Slicing the Global Tax Pie

Jun 28, 2010 Craig M. Boise

Craig M. Boise

Tax scholarship produced abroad frequently offers a unique perspective on the same knotty domestic and foreign tax issues with which we wrestle here in the United States.  A case in point is the recent article from Maarten de Wilde of Utrecht University, the Netherlands, which combines original thinking with elements of Dutch tax law in proposing a solution to perhaps the most perplexing problem in taxation today; namely, how to allocate the right to tax income between and among competing, sovereign jurisdictions, each of which asserts legitimate residence–or source–based claims to tax the global income of multinational enterprises (MNEs).

The current formula for global tax allocation attempts to assign a source to business income that reflects the physical location in which the income was produced. As de Wilde observes, however, the formula was developed in the 1920s, when there were far fewer MNEs, Europe was decades away from being economically integrated, and technological advances had not produced “e-commerce” and the bewildering array of intangible assets and financial products that are an integral part of the global economy and that have become increasingly difficult to source.  Complicating the essential sourcing problem are state tax systems that are not only internally inconsistent in their treatment of income from domestic and foreign transactions, but also differ among one another in their choice of rates, taxable units, tax bases, treatment of deductions, definitions of particular entities, and a host of other matters.  As a result, much business income is either subjected to double taxation, or to the extent MNEs are able to successfully arbitrage the differences among tax systems, no income taxation at all.

De Wilde argues that fixing this broken international tax system requires adherence to both “internal equity” and “internal neutrality.”  The first is satisfied when no more than one tax is imposed on income by a single state (the single tax principle) in exchange for that state’s provision of public goods.  The tax burden imposed by a state should attach at the point that the corporate taxpayer’s economic presence in the state exceeds a specified minimum threshold.

Internal neutrality requires that the tax burden that a state imposes on business income not vary based on whether the corporate taxpayer earns all of its income within the source country or not.  De Wilde argues that neither of the two most familiar concepts of economic neutrality, capital export neutrality (CEN) and capital import neutrality (CIN), achieves this result.  On the one hand, CEN, which is generally associated with worldwide taxation and a residence-state credit for source-country taxes paid, discriminates against MNEs (as opposed to domestic corporations) to the extent that the resident country does not fully credit source-country taxes (this violates the “benefit principle” of international tax law, which links tax liability with public goods received).  On the other hand, CIN, which is usually associated with territorial tax systems, discriminates by taxing source-country income without reference to losses incurred in non-source country jurisdictions (this violates the “ability to pay” principle, which links tax liability to actual overall income).

De Wilde proposes to combine the irreconcilable and unsatisfactory neutrality concepts of CEN and CIN into something he calls “capital neutrality.”  Capital neutrality requires a jurisdiction to impose worldwide taxation on the income of its residents (CEN).  But, in order to avoid discrimination, it also requires worldwide taxation of non-residents that meet a minimum threshold of economic presence such as having a permanent establishment (or, in the case of the U.S. where no tax treaty applies, a U.S. trade or business).  To satisfy the single tax principle de Wilde’s capital neutrality must be coupled with some form of double tax relief.  Again, however, he finds the methods associated with CEN (the foreign tax credit) and CIN (exemption of foreign income) unsatisfactory.  Here, de Wilde draws upon Dutch tax law for a solution—specifically, the form of double tax relief known as the “tax exemption method,” which he sees as a combination of the CEN and CIN concepts, and which he describes in some detail in the paper.  The paper contains a number of examples that illustrate the application of de Wilde’s proposal, but rather than give away the entire article here, I’ll let readers evaluate the rest of de Wilde’s thoughts on this issue for themselves.

To the extent that it relies on elements of the current global tax allocation formula, de Wilde’s proposal will be saddled with familiar difficulties. For example, states would still have to grapple with source issues, and those issues likely will become thornier as technology continues to affect the global business structures and transactions of MNEs.  Nonetheless, de Wilde has produced a very well written paper that presents fresh, provocative thinking about a problem to which few workable solutions have so far been proposed.

Health Care Costs and Fiscal Infirmity

Jun 2, 2010 Neil H. Buchanan1 comment

Neil H. Buchanan

Anyone who wants to understand fiscal policy in the United States for the next fifty years will need to understand health care costs.  There are many important issues in tax policy – the income/consumption debate, whether and how to tax wealth (especially at death), how to deal with transfer-pricing problems, when to tax capital gains, how to handle tax protesters, and so on – but the single issue that is going to drive tax policy is health care inflation.

Scary proclamations that the U.S. faces a “long-term fiscal crisis” are actually statements that health care costs could ruin the economy.  If health care costs stop increasing – either by government action or because of some “natural” maturation process in the medical-industrial complex – then there is no long-term fiscal crisis.  The so-called Social Security crisis is an over-hyped non-event, as I have argued elsewhere, and as even the most serious budget hawks will admit.  Nothing else in the budget (certainly not “waste, fraud, and abuse”) even comes close to justifying alarm about the long-term need to raise taxes.  It is all about health care.

Of course, the health care cost crisis is really a crisis for the whole economy, not just the federal and state governments.  Even if we were to raise taxes to cover all government health care expenditures, the scariest predictions about health care costs indicate that half of the economy’s resources will be dedicated to health care long before the end of this century.  Of course, there are good reasons to be skeptical about any long-run forecast, especially one that predicts such an extreme result.  If there is going to be a long-term fiscal crisis in the United States, however, it will be because health care costs have continued to spin out of control.

This basic fact – that the politics of tax policy will be driven largely by health care costs – suggests that tax policy scholars in the United States (and possibly elsewhere) need to expand their knowledge base to include some fundamentals about how health care works (and fails to work) in this country.  An extremely good place to start is with Atul Gawande’s article from The New Yorker, “The Cost Conundrum.”  Gawande is a Harvard Medical School professor who has written on health care issues for, among others, The New York Times op-ed page.  His analysis of the challenges facing health care provides a bracing insight into the ways that bad policy choices interact with self-interest to produce a terrible combination of high costs and bad health outcomes.

Although written for a non-academic audience, and although written by a medical doctor, Gawande’s article is in some ways among the best empirical social-science writing available.  As has become the trend in many economics departments, he exploits a “natural experiment,” that is, a situation where two outcomes can be compared meaningfully because the underlying facts of the two situations are otherwise so similar.  (A natural experiment, therefore, mimics a controlled laboratory experiment by “holding constant” other possible explanations for an observed outcome.)

The natural experiment in question is the difference in health care costs between two cities in Texas: McAllen and El Paso.  McAllen is the second-most expensive city in the country for per-person health care costs, behind only Miami, which has much higher labor and living costs.  By contrast, El Paso’s health care costs are only one half of McAllen’s.  Gawande spends much of the article exploring the various reasons that might explain the difference between the two cities’ health care costs.  It turns out that both cities have similar poverty rates, racial and ethnic profiles, high-fat diets, and nearly every other possible factor that could explain a difference in health care costs.

Notably, because both of these cities are in the same state, the doctors and hospitals in each city are operating under the same medical malpractice laws.  When I gave a talk on this subject at a conference in Jackson, Mississippi, earlier this year, an otherwise extremely receptive audience turned a bit icy when I denied that malpractice is a meaningful explanation for rising American health care costs.  No matter how one reads the national evidence, however – and for what it is worth, credible evidence suggests that perhaps 1% of the growth in health care costs is explained by malpractice costs – this explanation cannot possibly explain the difference in costs between two cities in the same state – a state, by the way, that has already adopted aggressive “tort reforms” in response to assertions that malpractice costs are driving up health care costs.

Gawande narrows down the list of possible explanations to one: the fee-for-service model in U.S. health care reimbursements.  If you are a doctor and you want to earn money with a Medicare patient, the rules set up a very simple incentive structure: the more you do to the patient, the more you will be paid.  If you do unhelpful and even dangerous things, such as surgeries that have a low chance of fixing the problem, you will be paid.  If you need to go back and fix something that would not have needed fixing but for your first medical intervention, you will be paid again.  Your income has nothing to do with your patients’ health.

There are, of course, professional ethics to consider, as well as anti-fraud provisions in the reimbursement rules.  What Gawande shows, however, is that an entire city can work within the rules and run up its costs to twice the level of another (extremely similar) city’s costs, because the latter city’s doctors and hospitals have simply not yet responded as strongly to the income-producing incentives inherent in the fee-for-service system.  Worse, he shows that El Paso (the low-cost city) is moving in the direction of McAllen, with medical professionals in El Paso finding it nearly impossible to continue to resist the financial incentives in the system.

No single article, and no pair of cities, can explain health care inflation.  If you are looking for a place to start to understand the myriad of issues underlying America’s biggest fiscal time bomb, however, you could do much worse than starting with this extremely engaging article.

Recent Developments in Comparative Tax Theory

May 7, 2010 Michael Livingston

Michael Livingston

Why isn’t there more work on comparative tax law, and why hasn’t a more sophisticated methodology developed to address comparative law tax issues?    A new book and two forthcoming articles deal with these questions.

The book is the third edition of Hugh Ault and Brian Arnold’s Comparative Income Taxation: A Structural Analysis, which appeared earlier this year.   One of the few comprehensive works on the subject—Victor Thuronyi’s 2003 volume also stands out in particular—the new Ault and Arnold reflects several changes, now covering nine (albeit primarily advanced) countries and including an additional section that covers individual, business, and international tax rules in topical as opposed to country-by-country fashion.  While the book remains primarily descriptive in nature, any comparativist will tell you that gathering information is half the battle, and much of what is needed, at least for the major OECD countries, is contained here.

The two articles are “An Evolutionary Approach to Comparative Taxation: Theory, Methods and Agenda for Research” by Carlo Garbarino of Bocconi University in Milan, (forthcoming in Theoretical Inquiries in Law) and “The Discursive Failure in Comparative Tax Law,” forthcoming in the American Journal of Comparative Law and authored by Omri Marian, currently an associate at Sullivan and Cromwell and previously a Michigan SJD student who also spent six years as an officer in the Israeli Navy.  As one might expect from someone with this resume, Marian’s article pulls few punches. He argues that while there have been numerous works on comparative tax law, these have generally not communicated with or even appeared to be aware of each other, and (taken together) they have “fail[ed] to produce even the faintest form of paradigmatic discourse.”

Marian attempts to jumpstart such a discourse by connecting comparative tax to a larger debate about the purpose and methods of comparative law generally, including the functionalist method, which asserts that different legal systems perform similar functions (albeit if in different ways) and that comparing how they perform these functions is a useful first step toward more general description; the harmonization of legal systems; and the legal transplant problem.   He then proceeds to discuss the work of various existing tax scholars, who knowingly or unknowingly adopt one or the other of these approaches, or else variants that emphasize economic, critical, or cultural approaches.   Although he has strong opinions, Marion’s purpose appears to be less to take sides than to situate the tax debate and stimulate a more sophisticated—or indeed any—debate among its practitioners.   But this is an immensely important service: a common methodology or methodologies is the sine qua non of any academic field, and Marion has taken an important first step toward achieving it for comparative tax scholarship.

Marian’s article was the impetus for a brief conference last fall at the Michigan Law School, at which a vigorous discussion of the topic ensued.  As often happens, there was an element of  “reinventing the wheel” here. Hugh Ault, who was in attendance, suggested that he and Mary Ann Glendon—author of one of the leading casebooks on comparative law—had discussions about comparative law and taxation two decades ago which addressed many of the same issues as arise in the current debate.

Also in attendance was Carlo Garbarino, whose article proposes a “functional evolutionary” approach to comparative taxation organized around themes of institutional analysis, tax transplants, and the effort to define a “common core” of tax law across different legal systems.   Garbarino concludes by proposing five challenges for comparative taxation of which three (providing a comprehensive theoretical framework, studying tax convergence and divergence, and analyzing the “circulation” of tax models by means of tax transplants) are of general interest while the remaining two relate to specific EU concerns.  While Marian and Garbarino disagree on several points—the former is notably skeptical about the latter’s functional emphasis—they agree that comparative tax is undeveloped as compared both to domestic taxation and comparative law generally.  Their differences pertain primarily to tone and, perhaps, geography, with Marian emphasizing American scholars and Garbarino trying to bring comparative tax law into the mainstream European comparative tradition.

Garbarino and Marian’s work is important in beginning to establish a firmer theoretical foundation for comparative tax work.  As the volume of comparative studies mounts, there is an inevitable need to move beyond simple description and toward meaningful, well, comparison: in particular, the issue of convergence and divergence or (what is really the same thing) the question of legal culture and its effect on tax outcomes.  By taking even modest steps in this direction, the authors make an important and overdue contribution.

The Corporate Pyramid Fable

Apr 4, 2010 Kim Brooks

Kim Brooks

There is nothing I like more when reading scholarly work than the thoughtful interrogation of long-standing myths about a particular phenomenon.  Take, for example, the article by economists Nicola Persico, Andrew Postlewaite, and Dan Silverman, “The Effect of Adolescent Experience on Labor Market Outcomes:  The Case of Height” (http://ssrn.com/abstract=293122).  For years economists (and frankly any casual observer) noted that taller people make more money and seem to command greater power.  This was widely explained as a bias in favor of height (or as discrimination against short people).  These three economists took that hypothesis and explored whether there was a stronger determinant of success as reflected in labor market returns.  Surprise!  It turns out if you look at height of white males over time against labor market success you discover that boys who were tall in high school have stronger labor market returns.  Adult height is only relevant to the extent that it correlates with youth height.

Bank and Cheffins’ paper is of the same ilk.  They take a look at a long standing puzzle:  why does the United States lack the corporate pyramid structures common in other countries of the world?  In some countries it is common for a successful individual or wealthy family to have a small stake in the overall operations of cascading companies, but to have a sufficient stake in the chain that they control billions of dollars worth of corporate activities with only a limited personal or family investment.  These arrangements have given rise to a variety of well documented concerns, including that a small number of investors exercise enormous control at the expense of minority shareholders, that tiny elites are given disproportionate access to corporate power, and that these investors have huge sway with government. The often told example of this kind of arrangement, retold by Bank and Cheffins, is of the unmarried brothers, Oris Paxton Van Sweringen and Mantis James Van Sweringen who were able to invest less than 20 million dollars but control eight class I railroads with combined assets of over two billion dollars.

In explaining the relative absence of these kinds of pyramid structures in the United States, it has become common to speculate that their absence is due to the United States’ tax on dividends to corporate shareholders, introduced in 1935.  Other countries, including Canada, allow inter-corporate dividends to pass tax free.  As the standard story goes, the imposition of the U.S. tax would have made investing through cascading or pyramid companies tax inefficient, and so investors would not have been as inclined in the U.S. as in other places to use pyramid structures to enhance their corporate control.  Put simply, the taxation of intercorporate dividends added to the already heavily taxed distribution of corporate profits.  (Corporate profits, at least for much of United States’ history have been taxed in the corporation and again when distributed to individual shareholders.  This additional tax ensured that they were also taxed when distributed between corporations.)

After devoting some time to distinguishing pyramid structures from other corporate structures, Bank and Cheffins turn to the question of why the United States has managed to avoid the proliferation of corporate pyramids.  They walk through the evidence marshaled to support the standard story, which relies to varying measures, but always significantly, on the imposition of the tax on intercompany dividend distributions in the mid-1930s.  Bank and Cheffins then turn to a dataset they created based on filings with the Securities and Exchange Commission between 1936 and 1938, the first years in which the dividend tax applied.  To reveal at least part of their punch line – they discover that the imposition of the tax had very little role to play in explaining the pyramid puzzle.

Bank and Cheffins dismiss some alternative explanations for why the introduction of intercorporate dividends taxation did not create a disincentive for pyramid structures.  They dismiss the explanation that dividends were not an important part of corporate finance. Although the importance of dividends has fluctuated they find they were a core element of corporate life in the 1930s.  They also dismiss a substitution effect – that firms may have been avoiding the payment of dividends by buying back shares (this simply did not hold on the evidence).  Finally, general market trends, namely an overall decline in the market, which may have explained the limited role of the tax, is dismissed on the evidence of relatively strong share performance during the period under examination.

Once a scholar has questioned a supposed correlation, and proposed a new possible correlation, it’s fun to see what explanations are offered for the observed relationship.  For example in the paper by Persico et al. the authors tentatively suggest that it is cultural and social factors that led to the increased labor market outcomes for tall youth.  Put simply:  tall youth are more likely to build self-esteem by enrolling in athletics and clubs and that self-esteem building activity informs deeply their later ability to command top market wages.

Bank and Cheffins do not disappoint.  They turn to offer some tentative alternative explanations for the rarity of pyramid structures in the United States.  While their analysis is detailed and sophisticated, in summary, they find that pyramid corporate structures were simply never a major part of the U.S. corporate landscape.  Indeed, the only commercial activity that was riddled with corporate pyramids in the 1930s was in the utilities sector.  Bank and Cheffins suggest that this sector offered a welcome mat to pyramids because the businesses were usually small, isolated, locally owned and controlled, and financially weak.  Among several other reasons carefully reviewed by Bank and Cheffins, their need for capital funding and the high risk the sector presented for investors explains why utilities became a haven for corporate pyramids.  The introduction of the Public Utilities Holding Company Act might explain why this sector was substantially reorganized.  Given that other industries have not suffered from some of the financial market limits that characterized the utilities sector in the 1930s, Bank and Cheffins conclude “the well-developed financial markets from which the U.S. has benefited may do considerably more to explain the rarity of corporate pyramids than do tax or other regulatory variable” (at 57).

This is an excellent and interesting article that grapples with a long-standing puzzle.  Its conclusions should unquestionably inform public policy developments on corporate governance.  It is well worth the read.

Politics at the Pulpit

Mar 13, 2010 Donald Tobin

Donald Tobin

Although the next Presidential election is still a couple of years off, one controversy that is sure to return to center stage is the prohibition in section 501(c)(3) that  bans 501(c)(3) organizations from intervening in a political campaign for or against a candidate for public office.  The Alliance Defense Fund has set up a “pastor initiative” to create a test case regarding a religious leader’s right to endorse a candidate from the pulpit.  I, and others, have participated in a series of debates regarding this issue, and I have argued that the campaign ban is constitutional.  In preparing for one of the debates, I read Lloyd Mayer’s article, Politics and the Pulpit:  Tax Benefits, Substantial Burdens, and Institutional Free Exercise. Professor Mayer’s article puts a new twist on an old issue, and provides a pathway for the Supreme Court to follow when it confronts the issue.  I hope Mayer’s article is cited in the minority opinion, but the article is an important contribution for people thinking about campaign intervention and section 501(c)(3) organizations.

As a brief introduction, proponents of the campaign ban argue that it is constitutional for Congress to condition tax-exempt status on a set of restrictions that ensure that organizations are acting consistently with the purpose of the exemption.  In this context, Congress has determined that organizations that receive a subsidy from the government in the form of tax exemption should not be involved in endorsing candidates. (See Regan v. Taxation with Representation of Wash., 461 U.S. 540 (1983), upholding the limitation on lobbying contained in 501(c)(3)). In a sense, such actions are deemed by Congress to be not charitable.  (See Bob Jones University v. United States, 461 U.S. 574 (1983), denying tax-exempt status to Bob Jones University because it discriminated based on race and determined that such discrimination prevented an organization from being charitable).  Religious leaders have a right to endorse candidates, work for candidates, and run for office.  They simply cannot do so on behalf of 501(c)(3) organizations.

Opponents of the ban argue that it infringes on the First Amendment rights of religious leaders.  They contend that Congress cannot require that they give up a constitutional right in order to receive a benefit.

Mayer’s path is however a little different.  He argues that the campaign ban must be read in light of the Religious Freedom Restoration Act of 1993 (RFRA), and that under RFRA, in many cases pulpit speech must be allowed as a statutory matter. (See also Allan J. Samansky, Tax Consequences When Churches Participate in Political Campaigns, 5 Geo. J.L. & Pub. Pol’y 145, 171-78 (2007), arguing that the campaign ban is invalid under RFRA as applied to communication from a religious leader to his or her following).  Since the Supreme Court may choose a statutory resolution to avoid the constitutional question, Mayer provides a clear path for the court to reach that conclusion.  The Supreme Court in Employment Division v. Smith rejected the application of higher constitutional scrutiny to neutral laws that impacted religion. (494 U.S. 872 (1990)).    Congress, in passing RFRA, sought to overturn the holding in Smith and require courts to apply a higher-level of scrutiny to Federal statutes that impacted religious practice. Mayer analyzes pre- and post-Smith cases to chart out why the campaign ban should survive statutory scrutiny, except in limited circumstances involving pulpit type speech.  In this regard, Mayer adds to the work earlier done by Samansky (who argues the ban is constitutional except as to intra-congregational speech) and charts and interesting course.

Mayer’s more ground-breaking work occurs in the last part of the article where he argues that there is growing support for an institutional approach to protecting constitutional rights and that this approach is particularly important with regard to religious organizations.  Mayer argues that a religious organization’s ability to communicate with its members about “matters of religious conviction is a necessary aspect of free exercise and so the government cannot, either constitutionally or under RFRA, discourage such speech by placing a condition on the receipt of a long-standing tax benefit.”  Although I intellectually disagree with both Mayer’s analysis and his ultimate conclusion, I cannot help but appreciate the path and arguments he sets out.  As this debate continues, Mayer’s work will certainly play a critical role in how people consider and examine this issue.  It is well worth your time to read it.

The Promise–and Limits–of Economics in Law

Jan 19, 2010 Diane Ring

Diane Ring

My teaching and research generally focuses on taxation, especially international tax.  However, I have always had an outsider’s fascination with antitrust law and policy. So when I saw a recent article entitled: Economic Analysis and Evaluation of ‘Fair Prices’:  Can Antitrust and International Taxation Learn from Each Other? I was intrigued and couldn’t resist.  The article, by Alessandro Turina and Nicolo Zingales explores the economic analysis of pricing and comparability in the transfer pricing regime of international tax and in the competition (antitrust) law of excessive and predatory pricing.  Their perspective is global as they draw upon U.S. law, E.U. law, OECD practice, and the distinctive outlook of various European countries.

The authors are restrained in their claims and comparison–they acknowledge the differences in purpose and structure between transfer pricing and antitrust laws.  But compelling parallels exist that command our attention.  Both regimes rely heavily on price-based analysis in which the underlying methodologies struggle to determine “comparability.”  Moreover, both strive to find the appropriate balance among legal certainty, administrability, and burden of proof as between business and government.  The article provides a baseline introduction to transfer pricing and competition law, thereby allowing the generally informed reader the ability to understand the place of price analysis in each regime and the challenge of determining comparability.

In transfer pricing, where the aim is to appropriately price transactions between related parties, the standard bench mark has been the price at which unrelated parties would deal in a comparable transaction.  In competition law, the EU approach to “excessive” pricing includes a determination as to whether the price charged is unfair “when compared to competing products.”  Similarly, some approaches to predatory pricing require identifying the market and the competition–i.e. which businesses and products are similar to the business under scrutiny.  As Turina and Zingales discuss, there are competing economic models, differing ideas about measuring cost, and conflicting perspectives about where the risk of decision-maker error should lie (that is, if the economics cannot completely answer the question of whether the price is arm’s length, excessive, or predatory should the system err on the side of low taxes and low prices?–or not).  Ultimately, as the authors articulate, “[i]n both cases, the foremost conceptual difficulty encountered by policy makers is how to turn principles and standards which are often based on complex and abstract economic concepts into a workable diagnostic tool with which real actors such as firms (and not markets!) come into dealing.”

The article also can serve as a launching point for thinking more pervasively about the role and use of economic analysis and principles in both setting and applying tax law and antitrust law.  Is it possible, as some suggest, that economics has taken over antitrust law and reasoning in the U.S.?  What about the implementation of the transfer pricing regime (and the preparation of the ever-important transfer pricing studies)?  What do we really mean when we say this?  Is there an implicit expectation that law is something more than economic principles, even in the context of business transactions being assessed against a market measure?  Does it reflect views about the limitations of economic models and data to answer questions of case by case application rather than offer more sweeping market level assessments?  And what can and should be done in recognition of any of these points?  There are no simple answers, only more variations on the question.  But the opportunity to consider the related reliance by both tax and antitrust law on an economic analysis of pricing and comparability reveals the important role played by economic reasoning and the broader concerns about the dynamics among law, legal policy, and economics.  Even if you don’t have a particular interest in transfer pricing or antitrust, the article provides a valuable occasion to consider how we should import economic concepts into legal regimes and at what risk.

Tax Policies, Public Opinions

Dec 7, 2009 Susan Morse

Susan Morse

Before reading Andrea Campbell’s recent book chapter, I relied mainly on two reference points for a mental framework of public opinion relating to taxes:  Donald Duck and Pat Soldano.  The famous Disney cartoon shorts from the 1940s aimed to convince a patriotic public that mass income taxes would help “Beat the Axis,” thus smoothing the transition from a class-based income tax.   Lobbyist and anti-estate tax crusader Pat Soldano, as Michael Graetz and Ian Shapiro tell it in their book Death by a Thousand Cuts, helped persuade America that repealing the estate tax would save hardworking family farms and businesses from the clutches of the federal government, making passage of the 2001 estate tax bill possible.   In my mental model, Donald Duck stood for effective pro-tax government propaganda.  Pat Soldano represented successful grassroots cultivation of anti-tax popular sentiment with the power to hold policymakers hostage, leaving them mainly with the escape hatch of debt financing.  But how did we get from Donald to Pat?

Campbell, a political scientist at MIT, gives a more comprehensive, empirical picture of the evolution of American public opinion on taxation.  She uses two data sources:  Gallup and other poll data, starting in 1939, and political communication such as presidential campaign speeches.  Her work suggests that “the dawn of mass taxation came with surprising calm,” with data such as 1943 Gallup poll results showing that 78 percent of respondents thought their annual federal income tax due was “fair.”  Campbell also traces increased public resistance to taxes starting in the late 1960s.  As she acknowledges, many developments contributed to this shift to anti-tax sentiment, including decreasing real after-tax income and growing public disapproval of government spending, for example on Vietnam and on social programs associated with racial divides.  She offers empirics to illustrate the trend, such as coded political speech data demonstrating a generally upward trend in the frequency with which taxes were mentioned starting in 1968.  The data extends to 2000 and later, and she includes an analysis of the increased correlation between a belief that one’s taxes are too high and a decision to vote for a Republican candidate for President in the 1990s, when other factors are held constant.

But it is the data from the 1950s and 1960s that I found most interesting.   Campbell reports, for example, that “the percentage of Americans saying their federal income taxes were too high fell . . . from 71 percent in 1952, to 46 percent in 1961.”   This result, remarkably, coincides with a period of high rates–for example, the top marginal rate between 1954 and 1963 was 91% and the lowest 20%.  According to Campbell’s data, the Kennedy-Johnson tax cut of 1964, which cut marginal individual income tax rates across the board by as much as 20%, was not presaged by big swings in public opinion about taxes or accompanied by significant public political rhetoric.

Campbell characterizes the prevailing public tax policy sentiment during the 1950s as “ambivalence.”  The data may also be consistent with satisfaction with the public benefits obtained in exchange for taxes, or with acceptance of the goal of a balanced federal budget.  In any case, they are striking in light of other accounts of contemporaneous elite tax policy debate, which engaged the tensions between fiscal conservatism and Keynesian policies, base broadening and tax expenditures, and equity and efficiency.  (Campbell cites histories by W. Elliott Brownlee, Dennis Ventry and Julian Zelizer.)  The  public opinion data suggest a division between debates among policy making elites and public political discourse; one question is whether other indicators of public discussion about taxes, such as newspaper commentary, would also show such a divide.

Campbell has a forthcoming book that will expand on her published chapter.  It promises to add further to the discussion of how the American public used to think about taxes and how it came to adopt a visceral anti-tax viewpoint.  Perhaps her work can also shed light on whether and how current public opinion might shift to accommodate fiscal crisis solutions that include (dare I say it) higher taxes.

Tax Havens in Context

Oct 27, 2009 Allison Christians

Allison Christians

Craig Boise and Andrew Morriss have produced a fascinating account of the emergence and role of the offshore financial sector with this case study of the Netherlands Antilles—once a powerhouse, now struggling to stay alive in the global economy.  With places like the Antilles again in the political and media spotlight, cast in their now-familiar role as renegades in international society, I have long thought we were overdue for an account that carefully considers the view from these countries and provides the context we critically need to understand the dynamics between tax competition and economic development.  This article may well be the most accessible account of the complicated history that shaped U.S. policy toward a growing number of tiny islands with tiny populations and limited opportunities for economic vitality.

It is certainly the most thorough and thoughtful analysis I have encountered on the topic of why “tax havens” exist.  Boise and Morriss bring us on a lively tour through the history of the Antilles and its complicated relationship with the United States.  They use first-hand accounts and historical research to build a narrative that is decidedly different than the story usually told by those who emphasize the need for crackdown when cooperation cannot yield a mutually beneficial result.  For instance, it may surprise readers to learn that the rise of the Antilles as an offshore financial center occurred not as opportunistic banditry but as the result of a serendipitous confluence of factors, all of which served goals other than facilitating tax evasion.  You will have to read the paper to find out how the Antilles met a dire need for asset protection during World War II, and how it facilitated American access to the Eurobond markets at a time when the United States depended heavily on foreign borrowing for its economic success.  You will also need to read this paper to see why the crackdown on places like the Antilles will likely be as futile as it is harmful to the populations whose livelihood depends on their ability to facilitate transactions in the global economy.

Readers will no doubt be unsympathetic to tax havens, and certainly to tax evaders—I am certainly no fan of Bono, the Rolling Stones, or any other person or group that prefers not to contribute to the social orders that make their fortune possible.  But this paper shows that the problem of tax evasion cannot plausibly be viewed as simply a collective action problem that could be solved by universal adherence to norms that would “level” the tax competition playing field, as envisioned in places like the OECD.  Once it is clear that the benefit of eliminating tax havens goes only to the world’s wealthiest countries, we may be less inclined to sit in moral judgment of nations that rely on their financial services industries for their economic survival.

You should read this paper if you want to understand what it is that offshore financial sectors offer to American and other investors and what role the United States and other developed countries play in ensuring that tax havens will always exist (even as the message to the public declares otherwise). You may come away from the paper with a little less enthusiasm than the authors for the regulatory tactics employed by these islands, but we could all do better to understand the context of the problems we face in a world of bound sovereigns but footloose capital.  I highly recommend this article and hope that it becomes required reading for anyone who takes seriously the dual issues of global tax evasion and disparate economic development.

Meet the Editors

Oct 26, 2009 Michael Froomkin

Section Editors

The Section Editors choose the Contributing Editors and exercise editorial control over their section.  In addition, each Section Editor will write at least one contribution (“jot”) per year.  Questions about contributing to a section ought usually to be addressed to the section editors.

Professor Alison Christians
University of Wisconsin School of Law

Professor George Mundstock
University of Miami School of Law

Contributing Editors

Contributing Editors agree to write at least one jot for Jotwell each year.

Professor Craig M. Boise
Associate Director of the Center for Business Law & Regulation, DePaul University College of Law

Professor Kimberley Ruth Brooks
H. Heward Stikeman Chair in the Law of Taxation,  McGill University, Faculty of Law

Professor Neil H. Buchanan
The George Washington University Law School

Professor Charlotte Crane
Northwestern University School of Law

Professor Michael A. Livingston
Rutgers School of Law – Camden

Professor Diane Ring
Boston College Law School

Professor Donald B. Tobin
Associate Dean for Faculty, Frank E. and Virginia H. Bazler Designated Professor in Business Law, The Ohio State University, Moritz College of Law

Call For Papers

Oct 25, 2009 Michael Froomkin

Jotwell: The Journal of Things We Like (Lots) seeks short reviews of (very) recent scholarship related to the law that the reviewer likes and thinks deserves a wide audience. The ideal Jotwell review will not merely celebrate scholarly achievement, but situate it in the context of other scholarship in a manner that explains to both specialists and non-specialists why the work is important.

Although critique is welcome, reviewers should choose the subjects they write about with an eye toward identifying and celebrating work that makes an original contribution, and that will be of interest to others. First-time contributors may wish to consult the Jotwell Mission Statement for more information about what Jotwell seeks, and what it seeks to achieve.

Reviews need not be written in a particularly formal manner. Contributors should feel free to write in a manner that will be understandable to scholars, practitioners, and even non-lawyers.

Ordinarily, a Jotwell contribution will

• be between 500-1000 words;
• focus on one work, ideally a recent article, but a discussion of a recent book is also welcome;
• begin with a hyperlink to the original work — in order to make the conversation as inclusive as possible, there is a strong preference for reviews to focus on scholarly works that can be found online without using a subscription service such as Westlaw or Lexis. That said, reviews of articles that are not freely available online, and also of very recent books, are also welcome.

Initially, Jotwell particularly seeks contributions relating to:

• Administrative Law
• Constitutional Law
• Corporate Law
• Criminal Law
• Cyberlaw
• Intellectual Property Law
• Legal Profession
• Tax Law

We intend to add more sections in the coming months.

References

Authors are responsible for the content and cite-checking of their own articles. Jotwell editors and staff may make editorial suggestions, and may alter the formatting to conform to the house style, but the author remains the final authority on content appearing under his or her name.

• Please keep citations to a minimum.
• Please include a hyperlink, if possible, to any works referenced.
• Textual citations are preferred. Endnotes, with hyperlinks, are allowed if your HTML skills extend that far.
• Authors are welcome to follow The Bluebook: A Uniform System of Citation (18th ed. 2005), or the The Redbook: A Manual on Legal Style (2d Ed.) or indeed to adopt any other citation form which makes it easy to find the work cited.

Technical

Jotwell publishes in HTML, which is a very simple text format and which does not lend itself to footnotes; textual citations are much preferred.

Contributors should email their article, in plain text, in HTML, or in a common wordprocessor format (Open Office, WordPerfect, or Word) to ed.jotwell@gmail.com and we will forward the article to the appropriate Section Editors. Or you may, if you prefer, contact the appropriate Section Editors directly.