eligibility by filing tax returns and calculating for themselves the benefits they are due, the EITC and CTC are less expensive to administer than other federal antipoverty programs. Drumbl also reports studies documenting that EITC and CTC beneficiaries as experiencing pride rather than shame from their participation in those programs, contrasting being treated by commercial tax preparers as “a client, a taxpayer” with the stigma and “dread associated with a trip to see the welfare caseworker.” Perhaps for this reason, the EITC and CTC enjoy higher participation rates than many other federal social welfare programs.

But determining EITC and CTC eligibility is complicated. That complexity makes it easy for EITC and CTC claimants to commit unintentional errors. It also drives most program participants to rely on professional tax return preparers or commercial tax return preparation software to claim their benefits. Thus, EITC and CTC claimants are placed “in the unusual position of paying money to receive an anti-poverty cash payment.” Many return preparers are not licensed. Others offer refund anticipation loans or other arguably predatory financial products to EITC and CTC recipients. Fraud and identity theft are common. High error rates attributable to complexity and fraud mean that EITC and CTC claimants are subject to much higher IRS audit rates than middle-income taxpayers. The IRS enforcement apparatus is oriented toward pursuing tax scofflaws for nonpayment of taxes and “does not differentiate between intentional and unintentional overclaims” for benefits. IRS audits follow a paper process, conducted by mail, that can be difficult to navigate for taxpayers with limited resources. Cryptic, computer-generated audit letters fail to explain clearly what the taxpayers who receive them are expected to do. Financial penalties for mistakes are high. As Drumbl concludes, “this is a very sad way to administer a social benefit program. The United States can do better.”

And with that, Drumbl turns to ideas for reform. Many countries have programs that are similar conceptually to the EITC and CTC. Drumbl documents case studies of similar tax credit programs in New Zealand and Canada. She acknowledges that no approach is perfect and “the grass is always greener on the other side.” Drawing from those case studies, however, she argues that “Congress can and should reform both the EITC and the [CTC] to better serve low-income families.”

Some of Drumbl’s suggested reforms are small. For example, Congress can simplify the definition of who is a qualifying child. At present, parents can claim children for EITC purposes until they reach nineteen years of age, or twenty-four if the child is a full-time student. For the CTC, parents can only claim that same child until the age of seventeen irrespective of student status. No policy rationale exists for the difference. The different cutoffs merely create more opportunity for inadvertent errors. She also suggests dividing the EITC into separate work support and family support credits—not a new idea, but one for which she offers more detailed proposals. Other of Drumbl’s proposed reforms are more substantial. For example, she suggests relying on household income rather than marital status in calculating credits and transitioning to year-round, periodic payments rather than annual lump sum payments.

Whether or not one agrees with all of Drumbl’s proposed reforms, everyone who is interested in tax policy and antipoverty programs should read this carefully-researched and thoughtfully-developed book. Federal efforts to alleviate poverty among the working poor are laudable when they work, but perhaps less so when poorly designed legislation and administration place heavy additional burdens on families that are already struggling. As Drumbl’s book demonstrates, the latter is all too common.

Cite as: Kristin Hickman, Pursuing Good Rather than Harm with the EITC and CTC, JOTWELL (October 29, 2020) (reviewing Michelle Lyon Drumbl, Tax Credits for the Working Poor: A Call for Reform (2019)), https://tax.jotwell.com/pursuing-good-rather-than-harm-with-the-eitc-and-ctc/.

Situating the Tax Law:  Exceptions, Not Exceptionalism

Alice Abreu & Richard Greenstein, Tax: Different, Not Exceptional, 71 Admin L. Rev. 663 (2019).

Level-headed approaches are rare in discussions of how the administration of tax law should fit into the larger body of administrative law. Alice Abreu and Richard Greenstein’s Tax: Different, Not Exceptional is one of those rare exceptions. All too often, advocates have portrayed the question as having an all or nothing answer, coded as whether tax is “exceptional.” If yes, then the norms of administrative law don’t apply; if no, then they all apply. (And, for many, if these norms all apply, the vast bulk of the work product of the Treasury and the IRS is tainted and should be questioned by the courts.) Abreu and Greenstein persuasively point out that this approach is simply useless.

Careful observers should always have appreciated that neither position is supported by the existing statutory framework. For some aspects of tax administration, there are exceptions in the Administrative Procedure Act itself, and additional exceptions are provided in other titles of the United States Code. But as Abreu and Greenstein point out with reference to Sorites Paradox, a heap of exceptions is often only just that, a heap of discrete exceptions. Even if each of those exceptions is well-founded, they do not necessarily mean anything about the other items that could be removed from the pile, or even about the nature of the pile itself. The questions that remain, given this reality, relate to how these discrete exceptions should be interpreted, and whether these exceptions have any implications for items not covered by their specifics. Tax: Different should go a long way toward establishing this approach to answering these administrative law questions.

Abreu and Greenstein usefully outline some of the sources that would treat tax law as exceptional. One of the best features of their presentation is that the reader cannot always anticipate the context or implications of the original assertions, such as when Erwin Griswold advocated a separate tax court. At the time, he was motivated not by cases in which taxpayers bamboozled federal district courts, but by the fact that the Supreme Court had in recent cases all too readily succumbed to the government’s arguments in cases like Higgins v. United States, 312 U.S. 212 (1941), which prompted an immediate Congressional response on behalf of taxpayers. As a result of this historical context argument, the reader is likely to understand many well-known assertions about the tax law in unexpected ways.

One strand they emphasize seems to have dominated recent discussions. This is the possibility that tax law should be all and only about revenue-raising. This approach finds support in many older authorities establishing some of the different treatments of tax matters (especially the judicial and statutory authorities severely limiting the courts’ ability to provide pre-enforcement relief). Ironically, this source of exceptionalism has been turned inside out. Since tax law has been recognized more and more as a legitimate tool in the pursuit of other legislative goals, the revenue imperative should no longer be accepted as a reason for tax exceptionalism.

Another strand identified by Abreu and Greenstein is the pervasiveness of tax law; virtually everyone is affected by the tax law, and as a result even the most prosaic issues can be the basis for a politically charged challenge. This aspect of tax law cannot be overestimated. To be sure, the institutions through which the roots of tax exceptionalism were established were concerned about revenue raising. Their own salaries and budgets depended upon it. But they also were protective of their own capital as political institutions. Therefore they were careful not to act in ways that would be perceived as anti-taxpayer—and did not let themselves be drawn into disputes that could be resolved through other acceptable procedures. They also were concerned for their own resources, and thus looked for ways to avoid being pulled into the maelstrom that tax politics can generate. The judiciary need not worry too much about the executive getting out of hand given the scrutiny that the legislature will almost certainly eventually provide.

Cite as: Charlotte Crane, Situating the Tax Law:  Exceptions, Not Exceptionalism, JOTWELL (September 29, 2020) (reviewing Alice Abreu & Richard Greenstein, Tax: Different, Not Exceptional, 71 Admin L. Rev. 663 (2019)), https://tax.jotwell.com/situating-the-tax-law-exceptions-not-exceptionalism/.

Planning For The Next Recession (Oh, Wait A Second …)

Recession-Ready: Fiscal Policies to Stabilize the American Economy (Heather Boushey, Ryan Nunn & Jay Shambaugh eds., 2019), available at The Hamilton Project.

Legal scholars, in tax and elsewhere, have increasingly recognized the need for countercyclical policy instruments. (An important example is Yair Listokin’s Law and Macroeconomics: Legal Remedies to Recessions.) Much of the tax system, of course, automatically responds to economic slowdowns, such as by generating less revenue when economic activity declines. In severe recessions, however, non-tax instruments become indispensable to delivering adequate stimulus and individual support.

In this regard, the Great Recession of 2007-2009 taught us several important things the hard way. One was that down business cycles are likely to be a recurrent feature of modern economic life. A second was that austerity makes absolutely no sense as a response to economic slowdowns. A third was that the political system cannot be trusted to respond adequately through discretionary policy changes.

The political economy concern used to be that Congress would simply act too slowly – as in the metaphor of a home heating system that has a six-month time lag, and hence that responds to a January deep freeze by turning on the boiler in July. But now there is also the threat of deliberate obstruction by Republicans whenever there is a Democratic president, alongside a rigid, non-reality-based ideology that tamps down responsiveness even when Republicans control both Congress and the White House. This creates an urgent need for the Democrats, if they win in 2020, to design automatic countercyclical fiscal policy changes that do not require any further discretionary enactment of legislative changes.

Luckily, an important recent book – Recession-Ready: Fiscal Policies to Stabilize the American Economy, edited by Heather Boushey, Ryan Nunn, and Jay Shambaugh and published by the Hamilton Project – offers a wide-ranging set of suggestions. These suggestions would merit serious consideration as cornerstones of a Biden Administration legislative agenda in January 2021.

Authors may sometimes, to their distress, find that their recently published books have lost timeliness with startling rapidity, as economic or political circumstances change. Here, however, it is the other way around. When Recession-Ready was published in May 2019, the editors and authors cannot possibly have known that the United States was only months away from entering from entering a downturn that would be vastly worse, and potentially more long-lasting, than the Great Recession of just over a decade ago that helped to inspire their work. Now, however, that we are in the midst (or early stages?) of the COVID Recession, their suggestions have only become timelier than ever. Consider the six main proposals that Recession-Ready offers:

1) Claudia Sahm’s chapter, Direct Stimulus Payments to Individuals, anticipates many of the problems that arose in 2020. It therefore proposes legislating in advance that Congress provide that such payments, in amounts defined relative to GDP, are automatically issued whenever certain objective economic markers of a recession (such as a sufficient rise in unemployment) are met. The proposal would also provide for automatic follow-up payments, on an annual basis, absent the meeting of objective markers of economic recovery. Among other salient points, Sahm notes that having such a rule on the books would permit advance preparation with regard to the administrative challenges faced by reaching non-income tax filers.

2) Matthew Fiedler, Jason Furman, and Wilson Powell III’s chapter, Increasing Federal Support for State Medicaid and CHIP Programs in Response to Economic Downturns, addresses what has proven to be among Congress’s worst failures in responding to the COVID Recession: its not addressing adequately the fiscal strains faced by state governments. It would cause the federal share of Medicaid and Children’s Health Insurance Program (CHIP) costs to increase automatically during recessions (again, as measured by objective criteria). The rise in federal contributions would automatically be tailored to particular states’ unemployment rates, and would phase down automatically as states’ economies recovered.

3) Andrew Haughwout’s chapter, Infrastructure Investment as an Automatic Stabilizer, would give states incentives to denominate shovel-ready programs that could then be started automatically, under specified criteria, based again on objective economic markers of recession. This as well could have mitigated one of the Trump Administration’s and 2020 Congress’s egregious policy failures in response to the COVID Recession.

4) Gabriel Chodorow-Reich and John Coglianese’s chapter, Unemployment Insurance and Macroeconomic Stabilization, could have mitigated another 2020 policy failure that was spearheaded by Republicans. It would automatically provide for suitable extension, enhancement, and federal funding of unemployment insurance when severe economic downturns (again, defined objectively) make this desirable.

5) Indivar Dhutta-Gupta chapter, Improving TANF’s Counter-Cyclicality Through Increased Basic Assistance and Subsidized Jobs, proposes providing for increased cash, voucher and emergency assistance provision, along with direct and indirect employment aid (such as wraparound support services) when recessions strike.

6) Hilary Hoynes and Diane Whitmore Schanzenbach’s chapter, Strengthening SNAP as an Automatic Stabilizer, would both limit or eliminate work requirements for receiving Food Stamps, and automatically increase their levels by 15 percent during recessions.

The precise details of all of these proposals are reasonably debatable, as all of the authors recognize. However, the need to provide for countercyclical fiscal policy changes automatically, such as the above six, is beginning to verge on being not reasonably debatable. We cannot afford to risk more of the policy malfeasance that needlessly immiserated millions of Americans in 2009, and then again, more gravely, in 2020 – with, perhaps, worse still to follow.

Cite as: Daniel Shaviro, Planning For The Next Recession (Oh, Wait A Second …), JOTWELL (September 1, 2020) (reviewing Recession-Ready: Fiscal Policies to Stabilize the American Economy (Heather Boushey, Ryan Nunn & Jay Shambaugh eds., 2019), available at The Hamilton Project), https://tax.jotwell.com/planning-for-the-next-recession-oh-wait-a-second/.

Raising Revenue by Taxing Capital

Mark Gergen, A Securities Tax and the Problems of Taxing Global Capital (June 2, 2020), available at SSRN.

The federal government’s spending to try to contain the economic fallout from the COVID-19 pandemic already approaches $3 trillion. It will cause U.S. national debt to exceed GDP for the first time since World War II. The current crisis has emphasized deep distributive justice concerns and raised calls for more public spending to help address them. Such public spending is important and necessary, but there is a question of how to pay for it. Taxing wealth and capital income can be part of the solution. These are systematically undertaxed, even though careful analysis demonstrates that wealth taxation would not create an unacceptable drag on the economy.

Within the broad wealth and capital income tax literature, Mark Gergen’s work offers a particularly clever and tidy approach to taxing capital. He proposes a securities tax to reach capital touched by the public market. This tax would be collected and remitted by market participants like public corporations. A complementary tax on imputed normal returns would reach private capital. Gergen recently posted A Securities Tax and the Problems of Taxing Global Capital, which describes international issues raised by his proposal. This paper follows on a 2016 article, How to Tax Capital, which covers the fundamentals of his idea.

Gergen’s proposal would:

  • Enact a “securities tax” on all assets touched by public markets – including publicly traded equity, publicly traded debt, and securitized assets such as mortgages, car loans, and student loans. It is estimated that this tax would apply to about 80 percent of the value of income-producing wealth in the U.S., excluding owner-occupied housing.
  • Require remittance of the securities tax not by individual taxpayers, but rather by public market entities, like publicly traded corporations and mutual funds.
  • Impose a complementary tax on imputed normal return from privately held assets.
  • Allow rebates to individuals to accomplish preferences e.g., a lower tax burden on retirement or other preferred savings accounts. Consider allowing rebates of half the securities tax to nonprofit shareholders.
  • Apply a low tax rate, such as 0.8%, which would raise an estimated $350 billion or more annually assuming the rebates listed above.
  • Use a credit mechanism to avoid double-counting assets such as securities held through mutual funds.
  • Minimize the incentive to invest privately because private-market disadvantages of illiquidity and higher fees would often exceed burden of tax at a low rate.
  • Allow rebates to refund tax to foreign shareholders not subject to U.S. tax, assuming robust proof of beneficial ownership.

The most attractive part of Gergen’s proposal is that that remittance by public corporations and other large public market participants would actually work. It is like the tax administration change that took place in the 1940s, which was the last time that national debt exceeded GDP. Then, the public finance solution included the innovation of third-party reporting and withholding. The law enlisted employers to withhold and remit payroll and income taxes. This made possible the broad “Class Tax to Mass Tax” expansion of the personal income tax. In the 21st century, employer remittance results in 99% compliance for taxes on wages.

In contrast, other capital and wealth taxation proposals imagine rich individuals filling out tax returns and sending in large checks to the government. Expected compliance with such a system is low compared to wage withholding. Indeed, underreporting could be a fatal weakness for some wealth tax proposals. One paper suggests that a tax on the “ultra-wealthy” would resemble the estate tax and “approac[h] a voluntary tax.”

Gergen’s design attends to efficiency as well. Since the proposed securities tax is determined by reference to the value of outstanding securities, its incidence should fall directly on those securities and reduce their value directly. It would be a tax on capital in fact as well as in law. This contrasts with the perennial uncertainty over how much of the corporate income tax burdens capital as opposed to workers or consumers. Also, an innovative credit mechanism would ensure that publicly held capital is taxed just once. For instance, a public company would pay tax on the publicly traded equity and publicly traded debt issued by that company. If the company in turn owned public securities in another issuer, the company would receive a credit for the securities tax remitted by that issuer.

The proposed securities tax remitted by public market entities would not reach privately held assets, such as rent-producing real estate, interests in investment partnerships, and physical commodities. Gergen’s solution to this problem is a tax on an imputed normal return to capital that is an element of a proposal developed by Edward Kleinbard. (We are mourning Ed now, after his passing on June 28.) As Gergen acknowledges, planning opportunities result from the difference between the imputed income tax on privately held capital versus the securities tax on publicly intermediated capital. But he argues that it is still better than a wealth tax that requires taxpayers to report asset values.

Gergen writes that his proposal raises concerns about the global taxation of multinational corporations. If the U.S. repealed its corporate income tax in connection with adopting the securities tax, then the change would encourage companies to shift taxable income and economic activity into the U.S. However, this distortion could be mitigated by continuing to impose corporate income tax on foreign multinationals’ U.S. income.

A final issue is constitutionality. Although the Sixteenth Amendment permits taxation of income, the Constitution elsewhere requires the apportionment of “direct” taxes. Would Gergen’s securities tax risk violating the requirement of apportionment? Gergen does not spill much ink on this issue. But the risk would be reduced if the structure avoided explicit connections between a corporation’s obligation to remit securities tax and an individual’s obligation to pay tax on wealth held through public markets. The Supreme Court has treated corporate taxes as excise taxes, not direct taxes. Congress might also enact “fallback” provisions that would apply in the event of a successful apportionment challenge.

Gergen’s proposal for taxing capital is ambitious. It would be a big change and raises political economy and transition questions. But it is also a clever and above all administratively practical way to tax capital broadly and effectively. It should be on the table as we consider our pressing and increasing need for public revenue.

Cite as: Susan Morse, Raising Revenue by Taxing Capital, JOTWELL (July 15, 2020) (reviewing Mark Gergen, A Securities Tax and the Problems of Taxing Global Capital (June 2, 2020), available at SSRN), https://tax.jotwell.com/raising-revenue-by-taxing-capital/.

The Bereaved Should Not Be Preyed Upon: Can the Tax System Help?

Victoria J. Haneman, Tax Incentives for Green Burial, __ Nev. L.J. __ (forthcoming, 2020), available at SSRN.

Dealing with the death of a loved one is one of the most stressful and debilitating experiences in most people’s lives. As Victoria J. Haneman summarizes some key empirical insights:

“After a major loss, such as the death of a spouse or child, a third of survivors will suffer detrimental physical or mental health issues. One-quarter of surviving spouses will suffer clinical depression or anxiety within the first year of loss. Grief is frequently accompanied by weight loss, anxiety, despair, hypnagogic hallucinations, temporarily impaired immune response, disorganization, and/or disorientation.” (P. 41.)

Setting aside the emotional turmoil, how do Americans deal with the practical side of these inevitable events? Not well at all.  Vulnerable people are always the target of unscrupulous grifters – such as Ryan O’Neal’s character in the classic film “Paper Moon,” who exploits grieving widows in the Depression-era Midwest – but the bigger problem is that the nominally legitimate “death industry” (in Haneman’s preferred turn of phrase) has at best a mixed record, often overcharging and upselling stunned family members who have much more important matters on their minds.

This article by Haneman on “green burial” will soon be joined by a companion article on “funeral poverty.” She is doing important work on an underexplored area in which tax policy might have a surprisingly important role to play in protecting families from predators. I highly recommend her engaging and well written work.

In 1963, the muckraking journalist Jessica Mitford published The American Way of Death, which she revised and updated prior to her death, with The American Way of Death Revisited being published posthumously in 2000. Mitford’s searing expose of the relentless and merciless emotional manipulation of devastated people in the pursuit of profit is unfortunately not of merely historical interest, despite a round of consumer protection regulations issued by the Federal Trade Commission in 1982. As Haneman notes, this manipulation continues to be a severe problem to this day.

This is a problem with a surprisingly simple economic explanation. To be clear, even though I am an economist, I am in no way saying that all social problems have simple economic explanations. People with training in economics (from a single college course up through a Ph.D.) almost cannot help but start to believe in the reductive view that human behavior can ultimately be explained by a simple textbook model of economics. That is emphatically not true.

Even so, there are some situations in which a basic economics-based insight goes a long way.  And when a standard assumption of textbook economics is not met, there is often something important to be learned. Indeed, the entire field of health economics arguably cannot be understood by anyone who does not know that textbook economics assumes “perfect information” by consumers but that real-world consumers are severely lacking in the necessary information to make savvy decisions about medical care and insurance purchases.

In the standard economic model – an approach that in its basic set of assumptions mirrors the rigid approach of formalist contract theory in law – potential buyers protect their own interests by informing themselves about the goods that they might buy (quality, price, alternatives, and so on). Crucially, walking away from the deal is assumed to be an option.

When is that assumption that buyers protect themselves least likely to be true? One example is when a person has fallen ill and is in an ambulance, when the last thing in the world they might be capable of doing is to negotiate and threaten to go to a different seller. Even a basic question like, “Which hospital do you want to go to?” – a question that could significantly change the costs to the consumer of the care that she receives – might be met with a blank stare (if, indeed, the patient is conscious at all). Because of this, good health care economists understand that the usual appeals to “market discipline” from other areas of economic analysis ring especially hollow when it comes to people supposedly engaged in bargaining for their medical treatment. Such patients are, to be blunt, sitting ducks.

If “When you might be dying” is the answer to the question, “What is the time when you are least likely to make a smart economic decision?” perhaps the next-worst time would be, “Right after someone you love has died.” This is what explains so much of what goes into Mitford’s books, which exposed high-pressure techniques that we generally associate with used-car salespeople being brought to bear on emotionally raw survivors. “Surely, you wouldn’t want to put your dad into a cheap casket. Here’s our most comfortable version. He would have liked that, wouldn’t he?”

Much of Haneman’s article focuses on how those decisions push people into making terrible decisions about the disposal of human bodies, where the harm is not just to the finances of the surviving family but to the environment.  As she shows, the overwhelmingly most popular options of burial and cremation are surprisingly damaging to the planet:

“Annually, in the 22,500 cemeteries in the United States, it is estimated that the following will be buried within the earth: 14,000 tons of steel vaults; 90,272 tons of steel caskets, 2,700 tons of bronze and copper caskets, 1,636,000 tons of concrete vaults, 30 million board feet of hardwood caskets, and, 827,060 gallons of embalming fluid. These statistics do not include the mercury from dental fillings and medical devices such as pacemakers, which may potentially leach into groundwater after human remains have decomposed.” (Pp. 22-23.)

A central argument of Haneman’s article is that this kind of environmental damage could be mitigated by a “green tax credit,” which she describes and defends well.  My interest here, however, is not in the direct impact of the credit in generating environmental benefits – although that is surely a worthy goal – but in the point that she makes about how the creation of a credit could have an important ancillary effect of reducing people’s vulnerability to exploitation at the time of a loved one’s death.

Haneman ends the article by arguing that a green tax credit “is likely to generate consumer interest and investment into the creation of more accessible financial products to facilitate prepayment” of funeral expenses (P. 42), which ties back to her description of “the importance of pre-need or pre-death planning and prepayment to protect the grieving consumer.” (P. 4.)

In short, the idea is that creating a tax credit for “green burial” will give people an additional reason to think in advance about funeral planning, which people are understandably not eager to think about.  That is, no matter whether the tax credit has any environmental benefits at all, some people will hear that there is a tax boon available to those who set up a funeral plan in advance.  That might not convince everyone to stop living in denial, but even if it encourages a few more people to take what amount to defensive measures against emotional exploitation, that would be a very good thing indeed.

Cite as: Neil H. Buchanan, The Bereaved Should Not Be Preyed Upon: Can the Tax System Help?, JOTWELL (June 15, 2020) (reviewing Victoria J. Haneman, Tax Incentives for Green Burial, __ Nev. L.J. __ (forthcoming, 2020), available at SSRN), https://tax.jotwell.com/the-bereaved-should-not-be-preyed-upon-can-the-tax-system-help/.

The New World of International Tax

Ruth Mason, The Transformation of International Tax, 114 Am. J. Int'l L. __ (forthcoming, 2020), available at SSRN.

International tax law has been in the news a good deal lately, and one of the key developments widely discussed among international tax experts is the “OECD/G20 Inclusive Framework on BEPS,” which aims to take on base erosion and profit shifting (i.e., “BEPS”) behaviors of multinational enterprises (“MNEs”). Ruth Mason offers a broad new view of these developments in her article, The Transformation of International Tax.

Here’s the backstory: Before the 2008 financial crisis, world leaders largely tolerated cross-border corporate tax avoidance and minimization by MNEs. The 2008 crisis, together with data leaks, hacks, and resulting parliamentary and congressional hearings, brought heightened public attention to these tax avoidance strategies. This jolted world leaders out of their longstanding inaction. In 2013, leaders of the G20 countries tasked the OECD—an international organization that in recent years has played a key role in international tax policy—with coordinating multilateral efforts to ensure that MNEs paid their fair share of taxes. The OECD accordingly created its now-famous “BEPS Action Plan” in 2013 and delivered final action recommendations in October 2015. These recommendations consisted of 15 action items that countries should undertake to confront MNE base erosion and profit shifting behaviors. In 2016, recognizing that the success of the BEPS project required the engagement of developing countries, the OECD established the OECD/G20 Inclusive Framework. Through this new structure, the OECD and G20 invited developing countries to participate on an equal footing in the creation of standards to combat base erosion and profit-shifting behaviors and in the review and monitoring of OECD BEPS implementation.

The OECD/BEPS project is often discussed in highly technical terms, with tax experts focusing on the specific doctrinal and policy mechanisms by which it intends to close tax loopholes. In her new paper, Ruth Mason argues, by contrast, that these changes aren’t merely technical. Instead, she writes that the international tax regime has undergone nothing short of a transformation since 2008.

Specifically, according to Mason, the BEPS project effectuated transformation along five dimensions: (1) by increasing the number of participants in international tax policymaking to include G20 and developing countries, (2) by expanding the agenda of international tax policymaking to include more multilateralism, thereby contributing to the growing importance of the OECD in international tax policymaking, (3) by moving towards a new “full taxation” norm (as opposed to merely focusing on avoidance of double taxation and the elimination of harmful tax competition), (4) by advancing novel forms of multilateral law (such as the new “Multilateral Instrument” and fiscal fail-safes); and (5) by bringing distributional issues to the forefront of the international tax agenda. Any one of these developments would be a major shift on its own, but Mason uses her masterful expertise in international tax—both from a U.S. and EU perspective—to tie all the threads together and explain how, in combination, they represent a fundamental transformation.

Mason then pushes the analysis further. She undertakes a normative evaluation of the new transformed international tax order, noting the uncertain effects for revenue and inclusivity, possible accountability problems, and potential difficulties with the new “full taxation” norm. Most notably, Mason is concerned about potentially controversial distributive issues that may arise among nations in deciding how to allocate worldwide tax revenues. She notes the conflicting and changing interests of the U.S. and EU, the emerging role of the BRICS, and the roles being played by the OECD and EU in the diffusion of norms and outcomes as important factors that will affect the ultimate worldwide allocation of tax revenues. Ultimately, she warns that distributive considerations cannot be indefinitely postponed or swept under the rug without risking chaos, failure of the new “full taxation” norm, or derailment of the entire BEPS project.

Mason’s paper gives the tax field its most recent “big picture” work, a wide-ranging conceptualization of the state of the international tax field. Her paper should spark reams of subsequent research in light of the numerous important questions it raises. For example, obvious follow-up lines of inquiry include investigation into the role and participation of developing countries in the new international tax order, further examination of the role played by the OECD, the EU, and the G20 in the diffusion of tax norms and standards and the impacts of this on policy outcomes, and, of course, empirical research about the success or failure of the BEPS project and the ultimate distribution of worldwide tax revenues that will result. The answers to these questions are important. They not only affect the ability of revenue-strapped nations to fund welfare states and social safety nets but also carry fundamental implications for the future positions and roles of nation states in our world order.

Shu-Yi Oei, The New World of International Tax, JOTWELL (May 22, 2020) (reviewing Ruth Mason, The Transformation of International Tax, American Journal of International Law (forthcoming, 2020), https://tax.jotwell.com/the-new-world-of-international-tax/.

Taxing “Takers”

Lily Batchelder, Leveling the Playing Field between Inherited Income and Income from Work through an Inheritance Tax in Tackling the Tax Code 48 (Jay Shambaugh & Ryan Nunn eds, 2020).

In Leveling the Playing Field between Inherited Income and Income from Work through an Inheritance Tax, Lily Batchelder proposes that our current estate and gift transfer taxes be abolished and that gifts, inheritances, and bequests in excess of a lifetime exemption and various annual exclusions instead be includible for both income and payroll tax purposes. She would require constructive realization of large accrued gains on gifts and bequests and repeal of carryover basis and stepped-up basis for such gains as well. To avoid forcing the sale of family farms and businesses, she would allow heirs to defer indefinitely the resulting taxes to the extent they exceed the heirs’ liquid assets, minus a cushion of $500,000. She would also permit taxable inheritances to be spread over five years to minimize bracket shift problems. Finally, to address the avoidance problems that currently plague our transfer tax system, she proposes a series of reforms to rules governing the timing and valuation of transfers through trusts and similar devices. The Urban-Brookings Tax Policy Center estimates that if the lifetime exemption were $2.5 million, Batchelder’s proposal would raise $34 billion per year; if the lifetime exemption were $1 million, $92 billion per year; and if the lifetime exemption were $500,000, $140 billion per year. By comparison, our current transfer tax system raises about $16 billion per year.

Batchelder’s thorough exploration of the problem includes: extensive empirical background; critical examination of the technical, economic, and ethical issues raised; and comprehensive proposed transition and reporting rules. It is essential reading for both tax specialists interested in the relationship between income and wealth taxation and lay readers concerned about addressing increasing wealth, income, and political disparities in the United States in a manner consistent with American political values.

Over the past decade, the twin problems of income and wealth inequality have become increasingly salient (Piketty 2014). Increasing economic inequality has produced increasing political inequality. And we have recently learned that in the face of a pandemic, it may also produce significantly different health and mortality outcomes. Addressing these problems is not easy. Equality of opportunity, not of results, is most consistent with mainstream American political traditions. If someone works hard, earns a lot, and thereby becomes wealthy, Americans have been reluctant to take what she has earned as undeserved. This reluctance, together with the perceived constraints of optimal tax theory, has led to severe limits on the use of income taxation to reduce economic inequality (Kleinbard 2014).

Batchelder’s solution is to tax accessions that have not been earned—gifts, bequests, and inheritances—at the same or higher rates as income from labor. This almost completely eliminates deadweight losses from the taxation of such accessions, because the only disincentive to earning would stem from the earner’s remote concern about her heirs’ inheritance tax bill. More importantly, however, it reframes taxes on wealth transfers as taxes on recipients, not taxes on donors. In the inimitable language of the American right, heirs are “takers” not “makers.”

At its core, therefore, Batchelder’s paper is a paper on political economy. Her most important argument is that including gifts, inheritances, and bequests in income rather than subjecting them to separate “death taxes” will be more saleable. Whether this is so, only time will tell. In the meantime, however, she has given us a comprehensive, technically sound path forward.

Cite as: Theodore P. Seto, Taxing “Takers”, JOTWELL (April 29, 2020) (reviewing Lily Batchelder, Leveling the Playing Field between Inherited Income and Income from Work through an Inheritance Tax in Tackling the Tax Code 48 (Jay Shambaugh & Ryan Nunn eds, 2020)), https://tax.jotwell.com/taxing-takers/.

Why New Orleans Has Shotgun Houses and Other Mysteries Solved

Meredith Conway’s article draws titular inspiration from the 1980s Talking Heads song, “Once in a Lifetime.” It’s hard to have been alive in the 1980s and not hear the song echoing in your head while you read her article. The song opens with the lyrics, “And you might find yourself/Living in a shotgun shack.”

What is a shotgun shack?

Shotgun cottages are characteristic New Orleans structures, although the architectural design crops up in other cities (and countries, too). There is some debate about how the houses got the name “shotgun cottages.” Conway isn’t seeking to resolve that debate, so she recounts what is probably the most common narrative. The houses are narrow, usually only one room wide, and when the doors through all the rooms are opened, you can shoot a shot gun and the bullet will travel through the front door, the interior of the house, and straight out the back door.

But why do they exist at all? Here, Conway diverges from the dominant narrative (that they were designed to accommodate narrow urban lots) and offers a tax story instead: perhaps the houses were designed this way as a tax avoidance strategy. According to Conway, many jurisdictions, including the Netherlands, Charleston, Japan, and Vietnam (alongside New Orleans) imposed taxes on elements of house design that inspired architects to build “skinny houses.” She reviews these skinny house-inspiring tax policies in Part IV of the article.

But let’s back up. What’s Conway’s aim in this relatively short (for an American law review) and approachable piece? Her claim is that at least some of the architectural features we see around us are explained by tax policy.

The article proceeds in ten parts. The primary sections are designed around documenting and recording taxes that influenced building (primarily housing) design. In addition to taxes that resulted in the construction of skinny houses, Conway details efforts to tax chimneys, windows, bricks, wallpaper, and number of floors. These taxation efforts cross jurisdictions and time periods, and the taxation ideas migrate. In each case, the primary motivation of tax collectors seems to have been to find administrable proxies for wealth. Each tax policy seems to yield avoidance strategies by homeowners and builders. Many have consequences for the development (or failure) of industries. Sometimes those strategies result in architectural designs that stick even after the tax is repealed.

Conway’s work in this piece feels like an introduction to what I hope will be more work by her, or others, in this area. She’s offered us a documentary resource on tax policies that were focused explicitly on housing design (e.g. impose a tax on the number of windows). There are undoubtedly more taxes that result less directly in architectural changes.

Many of the illustrations are historic, but the article concludes by exploring the use of tax policy to encourage eco-friendly building. This also seems like an avenue for further exploration. What can we learn from early efforts by tax policy-makers to tax elements of building construction that can be carried over and improved in the contemporary context, where eco-friendly building solutions are so desperately needed? Given the challenges she identifies with earlier interactions between tax policy and architectural and industrial developments, I hope Conway writes more to help us with new approaches to the interaction of tax policy and architecture, so that we don’t have to keep singing “same as it ever was” in our heads.

Cite as: Kim Brooks, Why New Orleans Has Shotgun Houses and Other Mysteries Solved, JOTWELL (March 26, 2020) (reviewing Meredith Conway, And You May Ask Yourself, What is that Beautiful House: How Tax Laws Distort Behavior Through the Lens of Architecture, 10 Colum. J. of Tax L. 165 (2019)), https://tax.jotwell.com/why-new-orleans-has-shotgun-houses-and-other-mysteries-solved/.