Obamacare and Lower-Income Workers

Feb 22, 2013 Susan Morse1 comment

Susan Morse

What if Obamacare changes the patterns of lower-income work?  Murmurs in the news suggest that this is happening, for example through increased use of part-time schedules.  In his forthcoming article, David Gamage explains the powerful incentives that the Affordable Care Act (ACA) presents to employers to ensure that lower-income workers will be insured through public exchanges rather than employer-provided health insurance.  These incentives to differentiate apply for a huge number of employees, as they apply until households have income of between 2.25 and 3.5 times the poverty level.

Gamage supports the ACA, but argues that it presents lower-income workers and their employers with a catch-22.  If employers provide health insurance, workers will overpay for it.  But if employers do not provide health insurance, workers cannot access traditional full-time-with-benefits jobs.

Gamage starts by explaining the reasons for the prevalence of employer-provided health insurance prior to the enactment of the ACA.   First, pools of employees “grouped together for reasons other than their health risks” solve the classic insurance problem of adverse selection.  Employers elect not to re-group employees according to health risk, perhaps for reasons related to employee morale.  Second, employers may also serve helpful intermediation functions by helping to explain and administer health insurance plans, or by providing default options.

Third, employees may exclude the value of employer-provided health insurance from their income.  The exclusion costs about $250 billion annually, is the largest single federal income tax expenditure, and survives the ACA.  It is an upside-down subsidy, meaning that higher-income taxpayers, who pay higher rates of income tax, obtain a larger monetary benefit as a result of each dollar of excluded employer-provided health insurance they receive.

The ACA provides two subsidies – premium tax credits and cost-sharing subsidies — to individuals who lack an offer of affordable employer-provided health insurance and instead purchase insurance from state-run public exchanges, which are subject to rules designed to foreclose adverse selection.  In contrast to the income tax exclusion for employer-provided health insurance, the ACA subsidies provide more dollar value to lower-income individuals than to high-income individuals.  The new law reduces subsidies on a sliding scale.  The premium tax credit, for example, ensures that a household at the poverty level will contribute no more than 2% of household income toward health insurance.  This credit declines with income and a household above 4 times the poverty level receives no ACA subsidies.

If an individual employed full-time (meaning at least 30 to 35 hours a week) purchases insurance on an exchange, the value of these subsidies may be offset by penalties payable by the individual’s employer as a result of the employer’s failure to offer affordable insurance, or failure to offer health insurance at all.  In general, the penalties may apply to employers of at least 50 employees.

At the lowest income levels, the value of the exchange subsidies exceeds the sum of (a) the increase in federal income taxes resulting from the loss of the benefit of excluding health insurance from income plus (b) the penalties payable by employers who fail to provide any, or any affordable, insurance.  Therefore, at the lowest income levels, the employer and/or the employee come out ahead if the employee purchases insurance from an exchange.  At the highest income levels, the relationship is reversed, and it makes more sense to use employer-provided health insurance rather than exchange coverage.  A break-even point falls between 2.25 and 3.5 times the poverty level, depending in part on family size. According to Tax Policy Center calculations, it will occur at approximately $80,000 of annual income for a family of four in 2016.  This exceeds median household income, which equaled about $50,000 in 2011.

The way in which a lower-income employee and employer share the savings produced by exchange coverage depends upon long-run wage responses.  But however the cost savings are shared, an employer should benefit from moving lower-income employees onto exchanges, either via lower costs or the ability to offer higher wages and attract more productive employees.  Nondiscrimination provisions prevent employers from achieving this result artlessly.  But the rules offer several more subtle escape routes.

For example, subject to final nondiscrimination rules, employers might increase employees’ wages and permit them to purchase insurance through a “cafeteria plan” under which insurance prices might be unaffordable for lower-income employees and affordable for higher-income employees.  Larger employers might outsource lower-income workers’ jobs, for example to smaller employers not subject to the employer penalties.  Or employers might move lower-income workers to part-time schedules.

Gamage points out that the phasing out of exchange subsidies as household income increases creates higher marginal tax rates that “stack with” marginal rates created not only by income and payroll taxes but also by phaseout provisions in other social welfare programs such as the earned income tax credit, food stamps and housing vouchers.  This may discourage work, or at least over-the-table work.  And Gamage joins others in explaining that because the doorway to purchasing exchange insurance for a family closes if one member of the family is offered affordable employer-provided self-only coverage, the ACA also discourages marriage.

Yet the incentives Gamage precisely lays out could prompt future events to proceed in a number of different directions, possibly for a net welfare gain, since the new ACA incentives act upon a second-best system shaped in part by other, pre-existing perverse incentives.  For example, what if increasing numbers of small employers, or part-time jobs, decreases unemployment and/or increases productivity, including in the “formal sector,” for example among second earners or retirees not prepared to work full-time?  What if lower-income workers with exchange coverage provide an initial critical mass that helps strengthen the exchanges through market forces and/or relevant statutory changes?  What if the exchanges as a result have sufficient market power to address the primary underlying fiscal issue, which is health cost inflation?

Gamage does not grapple with these broader questions in this paper.  Instead, he focuses on the question of how to rehabilitate the health insurance market by removing the perverse incentive wedges created by the combination of the ACA and the employer-provided health insurance exclusion.  He supports repeal of the income exclusion and enactment of refundable tax credits commensurate with exchange subsidies.  The proposal would not eliminate higher marginal tax rates caused by the ACA because of the phaseout of exchange subsidy benefits.  But it would leave employer-provided health insurance with only the non-tax risk-pooling and intermediation advantages that Gamage observes at the top of his paper.  It would thus create a fair playing field, sans perverse-incentive tax expenditures that favor one approach over the other, for the government and employers to compete to be the most efficient provider of health insurance.

Integrating Tax and Development Policy

Jan 16, 2013 Adam Rosenzweig

Adam Rosenzweig

A quiet, but powerful, movement seems to be emerging in the field of international tax – the explicit recognition that development policy is integral to any analysis of international tax policy.¹ Put differently, if the initial distribution of resources affects the return on resources, which itself affects the taxation of resources and thus the provision of public goods (which themselves feed back into the return on resources), distribution must be incorporated into the efficiency analysis of international taxation rather than thought of as a second, unrelated “fairness” step.²

Mitchell Kane contributes to this evolution in his thoughtful new article, Bootstraps and Poverty Traps: Tax Treaties as Novel Tools for Development Finance, 29 Yale J. Reg. 255 (2012). In this article, Kane attempts to integrate development economics into the tax treaty calculation itself – the exact opposite of traditional tax treaty policy. Originally, the policy behind tax treaties was to lower tax barriers to cross-border trade – as barriers dropped, trade increased, making everyone better off. What this theory did not take into account, however, was that this only worked for countries between which trade would flow. That is, countries with roughly similar economies. But what about small, capital poor countries? What would they get in return for signing a tax treaty with a wealthy country? The emerging consensus is: nothing. So why would they ever sign a treaty with a wealthy country such as the United States?

Kane attempts to overcome this problem by directly compensating such countries for entering into a tax treaty. The idea, stated quite generally, is that a wealthy country can use some of the surplus from the treaty to make a side-payment to the poorer country to compensate it for sacrificing some of its taxing rights. This makes intuitive sense. If the deal was that gains from trade between treaty member countries would roughly be split between the signatories, using side payments to make that happen when it otherwise would not merely fulfills this policy. Of course, Kane’s analysis is much more sophisticated, but the general idea holds.

Kane does not stop there, however. Relying on recent theories of development finance, his ultimate goal is for such countries to use the upfront revenue to pay for public goods, making the country more attractive to private capital and thereby escaping the so-called “poverty trap.” This would not only compensate the poorer country for relinquishing some of its taxing power but could also create a sort-of “virtuous cycle” in which shared worldwide growth, and thereby development, could actually occur.

There is much to like in Kane’s approach. Explicitly incorporating distributional considerations and development economics into the efficiency analysis of tax treaties (as opposed to tax competition more generally) marks the next logical step in the evolution of international tax scholarship. There are two potential criticisms, however, that I wish Kane would have addressed more directly.

First, the proposal looks similar at a quick glance (and only at a quick glance) to a previous failed experiment called “tax sparing” in which wealthier countries would effectively subsidize poorer ones using their tax laws to attract private capital. Unfortunately, tax sparing did not work as initially hoped, and was ultimately rejected by virtually all developed countries as a tool for increasing development. Consequently, misplaced accusations of “tax sparing” – or the related “buying off the bad guys” – are always a concern when engaging in this type of analysis.³ That some may refuse to engage Kane’s argument on its own terms is not a criticism of the argument itself and Kane addresses the development benefits of his proposal as compared to tax sparing in some detail. But anticipating these rhetorical criticisms might have made the Article a little stronger.

Second, and more substantively, what if everyone doesn’t sign on? Could the resulting system be worse from a worldwide welfare standpoint than if nothing had been done?⁴ Presumably the United States would have sufficient surplus to make side payments to multiple countries, but would it have enough to do so for every country in the world? Kane attempts to address this by contending that the returns from increased public goods would make signatory countries more attractive to capital than non-signatory countries. But that is rarely seen in the world today. Absent that assumption, Kane concedes that universal implementation would require some sort of cooperation among the countries of the world. But if such cooperation was possible, presumably the problem would not exist in the first place. This is not a problem unique to Kane’s article, but it underlies my ultimate skepticism of the proposal.⁵

Regardless, expressly incorporating distribution of resources, capital flows, and public goods into the tax competition analysis, and specifically into the tax treaty analysis, in the sophisticated manner Kane does, represents another valuable step in this important evolution of international tax law scholarship.

1. See, e.g., David Hasen, Tax Neutrality and Tax Amenities, 12 Fla. Tax Rev. 57 (2012); Steven Dean, More Cooperation, Less Uniformity: Tax Deharmonization and the Future of the International Tax Regime, 84 Tul. L. Rev. 125 (2009); Diane Ring, Democracy, Sovereignty and Tax Competition: The Role of Tax Sovereignty in Shaping Tax Cooperation, 9 Fla. Tax Rev. 555 (2009); Allison D. Christians, Tax Treaties for Investment and Aid to Sub-Saharan Africa – A Case Study, 71 Brook. L. Rev. 639 (2005). Allocation of resources has recently been incorporated into a law and economics analysis more generally as well. See Lee Anne Fennell, Resource Access Costs, __ Harv. L. Rev. __ (forthcoming), available at SSRN.
2. See Adam H. Rosenzweig, Why Are There Tax Havens?, 29 Wm. & Mary L. Rev. 239 (2010).
3. Cf. Calvin H. Johnson, Taxing GE and Other Masters of the Universe, 132 Tax Notes 175, n.47 (2011).
4. See, e.g., May Elsayyad & Kai A. Konrad, Fighting Multiple Tax Havens, 86 J. Int’l Econ. 295 (2012).
5. That is precisely why it could make more sense to build side payments into the regime rather than attempt to do so through treaties. See Adam H. Rosenzweig, Thinking Outside the (Tax) Treaty, 2012 Wis. L. Rev. 717.

Hypersalience and Why Understanding Behavioral Tax Law and Economics Means Understanding Tax

Nov 7, 2012 Leigh Osofsky

Leigh Osofsky

As Lilian Faulhaber describes in her article, The Hidden Limits of the Charitable Deduction: An Introduction to Hypersalience, salience recently has become a hot topic in tax scholarship.  This increasing focus on salience arises out of the behavioral economics school.  No longer are taxpayers assumed to be rationally maximizing their utility in the manner that economic models might predict.  Rather, behavioral economics suggests that they often rely on mental shortcuts, or heuristics, to make decisions.  As a result, scholars have suggested and, to some extent, documented how the salience, or prominence, of a tax provision may determine taxpayer responsiveness to the provision.  Scholars have identified two types of salience: market salience (the impact of salience on market, or economic, activity) and political salience (the impact of salience on political outcomes).  Faulhaber’s article addresses the scholarship regarding market salience.  As Faulhaber describes, the primary focus of such scholarship has been on whether and how low salience taxes (sometimes referred to as “hidden taxes”) may cause taxpayers to underestimate the true cost of taxation and thereby potentially reduce behavioral distortions from taxation, which many view as the Holy Grail of tax policy.

However, Faulhaber astutely notes that this perspective regarding salience is only one side of the “hidden tax coin.”  Faulhaber explains that low salience tax provisions only cause taxpayers to underestimate the true cost of taxation when the tax provisions are revenue-raising provisions.  Since scholars have not focused on revenue-reducing tax provisions, they have not focused to any great extent on the phenomenon that Faulhaber introduces in this article: hypersalience.  Hypersalience, as Faulhaber defines it, is “the phenomenon by which the prominence of a tax provision leads taxpayers to overestimate its incidence.”  Hypersalience exists when there is a highly salient tax-reduction provision, combined with low salience restrictions or limitations on the tax-reduction provision.  Faulhaber’s introduction of hypersalience into the tax literature is important for a number of reasons.  First, Faulhaber’s discussion adds an important new dimension to the increasingly prominent salience scholarship.  Second, Faulhaber’s focus on hypersalience allows her to delve into a number of resulting, pressing policy issues, which have not previously been examined.  Finally, Faulhaber’s general discovery of hypersalience illustrates a basic but fundamentally important lesson: Behavioral economics phenomena do not operate in a vacuum.  Rather, how they affect taxpayers depends on how they actually interact with particular tax provisions and with the administration of such provisions.

Faulhaber focuses on one particular set of tax provisions, the charitable deduction and its limitations, in order to examine hypersalience.  Faulhaber describes the popular belief (often promoted by charitable organizations themselves) that charitable contributions are fully tax-deductible.  However, numerous tax provisions in fact limit the deductibility of charitable contributions.  In particular, charitable deductions are only available to taxpayers who itemize their deductions, meaning that the vast majority of taxpayers cannot actually deduct charitable contributions.  Faulhaber calculates that approximately a quarter of all charitable contributions made in 2008 were not actually deducted by taxpayers, and suggests that hypersalience played a role in at least some of these contributions.  She does so by examining in detail multiple factors including: the complexity that taxpayers face when trying to determine whether or not they will be itemizing deductions, and the tax filing incentives that likely decrease non-itemizing taxpayers’ knowledge about the limitations on deductibility.

Faulhaber’s examination of the charitable deduction allows her to delve into a number of broader policy issues raised by hypersalience.  First, as Faulhaber demonstrates, charitable organizations themselves greatly contribute to the hypersalience of the charitable deduction, which potentially raises practical and normative issues regarding the role of third parties in (mis)educating taxpayers.  Second, policymakers’ failure to incorporate the concept of hypersalience into studies regarding price elasticity and treasury efficiency means that policymakers may not be calculating these measures correctly.  For example, with the charitable deduction, if taxpayers charitably give in response to the deduction, even when they are not actually going to be able to take the deduction, then the deduction may result in much greater giving per revenue cost than government forecasts currently suggest.  As Faulhaber indicates, this phenomenon could be an important, yet currently nonexistent, argument in favor of tax expenditures enacted through the Internal Revenue Code, rather than equivalent amounts of direct spending.  Third, taxpayers influenced by hypersalience may overconsume goods under the mistaken belief that their consumption of those goods costs them less than it really does.  Perhaps most notably and problematically, taxpayers may overinvest in home ownership as a result of the hypersalience of the home mortgage interest deduction.  Having identified these issues with hypersalience, Faulhaber concludes that we should try to reduce hypersalience and suggests restricting third-party marketing as a means of doing so.  While both her conclusion and solution will not be the last word on the matter, they are a good beginning in an ongoing conversation made possible by her unearthing of hypersalience.

At bottom, Faulhaber’s article provides important contributions to both the specific salience scholarship and to tax scholarship employing behavioral economics generally.  Her article underscores a lesson any tax lawyer would love: Understanding behavioral economics in tax means more than just understanding behavioral economics; it also means deeply understanding tax law and its administration.

Does Anyone Really Understand Medicare? Richard Kaplan Does, and You Can, Too

Oct 23, 2012 Neil H. Buchanan

Neil H. Buchanan

When former Massachusetts Governor Mitt Romney chose Paul Ryan to be his running mate in the 2012 United States Presidential election, he guaranteed that Medicare would become a central battleground of the campaign.  Ryan, a veteran Congressman from Wisconsin, is widely known for his efforts to turn the federal Medicare program into a voucher program (with the value of the vouchers deliberately calibrated not to keep up with health care costs over time), a transformation that would change everything about Medicare except its name.

Ryan’s proposal is sufficiently controversial that the Romney/Ryan camp has gone to significant lengths to distance itself from it – refusing to use the word “vouchers,” for example, which they evidently believe is toxic politically.  At the same time, the Republican team’s strategists have made a point of highlighting the decreases in Medicare spending that have been projected as a result of various cost-saving measures in the Patient Protection and Affordable Care Act, calling those measures “cuts in Medicare” for which President Obama should be blamed.  Both parties apparently believe that there is such strong support among likely voters to preserve Medicare that they must try to convince voters that the other candidate is going to gut the program, even though only the Republican side has ever proposed actually doing so.

Jotwell readers who wish to know more about Medicare might lament the lack of an accessible source of basic facts about how Medicare works.  That is where Professor Richard L. Kaplan comes in.  Kaplan, a noted tax scholar who teaches at the University of Illinois College of Law, is the founding advisor of the Elder Law Journal, and a noted expert in the field of elder law.  Professor Kaplan draws on his wealth of knowledge about the subject of health care for the elderly in “Top Ten Myths of Medicare,” which was published this past summer.  The article expertly walks the line between being technically accurate and broadly understandable.  Neophytes, as well as those of us who think we know a lot about these issues, will come away from Professor Kaplan’s short article (fewer than 14,000 words) with both knowledge and insight that are sorely lacking in public discussions about this crucial program.

To put the importance of this article in some perspective, readers might consider that the forecasts of long-term U.S. budget deficits that are so often mentioned in the press are driven almost entirely by projected increases in health care costs.  As the economist Paul Krugman once put it, any long-term fiscal problem that the United States faces can be summarized “in seven words: health care, health care, health care, revenue.”  In other words, other than replacing the revenues lost to the Bush tax cuts of 2001 and 2003, the only thing that matters in our long-term fiscal picture is getting health care spending under control.  (I should also note that this means, as both Professor Kaplan and I have each written about in many other venues, Social Security is most definitely not part of the problem, nor need it be any part of a solution.)

Professor Kaplan’s article, however, does not merely enlighten readers about the costs of the program and its interaction with federal budgeting (although he does that well).  He also includes explanations of the nuts and bolts of the program, while trying to correct the public’s misunderstandings about a wide range of issues regarding Medicare beneficiaries, medical providers, and so on.

The article, as its title makes clear, is usefully organized as a “top ten” list.  In a short review like this one, one must fight the temptation simply to list the ten subject headings, even though each one offers its own enticing hint of what one might learn by reading the article.  In addition to debunking a few obvious myths (#2: “Medicare is Going Bankrupt,” and #10: “Increased Longevity Will Sink Medicare”), the reader is treated to some genuinely unexpected revelations, perhaps the most surprising of all being Myth #1:  “There is One Medicare Program.”  Some readers will know that Medicare has multiple parts (Part A, Part B, and so on), but few will know the specifics of those separate programs as well as Professor Kaplan does.

This kind of academic article does, however, often run the risk of simply becoming a summary of a statute.  Fortunately, the myth-busting format provides an over-arching narrative to the article that allows Professor Kaplan to make some larger points – points that are truly counter-intuitive, or that are at least contrary to the conventional wisdom in U.S. policy circles today.

One theme that infuses the article is that Medicare is not the gold-plated, overly generous big government program that so many portray.  On page 13 of the article, for example, we learn how stringently (and, I would argue, absurdly) the program restricts benefits for nursing home care.  After detailing five surprising requirements before a patient can qualify for such coverage at all, Kaplan notes that Medicare pays for only twenty days of such care, and then for no more than an additional eighty days, with an inflation-adjusted deductible currently set at $144.50 per day.

This theme – that Medicare is hardly a freebie, forcing its enrollees to have serious financial “skin in the game” – is not merely a point about how well or poorly we actually provide for our elders’ care.  Professor Kaplan’s concern is also about planning, noting that too many people believe that Medicare simply covers everything, and so they fail to prepare for the large costs that they will actually face when they inevitably need health care.  Failure to plan, under the many onerous rules that Kaplan describes, is truly disastrous for many elderly Americans and their families.

Finally, although Professor Kaplan is very obviously a passionate proponent of Medicare in its current basic form, he is more than willing to acknowledge some troubling facts – facts that might (at least partially) support those whose views of Medicare are less favorable than Kaplan’s.

One of the common themes among supporters of Medicare is to point to the very low administrative costs associated with the program, compared to the costs borne by private, for-profit health insurers.  Even while debunking the myth that “Medicare Is Less Efficient than Private Health Insurance” – a myth that, as he points out, is based on little more than the presumption that government programs must be inefficient, because they are government programs – Kaplan carefully discusses why one key statistic is misleading: “Medicare spends only 1.4% of medical benefits paid on administrative expenditures, while private insurers spend 25% or more for such costs.”

The most cynical explanation for this “apparently excellent result” is that any program can keep its administrative costs down if it does not put much effort into policing false claims.  Medicare, we learn, sometimes has a “practice of paying apparently reasonable claims for medical services with little verification of the claims’ validity.”  Moreover, some of the program’s administrative needs are already covered by other agencies, such as the IRS’s role in collecting Medicare premia from workers’ paychecks.  This means that Medicare itself need not expend those resources, but the government as a whole does.

Still, the reader cannot help but come away with the sense that the lower administrative costs of Medicare mostly reflect genuine advantages over private plans.  Medicare need not advertise, and, perhaps most importantly, it has no reason to try to exclude sick people from its coverage, which is a major activity of private plans that must (for reasons of profit maximization) try to cherry-pick the healthiest customers and deny benefits to as many people as possible.

In short, readers could not find a better article to explain Medicare’s basic workings, its budgetary and political realities, and its combination of shortcomings and truly significant benefits to American society.  Even if the next U.S. President were not going to be chosen on the basis of his commitment to protecting Medicare, reading this article would be worth anyone’s time.

Are Tax Treaties Unconstitutional?

Oct 8, 2012 Ruth Mason

Ruth Mason

In a forthcoming article entitled On the Constitutionality of Tax Treaties, Rebecca Kysar argues that current tax treaties are unconstitutional under the Origination Clause because they alter the tax law without the involvement of the House of Representatives.

Kysar builds her argument though careful historical and doctrinal analysis.  She shows that the Origination Clause was an important concession to the large states that acted as a counterbalance to some of the prerogatives of the Senate, including the treaty power.  She shows that although the text of the Origination Clause requires only that “bills for raising revenue” originate in the House, the Supreme Court has interpreted the clause to refer to legislation that increases or decreases revenue.  Thus, Kysar argues that, even if the net effect of tax treaties were to reduce tax revenues, the Origination Clause should still apply to them because their “primary purpose” is a revenue purpose, and it is the law’s “primary purpose” that matters for the Origination Clause.  Among many other court cases, Kysar discusses at length two relevant Supreme Court precedents.  First is Missouri v. Holland, in which the Supreme Court upheld against a Tenth Amendment challenge a properly ratified treaty that sought to accomplish a goal outside the enumerated powers of Congress.  In Holland, the Court further held that the Necessary and Proper Clause permitted Congress to pass legislation to accomplish treaty goals that Congress could not accomplish by regulation alone (the treaty involved the regulation of hunting of migratory birds).   The other relevant precedent was Reid v. Covert, in which a plurality of the Court held that a treaty could not override individual rights guaranteed by the Sixth Amendment.  Kysar makes the argument that tax treaties should be analyzed more like the individual rights in the Sixth Amendment, and less like the reservation of powers in the Tenth Amendment since the Origination Clause represents an exclusive grant of power.   Furthermore, where appropriations, another exclusive prerogative of the House, is concerned, it has long been policy to seek implementing legislation for treaties.  Kysar traces procedure to the Jay Treaty, in which the House asserted its right to enact implementing legislation, and she convincingly argues that the failure of the House to similarly assert its constitutional prerogative under the Origination Clause with respect to tax treaties could not cure any constitutional infirmity in such treaties.

If we accept Kysar’s argument that the treaty power is subject to the Origination Clause, can tax treaties be saved? One argument might be that revenue is not the “primary purpose” of tax treaties.  Instead, the primary purpose of tax treaties is to assign tax jurisdiction; that is, tax treaties are jurisdictional—they say which of the two treaty partners can tax cross border income, and under what circumstances.  The actual tax is assessed (or not) under domestic law properly enacted.   Another argument might be that the purpose of tax treaties is, as the title of such treaties reports, to reduce double taxation and prevent fiscal evasion.  It remains to be seen whether such arguments (or similar ones) would be accepted by the Supreme Court, but Kysar rejects similar arguments as overly formalistic.

If tax treaties as currently formulated violate the Origination Clause, what solution does Kysar offer?  She argues that tax treaties cannot be self-executing.  Instead, they require implementing legislation, which would have to originate in the House.  Considering that most tax treaties are uncontroversial, I assume most treaties would have little trouble securing such implementing legislation, which leads to another question: What’s the policy pay-off for involving the House, especially in an era in which direct election of the Senate has dampened the democratic concern that motivated the adoption of the Origination Clause in the first place?

Kysar argues that the “first-mover” advantage that the Origination Clause confers on the House is still important, because the House, with its shorter-termed and proportional membership, is still more democratic than is the Senate.  This is an area of the paper where I hope Kysar will develop her analysis further.  She provides an example of how the Senate and the President might take the House’s concerns into account when negotiating tax treaties under as procedure that required implementing legislation.  In it, she supposes that the Senate and President would like a treaty with a withholding rate of 15%, whereas the House would like a treaty with a rate of 0%, and she concludes that the negotiated rate would likely end up somewhere between 0% and 15%.  This seems certainly seems plausible in the abstract, however, since the starting point for the Treasury Department in negotiating tax treaties in the real world is the U.S. Model Tax Treaty, which contains specific withholding rates (not ranges), it would be helpful to have an express discussion of how the requirement to involve the House in tax treaties would impact the Model.

In other words, whereas in domestic tax legislation, the House has the first mover advantage, for practical purposes in the tax treaty context, that advantage is held by the executive for two reasons.  First, the executive decides with whom to negotiate treaties, and secondly, the Treasury Department drafts the U.S. Model Tax Treaty.  Of course, these actions are informed by the preferences of the other branches (and maybe, under the current practice the executive shows undue consideration to the Senate’s preferences while neglecting those of the House).  It would be helpful for Kysar to provide an explanation of how bicameral legislative implementation of tax treaties might affect the U.S. Model, as would a discussion of the OECD Model, since that model dominates global treaty negotiations, and it, too, contains fixed withholding tax rates and substantive provisions that very rarely change.  The U.S. Model is nearly identical to the OECD Model, and most of our treaty partners rely on the OECD Model.  In short, I would like to know which provisions of modern tax treaties Kysar thinks are up for grabs (i.e., which ones are really subject to negotiation, and which are more or less fixed), and how participation by the House might affect those provisions.

Kysar’s readers will undoubtedly press her on the broader implications of her analysis of the Origination Clause (she acknowledges, for example, that trade treaties may suffer the same constitutional infirmity as tax treaties), but in the current article Kysar limits her analysis to tax treaties.  Although she leaves some questions unanswered, Kysar’s analysis of the constitutionality of tax treaties is an illuminating and much-needed contribution to the literature.

Tax Reform, Tax Expenditures, and the Role of the Tax Scholar

Sep 12, 2012 Michael Livingston

Michael Livingston

One of the more dynamic figures on the current tax scene is Ed Kleinbard, a top-shelf New York tax lawyer who became Chief of Staff of the congressional Joint Tax Committee and then, in 2009, a full-time member of the USC tax faculty. Among the various topics he has addressed are international taxation, capital income taxation, and the taxation of financial services, all with a keen understanding of “what really happens” and (typically) constructive suggestions on how to make the system work better.

Perhaps the most theoretically salient aspect of Prof. Kleinbard’s scholarship is his characteristically irreverent approach to the problem of tax expenditures and tax reform. Like many historic assaults on traditional tax policy, it began with a speech, “Rethinking Tax Expenditures”, which Kleinbard delivered in 2008 and which was further developed in a subsequent lecture and a Joint Committee pamphlet. The essential point was that tax expenditure analysis, developed by Stanley Surrey and emphasizing the comparison of tax deductions, credits, etc. to direct spending measures, had to a large degree outlived its usefulness. The reasons for this included the difficulty, first noted by Boris Bittker in the 1960s, of defining a “normative” tax system from which deviations could be measured, and the wide variety of different provisions, ranging from business incentives to social welfare programs, that were covered by the tax expenditure label. In his speech and related publications, Kleinbard called for a more systematic typology of these provisions together with a more sophisticated analysis of the political forces that encouraged reliance on tax expenditures: a reliance which, the author noted, has proved largely resilient to traditional tax expenditure analysis and has, if anything, been encouraged by procedural reforms that make direct spending programs even more difficult.

What are the practical implications of these ideas? A partial explanation came in a 2011 article by Kleinbard, The Role of Tax Reform in Deficit Reduction, simultaneously published in Tax Notes and as a USC research paper. In this latter article, Kleinbard argues that not only the tax expenditure concept but the entire idea of tax reform has become outdated, caught up in “nostalgia” for the 1986 tax reform and its implicit tradeoff of lower rates for a reduction in tax incentives. According to Kleinbard, current fiscal realities do not permit us the luxury of revenue neutrality; instead, we need to raise revenue, which he proposes to do primarily by eliminating itemized deductions (mortgage interest, charitable contributions, state and local income taxes) which he regards as the least defensible (and among the most costly) tax expenditures. Although the arguments for targeting itemized deductions are traditional—their personal nature and the “upside down” nature of the subsidy that they provide—they reflect Kleinbard’s willingness to distinguish between different categories of tax expenditures rather than simply assuming that any reduction in such provisions is per se valid.

Later in the same article, Kleinbard—whose previous work has emphasized international taxation—also proposals an overhaul (albeit a revenue neutral one) of corporate taxes, together with a long-range structural reform of the income tax to adopt avowedly separate rules for taxation of labor and capital. These proposals are less tied to his tax expenditure theory, but equally bold and original in character.

Kleinbard’s work reflects a growing sense that existing conceptual categories are inadequate in the current political climate. The existing theories of tax expenditures and tax reform each assume a broad ideological consensus, in which reduced rates could be traded for reductions in unjustified tax breaks (i.e., tax expenditures) with a resultant increase in fairness, efficiency, and simplicity. In a world where that consensus no longer exists, there is an obvious need to update these categories. By taking sides in the ideological debate—by stating openly that “tax reform” must be taken to include tax increases and that some “tax expenditures” are more justified than others—Kleinbard sacrifices some impartiality but gains a more realistic outlook and, perhaps, potentially greater influence.

Particularly provocative is Kleinbard’s assault on the “tax nostalgia industry,” most notably that associated with the 1986 Tax Reform Act and its (now aging) protagonists. As one who worked (albeit in a lowly capacity) on the 1986 act, I must plead guilty to a certain desire to celebrate and, perhaps, reenact it. But times change, and the role of a legal scholar must be to stay ahead of them: something that Kleinbard, whether one agrees with him or not, is clearly doing.

Corporate Tax Reform in Theory and in Politics

Jul 16, 2012 Susan Morse

Susan Morse

To find out what is going on with corporate tax reform, read Martin Sullivan. Read his columns, and read his book, Corporate Tax Reform: Taxing Profits in the 21st Century . Read him because he squarely tackles the interaction of theory and politics in the area of tax policy.

Academic theories of legislative process make more sense in context. Daniel Shaviro’s analysis of the 1980’s individual base-broadening, rate-lowering reform package is a case in point.  In the area of corporate tax reform, scholars have worked with the understanding, developed for example by William Eskridge, Philip Frickey and Elizabeth Garrett, that the U.S. legislative process favors the status quo.  Against this backdrop, Jennifer Arlen and Deborah Weiss argue that agency costs further hamper reform because managers favor policies like accelerated depreciation that provide targeted incentives for new corporate investment, even though shareholders prefer policies that also enrich existing investment.  Michael Doran builds on the Arlen and Weiss analysis with a public choice account of heterogeneity of interests among different corporations.  The result, he argues, is an incentive for corporations that disproportionately benefit from a certain tax break, for example the research and development credit, to lobby energetically to keep that tax break rather than supporting more general reform proposals like base-broadening and rate-lowering.

Corporate Tax Reform and Sullivan’s related columns connect academic theories about corporate income tax reform to the political morass facing current corporate income tax reform proposals.  Like Doran, Sullivan emphasizes heterogeneity of interests.  It is possible to identify three broad factions in corporate tax reform:  global U.S.-parented multinational corporations, domestic incorporated businesses, and domestic unincorporated businesses.  And within each faction, there are significant differences in specific interests.  In his book, Sullivan devotes two chapters and an appendix to corporate tax expenditures, which are one main source of the differences between and within factions.

As Sullivan explains in two other chapters, the call for business tax reform is prompted in part by the fact that the existing system permits U.S. parent corporations to defer paying U.S. income tax on significant chunks of income allocated to non-U.S. subsidiaries and to instead allocate that income to low- or zero-tax jurisdictions.  Edward Kleinbard and J. Clifton Fleming, Robert Peroni and Stephen Shay have described this phenomenon in separate articles.  Harry Grubert’s work shows that the average effective foreign tax rate on non-U.S. income earned by U.S. parented multinational corporations dropped to 16% in 2004 compared to about 21% in 1996 and that U.S. policy changes such as the 1997 promulgation of the “check-the-box” entity classification rules correlate with increased ability to shift profits offshore for tax purposes.  Media reports about Google and other corporations have highlighted egregious examples of corporations with dramatically low rates of tax on non-U.S. income, further pushing international corporate tax reform to the forefront.

One leading idea, put forth for example by House Ways and Means Chairman Dave Camp in 2011, is to join the worldwide trend and establish a “territorial” corporate income tax system which would exempt non-U.S. business income from U.S. tax.  The Camp proposal would exempt 95% of foreign-source dividends from tax, thus approaching a 0% rate of tax on non-U.S. income.  It would lower the top U.S. corporate income tax rate statutory rate from 35% to 25%, which happens to be the OECD average.  And it would eliminate business tax breaks like accelerated depreciation, the research credit, the domestic production activities deduction, and last-in, first-out accounting.  On each of these points – territoriality, rate lowering, and base broadening – Sullivan observes on-the-ground politics that comport with Doran’s balkanized interest group predictions in the area of corporate tax reform.

Territoriality.  Territoriality adoption could increase or decrease the effective tax burden on global multinationals, depending on the rules allocating income and deduction items between U.S. and non-U.S. as well as business and non-business categories. Sullivan’s observations bear out Doran’s prediction of the interest group reaction to this tension.  Specifically, he reports that global U.S.-parented multinationals, gathered under the umbrella of the “WIN” America campaign, are focused less on the overall corporate tax rate, and more on the move to a territorial system and on the details of income and deduction allocation rules within such a system.  WIN coalition members include Cisco, Google and Pfizer.  Although Sullivan suggests that members of this group may have congruent interests, writing that a territoriality proposal “must be devoid of any significant expense allocation, thin capitalization, and anti-deferral rules to get the support of this group,” one wonders whether subgroups within the group value different territoriality sweeteners differently.

Lower Rate.  As Sullivan tells it, members of the competing “RATE” Coalition, including domestically-focused corporations like Ford, Macy’s and UPS, are more concerned with the reduction of the top corporate rate than their WIN coalition counterparts.  Yet he also explains that within the RATE coalition there exist disparate lobbying interests used to focusing on different tax breaks.  For example, LIFO accounting disproportionately benefits oil companies; while accelerated depreciation, the research credit and the domestic production activities deduction benefit the “manufacturing and technology sectors,” but not “retailers, wholesalers and financial corporations.”

Base Broadening.  Sullivan has also considered targeted small business tax breaks.  This raises a third element of the business tax reform debate — the tension between the interests of incorporated and unincorporated businesses.  Unincorporated businesses would suffer from the repeal of tax breaks like accelerated depreciation, but would not benefit from reduced maximum statutory corporate income tax rates.  Stephen Shay has recently pointed this out.  The status quo advantage provided by the legislative process favors the interests of unincorporated businesses.  But here, too, there is the question of balkanization within the faction.  Will a desire to maintain the advantage of the domestic production activities deduction motivate small U.S. manufacturers to focus energy on avoiding the repeal of that provision rather than joining a larger group whose goal is to block reform legislation entirely?

Theories and histories about political process and tax reform are important in part because they may increase understanding of current reform debates.  But such an understanding requires information about the specific political factions and subfactions relevant to a particular issue.  In Corporate Tax Reform and related columns, Sullivan provides just this information.

Sullivan sees revenue-neutral business tax reform that accomplishes the goal of rate reduction as a remote possibility.  But he also has a deep understanding of the contours of the interaction among business tax reform interest coalitions and the degree to which balkanization within these factions may trump their broader interests.  Look to Martin Sullivan’s existing and future work to provide the connection between theory and politics on this important and developing issue.

Responsive Regulation and Large Business Tax Compliance

Jun 1, 2012 Shu-Yi Oei

Shu-Yi Oei

Leigh Osofsky’s paper, Getting Realistic about Responsive Tax Administration, studies an important feature of tax collections procedure, the IRS’s Compliance Assurance Process (CAP). CAP is a program—piloted in 2005 and extended to all large business taxpayers in 2011—by which the Service reviews the compliance of large business taxpayers prior to the filing of a tax return. The goal here is to resolve all tax positions before the return is filed, and to thereby move from a post-return filing audit system to a pre-filing cooperative conversation between taxpayer and Service. According to Osofsky, supporters tout several supposed benefits of CAP: it reduces IRS resource spending on large businesses, letting the IRS focus its energies on other areas; it helps taxpayers minimize uncertainty and hence compliance costs; it provides the Service with real-time data on compliance issues; it may encourage strong tax compliance norms; and it discourages impermissible tax planning by offering incentives for choosing compliance. Osofsky doesn’t think current empirical evidence is strong enough to allow us to rely on this story. She presents an alternative story: Increased resource wastage by taxpayers resulting from insufficient scrutiny and revenue losses to the government that offset IRS cost savings may mean that CAP is not as appealing as its supporters claim.

As an investigation of CAP, a little-known tax administration procedure for dealing with large business taxpayers, Getting Realistic is already an interesting and timely piece. However, the paper’s true uniqueness lies in its evaluation of CAP in the broader theoretical context of “responsive regulation” and “responsive tax administration” approaches. Responsive regulation is broadly used to denote approaches emphasizing a shift away from traditional, top-down regulation towards more participatory, bottom-up regulation. Osofsky describes its central tenets as including a notion that regulators should use persuasion to obtain compliance, an emphasis on procedural justice to encourage more compliance, and a notion that punishment should only be meted out only after cooperation hasn’t worked. In the tax administration context, the theory emphasizes the importance of understanding diverse taxpayer motivations and of trust building between taxpayers and Service, rather than traditional audit-style penalties. It also focuses on reciprocity and service as ways to increase compliance.

Having placed her critique of CAP within the framework of responsive regulation, Osofsky is able to point out problems with how the IRS is running CAP and to relate these to more global problems with responsive regulation theory and its implementation. First, Osofsky complains that the IRS has inappropriately reduced monitoring of large business taxpayers due to excessive faith in CAP specifically, and responsive regulation more generally, to yield compliance. Osofsky argues that such faith is misplaced because we can’t just count on responsive regulation to deliver higher compliance levels. We don’t know that procedural justice necessarily leads to more compliance. Further, we simply do not know if CAP, in fact, increases compliance. Second, CAP lacks a penalty for taxpayer failures to disclose CAP violations, and thus lacks a mechanism for ensuring taxpayer honesty. This lack of a “big stick” is inconsistent with the tenets of responsive tax administration and creates what Osofsky calls a “test drive” effect, whereby taxpayers get to feel out how the IRS will likely react prior to simply being subject to the same old penalties as everyone else at the audit stage. Osofsky recommends the use of a risk-adjusted, multiplier-style penalty to incentivize taxpayer transparency. Finally, Osofsky critiques the 2011 expansion of CAP to all large business taxpayers at their election as creating a self-selection bias, which leads to misallocation of IRS resources. Osofsky points out that while it may make sense to offer CAP to those large taxpayers who will be subject to continuous audit, it does not make sense to offer CAP to those taxpayers who wouldn’t otherwise be subject to audit.

In examining the mechanisms, potential benefits, and potential limitations of CAP, Osofsky’s paper is an important addition to the growing literature on tax administration and enforcement. Detailed academic studies of CAP and other programs like it are scarce, as is the literature on IRS operations and management and its tax collections policies and procedures more generally. This is too bad because the ways in which the Service goes about collecting taxes equally implicates important tax policy questions, such as efficiency, equity, administrability, and distributive justice. Osofsky’s extremely thorough study of CAP in this paper provides a fascinating addition to this underexplored facet of tax scholarship.

In addition, by placing her analysis of CAP in the context of the responsive regulation/responsive tax administration framework, Osofsky’s work really goes to heart of how the IRS formulates and justifies its tax collections policy choices. One possible story—and the one Osofsky primarily puts forth in this paper—is that policies such as CAP have been implemented in their current form as a result of misplaced faith in responsive regulation theory and its tenets. There are other (related) threads to the story and other possible stories: What is the relationship between faith in responsive regulation and limited IRS resources? Is the IRS moving towards “responsive” programs like CAP primarily because of limited resources? Conversely, is it a lack of resources that is leading the IRS to implement the responsive regulation framework in a less than perfect way? What part does information or expertise asymmetry play in the CAP/responsive regulation story? To what extent is IRS commitment to the CAP program a matter of managing sophisticated taxpayers and transactions in the face of a knowledge gap?

These are vital questions in tax administration, and Osofsky’s paper offers important and interesting insights into some possible answers.

No Option: Thinking Through Elections

Apr 16, 2012 Kim Brooks

Kim Brooks

For the most part, I prefer less choice.  More choice can lead to less time and less pleasure.  Think about the decision to stay in or go out for dinner.  You look in your cupboards and there isn’t much.  Perhaps a can of tomato and rice soup.  So, you think, maybe it’s a good idea to go out.  But where?  Sometimes brainstorming the options alone is daunting, and after generating a list I simply decide to stay in.  And that’s a good outcome.  In a less ideal case, I’ll spend several hours on the internet, reading reviews of restaurants, looking at menus and prices, calling friends for views, only to become so daunted by the options and by the lack of an obvious “winner” that I’ll stay home.  I will never regain that time.  Worse yet, I do all that research – the internet research and calls – and I chose something.  But when I go to the restaurant it’s a disappointment.  I spend the night wondering if I could have made a better decision.  Cream of tomato soup with rice, and three extra hours, would be preferable.

In “Choosing Tax: Explicit Elections as an Element of Design in the Federal Income Tax System,” Heather Field approaches the issue of the role and value of explicit tax elections.  Apparently more than 300 explicit tax elections litter the Internal Revenue Code.  Field explains that an explicit election is a case where multiple possible tax treatments might apply to a single economic event.

The article makes three main contributions to the literature.  First, Field draws parallels between the tax planning critiques of implicit elections (where taxpayers are left free to opt in or out of particular tax regimes by redesigning their transactions) and the tax planning consequences of implicit elections.

Second, she provides a taxonomy of functions for explicit elections – reconciling discontinuous regimes, facilitating tax classification, promoting simplicity and ease of administration, and condoning tax planning.  Drawing from the wealth of Field’s examples, let me illustrate each.  An explicit election may be used to reconcile a discontinuous regime.  For example, a taxpayer may buy the shares or assets of a business.  At the end of the day, in each case the taxpayer has bought the business.  But the tax consequences that flow from the decision to make one choice over the other are very different.  Nevertheless, in some cases section 338 of the Internal Revenue Code allows the taxpayer to elect to treat a share purchase as an asset purchase.  The objective:  to offer the taxpayer the chance to treat two similar transactions the same for tax purposes.

An explicit election might be designed to facilitate tax classification.  These kinds of elections appear where a taxpayer’s activities might be characterized along a continuous spectrum – say, from corporate to non-corporate form.  Adding an explicit election to enable entity classification may help taxpayers address the difficult classification issues that arise in the middle of the spectrum, where very little differentiates one type of organizational arrangement from another (think check-the-box).

Elections that promote simplicity and administrability improve the ease of compliance or enforcement.  For example, making a flat standard deduction available to some taxpayers provides some record-keeping ease.

The final category in Field’s taxonomy:  condoning tax planning.  Some explicit elections allow taxpayers to achieve a complement of economic benefits that best fit their personal profiles.

Finally, Field delineates some recommendations for the design of explicit tax elections. They might be designed with default rules (so you only need to elect out of them), they may have eligibility limits, they may require technical guidelines, and in their design the policy-maker needs to be attentive to the risk of abuse.

At the end of the day, Field doesn’t make a decision about whether to stay in and eat soup or to go out for dinner.  That’s up to the reader.  So you should read the article and form your own view.  I’ve at least saved you the time in deciding whether or not to do that.

Tax Ethics: Advice from the Past

Mar 5, 2012 Donald Tobin

Donald Tobin

Major cases in the news from tax shelter promotions to corporate accounting abuses have once again put the ethical obligations of  lawyers, and specifically tax lawyers, onto center stage (or at least in the wings).  Congress passed increased standards for return preparers and the Treasury has followed with increased preparer standards in Circular 230.

It is within this framework that I read Professor Michael Hatfield’s article, which examines the ethical debate and discussions by some of the leading scholars and practitioners during the 40s, 50s, and 60s.  These tax lawyers were at the forefront of discussions regarding the modern income tax.  Professor Hatfield’s historical examination provides us with insight into what they were thinking, and provides us with food for thought as we examine modern ethical problems. Professor Hatfield’s point is just that, to provide us with food for thought.  He does not attempt to draw conclusions from this debate regarding what we should do now.  Instead, he carefully and thoroughly outlines the debate at the time and leaves us with opportunity to draw our own lessons from the analysis.  What is clear from the article is that the leading tax lawyers of the time were as conflicted as we are today on many issues, especially the question whether tax lawyers had a special “duty to the system.”  Interestingly, however, they were almost universal in their agreement on two major points: (1) that the payment of taxes was a civic duty, one which had a strong patriotic element, and (2) tax lawyers had a duty to be proponents, reformers, and educators about the tax system.

Professor Hatfield starts his analysis by reminding us that these commentators were thinking about tax issues in the context of victory in World War II and the rise of communism.  Communism was thought of as the next great evil, and commentators believed that a just and fair tax system was essential to a strong capitalistic economy – the strength of which was necessary to defeat communism.

The historical analysis with regard to a tax lawyer’s duty to the system versus the duty to a client is very similar to the debate the tax bar has had since 1965.  With regard to the duty of tax lawyers almost all commentators concluded that once a taxpayer was involved in a tax controversy, a tax lawyer had no special duty to the system.  A lawyer in a tax controversy owed the client the same duty as other lawyers engaged in litigation.  A tax lawyer’s duty in the prelitigation stage, however, was more divisive. Several commentators including Mortimer Caplin (Caplin & Drysdale) argued for a need for “authoritative guidance in the prelitigation of tax practice.”  Professor John Maguire (Harvard) called for a full examination of “the tax lawyer’s special obligations.” He analyzed the issue based on the tax controversy/planning distinction often used today.  He argued that when the tax lawyer was acting as an advisor, he had a higher duty to the public interest.  Maguire felt such a duty was essential in light of the system of voluntary compliance. Professor Edmond Cahn (NYU) expressed concern that “lawyers were becoming the ‘jackals of the bourgeoisie,’” and Professor Jerome Hellerstein (NYU) argued that tax lawyers have a special duty to both the system and to the client, and pushed for increased disclosure as a means of preventing fraud and abuse.

Others, including Professor Boris Bittker (Yale), Mark J. Johnson (New York practitioner), and Professor John Potts Barnes (Virginia) found no special duty of tax lawyers in any situations.  Hatfield explains that these commentators staked their analysis on the high degree of ethical responsibility that all lawyers faced.  It was not that they were against a high standard for tax lawyers, but that they believed there was a high standard for all lawyers.

Professor Hatfield next examines the historical literature in light of world conflicts.  International conflicts and the threat to capitalism and democratic institutions influenced commentators to view the payment of tax as a means of upholding our democratic values and our democratic system.  As America confronted wars in Iraq and Afghanistan, the President and Congress seemed more afraid that the increased collection of revenue would decrease the support of these conflicts.  Paying taxes did not garner the same type of patriotic fervor it did Post-World War II.  Not only was there not a patriotic push for taxes, but there was a significant push for lower taxes during this period.

Finally, Professor Hatfield’s historical analysis also sheds light on a view, almost universally shared by commentators, that tax lawyers have a duty to engage in public activity to improve the tax system.  This view of “duty” has been shared by leaders in the tax bar since the 1940s (this may be why they are leaders.)  Interestingly, just this week, at the ABA Tax Section Mid-Year Meeting, Professor Kleinbard from the University of Southern California joined with others to present a challenge to the academic community attending the Teaching Tax program to help educate voters about tax policy and budget choices, as Congress and President deal with significant budget challenges.  Professor Hatfield’s historical reminder coupled with Professors Kleinbard’s immediate challenge, is a nice reminder to us all about the tax community’s professional duty to engage in public activity to improve the system.

Professor Hatfield’s historical analysis is a fun-filled stroll through yesteryear.  It provides us a brief glimpse as to “what they were thinking” as the foundation for the duties facing tax lawyers was developed, and reminds us of our public obligations to both support the success of the system of voluntary compliance and to use our expertise to work for a better system.