Category Archives: Uncategorized
Jun 9, 2022 Dorothy Brown
Professor Goldburn Maynard’s excellent Essay: Biden’s Gambit: Advancing Racial Equity While Relying on a Race-Neutral Tax Code, analyzes the Biden’s Administrations efforts to advance racial equity through the American Rescue Plan Act (ARPA) enacted by Congress and signed into law on March 11, 2021.
The first executive order that President Biden signed once sworn into office was Executive Order No. 13,985, designed to advance racial equity throughout his Administration including various federal agencies. ARPA contains some provisions that exemplify the language and spirit of Executive Order No. 13,985. That set the new Administration on a collision course with the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS), which have both been devoted to the idea of colorblindness when it comes to tax data. The IRS for example does not publish statistics by race, even though it has done so by age and gender. As Professor Maynard points out, Biden Administration efforts also conflicted with federal courts, which similarly operate with a colorblind jurisprudence. In Professor Maynard’s observation, parts of ARPA, such as distributing aid through the tax system, only indirectly and inadequately pursued racial equity goals. Others, such as debt relief for socially disadvantaged farmers or ranchers, were colorblind casualties.
As Professor Maynard points out, racial equity does not rely on equal treatment, but fairness in treatment including access to resources. Racial equity seeks to address historical disparities and minimize or eliminate systemic racism.
But let’s begin at the beginning…what is racial equity? Professor Maynard provides the overall definition, which “requires treating individuals differently based on need.” (P. 661.) He notes that programs targeted at reducing or eliminating poverty do not satisfy the definition of racial equity, as racial equity requires a “more comprehensive dismantling of oppressive systems.” (P. 663.) In one of the article’s signature contributions, he provides us with three questions that help identify whether a provision or policy promotes racial equity in the long run.
(1) Does the policy target individuals or groups based on need?
(2) Is the policy race conscious either by targeting aid to a racial group, ensuring equitable delivery of benefits, or ensuring that they are disproportionately targeted at disadvantaged minorities?
(3) Does the policy tackle root causes of racial inequality and remove barriers keeping certain racial groups disadvantaged? (P. 664.)
There were ARPA provisions that targeted the poor and disproportionately helped racial minorities, yet there were other programs that were specifically designed to address the root causes of current disadvantage by addressing systemic racism. The expanded child tax credit extended to Americans with no taxable income was an example of the former, while the debt relief program for disadvantaged farmers was an example of the latter.
As Professor Maynard describes it, a good portion of the stimulus package in ARPA, including the expanded child tax credit, was focused on distributing aid through our tax system. One of the many strengths of the article is his observation of the irony of the Administration using the tax code to advance racial equity given how “the IRS does not collect racial data on taxpayers. Rather, it exists as a colorblind agency, with neither the Form 1040 asking about race nor the agency including race or ethnicity in its published data analysis.” (P. 658.) He argues that a provision like the child tax credit addresses racial equity indirectly and inadequately, burdened by the disadvantage of the colorblind approach of the IRS and Treasury.
While Professor Maynard describes five policies or programs in ARPA that more squarely addressed systemic racial inequity relating to education, farming, housing, small businesses, and state and local aid, I want to focus on his treatment of the Biden Administration’s efforts for farmers – specifically black farmers. As Professor Maynard notes “ARPA also sought to address the impact of systemic discrimination on minority farmers.” (P. 669.) He then describes the decades of racial discrimination imposed by the U.S. Department of Agriculture on black farmers that resulted in a civil rights class action lawsuit by black farmers. ARPA included a debt relief provision for “socially disadvantaged farmers or ranchers (SDFR), including Black/African Americans, American Indians or Alaskan Natives, Hispanics or Latinos, and Asian Americans or Pacific Islanders. The Department could pay as much as 120% of each farmer’s or rancher’s debt on loans it made or guaranteed. Any socially disadvantaged borrower with direct or guaranteed farm loans as well as Farm Storage Facility Loans qualified for the aid.” (P. 670.) Almost immediately, a lawsuit was filed by white farmers excluded from the debt relief provisions of ARPA.
This provision could have made significant contributions towards achieving racial equity. But it has been defanged through injunctive relief issued by federal courts. Like IRS and Treasury, federal courts are limited by their colorblindness.
Professor Maynard describes the legal landscape of Supreme Court precedent as treating “efforts to dismantle systemic racism the same as attempts to impose racial segregation.” (P. 673.) He provides an excellent and accessible primer on Supreme Court precedent which makes government policies that classify people by race presumptively unconstitutional. In order to rebut the presumption, the government must show that it is necessary to support one race over another in order to “achieve a compelling state interest.” (P. 674.) But even if a government can show a compelling state interest, the government policy must be “narrowly tailored.” He correctly points out that this is a standard which “few programs survive.” (P. 674.) Unsurprisingly, a federal district court granted a preliminary injunction against the Biden Administration on behalf of the white plaintiffs challenging the debt forgiveness provisions in Miller v. Vilsack. The Biden Administration flunked the narrowly tailored requirement when their evidence “did not demonstrate specific instances of intentional discrimination against SDFRs who hold qualifying USDA loans. And any SDFRs who may have experienced racial discrimination but did not hold qualifying loans were not eligible for the relief….” (P. 677.)
Professor Maynard wryly observes that “[w]ith courts standing in the way, [racial equity] must be promoted in a neutral, indirect way that ignores systemic discrimination.” (P. 679.) Perhaps however it is the Biden Administration that should bear some responsibility for not engaging in better fact finding to prove its legislative scheme was narrowly tailored. Nevertheless, Professor Maynard’s conclusion is more than supported by constitutional precedent. Ultimately, Professor Maynard believes what is needed is “both targeted and universal programs to tackle inequality.” (P. 686.)
Professor Maynard ends on a positive note by observing that there is momentum building for racial equity work. He cites as examples sentencing disparities being reduced, support from President Biden for a commission to study reparations for slavery and segregation, and steps the Biden Administration has taken to work towards ending housing discrimination. Here’s hoping that momentum leads to increased racial equity outcomes.
May 10, 2022 Kim Brooks
I love everything about this book book, Tax Cooperation in an Unjust World, by Allison Christians and Laurens van Apeldoorn. It’s short, it’s readable, there’s no mystery about the point (and the authors don’t belabour it), and it’s important.
The main claim: our international tax system has justice at its heart. And when we fail to attend to its justice consequences, we enable states with great wealth to “facilitate[] and feed[] off continued human suffering.” (P. 1.)
Six chapters comprise the monograph. Chapter 1 explores two principles that the authors claim explain (and perhaps also guide) international tax arrangements. The principle of entitlement, which supports states’ claim to some share of the wealth generated in their state and by their people; and the principle of fair cooperation, which supports states’ claim to an equal share of the net benefits of cooperation between those states.
Chapter 2 turns to a puzzle that has plagued scholars (and perhaps to a lesser extent, policy-makers). If states (particularly middle- and low-income states) have a justifiable claim to tax revenue associated with activities arises in their state, by their people, and as the result of fair cooperation, why do they cede their rights to tax that income (in either domestic law or tax treaties)? Two explanations are investigated: countries cede their rights because they think it is an effective way to compete with their neighbours for investment or they cede them because they face pressure to do so from higher-income states (and maybe also from states with similar incomes).
With that groundwork laid, the authors set off on their argument. Chapter 3 articulates a “duty of assistance.” The thrust of the duty is that states that do not have “subsistence rights deficits” should leave taxing rights with states that do have those deficits. Only once subsistence needs can be met (in middle or lower-income states), should the principle of entitlement (for the higher-income state) be triggered. The authors argue that the pursuit of justice includes or requires this duty.
Chapter 4 brings the duty of assistance to life. The authors offer a variety of options and mechanisms that reasonably affluent states can (and, they argue, should) adopt to have their international tax policy accord with the duty of assistance.
Chapter 5 offers an “in the alternative” argument. If the reader doesn’t agree with the duty of assistance (or its scope and application), the authors argue that the principle of entitlement is nevertheless truncated for affluent countries where the partner is a country with subsistence rights deficits. The analysis requires revisiting equal benefit and entitlement principles and the argument turns on quantifying cost saving associated with specified subsistence deficits.
Chapter 6 offers some concrete examples of their “in the alternative” argument. The crux of the argument is that even current arrangements are malleable enough to facilitate accounting for subsistence deficits in tax system design. Chapter 7 concludes.
The chapters that explore the theoretical grounding for the principles and the duty of assistance are fascinating, but I’ll focus here on offering some more texture on the concrete proposals that live in Chapters 4 and 6.
Chapter 4 attends to actions for capital-exporting states that would help support the states with subsistence rights deficits. The major suggestion in this chapter is for capital-exporting states to ensure that business profits are subject to tax at residence, while giving source states (a rough proxy for states with subsistence rights deficits) the ability to tax that income at source. The goal is to create a backstop or minimum level of corporate taxation using a pass-through mechanism. States with subsistence rights deficits must take up the room yielded by capital-exporting states. In exploring each stage of the proposed mechanism, the authors address the design features, the effect on tax base allocation, and the feasibility of the reform proposal.
Chapter 6’s pragmatic analysis focuses on accounting for the cost of subsistence rights deficits. The authors demonstrate (and this is true for many of their claims in the book) that their argument does not require great leaps from some current practices. In this chapter, they look at how multilateral profit needs to be adjusted to reflect available knowledge about the costs, for example, of paying individuals less than a living wage to work or enabling uncompensated environmental degradation. The chapter explores two methods for accounting for those cost savings – through expanding the range of withholding taxes and reconfiguring our approach to profit allocation.
This book is an important contribution to the international tax literature and more broadly to the tax justice and human rights justice literatures. There is a small section near the end of Chapter 6 where the authors reply to possible critique, but it’s hard to imagine anyone could have one.
Apr 6, 2022 Adam Rosenzweig
Wei Cui,
New Puzzles in International Tax Agreements,
Tax L. Rev. (forthcoming 2022), available on
SSRN.
The G-7 and G-20 recently announced a “breakthrough” agreement by over 130 countries to adopt and implement a “global minimum tax” proposal. The agreement is reportedly expected to raise over $150 billion in new revenue by closing some of the most notorious tax loopholes in the world; ultimately the deal could reshape global commerce and shore-up beleaguered national finances following the global pandemic. Officials involved in the deal have been quoted as making sweeping statements that the deal was historic, and that it would reshape the global economy, make worldwide taxation fairer, eliminate incentives for corporations to avoid tax, and serve as a clear signal for global justice.
A consistent theme can be seen to emerge from this process – that the cause for most of the problems plaguing the international tax regime ultimately stem from a lack of political will, with global corporate interests exploiting the vacuum of an uncoordinated tax system. Regardless if it is true, such a theme carries with it two collateral implications: (1) there is no disagreement as to the substance of the deal from a legal or policy standpoint and (2) any questioning of (1) must be motivated by the same political forces preventing reform in the past. Wei Cui’s article New Puzzles in International Tax Agreements analyzes and criticizes this theme.
This theme creates a form of existential moment for international tax law scholars – precisely because a once-in-a-generation global overhaul of the regime appears within reach. Yet, as intellectual debates transition into real-world policy-making, even facially neutral contributions risk getting lost in the noise of the moment, or maybe even worse stuck in a form of intellectual purgatory.
This is where Cui’s article intervenes, and does so with refreshing clarity and candor. Cui brings academic rigor and precision to identify what he refers to as intellectual “puzzles” in the debate. His points could be thought of as a tax law form of observing that the emperor has no new clothes. To quote just a few representative examples:
- “[T]here is little evidence that, globally, the remote provision of services is increasing at the expense of trade through branches and foreign affiliates … [t]his renders the OECD’s claim that any international reform must be based on global agreement … puzzling.”
- There is “a glaring gap between what the G7 claims as already agreed-upon policies (a “global minimum tax”) and the actual policies under discussion …. nowhere in the OECD’s “Two Pillar” solution do countries actually commit to adopting a minimum corporate tax rate.”
- “Economic theory has in fact long struggled to explain basic features of the international tax system … Even more importantly … economists and other tax scholars have foregone a basic template for explaining actual and proposed cooperation.”
- “Tax specialists may be so far from coherent accounts of international cooperation that they hesitate to reject bad ones.”
Crucially, Cui’s article is not contrarian merely for contrarian’s sake. Rather, it appears to develop a set of intellectual puzzles in the first part of the article as a way to open enough intellectual space to allow for consideration of a new and significant alternative theoretical model in the second part of the article. The success of the first part of the article, therefore, is not in its novelty but rather in the clarity of its precision; it manages to distill well-worn, even obvious, ideas into concise intellectual daggers that cut deep.
That said, the sharp tone of the puzzles section of the article stands in stark contrast to the tone in the proposal section. To some it could come across as more measured if not tentative, explaining for instance that “critiquing the design of the new international tax agreement proposed by the G7, G20, and the OECD is not my main purpose.” The result is a version of the “two papers” dilemma – a single article with two parts that analytically may form a coherent and thoroughly defended and supported article yet ultimately may be stronger as two separate pieces. While normally that critique might be fitting, in Cui’s article more appears to be going on. Upon closer inspection, the shift in tone seems to be doing work on its own. Rather than being better off as separate papers, in this case the severity of the “puzzles” section might well serve as the means to open enough space in the current climate to allow the Cui article to both contribute to and rise above the politics of the moment.
This is an important move, because the article’s proposed model is substantial and deserves attention. Cui proposes replacing the basic economic theory underlying international tax policy for generations – one based on maximizing efficiency of cross-border capital flows – with an existing but separate economic model focused on maximizing gains from trade (which Cui collectively refers to as “TTT”). At its core, TTT is a form of prisoners’ dilemma game-theory model where high capital-mobility paired with low labor-mobility creates opportunities for worldwide gains from trade under the theory of comparative advantage, but at the same time creates incentives for importing capital-rich countries to externalize costs onto labor-rich exporting countries in the form of import tariffs. TTT theory provides a rational incentive for countries to support free-trade and enter into free-trade agreements notwithstanding any individual country’s incentive to compete.
The article presents two separate but related reasons to consider TTT as applied to international tax, one backwards looking and one forwards looking. First, Cui proposes that descriptively TTT might better explain many of the currently unresolved puzzles identified earlier in the article than current models. Second, from a normative standpoint Cui proposes that TTT could help better design and structure a system that could actually achieve many of the purported policy goals of the BEPS project. Perhaps more importantly, however, the claim of the article is more fundamental: not that TTT is necessarily a better first-principles theory than current theories but that the current international tax system fundamentally lacks any underlying first-principles theory.
By systemically analyzing the existing international tax infrastructure within a competing economic model, the proposal combines some of the best parts of first-principles normative theories with those of the most useful inductive doctrinal proposals. Ultimately, however, there lies an internal tension throughout the article which both increases its ambition but also risks its potential effectiveness: does combining the descriptive enterprise of identifying puzzles with the normative proposal ultimately narrow the audience for either part to the sliver of audience that overlaps?
It would prove truly unfortunate if Cui’s article were in fact to find itself losing potential audience for this reason. In part, the descriptive section both serves as a lead-in to the proposal and also stands alone. But the deeper question is whether this would be more a failure of the field than of the article or the author. The ultimate lodestar of the scholarly enterprise is the collective development of knowledge generated over time and incorporating myriad perspectives into perhaps one day a coherent whole. Correspondingly, any pressure (implicit or otherwise) towards conformity, no matter how well intended, ultimately undermines that scholarly endeavor. As a result, at this moment in international tax law perhaps Cui’s article is precisely what the field needs more of. Even if Cui’s article were to accomplish nothing else, challenging readers to confront many of the unspoken and uncomfortable tensions within the field may well serve the highest and best use for academic scholarship during an existential moment.
Feb 25, 2022 Kathleen DeLaney Thomas
The problem of income inequality is well-documented. And for those who support greater income redistribution, the current state of affairs is bleak. Proposals for a wealth tax or heavier taxation of capital income appear to have stalled, and little progress has been made towards meaningful reform measures that would shrink wealth and/or income gaps.
So what gives? We already know part of the story. Progressive tax proposals, such as mark-to-market taxation, tend to be complex, which in turn makes them harder to sell to politicians and the public. Similarly, reform measures like a wealth tax face criticism that they would be too hard to administer. Yet adding to these problems appears to be a general indifference, if not outright lack of support, from the public. This is puzzling because, given the evidence that only a very small percent of Americans holds most of the nation’s wealth, a lot of people would benefit from wealth or income redistribution. So why isn’t there more popular support for redistributive tax policies? A recent empirical study offers compelling evidence of another major barrier to reform: our irrational, subjective beliefs about where we fall on the income distribution.
The study’s authors, Joshua Conrad Jackson and Keith Payne, describe several cognitive tendencies that may explain why preferences for income redistribution are weaker than they should be based on economic self-interest. First, the authors explain that individuals’ perceptions of how their income compares to others (what they term “subjective income”) often does not line up with reality. The reason for this is that we tend to make social comparisons within our own groups, and we form those groups through our neighborhoods, social circles, and the like. This means low-income individuals will compare themselves to other low-income individuals in their social and geographic circle, and are less likely to compare themselves to those outside this circle. As a result, and unsurprisingly, most people tend to consider their income to be average. In other words, most people see themselves as middle class.
Jackson and Payne document the subjective income theory by analyzing survey responses from over 50,000 individuals who participated in the general social survey. Respondents were asked to rate their family income as “far below average”, “below average”, “average”, “above average”, and “far above average”, as “compared with American families in general.” The actual income distribution of the respondents was highly skewed and reflected inequality, with a small portion of individuals earning the majority of the income. Yet the subjective income reflected a normal (or bell curve) distribution: most participants reported their income as “average”, with roughly equal amounts reporting themselves above or below average. As the authors summarize, “This suggests that many people who actually have far less than the average American still considered themselves to have ‘average’ wealth.”
What’s more, Jackson and Payne found that subjective income predicted peoples’ attitudes about wealth redistribution. Specifically, they analyzed respondents’ attitude ratings to prompts such as, “The rich should pay a greater share of taxes compared with the poor.” Not only were subjects with higher actual income less supportive of redistribution, but also those with higher subjective income (i.e., those who perceived themselves to be higher in the income distribution, despite not necessarily being so) were less supportive of redistribution. In other words, the survey responses support the theory that, because people think in subjective income terms, some people think they are higher on the income distribution than they actually are, and these people are less supportive of redistribution policies that would benefit them.
Further surveys conducted by Jackson and Payne also support the notion that when subjects compare themselves to similarly situated individuals, their subjective perceptions of income tend to be more inaccurate relative to the actual income distribution. (The converse is also true: when subjects compare themselves with a group that is representative of the actual income distribution, their subjective income is much more likely to line up with their actual income.) Jackson and Payne also demonstrate evidence of a well-documented cognitive bias – insensitivity to large numbers—which they argue further exacerbates misperceptions about where one stands in the income distribution. Insensitivity to large numbers means that the larger numbers get, the less we tend to think the difference matters. For example, we might think there is a big difference between making $30,000 and $40,000, but we don’t think there is a big difference between making $400,000 and $410,000. Jackson and Payne argue that this bias matters in the current context because it “leads [people] to underestimate the gap between themselves and the very wealthy.”
Jackson’s and Payne’s article is insightful and well worth a read for any scholar interested in wealth and income inequality and redistributive tax policy. As the authors acknowledge, cognitive bias clearly isn’t the only reason redistributive policies are so hard to enact. And the cognitive barriers identified by Jackson and Payne are surely not the sole explanation for why there isn’t more public support for measures like a wealth tax. For example, overall mistrust in the government, or tax aversion, might also be contributing factors. But understanding why more people aren’t at least upset about income and wealth inequality is illuminating. And, as the authors suggest, perhaps this understanding can help inform future policymaking.
Jan 26, 2022 Charlene D. Luke
Andrea Monroe,
Making Tax Law Work: Improvisation and Forgotten Taxpayers in Partnership Tax, 55
U. Mich. J. L. Reform (forthcoming), available on
SSRN.
Andrea Monroe’s article, Making Tax Law Work: Improvisation and Forgotten Taxpayers in Partnership Tax, boldly calls on partnership tax experts to understand their role in normalizing dysfunction within partnership tax law and to support reform that is mindful of all partnerships.
Although millions of business entities are taxed as partnerships, assets and income are concentrated in a small number of them. As Monroe notes, drawing on IRS data from 2018, “less than 1 percent of partnerships held greater than 76 percent of partnership assets, and approximately 73 percent of partnerships held roughly 1 percent of partnership assets.” This suggests great differences among tax partnerships, yet, as partnership income and deductions are taxed to the partners and not the partnership, all tax partnerships must allocate their income and deductions to their owners.
Because Congress prized economic flexibility, the statutory framework allows partners to decide by agreement how to allocate the partnership’s income and deduction items. This flexibility is constrained by the requirement that such allocations have “substantial economic effect,” and if they lack such substantial economic effect, the allocations must conform to the “partner’s interest in the partnership.” Regulations provide detailed allocation rules implementing these concepts.
As Monroe notes, the regulatory allocation rules are at the core of the partnership tax regime. Yet, as Monroe argues, these allocation rules are dysfunctional both for elite partnerships and for “forgotten” partnerships. (Indeed, these rules are so difficult that even a superficial description would put this review well over the allotted space; please see Monroe’s article for an excellent overview.)
Monroe identifies as “forgotten” partnerships those entities that lack the resources to acquire the expertise necessary to engage meaningfully with the allocation rules and concepts. As Monroe highlights, and has written about more extensively elsewhere, IRS publications currently do not provide adequate assistance in navigating the allocation rules.
Monroe compellingly argues that because the law is functionally illegible to a large number of taxpayers, such taxpayers are consigned to rely on intuition, chance, and instinct, instead of on law. Monroe points out that tax experts often simply do not think about these taxpayers (hence, “forgotten”), or, less benignly, tax experts normalize the forgotten partnerships’ situations by assuming, or even arguing, that for less economically complex partnerships, instinct will often be good enough for compliance.
Monroe argues with compassion and eloquence that even if the tax returns of forgotten partnerships end up largely where they would have if technical partnership tax law had been accessible, that does not mean there is no harm. Instead, there is great harm to the impacted taxpayers’ dignity as well as to their trust in and access to the tax system. These taxpayers are forced to improvise and to do so without an understanding of the technical rules around which the improvision is taking place, which means that the process will almost certainly be more stressful, more unequal, and less nuanced.
With respect to elite partnerships, Monroe points to growing anecdotal evidence that such partnerships also do not rely on the allocation rules, but not because they are illegible to such partnerships. Instead, it is because the rules fail to reflect the economic priorities of elite partnerships.
With their resources and access to expertise, elite partnerships are, however, able to interact creatively with the allocation rules by creating workarounds in the form of allocations designed to yield greater certainty about economic distributions. They also have the capacity to assume the risk that such workarounds may technically fail to comply with the rules.
Thus, as Monroe explains, the allocation rules are also dysfunctional for elite partnerships, but in a completely different way. That is, like forgotten partnerships, elite partnerships also improvise, but they do so by choice and with expert guidance on how their improvision harmonizes (or clashes) with the allocation rules.
Monroe’s article calls out partnership tax experts who, with understandable pride in their intellectual and technical abilities in navigating partnership tax, embrace complexity and use it to benefit their clients without considering how what is often a rewarding and engaging puzzle for them is instead a meaningless pile of jargon to so many others. As Monroe indicates, dividing partnerships into “elite” and “forgotten” is a “blunt” categorization, but that does not detract from her overall message, which is a sharp and insightful critique of the “normal” practice of partnership tax.
In a nod to political realities, Monroe does not urge abandonment of the central flexibility of the partnership tax system, although she notes that “[i]f one were writing on a clean slate, reimagining partnership allocations entirely would surely be an intriguing option.” Monroe does present two concrete proposals for reform: she proposes that small partnerships have a more streamlined regime and that the Treasury add a safe harbor for target allocations. As she acknowledges, these two proposals, at least in their broad outlines, build on the work of other tax scholars.
More importantly, she issues a call to tax experts that they critically examine their role in the current dysfunction and that they apply their expertise not only to helping elite partnerships but also to using their creativity and insight to transform partnership tax law so that forgotten partnerships are able to engage fully with the tax system.
The dual-track reform examples offered in the article highlight that Monroe is not saying all partnerships need the same rules. Instead, she emphasizes that all entities organized as partnerships should be able to rely on law that is intelligible and that does not require improvisation.
Andrea Monroe’s article is a critical and timely reminder that the tax system, including the highly difficult portion applicable to tax partnerships, “only works if the vast majority of [taxpayers]—whether rich or poor, forgotten or elite—can participate.”
Dec 21, 2021 Kristin Hickman
“Don’t sweat the small stuff” was one of my father’s favorite sayings. It’s the thought that has always come to my mind whenever thinking about, and teaching, de minimis rules in the tax code. De minimis rules keep the IRS from seeming petty, for example by allowing an employer that provides free bagels in the break room from having to report the bagels as income to its employees. De minimis rules also allow taxpayers to avoid complexity and hassle when the dollar amounts at stake are small, for example by permitting taxpayers to immediately deduct many small capital expenditures, rather than having to amortize or depreciate them over several years. In short, I have always thought of de minimis rules as making a hugely complicated tax system just a little easier to navigate, and perhaps just a little kinder. At worst, de minimis rules have always seemed fairly harmless — “the equivalent of rounding errors in the design of the tax law.” Reading The Surprising Significance of De Minimis Tax Rules by Leigh Osofsky and Kathleen DeLaney Thomas has forced me to rethink these long-held intuitions.
Osofsky and Thomas begin their analysis of de minimis tax rules with an overview and a typology of sorts. Functionally, some de minimis tax rules indeed eliminate taxpayer burdens and protect unsophisticated taxpayers from finding themselves ensnarled in complexity. The IRS also benefits in these instances, by avoiding enforcement and other administrative costs. Other de minimis tax rules, however, are simply the result of rent-seeking behavior and benefit only sophisticated taxpayers pursuing complicated transactions. While de minimis tax rules can protect taxpayers from complexity, they also create complexity. And sometimes, de minimis tax rules that seem small turn out not to be so small after all, whether due to unintended consequences or interpretative choices that expand their scope.
One particularly interesting categorical observation by Osofsky and Thomas: although some de minimis tax rules come from Congress, others are adopted by Treasury and the IRS in rules and regulations. At least in some instances, these nonstatutory de minimis tax rules are simply the equivalent of administrative nonenforcement policies, albeit with more transparency. Yet, Osofsky and Thomas question whether Treasury and the IRS possess the authority to craft their own de minimis tax rules. For example, Osofsky and Thomas cite non-tax cases rejecting agency authority to adopt de minimis rules that undermine benefits provided by statutes. Osofsky and Thomas acknowledge that the benefits provided by the tax laws often may be less obvious than in some other regulatory contexts. But Osofsky and Thomas suggest that raising revenue itself is a form of public benefit that Treasury and the IRS undermine when they adopt nonstatutory de minimis tax rules. Of course, all agency enforcement officials must make choices regarding which cases to pursue, and a less transparent administrative nonenforcement policy could have the same effect as a de minimis tax rule, without the benefit of certainty that an authoritative rule or regulation provides. Regardless, contemplating more carefully the authority of Treasury and the IRS to adopt de minimis tax rules is worthwhile, especially given how often Congress revisits the tax laws. Perhaps if Treasury and the IRS believe a de minimis tax rule is warranted, they ought to suggest as much to Congress rather than adopting the rule themselves.
Finally, Osofsky and Thomas offer several suggestions for designing de minimis tax rules. For example, having explained why de minimis tax rules are not costless, Osofsky and Thomas suggest such rules “should be the product of a careful weighing of costs and benefits.” Osofsky and Thomas also contend that Treasury and the IRS should contemplate the downsides as well as the upsides of adopting such rules in regulatory form, rather than merely exercising nonenforcement discretion in cases involving small dollar amounts. Regulations benefit from the public participation process, but enforcement discretion offers more flexibility for distinguishing subsets of taxpayers or transactions. In particular, Osofsky and Thomas suggest that Congress and Treasury should scrutinize with particular care de minimis tax rules that benefit sophisticated parties and may be the product of political lobbying. Osofsky and Thomas also suggest indexing de minimis tax rules for inflation.
In summary, The Surprising Significance of De Minimis Tax Rules carefully examines, and calls into question, a practice that I suspect most tax professors and policymakers take for granted. Osofsky and Thomas do not argue that we should get rid of all de minimis tax rules. But Osofsky and Thomas demonstrate very effectively that we need to pay more attention to de minimis tax rules and not think of them merely as “the small stuff.”
